Treadco, Inc.

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Treadco, Inc.

1101 South 21st Street
Fort Smith, Arkansas 72901
P.O. Box 10048
Fort Smith, Arkansas 72917
U.S.A.
(501) 788-6400
Fax: (501) 788-6486
Web site: http://www.treadco.com

Public Company
Incorporated: 1958 as ABC Treadco, Inc.
Employees: 880
Sales: $144.2 million Stock Exchanges: NASDAQ
SICs: 7534 Tire Retreading & Repair Shops; 5531 Automobile & Home Supply Stores

Treadco, Inc. of Fort Smith, Arkansas is the nation’s leading independent tire retreader and the country’s second largest commercial truck tire dealer. Treadco operates 26 retreading production facilities and 28 facilities for its sales activities. The company owns 22 and leases 32 of these facilities. Treadco serves the South primarily, with the highest concentration of its facilities in Arkansas, Louisiana, and Texas, and facilities in Tennessee, Georgia, Kentucky, Oklahoma, Florida, and Mississippi. The company also serves the Southwest, West, and Mid-west markets with facilities in Arizona, Las Vegas, Los Angeles, Missouri, and Columbus, Ohio. Although Treadco leads in truck tire retreading and new truck tire sales, its share of these highly fragmented markets is only 3.4 percent. No single company dominates either market. Of the 16 million retreads produced in the United States in 1996, Treadco sold approximately 570,000; of the 11.6 million new truck tires sold in that year, Treadco sold 399,000. Treadco’s sales facilities feature most major brands of new truck tires, including Bridgestone, Michelin, General, Dunlop, and Kumho, among others.

In a difficult 1996, sales of retreaded truck tires slipped below half of Treadco’s revenues, representing $62 million of the company’s $144 million in revenues for the years, compared with $70.8 million of Treadco’s 1995 revenues of $147.9 mil-lion. Much of Treadco’s difficulty can be attributed to its soured relationship with long-time retread supplier, and that industry’s leading supplier, Bandag, Inc. In 1996, Treadco ended its nearly 38-year relationship with Bandag and switched the bulk of its retreading franchises to Oliver Rubber Company, a subsidiary of Standard Products Company and the second largest supplier of retread rubber and related equipment and supplies. Treadco also operates a facility in Las Vegas that uses the Hercules/Cedco precure process, and, in a joint venture with Bridgestone/Firestone, a retreading production facility outside of St. Louis, which uses Bridgestone’s Oncor mold-cure retreading system.

Although sales of retreads to the automobile market remain a small part of car tire sales, truck tire retreads generally outpace new truck tire sales. Prices for new truck tires range from $250 to $325 each, depending on their wheel placement; a retreaded truck tire costs from $80 to $110 and offers nearly the same mileage as a new tire. Truck tires are retreaded using one of two major processes: precure and mold cure. The precure process, as used by Bandag and Oliver, is the more widely used process in the United States. The first steps in the retreading production are similar for both retreading types. Used tires, called casings, are inspected both visually and electronically. Tires found to have punctures, ruptures, and other defects are rejected for retreading. Casings that pass the test are then inflated and the remaining tread is removed by buffing. In the precure process, the remaining undercasing is fitted with tread rubber according to the tire’s placement—as a steering wheel, drive wheel, or trailer wheel—and then is sealed in a rubber envelope. This assembly is placed in a bonding chamber, which uses heat and air pressure to bond the tread to the undercasing. The mold cure process is more capital intensive. In this process, rubber is extruded onto the casing and is then placed in a mold that will form the tire’s tread pattern when subjected to heat. Franchisees generally purchase the equipment and supplies, including tread rubber, from suppliers such as Bandag, Oliver, Bridgestone, and others.

In addition to its retreading and new truck tire sales operations, Treadco offers a variety of services to its customers. These include fleet evaluation and service scheduling, tire pickup and delivery, as well as 24-hour roadside assistance. None of Treadco’s customers accounted for more than two percent of the company’s revenues. Former parent Arkansas Best Corporation and its ABF Freight System truck fleet remain Treadco’s largest single customers, together representing 1.8 percent of Treadco’s 1996 sales.

Treadco has been a publicly traded subsidiary since it was spun off in 1991 from Arkansas Best Corporation. Arkansas Best continues to hold 46 percent of Treadco’s stock. Charles Young, son of Arkansas Best’s founder, is chairman of Treadco. John R. Myers is Treadco’s president and chief executive officer.

