Specialty Products & Insulation Co.

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Specialty Products & Insulation Co.

1097 Commercial Avenue
East Petersburg, Pennsylvania 17520-0576
U.S.A.
Telephone: (717) 569-3900
Toll Free: (800) 788-7764
Fax: (717) 519-4046
Web site: http://www.spi-co.com

Private Company
Incorporated: 1982
Employees: 500
Sales: $150 million (2002 est.)
NAIC: 235420 Drywall, Plastering, Acoustical, and Insulation Contractors

Specialty Products & Insulation Co. (SPI) is a privately owned company located near Lancaster, Pennsylvania. Through a number of subsidiaries, it fabricates and distributes mechanical, industrial, commercial, building, metal building, and HVAC insulation systems; passive fire protection systems; architectural/acoustical ceiling, wall, and flooring systems; and other specialty products. In addition, SPI offers specialty services such as energy audits, estimating, laser leveling and alignment equipment, material management, product training and installation seminars, and recycling/disposal programs. Domestically, the company maintains 70 facilities located strategically in 25 states, and it is able to export its products through a number of ports, including Baltimore, Boston, Charleston, Ft. Lauderdale, Houston, Jacksonville, Miami, New Orleans, New York, Philadelphia, Portland, San Francisco, and Seattle. SPI is also capable of serving its customers by importing products from overseas manufacturers.

Company Origins Dating Back to the Civil War Era

The foundation of SPI is very much tied to the history of Armstrong World Industries and the cork business. The founder of the Armstrong empire was Thomas Morton Armstrong, a Pennsylvania native whose parents immigrated to the United States from Londonderry, Ireland. As a young man Armstrong worked as a shipping clerk for bottle maker Williams McCully & Co. By the time he was 24, in 1860, he was able to save enough money to invest $300 and buy into a two-man cork cutting shop owned by John O. Glass in Pittsburgh, Pennsylvania. Armstrong's brother would buy out Glass in 1864, and the business became known as Armstrong, Brother & Company. During this period, the main business for cork cutters, as Armstrong well knew from his days at McCully & Co., was to supply cork stoppers for bottles. The material was supplied by the bark of cork trees, imported from Portugal, Spain, and northern Africa, and was cut by hand until the process was automated in 1862. Like many businessmen, Armstrong greatly benefited from the Civil War, during which his cork company earned a solid reputation for supplying stoppers for the Union Army. Unlike many businessman of the period, who sold shoddy goods at exorbitant prices, Armstrong earned high regard for meeting its obligations at contracted prices. The company was also innovative in the way it stamped "Armstrong" on its corks and offered a written guarantee concerning the quality of the product. Following the war Armstrong landed the business of a major New York drug firm, a deal that was instrumental in establishing the company as a national concern. In 1878 Armstrong established an international presence when it began to process corkwood in Spain and directly import to the United States. In the 1890s Armstrong became the world's largest cork company. It also purchased the Lancaster Cork Works in southeastern Pennsylvania, which the company's headquarters would relocate in 1929.

Because other materials challenged cork in the beverage-bottling business, Armstrong found other uses for cork in the 1890s, including insulation and gaskets. The company also became involved in the linoleum floor covering business. Linoleum, invented in England in 1863 by Frederick Walton, was pressed from a blend of cork flour, mineral fillers, and linseed oil under high temperatures and then colored. A linoleum plant was built in Lancaster and in 1909 Armstrong began to market its linoleum. It was through linoleum that Armstrong evolved into a company devoted to a wide variety of floor coverings and other home products. As part of its push for diversification in the early 1900s Armstrong also entered the contracting business, installing cork insulation in commercial refrigeration systems —taking further advantage of cork's versatility. Because of cork's cellular structure it trapped small pockets of air, making it an excellent insulating material and a popular lining for ice houses, steam pipes, and homes. It could also be shaped without loss of its properties, thus it could serve as a natural gasket for machine parts.

