Zoltek Companies, Inc.

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Zoltek Companies, Inc.

3101 McKelvey Road
St. Louis, Missouri 63044
U.S.A.
Telephone: (314) 291-5110
Toll Free: (800) 325-4409
Fax: (314) 291-8536
Web site: http://www.zoltek.com

Public Company
Incorporated: 1976
Employees: 1,650
Sales: $68.52 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: ZOLT
NAIC: 335991 Carbon and Graphite Products

Zoltek Companies, Inc. manufactures carbon fibers, a material renowned for its combination of strength and light weight— but not widely used because of its high cost. Zoltek is trying to increase the use of carbon fibers by reducing manufacturing costs. Rather than use custom-made acrylic fibers to make carbon fibers, the company uses textile-grade acrylic fibers that are less expensive. Zoltek operates seven factories in the United States, the United Kingdom, and in Hungary.

Origins

Zoltek’s self-declared revolutionary role in the development of the carbon fibers business was led by Zsolt Rumy, who was himself no stranger to revolution. A native of Hungary, Rumy grew up in a time of profound divisiveness, with his country struggling to free itself from Soviet dominance and his father jailed as a political prisoner. At the age of 14, Rumy threw Molotov cocktails at Soviet tanks patrolling Budapest during the Eastern European country’s 1956 uprising. The overthrow failed and the Communist forces tightened their grip, but not before the Rumy family escaped.

A decade later, after settling in the United States, Rumy had earned a degree in engineering from the University of Minnesota. In 1975, he took out a second mortgage on his house to start his own business, using $8,000 in start-up money to form Zoltek. Beginning with his wife, Mary, as his only employee, Rumy began his business as a distributor for the local chemical industry in St. Louis, Missouri. This was the origin of Zoltek’s equipment and services division that supplied industrial process equipment, aftermarket components, and repair services for the chemical, petrochemical, food processing, and power generating industries.

For the next 13 years, Zoltek was supported solely by the acts of selling, installing, and servicing industrial process equipment. Later, Rumy took a gamble and steered his company in a new direction; the decision eventually cast Rumy as a pioneer, promoting a revolutionary cause in the advanced materials industry. If successful, Rumy’s second revolution promised to make Zoltek one of the country’s leading industrial concerns.

The event that triggered a new era in the company’s history was Zoltek’s $750,000, 1988 acquisition of Massachusetts-based Stackpole Fibers—a financially troubled manufacturer of specialty carbon fibers. Although Stackpole Fibers was ailing at the time of the acquisition, Rumy was attracted by the technology the company employed, which at the time was being used in the manufacture of jumbo jet aircraft. Beginning in 1985, carbon fibers were used to make airbrakes for jumbo jets due to the fact that, unlike steel brake pads, the material did not soften when subjected to the friction and resultant heat caused by stopping a 280-ton airplane. Further, at the time of the acquisition, Stackpole Fibers appeared to be close to securing a lucrative contract with the National Aeronautic and Space Administration (NASA) as a supplier of carbon fibers for rocket nozzles. After completing the acquisition, in 1990 Rumy moved Stackpole’s operations to St. Louis, establishing manufacturing, research, and development facilities near Zoltek’s industrial process equipment business.

Early Roadblocks to Success

Zoltek’s two operating divisions operated side by side, but it soon became apparent that the gamble on Stackpole Fiber had not paid off—certainly not in the short term. The Zoltek division failed to land the NASA contract and found itself anxiously awaiting the development of the carbon fibers aircraft brake business, a process that was proceeding at a dishearteningly slow pace. By the early 1990s, the foray into carbon fibers had proven to be a frustrating disappointment and a strategic misstep for Zoltek, at the least.

No one doubted the qualities of carbon fibers as a material used in industrial applications—carbon fibers were exceptionally strong and exceptionally light in weight—but also exceedingly expensive. Manufacturers who otherwise would have wholeheartedly embraced carbon fibers could not look past the cost. Other widely used materials such as steel (selling for $.35 per pound), and fiberglass (available for $.80 per pound), were by far less expensive than carbon fibers (selling for as much as $12 per pound). Accordingly, companies such as Zoltek who competed in the carbon fibers market were forced to consign themselves to catering to aerospace customers. Because of this, the carbon fibers business was characterized by a low volume of output and high prices. Rumy, unable to penetrate into the exclusive community of carbon fiber end-users, faced a dilemma.

