Cheston, Cragmet, IRS
Cragmet was in profit if we closed the Aerojet shipment as of April 30, 1971. We were having a battle with the IRS based on the fact that the order called for installation and we claimed it was not finished. As a government job we were paid on a percentage of completion basis which was shown on our books as an advance from the customer. I could not see another vacuum melting facility in the near future and did not want to mail a check to IRS.
Consarc beat us to a market place that Cragmet should have won. Processing small quantities of stainless steel using the Union Carbide process required heat and the Germans and Swedes were offering equipment.
From Rowan's book:
Consarc's president had sold a very special vacuum degassing furnace to Vasco (the new name for the old Vanadium Alloy Steel Company). He'd befriended a senior metallurgist there, a Charles Sherman, and the system became known as the "Sherman Special."
About the time it was to be commissioned, Sherman retired and no one else at Vasco had any interest in the process. Early operational trials were unsuccessful, partly because there was now no one at Vasco dedicated to the process; the new president of Vasco, Frederick Kaufman, wanted it returned and his money back.
Then Teledyne bought Vasco and the Teledyne management got into the act, claiming Consarc's degassing furnace didn't work and generally "badmouthing" Consarc.
To be sure, it was a bad situation. The furnace had not been given a proper try and Consarc could ill afford to take it back anyway. Wooding's solution, he later told me, was that he phoned Henry Singleton, founder and chairman of Teledyne, at his home that weekend where Singleton was hosting a dinner party, and insisted to speak to him immediately. Once Teledyne's chairman got on the line, Wooding informed him he planned to file suit for libel.
Singleton was flabbergasted; it sounded like a bad joke. It wasn't merely that Teledyne included various technological divisions, several of which were good customers of the furnace company and several of our subsidiaries; at Inductotherm, we had built our business by helping our customers. We rarely insulted them and never sued them.
Consarc did not have engineers that understood the vacuum degassing process and did not have a functioning leak detector at the time. Klingerman was loaned to Consarc to teach them the ropes. Marino noted that Consarc could not spell vacuum.
Cragmet had become Inductotherm's largest customer during the four years we had been on Indel Avenue. We had a lean and efficient team and any layoff would have hurt. Raufer had found a full time job in administration of a smaller and smaller workforce. The fact that we were wasting the talents of a first class induction engineer to administration was of concern. Marino and Lona were fully in charge of manufacturing, field installations, and service.
I asked Rowan for time to talk over some idea's I had for the future. I had no idea that IPE had just built a solid state power supply and Rowan did not mention it. He set aside Saturday afternoon at his home for my discussion. When I arrived at his home he took me to his den and introduced me to his son. I was surprised to meet an alert young man with an inquisitive mind. Word on the street was that his son could not sit or stand.
Rowan kept his private life very private. It was understood that when he incorporated Inductotherm that he set up a trust for his three children. Each of them was to receive 10% when they were 35 years old. The thirty-percent trust was to accrue to the remaining children in case of death of one or more of them. This fact, true or not, was to become very important to my understanding of future events and the essence of Rowan's book.
I still wanted to merge with Consarc but it was not the correct time to talk with Rowan about that. I had known Rowan for thirteen years and had learned how to read his mind. When agitated his upper lip had an uncontrollable twitch. Mention of Consarc caused a severe twitch.
By 1971Rowan was an established company and the profit sharing trust, of which he was a major member, had grown to about $4 million. The shareholders equity was about $14 million. He never told us but he had no intentions of becoming a public company and he was not going to tolerate partnerships in the future.
Rowan generally agreed that Raufer could head up engineering for induction heating equipment. My offer to merge with his Cheston operation and give Rowan 80% of the outstanding shares was attractive to him. This would allow his accountants to count our earnings or losses in a consolidated tax account. Dividends from the new company would not be income to the parent company. Rowan felt Hill would not be an easy sell but asked me to arrange something and get back to him.
I asked Foster Lott, Rowan's in house advertising agent, to design a company logo that would use the Cragmet and Cheston "C" logos with an Inductotherm I inside. We worked on this for a couple of days and made an impressive letterhead for the new face of Cheston.
Hill was in California where his wife was living because they were having difficulties with their marriage. He was shocked when he saw the letterhead because he assumed Rowan and I had already agreed. It took two days of discussions before he started to come around. He showed me a long and detailed agreement that Rowan had made with the owners of Cheston in 1970. In order to convince Dick and his staff to move to Rancocas Rowan had agreed in writing to give the new operation exclusive worldwide rights to induction heating.