Formation of Armstrong Contracting and Supply Corporation in 1957

Synthetic materials and chemicals replaced cork as Armstrong's primary raw material during the 1950s, accelerating the move into diverse product lines. In 1957 Armstrong packaged its insulation and contracting and distribution businesses into a subsidiary it named Armstrong Contracting and Supply Corporation, which was later renamed ACandS, Inc. By the end of the decade, 60 percent of sales were attributed to building materials, with industrial specialties and packaging accounting for 20 percent each. In the mid-1960s Armstrong became involved in carpeting and with the promotion of flooring executive James H. Binns to the presidency in 1968, the company moved even further away from its traditional businesses. The interior furnishings market was thriving at this time, prompting Binns to pursue an "interior world" concept for the company. During the next few years Armstrong sold off businesses that accounted for about 25 percent of its $500 million in annual sales. Because ACandS no longer fit into the parent company's vision for the future, its employees approached Armstrong's management about buying the subsidiary. Armstrong agreed and in 1969 a group of management investors created a holding company named North Lime Corp., an allusion to the Lancaster address of the business. It sold shares priced at $1.19 each to 31 investors, comprised almost entirely of existing or retired ACandS executives. North Lime then bought the outstanding capital stock of ACandS. A year later all salaried employees were given the chance to buy stock at $2.50 per share. Heading the new company was James W. Liddell, who was instrumental in the rise of both North Lime and, ultimately, SPI. He also provided the inspiration for a new name for North Lime, Irex Corporation, an allusion to a submarine he served on during World War II.

Despite poor economic conditions of the 1970s, over the next dozen years Irex not only managed to survive, it expanded beyond its ACandS holdings, so that by the early 1980s it was one of the country's leading commercial and industrial insulation and specialty contractors. By this point the mechanical insulation industry was undergoing a number of changes: many smaller contractors were entering the market while at the same time manufacturers were choosing to focus on the manufacturing operations and paying less attention to distribution. Irex recognized that there was a need and an opportunity to establish an independent distribution company to service the mechanical, HVAC, industrial, and commercial insulation industries.

In 1982 Irex executives Alexander V. Stoycos and W. Kirk Liddell cofounded SPI. Liddell was the son of Irex's original president. Born and raised in Lancaster, he had planned a career in government administration rather than to follow in his father's footsteps. After earning an economics degree from Princeton as well as an M.B.A. and law degree from the University of Chicago, Liddell was working for the Washington, D.C. law firm of Covington and Burling in 1980 when he decided to move back to Lancaster and take a position as Irex's general counsel. After cofounding SPI, Liddell was named Irex's chief executive officer in 1984 while Stoycos stayed on to head SPI. From the outset the goal of SPI's founders was to create a business that would one day be large enough to stand on its own. Their belief that a pure distribution business would replace the distribution operations of manufacturers and contractors was borne out by the growth of the company in the ensuing years. SPI expanded both through internal means and by acquisition. It also maintained ties with its ancestral roots, becoming a top-three distributor of Armstrong's commercial ceilings. The two companies worked closely together to determine the best way to sell more Armstrong products.

In the early 1990s SPI enjoyed an accelerated rate of growth. From 1992 to 1997 the company saw its annual revenues double to $158 million while operating profits tripled. Also in 1997, SPI surpassed the combined sales of Irex's three other subsidiaries, all specialty contractors. SPI was now large enough and established in the marketplace to fulfill the dream of its founders and become a stand-alone company. Unfortunately for Stoycos, his health was failing and in May 1997 he died. According to the Lancaster New Era, "Liddell drew some comfort from the fact that, in one of his last conversations with Stoycos, he informed Stoycos that plans to spin off SPI were being developed. 'He was very, very pleased to know,' Liddell said." He also told the New Era, "Irex's plan is a vote of confidence in the management of SPI." There were also very practical reasons for the spinoff. According to Liddell, "Contracting and distribution are very different. SPI requires a lot of growth capital. By putting SPI out on its own, it (can) raise money to acquire additional distribution businesses." Moreover, he maintained, "SPI's industry is consolidating right now, and SPI has the opportunity to be the leading consolidator, because of its market position and its reputation." Making SPI independent was also good for Irex's contracting businesses, which competed with a large number of SPI's customers. In addition, the contracting and distribution segments of Irex were often at odds in their needs, whether it be computers or the need for capital. "We'll no longer have to do things that fit both businesses."

Taking over as president of SPI following the death of Stoycos was Ronald L. King, who brought with him some 35 years of experience in the insulation, asbestos, and safety industries. Before joining SPI in 1993 he served as a vice-president and general manager at a major insulation contractor. Following the announcement that SPI would be spun off, King told the New Era, "Our whole theme is to leverage our business to provide unequaled customer service, continue to drive costs out of the system and create an environment where innovative and challenged people want to come to work."

