McClain Industries, Inc.

6200 Elmridge Road
Sterling Heights, Michigan 48313-3706
U.S.A.
Telephone: (810) 264-3611
Fax: (818) 264-3230
Web site: http://www.mcclaingroup.com

Public Company
Incorporated: 1968
Employees: 560
Sales: $91.55 million
Stock Exchanges: NASDAQ
Ticker Symbol: MCCL
NAIC: 336211 Motor Vehicle Body Manufacturing; 332439 Other Metal Container Manufacturing

McClain Industries, Inc. is a leading manufacturer of waste transport vehicle bodies, containers, and equipment for the waste management industry. McClain brand names include Galion and E-Z Pack. The firm sells its products to resellers and directly to solid waste handling companies like Waste Management, Inc., who account for nearly a fifth of sales. Headquartered in the Detroit, Michigan, suburb of Sterling Heights, the public company remains in the control and majority ownership of members of its founding family.

Beginnings

McClain Industries got its start in the 1950s when Kenneth and Robert McClain’s father started an iron and sheet metal fabricating business in the Detroit area that specialized in making trash containers for industrial use. The company was a small one for many years, tallying an estimated $200,000 in annual revenues by the late 1960s. It was at this time that Kenneth and Robert bought their father out and began to run the business themselves. Both already worked for the firm, Kenneth having been trained as a welder.

With Kenneth as president and CEO and Robert as a vice-president, the company began to grow, adding manufacturing of waste compactors to its line of containers. McClain Industries went public in 1973. Its growth continued over the next decade, with revenues reaching $14 million by 1984. The following year, McClain purchased an Oklahoma City-based solid waste handling equipment maker, Custom Metal Industries, Inc. Custom Metal had 51 employees and revenues of $5 million. McClain’s customers at this time were principally municipalities, construction contractors, and retail stores that utilized the large trash containers and haulers that the firm made.

During the 1980s, the company’s stock price was one of the market’s top 100 gainers, as reported in USA Today, increasing in value by more than 3,400 percent during the decade. Revenues peaked in 1988 at $33.4 million but began to decline as the U.S. economy started to slow down. The firm reported a loss in 1990 and was later forced to restate earnings from both 1988 and 1989. After a downturn in demand of several years, sales slowly began to increase again, reaching $31.9 million in 1992. A cost control program, instituted at the start of the decade, also helped improve the company’s bottom line.

Galion Acquisition Doubles Company’s Size

July of 1992 saw McClain make its most significant acquisition when the Peabody Galion division of Peabody Industries was purchased for approximately $18 million. Peabody Galion (later shortened to Galion) had plants in Galion and Winesburg, Ohio, that manufactured front, rear, and side loading truck bodies, recycling truck bodies, dump truck bodies, and other solid waste handing equipment for the construction industry. Peabody Gallon’s sales actually surpassed those of McClain, having topped $31 million for Fiscal 1991. After the purchase, McClain expanded Gallon’s manufacturing operation to Oklahoma City and Macon, Georgia.

The company also began ramping up its investment in research and development, an area which hitherto had been given little attention. The efforts soon paid off with the receipt of a U.S. patent for a curbside recycling vehicle, readying McClain to capitalize on a waste management area that was experiencing explosive growth in the United States. The emphasis on research and development served to widen the company’s product lines, as well as to create products that had a longer life expectancy, bringing McClain in line with the industry’s trend toward keeping equipment in service longer and offering more generous warranties, typically five years.

To capitalize on the Galion acquisition, the company began to put an emphasis on marketing and sales, an area which had not been formally organized before. The addition of new manufacturing facilities outside of Michigan also led McClain to set up a computerized communications system to coordinate purchasing and accounting among the various sites.

In 1994, the firm prepared to offer an additional 1.2 million shares of stock to gain funds for additional expansion, but the offer was cancelled when the share price failed to rise to a level deemed adequate by the company. McClain family members held control of the firm with about 70 percent of the stock. At this time, the company had an estimated 16 percent of the $500 million environmental manufacturing market, which constituted four-fifths of McClain’s total business. The growing company began operating a mill in the Kalamazoo, Michigan, area to supply its various plants with metal tubing. Among McClain’s major customers were WMX Technologies, Inc. and City Management Corp., a Detroit-based trash hauler.

Successful Defense of Patent

In 1995, McClain’s Galion subsidiary won a patent infringement suit in federal court against Dempster, Inc. that resulted in Dempster paying restitution for past infringement and licensing the patent for future production of horizontally divided, high capacity waste recycling equipment, which Galion sold under the trademark E-Z Pack. Galion was doing well with sales of E-Z Pack units, having recently sold 50 of them to the city of San Antonio, Texas, for $1.57 million. Also in 1995, a local union in Macon, Georgia, charged McClain with unfair labor practices at the company’s plant there. The National Labor Relations Board and U.S Court of Appeals later found for the union, though McClain continued to dispute the result.

May of 1995 saw McClain reach an agreement to acquire EPCO Manufacturing Corp., Inc., a maker of baling equipment for scrap metals and recycled cardboard, paper, and plastics. A year later, the company also acquired a container manufacturing facility in Demopolis, Alabama, from Waste Management of Alabama, Inc.

