Keystone International, Inc.
Keystone International, Inc.
Incorporated: 1947 as The Keystone Tool Company
Sales: $.52 billion
Stock Exchanges: New York
SICs: 3490 Valve Manufacturing
Keystone International, Inc., is the largest manufacturer and marketer of specialty valves and related products in the world. It operated 25 manufacturing facilities in 12 countries and garnered about 55 percent of its revenues from sales outside the United States in 1993. The company has grown since the 1950s through a strategy of creating quality products, acquiring other manufacturers, and fostering geographic and market diversification.
The Keystone Tool Company was founded in 1947 in Houston, Texas, by C. K. Stillwagon. During his first three years in business, Stillwagon designed, engineered, and patented his renowned “butterfly valve.” In 1951, he began production of the valve that would be the foundation for his company throughout most of the 20th century. Stillwagon’s butterfly valves were used primarily in the nearby oil fields for various oil flow control applications. As the oil industry grew during the 1940s and into the early 1950s, Keystone prospered.
Although Keystone Tool got off to a fast start, Stillwagon was stumped shortly after he began selling his breakthrough valve. The energy industry slumped into a cyclical downturn in the early 1950s, leaving the fledgling start-up hungry for new orders. Stillwagon survived the temporarily recessed market, but it was that early experience that convinced him to aggressively pursue a strategy of diversification that would protect his company from individual market fluctuations. His decision to diversify geographically in 1959, moreover, spurred Keystone’s rapid growth during the 1960s and 1970s.
As Stillwagon expanded his line of butterfly valves and marketed his products to new industries, sales climbed steadily. Rampant growth in the oil industry boosted revenues during the late 1950s and early 1960s, as new oil wells and pumps were installed in record numbers throughout the southwest United States. In addition, Keystone began selling its valves in other markets, benefiting from the general postwar U.S. economic expansion. In fact, it was sales to these other markets, such as the chemical and utility industries, that helped Keystone weather the oil industry slowdown and shake-out of the 1960s and early 1970s. Created by mismanaged federal energy policies and flat oil prices, which resulted in a decline in the number of oil-producing companies from 30,000 in the early 1960s to just 13,000 by the early 1970s, the oil slowdown crushed valve demand by that industry.
The future of the Keystone company was also being shaped in the 1950s and 1960s by another company, Anderson, Greenwood & Co., which would later merge with Keystone to form the largest specialty valve company in the world. Like Keystone, Anderson, Greenwood was a Houston-based valve designer and manufacturer that was incorporated in 1947. Cofounders Marvin Greenwood, Ben Anderson, and Lomis Slaughter Jr. started the company with the intent of building small, private airplanes. They switched their focus to the aerospace industry in the early 1950s and eventually found themselves providing engineering services for a major defense missile project. The valves that Anderson, Greenwood designed for that project established its reputation as an innovator in the valve industry.
The company’s premier innovation in the late 1950s was the pilot-operated safety relief valve, a low-maintenance, cost-efficient valve that could be used to relieve excess pressure in vessels, pipelines, and other equipment. Under the advice of a sharp new salesman, Frank Bright, the company began marketing a version of that valve to the oil industry in the early 1960s. Despite the energy industry recession that was occurring at the time, Anderson, Greenwood’s valve was an instant hit in both the oil and gas industries.
Anderson, Greenwood & Co. again changed its emphasis in the mid-1960s, this time to the energy industry, and became a leader in the manufacture of energy-related valves during the 1970s and 1980s. “It was more fun than you can imagine, starting with a product that had zero sales,” Bright recalled in the August 18, 1986, issue of Houston Business Journal. “Watching something grow is worth ten times more than going with a General Motors and trying to hold your own.” Although it remained focused on the energy industry, the company stayed active in aerospace and other sectors. It also expanded moderately overseas, particularly in France; by the mid-1980s about 15 percent of its sales were to foreign buyers.
Keystone also grew internationally during the 1970s and 1980s, though under different management. Three years after taking the company public on the over-the-counter market in 1965, Stillwagon sold his share of Keystone to Systems Engineering and Manufacturing Company (SEMCO). SEMCO, a privately owned, Houston-based company, wanted to add Keystone’s patented butterfly valves to its diversified product line. SEMCO’s management team assumed some key positions at Keystone, but 39-year-old R. A. LeBlanc, who had been with Keystone since 1959, retained his leadership role.
