February 5, 2004

Allen says Vernay reinventing itself

A series of forces over the last four years has tested the financial resilience of Vernay Laboratories, dragging the company into year end deficits for two years in 2001 and 2002. Though the company’s dividends have shrunk to nothing in the past few years and Vernay anticipates eventually moving its headquarters out of Yellow Springs, company officials and a few private stockholders feel certain Vernay will bounce back from its financial straits and will thrive in a growing global market.

Vernay had the strongest fiscal year in its 58-year history in 1999, when sales reached nearly $73 million, according to a 2001 shareholders report. Though the company was diverting resources toward an investigation and cleanup of contamination found on its Dayton Street property, Vernay invested part of its profits to expand operations in Israel, the Netherlands and Georgia. But when in 2000 the United States’ economic recession began, Vernay experienced an “unprecedented fall in sales,” mostly to domestic business, the report said.

That same year a group of Vernay’s neighbors sued the company over the contamination issue, and with the wheels for growth spending still spinning abroad, Vernay ended the year with a $3 million deficit. Forecasts for increased environmental costs and a continued drop in North American sales prompted the company to warn shareholders to expect further financial decline.

“Management’s outlook is cautious for 2001,” that year’s report said.

According to a shareholder who wished to remain anonymous, in 2001 the value of Vernay’s shares began to drop, while its employee stock has hovered around $33 per share, the average price at which the company’s audited financial statements from 2000 show Vernay bought and sold shares in its employee stock ownership plan. Shareholder dividend receipts obtained by the News also show that shareholder dividends were cut in half to 11 cents a share.

Vernay executives’ salaries were frozen around that same time, said Vernay President and CEO Tom Allen. He said he would not comment further on the details of the company’s financial records.

Financial difficulties were compounded in 2002, according to Vernay CFO Frank Welling. As the cost of the lawsuit and contamination cleanup increased by several million dollars, Vernay was not able to maintain the covenants of its loan with Firstar Bank. Though the violations were waived, according to a 2002 shareholder letter and dividend receipts, the company was forced to cut off dividends altogether.

In June 2002 Vernay announced it was relocating its Yellow Springs manufacturing operations to facilities in Georgia and South Carolina, adding another temporary expense to the company’s books. The end of the year accounts showed the company’s North American operations experienced a $5 million loss, and Vernay ended another year in the red.

In 2003, though the loss in North America was expected to be smaller than previous years, the company was forced to reduce health care benefits for retirees by instating deductibles and increasing co-payments. According to one shareholder, projections for 2003 show Vernay should break even.

The company officials interviewed for this article indicated they preferred to keep their comments about Vernay’s finances to a minimum. Vernay is a privately held company whose stocks are not traded openly and whose financial issues are not a matter of public record, they said. The News did obtain some facts and figures for this article from shareholders reports and dividend receipts.

The cost of cleaning up

Vernay has spent a total of $8 million in the last four years on the environmental contamination issues at its Dayton Street facility, Allen said. For a $65-million-a-year company, the cleanup and lawsuit has been a “life-threatening event” in Vernay’s history, Allen said in an interview last week.

In 2000, a year after Vernay began pursuing an environmental investigation and through the Ohio Environmental Protection Agency’s Voluntary Action Program, a group of neighbors filed a federal lawsuit against the company. The neighbors and Vernay settled the suit in 2002, and the neighbors received oversight of Vernay’s investigation and cleanup. Vernay also agreed to work with the U.S. EPA on the cleanup.

Vernay spent nearly $3.4 million on the settlement and plaintiff’s attorney fees and another $5 million on consultant fees and litigation defense, according to Allen. Involving the courts and the Ohio EPA slowed down the cleanup process and turned what Allen called a “manageable” $2.6 million issue into an $8 million “distraction.”

“The environmental event in Yellow Springs has dominated almost all the decisions we’ve made over the last four to five years,” Allen said. “It’s my contention that we would have had this done some years ago, but the OEPA is notoriously slow.”

Some believe that the company did have over a decade to address its environmental issues and chose not to thoroughly deal with the contamination. If Vernay had cleaned up its pollution in 1989, when it was initially identified, the company might not have incurred such a heavy cost burden later, said one of the plaintiffs who wished not to be identified.

In a deposition taken in 2000 by the plaintiffs’ lawyer, David Altman, Allen said that the environmental problems had no bearing on the possible future move and that Vernay considered relocating before the lawsuit was filed because of high employee costs and the lack of productivity in Yellow Springs.

“While [Vernay] was covering up the problem in Yellow Springs they were building the plant in Georgia...and now that there are these victims who have lawsuits pending we get this blame-the-victim spin coming out of Vernay,” Altman said in an interview Tuesday. “That’s exactly why companies ought to do the right thing sometime in the beginning, or sometime between the beginning and now.”

Hope for resurgence

Despite the gloomy financial picture, Vernay has begun to show a glimmer of hope in developing markets in Israel, Europe, Japan and China, according to Welling. Solid sales abroad are offsetting the company’s poor domestic performance, he said, and the new operations in Georgia and South Carolina have been functioning productively while minimizing their losses.

Companies always go through financial cycles because price pressure and competition mean that nothing expands forever, said local resident Mike Gardner, who experienced similar periods throughout his 28 years in management at The Antioch Company.

The Antioch Company, now one of the largest privately held companies in the Miami Valley, had trouble with some of its subsidiaries in the 1980s and ended two separate years with a negative balance, said Gardner, who is now retired. But the company was able to eliminate the unsuccessful parts of its business and capitalize on its profitable operations and increased its sales from $100 million in the late 1990s to $400 million last year, he said.

The outlook for Vernay’s future is guarded but optimistic, and though business performance could be tenuous in the next several years, the company should bounce back and start distributing dividends again, said two Vernay stockholders who wished to remain anonymous.

Allen said that Vernay intends to shift its focus in the next five years from doing 80 percent of its business in North America, as it did during its first 40 years, to splitting its business equally between North America, Western Europe and Asia.

“I believe we’re over the hump, that the worst is behind us,” he said. “Vernay is reinventing itself to be able to participate with global customers.”

Still moving Plant 2

Part of Vernay’s reinventing itself involves creating a central location for all of its facilities in the southeastern U.S., where all the major manufacturing in the country is locating, Allen said. After the operations in Dayton Street’s Plant 3 moved to Georgia last year, Vernay conducted a feasibility study and decided to relocate its Plant 2 operations to Griffin, Ga.

The move is scheduled to begin in early November 2004 and will be completed by March 1, 2005, according to Gregg Gearhardt, vice president of North American operations.

Though all 36 production employees and possibly the four salaried employees currently working in the plant are scheduled to lose their jobs, no layoffs associated with the closure are expected before this October or November, Gearhardt said.

About 150 employees were laid off or retired in 2002 and 2003 before Plant 3 was closed in June 2003, and since then only three workers have been laid off in response to a reduction in business operations, Gearhardt said.

As he did nearly a year ago, Allen said that Vernay’s headquarters will probably not remain in Yellow Springs, but the company is looking at options in the Dayton and Springfield areas. If Vernay does not stay in the area, the next best option is to relocate to Georgia near the rest of its plants in the South, he said, because it “makes sense for us to be there.”

Vernay headquarters employs 63 salaried workers in the fields of corporate activity, research, engineering, accounting, human resources, inside sales and information technology. Five engineers have already agreed to move to the South before the end of the year, leaving 58 employees to decide their futures with Vernay.

—Lauren Heaton