Company Perspectives:

We are proud of our company and our customer focus. We believe our history and commitment to the future sets us apart from our competitors.

The drive to make SPI a major industry consolidator was launched well before the spinoff was finalized. In November 1997 SPI acquired Richlar Industries, an upstate New York company that served air conditioning and heating manufacturers, packaging, specialty wholesale, and retail customers. Richlar specialized in precision die cutting, lamination, specialty fabrication, and material conversion (such as rubber, fiberglass, elastomeric, and polyethylene) to customer specifications. In December 1997 SPI added Construction Systems, whose specialty products included acoustical systems and such architectural products as drywall and metal studs. In March 1998 SPI acquired Extol, a Texas insulation fabrication house and distributor serving the Gulf Coast as well as international customers.

Canceling the 1998 IPO

Following Irex's January 1998 announcement that it would spin off its distribution subsidiary, SPI filed paperwork with the SEC on April 10 in order to conduct an initial public offering (IPO) of stock. The plan was to sell two million shares of common stock, priced between $10 and $12 per share. The offering was to take place in June but poor market conditions for small-cap companies resulted in a postponement and eventually a cancellation. Instead, in October 1998 Irex and SPI worked out another way to spin off the business and enjoy an infusion of cash. The revised plan called for Irex shareholders to receive one share of SPI stock for every 50 shares of Irex stock they owned. In addition, a New York City private equity firm, Evercore Capital Partners, agreed to purchase $15.4 million of common stock and $3.5 million of subordinated debt, resulting in Evercore owning a 45 percent stake in SPI. In addition, Evercore made a commitment to invest as much as $20 million in financing through subordinated debt to pay for further SPI acquisitions over the next three years. SPI also retained the ability to offer an IPO at a later date. According to CEO King, "This transaction greatly enhances SPI's financial strength and, in my opinion, is a better result than we would have gotten from the IPO."

SPI completed three more acquisitions in 1998. In May it added Presnell Insulation, a southeastern group of fabrication houses. SPI bought Paragon Pacific Insulation (the company's only formal subsidiary). Paragon distributed insulation products to commercial and industrial customers in the Northwest. In December 1998 SPI closed on two deals, picking up Chem-power, a distribution/fabrication business serving the Ohio and West Virginia Valley markets, and Acoustical Supply Corporation, distributors of architectural, acoustical, and specialty products in mid-Atlantic markets.

In 1999 and 2000 SPI acquired seven more businesses. In May 1999 Acoustical & Interior Distributors was bought, adding to SPI's capacity to service the midwestern commercial building industry. A month later SPI closed on the purchase of Pamrod Products Company, maker of insulation vessel head products. SPI completed four acquisitions in August 1999. The first, Goodwin Insulation Distributors, served the commercial and industrial customers in New England. The second, House of Ladders, offered some diversity to SPI. The specialty distributor provided a broad range of ladder products, including step ladders, extension ladders, work stands, trestle ladders, and ladder jackets. SPI also added Abacus, Inc., a wholesale distributor of acoustical ceiling systems and commercial building materials in the Atlanta and northern Georgia market. Finally in August, SPI picked up International Technifab, a mechanical and building insulation distributor and fabricator, serving the Mountain States Region. In March 2000 SPI acquired Alpha Sales & Contracting, serving commercial and industrial customers in Oklahoma and Kansas.

As a private company, SPI had no incentive to reveal how well it was able to assimilate its slate of acquisitions or how well it was doing financially. Neither did SPI feel the need to promote itself in the press, relying instead on a longstanding reputation for excellence to maintain a leading position in its industry. With the advent of difficult business conditions in the new century, SPI ceased its buying spree and waited for better economic times to emerge. Despite the lack of forthcoming information on the company's finances, there was every reason to believe that SPI would remain a healthy and viable concern.

Key Dates:

1860:: Thomas Morton Armstrong becomes involved in cork business.
1957:: Armstrong forms Armstrong Contracting and Supply Corporation.
1969:: Armstrong Contracting is sold to an employee-led group, becoming part of Irex Corporation.
1982:: Irex forms distributing subsidiary Specialty Products & Insulation Co. (SPI).
1998:: Irex spins off SPI.