Kohler Co.

Harvard Business School Case 9-205-034

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Exhibit 1 Milestones in Kohler Co.’s History

1873-1900 Ø 1873 Kohler Co. founded

John Michael Kohler Ø 1883 Company manufactures firs enameled cast iron bathtub
Ø 1900 New foundry opens

1900-1905 Ø New foundry destroyed by fire

Robert Kohler

1905-1940 Ø 1911 Introduction of one-piece bathtub

Walter Kohler Ø 1912 Kohler Village incorporated
Ø 1917 50-year Master Plan for Kohler Village by Olmsted Brothers
Ø 1918 American Club opens as housing for single male workers
Ø 1920 Kohler enters electric generator market
Ø 1925 Manufacture of faucets and brass accessories begins
Ø 1927 Introduction of matching colors for bathtubs and toilets
Ø 1934 AFL strike; Kohler Workers’ Assoc. becomes employees’ bargaining agent

1940-1968 Ø 1940 Kohler Foundation established

Herbert V. Kohler, Sr. Ø 1948 Kohler enters small engine market
Ø 1958 Plant opened in Spartanburg, South Carolina
Ø 1965 New colors for plumbing fixtures introduced
Ø 1967 “Bold Look of Kohler” advertising theme launched

1968-1972 Ø 1971 Investment in cast iron production facilities

Lyman Conger

1972- Ø 1973 100th Anniversary of company

Herbert V. Kohler, Jr. Ø 1977 New 50-year Master Plan for Kohler Village by Frank L. Wright Foundation
Ø 1978 1-for-20 stock split
Ø 1981 American Club opens as a resort hotel
Ø 1984 Acquisition of Sterling Faucet
Ø 1986 Acquisition of first furniture company
Ø 1987 Sales reach $1 billion
Ø 1991 Vitreous china plant opens in Monterrey, Mexico
Ø 1994 Resort at Kohler Village expanded with opening of The Inn on Woodlake
Ø 1995 Joint venture in China
Ø 1996 Sales reach $2 billion
Ø 1997 Generator plant opens in Singapore

Source: www.kohler.com
Exhibit 2 Abbreviated Kohler Family Tree a

Lillie (1) John Michael

Vollrath Kohler

Evangeline Robert Walter Charlotte Marie Lilly Carl

Kohler Kohler Kohler Schroeder Kohler Kohler Kohler

John Michael Julilly Walter Carl Robert

Kohler House Kohler Kohler Kohler

(2)
Natalie Herbert
Black Kohler, Jr.

John Michael William Julilly Marie

Kohler IV Kohler Kohler Kohler

Laura Rachel
Kohler Kohler

a
Highlighted family members are those mentioned in the text

Source: Company documents

 (2) Wilhemina
Vollrath

Herbert Ruth
Kohler, Sr. DeYoung

(1)
Herbert Linda Ruth Frederic
Kohler, Jr. Karger Kohler Kohler

Rachel David
Kohler Kohler
Exhibit 3a Kohler Co. Balance Sheets 1993-1997 (in $ thousands, as of December 31 except 4/30/1998)

1993 1994 1995 1996 1997 ###

Assets

Cash and Cash Equivalents 46,252 32,955 22,329 20,039 26,117 2,454
Accounts Receivable 244,852 280,028 298,046 322,136 339,238 360,810
Inventory 201,208 221,791 248,777 247,820 249,957 265,606
Future Income Tax Benefits 8,413 14,781 16,813 16,510 15,346 0
Prepaid Expenses and Deposits 39,961 33,976 40,157 44,638 56,028 78,857
Total Current Assets 540,686 583,531 626,122 651,144 686,686 707,728

Property, Plant & Equipment, Gross 885,493 944,920 1,059,183 NA NA NA

Accumulated Depreciation (520,936) (572,451) (633,419) NA NA NA
Total PP&E, Net 364,557 372,469 425,764 437,818 447,714 444,841

Other Assets:
Intangibles 113,049 106,741 169,182 253,059 217,830 211,326
Deferred Income Taxes 10,493 13,215 13,778 19,550 61,273 0
Other Assets 23,262 24,035 31,619 21,205 34,338 95,906
Total Other Assets 146,804 143,991 214,579 293,814 313,441 307,232

Total Assets 1,052,047 1,099,991 1,266,465 1,382,776 1,447,841 1,459,801

Liabilities and Stockholders’ Equity

Short-term Borrowings 30,349 5,861 19,170 15,425 15,099 0

Accounts Payable 159,439 166,792 188,258 198,707 229,170 209,972
Accrued Liabilities 65,165 72,917 68,899 84,825 97,736 118,800
Current Maturities of LTD 7,201 5,903 5,672 23,541 8,824 48,629
Total Current Liabilities 262,154 251,473 281,999 322,497 350,827 377,401

