You are on page 1of 21

Kohler Co.

Harvard Business School Case 9-205-034
Case Software 9-205-707
This courseware was prepared solely as the basis for class discussion. Cases are not intended to serve as
endorsements, sources of primary data, or illustrations of effective or ineffective management.
Copyright © 2005 Presidents and Fellows of Harvard College. No part of this product may be reproduced,
stored in a retrieval system, used in a spreadsheet or transmitted in any form or by any means--electronic,
mechanical, photocopying, recording or otherwise--without the permission of Harvard Business School.

Exhibit 1

Milestones in Kohler Co.’s History

John Michael Kohler

 1873 Kohler Co. founded
 1883 Company manufactures firs enameled cast iron bathtub
 1900 New foundry opens

1900-1905

 New foundry destroyed by fire

1873-1900

Robert Kohler
1905-1940
Walter Kohler








1911 Introduction of one-piece bathtub
1912 Kohler Village incorporated
1917 50-year Master Plan for Kohler Village by Olmsted Brothers
1918 American Club opens as housing for single male workers
1920 Kohler enters electric generator market
1925 Manufacture of faucets and brass accessories begins
1927 Introduction of matching colors for bathtubs and toilets
1934 AFL strike; Kohler Workers’ Assoc. becomes employees’ bargaining agent

1940-1968

 1940 Kohler Foundation established

Herbert V. Kohler, Sr.




1968-1972

 1971 Investment in cast iron production facilities

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

Lyman Conger
1972Herbert V. Kohler, Jr.

Source:

www.kohler.com












1973
1977
1978
1981
1984
1986
1987
1991
1994
1995
1996
1997

100th Anniversary of company
New 50-year Master Plan for Kohler Village by Frank L. Wright Foundation
1-for-20 stock split
American Club opens as a resort hotel
Acquisition of Sterling Faucet
Acquisition of first furniture company
Sales reach $1 billion
Vitreous china plant opens in Monterrey, Mexico
Resort at Kohler Village expanded with opening of The Inn on Woodlake
Joint venture in China
Sales reach $2 billion
Generator plant opens in Singapore

Exhibit 2

Abbreviated Kohler Family Tree a

(1)

Lillie
Vollrath

Evangeline
Kohler

Robert
Kohler

John Michael
Kohler

Walter
Kohler

Julilly
House

Charlotte
Schroeder

Walter
Kohler

Carl
Kohler

John Michael
Kohler

Marie
Kohler

Lilly
Kohler

Robert
Kohler

Natalie
Black

John Michael
Kohler IV

William
Kohler

Julilly
Kohler

Carl
Kohler

(2)

Herbert
Kohler, Jr.

Marie
Kohler
Laura
Kohler

a

Highlighted family members are those mentioned in the text

Source:

Company documents

(2)

John Michael

Wilhemina
Vollrath

Carl
Kohler
Herbert
Kohler, Sr.

Herbert
Kohler, Jr.

Laura
Kohler

(1)

Rachel
Kohler

Linda
Karger

David
Kohler

Ruth
DeYoung

Ruth
Kohler

Frederic
Kohler

Exhibit 3a

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

1994

1995

1996

1997

4/30/1998

46,252
244,852
201,208
8,413
39,961

32,955
280,028
221,791
14,781
33,976

22,329
298,046
248,777
16,813
40,157

20,039
322,136
247,820
16,510
44,638

26,117
339,238
249,957
15,346
56,028

2,454
360,810
265,606
0
78,857

540,686

583,531

626,122

651,144

686,686

707,728

944,920 1,059,183
(572,451) (633,419)

NA
NA

NA
NA

NA
NA

Assets
Cash and Cash Equivalents
Accounts Receivable
Inventory
Future Income Tax Benefits
Prepaid Expenses and Deposits
Total Current Assets
Property, Plant & Equipment, Gross
Accumulated Depreciation
Total PP&E, Net
Other Assets:
Intangibles
Deferred Income Taxes
Other Assets
Total Other Assets
Total Assets

