PW Eagle, Inc.

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PW Eagle, Inc.

222 South 9th Street, Suite 2880
Minneapolis, Minnesota 55402
U.S.A.
Telephone: (612) 305-0339
Fax: (612) 371-9651
Web site: http://www.pwpipe.com

Public Company
Incorporated: 1993
Employees: 691
Sales: $246.1 million (2001)
Stock Exchanges:
NASDAQ Ticker Symbol: PWEI
NAIC: 326122 Plastic Pipe and Pipe Fitting Manufacturing

PW Eagle, Inc. is the second largest manufacturer of polyvinyl chloride (PVC) and polyethylene (PE) tubing products in the United States and sells its products under the brand PWPipe, the name of the West Coast plastic pipe manufacturer it acquired in the fall of 1999. As the largest merchant buyer of PVC resin in the country, the company can demand favorable prices for its raw materials and thus enjoys a small advantage in a highly competitive industry. PW Eagle’s wide range of plastic pipe products, ranging in diameter from one-half inch to 24 inches, are used for potable and sewage water transmission, turf and agricultural irrigation, plumbing, natural gas transmission, and, more recently, as casings for fiber optic lines and telecommunications cables. The company’s primary distribution area is west of the Ohio and Mississippi Rivers, where its nine manufacturing facilities are located. At each of the facilities, PVC compound is melted in an extrusion machine, pulled through a sizing apparatus that determines the diameter and wall thickness of the pipe, moved through a cooling water trough, cut into lengths, and shipped out to regional consumers. Company President Larry Fleming heads a management team made up of former PWPipe executives at PW Eagle’s operating headquarters in Eugene, Oregon, while CEO William H. Spell oversees the company from its corporate headquarters in Minneapolis. The largest shareholder in the company is Spell Capital Partners, a small private equity firm that holds about 40 percent of PW Eagle’s outstanding shares.

Blackhawk: Entering the PVC Pipe Business

The origins of PW Eagle lay in the early 1990s, when several separate plastic pipe manufacturers were united in an empty public shell know as Blackhawk Holdings. Blackhawk came out of Rath Packing Company, which ceased operations and went bankrupt in 1984. In 1985, a group of investors acquired the empty shell, changed the name to Blackhawk Holdings, Inc., and began operating in the field of financial services. When this venture failed, the board decided to make a fresh start and in 1992 brought in four members of Spell Capital Partners as directors. William H. Spell, a former investment banker, became president of the company. His father, Harry W. Spell, also joined the board, along with Bruce Richard, who had worked with the younger Spell at the Minneapolis utility Northern States Power Company, and Richard W. Perkins, president of a private asset management firm in suburban Minneapolis. William Spell’s task was to liquidate Blackhawk’s financial services assets and find acquisitions in a more promising industry. Richard and Perkins both supported the idea of finding a low-tech, dependable industry that could be consolidated under Blackhawk. At the time, the plastic pipe industry was fragmented into many regional enterprises. Raw materials accounted for close to 70 percent of the cost of producing the pipe, so if Blackhawk could gain enough of a presence in the industry, it could profit from increased buying power with suppliers of PVC resin.

In December 1993, Blackhawk gained control of Eagle Plastics in Hastings, Nebraska, for about $11.5 million. Under the deal, Blackhawk would own 91 percent of Eagle and the pipe manufacturer’s managers would own 9 percent. Eagle Plastics had 100 employees in 1993 and revenues of $24.2 million for the first 11 months of the year. Founded in 1984, the company produced PVC and PE pipes for the commercial and industrial markets in the Midwest. Larry Schnase was one of the founders of the company and continued serving as president until 1996. Now acting as Blackhawk’s CEO, William Spell was glad to have an ownership position in the manufacturing industry. The Minneapolis Star Tribune quoted him as saying, “We’re just so happy about it. The shareholders and the partners. It’s just happy days.”

Further Acquisitions: 1995–98

The manufacture of plastic pipes was a growing business because builders were drawn to a product that did not corrode or allow seepage. Through the 1990s, PVC pipes gradually gained market share from alternatives such as concrete, cast iron, and other metals. In addition, demand was up as the economy recovered from a downturn in 1991. Blackhawk reported revenues of $34.1 million for 1994 and a net income of $1.4 million. In 1995, the company gained two more manufacturing companies. The first was Pacific Plastics, Inc., of Hillsboro, Oregon, which Black-hawk bought for $6.7 million. The company then acquired Arrow Pacific Plastics of Midvale, Utah. Blackhawk changed its name to Eagle Pacific Industries, Inc. and was listed on the NASDAQ exchange under the symbol EPII. Revenues for 1995 were $51.3 million, much higher than the previous year due to the recent acquisitions, but the company reported a net loss of $865,000 due to fluctuating prices for raw materials in that year. Because the plastic pipe industry tended to pass the cost of raw materials on to its consumer, the business generated more profit when the price of PVC resin was rising, given that the price of finished materials usually rose at a faster rate than that of raw materials. However, PVC suppliers were producing more resin than could be consumed, and prices were at a six-year low.

