Bandag, Inc.

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Bandag, Inc.

2905 North Highway 61
Muscatine, Iowa 52761-5886
(319) 262-1400
Fax: (319) 262-1284
Web site:

Public Company
Employees: 2,591
Sales: $769 million (1996)
Stock Exchanges: New York; Midwest
SICs: 3011 Tires & Inner Tubes; 3559 Special Industry Machinery, Not Elsewhere Classified

Bandag, Inc. is the leading supplier of rubber used by its franchisees for the retreading of tires, mostly for trucks and buses. The company manufactures precured tread rubber, equipment, and supplies for the retreading of tires by means of a patented cold bonding process. During the early 1990s Bandag outstripped 31 other automotive parts companies in profitability, with a five-year average return on equity of 30.2 percent. The company and its licensees had 1,383 franchisees worldwide in more than 120 countries in 1996.

Early Developments, 19571970

Roy J. Carver of Muscatine, Iowa, was the owner of a family manufacturing firm named Carver Pump Co. when, on a business trip to West Germany in 1957, he learned about the cold-cure tire-retreading process invented by Bernhard Nowak. This process cured tire treads in one step and bonded them to old tire casings in another step. Because it employed temperatures lower than those used in other retreading processes, the casings were less likely to be damaged, thereby allowing durability greater than that of conventional recaps and thus cutting cost per mile. Carver, who had learned the tire business by changing flats in his fathers shop, was an entrepreneur willing to take a flyer on any number of schemes, and he bought the U.S. rights to the process from Nowak. The Bandag name combined Nowaks initials (BAN) with D for his home town (Darmstadt) and AG for the German abbreviation for incorporated. (It also, probably not coincidentally, approximated bandage.)

Back in Muscatine, Carver opened Bandag in a dilapidated former sauerkraut plant. He found that, given the usual problems with a start-up business, particularly one involving technical innovations, tire retreading was no easy road to riches. Carver nearly bankrupted the family pump company to develop the Nowak method commercially. More than once it was a case of get some money or fold camp, a company executive later told a Financial World reporter. This man remembered asking suppliers for loans payable with notes that converted to Bandag stock, adding that those who held on to the notes eventually became millionaires.

One technical problem was finding a way to apply uniform pressure on tire casings when retreads were being bonded to them. Carver himself came up with a solution by inventing a flexible rubber envelope capable of fitting over tires of any size. Another problem was solved when his research-and-development engineer formulated a more effective rubber-gum mixture to replace the bonding cement holding together the casing and retread. Carver received U.S. patents on the cold-recapping process during 19611962.

By fiscal 1963 (ending May 31, 1963) Bandag had turned the corner to profitability, earning $32,024 in net income on net sales of $1,910,187. These figures rose steadily, and by 1968, when the company went public, its facilities included three plants in Muscatine and a fourth in Shawinigan, Quebec. In that year Bandag had net income of $1.3 million on net sales of $13.5 million and marketed about one-quarter of its shares of common stock at $12 a share. Soon three other plants were opened, in Oxford, North Carolina; in Abilene, Texas; and in Lanklaar, Belgium.

Impressive Growth in the 1970s

By 1971 Bandag held about ten percent of the U.S. truck tire-retreading market and had a worldwide network of more than 500 franchisee! dealers, with some one-third of its sales being made abroad. The company sold its franchisees precured rubber and auxiliary supplies and equipment to retread worn tires in their own shops. It also was manufacturing and selling buffers, pressure chambers, and other equipment used by its franchisees.

In 1973 Bandag entered into the business of distributing and remanufacturing replacement parts for the heavy-duty vehicle industry by acquiring three companies for stock. One of these was Master Processing, manufacturers of specialty rubber com-pounds and high-technology industrial hoses. Eight other companies were subsequently acquired by 1978. In December 1973 Bandag also established a subsidiary, Heavy Duty Parts, Inc., to sell replacement parts for trucks and buses through its own distribution network. That year Bandags net sales reached $95.1 million. During the first half of the 1970s the company achieved a five-year annual sales growth rate of 32 percent and annual earnings growth rate of 43 percent. It commanded about 75 percent of the cold-rubber market and was retreading the tires on about 20 percent of all U.S. trucks in 1975. That year its sales came to $169.9 million and its earnings amounted to $19 million.

Although passenger tires were accounting for only three to four percent of its business, in 1976 Bandag launched a national television advertising campaign with a 30-second commercial running on all three national networks. This attempt to carve out a share of the passenger car, pickup, or van retreading market was not successful. In 1980 Bandag held less than one percent of the passenger car tire-retreading market.