885,493
(520,936)
364,557

372,469

425,764

437,818

447,714

444,841

113,049
10,493
23,262

106,741
13,215
24,035

169,182
13,778
31,619

253,059
19,550
21,205

217,830
61,273
34,338

211,326
0
95,906

146,804

143,991

214,579

293,814

313,441

307,232

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
Accounts Payable
Accrued Liabilities
Current Maturities of LTD
Total Current Liabilities
Post-retirement Obligations
Other Long-term Liabilities
Long-term Debt
Total Long-term Liabilities
Total Liabilities
Capital Stock
Retained Earnings
Treasury Stock, at Cost
Foreign Currency Adjustment
Total Stockholder's Equity
Total Liabilities and Equity

Source:

Company documents

30,349
159,439
65,165
7,201

5,861
166,792
72,917
5,903

19,170
188,258
68,899
5,672

15,425
198,707
84,825
23,541

15,099
229,170
97,736
8,824

0
209,972
118,800
48,629

262,154

251,473

281,999

322,497

350,827

377,401

55,607
54,694
140,601

56,248
58,877
132,209

56,463
67,584
202,138

56,462
53,344
251,699

56,166
58,905
220,116

0
111,852
183,815

250,902

247,334

326,185

361,505

335,187

295,667

513,056

498,807

608,184

684,002

686,014

673,068

32,555
526,437
-15,064
(4,936)

32,561
586,727
-15,190
(2,914)

34,171
634,447
-13,266
2,929

34,234
682,691
-14,304
(3,846)

34,235
763,838
-14,007
(22,239)

34,235
791,109
-14,127
(24,484)

761,827

786,733

538,992

601,184

658,281

698,774

1,052,048 1,099,991 1,266,465 1,382,776 1,447,841 1,459,801

Exhibit 3b

Kohler Co. Income Statements 1993-1997 (in $ thousands, as of Dec. 31 unless otherwise indicated)

1993

1994

1995

1996

1997

4 months
4/30/1998

1,542,114
1,164,305

1,771,959
1,333,933

1,833,902
1,412,155

2,014,818
1,532,192

2,213,403
1,637,385

757,473
559,273

Gross Profit

377,809

438,026

421,747

482,626

576,019

198,200

Selling & Administrative Exp.
Amortization of Intangibles

267,303
9,448

292,786
12,079

302,433
8,564

342,945
11,332

380,091
21,618

134,004
6,763

Operating Income after Deprec.

101,058

133,161

110,750

128,349

174,310

57,433

Non-operating Income (Expense)
Interest Income
Interest Expense

-10,486
1,877
12,337

-9,840
2,151
11,798

-8,801
3,623
10,972

-10,975
2,101
18,547

-5,746
2,237
14,031

-2,379
0
4,812

80,112

113,674

94,600

100,928

156,770

50,243

46,992

68,796

Net Sales
Cost of Sales

Pretax Income
Income Tax Expense
Net Income

Source:

Company documents

31,648
48,464

46,955
66,719

41,200
53,400

53,936

87,974

21,644
28,599

LTM
4/30/1998
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

48,464

66,719

53,400

53,936

87,974

65,287
(6,868)
4,192
3,631
(9,498)
(7,328)
(19,513)
30,932

70,771
(8,709)
4,921
2,039
(37,321)
(16,239)
4,484
12,146

69,977
(605)
4,626
248
(4,261)
(14,433)
(11,732)
(683)

109,299

98,812

96,538

(67,155)
3,084
0
(18,725)

(64,603)
4,648
0
(3,141)

-82,795

-63,096

-166,765

-199,775

103,232
0
(94,447)
202
(246)
(4,059)

5,055
0
(48,587)
235
(361)
(4,539)

102,973
0
(31,067)
176
(727)
(6,995)

78,000 (66,000)
10,567
49,245
(21,498) (26,962)
34
351
(1,071)
(55)
(5,697)
(5,688)

4,681

-48,197

64,360

60,334

-49,109

(942)

(817)

(4,758)