Eagle Pacific’s performance improved in 1996, helped by the stabilization of the plastic resin market. The company posted net earnings of $3.5 million on sales of $65.3 million. Over the course of the year, Eagle Pacific bought a distribution center in Baker City, Oregon, integrated Pacific Plastics and Arrow into its operations, and strengthened its financial position by repurchasing some $3 million in subordinated debt. The company now had three manufacturing facilities and began the process of upgrading them to make production more efficient. Production capacity expanded in 1997 at Hastings and Hillsboro and total pounds sold for the year rose 13 percent over 1996. Net sales in 1997 reached $71.7 million, showing 10 percent growth for the year. Nevertheless, net income was only $931,000, once again the result of irregularities in the price of PVC resin. In the first half of the year, operational problems at several resin producers drove up the price of resin, but Eagle Pacific could not pass on the costs since the increase was not due to a true rise in demand. Consequently, the selling price remained low all year long.

The company gained some working capital in the spring of 1997 when it issued $10 million in preferred stock to Massachusetts Mutual Life Insurance Company. The capital was used to complete a series of infrastructure improvements, reduce debt, and support further growth. The infrastructure improvements paid off in 1998, as total pounds sold rose 13 percent, compared to industry-wide growth of 1 percent. However, lower selling prices offset the increase in sales volume, and net income was a modest $1.79 million on net sales of $74 million. Eagle Pacific was still looking to make acquisitions, and in December 1998 it announced its intention to take over a PVC resin plant in Oklahoma City, Oklahoma. CONDEA Vista Company, which owned the plant, would get a 40 to 50 percent stake in Eagle Pacific in exchange for control of the resin plant. At the same time, Eagle Pacific planned to buy a PVC pipe business that was located next door to the resin plant, paying owner Lamson& Sessions $58 million. The deal would have quadrupled Eagle’s annual revenue, but it was officially dropped in April 1999 as PVC prices recovered from low levels and Vista and Lamson wanted to find a better deal.

Joining Forces With PWPipe in 1999

Luckily, there was a more successful acquisition on the horizon. The company in question was Pacific Western Extruded Plastics Company, better known as PWPipe. PWPipe’s history went back to 1967, when Simpson Investment Company, a family-controlled holding company, bought a small factory in Eugene, Oregon. The plant made PVC pipes for sewers and water mains. Simpson also owned the successful Simpson Timber Company, but the firm wanted to diversify since plastic pipe was cutting into the market for competing wood products. Simpson’s pipe manufacturing business expanded through acquisitions. The company acquired a plant in Sunnyside, Washington from Robintech in 1977; a plant in Visalia, California, from Gifford-Hill in 1982; and a plant in Tacoma, Washington, from Western Plastics in 1985. That year the company changed its name to Pacific Western Extruded Plastics, or PWPipe. Two more acquisitions brought the total number of manufacturing sites to six: a plant in Cameron Park, California, was bought in 1987 from Certain-Teed, and another in Perris, California, was bought in 1989 from Gamma.

In 1995, parent company Simpson Investment decided to concentrate on its paper and timber business and sold PWPipe to Mitsubishi Chemical for about $85 million. At the time, PWPipe had approximately 500 employees and was led by James K. Rash, who had been company president since 1982. As Rash told Tacoma’s News Tribune, “Our future will be brighter because we’ll be associated with a petro-chemical company—better aligned than a forest-products company owning us.” Mitsubishi aimed to vertically integrate its North American chemical operations and was considering building a resin production facility. However, an economic contraction in Asia, starting in the fall of 1997, pushed Mitsubishi to seek a buyer for PWPipe. The timing was just right for a deal with Eagle Pacific.

Company Perspectives:

PW Eagle strives to maintain and enhance its status as a leading provider of high-quality plastic pipe and tubing products and a recognized industry leader in quality and service.

Eagle Pacific bought PWPipe in September 1999 for $73.8 million, gaining control of the Oregon producer’s six west coast plants. The combined companies became the largest producer of PVC pipe in the western part of the United States. PWPipe’s 1998 revenues were $180 million, more than double Eagle Pacific’s figures. Concomitant with the sale, Eagle Pacific redeemed all $10 million of its preferred stock from Massachusetts Mutual and completely refinanced itself. Significant shares in the company’s equity were given to management executives at PWPipe.

