Man of Iron
When Gregg Foster bought Elyria Foundry, in 1983, it was losing $3 million a year on sales of $4 million. Not only is the foundry now profitable -- in a fading industry and during a deep recession -- but in eight years, only three employees have left
"This company was an unmitigated disaster. And the guy saw it had potential and did a fantastic turnaround job."
-- Paula George
Like many a salaried executive at middle age, Gregg L. Foster decided to quit his number-two-guy position in someone else's business to go for broke in his own. Unlike many, however, the vehicle he staked his fortune on was virtually insolvent, a shriveling arm of a dying industry. The odds of reviving the 85-year-old iron foundry Foster bought were about the same as those of the nearby Indians, Browns, and Cavaliers all winning championships in the same year.
Located in Ohio's Lorain County, a hit-by-hard-times blue-collar region some 30 miles from downtown Cleveland, Elyria Foundry was started as a job shop for the region's heavy-machinery trades. It has continued to cast huge air-conditioner compressor valves for York International, massive engine frames for Ingersoll-Rand, complex pump housings for Cooper Industries, and similar hunks of heavy metal.
In its heyday, around 1980, Elyria Foundry posted sales of almost $17 million and employed nearly 400 office and factory workers. There was such an undersupply in the markets Elyria was serving that customers came to it; the company didn't even have its own sales force. But by the end of 1982, sales had slumped to $7.7 million annually, owing mainly to economic troubles in the Oil Patch. When Foster finally bought Elyria, in August 1983, the foundry was operating at barely 15% capacity, it was losing some $3 million a year on annualized sales of $4 million, and it employed only 107 people.
"Basically, the company was in free-fall. The numbers were bleak, the trends were scary, and I didn't have answers," Foster confesses. But at least the seller, specialty-metal conglomerate Chromalloy American (now part of Sequa Corp.), had some orders on the fence -- jobs that nervous customers were reluctant to finalize. With those for starters, Foster entered a learn-as-you-go proposition. The worst he'd learn was that it couldn't be done.
No doubt Elyria could have been liquidated, instead of sold to Foster -- had liquidating been affordable. But with its pension plan underfunded by some $3 million, plus monthly carrying charges for insurance, heating, maintenance, and security, costs would have been formidable.
Loping into the cheerless picture came tall, angular Foster, guided by a local business broker. With only a mid-six-figure net worth to barter, Foster needed to find an enterprise in disfavor. "I couldn't compete with a strategic, deep-pockets, high-equity buyer for a company sold on the basis of cash flow," he says. "This price was within my means."
For Chromalloy, Foster was the right deal at the right time -- a certified public accountant who, for several summers during his college years, had labored as one of the gang in a Cleveland foundry and later served briefly as its controller. "Real estate in Elyria at the time was worth zero -- it had negative value, in fact. To find some other business that would want those buildings wasn't likely," Foster says, trying to explain the willingness of Chromalloy's management to bargain with so unknown a quantity. "They couldn't cut the losses, and they couldn't find someone they had confidence in to take Elyria over. I was strictly a stop-the-bleeding rescuer as far as Chromalloy was concerned. For me, it was an operation that required soft skills and people handling, and it was right up my alley."
After 18 months of negotiations, during which each side saw the climate get bleaker still, Chromalloy at last sold Foster the works through a deal for assets, financing essentially 100% of the business by advancing working capital. In the summer of 1983 Foster's leveraged net worth paid for 500,000 square feet of medieval-looking foundries, 200,000 square feet of ramshackle storage warehouses, a couple dozen creaky overhead cranes, four two-story electric furnaces, and countless other pieces of aging appurtenances. "Everything I had, plus everything I could borrow, plus everything that came over as collateral, didn't equal the prior 90 days' losses," he realized in horror.
A coalition of adverse forces seemed allied against Foster's determination and high hopes: (1) there was potential for a strike, should Foster balk at union demands; (2) 1983 might have proved not even close to the bottom of the recession for heavy machinery; (3) who knew what EPA standards the former owner had let slide, that the new one might be called on to correct?; (4) critical suppliers might have demanded payment terms as stringent as COD, since Foster was an unknown credit quantity; (5) the pricing structure bred losses and had to be rebuilt; and (6) the payroll was drowned by perks.
Foster had the foresight to canvass suppliers to make sure they'd work with him on credit. Worried that if he had to devote working capital to raw materials and supplies, "there would have been a first-round knockout," Foster told his creditors that a local bank had extended him a line of credit and that the seller was spotting him unencumbered working capital with which to get started. That did much of the trick. "They could see I had reserve borrowing power," Foster notes. "I asked them to give me a shot and told them I'd be able to pay sooner or later."
