Company battles its way out of haze Restructuring: Environmental Elements, a supplier of industrial air pollution control systems, has reinvented itself to survive a plunge in demand, with the hope of better days ahead.

June 14, 1996|By Ted Shelsby | Ted Shelsby,SUN STAFF

F. Bradford Smith, the 54-year-old chairman of Environmental Elements Corp., is not one to sugarcoat a bad situation.

Commenting on the troubles that have dogged the Baltimore-based supplier of industrial air pollution control systems in recent years, he said: "I watched this company go down the toilet along with the market" for its products.

But now Smith says he plans "to sit back and watch the fun," as the company seeks to reap the benefits of a major restructuring designed to return it to the days when business was booming and Environmental Elements was one of the hottest stocks in town.

After breaking away from Koppers Co. in 1983, Environmental Elements grew rapidly.

"During the period from '83 to '88, we grew the air business from about $22 million [a year] to about $45 million," said Smith.

Sales more than doubled again from 1988 to 1991, when the company grossed $94.7 million.

"Things looked pretty good at that time," Smith said.

But everybody thought the big boom was yet to come. The Clean Air Act had been passed by Congress, and, Smith said, "We were in great position to benefit from the government regulations to reduce air pollution."

But things didn't go as planned. In recent years, the company has seen its profits go up in smoke along with the demand for its services. Last month, Environmental Elements reported a loss of $3.5 million for fiscal 1996. Sales dropped 21 percent to $61.2 million, the lowest they've been since 1990. The company hasn't posted an operating profit since 1992.

"Despite the best prediction of everybody associated with our industry, the market didn't go up as a result of the Clean Air Act, it went down," Smith said. "It actually fell through the floor, and we have been struggling for several years to deal with that."

The problem, said Edward H. Verdery, the former chief operating officer who took over as president and chief executive in September, was that when the federal regulations came down they provided for pollution control "credits" that companies could buy, sell or trade among themselves rather than investing in anti-pollution devices.

Potential customers weren't being pushed by the U.S. Environmental Protection Agency to order new anti-pollution devices and, in most cases, they didn't.

There was little market for the company's giant electrostatic precipitators -- some as big as the company's five-story headquarters building facing Interstate 95 in Southwest Baltimore.

Under the leadership of Verdery, 50, Environmental Elements has gone through a painful restructuring -- its third in as many years -- designed to make the company profitable even if sales should fall to $50 million a year.

Previously, analysts estimated that the company could begin to make money only after it reached at least $75 million in sales.

"We have taken out three layers of management," Smith said. "That's about 25 people, high-priced people. Some had been with the company for a long time. Now there are only four layers of management from the top to the engineers doing the work."

Since March 1993, the company has eliminated more than half of its work force, cutting employment to 156 from a peak of 340.

The hatchet struck nearly every department, as senior management cut selling and general administration expenses by percent over the past three years.

"We were at about $13 million a year and now we're running at a rate less than $8 million," Smith said.

Environmental Elements had previously closed its manufacturing plant on Ridgely Street, opting to acquire its equipment from outside sources. That move eliminated more than 200 jobs.

"We had a $100 million business in a declining market," said Verdery. "We had to do something. We had the capacity, the resources, the overhead and the infrastructure to support a $100 million-a-year and still growing business."

Laurence C. Baker, an analyst with Legg Mason Wood Walker Inc., agrees that Environmental Elements' future looks better than its past.

"They have struggled through a very difficult time in the industry," he said. "I don't think the industry can get any worse. I agree with them, it will probably improve."

Baker said Environment Elements' downsizing has positioned the company well for any upturn in the industry.

He said the downsizing should also serve to insulate the company from unprofitable operations if the market stays flat.

Environmental Elements' restructuring involved more than closing factories and laying off workers. According to Verdery, the focus of the company has changed, and more changes could be coming.

zTC "We are still the largest supplier of equipment in the industry, but now we are becoming a full-service company," Smith said.

Environmental Elements is designing new air pollution control systems and doing the process engineering, which includes determining the right system to solve a customer's problem.

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