Central Sprinkler Corporation

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Central Sprinkler Corporation

451 North Cannon Avenue
Lansdale, Pennsylvania 19446
U.S.A.
(215) 362-0700
Fax: (215) 362-4731
Web site: http://www.centralsprinkler.com

Public Company
Incorporated: 1972Employees: 1,300
Sales: $225 million (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: CNSP
NAIC: 332919 Other Metal Valve & Pipe Fitting Manufacturing; 326122 Plastics Pipe & Pipe Fitting Manufacturing

Central Sprinkler Corporation, through its wholly owned subsidiary Central Sprinkler Company, is one of the largest manufacturers and distributors of automatic fire sprinkler systems and sprinkler components in the United States. The company not only makes sprinkler heads, but a wide array of component parts for sprinkler systems, including valves, grooved couplings and fittings, CPVC plastic pipe and fittings, and steel pipe. In addition, the company is one of the leading distributors of automatic fire sprinkler systems and parts, with numerous distribution centers located across the United States, and one each in the United Kingdom, Singapore, and China. During the last 25 years, sales have been on a continual increase, due in large part to the fact that federal and state regulations require sprinkler systems in both commercial and multi-residential buildings, and that similar regulations require sprinkler systems for older commercial constructions to meet the local building codes.

Early History

Central Sprinkler Company opened its doors for business in 1972. The company was established so that it could meet the growing need for automatic fire sprinkler systems, which had become part of the federal and state regulations requiring such sprinkler systems in commercial and larger, multi-residential buildings. One of the company’s first products, and the one that became its best-selling product during the middle and late 1970s, was the design and manufacture of the standard commercial sprinkler head.

The sprinkler head itself is the part of a sprinkler system that is activated by heat and, consequently, discharges a powerful and steady stream of water. The materials that comprise a sprinkler head include brass, copper, and various other types of corrosion resistant materials. A standard commercial sprinkler head is put in place on or near the ceiling of a room and is made up of a fusible alloy pellet that is contained in a bronze center strut by the use of a ball that is stainless steel. As the alloy melts at its activating temperature, the ball is pushed into the center strut and releases ejector springs, which, in turn, initiates the activity of the sprinkler head and discharges a strong steam of water according to a prescribed flow path. Most of the company’s commercial sprinkler heads are designed to be activated at temperatures normally ranging between 136 and 286 degrees Fahrenheit.

The company grew steadily but slowly on sales of its standard commercial sprinkler head and system, and management was cautious in its strategic plan for future growth. By the 1980s, Central Sprinkler Company looked attractive to many other firms and groups of independent financiers as a prospective acquisition, since it was financially stable with a good cash flow. In the acquisition-crazed period of the time, no company seemed immune from being purchased, no matter how good their balance sheet looked and how talented their management. Thus the company was purchased by a group of investors. The group assumed the name of Central Sprinkler Company when it was purchased in May of 1984 and it conducted the operations of the firm under the same name. Previous to the actual purchase of Central Sprinkler, the investment group did not list any assets or liabilities, nor had it engaged in any other activity or operation other than the acquisition of Central Sprinkler Company. The highest level of management within the company remained to direct its operations and in doing so bought a portion of the firm’s stock, with the rest of it purchased by the independent investment group.

With the impetus of leadership from the outside investment group, Central Sprinkler Company initiated an aggressive ac-quisitions program of its own. The company’s first purchase was that of Spraysafe, one of the leading manufacturers and distributors of sprinkler heads and sprinkler systems in the United Kingdom. Its first foray into the international arena was regarded as a success not only by company management but by industry analysts who began to recommend that investors purchase Central Sprinkler stock. With one purchase, top executives at the firm not only managed to significantly expand their product line to include glass bulb sprinkler heads, one of the items for which Spraysafe was known, but also had arranged the start of a distribution network for marketing Central Sprinkler products throughout Europe.

By the end of the 1980s the company was manufacturing and marketing an impressive variety of sprinkler system valves that were used as component parts in fire sprinkler installations. The valve is the device that controls the water supply within an automated sprinkler system, so that when a system is activated at a certain temperature, the valve triggers the flow of water through the system. In addition, the company also was garnering a reputation for its proprietary product line of steel sprinkler pipes. The pipe, which is used to carry the water from its source to the fire sprinklers when activated, received approval that is Underwriters Laboratory Listed and Factory Mutual Approved.

The 1990s and Beyond

During the early and mid-1990s the company expanded its product line to make a concerted effort to capture a larger part of the market. In late 1989 Central Sprinkler designed and manufactured a residential/life-safety sprinkler that it reworked during the early 1990s. The sprinkler was meant to provide a quick response and react to a fire before it could spread, which, in turn, significantly reduces the smoke and toxic fumes released by the fire. Designers added a glass bulb activating mechanism, which made the sprinkler even more effective, and the product soon gained the reputation as one of the best means for the protection of life during a fire.