Rebuffed initially, Rumy actually decided to delve deeper into the carbon fibers business. Instead of divesting his interests in carbon fibers, he assumed the role of a pioneer, intent on revolutionizing the industry much like the proponents of aluminum and plastics had done decades before. He conducted pilot studies, hoping to discover that carbon fibers could be manufactured at a significantly lower cost. Rumy theorized that once costs were reduced substantially, the applications for carbon fibers would increase exponentially, thus creating an ideal business opportunity for a company poised to take advantage of the rush towards carbon fiber use. When the Zoltek’s investigations revealed that carbon fibers could be manufactured from inexpensive acrylic fibers typically made by the textile industry, Rumy decided to risk more than he had with the acquisition of Stackpole Fibers. He diverted all of the company’s resources toward duplicating the properties of the carbon fibers used by aerospace customers and producing them at a substantially lower cost. At that time, the industrial equipment and services aspect of Zoltek was phased out, leaving the company and Rumy entirely dependent on the potential of carbon fibers.

1992–94: An Emerging Strategy

Rumy’s new corporate mission was formally launched with Zoltek’s debut as a publicly traded company. In November 1992, he completed an initial public offering (IPO) of Zoltek stock, raising $4 million to develop the company’s first continuous carbonization line for prototype acrylic-based carbon fibers. Zoltek’s equipment and services division was still in operation at this time, delivering steady—albeit modest—revenue and profit growth. But the company’s future was in carbon fibers. One year after the IPO, Zoltek posted $567,000 in net income, compared to a net loss of $206,000 during the previous year. Revenue was up as well, rising from $9.6 million to $12.3 million in 1995 primarily due to a 70 percent increase in sales from the carbon fibers business.

In 1994, Zoltek began using its proprietary acrylic-based system to manufacture lower-cost carbon fiber composites. The practicality of the company’s product received an encouraging boost in 1994 as well when TRW Vehicle Safety Systems Inc. awarded Zoltek a three-year contract, naming the company as the exclusive supplier of carbon fibers for the propellant systems in vehicular airbags. The TRW contract, rumored to be worth $5 million in sales annually, typified the new, broader-based applications for carbon fibers that Rumy was pushing for. It was an indication that those outside the aerospace industry would find the willingness to pay for the remarkable qualities of carbon fibers.

Aided by increased manufacturing efficiencies and the successful commercialization of the material, Rumy believed he could transform a high-price, low-volume industry into a low-price, high-volume industry. In his mind, Zoltek was poised to reap the financial benefits. Toward this end, Rumy made an important addition to the company’s operations in 1995, an acquisition that took Rumy back home—that of Magyar Viscosa.

1995 Acquisition of Magyar Viscosa Spurs Growth in Mid-1990s

In November 1995, Rumy turned to Wall Street for another infusion of cash, selling 1.85 million shares in a secondary offering that raised $26.3 million. With the proceeds raised from the offering, he purchased Magyar Viscosa, a Hungarian producer of acrylic and nylon fibers that were purchased by the European textile market. The acquisition, completed in December 1995 for $17.4 million, represented a significant step toward vertical integration, providing the company with a supply of acrylic fiber produced within the Zoltek organization. The purchase of the Hungarian plant also gave the company control over a fundamental aspect of producing carbon fibers, which enhanced Zoltek’s potential to achieve manufacturing efficiencies and drive down manufacturing costs. The acrylic fibers manufactured by Magyar Viscosa were textile-grade, considerably less expensive than the custom-made acrylic fibers generally used to make carbon fibers

Company Perspectives:

We expect to lead a revolution in the advanced materials business. Revolutions in materials are slow to develop, but they become unstoppable once they have gathered momentum. The coming revolution in carbon fiber composites is based on the material’s unquestioned technological advantages. We at Zoltek have set our sights upon becoming a much, much larger company. We believe we must attain a large critical mass if we are to fulfill our potential and truly make the future happen for big customers in major industries.

Investors were evidently in favor of Rumy’s 1995 acquisition, voicing their approval by sending the value of Zoltek’s stock price soaring in late 1995 and 1996. At that point, the company was ranked as the fifth-largest carbon fibers manufacturer in the world, a position that Rumy was intent on improving. In the wake of the Magyar Viscosa acquisition, Rumy laid out plans for his company’s future objectives: during the next five to seven years, Rumy wanted to increase Zoltek’s annual revenue to $200 million and increase the company’s carbon fiber production by 30 million pounds. This represented a massive increase that exceeded “the entire current world capacity of carbon fiber,” according to Rumy in a January 29, 1996 interview with the St. Louis Business Journal. For comparison, Zoltek produced approximately 3.5 million pounds of carbon fiber a year during the mid-1990s; thus, his projection represented a tenfold capacity increase.

Although much work remained to be done before Zoltek reached the lofty targets set by Rumy, there soon were indications that the company was making promising progress. Sales in 1996 ballooned from $12.6 million to $68.9 million, invigorated primarily by the company’s acrylic fiber plant in Hungary. A bigger cause for celebration occurred at the beginning of 1996, when the company introduced a new price point of $8 per pound for high-volume orders of carbon fiber. Said Rumy in his January 29,1996 interview with the St. Louis Business Journal, “this price is revolutionary in the industry because it is sufficient to attract new cost-sensitive, broad-based applications, such as large ocean-going shipping containers and automotive components.” The reduced price was also creating viable applications in a broad assortment of products, ranging from hip implants, to fire-retardant materials, to conductive coatings. Rumy knew he had to drive down production cost further, however, and set a target price of $5 per pound to be reached by the end of 2000. At $5 per pound, industry analysts projected that the carbon fiber market would begin to open up substantially.