Post-retirement Obligations 55,607 56,248 56,463 56,462 56,166 0

Other Long-term Liabilities 54,694 58,877 67,584 53,344 58,905 111,852
Long-term Debt 140,601 132,209 202,138 251,699 220,116 183,815
Total Long-term Liabilities 250,902 247,334 326,185 361,505 335,187 295,667

Total Liabilities 513,056 498,807 608,184 684,002 686,014 673,068

Capital Stock 32,555 32,561 34,171 34,234 34,235 34,235

Retained Earnings 526,437 586,727 634,447 682,691 763,838 791,109
Treasury Stock, at Cost -15,064 -15,190 -13,266 -14,304 -14,007 -14,127
Foreign Currency Adjustment (4,936) (2,914) 2,929 (3,846) (22,239) (24,484)
Total Stockholder's Equity 538,992 601,184 658,281 698,774 761,827 786,733

Total Liabilities and Equity 1,052,048 1,099,991 1,266,465 1,382,776 1,447,841 1,459,801
documents
ember 31 except 4/30/1998)
Exhibit 3b Kohler Co. Income Statements 1993-1997 (in $ thousands, as of Dec. 31 unless otherwise indica

1993 1994 1995 1996 1997 4

months
###

Net Sales 1,542,114 1,771,959 1,833,902 2,014,818 2,213,403 757,473

Cost of Sales 1,164,305 1,333,933 1,412,155 1,532,192 1,637,385 559,273
Gross Profit 377,809 438,026 421,747 482,626 576,019 198,200

Selling & Administrative Exp. 267,303 292,786 302,433 342,945 380,091 134,004
Amortization of Intangibles 9,448 12,079 8,564 11,332 21,618 6,763
Operating Income after Deprec. 101,058 133,161 110,750 128,349 174,310 57,433

Non-operating Income (Expense) -10,486 -9,840 -8,801 -10,975 -5,746 -2,379

Interest Income 1,877 2,151 3,623 2,101 2,237 0
Interest Expense 12,337 11,798 10,972 18,547 14,031 4,812
Pretax Income 80,112 113,674 94,600 100,928 156,770 50,243

Income Tax Expense 31,648 46,955 41,200 46,992 68,796 21,644

Net Income 48,464 66,719 53,400 53,936 87,974 28,599

documents
31 unless otherwise indicated)

LTM
###

2,269,661
1,680,813
588,848

394,805
20,786
173,257

-8,064
2,237
14,104
153,326

66,297
87,029
Exhibit 3c Kohler Co. Cash Flow Statements 1993-1997 (in $ thousands, as of December 31)

1993 1994 1995 1996 1997

Cash Flows from Operating Activities

Net Income 48,464 66,719 53,400 53,936 87,974

Adjustments to Reconcile Net Income to Cash Flow
from Operating Activities:
Depreciation and Amortization 65,287 70,771 69,977 79,464 86,178
Deferred Income Taxes (6,868) (8,709) (605) (3,722) (7,769)
Provision for Loss on Accounts Receivable 4,192 4,921 4,626 4,789 3,673
Other Non-cash Items 3,631 2,039 248 (1,146) (23)
(Increase) Decrease in Accounts Receivable (9,498) (37,321) (4,261) (8,683) (40,937)
(Increase) Decrease in Inventory (7,328) (16,239) (14,433) 3,950 (12,272)
(Incr.) Decr. in Prepaid Expenses and Other Assets (19,513) 4,484 (11,732) 4,525 (49,091)
Incr. (Decr.) in Accounts Payable and Accrued Exp. 30,932 12,146 (683) 658 63,038
Net Cash Flow from Operating Activities 109,299 98,812 96,538 133,772 130,770

Cash Flows from Investing Activities

Purchase of Property, Plant and Equipment (67,155) (64,603) (86,970) (76,348) (90,707)
Sales of Property, Plant and Equipment 3,084 4,648 4,685 6,051 7,604
Acquisition of Businesses 0 0 0 (129,478) 0
Other Investments (18,725) (3,141) (84,480) - -
Net Cash Flow from Investing Activities -82,795 -63,096 -166,765 -199,775 -83,103

