September 2014, Vol. 241, No. 9


50 Years In The Family: CECO Celebrates A Half-Century Of Success

Erin Nelsen Parekh, Associate Editor

It was 1964, and Ernest Hotze, a mechanical engineer who put himself through Oklahoma University working in oilfields, was trying to sell Tennessee Gas Pipeline some large compressors. Hotze worked for Clark Brothers, one of four big compressor manufacturers, and the business was very different from its modern incarnation.

Prices were standard. The difference between one manufacturer and the next often came down to the parts and the salesperson. Tennessee Gas was happy to take the Clark compressors, but it wanted them with Ingersoll Rand-style channel valves instead of Clark’s standard poppet valves. Hotze agreed. But neither Clark nor any other provider would produce valves that fit on the necessary schedule. So Hotze took the problem home.

“One of my first vivid memories is as a 12-year-old child with a pair of Vernier calipers, measuring channel valve parts in the living room and calling off the measurements to Dad so he could get a drawing made,” said Bruce Hotze, Ernest’s son and the current CEO of Compressor Engineering Corp (CECO).

The Hotze family eventually consisted of Ernest, his wife Margaret, seven sons and one daughter. In 1964, three of the boys were old enough to help their father gauge specifications, create drawings and visit machine shops and steel suppliers as he designed and built the necessary pieces to complete the Tennessee Gas order himself.

“The valves were finally assembled at our house. We put them all on a big truck and delivered them to two Tennessee Gas compressor stations. When the compressors were installed, the CECO channel valves were installed,” Bruce said. Tennessee Gas told Hotze there were plenty of other compressors in their system that could use channel valves and parts. A business was born.

Ernest Hotze worked by day selling Clark (eventually Dresser Clark) compressors and by night filling orders for Ingersoll Rand parts — replacements for the most popular reciprocating compressors in the country at the time. During a time when an original equipment manufacturer could take weeks to fill an order, CECO specialized in fast delivery. “They could call us about 4 o’clock and we would take shipments down to the bus station or the freight company or the airport, and they would have the parts the next day or the following day,” Bruce said.

The business was a whole-household affair. The family developed a Sunday ritual of sorting parts — from a box with 30 different components freshly tumbled for smoothness, each family member would collect one or two particular sizes, until the new inventory was organized.

CECO is “the house that Ernie built,” said Richard Hotze, the sixth son and president of the corporation, “with the help of his sons, who he considered slave labor.” That was no great advantage, according to Ernest Hotze. “He much preferred volunteer labor, because he could double their salary every week, and he didn’t have to house them and feed them or pay their medical bills.”

Fifty years after that first order, CECO employs around 230 people year-round and 1,000 during the pipeline construction season, across two major divisions, and is still headquartered in Houston. Four of Hotze’s sons lead the company: Bruce, second oldest; Richard; Mark, son number four, CFO and head of CECO Pipeline Services Company, Inc.; and David N. Hotze, fifth in line, president of the pipeline division. Their mother still serves on the board of directors at the age of 86, and one Hotze grandchild works at the company, with the possibility that others will follow in the family path.
Several among the second generation of Hotzes grew up working in the shop during the summer and after school. When Richard was in school, CECO’s plant was only a few blocks from the Houston private school all the brothers attended, a short walk. “After school we’d throw our book bags in the office, get on the machinery and go to work. Dad would pick us up at about 6 o’clock on his way home from his work at Dresser and take us home. We’d eat, do our studies and do it again the next day. The boys all grew up in the business.”

Early starts meant a lot of experience at a young age. Richard noted, “According to the Social Security Administration, although I’m 54 years old it shows that I have 45 years of contributions to the Social Security fund.” He has been working full time for the company since 1984.

Bruce, eight years older, recalled delivering parts and finished products between shops at 15, working after school, and long summers in an un-air-conditioned warehouse. “All the way through high school I was working, and when I was in college I was telemarketing industrial customers. Dad would send me all the leads he got from magazines. I would call those leads and send form letters to prospects.”

Bruce always intended his education to bring him back to the growing family business. “I was there at the beginning, I knew the business, so when I studied I looked to study related courses,” he explained. He spent two years in the engineering program at the University of Texas and then switched to the business school to graduate with a degree in management. After college, “I just came right back, there was really no thought about it. There was a job at CECO and I knew it, and Dad needed help, and I never thought about working anyplace else.” He joined full time in September 1974.

Of course, success depended on people not named Hotze, as well. Ernest Hotze continued with his job at Dresser Clark until he retired in 1976, and it took luck and assistance to keep up with his side venture in the meantime.

