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Purolator Products Company is the largest manufacturer of automotive filters in the United States. The original Purolator filter, invented in 1923, was the first replaceable oil filter for automotive motors. Since that time Purolator brand filters have been marketed by a string of companies, while the Purolator name has remained a leading factor in the automotive filter industry. In the late 1990s, Purolator Products operated as a unit of Mark IV Industries' automotive aftermarket division.
Facet Enterprises is Created in Mid-1970s
The Bendix Corporation spun off Facet Enterprises, Inc. as an independent company in 1976. The formation of Facet (an acronym for Filters, Automotive Components, and Environmental Technology) was the result of a settlement of a nine-year dispute between Bendix Corp. and the Federal Trade Commission (FTC). Bendix's 1967 purchase of Fram, a producer of automotive and industrial filters, had been challenged by the FTC on the grounds that, with this merger, too much of the filtration industry would be controlled by one firm. After drawn out negotiations, Bendix agreed to spin off several of its filter operations as Facet Enterprises.
Although Facet was created primarily in order to satisfy the FTC ruling, Bendix also planned to have the new company absorb the enormous pension costs of employees at three recently discontinued Bendix divisions. The Facet spin off was regarded by some analysts as a calculated move by Bendix to dump the pension funds by linking them to a new company whose assets were less than half of the liability of the cost of the pension fund. One year after the divestiture, Facet chairman, James B. Treacey, estimated that $34 million of the $51 million liability inherited by the new company was the result of employees who had retired or been terminated prior to the divestiture. It seemed impossible at the time that the company could ever succeed and Wall Street observers dubbed the new Facet "the company launched to fail." After eight years of dispute and threatened litigation some funds were recovered from Bendix retroactively to offset the pension load.
Despite its inauspicious beginning Facet Enterprises survived to become the leading filter manufacturer in the United States. By the early 1980s, under president James Malone, Facet's primary markets were in the automotive and ventilation segments of the filter industry, although the company also manufactured a variety of specialized filters for industrial use. Facet's automotive filters, which generated about one-third of the company's sales, were sold primarily as "private label" products to retailers like Sears and K-mart who then placed their own brand name on the products. Facet was the third largest manufacturer in the private label segment of the automotive filter market, which itself accounted for a large proportion of total industry sales. By 1985, Facet was recording net income of $2.5 million on sales of $171 million.
Facet Purchases Purolator in 1987
The genesis of a new company named Purolator Products occurred in 1987 when Facet Enterprises purchased the filter manufacturing end of Purolator, Inc for $67 million. The Purolator name had been associated with automotive filters ever since 1923 when Ernest Sweetland invented the first replaceable automotive oil filter using treated cotton waste. The new filter required fewer oil changes, and provided cleaner oil to the engine, reducing engine wear. Sweetland named his invention "Pure Oil Later," which became the basis for the Purolator line of auto parts. Purolator remained a major force in the auto parts industry through much of the century. During the 1960s Purolator entered the courier business and by the late 1980s this segment of the company's operations had become so successful that Purolator was looking to shed its automotive divisions.
The acquisition of Purolator's filter operations gave Facet a broader geographical base from which to service customers. Facet's automotive filter plants were located in Dexter, Missouri, and Salt Lake City, Utah, creating distribution problems for customers in the eastern United States. Management reasoned that they could deliver the filter that the customer wanted more efficiently if they had plants on both the east and west coast. Purolator's manufacturing plants in Fayettesville, North Carolina, and Ontario, Canada, provided the perfect solution to Facet's distribution problems. With the addition of Purolator's facilities, Facet would have access to 1.3 million square feet of manufacturing capabilities.
Market research indicated that Facet did not enjoy high brand recognition among consumers, ranking well behind the top three branded filters: Fram, AC-Delco, and Purolator. The four next most recognized brands, however, were all Facet manufactured filters under private labels. In fact, Facet's private label filters accounted for a greater market share than the number one branded filter, Fram. By acquiring Purolator, Facet hoped to capitalize on that company's high profile brand name. With the acquisition, Facet became the country's largest automotive filter manufacturer, controlling an impressive 30 percent of the market. Net income doubled to $4.9 million on sales of $280 million. Automotive filters were now generating over 75 percent of sales for the company with heating and ventilation filters providing the bulk of the remainder.