Dick was not an owner of Cheston but he was a director in addition to being the CEO. Without Dick and the experienced staff the little resistance furnace operation was nothing. By this time in 1971 Rowan was totally unhappy with his induction heating company in Michigan and Hotchkin told me we could buy it and move the operation to Rancocas in the near future. Hotchkin or Hill did not tell me that Cheston had a large potential lawsuit in the Federal court system.
Not a single person bought my idea except Rowan and Hotchkin. The plan was to give up 10% of the Cragmet stock, which would give Inductotherm 80% so they could consolidate us on the tax return. The new group would need money to pay off Cheston's obligations and to fund growth in the induction business. Cheston had a loss carry forward of $700,000 and I offered the full value of that situation in the merger.
A new class of stock was issued for the minority shareholders if they put up $100, 000. Inductotherm bought eighty percent of the new shares for $400, 000. We did not have the money to purchase these shares so it was necessary to borrow from the bank again. Lona declined to take the shares offered to him. He was angry at the fact that his shares were valued at seven times less than he paid in late 1969. Raufer finally agreed to the new arrangement and borrowed $32,000 from the bank at prime rate. He also agreed to step down and become Vice President of Engineering. Hill accepted the arrangement and borrowed $32,000 from Inductotherm with Raufer and I backing the credit.
When the deal was done the inventory was moved from Inductotherm to our building. Marino and Lona screamed "bloody murder." Fully ninety percent of the inventory was overstated and most of it was obsolete. I told everybody to hold tight and the first major induction heating order would make us whole. In the first month I saw that Raufer and Hill did not match up and trouble was coming. I saw Hill as a positive salesman who would allow our stable management to operate with Raufer in control of expanded engineering department. With cash in the bank and the worldwide rights to induction heating all we needed was out own solid state power supply in the future. I was still afraid of these electronic boxes and Hill could not sell induction equipment.
At this point in the chronology a very important event occurred. I have not been able to find the terms and conditions under which Peschel worked but it is assumed that he had at least 20% of the stock and Rowan gave him the same freedom that we had at Cragmet. I did not know that the Inductotherm electronic power supply was built by Peschel until I read it in Rowan's book.
Peschel at IPE decided to build an electronic power supply so he would not have to buy from Pillar. If he built a better and cheaper mousetrap he could sell his power supplies to Rowan and others. The power supply was at the very heart of the induction business and if Inductotherm bought these from Peschel's Rowan would lose the personal profit that his partner would gain. The handwriting was on the wall: Inductotherm would steal this solid state design and build these units in Rancocas.
Rowan records this event in his book:
At the nine-month goal in May 1971, almost to the day after the project had been launched, Taylor, Mellon, and Stokely gathered around the crude inverter unit they'd tacked together. It stood six feet high, and was 18 inches deep by three feet wide--half the volume of the Pillar units. But would it work?
The three of them held their breath as Taylor pushed the "on" button and twisted a dial. The inverter began to hum louder and louder as Taylor ran it up to its maximum power. After a minute, he turned it off, and the three of them sat down, just staring at each other, as if dumbfounded. "Let's do it again," said Taylor, after a few minutes had passed, "just to make sure it wasn't a fluke."
Sure enough, it ran again; this time Dale Mellon picked up a phone, dialed the company-wide intercom system, and said one word: "Shazaam!"
Within minutes, the lab was packed with co-workers, all exultant over what Taylor, Stokely, and Mellon had done. Taylor was especially happy. He had not only achieved a major engineering breakthrough: he had saved his job and probably the company.
The Cold War appeared to thaw in 1971. After a few Ping-Pong matches with China Nixon and Kissinger played the China card. We watched on television as our leaders toured the Great Wall. In secret meetings the Chinese were furnished with top-secret information about Soviet Rockets pointed at China. Nixon opened the door to Russia when he settled the lend lease payment. A wheat deal followed quickly, with the Soviets making a big buck with the rising price of wheat. Ford and Ajax and others obtained some good orders for foundry equipment for a truck factory financed by Chase Bank and backed by our government. I had nothing to do with any of this business.
Ruble went with me to a foundry in Dayton, Ohio in an attempt to sell equipment for melting and casting titanium. This job was totally beyond my ability and I told Roy that I was not smart enough to tackle that task. I suggested that plasma melting would be better and that Wooding would be better qualified. It was during dinner that I learned the part of the Wooding story including a private jet to Europe and a trip to Bermuda.