Rumy’s objectives, which were part of a five-year strategic plan called Zoltek 2000, served as the compass point directing Zoltek’s actions during the latter of the 1990s. To accomplish one of the company’s fundamental goals—the exponential increase of its production capacity—a fresh supply of capital was needed. As he had done before, Rumy turned to Wall Street, completing two more secondary offerings of stock in 1996 and 1997. The stock offerings raised more than $95 million, providing the money needed to install new continuous carbonization lines in Hungary and at the company’s plant in Abilene, Texas.

Obstacles in the Late-1990s

In late 1997 and early 1998, the heady days when Zoltek’s stock value had escalated month by month came crashing to an end. Being a publicly-traded company had its advantages—it had enabled Rumy to raise more than $100 million through stock offerings, for instance—but it also had its disadvantages. Namely, public ownership required a company to meet analysts’ quarterly expectations or suffer immediate consequences. Zoltek experienced the downside of the public ownership equation in 1998, when its earnings plunged and analysts, previously enamored of the company’s potential, began to distance them-selves from it. Between October 1997 and August 1998, Zoltek lost $780 million of its market value, or 75 percent of its projected worth.

The cause of the company’s anemic profit performance was an inherent aspect of its plan to dominate the carbon fibers market. To position itself as preeminent global leader in a market that was filled with potential yet largely unproven, Zoltek’s production capacity was being increased, but not being fully used. Rumy’s expansion of production capacity was based on the future, dependent on a lower production cost of carbon fiber and the development of new markets for carbon fiber. It was a plan predicated on a situation that did not exist in 1998, which meant idle plants and weak profit performance. Rumy was pursuing a vision, however—one that necessitated short-term sacrifices to fulfill long-term objectives. “We have had depreciation costs because of the over-capacity, but we don’t mind” he explained in a January 31, 2000 interview with the St. Louis Business Journal.

Acquisitions and Optimism for the Future

Due to Rumy’s insistence on increasing capacity, Zoltek reported a substantial loss for the fiscal year ending in September 1999. The company posted a $2.6 million loss, as it was unable to overcome the estimated $4 million in losses stemming from idle factories. The announcement of the loss, however, occurred at approximately the same time that Rumy announced a string of acquisitions that again buoyed analysts’ regard for Zoltek’s prospects. In October and November 1999, Zoltek completed the acquisition of four companies: Structural Polymer Holdings Ltd., Cape Composites Inc., Engineering Technology Inc., and Composite Machines Company Inc.

The acquisitions more than doubled the size of Zoltek, adding profitable businesses and managerial expertise that decidedly strengthened the value of Rumy’s organization. Perhaps more importantly, though, the acquisitions promised to help Zoltek in one area where the company needed help most. The acquired companies were “downstream,” or closer to the end-user, enabling Rumy to take an active role in the development of markets for carbon fiber composites. For instance, the largest of the acquisitions, U.K.-based Structural Polymer, was designing a 50-meter blade for a windmill that incorporated roughly 3,000 pounds of reinforcing carbon fiber. Structural Polymer was scheduled to begin producing the blades in 2001 for sale to Europe’s wind-powered electricity generating industry. As one industry analyst noted in a January 31, 2000 St. Louis Business Journal article, referring to the importance of the downstream acquisitions, “they don’t have to just sit there and be carbon fiber salesman. They can help the development process along.”

Key Dates:

1975:: After taking out a second mortgage on his house, Zsolt Rumy founds Zoltek.
1988:: Stackpole Fibers is acquired, ushering Zoltek into the carbon fibers business.
1992:: Zoltek completes initial public offering of stock.
1995:: Hungary-based Magyar Viscosa is acquired.
1999:: Structural Polymer Holdings Ltd. and three other companies are acquired.

As Zoltek entered the 21st century, its success depended on the future development of carbon fiber markets. Although wide-spread demand for carbon fiber composites had yet to materialize as the company celebrated its 25th anniversary, Rumy was optimistic. One news item that supported his sanguine perspective was an announcement by Delphi Automotive Systems in early 2000; the automotive parts manufacturer said it wanted to use carbon fiber in several new automobile safety features. If Delphi followed through with such plans, new automobiles could contain roughly 20 pounds of carbon fiber, which Rumy estimated would increase global demand from 35 million pounds annually to more than 600 million pounds annually. “I’m looking down the road five or 10 years from now, when carbon fiber is an important material,” Rumy explained in his January 31, 2000 interview with St. Louis Business Journal, “Then we will be a premier company.”