Given a vote of creditworthiness, Foster immediately took to the road, converting many of Chromalloy's on-the-fence orders into dollars and creating additional borrowing power to continue to expand. He was able to turn a modest bookkeeping profit by the end of the first month. By the end of 1984, his first full calendar year, sales had more than trebled to $8 million. In four more years, they doubled again to nearly $16 million. Employing some 265 salaried and hourly workers, the enterprise was projected to finish 1991 at close to $28 million in sales -- an eight-year compound annual growth rate of a hefty (for iron castings) 30%. All the more remarkable, the rising curve was achieved during a deep recession and within an industry whose allure had long since faded. Judging by the sorry condition of other foundries (including four more also owned previously by Chromalloy), Elyria may be the most profitable one in the country today.
At least three statistics suggest Foster knew considerably more about foundry operation than he lets on. One, man-hours per ton of output were quickly cut in half, from 70 to the upper 30s; two, sales per employee of $21,000 in 1983, just before Foster took over, soared to $109,000 in 1991; three, he instantly dismissed 15 of Chromalloy's 38 salaried staff. "They were skilled," he grants for the record, "but they had sanitized the business. Ownership was missing. The atmosphere was corporate. A personal business identity didn't jump out." Foster also banished six company cars and three company country clubs, and for quaint but observable effect, affixed his own stamps on personal mail from home and dropped the envelopes into company collection baskets. "It is offensive to me," Foster says, "for anyone to have special privileges. How can you ask a person to save a dime when he can see someone else is cheating?"
While cutting huge swatches out of corporate overhead, Foster also began assessing his inherited union shop -- which came complete with high-seniority workers in single-function jobs. "I didn't have a crane operator willing to come down and help somewhere else," he complains. Through prior agreements, longtime employees had earned special treatment that not only caused discord among the workers who hadn't, but taxed Foster's payroll annoyingly beyond his means. "If they're going to earn bonuses, I want to be the one to give them out."
But first Foster had to enlist employees -- none of whom, salaried or hourly, had been promised jobs in his newly acquired company. He needed to start from scratch, he realized. "If a business is really sick, it's overwhelming. You have to break it down into pieces you can fix, or you'll go nuts." He shut the plant for three days and, together with trusted Chromalloy carryovers Floyd Baum and Robert Gollmar, profiled some 300 candidates for rehire. The team penned the employees' qualities on three-by-five cards and pinned them to an office wall. The trio first selected a general supervisor, who in turn selected three plant supervisors. Then each vied for his own team of subordinates. The 100 candidates with the best performance and attendance records were offered jobs. No wages were cut, but salaries were returned to base, stripped of embellishment. Foster refers to the process as "The NFL Draft."
The International Molders and Allied Workers (IMAW), however, referred to it as union busting. A strike was threatened on Foster's first day in business. Countered Foster: "We do not think employees want five and a half weeks of vacation when they are laid off and can't use them. My priority is to get everyone back to work and provide stable employment full-time every month, so people can start making house payments again." Not only did the union back away, but shortly thereafter the plant voted overwhelmingly to decertify its bargaining agent.
The rejection of the union was at least partly inspired by a fiery I'm-in-charge-here speech from Foster. Gathering the rehired work force, he lectured: "I don't care what you used to do -- it didn't work. As of last Friday, this became a new company, and we're doing things differently. How we do them isn't negotiable. They're what we're going to live or die by." By the way, he added, driving the final nail into the IMAW coffin, "I intend to share profits with everyone here." At the end of the first year, 1984, Foster personally passed out profit-sharing checks, although profits were minimal and he could have retained them for working capital. "But we needed credibility up front," he says. "We needed to confirm in their minds what profit sharing meant -- in the form of a check, not talk."
The work force liked what it heard and -- as W-2s rose some 50¢ an hour above industry standard -- liked what it got. Because each supervisor would not allow his hand-selected team to fail, productivity immediately soared. And in Foster's eight years so far, only three employees have left, establishing an unheard-of turnover rate of, essentially, zero. As a further endorsement, more than 40 of the company's employees have enticed family members to join the force. (And Foster greets everyone by first name, reasoning, "They know mine, why shouldn't I know theirs?")
The company hires in spurts, resorting first to overtime to handle sales growth. Whenever a foundry shuts down in Pittsburgh or Dayton -- as a number have -- Foster books a nearby motel room and interviews the jobless. "I've cherry-picked from every foundry within 50 miles," he exults. Then he spends liberally on job training, so Elyria can cement its niche of complex, high-tensile castings, which require highly trained workers to execute them.
Foster's goal was better utilization of labor, and it's been achieved. In 1979, 391 employees produced 12,000 tons of castings; 10 years later, in 1989, approximately the same tonnage was produced by only 216 employees. Because of increased productivity, Elyria's wages are significantly higher than other foundries', while its labor costs are significantly lower.
From the president on down, no manager serves purely as management. Each has a line job as well. Foster's is salesperson, mostly as repairman to broken customer relationships. "I had to go out and meet customers, because they weren't going to give me any business unless I did. I had to sell them on me, that I was committed to the business. I put my name on the line that I was going to be in this business forever, whereas there was no commitment Chromalloy could make that convinced customers they'd be there even next month."
