Lindal Cedar Homes, Inc.

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Lindal Cedar Homes, Inc.

4300 South 104th Place
Seattle, Washington 98178
U.S.A.
(206) 725-0900
(800) 426-0536
Fax: (206) 725-1615
Web site: http://www.lindal.com

Public Company
Incorporated: 1966
Employees: 190
Sales: $37.7 million (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: LNDL
NAIC: 321992 Prefabricated Wood Building Manufacturing

The largest and oldest manufacturer of premanufactured cedar houses in the world, Lindal Cedar Homes, Inc. sells year-round cedar homes and sunrooms. The company’s precut homes are sold in kits containing nearly every component necessary to build a house, excluding mechanical items, flooring, cabinetry, and bathroom fixtures. During the late 1990s, the kits were sold by 170 independent dealers located in the United States and in foreign markets. A family-operated enterprise throughout its history, Lindal Cedar Homes maintains operations in Surrey, British Columbia, where the company obtains the cedar for its kits, and in the Pacific Northwest region surrounding its headquarters in Seattle.

Origins

Company founder and family patriarch Walter Lindal entered the precut housing business immediately after World War II. During the war years, Lindal served as an ordnance specialist, testing captured enemy weapons at military bases in the United States and Canada. Lindal’s military experience exposed him to the prefabrication building methods used to house troops and proved to be the inspiration for his professional career. When he was discharged from the Canadian army in 1945, Lindal settled in Toronto and started his own business producing modest, prefabricated frame vacation homes that resembled log cabins. To add to what little experience he had—consisting only of observing the construction of army barracks and working for an uncle involved in the lumber business prior to the war—Lindal studied architecture at the University of Ottawa on a part-time basis. With this background Lindal opened shop, entering an industry that would later regard him as a pioneer.

Aside from the normal challenges a fledgling entrepreneur faced, Lindal had to contend with an obstacle of his own making. By his admission, he had selected one of the most difficult markets in which to sell log-cabin-style housing. In Toronto, brick was the construction material of choice, its prevalence making Lindal’s sales efforts a daunting task. Further, Lindal’s material of choice—cedar—was not abundantly available, particularly the grades of wood he needed. Despite these inherent problems with the location of his company, Lindal managed to create a burgeoning and stable business. By the beginning of the 1960s, he had four plants in operation producing the primary material components for his cabins. At this point, however, the problems with his location could no longer be surmounted. High transportation costs in the area limited Lindal’s shipping radius to approximately 300 miles. Beyond that boundary, the shipping charges priced his log cabins out of the market. In order to expand his business further, Lindal needed to move, so he, his wife, and his children (the future senior executives of the company) packed up and headed west.

Lindal arrived in Vancouver, British Columbia, in 1962, ready to re-establish his business in an environment conducive to growth. Vancouver proved to be an ideal location. There was an abundant supply of red cedar in British Columbia and the long-haul freight costs were low, providing Lindal with the material and the room to expand his business. Expansion was on his mind and his expectations for the company were growing, leading him to invest in a new sawmill in British Columbia, where the company would obtain the bulk of its timber for the remainder of the century. Lindal established a longstanding presence in Canada, but the lure of fast-growing markets in the United States prompted another relocation of his company’s sales and administrative offices. In 1966 he moved his family again, establishing a permanent headquarters in Seattle. In 1971, he took his company public.

Marketing Strategy Matures in the 1970s

Shortly after Lindal Cedar Homes completed its initial public offering of stock, Lindal began to think on a grander scale. As the decade progressed, he began manufacturing and marketing housing kits to serve as primary residences rather than as vacation cabins, making a transition from the company’s origins as a log-cabin producer toward a more upscale producer of premium-priced homes. Customers were offered the opportunity to design their future homes according to their particular desires, the diversity and complexity of which increased as technology advanced. Concurrent with this foray into a much larger, much more lucrative market, considerable effort was devoted to cultivating a network of dealers. The dealers, the liaison between the customer and Lindal Cedar Homes, sold the kits, helped secure financing, and assisted the customer in custom designing a home. The specifications decided upon by the customer were then sent via the dealer to Lindal Cedar Homes’ manufacturing facilities. In building this dealer base, the company strove to secure agreements that restricted dealers to selling Lindal Cedar Homes exclusively, which created a partnership between the two parties that represented an integral facet of the company’s success.