Following management changes by SEMCO, Keystone stepped up its geographic diversification efforts during the 1970s and 1980s, eventually broadening its reach into England, Holland, France, Italy, New Zealand, Korea, Japan, Brazil, and several other countries. Keystone’s international strategy was relatively simple. Besides providing a unique, high-quality product, Keystone usually penetrated foreign markets by establishing a production facility and sales offices in the home country. Furthermore, it staffed the offices and facilities almost entirely with foreign nationals, from the president of the operation on down.
Keystone also elevated its market diversification efforts, particularly in the late 1970s and 1980s. It expanded sales to the chemical and power industries, for example, and started targeting a multitude of other industries, such as commercial construction, food and beverage, heavy equipment, water treatment, pulp and paper, and mining and minerals. Importantly, Keystone conducted a series of acquisitions of small companies during the late 1970s and early 1980s that broadened its product offerings to include actuator and control devices, among other things. Actuators, which are used to electrically or pneumatically trigger butterfly valves, fit well into the company’s product line.
Some of Keystone’s other acquisitions did not fit so well; it spun off an ailing trucking subsidiary in 1983 and jettisoned two other lagging subsidiaries in 1985 for a $381,000 loss. However, Keystone’s general product and market diversification strategy seemed to be succeeding. Keystone’s revenues broke $100 million in 1979, rising to $161 million in 1984 and then leaping to $192 million during 1985. Although that two-year gain was largely attributable to a strong economic recovery during that period, it also reflected the forward-thinking strategies that the company had been practicing since the 1950s and 1960s. Indeed, the faddish management gurus of the early and mid-1980s espoused theories on globalization and quality that Keystone had implemented years earlier. By 1985, for example, roughly half of Keystone’s revenues came from overseas sales.
Anderson, Greenwood & Co. also enjoyed solid growth during the mid-1980s. Sales of its valves and related equipment jumped from $57.8 million in 1984 to a healthy $75.8 million in 1985. Anderson, Greenwood benefited during the late 1970s and early 1980s from the strongest oil and gas markets experienced in the U.S. since before the 1950s. In 1986, however, the company, along with many other U.S. valve producers, was stunned by another oil and gas industry downturn. As oil markets became glutted and prices plummeted, Anderson, Greenwood’s orders slumped. The company was buoyed by shipments to its less-important petrochemical, food and beverage, and pulp and paper markets.
In 1986, Keystone acquired Anderson, Greenwood. At the same time, Keystone absorbed a major producer of industrial valves that significantly augmented both Keystone’s and Anderson, Greenwood’s product lines. Pennsylvania-based Yarway, with $70 million in 1985 sales, produced steam control valves and related products for power generation, chemical, pulp and paper, and a few other markets. The three-way merger created the largest producer of specialty valves and related products in the world.
The mergering of Keyston, Anderson, Greenwood, and Yarway became one of the largest mergers ever in the valve industry. Anderson, Greenwood realized that in order to avoid energy industry woes it would have to quickly expand into new industries and foreign markets. Keystone management believed that it could maximize sales of Anderson, Greenwood’s respected valve lines through its potent and diverse U.S. and international sales and distribution networks. In addition, Keystone viewed the merger as a means of increasing its product and market diversity. It also wanted to utilize Anderson, Greenwood’s excess production capacity to manufacture Keystone’s breakthrough “K-Lok” high-performance butterfly valve, which it had recently introduced.
One drawback of the 1986 merger was that Keystone assumed a large amount of debt. In addition, the cost and time involved in merging the operations of the three companies exceeded Keystone’s premerger expectations. Keystone, for instance, had to consolidate the group’s 21 European sales offices into 10 non-overlapping units. It also closed the least productive manufacturing facilities and had to condense the three company’s research and development divisions. All the while the valve industry remained in a general slump, though Keystone and its talented management group were faring better than most of their competitors.
Despite postmerger pangs, Keystone realized immediate benefits. By 1987 the company was already achieving record sales levels, and by 1988 the company had accomplished the bulk of its global manufacturing and sales force consolidation initiatives. Importantly, Keystone eliminated more than $30 million in debt less than 12 months after the merger, thus slashing its interest payments and reducing its ratio of debt to capital by almost 50 percent. By 1989, Keystone was generating revenues of $376 million annually and netting income of $37 million. Its total debt had fallen from $124 million in 1986 to just $71 million.
