Document LXqQdDK3Mpzd5xZgoVoeg3zz

BUSINESS Crompton & Knowles' Calarco Cultivates Aggressive Growth CMA 175286 Specialty chemical company head views logical selection of acquisitions coupled with conservative debt management as keys to expanding business Marc S. Reisch, C&EN Northeast News Bureau When C&EN interviewed Crompton & Knowles chairman, president, and chief executive officer Vincent A. Ca larco several weeks ago, the acquisi tion of APV Chemical's blow-mold ing and polymer machinery business was only a gleam in his eye. The acquisition of APV's Edison, N.J., operation announced last month adds $20 million in sales to Crompton & Knowles' specialty pro cess equipment and controls busi ness and reinforces its position in plastic extrusion machinery manu Calarco: opportunities in spades facturing even as it allows the com pany to enter the plastic blow molding equipment business. It fol lows the acquisition of Nutley, N.J.based Atlantic Dyes in August, which added about $55 million in sales to Crompton & Knowles before the sale of certain dye import busi nesses to Hoechst Celanese. That purchase bolstered Crompton & Knowles' position as the preeminent U.S.-owned and -operated textile dyes producer. It is not every company that will spend almost three times its previous year's net earnings from continuing operations ($24.5 million in 1989) to acquire new businesses while a reces sion looms ahead. Industry sources put the price tag on those two new businesses at $60 million. Is Cromp ton & Knowles a spendthrift? Well, no, says Calarco, who be lieves the company is in fact quite conservative in its handling of debt. "We view a debt-to-capital range of 40 to 45% as manageable, | while it provides us the flex4 ibility to do the things that we need to do." Overextend ing the company's ability to support its acquisitions are out of the question, it would seem. "We have never been a proponent of high leverage even in the heyday of high leverage," says Calarco, re ferring to a large number of deals in the past decade that depended on corporations borrowing large amounts of money that they subsequent ly could not repay. Between 1982 and 1990, Crompton's debt-to-equity ratio never moved higher than 43.7%, in 1990, and in fact has been as low as 20.1% in 1987, the year just before the $52 million acquisition Crompton & Knowles at a glance $ Headquarters: Stamford, Conn. Salas: $390 million for 1990, up 10% from 1989. Earnings: $30 million in 1990, up 22% from 1989. Business areas: The specialty chemi cals segment produces dyes and auxil iary chemicals, flavors, sp clalty sweeteners, seasoning bl nds, food colors, fragrances, pharmaceutical coatings, and organic Intermediates. The specialty process equipment and controls segment provides plastic ex truders, plastic blow-molding machin ery, electronic process controls, as well as process system design, engi neering, installation, maintenance, and modernization. of Ingredient Technology Corp., a specialty food and pharmaceutical ingredients business, and acquisi tion of Townley Dyestuffs in the U.K. By the end of 1989, Crompton & Knowles' debt-to-capital ratio de clined to 34.4%, setting the stage for its most recent acquisitions. There is, of course, more to an ac quisition than a company not buying beyond its means. The idea, says Ca larco, is "to extend the businesses in logical patterns and not make leaps into areas of technology that we don't really have any expertise in." Ingredients Technology, for instance, allowed Crompton & Knowles to ex pand its foothold in the food ingredi ents business with $20 million in sales to about $100 million in sales. Even after the Ingredient Tech nology acquisition and the more re cent Atlantic Dyes and APV pur chases, Crompton & Knowles has set its sights on other business area ex- February 4, 1991 C&EN 11 Business CMA 175287 pansions. Calarco says that if he could find the right deal, the compa ny would like to purchase a business that would enhance the small color dispersions and additives business for pharmaceuticals it now has. If such a deal is just around the corner, Calarco is not saying. He does acknowledge that the current business slowdown has brought Crompton & Knowles what Calarco terms opportunities "in spades." Right now "we've had more oppor tunities before us over the past six months than we have ever had, and they are continuing to come in." But although the opportunities may be there, they must be consistent with the company's strategy to grow in businesses it knows, "We don't want to be a billiondollar company that is everything to everybody. That is not us," says Ca larco. "One of these days we may be a billion-dollar company, but it will be on our terms, not haphazard growth for growth's sake. ... We want to be one of the best specialty chemical companies around," he ex plains, "and we want to be one of the most profitable. Not necessarily the biggest." Calarco's prescription for a suc cessful specialty chemical concern depends on "certain strengths" that the company can exploit. "One is that we feel we are particularly good at technical service and problem solving. We feel that is really the ba sis of any value added that one has and is probably more closely associ ated with the specialty chemical business and differentiates it from the commodity chemicals business." Solving problems is important to the "niche orientation" that charac terizes the businesses in which Crompton & Knowles is involved. It helps Crompton & Knowles "to be expert in a particular area and pro vides real focus in those business segments and helps to differentiate Crompton & Knowles from every one else." The company's problem solving capability and technical ori entation are what Calarco sees as unifying themes running through the disparate businesses in which it operates: plastics forming machin ery, food ingredients, and textile and printing