Foster talked companies like Ingersoll-Rand, Cooper, and Dresser into closing their in-house foundries -- which often lay idle in downturns -- and going with his job shop. "I'll sign a long-term agreement," he pledged, "that we will maintain a critical mass in our shop to stabilize the business. That way you won't be throwing money down a sinkhole every time the economy softens."
The critical mass the plant has been maintaining is 70% of capacity. Beyond that, Foster refuses to stir. "Depend-able, short-term delivery is the prime aspect of quality our customers require. I'm not going to get greedy or stupid," he promises. True to Foster's word, Elyria operates with a 30% cushion specifically to be able to offer customers short lead times. "I'm interested in being an excellent company to as many people as we can take care of -- and not one person more," Foster proclaims. On that basis, he's been pruning out one-shot customers in favor of a few mutually committed ones. Impressed by Foster's commitment, several large orderers have abandoned the traditional mode of letting several vendors carve one another up on price, and already have granted Elyria sole-supplier status.
At the same time, Foster sold himself to employees. "It was like going back in time," he says, recalling his pre-acquisition plant tours, "like in Cool Hand Luke, where workers thought they had to call their supervisors 'boss.' " After taking over, he renovated the factories' old locker rooms and installed a new lunchroom and new toilets. "Employees wouldn't take me seriously if they lived in a dump while management didn't." It's become a dictum that every year at least 50 hourly workers get plucked from the factory floor to go along with Foster on visits to customers, so they can see the results of their labors.
So far Foster has sunk $5 million into reconstruction. "This place requires an awful lot of capital. It's been a cash-management nightmare. I had no idea expenditures would be this high," he admits. True to his mission -- "My passion is for basic skills, for heavy industry, for the kinds of enterprises that are fading away; if I screw this up, it becomes a parking lot" -- Foster spruced up the foundry, cleaning windows and whitewashing walls that hadn't been touched since Hoover was president. "People who had worked here for years wondered what I was worrying about; a foundry is a foundry," says the fastidious Foster. "But when our customers tour the factories, they don't know foundries are supposed to be dark and grimy. Where they come from, they have machine shops and assembly plants that look like hospitals."
Foster may have been primed for union trouble and customer skepticism, but he was not ready for recession. He got a taste of the cruel world when, three months into a deal, a customer who had just been shipped a large order declared Chapter 11. "I was absolutely blindsided. I never even considered the possibility of getting stuck for a lot of money right out of the block," Foster confesses. "Things did not go perfectly."
His biggest mistake since he took over, he concedes, has been a tendency to assume that if you wait long enough, things that don't go perfectly will fix themselves. But patience impedes recovery, he discovered: for one thing, bad customers were being retained too long.
With that, Foster dictated to his staff the fiscal foundation of the turnaround -- a self-devised cost model that formulates the kind of work the foundry can take on and make money with. For his purposes, Foster considers a variable cost anything that would have been avoided had the product not been made, such as labor and materials. Everything else -- maintenance, supervision, materials handling, roof repairs, depreciation -- is a fixed cost.
"Our cost system is very sophisticated. It's designed to attract the kind of work we can make the most money on," says Foster. "Before, the company was going after metal-intensive work it got the least profit from, and it didn't think it could be competitive on the labor-intensive work it should have been doing."
In an effort to keep its customers, Chromalloy had rolled prices back to 1978 levels. "That," Foster says, "was reversible in the first week. We persuaded our people to go after markets that require highly trained workers to make the castings." To turn the company around and make it "the only foundry that's knocking doors down," Foster sold his capabilities on advanced labor skills and high-tech performance. Where job quoting traditionally is considered a clerical function, he forged a crack team of metallurgists and technicians dedicated to the task. "We surveyed the kind of jobs Chromalloy had lost, and we told ourselves to forget the profit numbers -- right then, this wasn't a profit question. Were they jobs that would go though our shop well? Did we have the skills to do them? We redefined fixed and variable costs according to the new system and ran them through again to find out whether there was margin in them.
"And son of a bitch if there wasn't!"
THE TURNAROUND IN NUMBERS
1980 1981 1982 1983* 1983** 1984 1985 1986 1987 1988 1989 1990 1991***
Net sales (in $ millions) $16.8 $15.7 $7.7 $2.3 $2.8 $8.0 $8.9 $8.7 $12.6 $15.8 $19.4 $23.0 $28.0
Total assets (in $ millions) $7.2 $7.4 $5.2 $5.5 $1.4 $3.5 $3.7 $4.3 $5.8 $6.0 $6.7 $6.5 $7.5
Employees 391 339 135 107 102 125 116 136 183 190 216 229 265
Sales/employee (in $ thousands) $49 $54 $57 $21 $28 $64 $77 $64 $69 $83 $90 $100 $109
Production (in thousands of tons) 11.1 10.3 4.5 1.4 1.6 4.9 6.2 6.9 8.3 10.0 12.1 12.4 13.6
*Seven months pre-acquisition
**Five months post-acquisition