As Lindal Cedar Homes repositioned itself in the mainstream market, Lindal’s children began taking their places as the next generation of management. “Dad,” Lindal’s son Robert explained, “wanted us all in the business, and he wanted us to grow with it.” Robert Lindal, like his two brothers, Douglas and Martin, and his sister, Bonnie, started working for the company during summer vacations from high school. As the Lindal children grew older, each gravitated toward his or her particular interest on a full-time basis, with Robert attracted by the operational aspect of the business, Douglas by sales, Bonnie by marketing, and Martin by administration. Robert, appointed chief executive officer in 1981, rose to the greatest prominence within the organization, but his siblings played essential supporting roles, helping the company realize the greatest success in its history during the 1980s. With the combination of shrewd marketing and the strength of an efficient and loyal dealer base, Lindal Cedar Homes more than tripled its revenue volume between 1983 and 1987. By 1987 the company was collecting $35 million in sales a year, while its net income, which had totaled $190,000 in 1983, had swelled to more than $2 million. Although the financial totals recorded at the end of 1987 represented prodigious increases, the celebrations in Seattle would cease a short time later. At the peak of its performance, the company stumbled profoundly. The remainder of the 1980s would be spent trying to cure the pernicious problems before they caused irreparable harm to the company.

Diversification in the 1980s

With annual sales escalating at an encouraging rate, the Lindals decided it was time to diversify the company’s interests and extend its reach into other markets. It was a move few industry pundits questioned at the time—a strategically sound maneuver made while the company was recording the greatest financial growth in its history—but the results were unquestionably disappointing. First, in 1986, the Lindal Cedar Home board of directors decided to begin producing oak and maple flooring to be used for the company’s home packages and to sell to the outside market. “We had a vacant plant, we had equipment, we had the kilns,” explained Robert Lindal, rationalizing the foray into flooring. “It looked like a good way to build volume with comparatively little investment.” It was a natural, logical extension of the company’s business, much like the other attempt to diversify in 1986 through the acquisition of Window Visions, Inc. For years, Window Visions had been making window frames for Lindal Cedar Homes. Its acquisition by the Lindals presented management with an opportunity to vertically integrate company operations, “to get control of the supply and at the same time expand the market,” explained Robert Lindal. Making hardwood floors and pine window frames proved to be ill-advised ventures, however, quickly hobbling Lindal Cedar Homes’ progress.

Company Perspectives:

We use only the highest quality building materials —starting with Western red cedar. The enduring beauty of our finegrained wood can’t be imitated with inferior materials. Our guaranteed supply of kiln dried timber ensures that you will be provided with the best in the industry. With the finest materials and the most stunning home designs on the market today, Lindal’s trademark post and beam construction allows for soaring cathedral ceilings, exposed beams, and large expanses of glass —creating a truly remarkable design you’ll be proud to call home. Plus, our new Select building system combines more design possibilities than ever before at an exceptional value for our renowned quality. What’s more, our international team of local Lindal dealers are there to assist you from the design to the completion of your new home.

Shortly after the company delved into it, the flooring business began to rack up losses. The company’s entry into flooring occurred at roughly the same time industry capacity increased significantly, which forced prices down and eroded profit margins. Window Visions, which to Robert Lindal and those around him “seemed like a good fit,” also recorded mounting losses, as the Lindals found themselves stewarding a company they did not have the experience to manage. As a result of the losses, Lindal Cedar Homes’ earnings fell from $.94 per share in 1987 to $.37 per share in 1989, punctuating a decline that “seemed to last forever,” according to Robert Lindal. A reaction to the company’s miscues came relatively quickly and the financial slide was arrested, despite Robert Lindal’s impression that the financial malaise dragged on for years. Window Visions was trimmed to a quarter of its original size, with its production restricted primarily to meeting Lindal Cedar Homes’ needs. While the window business was being reduced to a more manageable size (downsizing began in May 1989), the Lindals also turned their attention to the floundering flooring business and took a more drastic approach. In January 1990, the entire hardwood flooring business was shut down, its failure a painful lesson in the danger of diversification. Although the mistakes made in 1986 had caused companywide profits to plummet, the debacle lasted less than two years, representing a damaging yet brief hiccough in 40 years of otherwise strident success. By the beginning of the 1990s, Lindal Cedar Homes had fully recovered.

