Republic Engineered Steels, Inc. History

Address:

410 Oberlin Road S.W.
P.O. Box 579
Massillon, Ohio 44648-0579
U.S.A.

Telephone: (330) 837-6000
Fax: (330) 837-6083

Private Company
Incorporated: 1989
Employees: 3,800
Sales: $802 million (1998 est.)
SICs: 3325 Steel Foundries, Not Elsewhere Classified; 3312 Blast Furnaces & Steel

Company Perspectives:

It is the mission of Republic Engineered Steels, Inc. to be customer focused and the supplier of choice. To this end we are committed to continuously improving our processes and working together to provide long-term growth, security, and profitability for our employees and shareholders.

Company History:

Republic Engineered Steels, Inc. is the country's largest integrated producer of carbon and alloy bar, stainless, tool, and remelted specialty steels. As of 1998, the company operated 10 plants in Ohio, Pennsylvania, Maryland, Indiana, Illinois, and Connecticut. Republic primarily served the automotive, forging, industrial, and off-highway machinery, hydraulic equipment, aerospace, bearing, hand tool, and machine shop markets.

Company Origins

Republic traces its history to the establishment of the Berger Manufacturing Company in Canton, Ohio, in 1886. Berger was subsumed by United Alloy Steel Company, which was formed in 1916. Over the next 40 years, several companies were founded that would later merge to form Republic Steel. Union Drawn Steel was established in Beaver Falls, Pennsylvania, in 1889 and built a new plant in Gary, Indiana, in 1917. Another precursor to Republic, the Central Steel Corporation, was founded in Massillon, Ohio, in the early 1900s and built the world's first electrified steel plant. Central Steel grew rapidly, particularly during World War I when demand for steel skyrocketed. In 1926 Central Steel merged with Union Drawn and United Alloy to form the Central Alloy Steel Corporation.

In 1930 Cyrus Eaton, a Cleveland industrialist, formed Republic Steel Corporation from a merger between Central Alloy Steel Corporation and the Interstate Iron and Steel Company, a Chicago-based company that had been founded in 1905. With the merger, Republic Steel became the third largest steel producer in the country, competing with United States Steel Corporation and the Bethlehem Steel Corporation. Republic Steel's research staff and skilled workforce, as well as its concentration of electric furnaces suitable for making a new product--stainless steel&mdash′ovided certain commercial advantages over its larger rivals.

Republic Steel's fortunes were affected by the conditions that influenced the development of all domestic steel producers in the years that followed: the economic constraints of the Great Depression and the growing movement to organize steelworker labor. The steel industry suffered intensely in the Great Depression, with production dropping to pre-1900 levels. Rail production, for example, fell by 1933 to its lowest level since 1865. Full-time employment industrywide fell from 158,000 to 18,000 in 1932 and wages bottomed out at 33 cents an hour for steelworkers. Conditions were ripe for labor organization.

Several steelworker strikes were stymied between 1932 and 1935 for various reasons, but the passage of the National Labor Relations Act in 1935 gave labor organizers renewed confidence. In June 1936 the Steel Workers Organizing Committee (SWOC) was formed and, with $500,000 from the supporting miners union, began recruiting members among the workers at the largest steel mills in the United States, including Republic Steel. Industrialists opposed union formation, and threats and violence against union sympathizers were not uncommon. By 1937, however, the SWOC had organized the nation's largest steel company, United States Steel Corporation, and was representing workers at the bargaining table with U.S. Steel management. Republic Steel and the management at several other steel companies did not recognize the SWOC, who had not achieved as great a membership among their workers as at U.S. Steel. In May and June 1937, the SWOC called for a strike at these "Little Steel" companies. On Memorial Day, 1937, steelworkers demonstrating at Republic Steel's mill in south Chicago were confronted by police. In what was later called the Memorial Day Massacre, ten workers died and approximately 100 were injured, mostly from bullet wounds in the back. The SWOC continued to gain momentum, however. By the time the SWOC had ratified its constitution and changed its name to the United Steel Workers Union in 1942, it had established a collective bargaining agreement with Republic Steel.

World War II brought sudden prosperity to Republic Steel. To meet demands for steel in Europe and in anticipation of the United States entering the war, production had risen dramatically in 1940 and 1941. With steel needed for everything from bullets to tanks to aircraft carriers, Republic's steel works were soon running nonstop, and the company employed a record number of people.

Republic Steel saw a slight drop in production immediately after the war ended, but pent-up demand for consumer goods made with steel, such as cars and appliances, soon had the steel works booming. Steelworks in Japan, Germany, and England had mostly been destroyed during the war, which left the United States as the world's only significant producer of steel. Republic Steel faced no competition from imports and was able to increase exports to countries struggling with postwar reconstruction. The 1950s and 1960s were years of unparalleled prosperity for Republic Steel.

