Kohler Co. Adding 300 Jobs in Southeastern Wisconsin

May 29 -- Kohler Co. will add more than 300 jobs in southeastern Wisconsin over the next three years, the company announced Wednesday morning.

The job creation is a result of an expansion of the Kohler-based company’s global power business. Kohler is a privately held company whose products include mobile and standby generators.

The company will add an extension to its production facility in the town of Mosel in Sheboygan County. The jobs will be added at company locations in Mosel and the villages of Saukville and Kohler, the company said.

“This investment reflects our commitment to provide homeowners and businesses with superior product and rapid delivery,” said Herb Kohler, chairman and CEO of Kohler Co.

Since 2011, the demand for standby power has surged with more than 5,000 power outages and more than 50 million homes and businesses affected in North America alone, Kohler Co. said.

www.bizjournals.com 

Generac May be a Little Short on Power Here

January 2 -- I love modestly-sized niche industrial companies, but I tend to like them a lot better when they're not especially popular or well known yet. That's the problem with Generac (GNRC) - although I really like Generac's power generator business (and the prospects for taking it global), there is ample analyst coverage today and the valuation is not all that compelling.

Generac has built itself into a billion dollar-plus business by manufacturing a broad range of standby and portable electric power generators. Generac's systems range from 0.8kW to 9MW and cover the waterfront from small portable generators to fixed residential standby units to larger industrial generators.

Unlike competitors like Briggs & Stratton (BGG), Kohler, Cummins (CMI), and Caterpillar (CAT), Generac is solely focused on generators, and that focus shows. The company has the broadest array of products available to the market, many of which offer meaningful performance/cost advantages (like lower cost of ownership and higher reliability). Generac also uses a lean manufacturing process that includes outsourcing, and the company has reaped good margins and returns as a result.

Generac has also differentiated itself with the fuel sources - while it's commonplace for residential standby generators to run on natural gas or LP, industrial generators have historically used diesel. By offering natural gas and LP options (as well as diesel and bi-fuel), Generac has created genset options with lower cost of ownership and operation, but without sacrificing performance.

While Generac is certainly working on building its commercial and industrial (C&I) business (more on this later), the residential business generates more than 60% of revenue at present. The real question is just how big Generac's addressable market could get.

Generac believes it has about 70% of the residential standby market, with Briggs & Stratton and Kohler claiming about 10% each and Cummins holding 5%. Unfortunately, the residential standby market is only about 2.5% penetrated today (with another 12% or so of homeowners owning a portable system). With each 1% of residential standby market penetration worth about $2 billion in addressable market size, it's well worth asking if this market can grow.

The biggest obstacle to growth is that the purchase of a standby system is at the very least a highly discretionary purchase, if not a luxury item. Generac (and others in the market) have made great strides in lowering the cost (down about 50% over the last 14 years), and the company has worked with builders to increasingly design standby units into the basic design of new homes. Accordingly, it's not unreasonable to think that the growth of this market is tied at least in part to the growth in residential housing (particularly on the higher end where an incremental $2,000 to $5,000 may not be problematic).

Perception of need is another issue, but the U.S. utility infrastructure is taking care of that one for Generac. While major weather events like Hurricane Sandy and 2012's "super derecho" certainly bring more attention to the need for and advantages of standby power supplies, the ongoing erosion of the power system is arguably a bigger factor. There were over 60 power outages affecting more than 50,000 people in 2010, versus just five such outages in 1993. Given that it seems unlikely that the U.S. government is going to find enough spare change in the couch cushions to fund a major transmission/distribution system improvement initiative, more and more homeowners may turn to fixed standby systems as a means of guaranteeing that their power stays on all the time.

When it comes time to buy, Generac is usually well-positioned. Not only does Generac have over 4,000 dealers across the country, but its products figure prominently at Home Depot (HD) and Lowe's (LOW), even with Briggs & Stratton selling systems under the General Electric (GE) brand name.

Though clearly smaller than the residential business, I wouldn't sleep on Generac's C&I business, as the company has ramped up its investments into these operations. Right now, Generac has about 15% share in the C&I market, with much of that concentrated in the standby market. That leaves them well behind the likes of Caterpillar (which has about 30%) share, Cummins (25%), Kohler (20%), and Germany's Tognum.

Generac has done relatively well in places where you'd expect solid interest in standby power - healthcare facilities, educational facilities, telecom installations and so on. Part of the question now is how successfully the company can expand its addressable market. Given the cost of spoilage, businesses like supermarkets, convenience stores, and restaurants are all likely candidates, but I suspect there's a larger market in customer service-sensitive applications. Consider that in the recent Hurricane Sandy it would seem that more Verizon (VZ) towers stayed operational compared with AT&T (T), as Verizon made greater use of mobile gensets.