Bandags profits dipped in 1977, when it earned $18.4 mil-lion on revenues of $200.1 million, but the company maintained that this was due to its policy that year of encouraging its franchisees to reduce their inventories. The following year brought a new surge in sales and profits, partly because of the rise in popularity of radial tires, a retreading market in which Bandag characterized itself as dominant. The company treated its shareholders well, raising the dividend each year after 1976, when payments were first made.

By 1980 Bandag was the worlds largest producer of tread rubber and retreading equipment. It held an estimated 20 percent of the retreading market and one-third of the bus and truck retreading market. This sector of its business was being carried on by eight manufacturing plants (including one in South Africa) and about 1,000 franchised dealers, of which some 250 of them were abroad in 92 countries. The company also maintained 16 off-road tire-retreading centers in the United States. Heavy Duty Parts was selling more than 60,000 different items and had 43 distribution centers in the United States. Company revenues in 1980 totaled $337 million and net earnings rose to $27.4 million, both records. Heavy Duty Parts, however, while accounting for about one-fifth of sales, was contributing only two percent of profits.

Reorganization in the 1980s

Roy Carver had been leaving management to his subordinates, enjoying the good life as he flew around the world in his white Lear jet. He also owned two yachts, a 25,000-acre ranch in Belize, and a villa on the French Riviera. When he suddenly died of a heart attack in 1981, there were no succession plans, but his widow, who controlled most of the estates 43 percent of the company shares, backed her youngest son, Martin. The 32-year-old business school graduate was duly elected chairman and chief executive officer.

Martin Carver later recalled, Top management didnt welcome me with open arms. I was surprised by the level of resistance I got. It was fierce. This opposition was understandable, for Carver promptly fired the managers hired to carry out a plan to diversify Bandag that he called kind of stupid and refocused the company on its core business of retreading tires. He also sacked the president, taking the title himself, eliminated employment contracts, which he said made people lazy, and recalled executive cars. In December 1981 Bandag sold Heavy Duty Parts for $11.5 million in cash and securities. The unprofitable two off-the-road retreading subsidiaries, which accounted for about five percent of company sales, were sold in 1982 for $2.5 million, principally in cash. In 1984 Master Processing was sold to a privately held company for an undisclosed sum, and the Empex Hose division was sold for $3.6 million.

By 1984 Bandag held about 40 percent of the U.S. truck retreading market and 70 percent of the radial retreading truck and bus market. High-quality radial retreads were selling for only about 30 percent of the price of a new tire and yet were said to perform much the same. Specialty rubber compounds and industrial hoses accounted for less than ten percent of company sales. Return on equity averaged 22 percent in the first half of the 1980s. A stock repurchase program reduced shares outstanding by 40 percent between 1982 and 1990. The Carver family further solidified its grip on the firm by distributing shares of a new Class B common stock, with ten times the voting power of the old shares, in 1987. The action immediately raised the Carver familys voting power from 37 to 65 percent of the total. Bandags stock price rose tenfold between the early 1980s and the early 1990s.

Company Perspectives:

Our mission is to be the market leader in every market served by offering our customers clearly outstanding and unique products and services. As the market leader, we are dedicated to constantly and forever improving quality, service and customer satisfaction. We believe that continually improving the system of production and delivery of services and products will improve quality and reduce costs. This ultimately will enhance our competitive position, resulting in outstanding long-term growth and profitability.

By the end of the 1980s Bandag had doubled the size of its dealer force and held nearly 50 percent of the U.S. truck tire-retreading market. Carvers style of management won him widespread recognition. He expected managers to know the names of all of their workers, regardless of how many they supervised. Carver himself visited every Bandag dealer in the United States. A Formula Ford driver in his youth, he set a world land speed record for diesel trucks in a specially prepared vehicle to promote Bandags retreads. Financial World gave him an award in 1989, the year he vowed to make Bandag the best company in the world. That year the company achieved a 41 percent return on equity, with net income of $75.9 million on revenues of $535 million. Forty-two percent of its sales were abroad.

Developments in the 1990s

During this period Bandag shook up its European franchising network, replacing exclusive distributors who charged high prices and never worried much about volume with aggressive new entrepreneurs paying about $150,000 apiece for their units who even made house calls in $60,000 Mercedes trucks filled with tires and equipment. By 1992 Bandags share of Western Europes retread market had risen from five to 20 percent. That year the companys stock reached an all-time high and was split 2 for 1.