A Support Start-up in 1958

Treadco began as a single retreading shop in Little Rock, Arkansas to support Arkansas Best Corporation’s growing ABF Freight System truck fleet. The Treadco subsidiary was one of the first shops franchised to use the recently introduced Bandag retreading system, which had been brought to the United States by Bandag’s founder, Roy Carver, the previous year. Carver had discovered the retreading technique behind the Bandag system, which uses temperatures cooler than other precure retreading systems, on a trip to Germany in 1957. Carver pro-cured the world rights to the system, which had originally been developed to support German vehicles during the Desert War of World War II. Retreads crafted with the original Bandag system suffered from a series of technical failures and almost sank Bandag. But Bandag continued to develop the technology and had perfected the system by 1962. Based on its retreading system, Bandag went on to become one of the top 1,000 companies in the country.

In 1969, Arkansas Best decided to expand its Treadco operations beyond its own fleet to service other trucking companies in the region. The company set up ABC Treadco as a subsidiary and was granted a second franchise for a plant in Fort Smith, Arkansas. Three years later, Treadco added a third Bandag plant, in Pine Bluff, Arkansas. In that year, the company also began selling new tires. Through the 1970s, the company continued to add retreading production plants, while opening satellite sales offices for sales of new tires as well as retreading services supported by the production facilities. By 1979, the Treadco subsidiary was producing nearly $12 million in revenues for its parent. By 1981, Treadco was operating 14 retreading production plants in several states, including newly opened facilities in Tyler and Beaumont, Texas. Treadco’s retreading plants all used the Bandag system, making it the largest Bandag franchised retreader in the country. In that year, Treadco’s revenues had grown to $22 million of its parent’s $340 million. By then, Bandag’s patents had expired and other retreaders had introduced similar, competing retreading systems. But Bandag continued to maintain more than half of the retreading market.

During the 1980s, Treadco continued to expand its facilities. In 1982, the company added a plant in Oklahoma City, and, by 1985, with the addition of three Texas plants, in Victoria, Amarillo, and San Antonio, the company operated a total of 23 plants in eight states. Revenues had continued to grow, to nearly $30 million in 1983 and topping $38 million by 1985. Treadco continued to use the Bandag system exclusively in its plants. The subsidiary was also posting consistent operating profits for its parent. By 1985, Treadco’s operating profit had reached $4 million. The following year, Treadco added three new Bandag production facility franchises and sales offices, in Corpus Christi, Texas and in Joplin and Lafayette, Missouri, bringing the company’s total to 26 locations. Revenues increased to $47 million for that year. The following year, sales rose again, to $56 million, for operating profits of nearly $6.4 million. The addition of sales offices in Norcross, Georgia and Pharr, Texas and the construction of a production plant in Lubbock, Texas raised the Treadco chain to 19 production plants and eight sales offices. By then, Treadco was already among the top three tire retreaders in the country. In 1987, the company recapped some 350,000 tires, giving it 2.5 percent of the truck tire retreading market, while selling 135,000 new tires.

Over the next four years, Treadco concentrated on its sales satellites (a production plant could support two or more sales offices), adding 12 sales offices, while also opening four production plants during this period, including one serving the Phoenix, Arizona market. Treadco continued to use the Bandag system exclusively; by 1991, it was producing some 420,000 retreads per year. Meanwhile, Arkansas Best was fighting for survival: in 1988, Treadco’s parent became the subject of a hostile takeover by Razorback Acquisitions, which had been formed by a group of Wall Street raiders. Arkansas Best, at the time led by brothers-in-law H.L. Hembree and Robert A. Young, resisted the takeover. When Razorback raised its bid to $24 per share, Arkansas Best sought, and found, a white knight in Kelso, the private merchant banking firm behind the lever-aged buyouts of International House of Pancakes and American Standard, among others. Kelso led Arkansas Best’s management into a leveraged buyout of $26 per share, thwarting the Razorback takeover. The leveraged buyout, however, left Arkansas Best, for the moment known as Best Holding Corporation, saddled with some $370 million in debt.

Arkansas Best was forced to reorganize, shedding several of its subsidiaries, including its Riverside Furniture and two truckload freight carrier subsidiaries in 1989. By 1991, Arkansas Best, now led by Young after Hembree’s retirement, was pared down to its ABF Freight System trucking operation and its Treadco subsidiary. Treadco’s 1990 sales had reached $83 million, posting a net income of nearly $1 million.

The War with Bandag in the 1990s

In a move to reduce its debt further, Arkansas Best spun off Treadco as a public company in 1991. Selling 2.5 million shares, Treadco’s initial public offering raised $40 million for Arkansas Best, which retained a more than 46 percent interest in its former truck tire sales and retreading business. By then, Treadco had increased its number of locations to 36, including 20 retreading facilities. With an average 1,700 retreads per day and 430,000 retreads per year, Treadco maintained its leader-ship position as the industry’s largest independent tire retreader, and second in the industry overall, behind Goodyear’s in-house retreading operation. Treadco had also taken second place among leading new truck tire sellers and was the largest dealer of Bridgestone truck tires in the United States. Treadco continued to be led by James J. Seiter, named president and COO of the public company, and by Young as CEO.