3,380

7,519

(13,297)
46,252

(10,626)
32,955

(2,290)
22,329

6,077
20,039

32,955

22,329

20,039

Cash Flows from Operating Activities
Net Income
Adjustments to Reconcile Net Income to Cash Flow
from Operating Activities:
Depreciation and Amortization
Deferred Income Taxes
Provision for Loss on Accounts Receivable
Other Non-cash Items
(Increase) Decrease in Accounts Receivable
(Increase) Decrease in Inventory
(Incr.) Decr. in Prepaid Expenses and Other Assets
Incr. (Decr.) in Accounts Payable and Accrued Exp.
Net Cash Flow from Operating Activities

79,464
86,178
(3,722)
(7,769)
4,789
3,673
(1,146)
(23)
(8,683) (40,937)
3,950 (12,272)
4,525 (49,091)
658
63,038
133,772

130,770

Cash Flows from Investing Activities
Purchase of Property, Plant and Equipment
Sales of Property, Plant and Equipment
Acquisition of Businesses
Other Investments
Net Cash Flow from Investing Activities

(86,970)
(76,348) (90,707)
4,685
6,051
7,604
0 (129,478)
0
(84,480)
-83,103

Cash Flows from Financing Activities
Net Borrowings Under Revolving Credit
Other Borrowings
Other Principal Payments
Sales of Treasury Stock
Purchases of Treasury Stock
Dividends Paid
Net Cash Flow from Financing Activities

Effect of Exchange Rate Changes on Cash
Increase (Decrease) in Cash and Equivalents
Cash and Equivalents, Beginning of Year
Cash and Equivalents, End of Year

Source:

Company documents

30,243
16,010
46,253

26,117

Exhibit 4

Kohler Co. Income Statements 1997 by Group (in $ thousands, as of December 31)
Kitchen & Bath
Group

Power Systems
Group

Interiors
Group

Hospitality & R.
Estate Group

1,485,831
1,045,038

540,260
461,140

145,414
92,564

50,789
43,041

Gross Profit

440,793

79,120

52,850

7,748

Selling & Administrative Exp.
Amortization of Intangibles

284,097
-

44,600
-

45,580
-

4,872
-

Operating Income after Depr.

156,696

34,520

7,270

2,876

Non-operating Income (Expense)
Interest Income
Interest Expense

-6,400
1,477
10,181

-269
180
2,428

514
142
1,633

0
12
1,040

Pretax Income

141,591

32,004

6,292

1,848

Income Tax Expense

54,179

Net Sales
Cost of Sales

Net Income

Source:

Company documents

87,411

11,605
20,398

2,291
4,001

727
1,121

Elim. & Corp.
Var.

Kohler Co.
Consol.

-8,891
(4,398)

2,213,403
1,637,385

-4,492

576,019

942
21,618

380,091
21,618

-27,052

174,310

409
426
(1,251)

-5,746
2,237
14,031

-24,965

156,770

(6)
-24,957

68,796
87,974

Exhibit 5

Ownership of Kohler Co., April 1998

Name

Number of Shares

Percentage of Ownership

Herbert V. Kohler
Trust for the benefit of Herbert V. Kohler
Lineal Descendants of Herbert V. Kohler

924
450
50

12.4%
6.0%
0.67%

Ruth DeYoung Kohler
Trust for the benefit of Ruth DeYoung Kohler

974
450

13.1%
6.0%

Estate of Frederic Kohler

975

13.1%

John Michael Kohler
Trust for the benefit of John Michael Kohler

146
86

2.0%
1.2%

960
1,046
277

12.90%
14.0%
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

Kohler Foundation
Kohler Trust for the Arts and Education
Kohler Trust for Preservation

Total Shares Outstanding

Source:

Company documents

7,587.89

Exhibit 6a

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

1999

2000

2001

2002

63,512
351,713
258,962
15,744
57,150

56,838
355,124
261,669
16,194
56,007

55,621
376,927
272,065
18,764
63,369

70,976
393,929
281,550
19,730
66,272

95,207
410,560
294,261
21,719
68,809

747,081

745,832

786,746

832,457

890,556

476,419
197,387
21,072
25,414

498,839
184,511
23,035
25,094

516,899
171,635
21,331
26,804

531,993
158,759
26,407
28,102

554,161
145,883
29,070
29,214

Assets
Cash and Cash Equivalents
Accounts Receivable
Inventory
Future Income Tax Benefits
Prepaid Expenses and Deposits
Total Current Assets
Other Assets:
Property, Plant & Equipment, Net
Intangibles
Deferred Income Taxes
Other Assets
Total Other Assets
Total Assets

720,292

731,479

736,669

745,261

1,467,373 1,477,311 1,523,415 1,577,718

758,328
1,648,884

Liabilities and Stockholders’ Equity
Short-term Borrowings
Accounts Payable
Accrued Liabilities
Current Maturities of LTD
Total Current Liabilities
Post-retirement Obligations
Other Long-term Liabilities
Long-term Debt
Total Long-term Liabilities
Total Liabilities

15,099
225,771
79,862
8,824

15,099
225,664
77,926
8,824

15,099
239,481
78,705
8,824

15,099
251,384
79,492
8,824

15,099
261,007
80,287
8,824

329,556

327,513

342,109

354,799

365,217

56,166
60,201
235,115

56,166
61,586
195,115

56,166
63,125
150,115

56,166
64,388
105,115

56,166
65,804
70,115

351,482

312,867

269,406

225,669

192,085

681,038

640,380

611,515

580,468

557,302

Foreign Currency Adjustment

34,234
835,228
-60,888
(22,239)

34,234
889,857
-64,921
(22,239)

34,234
34,234
968,900 1,058,364
-68,995
-73,109
(22,239)
(22,239)

34,234
1,156,852
-77,265
(22,239)

Total Stockholder's Equity

786,335

836,931

911,900

Capital Stock
Retained Earnings
Treasury Stock, at Cost

Total Liabilities and Equity

Source:

997,250

1,467,373 1,477,311 1,523,415 1,577,718

Company documents: Management Projections

1,091,582
1,648,884

Exhibit 6b

Kohler Co. Projected Income Statements 1998-2002 (in $ thousands, as of December 31)
1998a

1999

2000

2001

2002

1,511,000
1,125,884

2,240,528
1,690,366

2,393,187
1,780,531

2,509,100
1,862,103

2,608,385
1,933,387

Gross Profit

385,116

550,162

612,656

646,997

674,998

Selling & Administrative Exp.
Amortization of Intangibles

268,748
13,680

411,254
12,876

428,161
12,876

446,143
12,876

460,518
12,876

Operating Income after Depreciation

102,688

126,032

171,619

187,978

201,604

Non-operating Income (Expense)
Interest Income
Interest Expense

-6,299
2,307
11,521

-10,173
4,569
14,325

-10,783
5,670
12,987

-11,430
7,500
10,286

-12,116
9,932
8,134

87,175

106,103

153,519

173,762

191,286

46,071

66,659

75,448

83,057

Net Sales
Cost of Sales

Pretax Income
Income Tax Expense
Net Income

Source:
a

38,585
48,590

Company documents: Management Projections

Eight-month period ending Dec. 31, 1998

60,032

86,860

98,314

108,229

Exhibit 6c

Kohler Co. Projected Statements of Cash Flow 1998-2002 (in $ thousands, as of Dec. 31)
1998a

1999

2000

2001

2002

48,590

60,032

86,860

98,314

108,229

56,113
36,816
0
0
9,097
6,644
(15,744)
21,707
(23,139)

87,661
(1,964)
2,000
(2,000)
(3,410)
(2,707)
(450)
1,463
(658)