In 1972 and 1973 Republic Steel, along with the nation's other two steel giants, Bethlehem Steel and U.S. Steel, forged an agreement with the United Steel Workers Union that would have far-reaching effects for the steel industry. The "experimental negotiating agreement" prohibited strikes and lockouts and guaranteed steelworkers a minimum three percent raise plus cost-of-living increases every year. Although management was pleased with having eliminated the threat of strikes, it did not anticipate the rampant inflation of the 1970s and the subsequent skyrocketing of employee wages.

Republic Steel, like the rest of the industry, began to show the first signs of trouble in the 1970s. The unprecedented prosperity of the previous decades had encouraged complacency in the steel industry. Payrolls were bloated, graft was rampant, little investment had been made in technological advances. When finally faced with competition from imported steel and steel products in the 1970s, the steel industry was in no condition to respond decisively. Republic was forced to begin laying off employees and closing steelmaking facilities.

In an effort to compete more effectively with the threats that imported steel products were presenting, Republic Steel was acquired by the LTV Corporation in 1984 and merged with Jones & Laughlin to form LTV Steel Co. However, the merger did not resolve the companies' problems, and LTV declared bankruptcy in July 1986. Still in bankruptcy in October 1988, LTV management decided to concentrate on the flat rolled steel business. The other major area of business, the bar division, was offered for sale.

Employee Buyout in 1989

Management and employees of the bar division, concerned that a highly leveraged buyer would be more likely to liquidate the division's assets than invest the capital needed to operate it as a going concern, tendered a formal bid to buy the bar division through an Employee Stock Ownership Plan (ESOP). LTV accepted the bid in May 1989, and the purchase was formally signed effective November 28, 1989. Russell W. Maier, who had been president of the bar division, became president and chief executive officer of the new Republic Engineered Steels, Inc.

Maier had been with Republic Steel since before the merger that formed LTV Steel. Starting in 1960 as an industrial engineer, Maier was promoted to a series of positions with increasing responsibility. In 1983, he was named chief operating officer; after the merger, he served as executive vice-president of LTV until becoming president and general manager of the bar division in 1985. According to the New York Times, Maier initially fought the idea of employee ownership, but came to believe that a combination of employee ownership and full employee participation in decision-making resulted in employee suggestions that led to significant cost savings.

The original initiative for the buyout was said to have come from the steelworkers union, the United Steelworkers of America (USWA). The complex ESOP was designed by New York investment firm Lazard Freres, and the purchase price was set at $280 million. The bar division's 5,000 employees, union and management, contributed an average of $4,000 each or a total of $20 million. Another $190 million was borrowed from the Bank of Boston and Security Pacific Bank, and the remaining $70 million was borrowed from LTV. The transaction left the new Republic in a highly leveraged position, but committed to its own operating future. Federal tax policies advantageous to the ESOP-owned Republic permitted greater use of cash generated from operations. Significant cash obligations for the young company included its debt service, contributions to its ESOP, and a postretirement health benefit fund. In the years that followed, Republic made a major reduction in its debt.

In conjunction with the purchase, a new labor agreement was reached between the USWA and Republic management. Appendix H-1 to the agreement acknowledged the need for the involvement of all employees in the success of the business. A committee, consisting of union representatives, salaried employees, and management, and known as the H-1 committee, determined to develop a new corporate culture, conducive to respect and trust between the groups, and oriented toward the profitability of Republic.

The H-1 committee established a companywide education program to enable the new employee-owners to understand the ESOP structure, to make sense of the financial statements, and to grasp the basic elements and goals of Republic's business plan. Republic provided most of the multimillion-dollar cost of the program, which involved an hour of business instruction each month for each employee-owner for 30 months.

Reorganization and Cost-Cutting in the Early 1990s

Republic's sales for its first stub year, through June 1990, were approximately $379 million. The next six months, from July 1990 through December 1990, saw a sharp drop to $310 million. Republic blamed the general economic environment and responded by reorganizing into four separate business centers, each with profit accountability: Steel Division, Rolling Division, Cold Finished Division, and Specialty Steel Group.

In addition, in June 1991, Republic announced a target of $80 million in cost reductions. Employee suggestions on operations were actively sought as alternatives to job cuts. By February 1992, more than 1,000 suggestions had been submitted, valued by Republic at $60 million in savings. One suggestion alone that made dramatic savings, approximately $3.6 million, was a new plan for the separation of different types of scrap steel for more efficient and reliable use in recycling.