The company continued its steady growth, raising revenues to $99 million in 1992 and to $113 million in 1993. The company’s earnings were also steady, reaching $5.3 million and $5.8 million for those years. In October 1993, Treadco moved to expand into a new market, purchasing Trans-World Corp. and its five central Florida-based retreading and sales facilities, which included four Bandag system plants in Jacksonville, Orlando, Ocala, and Sarasota. The Trans-World acquisition raised the number of Treadco facilities to 45, including 26 retread production plants. By 1994, the acquisition’s effect on Treadco’s revenues was apparent, as sales jumped to $141 million, providing $11.1 million in operating profit and $6.5 million in net income for the year.

Treadco’s production plants remained exclusively Bandag franchises, each bound under a separate multiyear agreement. These agreements gave Treadco the non-exclusive right to use the Bandag process, equipment, materials, and trademark, while requiring Treadco to purchase all of its tread rubber and other supplies from Bandag, at Bandag’s prices. The agreements allowed Treadco to expand without any territorial restrictions; they did not, however, prevent competing Bandag franchises from operating in the areas Treadco served.

By the mid-1990s, the terms of these agreements, especially Bandag’s control of the pricing of supplies, began to wear down Treadco. Over the 18 months between the beginning of 1994 and the middle of 1995, Bandag raised the price of tread rubber three times, for a total increase of nearly ten percent, while also raising the price of bonding cushion, another key ingredient in the retreading process. But Treadco, faced with an increasingly competitive trucking market, found itself unable to pass on the price increases to its customers.

In response, Treadco began looking beyond Bandag for the first time in its history. In April 1995, Treadco opened its first non-Bandag production plant, in Las Vegas, using the Hercules/Cedco precure system. In that month, also, Treadco announced that it had reached an agreement to form a joint venture with Bridgestone, opening a retreading facility in St. Louis that would bring that company’s mold cure process to the United States. Treadco informed Bandag of the new ventures in May, but received no response. As Seiter told Tire Business, “As time went on I got the feeling things were not going well with Bandag.” In August 1995, Seiter received his answer. Bandag, in a statement saying that the company “believes that consistency and quality can best be delivered by independent tire dealers who are fully committed to the Bandag system,” announced that it would not renew the franchises for eight of Treadco’s plants that were coming up for renewal in June and July of 1996. Analysts suggested that the move was an attempt to force Treadco to back down from its ventures outside of the Bandag system. The announcement gave Treadco more than enough time, however, to line up a replacement retreading system. In September, Treadco announced that it had signed with Oliver Rubber Company to supply the eight plants with retreading equipment and supplies; the agreement with Oliver also included a provision for Oliver to take over supplying any additional Treadco plants released from their Bandag agreements in the future.

A war was brewing between Bandag and Treadco. Indeed, one Bandag executive is reported to have donned an Indian headdress and war paint and to have declared war on Treadco at a Bandag sales meeting. By the beginning of October, Bandag informed Treadco that it would not renew the agreements for the remaining 18 Treadco plants unless Treadco agreed to abandon its use of other retreading systems. But Bandag lobbed its biggest salvo at the end of October, when three key Treadco executives, including Seiter, announced that they were leaving Treadco to join Bandag and set up a competing, Ft. Smith-based retreading franchise operation. A legal battle erupted soon after, with Treadco, claiming that Bandag was attempting to destroy its business, including luring away a number of Treadco’s largest customers, seeking the court’s permission to sever its remaining franchise agreements with Bandag.

Former Treadco Vice-President John R. Myers took over as president and CEO of Treadco in November 1995 and began the process of converting all of Treadco’s production operations to Oliver’s retreading system, a process that was completed by the end of 1996. Meanwhile, Treadco’s Bridgestone-based mold cure plant had come on line by the end of 1995. The effects of the war with Bandag had already begun to show by then, with retreading revenues barely passing sales from the year before, for total revenues of $148 million over 1994’s $140 million. By the end of 1996, retread revenues had slumped from nearly $71 million in 1995 to only $62 million; new tire sales formed the largest part of Treadco’s sales for the first time, rising to $72.4 million of the company’s revenues of $144 million for the year. In addition, Treadco sank into the red for the first time since becoming a public company, posting a net loss of $3.26 million. Nonetheless, with the completion of its plant conversions to the Oliver retreading system, Treadco could once again focus on its leadership position in the retreading industry. In July 1996, Treadco acquired Five Bros. Inc., a retreader with two sales offices and a production plant in Southern California, marking Treadco’s entry into the Los Angeles market.