“He got some pretty good advice,” said Bruce of his father. “Hy Byrd, who’d worked for Panhandle Eastern and started Gulf Interstate Pipeline and Gulf Interstate Engineering Company, got Dad in touch with some good lawyers downtown. The young lawyer we met 40 years ago is still our corporate lawyer. Hy said, ‘You need to have regular board meetings.’ So we got Hy Byrd on the board and we’ve had an outside board since 1974.”
Repair technicians attempt to place the new liner in a newly refurbished cylinder.
That advice proved valuable to the company’s growth through turbulent times. “When you have outside directors, they help mold the business and make you report, and they would question things that we were doing,” Bruce said. “I think that’s been one of our keys to success in the family business, that we ran the business like you would a public corporation.”

Another important support was René Horvath, an engine-model maker who ran CECO’s day-to-day business from the time activities were kicked out of the family house in 1968 to 1972. Also in the ’70s, Clint Hager joined from Ingersoll Rand and assisted in the valve department. Art Black, an engineer with experience at compressor companies, came on in 1978 to lead the engineering department.

“Art really stepped up our drafting and specifications and tolerances and materials specs. He knew how the original equipment manufacturers did it and we really didn’t have all those specs as tight as they could have been,” Bruce recalled. “The drawings pre-Art Black were not as good as the drawings afterward, and we were at a big explosion of growth so we were fortunate that all the drawings we were doing then were really top-notch.”

Overall, 25 employees have been with CECO for 20 years or more. Richard said the company has never had difficulty recruiting because workers understand they’re considered part of the family too. “The fact that they feel like family is what allows us to attract and retain employees.”

Another contribution to the long retention may be that there’s less cause for frustration than in many companies. “Decisions are made very quickly, there’s not a large hierarchy. It’s a small enough group that things can get done very quickly.”

In the 1980s, CECO expanded its offerings to include parts for natural gas pipelines. “My father knew all the players,” Richard explained, “so selling into that market was a natural move.”

The pipeline sector was slower-moving then. “In the gas pipeline industry it was very stable for many years. The federal government didn’t allow companies to get too big,” Richard said. Eventually, that changed, and many companies went through a number of acquisitions. But since the same people worked at the reshuffled pipeline companies, even as the names on the buildings changed CECO’s connections remained strong.

“Good personnel always resurface,” Richard said. “They find us. CECO has solutions that they like, and they come to us for our solutions.”

That groundwork led the way for CECO’s acquisition of a contractor in 2003, forming its construction and integrity maintenance division, CECO Pipeline Services.
A recent pipeline project in Lufkin, TX.
In all things, the brothers agree, their father led the way. “I always deferred to Dad,” Bruce said. “If I wanted to make an argument about doing something, I’d try to define the proposal and put it in writing and do all the justification, and if he didn’t like it I said OK and we’d fold it up and not do it. He came to the final decision.”

The loss of Ernest Hotze in 1995 caused distress—he died suddenly of a heart attack, still very much the head of the business he built despite being 80 years old. There were internal struggles over ownership of the company, direction and leadership. But the disputes were resolved and the business chugged on.

“We didn’t change much,” Bruce said. “We just went forward. It took a little bit more collaboration with the other brothers, but we had outstanding people running our engineering force, our sales force and purchasing—we had great senior leadership in the company who weren’t Hotzes, so we went on.”

With 28 years’ work at CECO now balancing a 37-year career alongside Ernest Hotze at Dresser, Jim Hutton saw little change in the style of management when the leadership of the company passed from father to sons. “The current leaders have continued to implement their father’s philosophy—identify a need and provide it,” he said.

Working with family has its ups and downs. “The great thing about a family business is we all have the same values and principles,” Bruce said. “Every family has different personalities. We’re a bunch of brothers who used to play tackle football in the front yard—we still play tackle football sometimes in the business. But we come to pretty good decisions in trying to go forward.”

“Everybody complains about their boss somewhere along the line. I complained about my boss from time to time,” said Richard. The main distinction of a family business he sees is “the business doesn’t stop when you go home. The brothers are always getting together. All the topics of discussion often migrate back to finding ways to satisfy customers’ needs.”

At the 50-year mark, the leaders of CECO see it poised for further growth. “I expect to see a tremendous growth in both the compressor engine parts side as well as the gas pipeline construction and maintenance business,” Richard said. “We have some innovative products for high-speed gas compression that are rapidly gaining acceptance in the midstream marketplace.” He called out the rMAX poppet valve in particular. “We’re selling them like hotcakes.” Another hopeful spot was a new polymer product used for packing and piston rings, which reduces the amount of lubricating oil consumed on high-speed compressors.

Opportunity in the compressor parts business is being driven by changes in the technology. “The big old integral gas engines run at 300 rpm, and the new high-speed engines run from 900 to 1,800 rpm, so they’re going very, very fast and wear out parts pretty rapidly,” Bruce explained. The new valves are more resistant to any liquids and dirt pumped out of shale gas fields.

