Katy Industries, Inc. Business Information, Profile, and History

History of Katy Industries, Inc.

Katy Industries, Incorporated was born out of an acquisition of the Missouri-Kansas-Texas railroad (MKT), a financially troubled operation that was in need of a profitable parent company. Wallace Carroll, whose knowledge of railroads dated back to his job as a section hand that helped pay his way through Boston College became acquainted with MKT many years later when he was persuaded that the ailing railroad had some attractive aspects that outweighed its reputation as a money-loser. In particular, Carroll was attracted by its New York Stock Exchange listing and the $30 million tax loss it would provide for his own company named American Gage.

Katy Industries became the parent holding company of MKT because the railroad company purchased 80% of the stock of Carroll's American Gage. With this purchase, Wallace Carroll became the chairman and majority stock owner of Katy Industries.

Carroll's experience with company acquisitions and expansions began in 1940 when he established a gauge business in Illinois. He had left New England for Chicago in 1963 after he was hired as a salesman for a Rhode Island precision gauge maker. Four years later he was selling gauges on his own. However, producing the gauges seemed a more profitable business than selling them, and thus Carroll borrowed $6,000 and took on a partner to start his manufacturing business. Carroll did not regret moving into the manufacturing business, but he did regret going into a partnership. "I promise myself I'd operate alone from that moment on," he stated, and he has kept his promise to himself ever since.

Carroll's entry into the gauge manufacturing business was timely. As with most manufacturing companies during World War II, Carroll's American Gage grew rapidly because of an "insatiable demand" for gauges. By the end of the war, American Gage was doing so well that Carroll was able to begin purchasing other small manufacturing businesses. Carroll wisely made his acquisitions based on a peace-time economy. In particular, one of the companies that he bought after the war was a manufacturer of pots and pans. By 1948 Carroll's holdings had grown large enough that he established American Gage and Machine Company, of which he became sole owner, as a way in which to contain his holdings.

During this time Carroll's formula for acquiring companies, as a general rule, was to pay cash. He looked for small, family-owned businesses that produced both a good product and a substantial profit. His preference was to keep the original management, but if the management was comprised of older men then his policy was to make them consultants or honorary officers and hire a younger generation to manage the company.

While Carroll was successfully developing American Gage, the MKT railroad was having its share of problems. Several years before the creation of Katy Industries, MKT was on the verge of bankruptcy. The "Katy," as the railroad is nicknamed, included 2700 miles of damaged roadbed from Missouri to Texas on which derailments were likely to occur if the cars were moving faster than 25mph. Shipment of stock would often he damaged and, very few shippers would allow their products to be transported on the Katy. In March 1965 as a result, only 600 cars were moving on a daily basis.

However, by October of 1965, 1000 cars were moving daily. The cause for this substantial increase in activity on the Katy lines was a "non-stop talker" name John Barriger who came on board to save the railroad from its bankrupt condition. Barriger did not expect that the Katy would ever become a prosperous railroad, but he did hope that he could rebuild it so that a larger railroad company would be enticed into a merger.

Barriger had spent many years around the railroads of the country. After his graduation from MIT in 1921 Barriger worked for the Pennsylvania Railroad and then moved on to Calvin Bullock, Limited, a Wall Street firm where he worked as an industry analyst and inspected the nation's railroads. During World War II he was associate director of the Office of Defense Transportation. After the war he headed the Monon railroad, which was almost bankrupt. When he left in 1953 Barriger had managed not only to save the railroad from bankruptcy, but to establish a sound financial basis for its future operations.

In 1965 Barriger was nearing retirement age at the Pittsburg & Lake Erie Railroad company when he heard that the Katy was in need of talented management. Preferring the excitement of his work and the challenge of the Katy over retirement, he took on the job. As the new president of MKT, Barriger relied on his friends to help improve the railroad. By repairing the roadbeds as much as he could within the first few weeks of his presidency, and by making a deal with his numerous railroad friends that their use of the Katy would be returned through payment of back damage claims and improved service, Barriger was able to increase the number of cars moving on the Katy lines within a short period of time.

The return to creditable service on the Katy was a difficult task. The poor condition of the roadbed meant spending any profits on the railroad. Still, its reputation as a money-loser had not prevented Barriger from saving it from bankruptcy, and although his hope that a merger with a larger railroad would take place was not realized, the railroad company looked strong enough for a parent company to give it the kind of support it needed. Barriger continued his presidency only long enough to get the Katy in a strong operating position.

Katy Industries quickly began to diversify after the acquisition of the MKT. Carroll separated the company into four very different groups: the Electrical Equipment and Products Group, the Industrial Machinery, Equipment and Products Group, the Consumer Products Group, and the Oil Field and other Services Group. By 1972 the company was expanding into European and Canadian markets, particularly within the oil and gas exploration fields.

One of the most important acquisitions for Katy Industries in the late 1960's was that of Bee Gee Shrimp, a collection of companies which operates a 100-trawler fleet off the coast of Georgetown, Guyana, and which harvests and sells shrimp. Bee Gee Shrimp was primarily responsible for doubling the sales and earnings of Katy's Consumer Products Group in 1979, and this allowed Katy a degree of comfort during the recession years.

Even the MKT was showing a profit for the first time since 1963. In 1971 the Katy made a $21,000 profit, which proved its ability to operate on a break-even basis. However, the profits were put back into the railroad, particularly in the area of track maintenance, which was a high 16% of operating costs that year.