Generac is also looking to compete more directly in markets like construction, where rivals like Caterpillar and Cummins have been pretty successful. In acquiring Magnum, Generac bought a business that has about 10% share in mobile trailer-mounted generators, as well as 35% share in the light towers that construction crews use to light up work areas at night.

Perhaps just as important are the overseas growth opportunities. Caterpillar, Cummins, and Tognum are global genset businesses, but Generac really hasn't been up until recently. The company is moving to change that, though, with a recent distribution arrangement for Australia and the acquisition of Ottomotores from TT Electronics. Ottomotores has solid C&I market positions in Mexico and Brazil, and I believe entry into Australia could be a launching pad into markets like Indonesia and India - markets where power reliability is a major issue even in large cities.

Will Risks Zap Investors?

Like any company, Generac has multiple operating risks for investors to consider. While Generac has benefited from its focused approach to the generator market, the company has begun to spread its wings a bit, re-entering markets like pressure washers. At the same time, there's always the risk that competitors will check any moves the company makes to gain share in the C&I market and/or look to grab some of that sizable share in the residential standby market.

Investors should also note that private equity group CCMP Capital Advisors owns more than half of the shares and three of the seven board seats. While the company recently announced (and then canceled) a secondary offering that would have seen about one-third of that stake go into the float, investors need to realize the potential for conflicts of interest here.

Likewise, I can't say I'm ecstatic about the company's decision earlier in 2012 to recapitalize and pay a $6 per share special dividend. The recapitalization added about $400 million in net debt, and I believe the capital could have been better used to grow the business.

Last and maybe least, there's a small matter with Briggs & Stratton that means little today, but could become an issue in the future. Generac exited the portable generator business years ago, and in so doing Briggs & Stratton came to own the trademark to "Generac Portable Products." Generac reentered the business in 2007 and while Briggs & Stratton doesn't presently use that trademark, I suppose it could and create some market confusion in the process.

The Bottom Line

I like the Generac business quite a lot, and I think there are good prospects for both domestic market penetration and overseas growth. What I don't like so much, though, are the expectations already built into the stock.

Generac has recently been delivering free cash flow margins in the high teens, but I think the company is likely to see those fall into the mid-teens as the company invests in growth. Even still, investors should note that the company spends quite little on Capex (relative to sales) compared with most industrial companies. Consequently, while I can see this company growing revenue at a nearly 10% compound rate out past 2000, the free cash flow growth rate is more likely to be in the high single digits.

If Generac grows at an 8%-9% clip, fair value (net of the debt) would seem to be in the high $20s. That said, I would note that the company earns very good returns on capital, enjoys healthy market shares, and has a manufacturing system that should scale well with relatively modest incremental investments. That would lead me to give it some benefit of the doubt in terms of its future growth prospects (and/or the appropriate discount rate), but even an "enhanced" fair value analysis suggests a fair value in the mid-$30s today. To me, then, that makes it a great watch list candidate, but a riskier idea for new money.

Stephen Simpson         www.seekingalpha.com 

Kohler Recalls Engines Used on Husqvarna, Cub Cadet and Troy-Bilt Riders

WASHINGTON, D.C. – May 5 -- The U.S. Consumer Product Safety Commission, in cooperation with the firm named below, today announced a voluntary recall of the following consumer product. Consumers should stop using recalled products immediately unless otherwise instructed. It is illegal to resell or attempt to resell a recalled consumer product.

Name of Product: Kohler Courage Engines

Units: About 10,000

Manufacturer: Kohler Co., of Kohler, Wis.

Hazard: A wire connector on the engine can become disconnected causing the operator’s seat switch to fail. When this happens, the blades will not shut down, posing a laceration hazard to consumers.

Incidents/Injuries: None reported.

Description: This recall involves Kohler Courage twin-cylinder engines sold with three brands of lawn tractors: Husqvarna, Cub Cadet, and Troy-Bilt. The vertical-shaft gasoline engines range in horsepower from 20 to 25. Engines included in this recall have serial numbers with the first five digits beginning with 41028 through 41056. Serial numbers can be found on the black engine cover.

Sold at: Lowe’s, Tractor Supply Company stores, and by authorized Cub Cadet dealers nationwide from February 2011 through April 2011 for between $1,500 and $5,700.

Manufactured in: USA

Remedy: Consumers should immediately stop using the lawn tractors and contact an authorized Kohler dealer or the retail location where the tractor was purchased for a free inspection and repair.

Consumer Contact: For additional information, contact Kohler Co. at (800) 451-2294 between 8 a.m. and 5 p.m. CT Monday through Friday, or visit the firm’s website at www.kohlerengines.com

Briggs and Stratton Union Workers Start Anti-Dues Petition

Rick Barrett  www.jsonline.com   

Nov. 23, 2010

In what has become an increasingly difficult environment for organized labor, some union workers at Briggs and Stratton Corp. are circulating petitions asking for the right to avoid paying union dues.

