ElkCorp

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ElkCorp

14643 Dallas Parkway, Suite 1000
Dallas, Texas 75254-8890
U.S.A.
Telephone: (972) 851-0500
Fax: (972) 851-0550
Web site: http://www.elcor.com

Public Company
Incorporated: 1965 as Elcor Chemical Corporation
Employees: 1,141
Sales: $506.5 million (2002)
Stock Exchanges: New York
Ticker Symbol: ELK
NAIC: 324122 Asphalt Shingle and Coating Materials Manufacturing

Formerly known as Elcor Corporation, Dallas-based ElkCorp chose its current name to more closely identify the company with its Elk brand of shingles, which provides the bulk of the company’s revenues. Two business segments comprise ElkCorp: Elk Premium Building Products, and several unrelated ventures lumped under Elk Technologies Group. Building Products accounts for approximately 90 percent of ElkCorp’s revenues, and most of that amount is attributed to the sale of premium laminated fiberglass asphalt shingles, manufactured in plants located in Texas, Pennsylvania, California, and Alabama. The company also produces nonwoven fabrics at its Texas plant for use in asphalt shingles as well as other building and construction applications. Elk Technologies Group includes four businesses. The first, Cybershield, applies conductive coatings to plastic components used in cellular phones, PDAs, computers, and other electronics in order to mitigate electrical interference and create circuitry and antennae. The Chromium Corporation subsidiary applies chrome and other finishes to extend the life of major parts used in railroad and marine diesel engines. Elk Technologies is devoted to the development and marketing of a fire retardant coating, VersaShield. Originally intended for use in building products, VersaShield is now being applied to consumer products, such as mattresses, upholstered furniture, curtains, and bed clothing. The final subsidiary, Ortloff Engineers, offers technologies and engineering services to the oil and gas industry and the sulfur recovery industry.

Founding the Company in 1965

The driving force behind the creation of ElkCorp was Roy E. Campbell, an engineer who later in life decided to apply his skills to business. Born in Dallas, he received a degree in civil engineering from Rice University in 1948, then went to work for AMOCO oil. In 1955 he and three colleagues formed a Midland, Texas, engineering consulting firm, Leibrock and Landreth, which soon changed its name to Leibrock, Landreth, Campbell, and Callaway. Deciding they wanted to become entrepreneurs, the partners began launching an assortment of businesses, including chemical and construction firms. In 1965 they formed a holding company to manage these disparate operations, naming it Elcor Chemical Corporation, which was primarily drawn from the initials of the partners. The “L” was for Leibrock and Landreth, the “C” for Campbell and Callaway, and the “O” for another partner named Ortloff. An “E” and “R” were then added to make “Elcor.” Although the company offered engineering services to the oil and gas industry, as well as the manufacture of ammonia and fertilizers, the main focus of Elcor at this time was sulfur recovery. Texas was a major source of the world’s sulfur supply, the deposits discovered as a byproduct of oil exploration in the state. Elcor’s engineers developed methods to extract sulfur from natural gas as well as gypsum deposits. In 1968, backed by two public offerings, the company began construction on a $40 million Texas facility, the Rockhouse Project, to recover sulfur from gypsum using high heat. The changing economics of sulfur, however, proved disastrous. Sulfur from western Canada, recovered inexpensively from sour gas, flooded the market, driving down prices from $40 a ton when Rockhouse was started to as little as $7.50 a ton when the plant came on line. By November 1970 the company was forced to close the operation.

With $50 million in debt and just $2 million in assets, Elcor filed for Chapter 11 bankruptcy protection, in order to convert creditor bonds into shares of stock. By August 1971 Elcor had satisfied its creditors and was ready to continue on as an engineering and construction business. In order to take advantage of a tax loss carry-forward, which was helpful only if the company could produce some offsetting revenues, Campbell looked to buy established, profitable businesses in other industries. His plan was to apply his engineering skills and abilities to develop efficient processes so that increased profits would actually pay for the acquisition.

Acquisition of Elk Roofing Products in 1975

Elcor’s first acquisition came in May 1972 when the company bought Chromium Corporation, an American Can Corp. company, which provided chrome plating for industrial diesel engine cylinders. In December of that year, Elcor picked up Elk Roofing Products, a Stephens, Arkansas, company established in 1955 to produce asphalt roofing shingles. Finally in 1975 Elcor acquired Mosley Machinery, a Waco, Texas, business that was the second largest maker of hydraulic scrap-metal processing equipment in the United States.

