55 Shuman Boulevard
Naperville, Illinois 60566-7089
Fax: (708) 420-7123
Sales: $386.99 million (1995)
Stock Exchanges: NASDAQ
SICs: 3743 Railroad Equipment; 3714 Motor Vehicles Parts and Accessories; 3821 Laboratory Apparatus and Furniture; 3469 Metal Stampings, Not Elsewhere Classified
The Varlen Corporation is a continuously evolving diversified manufacturing company. Founded in 1969 as a railway holding company, Varíen has expanded through a carefully managed program of acquisitions and divestitures. Although the exact nature of the products manufactured by Varlen subsidiaries has changed repeatedly through time, the company has maintained a continuous emphasis on industrial products aimed at specialized “niche” markets as well as an ongoing relationship with the railroad industry.
Varlen was founded in 1969 by the Dyson-Kissner investment firm as a railroad holding company. The company’s first president and CEO, John A. Moran, came up with the name “Varlen” as a combination of “various” and “lines,” reflecting the intention of running the company as a diversified manufacturing firm. From the outset, Varlen’s main emphasis was on the railroad industry, with its two founding subsidiaries Unit Rail and Chrome Crankshaft both predominately serving this market. Unit Rail, spun off by Dyson-Kissner as the seed company for the new enterprise, consisted of two smaller companies: Hubbard Manufacturing, which made the forged steel anchors that hold rails in place, and Beall Manufacturing, a producer of agricultural implements, washers, and fasteners. Chrome Crankshaft, acquired from outside interests, used a specialized chrome plating process to remanufacture crankshafts for railroad and other diesel engines. In 1970, the company’s first full year of operation, Varlen acquired its first non-rail related enterprise, the Stanlift Corporation, a distributor of material handling equipment. Sales surpassed $10 million in 1970 setting the company off on a promising start.
Growth in the 1970s
Varlen continued pursuing acquisitions through the 1970s incorporating each new company into the corporate structure while at the same time reconfiguring this structure to fit the companies acquired. In 1971 Varlen purchased the Loose Leaf Metals Company from private interests for $1.9 million and Varlen stock. Loose Leaf was a leading independent producer of ring and post binders for loose leaf notebooks and pads, selling to most of the major stationery manufacturers. With annual sales of about $5 million Loose Leaf would provide a sizable boost to Varlen’s total sales while extending its market to consumer related products.
The following year Varlen further extended this segment with the purchase of National Metalwares one of the largest manufacturers of custom steel tubular components in the U.S. National Metalwares’ products were used in furniture manufacture, child car seats, playpens and other consumer items. With these additions the common ground of Varlen’s subsidiaries switched from railroad products to metalworking and Varlen began positioning itself as a metalworking specialist.
In 1973 Jack Connor, a mechanical engineer and former executive with the American Can Company, took over the presidency of the growing firm, bringing with him a commitment to metalworking technology and a definitive plan as to how to grow a diversified company like Varlen. In an article in Management Review, Connor outlined the principles that Varlen would use to manage its diverse subsidiaries in the company’s program of “controlled diversification.” Connor insisted on the need for a common technology amongst corporate divisions so that corporate management could concentrate on a limited range of expertise yet he also encouraged the servicing of a variety of markets to limit the damage if a given market turned soft. Although in succeeding years Varlen would diversify into more widely distinct technologies, the company maintained the notion of preserving an underlying commonality of interest amongst its subsidiaries to avoid the hazards of a highly disparate conglomerate.
Under Connor, Varlen also established a decentralized management style that emphasized decision making on a local level. Incentives based on return on investment were used to encourage performance by division managers rather than imposing solutions from the corporate office. (The head office itself was moved from New York to Illinois in order to be closer to more Varlen facilities.) In fact, throughout its history Varlen maintained a very small corporate staff whose primary responsibilities were overall fiscal management and the overseeing of acquisitions and divestitures. Although the fundamental basis of Varlen’s corporate plan was to grow through acquisitions, the company’s approach to this process was relatively cautious, avoiding acquisition prospects that would not fit with other Varlen interests or that would require massive reorganization to turn a profit. At the same time Varlen was committed to selling off companies on a timely basis whose performance did not match expectations or that had become marginal to the corporation’s main goals. The final principle established early in Varlen’s corporate history was to borrow heavily for acquisitions but to pay off the debt quickly even if this meant temporarily reducing earnings. This studied approach to corporate growth has seen Varlen through almost 30 years of operation with only one non-profitable year and an almost unbroken string of sales increases.