dyes. "When you take those labels out and just describe the businesses and what it takes for suc cess, I think there is a similarity and thread that goes through all of them," he says. Running so many seemingly dis parate businesses at Crompton & Knowles is really not much differ ent than running ,Uniroyal Chemi cal, declares, chemical engineer Ca larco, who was that company's pres ident for five years until 1984, shortly before he joined Crompton & Knowles. "When I was at Uniroy al, we had an agricultural chemical business, we had a polymer busi ness, a rubber chemical business, and what have you--the same sort of thing." It is the ability to focus on busi nesses that it knows well and "in a Crompton & Knowles' sales have nearly tripled... $ Millions 400 -- ... and earnings have risen sevenfold since 1982 $ Millions 300 200 100 1982 83 84 85 86 87 88 89 90 1982 83 84 85 86 87 88 89 90 Note: Net earnings from continuing operations. Source: Crompton & Knowiea sense to fragment them a bit" that allows Crompton & Knowles to op erate as a specialty provider of prod ucts and services, says Calaico. For instance, five years ago the DavisStandard extrusion machinery oper ation devoted half of its output to the cyclical wire and cable covering business. "What we've tried to do is to develop our presence in other markets like the sheet business, which ultimately goes into packag ing and blown film, so that we have a broader spread of market partici pation. Today th^ wire and cable business is 20% of our total equip ment business. It has dampened our cyclicality and broadened our base of business, which has been very positive for us." Also over the past five years, Crompton & Knowles has grown a small extrusion equipment controls business to represent 15% of Davis-Standard and started an aftermarket extrusion equipment service business that represents another 15% of Davis-Standard. Calarco is keenly aware of Cromp ton & Knowles' not being a vertically integrated company that can produce finished products from raw materials it produces itself. He believes it is the value-added, service-related compo nent that will allow his company to excel. About 20% of the company's current sales in dyes come from new products introduced over the past five years, he says. Success in dyes is not a situation, he says, "where being in ethylene dichloride is necessary to be successful in polyvinyl chloride. It's not that at all." In fact, says Calarco, "I think the only company that has any integra tion whatsoever in terms of dye raw materials and intermediates is Bayer. And I would suspect that given the way it has succeeded over the past several years, ,,the intermediates business is as much a profit center as the dyes business is. I'm not so sure Bayer gets any real benefit from having that integration other than that it obviously has access to raw materials. But that has not been an issue with the advent of Far Hast producers who clearly are providing quality, timely products at reason able prices." Calarco says Crompton & Knowles' niche orientation in dyes goes back to Althouse Chemicals, which it pur- 12 February 4, 1991 CiEN CMA 175288 chased in 1954. "Scott Althouse de veloped add dyes for nylon working closely with Du Pont. Again, it was ... a specialized approach. And it is still with us today. It is a heritage of the corporation having survived 150 years at this point, albeit not in the same business," he says, referring to the textile loom business machinery manufacture in which the company had been engaged continuously until it sold the last of its textile machinery business to Leesona Corp. in 1981. That Crompton & Knowles oper ates in many different businesses does not mean management keeps at arm's length, involving itself only on a financial level with operating subsidiaries. "We don't run the com pany from a holding company point of view at all. We are in the plants, the businesses. We follow it in sig nificant detail, so that if we feel help is needed we are willing to provide it even though the [business manag ers] may not want it. It is very much a hands-on approach. ... It's just sticking with the basics day in and day out and not taking anything for granted. It's a lot of blocking and tackling," says Calarco. Crompton & Knowles corporate managers took a hand, too, in a re cent agreement with Japan Steel Works giving Davis-Standard the ex pertise to enter the twin screw plas tics extrusion business. "This gets us into the whole concept of engineered resins and grafted polymers, which we see as a growing area requiring a different type of technology--an ex tension of where we are today.". Since the acquisition of Ingredient Technology changed Crompton & Knowles' involvement in the food flavorings market from the eastern and midwestem U.S. to an involve ment throughout the country, the company has attempted to enhance its position with biotechnology re search. Calarco says a research project is under way with a small biotech nology company, which has a good track record, to develop a biotechnol ogy route to natural flavors. He says that right now he prefers not to name the company doing that re search for Crompton & Knowles. The company is also considering "rationalizing" some of its season ings business. "The seasonings busi ness has a spectrum of value added from the low-end raw spice to highend flavorings. We're really not in terested in the low-end spice busi ness. That is not our cup of tea," he says. The low-end part of the busi ness may be too small for Crompton & Knowles to sell, but Calarco says, "We are still in the evaluative stages on that. We are looking'at all our op tions." Because management is involved in the intimate daily details of the company's various businesses, Calar co thinks the company can avoid a takeover. The rationale, ultimately, behind the close attention to details is the effort "to provide value