Pennzoil Purchases Facet in 1988
Lured by Facet's market share Houston based Pennzoil Corporation purchased Facet in 1988 for $233 million. Pennzoil was drawn to the acquisition by Facet's potential as an attractive combination with Pennzoil's growing "quick lube" business, the industry's term for the single service quick oil change outlets that had been springing up across the country since the early 1980s. Pennzoil was one of the leading suppliers of motor oil to the quick lube segment, and Facet provided private label filters to the three largest quick lube operators: Jiffy-Lube, Minit-Lube, and Valvoline Rapid Oil Change.
The same strategy that had encouraged the purchase of Purolator led to another major merger when two years later, in 1989, Facet acquired Servodyne Corporation. Servodyne, originally a West Coast filter and cartridge manufacturer, had acquired a large number of filter distribution companies during the 1980s making them an attractive partner for Facet. In 1990 the new company, Facet-Servodyne, Inc., officially changed its name to Purolator Products, Inc. in an effort to capitalize on the superior brand recognition of the Purolator name. President and CEO, James R. Malone explained the strategy to Tulsa World, "This is the first step in a corporate strategy which will eventually replace the Facet name with the highly respected and much better known Purolator name."
Most of Facet's business, had been in private label sales of filters to other automotive aftermarket suppliers before the purchase of Purolator and the subsequent name change. After the name change, Purolator began a two-tiered sales strategy, continuing to supply filters for private label use and promoting its own high profile Purolator brand and distinctive logo. Nevertheless private label sales continued to account for the lion's share of Purolator Product's activity in the automotive sector.
Pennzoil Sours on Purolator
When Pennzoil bought Facet in 1988, the company controlled about 32 percent of the automotive filter market. By 1990 this figure had climbed to almost 40 percent with sales reaching over $420 million. In spite of the sales growth, Pennzoil almost immediately began to regret the purchase of Facet and did not foresee realizing a return on their investment. The hoped-for savings in transportation costs in delivering filters to customers was not realized on the balance sheet, as the cost of purchasing and managing the company outstripped Purolator Product's income and the advantage that it offered to Pennzoil's quick lube venture. In addition, Pennzoil's purchase of Jiffy Lube in 1989 set the company up as a direct competitor to other quick lube operators who quickly dropped Facet as a supplier. By 1989 the newly named Purolator Products company was recording a net loss of $7 million.
Despite having sunk approximately $61 million into their new acquisition within two years, Pennzoil became anxious to unload the money losing Purolator. Pennzoil was prepared to bite the bullet and take a loss on the Facet-Purolator transaction, announcing to shareholders that they expected to lose up to $125 million on the divestiture. Even this estimate, however, turned out to be wishful thinking, as all offers fell well short of Pennzoil's asking price. Pennzoil was not willing to give the company away for nothing, despite its being a serious cash drain, because Purolator was still the dominant manufacturer in the automotive filter market. Compounding the lack of a reasonable offer on Purolator was a disagreement between Pennzoil and the Internal Revenue Service. During the late 1980s, tax laws had been revised to limit the deductions large corporations could claim on the sale of unproductive subsidiaries. Pennzoil had been counting on claiming $102.5 million in losses on Purolator as a discontinued operation for the fourth quarter of 1990, but the new ruling reduced this figure to only $60 million.
Purolator Rebounds in the 1990s
Frustrated in its attempt to sell Purolator Products, Pennzoil developed a new tactic in dealing with its unfortunate purchase. In April 1990, Pennzoil fired 25 Purolator executives. President and Chief Executive Officer James Malone was replaced by turnaround specialist Roman Boruta. Boruta and his team liked what they saw in most aspects of the company and were confident that Purolator Products still had great potential. At the same time Boruta discovered that the company had essentially been buying business by accepting any contract, even at a loss, in order to maintain or boost market share. Boruta explained the situation to Automotive Marketing: "They were taking every contract, no matter what the price, no matter what the cost implications. We had one customer where the cost of sales was much higher than the cost of producing it. I'm sure they had good reasons for doing this but I don't know what they were.... Some people think volume cures a lot of sins, that's what was happening. The property and equipment was all right. But accounts receivable was terrible. There were 50% past due accounts."
