Steel Firm Forges Profitable Plan
With the steel supply business struggling in the economic slowdown, Earle M. Jorgensen Co. has forged a profitable strategy from improved technology and a diverse customer base.
Despite a heavy debt load from a buyout 11 years ago, the Brea company has improved year-to-year profits for six straight quarters and was the only major distributor to post higher earnings in the last half of 2000.
By contrast, much of the industry has seen results sour since May, when the nation’s largest metals distributor, Chicago-based Ryerson Tull Inc., warned that business was slow.
By summer, the steel and aluminum supply business, a harbinger of manufacturing activity, had buckled. Factory output followed, dropping by year’s end to the lowest level since 1991, a factor the Federal Reserve has cited in cutting interest rates.
With Ryerson and Jorgensen’s other rivals, such as Franklin Park, Ill.-based A.M. Castle & Co. and Houston-based Metals USA Inc., reporting losses, the industry hit its worst period in several years, said Morgan Stanley steel analyst Waldo T. Best.
Jorgensen, already in a four-year cost-cutting plan, was able to continue growing largely because an automation program made deliveries to customers more reliable and helped the privately held company better manage inventories, its executives say.
In so doing, it has become an example of efficiency and modernization that has eluded much of the industry. Among the other major distributors, only rival Reliance Steel & Aluminum Co. in Los Angeles has made such a concerted effort to modernize.
Jorgensen’s income gets a boost from its specialties--bars and tubes of aluminum and stainless steel--which sell at higher profit margins than the plate steel handled by many competitors. And its mix of customers has proven to be a boon. Its 40,000 customers, from small machine shops to industrial giants like Boeing Co. and oil-field services company Halliburton Co., have given the firm a hedge against cyclical economic trends.
Sales to the booming energy industry, where Jorgensen started 80 years ago, are up 50% this year, helping offset slow sales to Deere & Co. and other farm manufacturers, an industry that is Jorgensen’s biggest business segment. And aerospace orders are coming back, said Jorgensen Chief Executive Sandy Nelson.
The company wasn’t hurt much by the slowing automotive industry, a prime customer for distributors, because it doesn’t sell directly to major auto makers or their largest parts suppliers.
Even more important factors in the long term are technology-driven changes at Jorgensen’s more than 30 regional service centers.
Just peer into Jorgensen’s Lynwood warehouse on Alameda Street, where founder Earle M. Jorgensen-- later to become a member of President Ronald Reagan’s California “kitchen cabinet”--started in 1921 by piling Navy scrap metal for resale to the Signal Hill and Huntington Beach oil fields.
There, employee Michael Sanchez spent more than six years manhandling steel and aluminum bars pigeon-holed in low racks or piled on the floor. Today, in a nearly completed $3-million modernization, the low racks are giving way to tall stacks of bar-coded bins. Machines retrieve the metal.
The newly automated plant has dramatically improved efficiency. Sanchez said he spent up to an hour putting together an order. He now fills nine or 10 orders in the same time.
“It’s saved 10 years of wear and tear on my body,” he said.
Besides buying and storing metal from major producers, wholesalers offer services such as cutting, bending, hardening or polishing it to order--an increasingly important part of the business for Jorgensen as customers become more demanding.
“They pick up a phone and say: ‘I know it takes a week, but we want it tomorrow,’ ” said Lynwood plant manager Craig Johnson, who helped modernize Jorgensen plants in Minneapolis, Chicago and Philadelphia.
The company was put together in 1990 when leveraged-buyout firm Kelso & Co. bought Jorgensen for $261 million and merged it with Kilsby-Roberts Holdings Inc. in Brea, which it bought for $75 million.
Waves of similar mergers reduced the industry from 7,000 companies in 1980 to fewer than half that number by the late 1990s. Even so, the metals distribution and processing industry remains fragmented: Jorgensen, one of a handful of nationwide companies, only has about $1 billion in annual revenue in a $45-billion market.
The industry also has seen its share of cutbacks. Jorgensen, for example, shut down centers in Detroit, Birmingham, Ala., Albany, N.Y., and elsewhere; sold unprofitable operations in Singapore, Britain and Mexico; took a write-down the value of troubled operations and eliminated hundreds of jobs.
Last month, Jorgensen cut a layer of management, eliminating 50 positions. Ten were at its headquarters, which now employs about 65 people--down from 270 when Nelson took over four years ago. The latest cuts will cost $4 million in severance and other charges but should save Jorgensen up to $7 million annually.
Some companies, like Metals USA and Reliance Steel, have been acquiring regional distributors. Jorgensen has grown by increasing sales at existing facilities. It also opened six small plants to cater to local needs.
Nelson said he hopes his company can leverage its size and efficiencies to grow 50% over the next three to five years. Ultimately, the goal is to go public or possibly sell itself.
For now, he appears to be on track. Jorgensen has not posted earnings for its fiscal year, ended Saturday, but for its first nine months, net income rose 80% to $16.7 million from $9.3 million for the year-earlier period. Despite falling metal prices, sales rose 18% to $789 million.
Jorgensen, however, has increased its borrowing as its trucking, handling and warehouse costs rise. Its huge long-term debt, much of it taken on to fund the Kelso buyout, grew to $343 million at the end of its third quarter, ended Jan. 2, from $315 million a year earlier. About 75% of its $16.3-million third-quarter operating income was used to pay interest, leaving the company with a thin $3.8 million before taxes.
Chief Financial Officer William Johnson said the company has ample credit available to continue growing and sufficient cash to meet its debts.
Because the debt is so heavy, Standard & Poors has kept a junk-bond rating on Jorgensen’s public bonds despite the firm having what S&P; analyst Paul Vastola calls solid competitive advantages.
S&P; considers Jorgensen’s outlook stable despite the industry’s downturn. By contrast, it downgraded Ryerson’s debt rating to junk-bond status last month.
Analysts say the industry may be due for a upturn. The National Assn. of Purchasing Management reported this week that although manufacturing declined in March for the eighth straight month, the rate of decline has slowed.
Nelson said he is ready for whatever comes.
“We’re an ‘old-economy’ company with a hunger and enthusiasm for ‘new-economy’ tools,” he said. “And it’s working.”
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One for the Money
Slack demand for steel and aluminum meant earnings were hammered at most metal distributors in the last six months of 2000. Earle M. Jorgensen in Brea was the only major player to post a gain. A look at second-half earnings for major steel distributors:
Source: Bloomberg News