Also in 1975, Elcor bought a shingle plant in Tuscaloosa, Alabama, marking a greater commitment to the roofing business. Although Elcor came to the field with no experience, Campbell and his colleagues turned that situation to their advantage, taking a fresh look at the roofing business and approaching it with the process orientation they used in the oil and gas industries. They studied a number of technologies used around the world and settled on the Sandy Hill glass mat process for the manufacture of fiberglass-laminated shingles, which would later become the industry standard. Elcor designed a new plant around the method in Ennis, Texas, located 30 miles south of Dallas. The first stage of the Elk facility opened in 1978, becoming the first U.S. plant to apply the Sandy Hill process. A year later productivity was greatly enhanced and costs reduced by the introduction of a high-speed continuous laminating process, another Elk first, as was the 1980 addition of computerized process control. The company was several years ahead of the competition, but by the early 1980s industrywide improvements led to excess capacity, and asphalt shingle prices fell to unacceptable levels. As a result, Elcor decided to drop the asphalt shingle line, which was susceptible to heavy pricing competition, and instead concentrate on the more lucrative premium roofing market. In particular, the company targeted wood shingle customers, emphasizing the potential fire hazard of wood and shorter lifespan than two-ply fiberglass products. Elk’s older Arkansas plant, increasingly outmoded and a drain on Elcor’s profitability, was closed in 1985. A year later, Elk introduced its Prestique Plus top-of-the-line, extra-thick fiberglass laminated shingle intended for reroofing expensive homes.

Elcor made other changes to its business mix in the 1980s. With the oil and gas industry enduring severe difficulties, Elco closed its Midland oil and gas construction business in 1985 and formed the Ortloff Engineers subsidiary to continue offering engineering and consulting services. With no reason to remain based in Midland, Elcor moved its headquarters to Dallas in 1988. In the meantime, the company opened a new concrete-roof tile plant in Pompano Beach, Florida, but the stock market crash in October 1987 sent shingle prices tumbling, leading to suppressed earnings for Elcor.

For the next couple of years, Elcor and the housing industry were beset with poor economic conditions, which led many homeowners to delay construction or remodeling plans. In 1991 the company was forced to sell its Florida roofing plant, which had been adversely affected by a new housing slump in the state. In addition, Elcor sold off a Chromium plant in Chicago. As a result of asset sales and writedowns, in fiscal 1991 Elcor posted a $15.5 million loss on revenues of nearly $116 million.

With its balance sheet cleaned up, however, the company was poised for a rebound. Later in 1991, with the economy improving and housing starts increasing, the roofing market began to improve. In addition, Elk launched a new product, a fiberglass shingle that looked like wood. The company’s recovery also was aided by severe weather that damaged roofs and led to rebuilding. First there was an increase in wet weather caused by the El Niño phenomena, followed by a series of hailstorms in Texas, Kansas, Colorado, and Florida. Elk’s shingle manufacturing plants were already pushed to capacity when Hurricane Andrew struck in the late summer of 1992, causing damage in Florida and Louisiana. As a result, Elcor, which changed its name from Elcor Chemical Corporation to Elcor Corporation in 1992, enjoyed profitable years in fiscal 1992 (ending June 30, 1992) and fiscal 1993. Revenues improved to $138.3 million in fiscal 1992 with net income of $8.3 million, followed by sales of $161.4 million and net income of $17.8 million in fiscal 1993.

Wall Street was quick to take notice of Elcor’s turnaround: In just nine months the price of Elcor stock quadrupled. Despite having its factories running at full capacity, Elk was actually losing market share in premium shingles, the result of a sharp increase in the product’s popularity. To take advantage of this situation and build on its momentum, Elcor in April 1993 announced that it would build a new plant in the Los Angeles area, eventually built in Shafter, California, part of an $80 million capital investment program conducted over the next few years. California, with its large number of wood shingle roofs, was an especially promising market for premium laminated shingles. Not only would the Shafter plant come on line in 1995 at a time when the California economy was expected to be on the upswing, its location cut shipping costs to western states and allowed Elk’s Texas plants to better supply the southwestern and midwestern states.

In 1994, Elcor approved the construction of a $30 million plant to produce nonwoven materials for use in making fiberglass shingles as well as other construction products. The new Ennis, Texas, facility opened in 1997. With annual revenues lingering around $160 million, Elcor experienced sharp increases as new capacity came on line. In fiscal 1996, sales topped $196 million, with net profits of $10.7 million, followed a year later by sales of $230.8 million and net profits of $12.3 million.

Company Perspectives:

ElkCorp, through its subsidiaries, manufactures Elk brand premium roofing and building products (over 90% of consolidated sales) and provides technologically advanced products and services to other industries. ElkCorp strives to be the supplier of choice in each of its businesses.