91,786
1,704
2,000
(2,000)
(21,803)
(10,396)
(2,570)
(9,072)
16,136

94,593
(5,075)
2,000
(2,000)
(17,002)
(9,485)
(966)
(4,201)
13,952

97,355
(2,664)
2,000
(2,000)
(16,631)
(12,711)
(1,989)
(3,649)
11,835

140,085

139,967

152,645

170,130

179,775

Cash Flows from Operating Activities
Net Income
Adjustments to Reconcile Net Income to Cash Flow
from Operating Activities:
Depreciation and Amortization
Deferred Income Taxes
Provision for Loss on Accounts Receivable
Other Non-cash Items
(Increase) Decrease in Accounts Receivable
(Increase) Decrease in Inventory
(Increase) Decrease in Future Income Tax Benefits
(Incr.) Decr. in Prepaid Expenses and Other Assets
Incr. (Decr.) in Accounts Payable and Accrued Exp.
Net Cash Flow from Operating Activities

Cash Flows from Investing Activities
Purchase of Property, Plant and Equipment
Sales of Property, Plant and Equipment
Acquisition of Businesses
Other Investments
Net Cash Flow from Investing Activities

(87,691) (105,000) (105,000) (105,000) (115,000)
0
7,795
8,029
8,189
8,353
0
0
0
0
0
-87,691

-97,205

-96,971

-96,811

-106,647

26,594
0
4,033
2,245
0
(1,765)

15,000
(55,000)
0
0
(4,033)
(5,403)

15,000
(60,000)
0
0
(4,074)
(7,817)

15,000
(60,000)
0
0
(4,114)
(8,848)

15,000
(50,000)
0
0
(4,156)
(9,741)

31,106

-49,436

-56,891

-57,962

-48,897

(6,674)
63,512

(1,217)
56,838

15,357
55,621

24,231
70,976

56,838

55,621

Cash Flows from Financing Activities
Net Borrowings Under Revolving Credit
Other Principal Payments
Sales of Treasury Stock
Foreign Currency Adjustment
Purchases of Treasury Stock
Dividends Paid
Net Cash Flow from Financing Activities

Increase (Decrease) in Cash and Equivalents
Cash and Equivalents, Beginning of Year
Cash and Equivalents, End of Year

Source:
a

Company documents: Management Projections

Eight-month period ending Dec. 31, 1998

83,500
2,454
85,955

70,978

95,207

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

a

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)

Stock Market Data as of 4/30/1998
Ticker
Shares Outstanding (in thousands)
Stock Price ($)
Market Value of Equity
Market Value of Equity,
Average of Latest 36 Mths.
Beta Over Latest 36 Months
Standard Deviation of Stock Returns
Financial Data as of 3/31/1998
Latest Twelve Months
Total Debt
Sales
EBITDA
Cash Flow c
EBIAT

a

American
Woodmark

Masco

Briggs &
Stratton

Cummins
Engine

Detroit
Diesel

ASD
71,929
48.69
3,502.0

AMWD
7,811
30.25
236.3

MAS
169,634
58
9,838.8

BGG
24,514
45.25
1,109.3

CUM
42,036
54.38
2,285.7

DDC
24,701
23
568.1

2,762.9
0.82
7.7%

82.0
0.76
14.7%

5,937.3
1.28
6.4%

1,210.0
0.66
5.7%

2,053.6
1.09
8.5%

502.5
1.3
10.4%

2,404.0
6,139.5
699.3
462.5
292.6

13.4
327.0
37.6
27.4
17.1

1,187.9
3,945.0
838.4
553.4
437.3

259.6
1,327.2
178.3
127.2
80.4

1,250.0
5,821.0
487
390.2
224.2

107.4
2,233.0
105.5
82.8
41

2,216.6
5,767.8
667
420.9
263.5

12.3
262.7
30.7
22.1
13.7

1,341.3
3,414.0
721.9
473.6
367.4

155.4
1,282.2
187
132.1
87.1

686.7
5,431.0
448.3
377.5
221

127.3
2,090.7
100.2

b

Average of Latest Three Years
Total Debt
Sales
EBITDA
Cash Flow c
EBIAT

Source:

American
Standard

78.2
40.5

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

1 Year Bonds
5 Year Bonds
10 Year Bonds
20 Year Bonds

Source:

Dec-97

Apr-98

5.53%
5.77%
5.81%
6.07%

5.38%
5.61%
5.64%
6.00%

Board of Governors of the Federal Reserve System