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Reliance Electric Company Business Information, Profile, and History

million motor sales debt

6065 Parkland Boulevard
Cleveland, Ohio 44124-6106

History of Reliance Electric Company

Reliance Electric Company is a manufacturer of large mechanical couplers and electrical motors and drives used in heavy industries from steel and paper mills to coal mines. The company diversified into electronic equipment for the telecommunications industry in the 1970s. Reliance's stock was returned to public equity markets in February 1992 after a thirteen-year absence. The company has more than 250 operating facilities in nine countries as well as a global marketing and distribution network.

Reliance Electric was founded in 1904 in Cleveland, Ohio, as a partnership between two cousins: inventor John Lincoln and industrialist Peter Hitchcock. Lincoln had developed a new and better arc-type light bulb while working with the Brush Development Company. He convinced Hitchcock to use his financial resources to develop, manufacture, and market the bulb. By the time the two formed their partnership, however, the inventor Thomas Edison had announced the development of his incandescent light bulb, rendering null Lincoln's advances of the clearly inferior arc bulb.

The partners were dismayed at this unfortunate turn of events, but Lincoln revealed that he had also been working on a new type of direct current (D-C) motor. Direct current was the primary means of electrification at the time because alternating current was considered dangerous and unpredictable. Lincoln invented the first adjustable speed direct current motor, and Hitchcock fronted the money to begin manufacturing. They shipped their first industrial electric motor in 1905. The two named their new company after the inventor: Lincoln Electric Motor Works.

When Hitchcock died in 1907, Lincoln sold his interest in the company to Charles and Ruben Hitchcock, Peter's sons. The youngest, Ruben, took over the company. Having little business or electrical experience, Ruben sought a new president. He found one in Clarence Collens, a Yale graduate, who stayed with the company in that capacity for the next forty years. Ruben Hitchcock served as executive vice-president. When Collens came on as president, the company was incorporated as Reliance Electric and Engineering Company. There had been some confusion in the Cleveland business community prior to the name change--another electric concern in the area was named Lincoln Electric.

The variable speed motor, or armature shifting motor, as it was known in the trade, was Reliance's only product until 1913. That year, the company's chief engineer, Alex McCutcheon, designed a T-line D-C motor that soon became Reliance's primary product. It was used in many of Cleveland's booming steel mills and was a mainstay of the product line until the early 1950s.

Reliance began to design and manufacture industrial alternating current (A-C) motors in the 1920s, but the company was late to join the race to convert to A-C. A-C generation had been developed around the turn of the century, and came into heavy use in industry by 1910. General Electric Company (GE) and Westinghouse Electric Co. had used the ensuing decade to become well-established producers of industrial A-C motors.

Combined, GE and Westinghouse held 50 percent of the United States' total industrial electric business. As industry leaders, they established the prices that the rest of the market followed. Reliance executives soon realized that they needed to find a niche for their company to remain competitive and profitable. They decided to concentrate on becoming a flexible, timely supplier of industrial motors, emphasizing the applied engineering aspect of the business. To accomplish this conversion, Reliance hired sales representatives with technical knowledge. These representatives would not just sell Reliance products, they would also investigate customers' needs and recommend equipment to get the job done.

One of the salesman, Jim Corey, proved his technical expertise when he received a patent for an adjustable voltage, multi-motor control system for use in the paper and textile industries. Corey was not trained as an electrical engineer. He had started at Reliance as a "blueprint boy," then moved up to become a draftsman, salesman, sales manager, vice-president of sales, and eventually president of the company.

Reliance made its first inroads into the A-C business in 1927 with a modification of the General Electric enclosed fan-cooled motor. The GE model was not well suited for the high-particulate environment found in most automotive factories, so Reliance copied and improved the motor for those specific conditions. A lucrative contract with General Motors for the manufacture of its new Pontiac cars gave Reliance just the push it needed to get established in alternating current motors.

The company grew quickly on the basis of these new technologies, and in 1929, on the eve of the Great Depression, Reliance's sales peaked at about $3 million. The Corey motor helped partially insulate the company from the severe economic downturn, since the textile industry was virtually depression-proof. The introduction of the first electrical variable speed drive package during the 1930s established Reliance's enduring leadership in that facet of the business.

During World War II, Reliance served as a primary supplier of motors to the military, especially the Navy. The company also supplied the motors needed to build hundreds of tanks. This war-related business required and enabled Reliance to build two new Cleveland plants in the 1940s and another in the suburb of Euclid in 1951.

Technological advances, like semi-conductors, transistors, and digital equipment, combined with mergers and acquisitions to drive Reliance's growth in the postwar era. During the 1950s, the company expanded its electrically-based products to include mechanical power transmission products. Reliance acquired the Reeves Pulley Company in 1955 and the Master Electric Company in 1957. These two entities complemented Reliance's established mechanical operations. The company prospered in the late 1950s, and its stock began to be traded on the New York Stock Exchange in 1957. Sales that year neared the $100 million mark. In 1959 Reliance established a Canadian subsidiary, and two years later, it formed a joint venture with a firm in Switzerland.