Cash Flows from Financing Activities

Net Borrowings Under Revolving Credit 103,232 5,055 102,973 78,000 (66,000)
Other Borrowings 0 0 0 10,567 49,245
Other Principal Payments (94,447) (48,587) (31,067) (21,498) (26,962)
Sales of Treasury Stock 202 235 176 34 351
Purchases of Treasury Stock (246) (361) (727) (1,071) (55)
Dividends Paid (4,059) (4,539) (6,995) (5,697) (5,688)
Net Cash Flow from Financing Activities 4,681 -48,197 64,360 60,334 -49,109

Effect of Exchange Rate Changes on Cash (942) (817) (4,758) 3,380 7,519
Increase (Decrease) in Cash and Equivalents 30,243 (13,297) (10,626) (2,290) 6,077
Cash and Equivalents, Beginning of Year 16,010 46,252 32,955 22,329 20,039
Cash and Equivalents, End of Year 46,253 32,955 22,329 20,039 26,117

Source: Company documents

f December 31)
Exhibit 4 Kohler Co. Income Statements 1997 by Group (in $ thousands, as of December 31)

Kitchen & Power Interiors Hospitality & R.

Bath Group Systems Group Estate Group
Group

Net Sales 1,485,831 540,260 145,414 50,789

Cost of Sales 1,045,038 461,140 92,564 43,041
Gross Profit 440,793 79,120 52,850 7,748

Selling & Administrative Exp. 284,097 44,600 45,580 4,872

Amortization of Intangibles - - - -
Operating Income after Depr. 156,696 34,520 7,270 2,876

Non-operating Income (Expense) -6,400 -269 514 0

Interest Income 1,477 180 142 12
Interest Expense 10,181 2,428 1,633 1,040
Pretax Income 141,591 32,004 6,292 1,848

Income Tax Expense 54,179 11,605 2,291 727

Net Income 87,411 20,398 4,001 1,121

documents
as of December 31)

Elim. & Kohler Co.

Corp. Var. Consol.

-8,891 2,213,403
(4,398) 1,637,385
-4,492 576,019

942 380,091
21,618 21,618
-27,052 174,310

409 -5,746
426 2,237
(1,251) 14,031
-24,965 156,770

(6) 68,796
-24,957 87,974
Exhibit 5 Ownership of Kohler Co., April 1998

Name Number of Shares Percentage of Ownership

Herbert V. Kohler 924 12.4%

Trust for the benefit of Herbert V. Kohler 450 6.0%
Lineal Descendants of Herbert V. Kohler 50 0.67%

Ruth DeYoung Kohler 974 13.1%

Trust for the benefit of Ruth DeYoung Kohler 450 6.0%

Estate of Frederic Kohler 975 13.1%

John Michael Kohler 146 2.0%

Trust for the benefit of John Michael Kohler 86 1.2%

Kohler Foundation 960 12.90%

Kohler Trust for the Arts and Education 1,046 14.0%
Kohler Trust for Preservation 277 3.7%

Other Kohler Family Members 780 10.5%

Kohler Employee Plan 27 0.36%

Outside Shareholders 300 4%

Total Outstanding Common Shares 7,445 100%

Restricted Shares 142.89

Total Shares Outstanding 7,587.89

Source: Company documents

Exhibit 6a Kohler Co. Projected Balance Sheets 1998-2002 (in $ thousands, as of December 31)

1998 1999 2000 2001 2002

Assets

Cash and Cash Equivalents 63,512 56,838 55,621 70,976 95,207

Accounts Receivable 351,713 355,124 376,927 393,929 410,560
Inventory 258,962 261,669 272,065 281,550 294,261
Future Income Tax Benefits 15,744 16,194 18,764 19,730 21,719
Prepaid Expenses and Deposits 57,150 56,007 63,369 66,272 68,809
Total Current Assets 747,081 745,832 786,746 832,457 890,556

Other Assets:
Property, Plant & Equipment, Net 476,419 498,839 516,899 531,993 554,161
Intangibles 197,387 184,511 171,635 158,759 145,883
Deferred Income Taxes 21,072 23,035 21,331 26,407 29,070
Other Assets 25,414 25,094 26,804 28,102 29,214
Total Other Assets 720,292 731,479 736,669 745,261 758,328

Total Assets 1,467,373 1,477,311 1,523,415 1,577,718 1,648,884

Liabilities and Stockholders’ Equity

Short-term Borrowings 15,099 15,099 15,099 15,099 15,099

Accounts Payable 225,771 225,664 239,481 251,384 261,007
Accrued Liabilities 79,862 77,926 78,705 79,492 80,287
Current Maturities of LTD 8,824 8,824 8,824 8,824 8,824
Total Current Liabilities 329,556 327,513 342,109 354,799 365,217

