C&EN feature
SMALL CHEMICAL COMPANIES A constant challenge to grow W A L T E R S. F E D O R , Senior Editor, Chemical and Engineering News, New York, N.Y.
Higher asset classes generally have greater profit margins 1 Before-tax profit margin as a percentage of sales • 16 15
ASSET RANGE
2
$1 to $50,000
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zero
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14
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$50,000 to $100,000
13
1
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$100,000 to $500,000
12
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$500,000 to $1 million
6
$1 million to $2,5 million
11
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$2.5 million to $5 million
8
$5 million to $10 million
9
$10 million to $25 million
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$25 million to $50 million
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$100 million to $250 million
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More than $250 million ^ ^ ^ *
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$50 million to $100 million
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136 C&EN JUNE 13, 1966
4
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6
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The promises of bigger profit margins and better returns on investment lures the small chemical company to increase its asset size
T
he world of the chemical industry, like that of other manufacturing industries, comprises a core of giant corporations surrounded by many, many small companies. Generally, the giant corporations are the commodity producers, making large-volume items at low unit cost. The small companies are the specialists, selling a service or making a product usually not attractive to larger companies. Almost any comparison of annual reports shows that the bigger companies have better profit margins and better returns on investments than do the smaller companies. As companies grow their profit margins increase. Therefore, small companies are constantly being challenged to grow. And these small companies want to grow—through forward and backward integration, internal diversification, or by acquisition. That better profit margins can come from growth is shown clearly in income tax returns for the chemical industry compiled by the Internal Revenue Service. Chemical companies with zero assets (for example,
Small companies grow faster than the chemical industry's giants or average Sales (billions of dollars)
Chemical and allied products industry average
3.0
2.0
1.0 0.9 0.8 0.7 0.6 0.5 0.4
Small company composite 0.3
0.2
0.1 1955
1956
1957
1958
1959
a company that leases its facilities) average a 14.4% profit margin before taxes. As assets increase, the profit margins decrease with the curve bottoming out with companies with total assets less than $50,000. For those companies with total assets greater than $50,000 the profit margins begin to rise, but do not reach the 14% level again until total assets exceed $250 million.
1960
1961
1962
1963
1964
1965
Only 22 chemical companies have total assets greater than $250 million. Thirty-three companies have assets between $50 and $250 million. And about 11,000 chemical companies have assets less than $50 million. This last asset group comprises the small chemical companies. In the chemical industry, the small companies play one, two, or more roles —importing, exporting, reselling, basic
manufacturing, or compounding, for example. Frequently, the small companies' strength lies in specialization and an ability to develop customer relations at a local level more effectively than a large company can. About the only thing common to all small chemical companies is that they seek imperfections in the chemical business continuum. It is in these chinks that the small chemical company starts. Gaining a foothold, the small chemical company can sometimes grow and prosper. However, there are both perils and pleasures in being a small company in an industry dominated by giants. The small chemical company generally reflects the image of its founder, who may have worked for a larger company but who has finally decided that he would rather be a big fish in a little pond. Or the company may be based on a special technology evolved by the founder. Or perhaps the founder was a hot-shot salesman and saw an opportunity to develop a business where none had existed. In any event the reasons for starting a small chemical company are as varied as the people who start them. Those companies with assets less than $10 million are flexible and generally aggressive. They operate with little depth in management and they frequently plunge into developing areas faster than their larger, more inhibited competitors in the chemical industry. Such companies seldom get involved in conducting detailed market research or making extensive marketing plans. Many of the companies' decisions are based on the presidents' feel for the market although, admittedly, the feel may be based on long experience in the business. JUNE 13, 1966 C&EN
137