Mergers and acquisitions continued in the 1960s and 1970s. The Mechanical Group was expanded with the purchase of the Dodge Manufacturing Company in 1967. Dodge and previously-acquired Reeves were then, and remain in the late twentieth century, respected trademarks among power transmission products. That year Reliance also purchased the Toledo Scale Company. 1968 saw the acquisition of Atlanta-based Custom Engineering Corp., and Applied Dynamics, a computer manufacturer, was purchased the following year. With foreign sales of $30 million in 1969, Reliance purchased two European companies to secure its international position.

B. Charles Ames was named president and chief operating officer of Reliance in 1972, and was given the additional duties of chief executive officer four years later. In 1973 Reliance merged with Lorain Products Corp., a suburban Cleveland manufacturer of specialized power equipment for the communications industry. The company made its second acquisition in this field in 1977, with the purchase of Continental Telephone Electronic Co., a producer of telecommunications equipment. The company further shored up its telecommunications business with the purchase of Utility Products Co. of Milwaukee and Federal Pacific Co. of Newark. Kato Engineering, maker of industrial electrical generators, was purchased in 1978. As a result of these acquisitions, Reliance grew steadily over the course of the decade: the company marked its fourth consecutive year of record sales and earnings in 1976, posted profits of $13.4 million on sales of $207.6 million in 1977, and registered record earnings of $64.6 million on sales of $966.2 million in 1979.

In December of that year, the Exxon Corporation purchased Reliance for $1.24 billion. The sale consisted of $72 for each Reliance common share and $201.60 for each share of convertible preferred stock. Exxon, like several of its competitors in the oil industry, sought to use its excess capital to diversify its interests. Exxon was especially hopeful that Reliance would be able to manufacture the oil company's experimental "alternating current synthesizer," a device that would use current only when needed. Exxon boasted that the alternating current synthesizer, or ACS, could save the United States as much as one million barrels of oil each day. Exxon transferred its ACS Group to Reliance in 1980 so that the subsidiary could apply its electrical engineering expertise and develop, manufacture, and sell a line of variable speed drives using the new technology. By the end of 1981, however, it had become painfully clear that Exxon's ACS projections were exaggerated: the test model was too expensive and unreliable to be manufactured on a large scale. To make matters worse, Reliance posted losses in three of the next four recession-plagued years: $6 million in 1980, $50 million in 1982, and $59 million in 1983. The $31 million profit in 1981 did not come close to balancing the losing years.

Ownership by Exxon had both positive and negative effects on Reliance. There was some apprehension among Reliance's customers as to what the oil conglomerate would do with the motor manufacturer. That uncertainty was exploited by Reliance's rivals as they attempted to undermine customer confidence in the company's staying power. At the same time, Exxon supported Reliance throughout crises that might have devastated the company, had it remained independent during the 1980s. A recession in 1981 and 1982 diminished Reliance's primary markets, including steel and other metals, mining, machine tools, and industrial controls.

Federal Pacific Electric (FPE), which Reliance purchased just months before the 1979 Exxon takeover, turned out to be one of the company's most unfortunate acquisitions. Reliance discovered that FPE had been manufacturing some substandard circuit breakers, its largest line of products, and had deceived Underwriters Laboratory (UL) to get its approval for the critical home and commercial construction markets. As a result, UL withdrew its approval of all FPE circuit breakers, forcing the company to purchase and market others' products. Reliance initiated a costly seven-year, multi-suit litigation against UV Industries Inc., former owners of FPE, which was not concluded until the late 1980s, when Reliance divested the troublesome subsidiary.

The devastating recession, excess capacity, low demand, and intense competition forced the company to close its original plant on Ivanhoe Road in Cleveland in February 1984 and move its operations to more modern facilities in Ashtabula, Ohio, and Shelby, North Carolina. The tough times led to other cutbacks as well. From 1982 to 1984, Reliance eliminated 25 percent of its manufacturing space and 27 percent of its payroll. When a strong recovery forecast for 1986 did not materialize, further economizing was undertaken.

In 1985 Reliance earned $30 million on revenues of $1.67 billion and purchased Inertia Dynamics Inc., a small company headquartered near Hartford, Connecticut. Reliance hoped to combine Inertia Dynamics' expertise in electric clutches and brakes with its own industrial motor and drive technology in order to broaden its product line into copiers, motorized wheelchairs, computer disc drives, and other specialized equipment.

Reliance became the largest industrial motor manufacturer in the United States with the April 1986 purchase of the Medium A-C Motor Division from one of its oldest competitors, Westinghouse Electric Corporation. By the end of that year, Reliance entered a new phase in its ownership status when a group of the company's officers and institutional investors took the company private after six years under Exxon's wing. Led by John B. Morley, president and chief executive officer of Reliance since 1980, the investment group included Citicorp Capital Investors and Prudential Bache Securities, two New York investment firms. Citicorp purchased about 43 percent of the company in the buyout, Reliance management bought an estimated 15 to 20 percent. Prudential assumed about 13 percent, and institutional investors secured the remainder. The $1.35 billion leveraged buyout included two companies Reliance managed for Exxon: Exxon Printing Systems Inc., a startup ink-jet business in Connecticut, and Lionville Manufacturing Inc., an electronic design and production firm near Philadelphia. At the close of the leveraged buyout, 50 to 60 percent of Reliance's business was concentrated in electrical and mechanical sales, 25 percent of revenues came from telecommunications, and the remainder came from Toledo Scale Corp. sales. Although the company's stock was not publicly traded, many of its preferred stock and debt issues were traded on the over-the-counter market, requiring public disclosure of financial figures.