The 1990s: A Mixed Picture

Entering the 1990s, Lindal Cedar Homes ranked as the largest maker and distributor of custom cedar houses in the world. Internationally, the company had achieved great strides by negotiating agreements with dealers overseas. By 1990 the company had a network of independent dealers in Spain, the United Kingdom, West Germany, Greece, Korea, Japan, and New Zealand—350 dealers in all, counting those in the United States and abroad. The dealers exclusively sold Lindal kits and worked with customers to facilitate the home’s construction. Lindal Home Cedar dealers helped customers find a contractor to build the home, arranged financing, and explained applicable local building codes. Additionally, customers were given the opportunity to custom design their homes within certain parameters. In 1990 the company introduced new technology that broadened the customer’s design choices and expedited the completion of his or her order. Called “Lindal-sketch,” the computer-aided design system allowed dealers to produce floor plans and home designs for individual customers. “Once major decisions have been made,” explained Douglas Lindal, executive vice-president, “a customer can leave the distributor’s office with a floor plan acceptable to a bank for mortgage appraisal and accurate enough to get bids from contractors.” After a customer completed design decisions, the dealer sent a floppy disk to the company’s headquarters, where the data was fed into another computer that created the necessary working drawings.

Armed with new design technology and supported by its expansive dealer base, Lindal Cedar Homes neared its 50th anniversary exuding the vibrancy that had characterized the company during the mid-1980s. Orders for its sunrooms, which were sold in both the remodeling and new home markets, were up 50 percent, representing one of the promising areas of growth for the company during the 1990s. On a general trend, the custom-home market derived its greatest growth from what company officials described as “move-up buyers,” affluent, 30- to 60-year-old professionals with household incomes in excess of $50,000. The changing demographics of Lindal Cedar Homes’ customers was welcome news, continuing the company’s climb toward increasingly upscale markets, a characteristic of its development from the 1970s forward. As the wealth of the company’s typical customer increased, the designs of the homes offered by Lindal Cedar Homes changed to cater to the new tastes. Nearly half of the company’s customers opted for traditional-style homes with natural-stained red cedar, but the demand for less rustic-looking homes was on the upswing, fueled by the increasing affluence of customers. Clapboard siding, round log, plank siding, and color-stained exteriors were becoming increasingly popular choices, prompting the company to supplement its range of selections. “We are going after different looks and reaching out beyond the appeal of natural cedar,” explained Bonnie Lindal McLennaghan, vice-president of publications. “Home buyers can have anything they want from Lindal.”

Following the completion of the company’s first half-century of business, the encouraging growth prospects of the 1990s began to fade. During the latter half of the 1990s, as Lindal Cedar Homes hotly pursued further penetration into the upscale segment of the market, the company fell victim to shortages of its primary raw material—western red cedar—which forced prices upward. For decades, the threat of reductions in cedar supply had loomed over the company, but it always managed to obtain sufficient supplies to feed the demands of its business and withstand fluctuations in lumber prices. In 1997, however, high raw material prices persisted, severely hampering profitability. “In more than 50 years of operation,” Robert Lindal noted at the time in a press release, “this is one of the most difficult periods we’ve experienced, and this wood-pricing cycle is one of the longest we’ve ever seen.” For the first time since 1981, Lindal Cedar Homes lost money in 1997, registering a net loss of 452,000. In the wake of the disappointing loss, the company focused on improving operations and efficiencies while it waited for market prices to stabilize.

By the end of the 1990s, Lindal Cedar Home’s outlook was more sanguine than it had been at the end of 1997. Although 1998 ended as another unprofitable year, lower wood costs in early 1999 fanned a modicum of optimism. Sales increased 44 percent in the first fiscal quarter of 1999 and profitability improved, aided in part by an 11 percent reduction in general and administrative costs. Further encouraging news arrived during the company’s second quarter of business when new home orders increased 28 percent, although sustained profitability continued to elude Lindal Cedar Homes as it planned for the next decade. The first years of the 21st century promised to test the company’s ability to withstand the cyclical pressures of its business—a test the oldest and largest manufacturer of cedar homes was amply qualified to pass.