Change in strategy pays off for Environmental Elements AIR POLLUTION PREVENTION


Henry David Thoreau may never have been known for his business acumen, but his admonition to "simplify, simplify" is a -- strategy that Baltimore-based Environmental Elements Inc. intends to follow.

Since 1983, the company has trimmed its diverse environmental services business to a single area: supplying air pollution control devices to utilities and industries.

The strategy has paid off. The company expects its revenues to increase from $56 million last year to $100 million this year.

In July, the company had its first public stock offering, a move that it hopes will put it in position to win lucrative contracts from utility companies.

"The company is very strongly positioned in what I consider to be a strong growth market," said Richard J. Sweetnam Jr., an analyst with Kidder, Peabody & Co., the investment banking firm that was the underwriter for Environmental Elements stock offering.

In 1982 the company was a money-losing subsidiary of Koppers Co. Inc., a Pittsburgh company that produces highway construction materials and chemicals. Koppers sold Environmental Elements and a year later, the company became profitable.

Mike Walker, an analyst with Legg Mason, credits the turnaround to the new management team and its decision to narrowly focus its business in the area of air pollution control.

Environmental Elements President and Chief Executive Officer Bradford Smith said he learned the advantages of specialization when he was an accountant. "The clients I saw do well over a long period of time were in one business, but they were the Cadillac of that business and did it better than anyone else in the world and they dominated the markets."

When operating under Koppers, Environmental Elements was involved in a number of pollution control areas. It made a water purification system, trash compactors, noise control technology, incinerators and air cleaning devices.

In the late 1970s, the company operated a 320,000-square-foot plant in Baltimore and employed 400 to 450 people. The subsidiary was poised to grow quickly.

That was before the 1979 recession hit and Environmental Elements began losing money. In 1982, Koppers itself posted its first loss ever. It decided to sell its unprofitable ventures, including Environmental Elements Inc.

Richard Hug, who was president of Environmental Elements at the time, had faith that the company could again become profitable once the recession ended. "I had a vision that the environmental business at some point in the future was going to come back to the top of the country's agenda," said Hug, currently company chairman.

He asked Smith and the Arthur Anderson Co. accounting firm to help him with a leveraged buyout offering.

Smith and Hug had known each other socially for several years when Hug asked Smith to prepare the study on Environmental Elements.

"I didn't have any idea whether it made sense," Smith said frankly.

Among the risks he had to consider was whether the company could generate enough revenue to pay the bills, whether the investors had the wherewithal to carry the company until it earned money, whether the financing was feasible and whether key people would leave the company.

It was six months before Smith could answer those questions to his satisfaction. When he did so, he not only recommended that Hug buy the company, he also agreed to leave the accounting firm where he had worked his entire career and join the venture.

"I was having a grand time at Anderson," Smith said. But Hug made him an offer he couldn't refuse. "I had to look myself in the mirror and ask, 'You've got this opportunity, why would you want to turn it down?' "

Hug said he asked Smith to join the team because he needed his financial expertise. "My strength is in marketing. His was in the financial nuts and bolts. I was Mr. Outside. He was Mr. Inside."

Recently, Hug handed over to Smith the day-to-day operations of the company while retaining the title of chairman of the board.

The company's turnaround has not been without effort and sacrifice, however. Immediately after taking over the company, the new managers eliminated 100 jobs.

Then the company began to streamline its products, selling its trash compactor, water purification and incinerator businesses. Unable to find a buyer for the noise control, they discontinued its operation.

For several years they tried to keep the manufacturing facility on Russell Street, but the plant was too large and unwielding for the operation they wanted. Last year, they sold the plant. The move cost 200 more people their jobs, although Smith said the company worked hard to find other jobs for employees.

Although now offering only air pollution control devices, Environmental Elements has plenty room to grow, Smith said.

Environmental Elements does not make the equipment itself, but it designs systems, orders the parts from subcontractors and oversees the installation of the air cleaning equipment.

The control devices, called precipitators, that Environmental Elements supplies cost between $1 million and $12 million, but Smith said there is a market for more expensive and less expensive devices.

The company recently bought technology from a German firm that allows Environmental Elements to offer precipitators designed for mining and chemical companies -- businesses they have not been able to service in the past.

The public offering of its stock this summer was prompted by the desire to provide technology to utility companies. Smith said the utility companies would not buy Environmental Elements products unless the company was bonded. In order to become bonded, the company sought the security of public ownership.

The company chose Kidder Peabody & Co. and Legg Mason Wood Walker to offer it stock, which is trading at about $14 a share.

Legg Mason is predicting that the company will have a 20-25 percent annual earnings growth over the next five years.

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