Revenue, employment continue to grow at Koch Industries

07/12/2014 4:33 PM

08/05/2014 9:23 PM

Correction: An earlier version of this story said Koch Supply and Trading has offices in the Cayman Islands, France and India. It doesn't, but it does have offices in the United Kingdom.

In a little more than a decade, while a lot of companies were contracting, Koch Industries has doubled its revenue and increased employment fivefold.

That growth means the privately held company — whose three major shareholders groups are the Charles Koch family, the David Koch family and the family of Texas oilman J. Howard Marshall — is studying an expansion of its 1.2 million square feet of buildings near 37th Street North and Oliver in Wichita.

In 2011, the company had its best year ever with revenue of $110 billion. It’s on track to exceed that this year.

Since 2000 it has expanded company-wide employment from 12,000 to 60,000. A big chunk of those employment gains are from its $4.4 billion acquisition of Invista in 2004 and its $21 billion acquisition of Georgia-Pacific Corp. in 2005.

Locally, Koch Industries’ employment levels have increased from 2,200 in 2000 to 2,700 today. And that’s creating the need for more space at its Wichita headquarters, company officials said.

Dave Robertson, Koch Industries president and chief operating officer, said the company is considering adding a building that could be 200,000 square feet and accommodate 600 to 700 employees.

“We have architects and engineers developing options for us, and we expect they’ll be finished with those options roughly by the end of September,” Robertson said. “And I expect we would make a decision by the end of the year.”

Robertson, a 28-year veteran of the nation’s second-largest privately held company, sat down with The Eagle to talk about the company’s growth, how it sustained growth during one of the country’s most tumultuous economies in decades, and where Koch goes from here.

More diversified

Today, Koch operates 21 companies in eight industries: refining, chemicals and biofuels; process and pollution control equipment and technologies; minerals; fertilizers; commodity trading and services; polymers and fibers (Invista); forest and consumer products (Georgia-Pacific); and ranching.

Its overseas operations – it operates in nearly 60 countries – include Koch Supply and Trading with offices in the Singapore, Switzerland and the United Kingdom; Koch Fertilizer, which has plants in Trinidad and Tobago, and terminals in Brazil and Australia; and Invista, which has a presence in 20 countries.

“I would say we are a manufacturing company,” Robertson said. “I mean, if you look at what we do, we’re making things that people use every day.

“Some of those it’s very easy to see because if you go buy Quilted Northern you know that’s made by Georgia-Pacific. But when you buy gasoline, there’s a reasonable probability that could be our gasoline. But it’s a commodity so it gets blended into the pool of energy, so it’s not as easy to see.”

Since 2000, some of the businesses that make up the company have changed.

For instance, Robertson said the company used to be more heavily involved in asphalt. While asphalt remains a part of Flint Hills Resources, a Koch subsidiary, “we sold down a lot of that asphalt business,” he said. And the company no longer has its natural gas liquids business, he said.

Where it has expanded is in chemicals. That would include ethanol, base oil — which goes into engine oil and other industrial lubricants — and fertilizers.

“In the fertilizer business we have much more production, and we’ve really moved into what I call enhanced-efficiency fertilizers,” Robertson said.

Enhanced-efficiency fertilizer is based on a concept similar to a time-release drug. That is, it delivers a certain dosage of “energy” to a plant at an appropriate time, helping it to grow and produce more effectively. It’s the kind of fertilizer that farmers can use, and it also can be used on ornamental grasses and golf courses, Robertson said.

The big changes to Koch’s business profile, however, are the additions of Invista and Georgia-Pacific.

Invista manufactures polymers and fibers that go into clothing as well as automobile interiors and carpeting. Some of the brands under Invista are Stainmaster and Lycra.

Some Invista locations, including Wichita, have increased employment since the acquisition, said Koch spokeswoman Melissa Cohlmia. But overall Invista employment numbers are down because of the recession, increased efficiencies and the sale of several Invista assets, she said.

Georgia-Pacific manufactures products derived from wood, such as plywood, tissue paper and paper towels. Its brands include Brawny, Quilted Northern and Dixie.

Of those two companies, Robertson said Georgia-Pacific was responsible for most of Koch Industries’ surge in employment. While the addition of Georgia-Pacific has pushed Koch’s total employment higher, Cohlmia said Georgia-Pacific has decreased its employment since Koch acquired it “for a number of reasons, including recent economic impacts on the housing and construction sector.”

She noted, however, that Georgia-Pacific has 1,500 positions open across the country, which the company is trying to fill.

Koch Industries is still vested in the energy business — for example, it operates refineries in Alaska, Minnesota and Texas with a combined crude oil processing capacity of 800,000 barrels a day. But that sector does not account for as big of a percentage of its overall business as it did a decade ago.

