Metamorphosis Featured

9:41am EDT July 22, 2002
Glen W. Lindemann remembers the days when he felt obligated to apologize for being Figgie International. Even after the once mighty, billion-dollar conglomerate was carved up and the bulk of its divisions sold off, the name “Figgie” still rang cold in the marketplace.

“The first year or so that I was involved in corporate (activities) before we changed the name (to Scott Technologies Inc.), I’d have to explain, ‘Yes, it’s Figgie International, but it’s a different company, it’s different management,’” says Lindemann, CEO and president of Scott Technologies. “I’d go through 10 or 15 minutes worth of almost apologetic explanation before finally getting to the growth story.”

That’s not surprising, considering the heavy baggage that weighs down the Scott/Figgie saga. Any business identity change is complicated, but in Scott’s case, that baggage has made the explanation even longer and the turnaround that much more difficult.

“During the early 1990s, the company fell off-track,” says Mark A. Kirk, senior vice president and CFO, trying to sum up the company’s past. “It lost its focus and found itself in a serious liquidity crisis. The company was in bad need of cash and lost a significant amount of money.”

In simpler terms, former owner Harry E. Figgie Jr. was ousted after a flawed capital investment strategy aimed at automating numerous manufacturing operations left the company in serious debt and its books muddled. When the dust finally cleared, the business was in dire need of a complete overhaul.

Recalls Kirk, “It was almost a survival process. (We said) ‘Let’s just survive. Let’s divest what we can. Let’s get the cash we can. Then we’ll see where we go from here.’”

Picking up the pieces from the rubble was not easy. The new management team — led by John Reilly and Lindemann — developed a highly focused strategic plan to pare the company back to its core, then slowly begin the process of rebuilding it and its name.

Today, with Lindemann at the helm, the company has come full circle, assuming the identity of one of its first acquisitions and strongest divisions, Scott Aviation. Lindemann says the goal is to continue Scott’s growth through the acquisition of companies that complement its line of safety equipment.

“Scott has always been one of the stars within the Figgie company,” explains Larry Baker, an industry analyst with Legg Mason Wood Walker Inc. who follows Scott. “Now that it has emerged as an independent company, it has allowed people to focus on it more clearly. The track record there is excellent and the outlook is very strong. (Scott) is by far the strongest name in their market, in both the health and safety side of the business, as well as the aviation side. We’re urging people to buy the stock.”

The glowing industry reviews are drastically different from those just a scant six years ago, when the Figgie family was ousted in a high-profile shake-up. That set in motion a slow, deliberate return to profitability. And despite the strength of Scott Aviation, as the sole survivor in the company’s massive divestiture, it was left to deal with the aftermath and handle the messy clean-up duties.

But before it could move forward as a new entity, as with the nearly two dozen divisions that were sold off, Scott had to shed its Figgie stigma. Here’s how Lindemann and his team made true believers out of the disenchanted.

Find your sweet spot and exploit it

The focus of the Figgie growth strategy was evident in its business operations of the 1970s and ’80s — function as a conglomerate of multiple companies in different disciplines. The thinking was that the broad-based structure would allow the holding company to weather ups and downs in each industry.

“That was a philosophy for the time,” Lindemann says. “But I’ve always been a great believer of focusing in on your core strength and what you do well.”

That may help explain how Scott Aviation flourished under Lindemann, even in the dark days leading up to Figgie’s eventual implosion. It also explains the new management team’s philosophy after Reilly succeeded Figgie Jr. as company CEO in 1994. At the time, Lindemann was a member of the board of directors and head of Scott Aviation.

Over the next few years, the new team sold off 27 divisions, leaving three — Snorkel, Scott and Interstate Electronics Corp. — as the base for recovery efforts. But even that wasn’t focused enough, and in 1997, the company rid itself of the Snorkel division, which built aerial work platforms. Two years later, IEC, the electronic flight guidance systems manufacturer, was sold as well.

“We really had some businesses in the portfolio that we should not have been in,” Kirk says. “We felt like we needed to reallocate capital in the portfolio, so we divested IEC, which was a business that really just didn’t have good synergy with the rest of our core businesses.”