By 1971 another man with a reputation of being able to "tackle tough jobs" was at the Katy. Reginald Whitman became president and chairman of MKT in 1969 and is credited for being able to keep the company headed in a profitable direction. Whitman's confidence that the Katy would not only be profitable, but that it would also grow was an important aspect of the future earnings of the company.

By 1973 neither the railroad's negative book value of $9 million nor its net deficit was consolidated in Katy's annual report. The company did not have to write-off the railroad's losses against its consolidated earnings. In addition, Katy no longer had to carry the railroad's large debt on its balance sheet.

For Katy, the railroad provided a shelter that was important to its acquisitions. Between 1970 and 1973 Katy purchased 15 companies for approximately $34 million. Most of the companies were small and privately-owned. Once they were put behind the tax shelter of the railroad their profits increased significantly.

Katy is considered to be a "diversified investment fund" which is different from its kind because it usually owns a majority, if not 100%, of its affiliate's stock. W.H. Murphy, Treasurer of Katy, regards this policy as one which allows a "uniformity of overall corporate policy as well as the exchange of technology, marketing, purchasing, and financial assistance" within the companies.

Katy's formula for acquiring companies has not changed significantly over the years. Carroll still likes to purchase small companies which have good product lines and present small risks. Says Carroll, "If it is profitable or we could make it profitable, we buy it." It is also Carroll's policy to buy companies which already have good management in order to give the division manager a sizable amount of autonomy. In addition, Katy offers incentives to its subsidiaries which are based on earning increases as a means of keeping the companies productive and efficient.

This formula has been a successful one for Katy. Its net growth increased from $2 million in 1971 to $18 million in 1981. Katy managed to increase sales throughout the recession years of the early 1980's. In fact, its earnings were so good that Katy expanded its pump manufacturing company, LaBour Pump, which is located in Ireland.

In 1983 Katy began to expand into the silverware business. Carroll first purchased Wallace Silversmith Inc. in August, and then purchased Insilco Corporation's international unit around October of the same year. These new acquisitions and investments in the early 1980's represent some of Katy's efforts to offset the uneven earnings of the company's railroad and machinery operations.

By 1985 plans were in the air to sell MKT. Union Pacific had made an offer that required MKT to obtain 60% of the outstanding income certificates on the company. MKT had only purchased 41% by mid-1985. Union Pacific then terminated the offer. Chairman Carroll's comment on this turn of events in early 1986 was that Katy would "keep on running the railroad; it's a good property." What the future holds for the MKT depends greatly on its ability to meet the terms of any future offer.

Katy needed to increase its earnings for 1985. The company had some significant losses which were blamed on the casualty and property insurance business, Midland Insurance. Midland's problems were caused by difficulties in the market. Katy liquidated the insurance company in the early part of 1986, but net sales dropped from $4.3 million in 1984 to $3.9 million in 1985.

In other areas, however, Katy was experiencing new developments. Early in 1985 Katy announced that its subsidiary, Katy-Seghers Incinco Systems Inc., had been awarded its first contract to build a waste-to-energy plant. It had taken the company six years to win a contract since the start of the business in 1979, and the subsidiary was expected to see some profits in 1985. Carroll sees the waste-to-energy plants as the "future direction" of Katy Industries and expects that there will be great demand, and competition, for these plants because of the increased environmental concerns of the nation. Specifically, state and local governments are considering this form of incineration, and if the trend continues in this area, Katy expects to be in the midst of the development of these plants.

With an eye toward future trends and a conservative company policy of acquiring profitable and small-risk companies, Katy is a diversified conglomerate that will continue to grow in the future.

Principal Subsidiaries: Bush Universal, Inc.; W.J. Smith Wood Preserving Co.; Shrimp Group; Sterling Salem Corp. (80%); Peters Machinery Co.; Fulton Iron Works Co.; Aetna Bearing Co.; Panhandle Industrial Co.; Quality Foods Machinery, Inc.; Bach-Simpson Ltd. (Canada); Elgin Diamond Products Co. (50%); Missouri-Kansas-Texas Railroad Co. (97.77%); American Gage & Machine Co.; Coastal Oil and Gas Ltd. (Newfoundland); Katy Oil Company of Indonesia; Oakes Machine Corp.; Simpson Instruments Sales & Service, Inc.; Katy Export, Inc.; Sahlman Seafoods, Inc.; LaBour International Limited; Wallace International Silversmiths, Inc.; Bee Gee Shrimp, Inc.; Hermann Loewenstein, Inc.; W.H.E. Watch Company, Inc.; Zeugama, Limited; Seacom Sales Company, Inc.; Gilt, Inc.; HMW Industries, Inc. (50%); Data Processing Inc.; Amerad Advertising Inc.; Diamond Stylos Co., Ltd. (30%); B-B Liquidating Co.; C.E.G.F., Inc. (80%); E.R. Liquidating Co., Inc.; Elgin Watch International, Inc.; Empro Manufacturing, Inc.; International Carbide Tool, Inc.; Intrad Imports, Ltd.; KT Air, Inc.; KT-Plas, Inc.; Katy Bearing Corp.; Katy Communications, Inc.; Katy International, Inc.; Katy Seghers Incinco Systems, Inc.; Katy Teleswitch, Inc.; Modern Foods, Inc.; Trans Continental Leathers, Inc.