Complicated market offers challenges, but overall growth prospects are encouraging
By Robert McIlvaine and Betty Tessien, The McIlvaine Company
Over the four decades of its existence, the cleanroom industry has been good to some investors and a disaster for others. Today the industry is still highly splintered despite the participation of a number of large international companies.
One problem is that the market is defined as a condition rather than a product or an application. Further, this condition is defined by the quantity of particles in the air. Granted, special gloves, garments, filters, walls, monitors, etc., are required for these conditions, but in general, the demands in the ultraclean sector are small compared to the general demands. In other words, the markets for cleanroom wipes and gloves are small compared to other uses such as in manufacturing and hospitals.
Merging similar-but-different technologies
Some years ago, U.S. Filter rolled up several hundred water filtration and treatment companies into a multibillion-dollar enterprise. This effort was built on expansion of a group of products, not a condition. Combining the manufacture of gloves and filters makes very little sense; rather it makes more sense to expand the geography and product varieties of gloves or filters.
Over the last decade a number of cleanroom companies have been acquired by public companies. In general, these companies have already been manufacturing compatible products for non-cleanroom applications.
One concept has been to integrate cleanroom air treatment technology into HVAC systems. Fedders Corporation was a leading example of this strategy. Its acquisition of Envirco, a major supplier of fan filter units and other cleanroom hardware, was followed by international expansion, including development of a good base in China. But for one reason or another, the strategy does not seem to have worked.
In July, Fedders Corporation announced that it had engaged The Blackstone Group to explore the possible sale of the company’s global indoor air quality (IAQ) businesses. It explained that the IAQ businesses were not core to the company’s principal global, residential and commercial HVAC businesses.
Included in the possible sale are the company’s North American IAQ production facility located in North Carolina, two factories in Suzhou, China, and sales offices located in the U.S., the U.K., Germany, China, Malaysia and India.
Fedders has had some rocky times and is appealing the decision by the New York Stock Exchange to suspend trading, beginning November 8, in its common and preferred stock, due to falling below its minimum market capitalization listing standards. Fedders common stock is now trading under the symbol FJCC and Fedders preferred stock under the symbol FJCCP.
Fedders also attempted to marry cleanroom air treatment with air pollution control. It acquired Trion, a major manufacturer of two-stage electrostatic precipitators utilized for in-plant air treatment as well as treatment of exhausts from light manufacturing. The would-be acquirers of the IAQ businesses will have to address whether this is a sound strategy.
Combining cleanroom air treatment and air pollution control does have a number of strengths. For example, the technology development is complementary. Also, the production needs are similar, allowing one factory to produce all the products. The end-user categories overlap somewhat, but the air pollution control systems are sold primarily to commercial restaurants, automobile manufacturers and others not associated with cleanrooms.
The Daikin acquisition of OYL from Hong Leong Group in late 2006 is another example of merging cleanroom technology with air pollution control and HVAC. At the offering, the purchase price was estimated at approximately 239 billion yen. American Air Filter (AAF), which is part of the OYL group, supplies complete engineered cleanroom systems as well as individual HEPA filters and even media for the capture of molecular contaminants.
AAF is a very large supplier of standard air pollution control products and competes with Trion (Fedders), but it also offers a much broader range of air treatment products. It has a number of manufacturing facilities in Asia, but the home office is in Kentucky.
Purafil, Inc. is a leading manufacturer of gas-phase air filtration systems designed to eliminate corrosive, hazardous, odorous and toxic gases. Purafil maintains nearly 20,000 installations worldwide. It is very active in the supply of gas-phase systems for airborne molecular contamination (AMC) elimination in semiconductor plants. Kaydon Corporation acquired the company in 2005.
Purafil has also been successful in selling its media for reducing odors from wastewater treatment plants. The technical challenge is similar to cleanrooms since odors are detectable by the human nose at the very low concentration levels found in cleanrooms.
Kaydon is a diversified manufacturer with a $1.2 billion capitalization. It supplies hydraulic and diesel oil filtration systems to a wide range of end users. But it is also a supplier of a number of unrelated products such as bearings and seals.
Consequently, three major suppliers of cleanroom air treatment products will have changed ownership in the last 24 months.
One very successful example of marrying cleanroom technology with air pollution control is the Donaldson Company. It makes absolute filters used in disk drives, as well as a number of other filtration products. It is also the world’s largest supplier of small air pollution control units. It has expanded vertically through the Tetratec division, which makes membrane media used not only by Donaldson but other filtration companies as well.