The petition to remove the union security clause from the contract would not do away with the union, United Steelworkers Local 2-232, but would do away with the requirement that all union-covered workers pay dues.

The unusual action was triggered by a pending dues increase that would link the size of the monthly dues payment to an employee's wages - in some cases more than doubling the dues of the highest-paid workers.

The move comes as unions at Briggs and several other marquee Wisconsin companies - including Mercury Marine Inc., Kohler Co. and Harley-Davidson Inc. - have had to accept contract concessions such as two-tier wage systems that pay new workers less, increased use of temporary workers, layoffs, wage freezes or increased health care costs.

"Union members generally like their unions," said John Heywood, a business professor at the University of Wisconsin-Milwaukee who teaches classes in human resources and labor relations. 

"But they have had to give up a lot. It's not a good environment."

The Briggs petitioners contend that giving employees the option of not paying dues would hold union leaders more accountable, forcing them to work harder for their members.

"All we are looking for is freedom of choice," said Briggs employee Don Metzefeld.

The Steelworkers represent about 350 employees at the Briggs plants in Milwaukee and Menomonee Falls.

The petitioners have asked the National Labor Relations Board for an election that would decide whether employees have the right to not pay union dues and, under law, still get the benefits of the union contract. They need 107 signatures to get an election, and organizers said they have about 70.

Such petitions are rare, according to the National Labor Relations Board, which said there have been only four of them in Wisconsin and the Upper Peninsula of Michigan in the past four years.

Of those four, three resulted in elections, but none resulted in an elimination of the union security clause.

"Our office has been open since June 1964. Over that time, we have had 180 of these petitions. It's not very many," said Erving Gottschalk, National Labor Relations Board regional director.

Triggering the petition drive among the Briggs workers was the upcoming change in the dues structure.

Union members pay dues of about $44 a month, regardless of their annual income.

Under the new system, effective in January, a worker with gross pay of $5,000 a month, working 190 hours, would pay about $76 a month in dues, according to Steelworkers officials.

In contrast, someone earning $2,000 a month, or $24,000 a year, would see a decrease in dues.

"It's based on your ability to pay. We believe the formula is fair to all of our members," said Michael Bolton, Steelworkers District 2 director.

For five years, the new system has been scheduled to be implemented in 2011, Bolton said, adding that the Steelworkers' leadership opposes the petitioners' efforts. "It's for the betterment of all to have a union shop," he said.

Briggs employees recently approved a labor contract that gave them a signing bonus and 2% annual raises for the next three years, but it also increases health care costs and allows the company to bring in temporary workers to supplement production in the generator division at Wauwatosa.

Briggs officials said they were not involved in the union petitions and declined to comment.

At some companies, many people get the benefits of union representation without having to pay for it, Heywood said.

"Ultimately, a union will not be able to do its job if enough people don't pay," he said. A vote to eliminate a union security clause "can be the first move to undermine and replace the union, if enough people go along for a free ride."

But getting rid of the security clause doesn't mean everyone will abandon a union, said Cheryl Maranto, a Marquette University associate professor of management in the College of Business Administration.

"If there's a small, disgruntled group of people who don't want to be part of the union, it would not be a big deal. But if a large number of people choose not to join the union, and not pay the dues, it would definitely have some impact," Maranto said.

The petitioners said their effort differs from a "decertification" election, which tries to remove a union as the collective bargaining representative.

"Even after a successful de-authorization, every employee remains fully covered by the contract, whether or not he or she remains a union member or pays any dues," a Briggs employee noted in an e-mail. "Union officials have to sell the benefits of union membership."

In the long run, the change could weaken a union's collective bargaining power, said Kimberly Freeman Brown, executive director of American Rights at Work, a pro-union organization.

"It's a drain on resources," she said. "The next time the union negotiates a contract, it won't be in as strong of a position. Long term, it could cost the workforce a lot more than their union dues on a range of issues, including wages and benefits and having a voice in the workplace."

Kohler Says Sheboygan Plant is 'Not Sustainable' Without Cost Cuts

Oct. 5, 2010 -- Kohler Co. said Tuesday that its Sheboygan County manufacturing operations "are not sustainable long term" under their current cost structure.

But a spokesman said later that the firm, which is seeking major concessions from its union workers, isn't threatening to relocate.

"We are trying to avoid getting to that point by seeking solutions during these negotiations," Kohler spokesman Todd Weber said by e-mail.

Earlier Tuesday, Kohler issued a four-page statement - unusual for the privately held firm in its length and detail - laying out its position in what have become high-stakes talks with the United Auto Workers on a new labor contract.

Calling the costs to run its Sheboygan County factories "significantly higher than any of our other plants," Kohler summarized its proposals for extensive use of casual employees, a two-tier wage scale that would pay new workers less and a five-year pay freeze for current union-represented employees.

