EEC scours the red from bottom line A profitable year, at last, ignites a glow at Baltimore company

July 26, 1998|By Sean Somerville | Sean Somerville,SUN STAFF

Fifty thousand dollars is hardly a bottom-line number to stir investors into a frenzy.

But Environmental Elements Corp. hopes that modest annual profit -- a penny a share -- marks the beginning of hard-won resurgence after five difficult years.

The Baltimore company fell into the red in 1993 as the huge market expected for air pollution control equipment never materialized. The $50,000 profit marked the company's first operating profit since 1992.

To pick itself up, EEC cut more than half of its 340 jobs, retooled its U.S. business and struck licensing deals to snare overseas business.

Now, the company says, the years of losses are behind it.

"We've seen our worst times, and we're now very much on the upside," said E. H. Verdery, chairman and chief executive officer. "There are opportunities available to us as a result of this process. A lot of our competitors didn't survive. We were one of the fortunate ones."

New orders in the company's most recent fiscal year, which ended March 31, doubled, from $44 million to $88.6 million. The company's backlog -- orders taken but not filled -- more than doubled, from $33.8 million to $69.8 million.

Last week, the company reported first-quarter earnings of $207,000, more than 14 times the $14,000 of the year-earlier period, on sales of $16.5 million, up 19 percent from $13.9 million.

The company expects sales to double over the next two years, to about $100 million, and it says a low-cost structure will push the increase largely to the bottom line.

"If the market turns down, the question isn't layoffs or losing money," said S. Michael Dunseith, senior vice president of operations. "The question is 'will we make a little less?' "

Analysts are encouraged, but wary. The stock, which hit a 52-week high of $6.875 in February and a low of $2.125 in August, closed at $3.6875 Friday.

Legg Mason Inc., which expects EEC to earn about 25 cents a share this year, rates the stock a market performer, a lukewarm ** designation that the company has held during much of its struggles.

"We've seen false starts before," said Laurence C. Baker, Baltimore-based analyst with Legg Mason.

L "We'd like to see some of that top-line growth," Baker said.

He also said EEC has taken steps that helped it weather the tough market. "I thought they might not survive alone," Baker said. "I thought they might join with someone else. But they hacked away at costs when there were no revenues. That put them in the position they are in today."

It wasn't easy, just about anyone at EEC will tell you.

After breaking away from Koppers Co. in 1983, Environmental Elements grew rapidly. Sales reached $94.7 million in 1991 and were expected to boom in the aftermath of the Clean Air Act of 1990. Other major figures got into the business looking for a piece of the action.

The boom never came. "All of a sudden, a lot of competition was chasing a little business," said Dunseith, who worked for the company in the mid 1970s and returned for a second tour in the early 1990s.

With options such as pollution credits and uncertainty about the act's requirements, customers were reluctant to invest in machinery such as EEC's huge electrostatic precipitators. "The EPA spent eight years putting meat on the bones," Dunseith said. "So customers did the logical thing: They did nothing."

Sales started a steady decline, bottoming out at $47.7 million in fiscal 1997 -- about half the 1991 level -- before rebounding to $52.6 million in the past fiscal year. Losses piled up.

Trying to match the company's resources to the market, the company started cutting jobs, ultimately decreasing the work force from 340 to as low as 130.

"You think it's a temporary lull, that this is just an episode and it continues to go down," Verdery recalled. "You cut once and you think you've caught it; you cut twice and you think you've caught it. The third time you make the cut you start really questioning your ability to predict the future and [to know] whether or not there will be a business at the end of this process."

It wasn't only cutting. Hurt by sales force promises of prices that engineers couldn't deliver, the company's margins were squeezed. EEC decided to tear down the traditional division between the "front end" and "back end" of the business by forming project teams.

"It's important to create the expectation that people can go as far and as fast as they would like -- if they take ownership," Verdery said. "If you can create that environment, instead of having four or five people pulling in the harness, you can have 150."

Dunseith said, "I don't have structural engineers sitting on the bench while mechanical engineers work their butts off."

Combined with technology and out-sourcing, that means the company can support $100 million in sales with its current staff of 150.

Terry Henderson, a project manager for Duke Fluor Daniel, a North Carolina company, said EEC won a recent contract partly by emphasizing cost and teamwork in its approach.

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