to the shareholders. A lot of people talk about that, but we have tried consis tently to deliver." He points out that five years ago the company had about 3 million shares outstanding with a market value of about $60 million. By contrast, today there are about 25 million shares outstanding with a market capitalization of about $500 million. "Within that period, we split the stock three times. In the past three years we've increased the dividend 35% a year. As for me. I'd say that the shareholder has been very well served." Given that history of the com pany's financial growth, Calarco points out that "To me, the best de fense that any company could have is to have a high stock price." Re cently the company's stock price has been about $19 per share on the New York Stock Exchange, with a stock price earnings ratio of 16. That is better than specialty chemical maker W. R. Grace & Co., whose re cent price earnings ratio was 10, and almost as good as Great Lakes Chemical, whose recent ratio was 17. Larger and more traditional chemical producers such as Dow Chemical and Du Pont sported re cent price earnings ratios of 9 and 10, respectively. However, Crompton & Knowles does not rely on its relatively high market value alone to protect it from a takeover attempt. The company passed two antitakeover measures in 1986 that would limit stidden chang es in the control of the company's board of directors and would require 80% share approval of certain busi ness combinations. They exist, says Calarco, "for shareholder protection more than anything else. I think the board of directors would be lacking in its own fiduciary responsibilities to not have these things. What it does is to provide time for the board of di rectors to deal with the issues. That is not to say that if the shareholders are best served, a deal wouldn't be done." But Calarco believes the com pany's independence is currently in the best interest of shareholders. Al though he acknowledges that 1990 was a difficult year and 1991 prom ises to be even more so, "I have long contended that we are no flash in the pan success. We have far exceed ed in terms of performance what the economic indices would indicate was possible in the past." Calarco thinks the company can continue to outper form the market. Specifically, he believes the com pany's sales will be around $500 million in the next several years, up from the $390 million it reported in 1990. "We do have an earnings goal each year of 10% a year above infla tion. We like to keep our return on equity at least above 18%. We are running at something like 27% right now." The Crompton & Knowles execu tive acknowledges that the future Qf the company depends, in part, on its ability to recruit well-trained, capa ble technical people. "We are seeing an increasing level of difficulty fill ing the needs we see for the techni cal side of our business. Each of our salesmen are technically trained in February 4, 1991 C4EN 13 Business CMA 175289 the textile business and we haven't seen that much difficulty in that end of the business. But when we look for technical service people and lab research personnel, we have seen more difficulty over the past couple of years. I think that is symptomatic of the whole issue of science educa tion in the U.S. It is something we are concerned about." Crompton & Knowles does sup port some scholarships at leading universities such as the Ben Franklin Institute at Lehigh University, Poly technic University (formerly Brook lyn Polytech), and Wooster Poly technic. A director of the Chemical Manufacturers Association (CMA), Calarco believes that "economic illit eracy in this country is only second to scientific illiteracy. It's incredible to see. People do not know basic is sues. People view the chemical in dustry as the bogeyman. They be lieve it's got to be bad because it is chemical. They do not understand the benefits." Calarco believes what has happened is that "the lack of un derstanding and fear give you public policy that follows public perception resulting in increased cost and in creased regulation of industry that probably is not necessary." He endorses CMA's Responsible Care program, which not only seeks safe plant operation, chemical distri bution, waste reduction, and coordi nated emergency response with the local community in the event of an accident, but also seeks to involve the community in plant operations via community advisory panels. With that program, now a condition of membership in CMA, the group has "taken the bull by the horns to give a more positive view." "Effectiveness of CMA's program is probably not the right measure now," says Calarco. "We are in the implementation and execution phase of it now even as we are also devel oping other codes of conduct and practice that we need to have in or der to put the meat around the bones of responsible care." Even as the pro gram comes into place, the communi ties in which plants axe located will continue to be suspicious of the in dustry. "The public honestly and tru ly understands the industry is pro viding products they want and need to have. But the public ought to be able to know that the industry is op erating safely and that the emissions coming from the plants in their com munities are not hazardous to their health. The only way the public is going to see that is if they see the re sults." * By dealing with issues such as waste minimization and community awareness through CMA's program, the industry hopes to let people know that a chemical plant is not "this black box plant in a communi ty that no one understands and knows what to do with," says Calar co. CMA's program hopes in part to start a dialogue between chemical company management and local communities, he adds. Problems * *' . .i' r V~;'':'V . V * *. % -ly ' > ''. 1 >. f' in i-.'jii ' ;C*>- '<-'!. ''Vi 3- `r-.*- v f & f' *kit ; M*-. 'f, ;? ';i s i ;i >I'&i--.--ff-WS.