Integration Under the PW Eagle Name: 2000-02

With the PWPipe’s management experience now working for Eagle Pacific, the transaction strengthened the company in the area where it was weakest. The company’s operating headquarters was immediately moved to Oregon, and the top management positions were given to a group of six executives who had worked together at PWPipe since 1990. James K. Rash continued in his position as president; Roger R. Robb, who had been with PWPipe since 1984, carried on in his role of chief financial officer; and Larry I. Fleming, a PWPipe executive since 1990, continued as senior vice-president. Meanwhile, William Spell remained CEO, his father Harry Spell stayed on as chairman of the board, and Bruce Richard continued as vice-chairman. All of the company’s products would now use the PWPipe brand name, although the official corporate name was changed to PW Eagle, Inc. in 2000. The combined companies were ready to play a strong role in the plastic pipe industry. William Spell said of the PWPipe acquisition, “In the last five years the two companies have spent a total of approximately $45 million in capital improvements to become low-cost efficient producers and both are currently reaping the benefits of those expenditures. The addition of the PWPipe management group will add significant experience and depth to our management team.”

The market for plastic pipe looked good at the end of 1999. Demand had grown from two billion feet in 1989 to four billion in 1998, outpacing more moderate growth for copper and steel pipe during that period. Moreover, the low-tech product was experiencing demand from a high-tech industry: about one quarter of PW Eagle’s pipe was being used to protect fiber optic and telecommunications connections. The company’s sales were $154 million in 1999; if the PWPipe acquisition had been completed on the first of the year, sales would have been $303 million. Sales were boosted by higher raw materials prices, as no new capacity for producing PVC resin had been added since late 1997. At the same time, demand was strong. Net income for 1999 was $14.6 million.

PW Eagle rode a wave of success well into 2000. First quarter earnings exceeded analysts’ estimates, and the company’s stock price was up 310 percent in the first six months of the year. Spell, describing himself as a “reformed investment banker,” told the Minneapolis Star Tribune that the company’s growth had exceeded his expectations. “At the end of the day, give me a company that has a product and cash flow,” he said. “That’s where I’d rather be any day.” In August, PW Eagle, looking to fill in the gaps in its market coverage, bought a plant in Phoenix. The acquisition would allow the company to supply this area while enjoying lower transportation costs. The year end figures for 2000 showed continued growth: net sales were $344.0 million, with a net income of $18.2 million.

However, an economic downturn had already started late in 2000, causing a fourth-quarter loss of $7.5 million. In a “Dutch Auction” tender offer in May 2001, PW Eagle tried to stabilize its stock price by buying back 1.2 million shares, about 15 percent of its outstanding common stock. However, the share price continued to fall steadily. The company then moved to scale back its operations. The Hillsboro plant, with 100 employees, was closed permanently, and the Phoenix plant, with 21 employees, ceased operations temporarily. The company hoped to reopen the Phoenix plant when demand picked up. After the closings, eight plants remained operational. The 2001 economy remained weak, pushing down both prices and sales. PW Eagle’s net sales for the year were down 28 percent to $246.1 million, and the company reported a net loss of $12.9 million. A leadership change also took place in 2001: Jim Rash retired in February from his position as president and was replaced by Larry Fleming.

In a further effort to improve its financial condition, PW Eagle entered into an agreement in March 2002 to sell and lease back several of its facilities. The real estate investment banking firm W.P. Carey& Co. LLC acquired the Tacoma, Washington, West Jordan, Utah, and Perris, California, plants, as well as the operating headquarters in Eugene, Oregon, for about $13.7 million. Separately, PW Eagle also sold its Hillsboro, Oregon, property with some equipment for $1.31 million. Proceeds from the transactions were used to reduce the company’s considerable debt. The euphoria of the company’s rapid gains following the PWPipe acquisition was over. Spell would have to keep the company going through leaner times, waiting for an economic recovery to fuel renewed demand for plastic pipes.

Principal Competitors

Formosa Plastics Corporation; NACO Industries, Inc.; NIBCO Inc.; Royal Group Technologies Inc.

Key Dates:

1967:: PWPipe begins making PVC pipe in Oregon.
1984:: Eagle Plastics is formed in Hastings, Nebraska.
1993:: Blackhawk Holdings, Inc. buys Eagle Plastics.
1995:: Blackhawk acquires Pacific Plastics and Arrow Plastics and changes its name to Eagle Pacific Industries, Inc.
1999:: Eagle Pacific acquires Pacific Western Extruded Plastics Company (PWPipe) from Mitsubishi Chemical.
2000:: The company name is changed to PW Eagle, Inc.