Scott Aviation was the sole remaining entity. Lindemann and his team had discovered its sweet spot — safety equipment — and the organization was flush with cash for future acquisition of complementary businesses. Explains Kirk, “We created a significant war chest of cash through strong operating cash flow and (selling) every noncore asset that we had.”

Even before the divestiture of IEC, Lindemann and the board realized the Figgie name had to be jettisoned.

“(One concern was) the name itself and the legacy it brought,” Lindemann says. “That’s one of the reasons we changed the name — because we are a different company. Ultimately, we presented to the shareholders the idea.”

A whopping 98 percent agreed.

The change symbolized more than just a break with the past, Lindemann says. It represented the fact that a new company had been formed, especially since Scott Aviation inherited the Figgie name simply because it was the strongest division.

“Our stint within the Figgie conglomerate didn’t really change the direction or the market that the company served,” says Robert G. Berick, director of corporate communications and investor relations.

Rebuild trust

The evolution, de-evolution and rebirth of Scott Technologies reaches back nearly 70 years, to 1932, when Earl Scott, an inventor with a knack for developing aviation products, launched a small firm out of his basement. Shortly after the outbreak of World War II, Great Britain turned to the United States for help equipping airmen with breathing equipment for high altitude bombing runs against the German army.

Scott’s firm was contracted to produce oxygen generators. The inventor parlayed that success into a viable company, which he sold in the late 1960s to the fledgling Figgie. Years later, when Figgie’s massive sell-off was over, it was Scott that survived.

Figgie’s problems stemmed from racking up too much debt, an irony not lost on those familiar with one of Harry Figgie’s ventures into publishing. His 1992 book, “Bankrupt 1995: The Coming Collapse of America and How to Stop It,” spent nine months on the New York Times best seller list.

Figgie wrote about the country’s deficit crisis and the impact it would have on American citizens, as well as on the global economy, when the U.S. becomes nationally bankrupt. He offered suggestions on how to avoid financial ruin.

Hindsight proves him wrong about the country, but he should have applied the advice to his own business. Instead, the company borrowed heavily to acquire businesses and update manufacturing plants. The new divisions couldn’t generate enough revenue to sustain the growth and posted losses in excess of $100 million a year.

Reilly was brought in to keep the company from sinking after Figgie Jr. and his family were forced out in 1994. It was Reilly and his team that started carving up the company. They developed the plan to rebuild Figgie and instilled a renewed sense of trust among shareholders, customers, suppliers and industry analysts.

Today, Scott Technologies is truly a different company than its predecessor was. While Figgie was a Fortune 500 behemoth with more than $1 billion in revenue in 1990, Scott’s revenues of $201 million are more than enough to satiate the management team and shareholders.

But attitude changes and belief in the system don’t arrive overnight. It’s not that easy to bring people back to the table without a hint of skepticism in their eyes when they’ve been burned before.

The company’s first step in rebuilding trust was making sure the cornerstones chosen for the effort were the right ones. All signs pointed to Scott.

“Looking at the three businesses that they had, if you had to have one business that you wanted to be associated with over an economic cycle, Scott was the one,” Baker says.

With the right foundation in place, the new management team set out to make over the company’s tarnished image. That required addressing the sordid issues of the past, something today’s team doesn’t shy away from.

“It’s part of the turnaround and the transformation,” Kirk says. “To appreciate the value that is here today, you’ve got to reflect on the value that wasn’t there a few years back.”

With Scott, there were solid financial returns to pin the rebuilding effort upon. Even in Figgie’s worst financial showings, the Scott division accounted for most of the company’s revenue. And while the division didn’t grow as quickly as the numbers reflected it should have, it was only because much of the money was funneled back into Figgie to keep it alive.

Today, Lindemann acknowledges that was done for survival purposes, but says it was frustrating, especially since he was forced to hold back payments to vendors when the cash just wasn’t in Figgie’s accounts.

“I lived through those eras. Believe me, I know what it was like to be running a division where you had a lot of the corporate overhang that was just killing you,” he says. “We had these wonderful dreams of building a big company. We wanted people to see our results and focus on that. Now, they’re finally able to do that.”