Smaller companies with more cleanroom leverage
For the investor, large companies such as Daikin and Kaydon offer relatively little opportunity to translate cleanroom success into stock appreciation. The cleanroom part of the business is just too small a percentage. However, there are some smaller companies whose cleanroom success will impact the bottom line.
Flanders is an example of a public company with cleanroom leverage. It is a vertically integrated company with nine filter assembly plants, two metalworking facilities and a paper mill among its thirteen operating sites. The company’s air filtration products are used in high-technology industries, including semiconductors, ultrapure material handling, biotechnology, pharmaceutical production, synthetics manufacturing and the containment of airborne radioactive particulates in nuclear facilities.
Flanders has a market capitalization of $270 million. Its growth is partially due to an acquisition in the retail filtration area. In the third quarter, it posted earnings of $6.2 million, or 24 cents a share, on revenue of $66.4 million compared with earnings of $3.7 million, or 14 cents a share, on revenue of $63.4 million for the same period last year. It has been trading on the NASDAQ for the last 10 years.
Cleanroom consumables are a multibillion-dollar world market. The problem is that most of the participants are large companies for which cleanrooms are only a small portion of the total.
For example, Kimberly Clark is a major supplier of cleanroom gloves and wipes, but this activity is minuscule compared to the total revenues of this international integrated manufacturer.
ITW Texwipe has plants in the U.S., Taiwan, Mexico and the Philippines. It supplies a complete array of wipers, swabs, mops, face masks, cleaning solutions and stationery for use in cleanroom environments. In 2001, Texwipe was acquired by Illinois Tool Works (ITW), which designs and produces an array of highly engineered fasteners and components, equipment and consumable systems, and specialty products and equipment. Its 700 decentralized business units in 48 countries employ nearly 50,000 people. So even though ITW Texwipe is one of the largest suppliers of cleanroom consumables, the impact on the corporation is small.
Cintas Corporation is enjoying increased revenues and profits. In the most recent quarter ending in September 2006, it reported revenue of $914.2 million, an 11 percent increase from the previous year’s first quarter revenue of $823.5 million. Net income of $85 million increased 8.3 percent from $78.4 million last year. Cintas expects fiscal 2007 to be another record year, which would result in its 38th consecutive year of growth in sales and earnings.
Cintas provides highly specialized services to businesses of all types throughout North America. The company designs, manufactures and implements corporate identity uniform programs, and provides entrance mats, restroom supplies, promotional products, first aid and safety products, fire protection services and document management services for approximately 700,000 businesses.
Cintas stocks more than 10,000 cleanroom products from 600 manufacturers and suppliers and is a significant player in laundering, processing and distribution in the cleanroom industry. Nevertheless, the impact of this activity on total profits for the company is minor.
Growth in Asia spurs acquisitions
The rapid growth of cleanroom markets in Asia will very likely spur a new round of acquisitions. Some companies, such as Hollingsworth & Vose and Ahlstrom, have expanded through investing in manufacturing facilities in China. Investment in this emerging market will curtail the growth of large Chinese competitors who would otherwise eventually be expanding internationally.
The automobile industry is a prime example of failure to invest in growing markets. After World War II, GM, Ford and Chrysler determined it was not worth the investment to manufacture vehicles with steering wheels on the right side and thus allowed Japanese vehicle manufacturers to grow in an uncontested market.
The lesson today is that, if you don’t establish a presence for your products in China, you will be creating a vacuum that will result in eventual increased competition in your established markets. This is particularly true of the cleanroom industry. The rapid growth of the semiconductor, flat-panel display and other cleanroom industries in China is bound to influence the international rankings of cleanroom suppliers.
One of the routes for growth will be acquisition of Chinese companies. There are some recent examples of this strategy by international investment funds and private investors. These companies will then be acquisition candidates.
In general, investment in the cleanroom industry will continue to be complicated. Nevertheless, the good growth prospects and high margins will make it worthwhile for investors to pursue opportunities.
Robert McIlvaine is president and founder of The McIlvaine Company in Northfield, Illinois. The company first published Cleanrooms: World Markets in 1984 and has since continued to publish market and technical information for the cleanroom industry. He can be contacted at [email protected]
Betty Tessien is the cleanroom publications editor for The McIlvaine Company. She can be contacted at [email protected]