I suppose that Wooding was misusing a "perk" as any good Irishman or "hillbilly" might do if given the situation. In his defense the Island of Bermuda has more British bank headquarters per acre than any place in the world. The battle lines were drawn between Rowan and Wooding and the power of the purse would win.
Ruble told me that he was going to have to change Rowan's ways on selling to large organizations because he was losing business that he did not know about. Rowan and his sales team were masters at selling to individual foundry owners but were not wasting their time calling on engineering groups and large business. He was especially displeased that Ajax had won a large order from the Soviets that was purchased through the KAMA purchasing group the Soviets had opened in New York where Ford handled the foundry design for a large truck factory to be built in Russia. And, yes one of his salesmen had been contacted by a New York trading agent that was looking for a thirty ton vacuum melting facility for the Soviet Union based upon the Latrobe Steel job that Stokes and Inductotherm built in 1962. I told Roy that the system at Latrobe was not a winner and I would never build it that way, but I promised to look into it.
Rowan tells the story of Soviet sales quite different. It is difficult for me to believe that his writer did not have the correct facts. It was inevitable, I suppose, that the Russians would want our furnaces, too. Nonetheless, neither Inductotherm nor any of our subsidiaries sought out contracts from behind the Iron Curtain; we might never have dealt with them at all, if we hadn't acquired Cragmet--and Jimmy Metcalf--back in 1967.
At the time we acquired the company, Cragmet was engaged in carrying out a sale it had made to a Soviet governmental agency, the Kama River Purchasing- Commission, which had bought a vacuum furnace for a truck plant it was building near Kramagorsk, in the Ukraine.
Selling to the Russians was different from the way Inductotherm liked to do business--instead of dealing with entrepreneurs, foundry operators and corporate officers, you had to deal with bureaucrats, planning commissions and politicians--men with a totally different set of priorities. While most Russian people couldn't afford a pound of hamburger--if they could even find it in a grocery store--money was no object to the government functionaries and party members who ran their industry. They liked having the biggest, most modern equipment.
When we joined Inductotherm I had never thought about selling in Russia. Russians had plenty of hamburgers. It was not sold in the markets or grocery stores because Russian wives ground it fresh at home. What was missing was fast foods, pantyhose, and good toilet paper. And, "tampons".
"The Cragmet furnace in this instance was the wrong tool for the job, which we explained to the Soviets once the company became an Inductotherm subsidiary. But the Planning Commission wanted it anyway. They worked on its purchase for five years before abandoning the project in 1976."
Rowan got many things mixed up in his chapter named Foreign entanglements which was the story about my business with the Soviets. The whole affair stretched out over thirteen years with Rowan and Inductotherm very much involved. From time to time I will insert parts of this chapter to keep the record straight as I remember it all too well.
The next event from Rowan's book is important in Cheston history:
"Now, if those rumors were true, we were once again in deep trouble. When I confronted Goggio directly to give him the chance to confirm or deny the story of their duplicity, he blithely admitted it was true."
And what about our agreement?" I asked, incredulous. "I suppose it doesn't matter that Inductotherm bought exclusivity to the frequency inverter. Are you just planning to go back on your word, and let the chips fall where they may? Ernie, I'm disappointed in you. I suppose you feel no loyalty to Inductotherm at all, do you?"
Goggio shrugged off my words with, "Hey, we're not violating the agreement. It says we won't help directly, but we're offering to lease the inverters. Besides, it's not as if anything has to change, Hank. We can go on doing business the way we always have. But look at it from our perspective. The way we see it, we've been shortchanging ourselves by restricting ourselves to Inductotherm."
Two days after Goggio announced his intentions to go into the furnace business, IPE's Byron Taylor arrived in Rancocas to work with our engineers to design Inductotherm's new solid-state inverter for melting applications. Even with Byron's experience in building this inverter at IPE, it was no small task.
If anyone believes these events were not planned I have a bridge for sale.Rowan sold the minority shareholders at Cheston the exclusive rights to induction heating and building power supplies for this market under license from IPE would have been a natural business decision. He hired his partner's chief brain. His partner Peschel was on his way out.
Goggio must have departed Rowan's office before he knocked on our door. Hill was on a sales call so I asked Marino to join us to talk with a supplier of induction power supplies that would be much cheaper than Inductotherm. Goggio offered three units at less than half the price Ruble was charging. We had money in the bank so we bought the three units without knowing where they would be used.
