Allied Healthcare Products, Inc. History

Address:

720 Sublette Avenue
St. Louis, Missouri 63110-1927
U.S.A.

Telephone: (314) 771-2400
Fax: (314) 771-0650

Public Company
Incorporated: 1980
Employees: 884
Sales: $118.11 million (1997)
Stock Exchanges: NASDAQ
Ticker Symbol: AHPI
SICs: 3841 Surgical & Medical Instruments; 3842 Surgical Appliances & Supplies

Company Perspectives:

We live in an age where the world is growing smaller. Therefore, we believe, as did our founders, that every business must contribute to the welfare of our society.

Company History:

Allied Healthcare Products, Inc. is a leading manufacturer of respiratory products used in hospitals, ambulances, and patients' homes. The company's business can be divided into three broad lines: respiratory therapy equipment, such as critical care ventilators, humidifiers, and monitoring systems, which in 1997 accounted for 54 percent of its sales; medical gas equipment, including in-wall medical gas system components, pumps, and compressors, amounting to 36 percent of sales; and emergency medical products, such as trauma burn kits, spine immobilization products, portable resuscitation systems, and bag masks, which represented the remaining 10 percent of sales. Although by the mid-1990s consolidation in the U.S. healthcare industry led to a reduction in Allied's domestic sales, its international sales boomed during the same period. The company marketed and distributed its products under a variety of brand names, such as Chemetron, Gomco, Timeter, Oxequip, and Life Support Products.

Early History

Allied Healthcare's origins date back to the Great Depression and a St. Louis company called Stilecraft. Carl Sciuto and his four brothers founded that company in their hometown to manufacture wooden blinds. Stilecraft diversified over the years and eventually focused on the production of medical care equipment. In 1971 Sciuto sold the firm to Chemetron, which at the time concentrated on chemicals, metals, and electronics. Chemetron developed Stilecraft into its distinct medical products division, and four years after Chemetron's 1976 merger with the massive conglomerate Allegheny International, Inc., the medical division was renamed Allied Healthcare Products, Inc. Allied manufactured medical gas equipment, such as valves, vacuum pumps, and air compressors, as well as a range of patient care products, including gauges, regulators, and humidifiers.

Harbour Group, a St. Louis-based holding company, acquired Allied in 1985 when Allegheny underwent a corporate restructuring. At the time, Harbour Group focused exclusively on stable manufacturing companies with proven financial success. Sam Fox, who founded and led Harbour Group, summed up the philosophy of his acquisitions in the January 15, 1995 issue of the St. Louis Post-Dispatch. "We don't traffic in companies. We build companies. We covet our companies. They are not a piece of meat." Not passive investors, Harbour Group and Fox played an influential role in Allied's development. Although Allied's management remained autonomous, Harbour Group actively assisted Allied in managing budgets and creating corporate strategies.

Growth and Diversification in the Mid-to-Late 1980s

Harbour Group and Fox charted a course of aggressive expansion for Allied. In a June 1985 St. Louis Business Journal article, Fox and B. H. Ware, Allied's president, outlined what would lie ahead. "We now are looking at companies that will mix with Allied. We'll expand in the industry both via Allied product expansions and acquisitions." In 1986 Allied began to fulfill this agenda with the acquisition of Oxequip Health Industries. Oxequip manufactured medical gas control panels, outlets, valves, compressors, pumps, and alarms, which strengthened Allied's position in the medical gas industry. Allied continued its growth with the 1988 purchase of Architectural Medical Products, which made modular medical walls and service columns for hospital construction and remodeling. In July of that year Allied grew again, buying Timeter Instrument Corporation, a market leader in the production of flowmeters, regulators, and air compressors used in the distribution and control of medical gases. Thanks to these strategic acquisitions, Allied became "one of the largest domestic suppliers of capital equipment for medical gas pipeline systems, suction equipment, and related accessories for hospitals," according to a company press release. By 1988 more than 50 percent of hospitals in the United States were served by Allied's medical gas delivery systems. Sales for the year reached $50 million.