As a privately held company, it does not disclose detailed financial information.

“We are a more diversified company than we were back in 2000,” Robertson said. “If you take it from our revenues perspective, a smaller percentage of our revenues come from energy-related things. (But) I would tell you it’s still a significant portion of Koch Industries.”

Alignment

An obvious component of the company’s growth has been its acquisition of Invista, Georgia-Pacific and dozens of other companies. The company said it has spent about $45 billion since 2003 on acquisitions and capital expenditures.

But Robertson said its growth also has come about by effectively using Market-Based Management — a management philosophy and practice developed by Charles Koch — in an economy that has twice experienced recession since 2000.

“We believe that businesses exist, really, for making people’s lives better, making products and services that make people’s lives better,” Robertson said. “And the more efficiently and effectively you do that, then the more you profit.

“It means we had to do a pretty good job — maybe a better job than we’ve done in the past or maybe a better job than some of our competitors are doing during this economic downturn — for us to perform very well. If you got into each individual (Koch) company there’d be a little different twist to that, but at a macro level I think we did a decent job of applying our management philosophy.”

Market-Based Management is not just some concept to Koch leadership, said Ron Ryan, an entrepreneurship and management professor at Newman University. He said the company really does practice what it preaches. And that’s even internally, Ryan said.

If somebody outside of the company can do a better, more efficient job than a Koch employee, then the company will outsource that task, Ryan said.

“You’re always competing, even if you’re inside the company,” he said.

The company also benefits from being privately held, Robertson said. With three shareholder groups, it can make big decisions quickly.

“If there’s an opportunity that would require board approval, we could do that very, very quickly — within a matter of hours,” Robertson said.

Being closely held also means that shareholders and the leaders of Koch businesses “know each other and it’s easy to get aligned around the strategies we have.”

“And I think that’s different than publicly held companies because you have this nameless, faceless thousands and hundreds of thousands of shareholders that are out there,” Robertson said. “It would be impossible to have that alignment.”

Being privately held also affords Robertson and other leaders a chance to look further down the road.

“It allows us to focus on the long term as opposed to quarter to quarter,” he said. “Charles is focused on, really, the present value of the future cash flows, thinking long term and how we as a company create the most value in society. And to do that you have to think long term because good things take time.”

Taking the long-term view is a big reason why the company doesn’t like to carry much debt. Robertson said it had to borrow to acquire Georgia-Pacific and that it’s not an obstacle to a good acquisition.

But “sort of true to our Midwestern upbringing and values, we are generally a very conservative company in that regard,” he said, “which means we want a high percentage of equity relative to debt.”

It’s not debt per se that Koch leaders don’t like. It’s the fact that debt comes with restrictions, or covenants.

“Debt covenants oftentimes are measured on a quarterly basis, which even if you’re not public, it sort of puts you close to being a public company because you may have to do short-term things or make decisions that you wouldn’t make for the benefit of the long term,” he said.

Moreover, he said “it takes away degrees of freedom and our ability to freely do what we think businesses should do, which is make people’s lives better.”

Robertson added that when the company has had to take on a level of debt with which it’s not comfortable, “we work to pay that down quickly.”

Koch’s future

Robertson said Koch Industries’ goals are basic: continue growing as a privately held company.

“We are very fortunate in that our shareholders, really for as long as I’ve known, have reinvested 90 percent of earnings back into the company,” he said. “So they effectively take a 10 percent dividend and leave 90 percent there for growth. So if we’re profitable, then that provides the fuel for continued growth.”

Malcolm Harris, a Friends University economist and finance professor, said Koch has been a successful big company because it remains entrepreneurial and acquires businesses that Koch thinks it can make better, more efficient and more profitable.

“They don’t buy companies just to get bigger,” Harris said, “so they are very smart about their acquisitions.”

Robertson is guarded in talking about what type of companies Koch might consider acquiring in the future.

He said the company would consider another consumer products business like Georgia-Pacific, for example, because Koch has developed the operational capability to run and grow that kind of business. But it likely wouldn’t consider acquiring a professional sports franchise or a pharmaceutical company “because that’s not a core competency that we have to be able to do that.”

But he acknowledged Koch was initially interested in Georgia-Pacific because of its lumber and building products business, not because it made Brawny paper towels.

“Now when you step over into the marketing of those products, a brand we did not have that capability or we were not strong at that capability,” Robertson said. “So we took a little bit of a leap there and acquired the capability within Georgia-Pacific.”

The Georgia-Pacific acquisition also distinguishes itself by being Koch’s largest acquisition in its 72-year history. Robertson doesn’t hesitate when asked whether Koch would consider an acquisition of that size again.

“I don’t know when, what it would be or where, but I believe we will do an acquisition of that size again, in the future,” he said.

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