For the first time since 1977, Bandags sales and profits dipped in 1993, although only slightly. Carver blamed the problem on the high costs of developing a tougher, higher-priced new retread called the Eclipse, molded to curve onto tire casings in a relaxed state. Initially forecast to account for half of company sales by 1995, the Eclipse was slow to reach the market and was only being produced by the Muscatine and Oxford plants by that year. European earnings continued to be disappointing despite the companys larger market share. Net sales rebounded to $650.6 million and net income totaled $94 million in 1994, levels surpassed once again in 1995.

In 1992 Carver adopted for Bandag the total-quality management principles developed by the late Edwards Deming. This formula included long-range planning, statistical monitoring of process control to make manufacturing more predictable, just-in-time delivery of inventory, greater responsibility of individual workers for their output, and more attention to customer needs. Among the changes was a pay plan that eliminated bonuses for executives, managers, and salespeople. The concern is that if Im working my butt off, I should get paid more than a slacker, Carver told Financial World. But a system thats well designed will not have slackers.

Bandags revenues rose from $755.3 million in 1995 to $769 million in 1996, but its net income fell from $97 million to $81.6 million. Carver attributed this development to soft sales trends and higher operating expenses. One of the companys problems was a legal dispute with Treadco, the largest U.S. tire retreader and formerly Bandags largest franchisee. This company was in the process of terminating its 26 franchises. In addition, Tredcor, Bandags largest franchisee in South Africa, did not renew its roughly 30 franchise contracts because of disputes over pricing and its marketing of a competing retread. During the year Bandag introduced a new tire-management system and two new product lines.

Of Bandags 1996 revenues, tread rubber, cushion gum, and retreading supplies constituted 91 percent. Sales in the United States accounted for 64 percent and European sales accounted for 17 percent. About 50 European franchisees were retreading tires using the Vakuum Vulk Method, another cold-process precured retreading system for which Bandag owned worldwide rights. The company was manufacturing precured tread rubber, cushion gum, and related supplies in manufacturing plants that it owned in the United States, Belgium, Brazil, Canada, Indonesia, Malaysia, Mexico, New Zealand, and South Africa. It was also manufacturing pressure chambers, tire-casing analyzers, buffers, tire builders, tire-handling systems, and other items of equipment used in the Bandag and Vakuum Vulk retreading methods.

At the close of 1996 Bandag had no long-term debt. As of March 1997 the Carver family owned shares of common stock constituting 75 percent of the votes entitled to be cast in the election of directors and other corporate matters.

Principal Subsidiaries

Bandag A.G. (Switzerland); Bandag B.V. (Netherlands); Bandag de Mexico, S.A. de C.V. (Mexico); Bandag do Brasil Ltda. (Brazil); Bandag Canada Ltd. (Canada); Bandag Europe N.V. (Belgium); Bandag Incorporated of S.A. (Proprietary) Limited (South Africa); Bandag Licensing Corporation; Bandag New Zealand Limited (New Zealand); VV-System AG (Switzerland).

Further Reading

Bandag Gets a Bounce Out of Retreads, Business Week, May 22, 1971, pp. 4445.

Bandag Incorporated, Wall Street Transcript, August 10, 1981, pp. 62,61062,611.

Bandag Profits Rebound as Dealer Orders Mount, Barron s, October 2, 1978, p. 41.

Breaking into European Markets by Breaking the Rules, Business Week, January 20, 1992, pp. 8889.

Byrne, Harlan S., Bandag Inc., Barrens, January 29, 1990, pp. 6061.

, Bandag Inc., Barrens, April 26, 1993, pp. 4041.

Croghan, Lore, Hot Cars and Cold Rubber, Financial World, March 28, 1995, pp. 52, 54, 58.

Fierman, Jacquelyn, How to Make Money in Mature Markets, Fortune, November 25, 1985, p. 48.

Financial Worlds Silver Winners, Financial World, April 4, 1989, p. 74.

Gray, Ralph, Bandag Put Its Retreads into National TV Spotlight, Advertising Age, April 5, 1976, p. 12.

Lazo, Shirley A., Bandag Keeps Its Payout String Alive, Barrens, November 18, 1996, p. 70.

Miller, Joe, Retread Giant Got Start in Iowa River Town, Rubber & Plastics News, October 9, 1995, pp. 4445.

Pacey, Margaret D., Brad Ragan vs. Bandag, Barrens, March 24, 1975, pp. 11, 18, 20.

Simon, Ruth, Minding the Store, Business Week, November 4, 1985, pp. 208209.

Troxell, Thomas N., Jr., Bandags Sure Grip, Barrens, June 9, 1980, pp. 5657.

Walser, Clarke L., Bandag, Incorporated, Wall Street Today, March 16, 1970, pp. 19,92719,928.

Robert Halasz