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

Company Perspectives:

We strive to increase the top line, reduce costs, closely manage working capital, and control capital expenditures. Successful execution in these areas will benefit not only our shareholders, but our customers as well, as a stronger company can reinvest more readily into constantly improving its customer service and into more innovative product development.

History of Katy Industries, Inc.

Katy Industries, Inc. operates as a manufacturing company with two main business segments: Maintenance Products and Electrical/Electronics. The company manufacturers a wide variety of products including consumer storage, janitorial supplies, scouring pads, electrical cords, surge protectors, and garden lighting. The firm's customer base includes commercial and consumer retail outlets as well as original equipment manufacturers. Katy Industries has facilities in eleven states and three countries.

Early History

Katy Industries 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, 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, which listed on the New York Stock Exchange in 1968.

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 promised myself I'd operate alone from that moment on," he stated, and he has held to that promise 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 wartime demand for products such as 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 25 miles per hour. Shipment of stock would often he damaged, and very few shippers would allow their products to be transported on the Katy. As a result, by March 1965 only 600 cars were moving on a daily basis.

However, by October 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, he 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 also 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 deals with his numerous railroad friends to the effect 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.

Diversification of Katy in the Late 1960s and 1970s

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 1960s was that of Bee Gee Shrimp, a collection of companies that operated a 100-trawler fleet off the coast of Georgetown, Guyana, that harvested and sold 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 percent 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 with keeping 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.

By this time, Katy was considered to be a diversified investment fund, which was different from others of its kind because it usually owned a majority, if not 100 percent, of its affiliate's stock. W.H. Murphy, Treasurer of Katy, regarded this policy as one which allowed 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 did not change significantly over the years. Carroll continued to purchase small companies that had good product lines and presented small risks. As Carroll stated, "If it is profitable or we could make it profitable, we buy it." It was also Carroll's policy to buy companies that already had good management in order to give the division manager a sizable amount of autonomy. In addition, Katy offered incentives to its subsidiaries, which were based on earning increases as a means of keeping the companies productive and efficient.

This formula was 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 1980s. In fact, its earnings were so good that Katy expanded its pump manufacturing company, LaBour Pump, which was 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 1980s represented 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 percent of the outstanding income certificates on the company. MKT had only purchased 41 percent 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."

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. At the time, Carroll saw the waste-to-energy plants as the "future direction" of Katy Industries and expected 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 were considering this form of incineration, and if the trend continued in this area, Katy expected to be in the midst of the development of these plants.

A Transformation Begins: Late 1980s

During the late 1980s and into the 1990s, however, the direction of Katy Industries would change dramatically. Carroll retired, leaving Jacob Saliba as chairman and CEO and William Murphy as president. Under new leadership, Katy began its transformation, which was marked by takeover threats, restructuring, and divestiture.

In 1988, the company finally sold the MKT--which was in financial crisis--to Union Pacific. Katy also divested its seafood business, and by 1990 its main business segments included industrial machinery and components, consumer products, and energy resources. As Katy streamlined its operations, it became attractive as a takeover target. In fact, the Carroll family, which owned approximately 52 percent of the firm in the early 1990s, launched an effort to take the company private. Certain shareholders believed the offer undervalued Katy, and a takeover war began. By 1993, potential suitors included Rosecliff Inc., Pensler Capital Corp., and Steinhardt Enterprises Inc.

During this time, Katy elected a new management team. John Prann was named president while Philip Johnson became chairman. (Saliba was named chairman again in 1997 when Johnson left the firm.) The company also moved headquarters to Englewood, Colorado. In order to maintain its independence, Katy distributed a $14 per share dividend to its shareholders to reduce its available cash and make it less attractive as a target.

The plan worked, and Katy was left to focus on a new restructuring effort that left consumer products, electronics testing equipment, food packaging machinery, and specialty metals as its core business units. The firm continued to sell off unrelated subsidiaries including Panhandle Industrial Co. and also made strategic acquisitions. In 1995, Katy purchased GC Thorsen Inc., a electronic parts distributor. The following year, the firm made a $47 million purchase of Woods Industries Inc., another electronics-related concern.

During 1998 and early 1999, Katy made five acquisitions that included Contico International Inc., a manufacturer of consumer storage, home and automotive products, and janitorial and food service equipment and supplies; specialty abrasives firm Bay State Gritcloth; Wilen Products Inc., a professional cleaning products concern; the consumer electrical division of Noma Industries Ltd.; and Disco Inc., a cleaning products manufacturer catering to the food service industry. By this time, Katy had also divested six companies and its machinery division.

A New Focus for the New Century

As Katy prepared to enter the new century, it adopted yet another focus--maintenance supplies and electrical and electronic products. Revenues jumped from $382 million in 1998 to just under $600 million in 1999 as a result of its aggressive acquisition strategy. In 2000, however, sales fell to $579 million, and the company reported a loss of $5.4 million. Then, in 2001, the firm reported a loss of $63.3 million. That year, the firm took $58.4 million in charges related to restructuring and the write off of certain assets. In addition, sales fell by 12.7 percent in 2001 due to weakening demand and the slowing economy.

As part of the company's cost cutting efforts, it moved headquarters from Colorado to Connecticut and closed an office in Chicago. It also completed a recapitalization with KKTY Holding Company L.L.C. It sold $70 million in stock--700,000 shares--which was mainly used to pay off debt. Saliba retired from his post in 2001 and left C. Michael Jacobi as president and CEO.

In 2002, Jacobi continued to focus on cutting back on expenses, improving profit margins, and new product development. Competition remained fierce, and the recovery of the U.S. economy was crucial to the success of the firm. While Katy had come along way in restructuring itself since the early 1990s, its future held many challenges.

Principal Subsidiaries: American Gage & Machine Company; Contico International, L.L.C.; Contico Manufacturing Limited (U.K.); Contico Manufacturing (Ireland) Limited; CRL Export, Inc. Glit/Disco, Inc.; Hallmark Holdings, Inc.; Duckback Products, Inc.; Primary Coatings, Inc.; GC/Waldom Electronics, Inc.; Katy International, Inc.; Glit/Gemtex, Inc.; Hamilton Precision Metals, Inc.; HPMNC, Inc.; HPM of Pennsylvania, Inc.; Hamilton Metals, L.P.; Wabash Holding Corp.; Wilen Products, Inc.; Katy International, Inc. (British Virgin Islands); Katy Oil Company of Indonesia; Katy-Teweh Petroleum Company; Katy-Seghers, Inc.; Savannah Energy Systems Company Limited Partnership; PTR Machine Corp.; W.J. Smith Wood Preserving Company; Woods Industries, Inc.; Thorsen Tools, Inc.; Woods Industries (Canada), Inc.; Glit/Gemtex, Ltd. (Canada).

Principal Competitors: Ecolab Inc.; The ServiceMaster Company; Unilever.

Chronology

• Key Dates:
• 1948: Wallace Carroll establishes American Gage and Machine Company.
• 1967: Katy Industries incorporates.
• 1968: The company goes public.
• 1972: The firm expands into European and Canadian markets.
• 1988: The company sells MKT to Union Pacific.
• 1993: Katy Industries fends off takeover attempts.
• 1998: Five companies are acquired and six are sold during a restructuring effort.
• 2001: The company completes a recapitalization.