In the gas pipeline market, sunny forecasts dominate the company’s expectations in both integrity services and construction. “There are tens of thousands of miles of hydrocarbon highway that need to be modified or installed in the next 10-15 years, and we’re going to get our fair share of that marketplace,” Richard said.

With a great deal of new pipe under construction and increasing requirements for inspection, the size of the pie is increasing. “Mother Nature’s on our side. The more pipe that’s in the ground, the more maintenance work has to be done,” he said. “We do that extremely well.”

Bruce agreed. “We’ve been doing a lot of work in some of the new fields up in Ohio and West Virginia, putting in gathering systems, so that’s quite exciting as this shale play expands so rapidly. We’re filling that need. We’re doing a lot of recoating large pipe, digging up old pipelines and blasting them, coating them and covering them back up.”
Pipeline flow reversals are another source of new business. “We’re involved in some of the stations, taking old compressors, refitting them and redoing the cylinders,” Bruce said. “If you take a whole station with 10 engines and you have to redo all 10 engines and change the flow, and some of them have been sitting idle are now coming back online… It might be $10 million of work at a station if they’re trying to get them all back in first-class shape.”

The natural gas business as a whole has much to look forward to. “I think the shale market is going to be good until probably the year 2030,” said Bruce. “It’s going to be great for the country. There are many new plants being built to take natural gas and natural gas liquids and make plastic and fertilizer, as well as other businesses using gas feedstocks that closed down in this country 15-20 years ago. The low natural gas prices have been really great for the refineries, where I think we will see a resurgence of growth.”

Are they worried about bust cycles following the current boom? “We try to operate with a little bit of caution and not over-invest in a lot of equipment or yellow iron,” Bruce said. “But the world is growing and China and India need more fuels. And the United States is now the leading producer.”

History offers them some reason for confidence. “There have been booms and busts throughout the history of the natural gas industry,” Richard acknowledged, but the company has proved capable of withstanding it. “We were in a variety of different markets and when one of them was down another was up. When natural gas prices fell, our services to fertilizer plants went up dramatically, because their feedstock became very cost-competitive. CECO’s customer base was very diversified, so we were pretty resilient. We’d go up in one market and down in another, but overall we’ve stayed pretty consistent throughout the years.”

For anyone trying to follow in the Hotzes’ footsteps, Bruce advises entrepreneurs to consider both the philosophical and the practical. “You have to be persistent, and don’t let the failures get you down. And there will be failures. I remember one time when we were first making channels and springs in the garage, a machine shop was stamping our channels and there was a little crack in the corners. We started inspecting them under a microscope and the channels all had cracks. We ended up having to throw out all of our inventory. We went to a research firm that gave us some recommendations; we changed some of our processes and started over again.”

“That was enough to make my father consider closing it down,” said Richard. “It was a fairly good-sized mess. We had to throw away a bunch of inventory and start afresh.”
That said, Bruce reminded startups not to lose sight of the basics. “Pay attention to cash and capital. You’ve got to have enough working capital to take care of all your equipment, your inventory and your accounts receivable.”

Asked whether a business like CECO could get started in the modern era, both brothers mention increased regulations and more scrutiny on young businesses, but ultimately there seems to be little question about the answer.
“Absolutely,” Bruce said.

As they mark the milestone anniversary, the Hotze family is less concerned with what’s changing, and more with what’s stayed the same.

“We follow the same principles as my dad had when he started the business,” Richard said. “Find the customer’s need and fill it.”

With 65 years’ experience and counting, Jim Hutton, PE, offers advice
Jim Hutton, who worked with Ernest Hotze at Dresser, joined CECO in 1986 shortly after retiring from his first 37-year career. After 28 years at CECO, Hutton is now among the oldest practicing professional engineers in Texas. Hutton has seen plenty of cycles during his 65 years in the energy business.

“We have seen ups and downs, which confirm our impression that in the durable goods industry you always have ups and downs. Sometimes it is feast or famine.” Hutton said that knowledge has prepared him to expect and prepare for cyclical prosperity. He gave his advice for any company looking to succeed:

A company’s success is achieved by:
• Hiring talented people who are ethical and have strong work habits.
• Treating them with respect and always keeping them involved and
enabling them to continuously improve.
• Being responsive to our customers, solving and correcting all field problems.
• Continuing to develop new and more efficient products.
• Having salespeople who know their products and who stay involved in an
order from start to finish.
• Being sincere in all we do.
• Demonstrating gratitude.
• Making our customers feel important.
• Making sure our stated values do not clash with our actions.
• Making sure managers meet a lot of customers on a regular basis.

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