Goodrich: From Tires To Pvc To Chemicals To Aerospace...Zachary Schiller
Few chief executives have reinvented their companies as often as B.F. Goodrich Co.'s John D. Ong. He got the Akron industrial giant out of the tire business in the latter part of the 1980s as competition heated up. And as the uses of polyvinyl chloride multiplied, he looked to the PVC business as the source of future riches. Then last year, he did an about-face, selling off the PVC business while putting more emphasis on his company's other chemical businesses.
But while Ong has demonstrated an unusual willingness to change course, his strategic turns haven't done much for Goodrich--or its shareholders. The company has produced an average annual return on equity of just 1.4% since Ong became CEO in 1979, compared with an average of 14.4% for the companies in the Standard & Poor's Industrials index. During the same period, Goodrich's sales have dropped an average of 3.5% a year, while the companies in the S&P index had a 5.4% annual gain (chart). Small wonder Goodrich's stock is a perennial laggard on Wall Street: Now trading at around 44, Goodrich hasn't even come close to its 1989 high of 69. Goodrich is in chronic need of a turnaround, complains one former executive. "It keeps getting fixed and fixed and fixed," he says.
DOUBLING UP? Now, Goodrich is being fixed yet again. The 60-year-old Ong is making a big push into aerospace--at a time when the industry is in its worst slump in more than a decade. Building on Goodrich's aircraft-parts and servicing business, Ong last year used much of the $630 million in proceeds from the sale of Goodrich's PVC business to acquire landing-gear maker Cleveland Pneumatic Co. and Rosemount Aerospace, which makes sensors that measure flight data, such as speed and temperature. Ong's goal: By 2000, he wants to double Goodrich's revenues, to $4 billion, with sales divided equally between aerospace and chemicals. "I suppose [the board], like I, wish we could have moved faster and done a little better," says Ong, who stepped down on June 21 as chairman of the Business Roundtable, Corporate America's high-powered lobbying group. "But we've taken a company with enormous vulnerability and turned it into a company with a lot of promise."
That promise has been long in the making. In 1986, Ong, a Harvard law graduate who joined Goodrich in 1961 as assistant counsel, began exiting the slow-growth tire business, which had accounted for 39% of Goodrich's sales. First, he spun off Goodrich's tire business into a joint venture with Uniroyal. Two years later, Ong sold Goodrich's 50% stake to Uniroyal's owners, a group led by the investment firm of Clayton Dubilier & Rice Inc. France's Groupe Michelin purchased Goodrich's remaining small interest in the business when it bought Uniroyal Goodrich Tire Co. in 1990.
Throughout the 1980s, Ong depended on the PVC business for much of Goodrich's revenues. The company had been a pioneer in the industry, developing the plastic back in 1926, when it was used to waterproof umbrellas and raincoats. By the 1980s, PVC was being used for everything from piping to wire insulation. Still, the demand for PVC never quite lived up to Ong's ambitious expectations. And later attempts to customize special PVC compounds for buyers failed to boost profits. Finally, the market sagged as the recession set in in 1990. This time, Ong decided he wanted no part of such a cyclical business. So in February, 1993, he announced that Goodrich would sell off the PVC operation, known as Geon Co.
The proposed sale didn't sit well with investors. Many had bought shares in Goodrich largely because of its PVC business and felt Ong was unloading the unit just as the economy and demand for PVC would pick up. Within a week of Ong's announcement, Goodrich shares fell 18%, to just under 43. "We were looking for the PVC exposure," says Betsey Lynch, manager of research for the State Teachers Retirement System of Ohio, which dumped its Goodrich shares. "We were just playing that part of the cycle."
Ong acknowledges that the ownership of about half of Goodrich's outstanding common stock has changed hands since early 1993. But he is hardly repentant. "We feel our job is to build shareholder value over the long term, not just deliver return to a shareholder who may be in and out of the stock in [a given] time period," he says. But even some shareholders who have decided to stick it out with Goodrich say Ong's decision was premature. They point out that Geon, which was spun off in two parts in April and November at $18 and $20 a share, respectively, is currently trading around $26.
Ong doesn't buy much of the criticism about his performance. He argues that Goodrich was in sorry shape when he and his management team took over--a view seconded by Goodrich's directors. "They've been dealing with tough industries," says John L. Weinberg, senior chairman at Goldman, Sachs & Co. and a Goodrich board member since 1962. "I think John has done an excellent job."
And while shareholder returns have been below average, they haven't been disastrous, Ong says. Since 1991, Goodrich's board has paid a dividend of $2.20 a share, or a lofty annual yield of 5.06%. That compares with an average 2.62% for the S&P Industrials. "I don't think there is a case to be made the shareholder has suffered inordinately, and now he has a company with interesting growth possibilities," Ong says.
Indeed, Ong believes that he finally has the business mix he needs to generate better results. Goodrich's $830 million specialty chemical business, which makes everything from plastics to synthetic thickeners for cosmetics, is beginning to show improvements. And the aerospace business also holds big promise, Ong says. Over the past 10 years, Goodrich has had a thriving aircraft wheel-and-brake business. And it has gradually expanded into aircraft parts and servicing. With the industry expected to climb out of its morass by 1996, Ong sees an opportunity to build on that success.
Last year's acquisitions could further those ambitions. Cleveland Pneumatic, a landing-gear maker that Goodrich bought from Abex Inc., an aerospace company, fits well with Goodrich's existing wheel-and-brake business. Still, it has problems. The small company lost a key contract for the Boeing 777 in 1991, and its sales declined 26% last year, to under $200 million. That's why it came relatively cheap at $193 million. Goodrich has spent the last year improving the unit's efficiency. It has laid off 140 workers, 17% of Cleveland Pneumatic's workforce. Goodrich has also reorganized the shop floor, helping reduce the time it takes to make a landing gear from nine to six months. Rosemount, widely regarded as the Cadillac of the sensor industry, is in far better shape. Goodrich purchased the $130 million company from Emerson Electric Co. for a hefty $301 million.
DOUBTERS. The two additions have expanded Goodrich's aerospace business by almost 50%, to over $1 billion this year. And Ong says the acquisitions will enable Goodrich to offer larger systems for aircraft, such as complete undercarriages. Until sales of new aircraft revive, Goodrich will depend on its airplane-refurbishing and spare-parts businesses. Still, some competitors question if Goodrich can meld its new and existing businesses into a true contender, squeezing more efficiency from the combined operations--especially at a time of intense competition. "The real question is how well they can integrate this stuff," says Frederick B. Sontag, president of Unison Industries in Jacksonville, Fla., which makes electrical engine components.
There are some signs that Ong's latest strategy may eventually get Goodrich back on track. Analyst Nick J. Spencer of Sanford C. Bernstein & Co. estimates that Goodrich's earnings from continuing operations--including partial results from its recent acquisitions--could quadruple this year, to $61.4 million, as revenues rise 19%, to $2.2 billion. That represents a return on equity of under 7%. Still, some investors are pleased. "I think they're finally focused and making good investments now," says Stephen J. Fauer, senior investment analyst at Manning & Napier Advisors Inc., a money-management firm that owns more than 7% of Goodrich's stock. Says Ong: "I've never felt more confident about our ability to deliver the goods than I do right now." Goodrich shareholders know the company has left the road. The question is whether it will really take to the skies.