When companies exceed $10 million in assets they must begin to build management in depth. They must develop second lines of management to back up their key executives. The organizational structures established at this point in the companies' history never really change, no matter how large the companies become. The structures are supplemented with the evolution of various staff functions and decision making becomes a slower process. Once a chemical company's assets get beyond $25 million, the organization starts to function as a small corporation. Management develops in depth and various staffs begin to appear to support the organization. Also, the company gains status in the industry and has sufficient weight to wield power in marketing matters. Small companies amid the giants How 15 small chemical companies have approached the problems of surviving and prospering, what some of these problems have been, and the successes and failures of some of these various approaches are treated in this article. In this article I have examined the growth during the period 1955-65 of 15 small chemical companies—Alcolac Chemical, Philip A. Hunt Chemical, Lawter Chemical, Texize Chemical, and Ventron (formerly Metal Hydrides, Inc.), all with total assets less than $10 million; Ansul, Cowles Chemical, Essex Chemical, Lithium Corp. of America, Millmaster Onyx, and Pantasote, all with total assets between $10 and $25 million; and Calgon, Emery Industries, Foster Grant, and Mallinckrodt, all with assets between $25 and $50 million. Together, these companies account for about 1% of the total sales of the chemical industry. None of these 15 companies had sales greater than $50 million in 1965; three expect sales to reach $100 million in 1970; three expect sales to reach $75 million that year. All 15 companies have grown in some fashion in the past decade. Since 1955, these companies aggregated a 9.6% annual growth rate in sales compared with a 7.0% rate for the industry and a 6.2% rate for the Big Five—Du Pont, Union Carbide, Monsanto, Dow, and Allied. Beforetax profit margins also improved for the small company composite. The composite-tax profit margin averaged 7.3% in 1955 and rose to 9.8% in 1965. But these composites are below those of the Big Five (-23.7% in 1955, 18.6% in 1965) and of the industry overall (15.7% in 1955, 13.9% in 1965). 138 C&EN JUNE 13, 1966
Not all of the small companies grew smoothly and easily. Lawter, Hunt, Calgon, Cowles, and Millmaster Onyx made the most solid and consistent growth. Alcolac, Ansul, and Essex had severe setbacks in the late 1950's and Texize in the early 1960's. Since these setbacks, however, these companies have recovered nicely. Emery ran into plant expansion problems mostly because of new technology, but the company expects now to begin to reap the reward for solving these problems. Foster Grant and Pantasote were victims of price deterioration in their product lines, but have responded with promising diversification moves. Ventron and Lithium Corp. both have shaken the burden of one-customer business (the Government) and, consequently, their futures are brighter. Mallinckrodt has shaken off its lethargy of the past years and is now showing definite growth signs. Asset groups and economic
guideposts
This analysis of 15 small chemical companies is separated into three major asset groups: total assets less than $10 million, total assets between $10 and $25 million, and total assets between $25 and $50 million. Within each asset group are discussions of the following five major economic guideposts to interpreting a company's performance: sales, operating income, working capital, return on investment, and current ratio. Sales growth is a good measure of the performance of a company in the market place. Among other things, sales growth can serve as an indicator of a company's aggressiveness (or timidity), its reliance on one customer, its susceptibility to economic pressures of all sorts. Sales growth serves as a barometer of the success or failure of a company to meet or better competition, but it is not a beall, end-all measurement. The ultimate meaning of sales or sales growth lies in how many dollars remain as profit. Operating income is perhaps the best measure of profit. Referring to income before taxes plus depreciation, operating income measures the amount of money earned by a company's operations after costs and expenses are deducted. Operating income can be viewed in several ways, including its rate of growth (a measure of accumulation by the company) and its relation to sales (a measure of profitability and profit trends within the company). An income statement shows whether a company is growing or declining. Text continues on page 142
Financial data on 15 selected small chemical companies E x p l a n a t i o n of t a b l e headings Net sales. Gross safes less discounts, allowances, and returns. Operating income. Income from operations before taxes, plus deprédation charges (usually does not include income from investments). Profit margin before taxes. Alt income from operations (as a per cent of sales) after deductions for costs, expenses, interest, depreciation, and the like. Cost of sales. Costs necessary to produce products sold—for example, manufacturing and raw material costs—as a per cent of sales. Selling expenses. Expenses involved in selling products—for example, advertising and promotion expenses—as a per cent of sales. Net income. Income after operating costs, expenses, interest, depreciation, and taxes. Cash flow. Net income plus depreciation and deferred taxes. Working capital. Current less current liabilities.
assets
Current ratio. The ratio obtained by dividing current assets by current liabilities. Liquidity ratio. The ratio obtained by dividing cash and marketable securities by current liabilities. Credit days. The average number of days it takes a company to collect accounts receivable. Debt ratio. Ratio of long-term debt (debts payable longer than one year) to long-term debt plus net worth (stockholders' equity). Gross plant turnover. dollar of gross plant.
