Fluorocarbon’s Latest Acquisition Fans Hopes
On the credenza in Peter Churm’s office is a ruled writing pad with a cryptic inscription, “250 in 5,” at the top of each page.
It is the last of the dozens of pads that Churm, the affable 61-year-old chairman and chief executive officer of Fluorocarbon Co. in Laguna Niguel, ordered four years ago in an effort to inspire his executive team.
At that time, Fluorocarbon was a mid-size rubber and plastics manufacturer with annual revenues of $74 million. Churm’s objective was to expand to $250 million in sales within five years.
With a year to go, Fluorocarbon’s sales are far from the goal Churm set back in 1983. During the fiscal year that ended Jan. 31, the company booked revenue of $94 million, down 9% from the preceding year’s record $104 million.
Sales have been restrained by the 1985 decision to sell off the company’s lackluster semiconductor operation and by the sudden collapse in 1986 of the energy industry--one of Fluorocarbon’s key markets.
So much for Churm’s goal of $250 million in annual sales.
Or so it seemed.
“I got so discouraged about two years ago that we didn’t reprint the pads,” said Churm, who began with Fluorocarbon 29 years ago and became its top executive in 1980. “I had given up hope.”
Now, that hope has been restored.
Giant Eaton Corp. recently accepted Fluorocarbon’s $70-million bid to purchase Eaton’s $100-million-a-year polymer products group. The deal was closed in late May.
After several years of pursuing growth through a haphazard series of relatively small acquisitions, Churm has landed a big one. In his words, it was “a superman leap” for Fluorocarbon.
Whether it was a sensible leap will depend on Fluorocarbon’s future performance. While two of the few analysts who regularly track Fluorocarbon are recommending purchase of its shares because of the acquisition, one of them questions whether the Eaton division was worth $70 million.
The market’s response to the acquisition has been negligible. Fluorocarbon’s stock, which was selling at $12 per share in early January, gradually rose to about $14 by the time the acquisition was announced in April. The stock closed Monday at $14.75 per share in light over-the-counter trading, up 38 cents for the day.
But there is no question in analysts’ minds about the impact of the purchase from Eaton. Fluorocarbon expects sales to at least double next year, and Churm’s goal of $250 million is not out of the question.
The acquisition added 700 employees and seven manufacturing facilities to Fluorocarbon’s lineup, increasing the company total to 2,150 workers in 28 locations across the country.
Fluorocarbon employs about 280 people in Orange County, with two plants in Anaheim, one in Los Alamitos and executive offices in Laguna Niguel. The company’s only other California operations are two rubber-products plants in Sunnyvale, employing 90 people.
The acquisition adds a new but related line of products to Fluorocarbon’s existing assortment of highly specialized rubber and plastic products and fluid-sealing devices.
The Eaton division, based in Aurora, Ohio, produces a variety of wire, cable, tubing and hose. It also makes industrial transmission gear shifters and other push-pull cable devices.
Scott Baily, an analyst for Smith Barney in New York, described the purchase as a “long-term positive” for Fluorocarbon and is urging clients to accumulate the stock.
Analyst Ed Lewis of First Kansas City Securities also issued a buy signal based on the acquisition, noting that the Eaton division’s products tend to be purchased by the same companies that already buy Fluorocarbon’s existing products.
“What they’ve essentially done is add a new line of products for existing customers,” Lewis said. “The hope is that they’ll realize some efficiencies there.”
But Lewis also said that Fluorocarbon has a reputation for sometimes buying high and selling low and that the company may have paid top dollar for the Eaton operation.
Fluorocarbon’s rapid expansion belies its humble origins in Fullerton, where the company was churning out about $500,000 in annual sales when Churm signed on as a general manager in 1958, three years after it was founded.
At the time, Fluorocarbon was one of the few firms in the nation producing products from a new plastic material invented by Du Pont. It would be several years before someone sprayed the stuff on a frying pan and made Teflon a household word.
Churm, a former production manager for Kimberly Clark, was invited to join Fluorocarbon by its founder, George Angle. The two were introduced by their wives, who attended high school together in Illinois. Churm and Angle became close friends as well as business partners.
Churm, who was named president in 1963 and succeeded Angle as chairman almost two decades later, soon decided he could transform Angle’s tiny operation into a national network by gobbling up other Teflon processors across the country. His first successful strike was a New Jersey plastics producer called Timely Technical Products, purchased in 1962--three years before Fluorocarbon went public.
That first acquisition was nearly the last. Timely’s managers and employees were, at best, inept. Churm suspects worse. For every dime Fluorocarbon earned in California, it lost nine cents in New Jersey. It was, Churm said, a case of “severe indigestion” that took nearly three years of intense effort to cure.