In 1993 the company introduced another type of sprinkler head, the extended coverage commercial sprinkler. A revolution in sprinkler technology, this type of sprinkler head extended the water spray from 130 square feet to an amazing 400 square feet. Introduced and marketed under the trademark name of Optima, management at Central Sprinkler soon discovered that this sprinkler was one of the company’s most profitable products. In addition to the extended coverage commercial sprinkler, during the same year the company introduced the early suppression response sprinkler, designed for use in special and uniquely hazardous environments. Designed specifically to protect large storage areas where a quick response sprinkler with a high density of water spray is needed, the company included a larger orifice in the design of the sprinkler head to reduce the amount of pressure required for the spray. In 1995 Central Sprinkler continued its innovative designs with the introduction of a specific application series made to provide improved fire protection while at the same time keeping installation costs to a minimum.

Aside from expanding Central Sprinkler’s product line, management decided to embark on a vertical integration program that included strategic acquisitions to expand its market share. In July of 1994, management created a new company, Castings, Inc., through the purchase of a foundry located in the southeastern United States. The foundry manufactured piping system components and significantly enhanced Central Sprinkler’ s desire to provide corrosion resistant piping for its sprinklers. Purchased for $1.8 million, Castings, Inc. soon was fully integrated within its parent company’s production facilities and distribution network. The acquisition of a ductile iron factory shortly afterward by Castings provided the company with the ability to make its own grooved fittings and couplings and other piping systems component parts. In May of 1995 management formed another new company, Central CPVC, to manufacture CPVC plastic pipe and fittings. The company began building a new facility in Huntsville, Alabama, and production started in 1997. All of these developments were meant to provide Central Sprinkler with the ability to compete more readily, not only in the fire protection market, but in the mechanical, industrial, original equipment manufacturing, and heating and air-conditioning markets, where management saw the most promising opportunities for growth.

During this time the company began to expand its distribution network and provided a host of different parts normally used in sprinkler system installations. Fittings, electric switches, control valves, and hangers were sold to contractors. In keeping abreast of the technological developments that impacted its business, Central Sprinkler began to market and sell computer-aided design systems to architects and contractors for use in the installation of highly sophisticated commercial and multi-residential sprinkler systems.

Company Perspectives:

Central Sprinkler is a leader in the fire sprinkler systems industry. The Company is a leading designer, manufacturer and distributor of the most diverse line of fire sprinklers available, a complete line of valves and accessories, CPVC pipe and fittings, steel pipe, and ductile iron grooved fittings. Management is confident that strong market fundamentals combined with the Company’s diverse line of quality sprinklers, innovative research and development programs, strong relationships with installation contractors and continued development of cost cutting programs should be major contributing factors to expected sales and profit improvements going forward.

Unfortunately, for all its success during the early and mid-1990s, Central Sprinkler was hard hit by a series of lawsuits filed against it in August of 1997 and March of 1998. The class action lawsuit filed in 1997 by the State of California was on behalf of a number of building owners who had installed the company’s brand-name Omega sprinkler system in their buildings. The lawsuit brought against the company in 1998 was filed by the U.S. Consumer Product Safety Commission, also focusing on the Omega sprinklers. Both suits charged that the sprinklers were faulty and would not work properly during a fire. Although the company discontinued the manufacture and sale of the Omega sprinkler in 1998, Central Sprinkler was forced to reach an agreement with both plaintiffs such that it would provide for a free replacement sprinkler and its component parts, and that a separate account would be established for payment to the owners of the Omega sprinkler, the administration of a recall program, and an extensive notification program related to the recall of the Omega sprinkler.

During the summer of 1998 Central Sprinkler announced that it would recall more than eight million Omega sprinkler heads and systems and that any homeowner or commercial property owners who responded to the recall notice would receive a free replacement sprinkler system. In addition, the company announced that it had set aside $38 million to pay for both the replacement sprinklers and for a portion of the charges that customers incurred during the installation of the sprinklers. In spite of the settlement, many people remained unsatisfied with the terms of repayment, and a number of individuals chose to file individual lawsuits against the company. As a representative of the Building Owners and Managers Association International argued, the $38 million set aside by Central Sprinkler was inadequate since it represented “less than five bucks a sprinkler.”

Responding to the likelihood of greater financial problems because of the litigation, in April of 1999 management at Central Sprinkler hired Mathias J. Barton to act as chief financial officer and senior vice-president of finance. Barton, although a young man of 39, brought with him considerable experience in finance, accounting, information systems, purchasing, and customer service operations. He had worked previously at Rapidforms, Inc., a New Jersey-based manufacturer of business forms and other products. The hope was that Barton could steer the company’s ship through the reefs of impeding lawsuits that were potentially damaging to the continuance of its operations.

During the first quarter of 1999, sales for the company declined about five percent. This was due to the discontinuance of the Omega sprinkler systems and the increased competition within the marketplace. Yet Central Sprinkler forged ahead in its research and development program, confident in its ability to maintain a position of technological leadership and its market share within the sprinkler system industry.