Boruta's first order of business was to collect the outstanding accounts even if contracts were put in jeopardy. New customers were researched before contracts were finalized, and tighter payment schedules were written into new contracts. At the same time Boruta renegotiated prices with major clients. Even at the risk of losing the company's contract, which represented 14 percent of overall sales, Boruta sought and obtained a six percent price increase from automotive giant Ford. Although the focus of the reorganization was on improving accounts, manufacturing costs were also streamlined most notably by closing the outdated Canadian plant, putting 200 employees out of work. Overall the Purolator work force was reduced by approximately 900. After recording a net loss of about $50 million in 1991, Purolator Products had a net income of approximately $13 million the following year.
As Purolator's bottom line improved, new bids came in from aftermarket companies wanting to purchase the refurbished company, but as Pennzoil Chief Executive Officer James L. Pate told The Wall Street Journal, "I wouldn't even entertain an offer, we've decided to keep it." The following year Pennzoil spun off Purolator Products, offering ten million shares to the public in October 1992 and severing all ties with its troubled subsidiary. Rationalizing the apparent about-face, CEO Pate told Tulsa World that Pennzoil would focus on "areas it considers strategic to future business." With Pennzoil divesting itself of Purolator to focus on its strong suit, oil and gas refining, Purolator was once again an independent company.
When Purolator was spun off by Pennzoil in 1992, the company was organized into four business segments. The company's automotive products segment, providing about 75 percent of sales, produced automotive oil, air and fuel filters for virtually all automobiles and light duty trucks then operated in North America. Approximately 90 percent of these sales were to the aftermarket sector for vehicle repair and maintenance. The remainder went to original equipment manufacturers like Ford and Chrysler for placement in new vehicles. The company's plant in Fayetteville, North Carolina, was the world's largest automotive filter manufacturing plants. Analysts estimated that the company's share of the U.S. automotive filter market was once again at about 30 percent. In addition to domestic operations, Purolator established a European sales, marketing, and distribution subsidiary, Purolator Filter GmbH, and continued to control a 39.3 percent equity interest in Purolator India Limited, a company that had been started by Purolator back in the 1960s.
Purolator's second largest segment was made up of air filtration products manufactured and distributed through the company's wholly owned subsidiary Purolator Products Air Filtration Company. Although this subsidiary made up only 13 percent of Purolator sales, it was one of the largest U.S. manufacturers of air filtration products for heating, ventilation and air conditioning systems. These products were marketed under both the Purolator and Facet brand names. The remainder of Purolator's sales were provided by the separations systems segment, conducted through the company's wholly owned subsidiary, Facet International, and the industrial filter products segment, managed by the company's Facet Filter Products Division.
Mark IV Acquires Purolator
By 1993, after one year as an independent company, Purolator sales had climbed back up to $435 million and the company was back in the black with net income of $17.8 million. The company's new-found independence was short lived, however, as in 1994 Mark IV Industries, Inc. acquired Purolator Products Co. for $260 million. Mark IV was a diversified manufacturer of engineered systems and components for power transmission, fluid power and transfer, and filtration applications for industrial and automotive customers.
In 1997 Mark IV undertook a major reorganization which saw the original Purolator Products broken up into a variety of operating units. The company's main automotive filter product line became the basis for Mark IV's automotive aftermarket unit along with Mark IV's automotive belt and hose manufacturer, Dayco Products. Purolator Products Air Filtration Company, Facet International, and Purolator Filter Products were transferred to Mark IV's industrial operating unit.
As part of Mark IV's integration of Purolator Products, the company's manufacturing plant in Dexter, Missouri, was closed, while facilities in Fayetteville, North Carolina, were expanded and a 506,000-square-foot distribution center was built to supply all of the needs of the company's customers in the eastern United States. Mark IV management was confident that this reorganization would increase profit margins and allow Purolator Products to take full advantage of their dominant market share in automotive filters.