Enduring the Founder’s Death in 1997 and Preparing for the Future

Now 71 years of age, Campbell established a succession plan for Elcor that would allow him to stay on as chairman while Harold K. Work took over as the president and CEO of the company, taking responsibility for day-to-day operations. The plan was never implemented, however. Campbell became sick, and he died in August 1997 after a lengthy illness. Work subsequently was named Elcor’s chairman as well as its president and CEO. He inherited the reins of a healthy and prospering company, and soon spearheaded another $100 million capital investment plan to increase capacity in shingles as well as Elcor’s industrial products division.

All aspects of Elcor’s business made solid progress in fiscal 1998. Demand for roofing products was strong, especially in the western United States. Excessive wet weather caused by El Niño, ironically, suppressed business because roofing contractors were often prevented from working during long periods of heavy rain. Strong consumer demand for electronics, in particular digital phones, spurred Chromium Corporation’s Compushield conductive coatings and conductive gasketing business. In addition, a strong economy resulted in the need for remanufactured diesel engine components, which also benefited Chromium Corporation. The Ortloff Engineers subsidiary saw its revenues double over the previous year, although falling oil prices would soon hurt business, as many customers postponed projects until conditions improved.

As a result of these positive developments, Elcor recorded $268.2 million in revenues in fiscal 1998, a 16 percent increase over the prior year. Net income grew to $18.3 million, a 49 percent improvement. Clearly, the premium shingle business was driving Elcor’s balance sheet. In fiscal 1999, the Roofing Products Group enjoyed a 22 percent increase in sales. Overall revenues for Elcor now reached $317.9 million, and net income totaled $21 million.

Despite its lucrative shingle business, the company continued to pursue other revenue streams. In January 1999 Elcor acquired YDK America Inc., a conductive coatings company located in Canton, Georgia. Several months later the business was renamed Cybershield. Although conductive coatings was a small part of Elcor’s overall business, the acquisition was an important addition. It gave the company a second location, reassuring major customers that in the event of a natural disaster Elcor would be able to supply their needs, especially because the nine-year-old Canton plant was only operating at a third of its capacity. Moreover, buying YDK brought with it two significant new customers, IBM and Compaq Computer, as well as a lion’s share of the wireless telephone handset market.

Elcor continued to post strong results in fiscal 2000, as revenues topped $350 million and net income totaled nearly $30 million. When the U.S. economy began to encounter difficulties, however, Elcor experienced the effects in fiscal 2001. Revenues grew at a slower pace, to $379.2 million, and net income fell to $8.8 million. In February 2001 Elcor underwent a change in leadership, with Work stepping down as president and CEO in favor of Thomas D. Karol, who had nearly nine years of experience as the CEO of Pro Group Holdings, a carpet manufacturer and distributor. A year later Karol also would be named chairman of the board.

To help meet demand for its premium shingles, Elcor in June 2001 placed in service a new manufacturing plant located in Myerstown, Pennsylvania. A year later the company announced a two-year $77 million project to add a second shingle manufacturing line in its Tuscaloosa facility, as well as other enhancements to improve productivity. At the same time, management announced that effective September 1, 2002, the company would become known as ElkCorp, an acknowledgment of the importance of the Elk product lines.

Nevertheless, it did not neglect the nonshingle side of the business. Both Cybershield and Chromium faced a challenging future and looked to diversify into new markets. Cybershield consolidated its operations, closing down the Alabama operation, the cost of running two separate plants outweighing the benefits of maintaining separate locations. ElkCorp also formed a new subsidiary, Elk Technologies, to develop and market fabrics using the company VersaShield fire retardant coatings. On balance, however, the future of ElkCorp remained very much dependent on the success of its premium shingle business.

Principal Subsidiaries

Elk Premium Building Products, Inc.; Elk Technologies, Inc.; Cybershield, Inc.; Chromium Corporation; Ortloff Engineers, Ltd.

Principal Competitors

CertainTeed Corporation; G-I Holdings; Owens Corning Corporation.

Key Dates:

1965:: Roy E. Campbell and colleagues form Elcor Chemical Corporation in Midland, Texas.
1970:: The company files for bankruptcy protection.
1972:: Chromium Corporation and Elk Roofing Products are acquired.
1976:: The company changes its name to Elcor Corporation.
1985:: The company focuses on the premium shingle market.
1988:: Company headquarters moves to Dallas, Texas.
1997:: Campbell dies.
2002:: The company changes its name to ElkCorp.