Bonny Forge was in major difficulties when I knocked on their door in Reading, Pennsylvania. A major fire had destroyed their heating ovens. They needed to heat two-inch round by four-inch long steel bar to forge large hydraulic fittings and the needed it yesterday. It was time to try one of these electronic power supplies and get into the induction heating business. I set a reasonable price and offered a quick delivery. In less than two months we were heating steel slugs and the customer was making hydraulic fittings for their customers. Thank goodness we bought three units because Ruble was to use these units as spare parts to service Pillar units he had in service. We extracted a pound of flesh from Inductotherm for these spare parts.
Bob Klingerman traveled with me in the summer of 1972 to Pfizer in Easton, Pennsylvania. I thought we had gone to the wrong factory when we arrived at the paint division of Pfizer. Doctor Robert Froberg was the scientist and manager of a small facility for carbon processing that was located in the corner of this large facility. He explained that his pyrolytic graphite production facility was a strange outgrowth from a special paint for fireproofing of ships and Pfizer had a long-term obligation to the Navy to produce this product.
Before we started to talk about his current needs he gave us a quick tour of the facility. I saw that he was using a vacuum furnace with a bottom loading system. This brief look became my foundation idea for the furnace line I sold to the Soviets in 1983. It had nothing to do with carbon or the technology to produce it.
The light bulb that lit in my mind was not what I was seeing. Froberg's furnace had screws that lifted the upside down lid that contained the carbon product he was producing up to the hot zone. In the down position he had wheels on the bottom of the lid so it could be rolled out for normal overhead crane handling of the product. He had a second position planned with another set of screw jacks. What I saw was not there. I saw a stiff framework with the screw jacks in it. This system would have wheels that rolled on rails so it could service a line of twenty or more furnaces. My mind saw a normal fork truck pulling this material handling car down this tunnel of furnaces.
We listened a few minutes to his need and planned solution. He introduced us to carbon fiberform insulation produced by FMI that could be purchased up to four inches thick. The maximum width was twenty-four inches and the maximum length was fifty-four inches. It was love at first sight between this material and me. Ten years later I would be producing it in large sizes and shapes. It would mistakenly be placed on the export control list thirteen years later as an item vital to the military security of the West.
I recognized that Froberg was the total boss of this operation. I told him that he had the ideas and between the three of us if we could not complete the basic design in thirty minutes. We started the design and set the price. I never got to see this facility because Froberg made it secret. The equipment did not work because it was thirty years ahead of its time. He may be the best engineer in the world for carbon and chemical vapor deposition.
I later sold Froberg the simple test furnace we used for the Aerojet tests that had the original miniseptor and carbon felt. I have no idea what use he found for this equipment. These two items in the seventies were my only business with Pfizer.
The working relationship between Raufer and Hill continued to worsen. I discussed the situation with Ruble and Raufer and asked the board to appoint me as president. Dick Hill was hurt but did not object. By this time we had spent a lot of time at the bar of the Pirates Inn just across the Rancocas creek and this discussion took place after I had consumed several martinis.
As president I took charge of the lawsuit pending in Cleveland Federal Court for a prior non-performance of equipment. Cheston's operating and management team was furious at the situation and this was the reason I assumed the post of president. Hill had understated the serious nature of this lawsuit when Inductotherm purchased the company. The amount of the claim and mounting legal fees were well in excess of the company's net worth. Hill refused to bend.
We went to Federal Court to meet the judge and the suing party. The judge told us that the case was complicated and that a jury could not understand it. My offer to the judge to buy back the equipment for sixty-five thousand dollars as full settlement was a surprise for Hill and our council. The judge asked the other party to meet him in chambers. Hill was very upset with me since he knew that the equipment was a pile of junk and could not be sold. The judge met us in the hall with a counter proposal of seventy five thousand dollars. My offer to split the difference was accepted. There was a risk in buying back those six heaters that had to be rebuilt at the same time the company was building twenty for stock. Hill had never sold more than four in one year. My feeling was that we needed to mass produce them to get the costs down so Hill could lower his prices and sell them. The team did a good job and began to like the little machine that we named The Green Pig.
Cheston purchased a portion of the Pelton Water Wheel Company that made the controllers for hydropower. It looked like a good fit and Rowan noted that this could be larger than Inductotherm in the future.