By including "Engineered" in its new corporate name, Republic signified its intent to meet demanding specifications from its customers, more than 50 percent of whom were in the automotive industry. The products of Republic's Rolling Division and Cold Finished Division could be produced in a wide variety of sizes, grades, shapes, and finishes. The Specialty Steel group produced precision bar steel that met critical requirements for aerospace as well as energy and defense applications.

Republic's principal competitors in these markets included U.S. Steel/Kobe joint venture, the Timken Co., MacSteel Co., Bethlehem Steel's bar division, Inland Steel's bar division, and North Star. Low cost minimills like Koppel Steel and Nucor were an increasing threat to Republic as well.

As a privately held company, Republic was not required to release its results of operations to the public. It did, however, disclose financial information on a quarterly basis--including operating income, which was positive for all but one quarter in the first year after its formation. In any event, within its first 13 months, Republic was able to build a cash reserve of approximately $90 million, out of which it paid down $37 million of its debt.

Republic made only one stock dividend payment, shortly after the ESOP was formed. Since the stock was not publicly traded, employee-owners could only sell their stock back to the company, and then only upon retirement. A minimal gain of a few hundred dollars might be recognized by the individual. But to most of the employee-owners in the early days, job security was more critical than capital gains. Although Republic was not the first steel company in the United States to respond to financial troubles with employee ownership, its experiment was conducted on a much broader scale than that of Weirton Steel, for instance, which preceded it. As CEO Maier looked to the future in the early 1990s, he was "cautiously optimistic." Maier recognized that the future of Republic was tightly bound with that of the automotive industry that it served and the U.S. economy as a whole.

Renewed Expansion in the Mid- to Late 1990s

Although the steel industry remained slow in the early 1990s in the United States, Republic managed to generate a healthy cash flow. Because of the complex federal tax structure for companies with ESOPs, Republic reported losses of $42 million over its first three years. To allocate common stock placed in ESOP trust at the company's formation, Republic was required to take quarterly noncash charges of $8 million. Although this requirement led to a red bottom line, it left Republic with cash to make capital improvements and to reduce its debt. Within a few years, the company had paid off all of the $260 million of short-term debt used to finance the leveraged buyout, partly through a long-term bond issue in 1993. In addition, the company invested in much-needed modernization of its plants.

The ample cash flow also helped Republic expand through acquisitions. In 1993, the company purchased Western Steel Group, a maker of cold finished bar. The following year, Republic expanded its stainless tool steel and forged products business by acquiring the principal assets of Baltimore Specialty Steels Corporation. The deal with parent company Armco, Inc. was made for an undisclosed sum. Republic transformed operations at the plants acquired from both of the troubled acquisitions. By creating flexible, self-directed teams, Republic was able to eliminate 40 percent of the workforce while maintaining the same level of production.

In 1995 Republic floated an initial public offering of eight million shares of common stock. With the $64 million it gained from the IPO, Republic repurchased the employees' preferred stock, thus freeing itself from the guaranteed dividends of 16.5 percent instituted with the creation of the ESOP. Although the initial public offering introduced outside influence, the employees still owned 58 percent of the common stock, thus retaining control of the company.

Also in 1995 Republic began construction of a CAST-ROLL facility in Canton, Ohio. The only plant of its kind in North America, the facility cost approximately $165 million. The state-of-the-art plant reduced the time needed to create billets of different sizes and metallurgical grades. By closely linking such processes as ladle refining and rolling operations, the new facility could ready molten steel for shipping in one sixth the time needed using traditional methods.

In 1997 the ESOP stock was fully allocated and Republic no longer had to take quarterly charges toward it, leaving the company with a much-improved bottom line. Republic split its businesses into three independent divisions: Hot Rolled Bar Division, Cold Finished Bar Division, and Stainless and Specialty Steels Division. The same year, Republic signed a four-year technology exchange agreement with the Japanese company Sanyo Special Steel. Sanyo agreed to provide technical assistance to Republic in its steel melting practices and in fine-tuning the operation of its CAST-ROLL facility.

In 1998 Republic agreed to be acquired by an investor group led by the Blackstone Group and Veritas Capital Partners. Blackstone and Veritas planned to merge Republic with Bar Technologies, Inc., which the investors also owned. BarTech produced hot rolled engineered and cold finished steel bar products, primarily for the automotive machinery and tool industries. The new company, which was due to be finalized by the end of 1998, would be named Republic Technologies International.

Principal Subsidiaries: Nimishillan and Tuscarawas Railway Company; Oberlin Insurance Company.

Principal Divisions: Hot Rolled Bar Division; Cold Finished Bar Division; Stainless and Specialty Steels Division.

Republic Engineered Steels, Inc. History

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