To finance its acquisitions, Allied assumed a great deal of debt. But its performance in the late 1980s and early 1990s sufficiently impressed potential investors that Allied was able to go public in January 1992 with an initial stock offering of 1.2 million shares. The effort was a success, and Allied emerged from the sale free of debt. Although after the stock offering Harbour Group no longer directly controlled Allied, the former parent company continued to exert considerable influence. Even after the stock sale, Harbour Group and Fox retained a 67 percent share in Allied. In a January 1992 St. Louis Post-Dispatch article, Earl R. Refsland, the newly appointed president and chief executive officer of Allied, stressed the "fine relationship between Allied and the Harbour Group," although he did assert that "this company is totally managed by [Refsland's] team." Refsland had no plans to alter the successful strategy initiated by Harbour Group. Speaking in December to the St. Louis Post-Dispatch, he reiterated Allied's commitment to expanding existing market shares and to "acquiring smaller medical firms whose products fit with Allied's existing lines."

Throughout 1992 and 1993 Allied continued to develop its core markets within the healthcare industry. Bolstered by technical advances--such as the Trio Headwall System, an innovative "3-in-1" gas outlet that allowed healthcare facilities to switch quickly between air, oxygen, and vacuum services--Allied's hospital construction and renovation products sold well. Its inpatient respiratory therapies were also strong performers. At the same time, the company recognized the exciting potential of the home healthcare market for its respiratory equipment. An aging population was coming to prefer home medical care over hospital treatment, a development that fueled a higher demand for home respiratory therapy products. The introduction of such products as Allied's FDA-approved oxygen concentrator, a device that converted room air to nearly pure oxygen, increased the company's presence in the home care market. Allied's sales of home care health products rose 30 percent in 1993 alone. Total sales for the year soared to $61 million.

In 1993 the leadership of Allied changed hands. Earl Refsland, citing personal reasons, resigned as president and chief executive officer in July and was replaced by James Janning, who had served both as a director of Allied and as the president and chief executive officer of Harbour Group. Although Janning was appointed only as an interim chief executive officer, he headed the company for over a year and presided over two important Allied acquisitions--Life Support Products, Inc. and Hospital Systems, Inc.

The purchase of Life Support Products in December 1993 further diversified Allied's product lines, maneuvering the company into the emergency medical field. Life Support Products manufactured emergency medical equipment with an emphasis on ventilators and trauma care products. Meanwhile, the acquisition of Hospital Systems in March 1994 reinforced Allied's hospital construction line. The headwall products (prefabricated wall units that housed medical gas, electrical outlets, and fixtures for monitoring equipment) made by Hospital Systems were used in the renovation of hospitals. According to the August 5, 1994 issue of the St. Louis Post-Dispatch, the revenues generated from these two companies boosted Allied's sales 11.5 percent, and Forbes, in its November 6, 1995 issue, recognized Allied as a "steady performer." The magazine stated, "There is no one special technology that distinguishes Allied from its many competitors. Rather Allied's strength is in its comprehensive product line."

At the same time that Allied expanded into the home healthcare and emergency medical markets, the company substantially increased its international presence. By 1994 Allied had opened sales offices in Mexico City, Singapore, London, and Paris and employed a fleet of representatives to sell the company's diverse array of products abroad. Allied's growing international sales contributed to its overall strong sales performance. In 1993 alone Allied's international sales rose 31 percent.

Changes in the 1990s

The pace of Allied's expansion only accelerated when David LaRusso took the helm of the company. After he was appointed president and chief executive officer in August 1994, LaRusso directed Allied through five major acquisitions in 16 months at a total cost to the company of $61.7 million. The revenues generated by these strategic acquisitions contributed to Allied's trend of record sales that began in 1992, the year it went public, and ended in 1996.

In September 1994 Allied purchased B&F Medical Products, Inc., a manufacturer of home healthcare respiratory products, such as tubing, kits and masks, aspirators, oxygen concentrators, and oxygen regulators. This takeover moved Allied further into the home healthcare respiratory equipment field, especially with the addition of B&F's Shuco nebulizer to Allied's product line. The nebulizer converted liquid medication into an aerosol, which was especially useful for chronic lung disease patients with airway problems. Buoyed by the B&F purchase, Allied's 1994 sales surpassed $74 million.

LaRusso next engineered Allied's January 1995 acquisition of Bear Medical Systems, Inc., the producer of the market-leading Bear 1000 adult ventilator. In addition to its line of acute, sub-acute, and home care ventilators, Bear Medical Systems provided Allied with its first high-tech manufacturing facility. In the January 24, 1995 issue of the Press-Enterprise, LaRusso acknowledged the significance of this aspect of the deal. "The [facility] acquisition will complement Allied's existing research and development efforts, and clearly will position Allied as a medical device company, and not just a manufacturer of medical hardware."

