Koppers Industries, Inc.

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Koppers Industries, Inc.

436 Seventh Avenue
Pittsburgh, Pennsylvania 15219
U.S.A.
(412) 227-2001
Fax: (412) 227-2333
Web site: http://www.koppers.com

Private Company
Incorporated: 1944 as Koppers Inc.
Employees: 1990
Sales: $593.1 million (1997)
SICs: 2999 Petroleum & Coal Products, Not Elsewhere Classified; 2861 Gum & Wood Chemicals; 1241 Coal Mining Services; 3624 Carbon & Graphite Products; 3743 Railroad Equipment

Although Koppers Industries, Inc. began as a manufacturer of byproduct recovery coke ovens in 1912, its circuitous route through a number of acquisitions and diversified products classifies it as an early predecessor to a modern-day conglomerate. From its long association with the Mellon family interests in Pittsburgh’s heavy industry, to its forays into chemicals, plastics, wood products, road building, and even buttons, the company struggled to secure an identity in the face of cyclical markets and dependence on capital goods spending. While the impressive returns earned during the 1970s expansion into chemicals were interrupted by a depressed market in the 1980s, Koppers underwent several incarnations before becoming the pared down company of the late 1990s. From a successful stint in road building, paving, and repairs to its present status as a leading supplier of carbon-based materials and treated wood products, as well as coke products—its initial foray into manufacturing—Koppers has come full circle with a strong identity and a firm bottom line.

Starting Off with a Bang, 1920s to 1955

In the 1920s an entrepreneur from Virginia purchased a small coke oven company in an attempt to build a consortium of companies to integrate all aspects of coal production. Henry B. Rust then solicited support from Andrew Mellon, one of the nation’s leading financiers and industrialists, and was soon operating a vast network of holding companies engaged in mining, railroad transportation, shipping, utilities, and steel mills. Rust’s conglomerate, named Kopper United, successfully exploited all the potential uses of coal and subsequently became the favorite of Mellon’s industry operations. Their empire, however, was short-lived. The Depression came and with it Roosevelt’s Public Utility Holding Company Act, which forced the company to sell Eastern Gas & Fuel Associates. By losing this division—which directed the coal, utility, and railroad operations—the company relinquished control of its integrated coal orientation. Of the remaining former empire, the manufacturing and engineering divisions evolved into Koppers Inc.

The traditional business of manufacturing byproduct coke ovens and products related to coal such as tar became, once again, Koppers’ major source of income. Yet sensing the company had lost its direction, the Koppers board of directors (with the Mellon family representing a major presence) appointed Brehon Burke Somervell, a World War II four-star general, to assume control of the operations. As chief executive officer, Somervell proposed that the company follow a delineated course of action by imposing a strict military hierarchy. Minutiae of detail demarcating job responsibilities, limits of authority, and centralized powers were codified in books. While many found this method of leadership incompatible with the industry, Somervell’s plan was to create an environment conducive to generating new technologies. The General’s tenure at Koppers was shortened by illness; upon his death in 1955 he had only directed the company for five years.

Postwar Change, Late 1950s to 1969

Although the rigid organizational structure was abandoned after Somervell’s death, the World War II veteran had successfully launched a campaign into the new areas of chemicals and plastics. Fred Foy, a company executive who had served under the General during the war, assumed Somervell’s position and continued his predecessor’s program of diversification. Before joining Koppers, Foy worked as vice-president at J. Walter Thompson and also worked at Ford. By 1956 sales gained from the company’s plastic operations heralded a long awaited re-vitalization of the almost 50-year-old company. Unfortunately, intense competition from large companies in petroleum caused a volatile price war. After this price war ended, Koppers reported low profit figures.

The results from the plastic campaign did not represent Koppers’ only disappointment; the old product line also suffered from poor performance figures. Shares earning $5.01 in 1956 now earned a little more than half that. To prevent any further profit decrease Foy, along with his energetic young president Fletcher L. Byron, held a policy planning meeting. Together the two executives decided on strict measures to reduce costs and consolidate businesses. Nineteen plants producing low profits were closed and the Engineering and Construction division, which built plants for the steel and iron industries, acquired a general contracting firm. This subsidiary, purchased for $20 million, released the division from sole dependence on the cyclical steel industry by encouraging business in other fields. By 1960 the first nine-month earnings figures posted a healthy 50 percent increase. While much of these encouraging numbers resulted from sales in the Engineering and Construction division, closer inspection revealed that a backlog of orders carried over from the previous year had artificially increased the new year’s figures.

The entry into the chemicals field, initiated under General Somervell, remained a disappointment. While some 60 percent of the $300 million in sales could be traced to chemicals, Koppers’ profits remained far behind competing chemical companies. This discrepancy resulted from the company’s dependence on old-line products at the expense of new technologies. While competitors manufactured innovative plastics such as styrene, polystyrene, and polyethylene, Koppers produced age-old products such as roofing pitch and road-paving items. A major integration of plastics operations had not occurred until the mid-1950s, well behind the industrywide movement. To remedy this situation, Foy announced plans to market an innovative plastic building panel and double capacity projections for polystyrene production. By bolstering the chemical operations through the sale of new plastics, as well as attempting to provide an entry for old products into new markets, Foy hoped to mitigate the effects of chronic fluctuations in the market for engineering and construction products.