Sales per
Return on investment. Profitability of a company on its investments, Calculated by dividing net income by the sum of working capital and gross plant. Total assets. Sum of current assets, investments, prepaid expenses, net plant and equipment, and other tangible assets. Money f i g u r e s , except f o r g r o s s p l a n t t u r n o v e r , are in t h o u s a n d s of d o l l a r s (figures in parentheses are losses)
Net sales
Operat. lug income
Profit margin before taxes
Cost of sales
Selling ex Net penses income
Alcolac Chemical Corp. (Fiscal year ends June 30) $ 1,311 $ 67 1955* 3.9%• 57.8%, 33.0% $ 1956* 1,629 70 64.1 3.0 25.0 — 1957* 1,833 (22) 69.4 23.9 1958* — 1,745 (88) 68.3 26.3 1959* 2,050 66 0.7 64.1 20.4 I960* 171 2,225 18.1 5.1 57.0 2,118 1961 165 4.7 25.1 70.1 2,641 1962 384 11.7 63.2 22.6 1963 3,049 492 13.3 63,1 23.9 578 4,280 1964 11.0 23.6 65.4 601 5,071 1965 67.3 9.4 23.1 . « Less than 1. h Data reconstructed from calendar year to Ansul Co. (Fiscal 12,609 1955 1956 14,443 1957 15,982 9,666 1958 10,243 1959 1960 11,055 11,076 1961 12,446 1962 14,629 1963 18,717 1964 22,456 1965 Calgon
years ends 1,217 1,209 1,647
744 1,032 1,099 1,124 1,491 1,298 2,318 2,802
Sept
7.8 6.5 8.5 2.4 7.3 7.4 7.6 9.2 6.0 9.9 10.1
30) 66.2 66.7 66.2 56.5 53.4 53.5 53.6 51.7 53.6 51.7 53.2
49 $
65 $
45
66
(62) (136)
(27) (88)
9 107 82 143 192 235
61 165 147 218 280 342 429
1.4 1.3 1.1 (124) 0.8 m> 0.8 45 1.1 125 1.4 272 2.0 325 1.6 449 1,6 4Π 1.4
3.6 2.9 2.8 5.7 3.6 3.2 3.2 2.2 2.7 2.6 2.8
179
158 27
301 fiscal year ending June 3&
449 465 634 139 450 460 456 589 431 873
22.8 23.5 22.4 36.3 33.7 32.6 35.2 36.3 37.3 34.8 36.6
LiquidCash Working ιCurrent ity flow capital ratio ratio
1,218
681 735 923 419 735 738 742 934 850 1,340 1,757
2,858 3,076 3,204 3,277 3,412 3,481 3,877 3,418
537 6,025 6,268
Credit Debt days ratio
Gross Return plant m -, turn' - invest- '
ever
0.2 0,4 0.5 0.5 0.2
19 35 33 16 16 21 33 28 37 40 43
10.4% $2.97 9.3 3.29 9.0 3,88 4.28 14.4 4M 16.6 19,9 5.39 18.1 2.65 16.8 3.13 11.0 3.12 2.29 30.8 27.3 2.31
0,9 0.6 0J 1.2 0.3 0.5 0.5 0.2 0.2 0.3 0.2
52 55 44 49 68 78 86 84 98 87 36
17.3 14.2 11,5 10.8 9.1 5.4 10.3 15.0 25.1 24.0 25.2
0.1 0.1 0.1 0.1 α
α
3.60 3.65 3.89 2.17 2.17 2.25 2.14 2.26 2.28 2.70 2.91
Total assets
7.9% 6,9 _ .^ 2,8 23>4
$ 1,024 1,102 1,045
" SM: 12.8" 14,8 • 9Λ-' 11.5
1,139 1,134 1,745 2,782 3,147
7.0 6,6 8.7 1.8 5.5 5.5 5.0 6.6 3.7 6,7 8.7
5,914 6,953 7,362 6,258 7,072 7,359 8,160 10,267 13,555 14,813 15,652
918 870 887
Corp.
7.37 47 0 9.7 19,405 1,1 61.1 2,032 27.2 1955 905 1,080 5,372 3.7 4.99 0.4 50 11.5 22,820 5,057 2.5 60.6 10.0 2,503 1,361 1956 1,135 28.2 5.20 47 16.7 0.7 30,738 7,841 2.9 60.0 10.4 1957 29.6 3,540 1,911 1,570 4.62 44 15.2 0.5 33,729 1958 7,295 2.8 1,433 1,829 61.5 9.1 3,461 29.9 45 12.7 4.50 10.9 39,192 0.4 4,833 1959 2,035 2,586 28.9 8,175 2.6 60.1 5.08 60.3 m 11,2 0,5 9,044 2.9 4,866 41,694 10.3 1960 2,039 2,620 29.4 4.58 0.5 4,514 47 104 9,558 3,0 60.4 42,245 1,829 2,476 30.4 9.2 1961 4,43 0.6 10.2 4,976 2,005 2,688 10,220 2.9 30.8 59.0 1962 42,135 m 9.o 1.3 5.10 42 7,8* 56.3 5,494 39,528 1963 12.6 2,319 2,846 12,432 2.5 31.1 5,12 1.2 54.8 7,017 44,191 14.7 38 6.6 3,084 3,624 13,334 2.5 30.5 1964 1965e 49,957 8,291 16.7 53.9 30.9 3,904 4,445 13,456 2.9 1.4 •39 5.2 .4.98 * Ooes not include Pittsburgh Activated Carbon acquisition. On a pooling of interest, Calgon's saies were $0.0 million, $11.0 million, and working capital $17.5 million in 1965. Cowles Chemical 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965
ment
6,265 6,185 6,747 7,671 8,614 9,767 10,583 11,850 13,288 19,149 20,660
11.3 11.8 11.4 94 12.1 -.»**." : -9