Allied then purchased BiCore Monitoring Systems in June 1995. BiCore manufactured and marketed respiratory assessment systems, equipment designed to monitor the breathing of critically ill patients in order to allow them to spend less time on ventilators. On top of its significant domestic sales, BiCore also marketed its products to intensive care units in Western Europe, the Far East, and the Middle East. BiCore's distribution channels allowed Allied to further expand its international marketing efforts.

With its July 1995 acquisition of Design Principles, Inc., Allied continued to position itself as a key player in the emergency medical products market. Design Principles developed, manufactured, and marketed specialized products used in the transportation of patients with spine and neck injuries (including the Life and Lite Emergency Stretchers, an extremely durable yet X-ray translucent transport device). In December 1995 Allied completed its buying spree with the purchase of Omni-Tech Medical, Inc., another manufacturer of ventilation products. All these acquisitions had a powerful effect on Allied's sales, which in 1995 totaled over $111 million.

Allied's booming sales, however, masked underlying structural problems. The string of acquisitions had left the company saddled with substantial debt, which a September 1995 stock offering had been unable to eliminate. Although Allied's 1996 net sales increased to $120 million, the company's costs rose dramatically, leaving Allied with a profit of only $1.8 million, down 80 percent from 1995. Allied's sales actually declined in 1997, and the company operated at a net loss for the year. Allied's diminishing profitability reflected the company's growing pains as it sought to integrate its numerous acquisitions. In a September 1996 press release, Allied's president underscored the complexities of assimilating its diverse companies: "[M]aking the necessary additional investments to enhance [the acquisitions'] value and adapting their management systems and controls has turned out to be more difficult than originally anticipated." He explained that the "investments required in new product development, international expansion, manufacturing equipment, and operating systems contributed to earning problems." Allied's stock price plummeted in response.

Political issues were also a factor in Allied's financial woes. Proposed changes in Medicare and Medicaid reimbursement policy had an impact on hospitals' routine purchases of medical products and equipment. In addition, as the Financial Post noted in January 1996, the U.S. Congress's budget impasse of that year detracted from earnings across the entire healthcare industry. Allied also fell prey to evolutionary changes within the healthcare industry. Increasingly frequent hospital consolidations and the rise of managed care contributed to steady decreases in domestic orders for medical equipment and hospital construction products. For a business such as Allied, which had relied on its medical gas devices for 40 percent of its 1995 sales, the slackening pace of hospital construction and renovation was devastating. Allied's domestic sales flattened.

In an effort to emerge from its slump, Allied instituted a program to improve operational efficiencies and to reduce costs. In November 1996 it invested $1.8 million in its Toledo, Ohio, manufacturing plant and $1.5 million in the St. Louis plant. The company installed new computer-controlled machining centers in St. Louis and modernized the injection mold equipment in Toledo. Management consolidated the sales force and sought to decrease redundancies. In a bold move Allied's board of directors removed LaRusso from his position as president in May 1996. Six months later, after Janning served once more as interim president, Uma Aggarwal was appointed to the post.

Despite its domestic troubles, Allied's international markets remained a bright spot for the company, generating continually rising sales. This trend was due to the fact that a core element in Allied's product line--medical gas systems--remained in high demand abroad. While hospital construction in the United States had slowed substantially, developing countries continued to carry out large hospital building and modernization projects. As Janning told the St. Louis Post-Dispatch in November 1996, "[O]ur products are things countries use early in their process of developing modern health-care systems." Allied's international sales grew from 18 percent of total sales in 1994 to 26 percent in 1996.

Under the leadership of Aggarwal, Allied continued to address its falling profits. After suffering setbacks from a machinist strike at the St. Louis plant in June 1997, the company refinanced its debt through a new $46 million credit facility. This arrangement allowed Allied to repay some outstanding debt and provided additional liquidity. In November 1997 Allied shed two of its recent acquisitions, Bear River Medical Systems and BiCore, in a sale to Thermo Electron Company. The proceeds from the sale were used to pay off all of Allied's subordinated debt and some term notes and also provided Allied with the opportunity to shift its focus. As Aggarwal explained at the time in a press release, the sale of the two companies "allow[ed] Allied to focus on its medical gas equipment and home care business." Allied's return to its core competencies also allowed it to achieve profitability by April 1998. That year, in February, Harbour Group and Allied Healthcare finally parted ways when Sam Fox sold or donated almost all of his Allied stock.

Allied Healthcare Products, Inc. History

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