By the mid-1970s Varlen was characterizing itself as an “industrial metalworking company serving a wide spectrum of markets.” With the acquisition of Webco Tank Inc. and Keystone Industries, and with the sale of the ill-fitting material handling distributor Stanlift Corp, the company was now divided into six business segments: railroad industry products, including track anchors, locomotive component rebuilding, freight car cushioning, and gates for hopper cars; agricultural products; tubular metal products; loose leaf metal products for the bindery industry; large industrial applications, including steel storage tanks, heat exchangers, grain oil extraction equipment, and metal columns and towers; and specialized industrial bolts and fasteners.
Sales climbed to $103 million and earnings to a record $5 million in 1978. Over half of these profits were provided by the railroad industry which, despite analysts’ scepticism in the early 1970s, had shown steady growth through the decade. Once thought to be a dying or at least sickly industry, rail transportation had increased during the energy crisis of the 1970s. In addition, the 1976 Federal Railroad Revitalization and Regulatory Reform Act promised billions in loans and grants for rolling stock and trackbed improvements, both of which were key markets for Varlen’s railroad products.
Reorganization in the 1980s
While Varlen’s first decade of operation had shown steady and impressive sales and earnings growth, the company was to encounter its first stumbles in the recession plagued 1980s. During the early 1980s Varlen extended its locomotive engine rebuilding capabilities, which had been part of the company’s operations from its inception, to heavy duty industrial diesel engines with the purchase of S-G Diesel Power Inc. and Forsyth Engineering. At the same time the company shed its agricultural products segment, which had not been performing well, with the sale of its Union Iron Works and Beall Manufacturing subsidiaries, announcing plans to divest its tank fabrication companies, Sapulpa Tank and Webco Tank.
By 1984, under the management of new company president, Richard L. Welleck, Varlen was divided into three operating segments: remanufacture and fabrication of large industrial processing machinery and diesel engine components (S-G Diesel and Forsyth Engineering); railroad products (Unit Rail Anchor, Keystone Railway Equipment, Chrome Crankshaft and Chrome Locomotive); and metal products (National Metal wares, Loose Leaf Metals, and Rockford Bolt and Steel). Annual income had topped $6 million on sales of $137 million.
The company’s railroad products segment was augmented in 1981 with the acquisition of the locomotive, locomotive parts, and locomotive rebuilding facilities of the defunct Rock Island Railroad. Although this purchase would make Varlen one of the world’s largest independent rebuilders of locomotives, it would also ultimately result in a $6.9 million inventory write-down and a $3.3 million net loss in 1985, the company’s only non-profitable year.
Varlen’sprimary objective is to increase the long term value of its shareowners’ investment. This will be achieved by building upon our employees’ creativity and their commitment to serving customers better and more efficiently than our competitors do in the markets where Varlen chooses to compete. Varlen will invest resources in selected industrial markets where it has, or can obtain, a leadership position; we will redeploy resources from markets where we cannot. We will continue to enhance our global presence. Varlen ’s engineered products for the niche markets in which it participates are characterized by differentiate process technology employed in their manufacture and/or superior performance attributes. Our dedication to continuous improvement will be unrelenting.
The railroad products boom of the late 1970s softened in the early 1980s as high interest rates, a recessionary economy, and unfavorable tax laws discouraged railroads from making the capital improvements that Varlen products served. In spite of the new acquisition, Varlen’s railroad segment dropped to only 31 percent of profits in 1984 and metal products, particularly tubular steel products and loose leaf binders, became the top money maker for the diversified firm.
By 1986, it became clear that the remanufacturing segment was not adding substantially to earnings; S-G Diesel was sold and the segment eliminated. In its place, Varlen entered the automotive components field with the purchase of Means Stamping Industries, composed of four companies manufacturing precision metal components for auto parts makers.
Over the course of the next few years Varlen began to reposition itself away from an emphasis on metalworking and focused instead on building a reputation as a manufacturer of precision industrial components for niche markets. The purchase in 1988 of Precision Scientific, Inc., a $30 million manufacturer of research laboratory and petroleum analysis equipment, moved the company more firmly in this direction and created a fourth operating segment.