While under Exxon's control, the company had invested over $400 million of its own cash flow into new plants and economized substantially, but it was faced with massive interest charges after the buyout. In 1987 Reliance accumulated sales of $1.17 billion, posted a $4 million profit, and brought down its debt level to $969 million. The company moved to a new headquarters in 1989, following the 1988 sale of a forty-acre parcel of land to a St. Louis developer in exchange for the new building. The move consolidated staff from three buildings into one, thereby lowering some overhead costs, and brought in extra cash (from the sale of the old buildings) that was used to pay the debt from the buyout.

The 1989 sale of Toledo Scale Corp. to Mettler United States Inc., an affiliate of Switzerland's Ciba-Geigy Ltd., and a $24 million 1988 profit on sales of $1.3 billion helped Reliance bring its debt down to about $600 million, half the 1986 level. The significantly lower debt allowed Reliance to pursue more aggressive research and development and growth-oriented strategies, including acquisitions, joint ventures, and licensing contracts.

Several factors combined in the early 1990s to induce Reliance to make a public stock offering in 1992. In 1991 Citicorp indicated its desire to liquidate its 43 percent stake in Reliance common stock. That request led Reliance to hire Goldman, Sachs & Co. and Prudential Bache Securities (which still held 13 percent of Reliance) to help the company find a new primary investor. In November of that year, Reliance entered into preliminary discussions with Siemens Corp. that were expected to result in the acquisition of Reliance by the German company, but the negotiations failed in December. By this time, Reliance's debt had risen to $700 million. Plummeting interest rates prompted the company to refinance its buyout debt in 1992, saving approximately $36 million in interest costs. Reliance executives decided to further reduce debt by taking the company public in February 1992 with an offering of 15.8 million shares of common stock at $19 each. The over $300 million cleared from the sale was used to recover Reliance's outstanding subordinated debentures as part of the plan to recapitalize the company's debt-ridden balance sheet.

On its first day of public trading in more than a decade, Reliance topped the New York Stock Exchange's list of most active traders, with more than five million shares changing hands. Reliance remained cautiously focused on debt-reduction in the early years of the 1990s, thereby justifying a no-dividend policy. In 1992 alone, the company had reduced its debt from $588 million to $375 million, helping it raise its senior debt credit rating given by Standard & Poors to "BBB." Although a persistent recession prevented many of Reliance's traditional customers from making capital investments in the company's engineered products and systems, profits increased modestly from $34 million in 1991 to $48 million in 1992. Reliance dedicated itself to meeting the International Standards Organization's strict ISO 9000 global quality requirements by the end of 1993. The company continued to make significant investments in research and development ($103 million in 1992) to maintain its customer-driven research and fund experiments in new technologies, especially energy-efficient motors. Sales of industrial equipment constituted three-fourths of Reliance's sales in the early 1990s, but company executives still considered telecommunications an important growth vehicle.

CEO Morley hoped to lower Reliance's debt to $250 million, or a debt-to-equity ratio of about 33 percent, in 1993. Profits doubled in the first quarter of that year, perhaps forecasting Reliance's emergence from the nationwide recession.

Principal Subsidiaries: Reliance Electric Industrial Company; Reliance Comm/Tec Corporation; North American Transformer, Inc.; Reliance Motion Control, Inc.; Inertia Dynamics, Incorporated; Reliance Automation Pty. Ltd. (Australia); Reliance Electric GmbH (Austria); Reliance Electrica Ltda. (Brazil); Reliance Electric Limited (Canada); Reliance Electric Scandinavia ApS (Denmark); Reliance Electric S.A.R.L. (France); Reliance Electric (Hong Kong) Limited; Reliance Electric S.p.A. (Italy); Reliance Electric Limited (Japan, 45%); Reliance Electric Service Ltd. (Japan, 45%); Renix Co. Ltd. (Japan, 36.9%); Suntech Company, Ltd. (Japan, 49.2%); Yonjun-Reliance Electric Co. Ltd. (Korea, 55%); Reliance Electric & Engineering Co. S.A. de C.V. (Mexico); Dodge de Mexico s.A. de C.V.; Productos Lorain de Mexico S.A. de C.V.; Reliance Exportel S.A. de C.V. (Mexico); Reliance Electric (Singapore) Pte. Ltd.; Reliance Electric S.A. (Spain); Reliance Electric A.G. (Switzerland); Electro-Craft Limited (United Kingdom); Reliance Electric (UK) Ltd.

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