Post-retirement Obligations 56,166 56,166 56,166 56,166 56,166

Other Long-term Liabilities 60,201 61,586 63,125 64,388 65,804
Long-term Debt 235,115 195,115 150,115 105,115 70,115
Total Long-term Liabilities 351,482 312,867 269,406 225,669 192,085

Total Liabilities 681,038 640,380 611,515 580,468 557,302

Capital Stock 34,234 34,234 34,234 34,234 34,234

Retained Earnings 835,228 889,857 968,900 1,058,364 1,156,852
Treasury Stock, at Cost -60,888 -64,921 -68,995 -73,109 -77,265
Foreign Currency Adjustment (22,239) (22,239) (22,239) (22,239) (22,239)
Total Stockholder's Equity 786,335 836,931 911,900 997,250 1,091,582

Total Liabilities and Equity 1,467,373 1,477,311 1,523,415 1,577,718 1,648,884

Source: Company documents: Management Projections

ecember 31)
Exhibit 6b Kohler Co. Projected Income Statements 1998-2002 (in $ thousands, as of December 31)

1998a 1999 2000 2001 2002

Net Sales 1,511,000 2,240,528 2,393,187 2,509,100 2,608,385

Cost of Sales 1,125,884 1,690,366 1,780,531 1,862,103 1,933,387
Gross Profit 385,116 550,162 612,656 646,997 674,998

Selling & Administrative Exp. 268,748 411,254 428,161 446,143 460,518

Amortization of Intangibles 13,680 12,876 12,876 12,876 12,876
Operating Income after Depreciation 102,688 126,032 171,619 187,978 201,604

Non-operating Income (Expense) -6,299 -10,173 -10,783 -11,430 -12,116

Interest Income 2,307 4,569 5,670 7,500 9,932
Interest Expense 11,521 14,325 12,987 10,286 8,134
Pretax Income 87,175 106,103 153,519 173,762 191,286

Income Tax Expense 38,585 46,071 66,659 75,448 83,057

Net Income 48,590 60,032 86,860 98,314 108,229

Source: Company documents: Management Projections

a
Eight-month period ending Dec. 31, 1998
of December 31)
Exhibit 6c Kohler Co. Projected Statements of Cash Flow 1998-2002 (in $ thousands, as of Dec. 31)

1998a 1999 2000 2001 2002

Cash Flows from Operating Activities

Net Income 48,590 60,032 86,860 98,314 108,229

Adjustments to Reconcile Net Income to Cash Flow
from Operating Activities:
Depreciation and Amortization 56,113 87,661 91,786 94,593 97,355
Deferred Income Taxes 36,816 (1,964) 1,704 (5,075) (2,664)
Provision for Loss on Accounts Receivable 0 2,000 2,000 2,000 2,000
Other Non-cash Items 0 (2,000) (2,000) (2,000) (2,000)
(Increase) Decrease in Accounts Receivable 9,097 (3,410) (21,803) (17,002) (16,631)
(Increase) Decrease in Inventory 6,644 (2,707) (10,396) (9,485) (12,711)
(Increase) Decrease in Future Income Tax Benefits (15,744) (450) (2,570) (966) (1,989)
(Incr.) Decr. in Prepaid Expenses and Other Assets 21,707 1,463 (9,072) (4,201) (3,649)
Incr. (Decr.) in Accounts Payable and Accrued Exp. (23,139) (658) 16,136 13,952 11,835
Net Cash Flow from Operating Activities 140,085 139,967 152,645 170,130 179,775

Cash Flows from Investing Activities

Purchase of Property, Plant and Equipment (87,691) (105,000) (105,000) (105,000) (115,000)
Sales of Property, Plant and Equipment 0 7,795 8,029 8,189 8,353
Acquisition of Businesses 0 0 0 0 0
Other Investments - - - - -
Net Cash Flow from Investing Activities -87,691 -97,205 -96,971 -96,811 -106,647

Cash Flows from Financing Activities

Net Borrowings Under Revolving Credit 26,594 15,000 15,000 15,000 15,000
Other Principal Payments 0 (55,000) (60,000) (60,000) (50,000)
Sales of Treasury Stock 4,033 0 0 0 0
Foreign Currency Adjustment 2,245 0 0 0 0
Purchases of Treasury Stock 0 (4,033) (4,074) (4,114) (4,156)
Dividends Paid (1,765) (5,403) (7,817) (8,848) (9,741)
Net Cash Flow from Financing Activities 31,106 -49,436 -56,891 -57,962 -48,897