Fiscal 1997 was a difficult year for McClain. The company closed its EPCO operation and transferred production of balers to one of its Ohio facilities, resulting in a substantial write-off, and production changes at the company’s Georgia plant caused additional losses. Revenues for the year reached $90.1 million, but the company reported a loss of $1.7 million, its worst ever, due in part to the manufacturing changes as well as errors in product pricing and an overall slowdown in the market.

During 1998, the firm worked to improve its margins by changing vendors and ordering procedures and purchasing some items in bulk for long-term use. Sales and advertising efforts were also ramped up. The number of its competitors was growing at a rapid clip, and in order to make sales McClain was forced to price its products at a level that yielded relatively little profit. One reason for the heightened competition was the relative ease of entry into the container market. The basic product was essentially a welded steel box, and many small companies across the country possessed equipment to manufacture them. While few had McClain’s national distribution or name recognition, this did not deter newcomers from entering the business, though many also left it after a short time.

Despite the crowded field, McClain made it through the year with four quarters of record profits. It was helped in part by consolidation taking place within the waste management industry, which led to more equipment being ordered. McClain was also helped by its policy of selling truck chassis, which it did not manufacture, to go along with its own truck bodies at a small markup, thus allowing customers to acquire the body and chassis from a single source rather than from separate vendors.

Sales leveled off in 1999, however, and the company reduced its workforce by 5 percent to compensate. McClain also authorized a stock buyback program the following year to repurchase 100,000 shares, the second offer of this type it had made in a three-year period. The company’s share price continued to hover in the $5 to $7 range, which company officials felt was far too low.

In October 2000, McClain reached an agreement to buy Benlee, Inc. of Romulus, Michigan. Benlee, with annual sales of $12 million in 1999, was a maker of roll-off trailers and containers for the scrap metal industry. The work that Benlee performed was something that McClain often subcontracted out, and the acquisition was expected to save money for the firm.

Key Dates:

1968:

Kenneth and Robert McClain purchase their father’s container manufacturing firm.

1973:

McClain goes public.

1985:

Custom Metal Industries of Oklahoma City is acquired.

1992:

Peabody Galion truck body division is purchased for $18 million.

1995:

Galion wins patent infringement suit against Dempster, Inc.

2000:

McClain abandons the Galion dump truck body line.

At this time, McClain’s Galion Dump Body unit was having problems in an extremely competitive market, and during the latter part of 2000 the decision was reached to exit the field and liquidate the inventory of dump truck chassis. A loss of $1.75 million was the result, half of the $3.5 million in red ink accumulated by the company’s truck group for the year. Sales for 2000 hit a record level of $141 million, with a small loss of $86,000 recorded. However, 2001 saw the tightening U.S. economy hit McClain hard, with revenues dropping by more than a third, to $91.55 million, and losses of nearly $5 million posted. According to CEO Kenneth McClain, “The loss resulted from decreased sales volume, deep discounting, and increases in bad debt reserves due to the severity of the nationwide economic slowdown. We expect sales to remain depressed during Fiscal 2002 and are continuing our strategy of reviewing and reducing our operating costs and inventories to reflect reduced sales volume.”

Still a leader in its field of waste management equipment manufacturing, McClain Industries was in a business that was suffering from too many competitors and a highly variable demand curve. The company, still under the control of its founding family, had survived other dry periods and would likely do so again.

Principal Subsidiaries

McClain E-Z Pack, Inc.; McClain Galion, Inc.; McClain Southland Company; Shelby Steel Processing Co.; McClain Tube Company; McClain Group Leasing, Inc.; McClain International FSC, Inc. (Virgin Islands).

Principal Competitors

Kann Manufacturing Corporation; Leach Company; Heil Environmental Industries; Waste Technology Corp.; Wastequip, Inc.

Further Reading

“CEO Interview: McClain Industries,” The Wall Street Transcript, November 22, 1993.

Kosdrosky, Terry, “McClain Turns Around But Faces Challenges,” Crain’s Detroit Business, December 21, 1998, p. 3.

—, “Turning Trash into Cash: McClain Cleaning up on Waste-Hauling Gear,” Crain’s Detroit Business, August 16, 1999, p. 2.

“McClain Acquires Peabody Galion Division,” American Metal Market, August 12, 1992, p. 9.

“McClain Sales Down 34% in Third Quarter,” Trailer/Body Builders, September 1, 2001.

“McClain to Buy EPCO,” American Metal Market, May 17, 1995, p. 10.

Raphael, Steve, “McClain CEO Down After Record High,” Crain’s Detroit Business, January 29, 1996, p. 1.

—, “McClain Industries to Waste No Time on Next Stock Split,” Crain’s Detroit Business, May 3, 1995, p. 16.

Snavely, Brent, “Boss’ 65th Gave Birth to McClain Acquisition,” Crain’s Detroit Business, October 16, 2000, p. 28.

—, “McClain Puts Money Where its Stock Is,” Crain’s Detroit Business, August 28, 2000, p. 4.

—Frank Uhle