The turnaround was mired with highs and lows. The company’s stock dropped to a low of about $6 a share in the mid-’90s before rebounding recently. In early April of this year, it hovered around $19.

“We clearly demonstrated how we’re going to be a different company and how we plan to grow the company,” Kirk says. “Back in late ’97 when Glen got up here, it was really just a promise. In ’98, it was, ‘We’re building the infrastructure and we’re building the game plan.’ Nineteen ninety-nine really was the year, I think, in the investment community’s eyes, that we really did start the new growth chapter, and we clearly demonstrated to folks how we’re capable of making this a new company. This year, we’ve really started to separate from the past.”

Scott’s reversal of fortune is clearly visible in its earnings reports. Sales reached $201 million in 1999, a 14 percent increase from the $177 million posted in 1998. Kirk expects that trend to continue.

The growth, we think, is just beginning,” he says. “In 2000, we expressed that we intend to grow 15 percent.”

That belief, also present among other company leaders, is tied to recent results. Scott went from an $8.5 million loss in 1998 to $50 million in black ink last year. It’s the type of leap that causes others to stand up and take notice.

“I still participate in a lot of the trade associations and it’s great to be congratulated by your competitors,” Lindemann says. “(It’s nice) to finally be rid of the burden of the past and finally be able to demonstrate a great company. Even the competitors recognize that.”

Growth through acquisitions

If divestiture is a sign of the company’s past, acquisition is the mark of the future. Scott recently announced its third acquisition — Kemira Safety Oy of Finland, a manufacturer of respiratory safety equipment. The move came shortly after last December’s acquisition of Av-Ox Inc., of Van Nuys, Calif., a company that maintains and overhauls oxygen equipment for the airline industry which had 1999 sales of $10 million.

There are more acquisitions on the horizon, Lindemann says, due in part to $65 million in cash earmarked for acquisitions and a $75 million credit line. But don’t expect Scott to suddenly start buying companies in a flurry now that it can. The additions reflect Scott’s long-range plan — steady and targeted acquisition.

“We have to be careful,” Lindemann says. “The investment community looks at what we do. If they can’t see the synergies, if they can’t see the benefits to the shareholders, they’ll write it that way and our stock goes down.”

That helps explain Lindemann’s choosy philosophy. Last year, he walked away from seven or eight deals rather than pay for property that was overvalued due to a white-hot seller’s market.

“We kick the tires and we realize the value’s not there,” he says.

It’s also a matter of complementary operations.

“You find a lot of acquisitions are unsuccessful when companies just buy and strip out costs,” Kirk says. “Ultimately, if you can’t grow the two businesses together, then you don’t create any value. Growth of the top line has to be an important element.”

The acquisition of Av-Ox, and a previous acquisition of Scott Bacharach Instruments, were designed to enhance Scott’s position in the marketplace by expanding product lines and leveraging existing distribution channels. The thoughtful process has not gone unnoticed by industry observers.

“It’s been a sound strategy and very well executed,” says Baker. “A key market, commercial aviation, is in a downturn and they’re still able to put together positive earnings.”

In 1997, Scott titled its annual report “Focus” as a reflection of the company’s new approach. In 1998, the report was “Safety in Numbers.” It was partially a play on words, but also an indication of the important numbers reflected in the company’s growth. That year, Scott conducted business in nine of the 11 largest cities in the country. It dominated 60 percent of the commercial aviation market. The final numbers: $177 million, Scott’s sales record at the time.

The 1999 annual report, which went to press last month, is titled “Focused, Strengthened, Growing,” which represents the three-pronged business strategy. One can only speculate what words will emblazon the 2000 annual report.

Though the turnaround seems complete to outside observers, it’s not. Lindemann says Scott will not rest on its accomplishments and still has much work to do in re-establishing the company’s reputation and strengthening its position in the marketplace.

“We’re a new group of people and going forward,” he says. “The old Figgie philosophies and troubles are theirs. We’re a new company, a new story, and that’s what I want to look at going forward.” How to reach: Scott Technologies, (216) 896-1333

Daniel G. Jacobs (djacobs@sbnnet.com) is senior editor of SBN.