Increase (Decrease) in Cash and Equivalents 83,500 (6,674) (1,217) 15,357 24,231
Cash and Equivalents, Beginning of Year 2,454 63,512 56,838 55,621 70,976
Cash and Equivalents, End of Year 85,955 56,838 55,621 70,978 95,207

Source: Company documents: Management Projections

a
Eight-month period ending Dec. 31, 1998
sands, as of Dec. 31)
Exhibit 7a Descriptions of Comparable Companies

Company

American Standard

American Woodmark

Masco

Briggs & Stratton

Cummins Engine

Detroit Diesel

Source: Compiled by casewriter from company documents

7a Descriptions of Comparable Companies

Description

Global manufacturer of air conditioning systems (60% of 1997 sales), bathroom and kitchen fixtures and
fittings (24% of 1997 sales), and braking and control systems for trucks, buses and utility vehicles (16%
of 1997 sales).

Manufacturer of kitchen cabinets and vanities.

Largest domestic manufacturer of kitchen and bath products, including faucets (mainly under their Delta
brand), cabinets, appliances, showers and tubs, and other plumbing supplies. Other home improvement
and building products include ventilating equipment, water pumps, and insulation.

World’s largest producer of 3-to-22 horsepower gasoline engines for outdoor power equipment, including
lawn and garden equipment (81% of 1997 sales); and generators, pumps and pressure washers for
industrial, agricultural and consumer applications.

Leading worldwide designer and manufacturer of diesel engines, gas engines and engine components
for equipment used in automotive, power generation, industrial and filtration markets around the world.

Manufactures and services diesel and alternative fuel engines for the automotive and power generation
markets worldwide.

Compiled by casewriter from company documents

Exhibit 7b Selected Financial Data about Comparable Companies (in $millions)

Cummin
American American Briggs & s Detroit
Standard Woodmark Masco Stratton Engine Diesel

Stock Market Data as of 4/30/1998

Ticker ASD AMWD MAS BGG CUM DDC
Shares Outstanding (in thousands) 71,929 7,811 169,634 24,514 42,036 24,701
Stock Price ($) 48.69 30.25 58 45.25 54.38 23
Market Value of Equity 3,502.0 236.3 9,838.8 1,109.3 2,285.7 568.1
Market Value of Equity,
Average of Latest 36 Mths. 2,762.9 82.0 5,937.3 1,210.0 2,053.6 502.5
Beta Over Latest 36 Months 0.82 0.76 1.28 0.66 1.09 1.3
Standard Deviation of Stock Returns a 7.7% 14.7% 6.4% 5.7% 8.5% 10.4%

Financial Data as of 3/31/1998 b

Latest Twelve Months
Total Debt 2,404.0 13.4 1,187.9 259.6 1,250.0 107.4
Sales 6,139.5 327.0 3,945.0 1,327.2 5,821.0 2,233.0
EBITDA 699.3 37.6 838.4 178.3 487 105.5
Cash Flow c 462.5 27.4 553.4 127.2 390.2 82.8
EBIAT 292.6 17.1 437.3 80.4 224.2 41

Average of Latest Three Years

Total Debt 2,216.6 12.3 1,341.3 155.4 686.7 127.3
Sales 5,767.8 262.7 3,414.0 1,282.2 5,431.0 2,090.7
EBITDA 667 30.7 721.9 187 448.3 100.2
Cash Flow c 420.9 22.1 473.6 132.1 377.5 78.2
EBIAT 263.5 13.7 367.4 87.1 221 40.5

Source: Compiled by casewriter from company documents

a
Standard deviation of total monthly stock returns over the latest 36 months. The standard deviations of returns
over the same period for stock portfolios are: i) 6.3% for an equal-weighted portfolio of the three kitchen and bath
companies, (ii) 6.2% for an equal-weighted portfolio of the three engines and generators companies, (iii) 5.5% for
an equal-weighted portfolio of all six companies, (iv) 5.8% for an 80/20 portfolio of (i) and (ii), and (v) 3.3% for the
U.S. equity market.
b
Financial Data for American Woodmark are as of 4/30/1998
c
Cash Flow is defined as EBIAT plus Depreciation
 CF
306

23

136
122
353
68
Exhibit 8 Prevailing Yields on U.S. Government Securities

Dec-97 Apr-98

1 Year Bonds 5.53% 5.38%

5 Year Bonds 5.77% 5.61%
10 Year Bonds 5.81% 5.64%
20 Year Bonds 6.07% 6.00%

Source: Board of Governors of the Federal Reserve System