Despite a nasty U.S. and global recession, Keystone managed to continue increasing its sales and income during the early 1990s. In fact, sales climbed steadily from $446 million in 1990 to $528 million in 1992 as net income fluctuated around the $43 million mark annually. Furthermore, Keystone managed to stabilize its debt load despite new acquisitions. In 1989, for instance, Keystone acquired valve operator and makers Vanessa and Biffi of Italy and Valvtron of Houston, a metal-seated valve manufacturer. In 1991, it purchased Kunkle Industries, a leading manufacturer of spring-operated valves. Besides those expenses, Keystone earmarked $22 million in 1992 for a complete restructuring of the company; the reorganization entailed assimilating the six companies and 11 major product lines that Keystone had acquired in recent years. Keystone also allotted $30 million to expand and upgrade its worldwide manufacturing network, particularly in Asia.
By 1993, Keystone International was truly a global, diversified manufacturer. It was operating 25 manufacturing facilities in 12 different countries and employing a worldwide work force of 4,200. Industrial valves, including the butterfly valve, remained the heart of Keystone’s business. They accounted for 40 percent of 1993 shipments, followed by safety and environmental products, controls, and various specialty products. The company’s geographic and customer markets were extremely diverse: 44 percent of Keystone’s sales in 1993 were in the United States; 29 percent were in Europe, the Middle East, and Africa; 20 percent were in the Asia-Pacific region; and 7 percent were in Canada and South America. In addition, its sales were spread fairly evenly amongst 14 different sectors, the largest of which was chemicals (12 percent), followed by power generation (10 percent). No single customer accounted for more than 10 percent of the company’s sales.
Despite Keystone’s diversity and good reputation for quality and service, the global recession caught up with the manufacturer’s balance sheet in 1993. Weak European and domestic demand, coupled with a strengthening U.S. dollar, contributed to a revenue slide of 2 percent in 1993, to $516 million. Net income, moreover, tumbled 8 percent to $39 million, partially as a result of restructuring and facility improvement expenditures. The fall was disheartening, especially given Keystone’s average income growth rate of 10 percent since 1979.
Nevertheless, LeBlanc and his fellow managers remained optimistic. The company had positioned itself well to take advantage of recovering North American and European economies, and it was experiencing solid gains in burgeoning Asian markets, particularly in Korea and China. It continued to acquire new companies and products in 1993 and 1994 and to open and improve manufacturing facilities in different corners of the globe. “As the world’s economies stabilize and begin to grow, we are optimistic that Keystone will achieve its goal of consistent earnings growth,” LeBlanc stated in Keystone’s 1993 annual report. His optimism was mirrored by the price of his company’s stock going into the mid-1990s.
Keystone Value USA, Inc.; Anderson, Greenwood & Co.; Keystone Controls, Inc.; Kunkle Industries, Inc.; Keystone Vanessa-Valvtron, Inc.; Keystone Vanessa, Inc.; Yarway Corporation.
Brubaker, Laurel, “Keystone Orders Hit Record $74 Million,” Houston Business Journal, May 25, 1987, p. 9A.
”Keystone Acquisitions Fortify Sales,” Houston Business Journal, March 17, 1986, Sec. 1, p. 24.
Keystone: The Flow Control Company, Houston: Keystone International, Inc., 1994.
Klempin, Raymond, “Digesting a Double Merger,” Houston Business Journal, March 24, 1986, p. 18B; “Anderson Greenwood: Airplanes and Pilot Valves,” Houston Business Journal, August 18, 1986, p. 1A.
Lehren, Andrew H., “Keystone Buys Yarway for $100 Million,” Philadelphia Business Journal, March 31, 1986, Sec. 1, p. 12.
McNamara, Victoria, “Stock Jump Stuns Keystone President,” Houston Business Journal, January 8, 1990, Sec. 1, p. 1.
Schlegel, Darrin, “Keystone Expands Global Operations with $35 Million Spending Program,” Houston Business Journal, May 10, 1993, Sec. 1, p. 4; “Keystone Acquires Australian Valve Maker,” Houston Business Journal, October 11, 1993, Sec. 1, p. 8.