Working alongside Foy in this major revision of company operations was the indefatigable Byron. The company president had joined Koppers as an assistant to a division manager soon after World War II and in the following 13 years he assumed eight different positions of increasing responsibility. The son of a coal buyer at the American Steel & Wire Company, Byron decided at an early age that his career was in the steel industry. After college he joined the same company that employed his father and began working as a sales trainee. During World War II Bryon took a leave from the company to work as a coordinator for a research project at the Naval Ordnance Laboratory in Washington. After participating in the conceptualization of surface-to-air missiles, Byron decided at the end of the war to return to the steel company. When American Steel responded with only lukewarm enthusiasm, Byron applied for a job at Koppers.

In three years he was promoted to plant superintendent after helping negotiate a compromise to a strike at a West Virginia plant. In a daring act of independence, Byron spent $500,000 to replace aging equipment without the authority of his supervisor. When the replacement equipment upgraded plant productivity so that in just over a year profits jumped from negative figures to $2 million, Byron’s grateful superiors forgave him his impetuosity. The company then sent the young executive to a management training program at the Harvard Business School, where he was exposed for the first time to an intellectual environment full of different ideas and philosophies. This exposure eventually led to the implementation of a highly decentralized, yet intellectually demanding, approach to business that would characterize Byron’s tenure at Koppers.

In 1960 Foy, retaining titles of both chairman and CEO, promoted Byron to president. This promotion came after initially rejecting the candidate as too young. Four years later the Byron-Foy team had successfully molded a company whose revenues surpassed the $1 billion mark. By identifying expandable markets, Koppers began producing piston rings for highspeed diesel engines which accounted for over 50 percent of net income in one year. Similarly, Koppers ranked fifth among domestic producers of polyester resins and ranked high among those producing phthalic anhydride. One particularly successful branch of Koppers polyester resin business was the manufacture of buttons.

Growth and Decline, 1970–81

Koppers’ foray into plastic building panels proved less successful because marketing of the unusual product demanded time-consuming and expensive planning. Similarly, an attempted partnership to produce polyethylene from Koppers plastic division using ethylene manufactured by the Sinclair Oil Company also failed to generate hoped for profits. Despite an impressive beginning the joint venture fell victim to intensive competition from other oil companies. This failed venture ended Koppers’ participation in the thermoplastic and petrochemical markets.

Company Perspectives:

Koppers Industries is a diversified company—heavily based in metallurgical coke manufacturing, coal tar processing, and wood preserving technology—organized to supply the key chemicals and materials required for successful manufacturing, processing, and construction.

Notwithstanding these disappointments, Koppers’ overall performance in the 1970s caused common stock shares to triple in value as management announced a two-for-one split. By 1979 earnings reached a high of $3.21 a share. To encourage growth, Byron guided Koppers into several high technology projects. Purchasing 30 percent of Genex Corporation, a recom-binant-DNA research company, Byron’s strategy suggested many benefits for Koppers’ organic chemical production. It was hoped that the research would discover the process to genetically engineer resorcinol, a product previously manufactured by a traditional method. Additional plans were underway to explore synfuel processes such as coal gasification.

By 1980, however, company equity dropped from 20.3 percent to 17.1 percent. A depressed market started by a recession once again had adverse effects on company performance. Apart from the cyclical nature of the market, industry observers began blaming internal structural problems for Koppers’ ailing profit margins. While Byron’s decentralized policy of encouraging middle managers to assume greater responsibility in decision-making actually allowed for a certain number of mistakes, the costs of these mistakes started to reflect on productivity. Miscalculations and faulty equipment forced writeoffs and reduced profit margins.

While Byron promised better returns once an assured turn in the economy revived capital spending, he continued to pursue his unorthodox policy of management. This policy promoted the delegation of authority to such a degree that much of Byron’s time was actually spent outside the area of daily decision-making. By giving priority to the intellectual and civic responsibilities believed to be incumbent upon himself as a business leader, Byron functioned more as a spiritual guide than an actual company director. Not only did he traverse the country on a lecture circuit to prominent universities and businesses, he also conducted trimonthly seminars for his own young executives to examine the philosophies of such thinkers as John Kenneth Galbraith, John Maddox, and Michael Harrington.

By 1981 profits dropped $2.4 million to a total of $51.8 million. Instead of patiently waiting for the recession to end, management announced an effort to reduce capital outlays and sell unprofitable businesses. Selling up to 18 percent of poorly performing operations in all four of the major divisions, as well as allotting just $110 million for capital spending, Koppers’ management hoped to find immediate relief for the company’s disappointed shareholders. High technology research remained a protected project as maturing operations in the wood and forest division were terminated. The ascension of Charles R. Pullin to the positions of chairman and CEO gave further impetus to this consolidation effort.