The year 1989 was a watershed for Varlen as management decided to divest some of the subsidiaries that had been mainstays of the company since its founding in order to consolidate operations and divert assets to its new core precision components industries. Loose Leaf Metals, Rockford Bolt and Steel, Jackson Screw Company, Chrome Crankshaft, Chrome Locomotive, and Forsyth Engineering were all sold in the course of this reorganization. The company’s auto parts business was enlarged with the acquisition of Consolidated Metco, Inc., an Oregon-based manufacturer of tight tolerance aluminum castings and structural foam plastic parts for heavy duty trucks and trailers.
In spite of an overall slowdown in the auto industry in the late 1980s, Varlen’s auto components sales rose thanks to the company’s emphasis on trucks and vans, which were the one growth segment in the industry. The 1989 reorganization of Varlen saw the company’s operations consolidated into two operating segments: Transportation Products (Consolidated Metco, Keystone Railway Equipment, Means Industries, and Unit Rail Anchor) and Laboratory and Other Products (Precision Scientific and National Metalwares). With sales of $226 million and earnings of over $10 million it appeared that Varlen was moving in the right direction with the restructuring of its core industries and the company was named one of the top 200 small companies in America by Forbes in 1989.
International Expansion in the 1990s
The recession of the early 1990s had a damaging effect on all of Varlen’s product segments but was particularly hard on the railroad and research laboratory products subsidiaries. Earnings were halved to only $5 million in 1990, and the company began to look towards other markets to improve performance. Increasingly in the 1990s, American business began to think globally, trying to compete in the international marketplace. An international presence became necessary for industrial component manufacturers like Varlen not only to increase markets but because American industries were looking for suppliers that could serve their growing foreign operations.
In keeping with this trend, in 1990 Varlen purchased Walter Herzog GmbH of Germany, the leading manufacturer of automated equipment for petroleum analysis, a sector that was growing worldwide. Varlen’s railroad equipment sector was strengthened in 1994 with the purchase of Aciéries de Ploermel, a French manufacturer serving the passenger and freight car markets in Europe. In the same year, Varlen acquired an American firm Prime Manufacturing Corp., a manufacturer of heating and air conditioning systems which, two years later, would capture an important contract for locomotive air conditioners in the People’s Republic of China. By 1996, international sales accounted for 19 percent of Varlen’s revenues.
By the mid-1990s Varlen had shed its last original metal-ware company with the sale of National Metalwares, the tubular steel manufacturer acquired in 1972, whose products had boosted sales in the 1980s when railroads were in a slump but which had lost major markets in the early 1990s. Varlen’s operations were now divided into two sectors: Transportation Products, including railroad and automotive equipment, and Analytical Instruments, including research laboratory and petroleum analysis equipment. The first of these segments accounted for over 80 percent of earnings, and Varlen announced plans to divest its research laboratory equipment companies that had been suffering from declining government funding for scientific research.
The company’s railroad equipment sales, which had risen by 42 percent form 1994 to 1995, received a potentially substantial boost in 1996 when the company entered into a definitive agreement to acquire Brenco Inc., a leading manufacturer of tapered roller bearings for freight cars. This acquisition had the potential to increase Varlen sales, which had reached $387 million in 1995, to about $500 million. With the Brenco acquisition Varlen was poised to enter the last half of the 1990s in a strong position to meet their corporate goal of maximizing shareholder investment.
Aciéries de Ploërmel (France); Alcor Petroleum Instruments, Inc.; Chrome Crankshaft Companies; Consolidated Metco, Inc.; Walter Herzog GmbH (Germany); Keystone Railway Equipment Company; Means Industries, Inc.; Precision Scientific Petroleum Instruments Company; Prime Manufacturing Corporation; Unit Rail Anchor Company; Varlen Instruments, N.A.
Byrne, Harlan S., “Varlen Corp.” Barron’s, May 15, 1989, p. 110.
Cathey, Paul J., “How to Effectively Manage Metals Acquisitions,” Iron Age, February 10, 1975, pp. 40–42.
Connor, Jack, “Secrets of Controlled Diversification,” Management Review, October 1974, pp. 4–9.
Gordon, Mitchell, “Making Tracks,” Barron’s, August 13, 1979, pp.30–31.
Rolland, Louis J., “Varlen Vista,” Financial World, January 5, 1972, p. 20.
“Smoother Ride: Varlen Corp. Steams Ahead After Two-Year Slump,” Barron’s, September 17, 1984, pp. 58–59.