It took even longer for Churm to get back into the acquisition mode. But in 1969, Fluorocarbon bought another plastics company, followed by a series of purchases in the 1970s and ‘80s. The acquisition list eventually grew to 30. There also were 10 divestitures of divisions that didn’t quite cut it, including the company’s semiconductor group--Churm’s unsuccessful fling at diversification.
Most of the purchases, however were within three related markets.
The original Teflon operations grew into a plastics group generating products ranging from aircraft instrument panels to plastic pumps and valves. A later addition, the rubber group, makes everything from surgical tubing to oil well seals. Fluorocarbon’s fluid-sealing group produces piston rings and an assortment of other circular seals.
“We are a niche business,” Churm said. “We find a little niche that is very profitable. It may be a smokestack application, but it is a very highly engineered application to serve a specific need.”
Many of Fluorocarbon’s major customers, such as America’s automakers and construction-machinery manufacturers, are mature industries subject to cyclical changes in overall industrial production.
Because Fluorocarbon’s sales of existing products are dependent upon the fortunes of its customers, Churm decided early on that acquisition was the key to growth. And he developed his acquisition strategy largely by trial and error.
“They used to call me a hip shot,” said Churm, who began controlling the company’s day-to-day operations in the late 1960s, when Angle decided to step back from the operational side of the business.
“We would go out and buy something and then see if it would fit. Sometimes it didn’t,” Churm said. By his own account, about half of the company’s acquisitions were winners, a quarter were washes, and the remaining fourth were outright losers.
It was not until recent years that Fluorocarbon developed a more refined, specific plan to guide its future growth.
Even so, the company hasn’t hit a home run on every swing.
“Their success would have to be called mixed,” said Lewis, the First Kansas City analyst. “If you look at their track record over the last five years, you’ll see that their return on assets has declined. In other words, the assets grew faster than the earnings did.”
Fluorocarbon’s most memorable disappointment was its foray into the semiconductor field. It began with the 1979 purchase of U.S. Fused Quartz, the largest quartz-product fabricator in the nation. The operation was expanded into a semiconductor group accounting for about 25% of Fluorocarbon’s sales at one point.
It took six years, but Churm eventually decided that he didn’t have the stomach to traverse the peaks and valleys of high technology. After much agonizing, he sold the semiconductor holdings in 1985.
A continuing problem area for Fluorocarbon is America’s ailing oil patch. In 1984, the company invested heavily in plants that produce sleeve bearings and other rubber products used by oil well drillers and service companies. Two years later, as the price of oil plunged from $28 a barrel to less than $10, oil field activity dried up and so did Fluorocarbon’s sales to the industry--which is only now beginning to recover.
The oil field debacle prompted Churm to consolidate the company’s rubber operations and engage in other corporate cost-cutting. The restructuring paid off during the first quarter of Fluorocarbon’s current fiscal year, as sales increased 8% to $27 million and profits jumped 51% to $1.3 million in the three months ended April 30.
Churm estimates that it will be at least a year before the impact of the Eaton acquisition shows up in the company’s earnings. When it does, he envisions an increase in investor interest in the company’s stock.
When Churm discusses share prices, it is more than an academic issue. As owner of 378,240 shares, he is Fluorocarbon’s largest single shareholder. His 9% stake has a current market value of $5.5 million, dwarfing his annual compensation of $265,000. Angle, who has sold a portion of his stock, currently owns 6.5% of the company’s common shares and serves as vice chairman.
Churm is counting on future acquisitions to significantly enhance future revenues, earnings, and, ultimately, share value.
Despite the potential perils inherent in buying unfamiliar operations, he said an aggressive acquisition strategy is necessary to keep Fluorocarbon’s growth from flagging.
“This is not our last acquisition,” he said. “Now we’re at $225 million in sales, and I want to go to $500 million. I’ve only got four years left (to retirement), and we’ve got to get going.”
FLUOROCARBON CO. AT-A-GLANCE Based in Laguna Niguel, the company is a diversified producer of specialized plastic and rubber devices and fluid seals used by manufacturers of automobiles, aircraft and other major industrial products. In May, Fluorocarbon acquired the polymers division of Eaton Corp., an acquisition expected to double its annual revenue by next year.
Year ended January 31: (in millions) 1987 1986 1985 1984 1983 Revenue $97.8 $104.0 $94.2 $76.6 $73.9 Net income 4.0 6.1 5.7 3.2 2.0
Assets: $84.7 million
Employees: 2,150
Shares outstanding: 4.3 million
52-week price range: $10.375-$15.125 Monday’s close (OTC): $14.75