New Leadership, New Goals, 1982–89

A former president of Koppers’ Road Material group Pullin, unlike his predecessor, thoroughly immersed himself in day-today operations. The new company leader had grown up in West Virginia as the son of a steel worker. A high school summer job with the state highway department directed his ambitions toward the road building industry. From the time he joined Koppers in 1946 as a technical service engineer to his final promotion to top management, Pullin was employed in the road building industry. Although some of that time was spent at another construction company, he returned to Koppers when the new road materials division needed an experienced leader.

While Pullin continued to invest money in high technology research, Koppers’ most impressive results emerged from the division closest to Pullin’s experience, namely, Road Building. Two new ventures in innovative production increased research spending to $88 million in 1984. These projects included the exploration of engine technology and the development of plant disease diagnostic equipment. Koppers’ recovery, however, did not result from revenues generated from these new technologies; rather it was traditional blacktop roadway production that symbolized the beginning of the company’s revitalization. During the first six months of 1984 the Road Building division generated $274.5 million of the $811 million in total revenues. By developing an integrated operation, independent of subcontractors, Koppers emerged as the first nationwide paving company. Furthermore, the five-cent-a-gallon fuel tax included in the Surface Transportation Act allocated funds for the rehabilitation of the nation’s highways. Koppers moved to capitalize on this growing market.

When road building emerged as the mainstay of company profits, Pullin reduced Koppers’ investment in technological research. The 30 percent stake in Genex failed to produce the sought after financial rewards. As a result, it was sold along with several other mature businesses. Some $360 million in assets were generated from the sale of the coke ovens, button, and several wood product operations. This housecleaning included the sale of Koppers’ original steel industry construction business; a hard decision for many of Koppers’ executives. In addition, Pullin slashed capital spending by reducing Koppers’ workforce.

Thus as nationwide spending for bridge and road construction increased 17 percent between 1983 and 1986, Koppers successfully exploited the market trend. The price of common stock, decreasing in 1985, increased to a high of $27 per share in 1986. Yet Koppers’ focus and fortune was still evolving, and change—both large and small—was on its way. Market volatility, economic conditions, and several leadership and ownership changes began in the summer of 1988 when Koppers was acquired by BNS Acquisitions (a subsidiary of Beazer Limited) for $226.8 million and renamed Beazer East, Inc. A few months later, the management of Beazer, Inc. and KAP Investments, Inc. (a wholly owned subsidiary of Koppers Australia) led a leveraged buyout of the company’s assets, financed through warrants, issuance of stock, and various loans. When the dust settled, Koppers Industries had been born again.

A Refocused Direction, the 1990s

With the new, improved version of Koppers Industries in the early 1990s, road paving, once the boon of the company’s bottom line, was out; and concentration was placed on three major divisions: carbon materials and chemicals, railroad and utility products, and coke products. While the lion’s share of the company’s revenues (50 percent) came from the rail and utility products division, by the mid-1990s this figure fell by 10 percent while carbon materials and chemicals rallied—bringing both divisions to a dead heat of 40 percent of sales. Coke products also claimed a bit of the rail and utility’s slice, by increasing to 15 percent of sales. Koppers was full-steam ahead, however, for all divisions—acquiring the nation’s most modern coke facility in Monessen, Pennsylvania, in March 1995; the U.S.’s largest railroad crosstie treating plant in Somerville, Texas, in April; Aristech Chemical Corporation’s coke chemical division a year later; the U.K.’s Bitmac, Ltd., a tar distillation company, in August 1996, and still more.

Sales for 1995 and 1996 were robust, as Koppers’ strategic acquisitions eliminated middle-men and supplied its divisions with the majority of their raw materials. As a result, annual sales climbed 10 percent from 1994’s $476.4 million to $525.7 million in sales in 1995, and grew another 12 percent for 1996’s $588.5 million. Internationally, Koppers was strong in both Australia and Denmark as its joint ventures, Koppers Australia and Tarconord, respectively, were major suppliers of carbon pitch and related products. In 1997 Koppers bought out its longtime Australian partner, Broken Hill Proprietary Company Limited, for full control of Koppers Australia, as well as having KAP Investments and a group of company investors spend $52.5 million to purchase all of Koppers’ voting and non-voting shares from Cornerstone-Spectrum Inc., an affiliate of Beazer East, Inc. Sales before the extraordinary charge for the stock purchase were $593.1 million, up just slightly from 1996’s $588.5 million, while earnings were slashed due in part to the closure of a coke plant in Woodward, Alabama, and a wood-treating facility in Feather River, California.

Despite its tumultuous history, Koppers Industries carved niches for itself in a myriad of manufacturing areas. From coal and coke to carbon pitch, phtalic anhydride, and creosote, from buttons to road paving, from railroad crossties to utility poles—Koppers produced them all, with the same dedication to quality and long-range goals. Though Koppers streamlined its businesses in the 1990s to just three divisions (Carbon Materials and Chemicals, Railroad and Utility Products, and Coke Products), each was a leader in its industrial segment with 21 facilities in the United States, and another 14 in the South Pacific (mostly in Australia and New Zealand).