"Kohler Co. will try to maintain a long-term presence in Sheboygan County," Weber said in the statement, "but we need to get our future wage and benefits more in line with competitors in the market to protect what we have in Sheboygan County and be viable long term."

At issue are the company's factories in the village of Kohler, where it makes plumbing products and engines, and just north of Sheboygan, where it makes generators. There are 1,937 UAW-represented employees now working at those plants, with another 550 on layoff, the company said.

Kohler said union-represented workers average $22.54 an hour, a rate the firm said is the highest among its 15 U.S. factories "by a substantial margin."

The company said the lower pay new employees would receive would be above the local average for manufacturing - currently $14.70, according to Kohler. The union has said the company wants the lower-tier employees to get about 35% below the current pay for regular workers, which would suggest a rate of about $14.65 an hour.

Kohler is seeking to use casual employees - or in the company's language, a flexible workforce - for up to 25% of the annual hours worked by bargaining-unit members. Casual workers would be paid the lower-tier rate, and get reduced benefits, until they worked 1,000 hours over 12 months. They also would be union-represented, Kohler said. The Journal Sentinel, quoting a union official, incorrectly reported previously that the workers would not be union-represented.

The company also wants to reduce benefit expenses that it says are "compounding the uncompetitive cost structure." The firm said it is looking to increase union-employee contributions for health care benefits to 20% of the cost.

Kohler's call for widespread use of casual employees and lower pay for new workers mirrors the strategy employed last year by Mercury Marine in Fond du Lac and just recently by Harley-Davidson Inc. in Milwaukee and Tomahawk. Both companies successfully wrested from their unions the concessions Kohler now seeks - and won public financial aid as well - all under threat of moving production out of Wisconsin.

Asked if Kohler is pursuing state aid, Weber said, "At this time, Kohler Co. is not talking to the State of Wisconsin regarding assistance."

Lawnmower Makers Settle Horsepower Suit

April 7 -- Spring has finally arrived, and with it the obligation to get the yard back in shape. But this year consumers finally have a reason to be thankful for their lawnmower: a class action lawsuit settlement that entitles scores of people to a check and/or a warranty extension.

The settlement concerns a lawsuit, filed last May, contending that advertisements for over 20 lawnmower brands exaggerated the machines' horsepower. The complaint, filed in federal court in Wisconsin, claimed the defendant companies "defrauded the public" by "significantly overstating" the horsepower of the subject lawnmowers, and by "failing to disclose...[their] true, significantly lower horsepower."

Specifically, the complaint stated that the defendants sold "identical, but differently and misleadingly labeled, engines at different prices -- with higher prices for engines labeled with purported higher horsepower." In other words, the companies took two identical engines, slapped different labels on them, and sold them at significantly different prices.

The suit also claimed that several of the companies created a so-called "Power Labeling Task Force," a group that they used to plan and organize their conspiracy. The group held meetings "at various locations," and even kept minutes that were distributed once the task force had adjourned.

By discovering the task force, the plaintiffs were able to include a count for violation of the Racketeer Influenced and Corrupt Organizations Act (RICO). According to the complaint, the defendants' "repeated acts of mail and wire fraud" -- namely, mailing false and misleading advertisements -- rose "above mere fraud."

The suit concerns lawnmowers with the brand names Yard-Man, Cub Cadet, Honda, Bolens, Exmark, Deere, Sabre, Scotts, Toro, Yard Machines, Craftsman, Troy Bilt, Husqvarna, Poulan, Poulan PRO, Lawn-Boy, Weed Eater, White Outdoor, Snapper, Simplicity, Brute, and Murray. The suit also covers "numerous other brands" with engines manufactured by Briggs & Stratton, Tecumseh, Kawasaki, Honda or Kohler.

Under the settlement, class members who submit timely claim forms can receive $35 for every eligible walk-behind lawnmower they own, and $75 for every eligible ride-on mower. Consumers who own a Briggs & Stratton, Toro, Tecumseh, TecumsehPower, Kawasaki, or Kohler mower, which was under a manufacturer's warranty when purchased, can receive a one-year warranty extension.

Additionally, MTD, Kawasaki, Kohler, Sears, Deere, Tecumseh, Briggs & Stratton, Toro, Electrolux, and Husqvarna have agreed to begin using a "new uniform standard" to measure horsepower.

A final approval hearing is scheduled for June 22. Class members who wish to object or opt out of the class must do so by June 4. Claim forms for the above-detailed cash benefits are due by August 31. Consumers have one year following final approval to submit claim forms for a warranty extension. Additional information is available at the official settlement website.

In addition to the RICO claim, the complaint alleged unjust enrichment, antitrust violations, conspiracy, and violations of state consumer protection laws.