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Filter Feeders
Like its hometown, Meriden's Cuno has adapted and thrived by embracing technology
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Business New Haven
7/9/2001
By: Anne-Marie Brungard
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Cuno Inc. (NASDAQ: CUNO), the Meriden-based fluid-purification company, has evolved much in the same way that the Silver City itself has over the years. Meriden has long been renowned for its history of diverse manufacturing ventures, from silverware to electrical appliances. But as manufacturing is now heavily entwined with technology, Cuno has taken its manufacturing roots to the next level using high-end technology.
In 1912, Cuno (named after founder Charles Cuno) began manufacturing a variety of products, primarily for the automobile industry. Indeed, its first patent was for an automobile cigarette lighter. The company began developing new products for filtration, including engine and hydraulic metal filters. Filtration and separation became the company's primary focus in the early 1960s. Cuno was the fluid-purification business arm of Commercial Intertech until 1996, when Cuno was spun off, incorporated and became a publicly listed company.
Becoming a stand-alone company without the resources and deep pockets of a parent company is challenging enough, but Cuno also found itself having to fight off a hostile takeover, and battled to take its place among the world leaders in the industry. Market pressures have driven Cuno to evolve as a technology-based company.
Sophisticated consumers demand ever-purer drinking water. That, coupled with EPA regulations directed at water quality, and advances in health-care technology, are requiring precision high-end filtration applications.
Industry experts recognize Cuno as one of the leading designers, manufacturers and marketers of filtration products for the separation, clarification and purification of fluids and gasses. Forbes magazine listed Cuno as one of the 200 best small companies in America.
Cuno's products are used primarily in fluid processing (32 percent of fiscal-year 2000 sales), potable water markets, including consumer and residential drinking water (42 percent of sales) and health care (26 percent of sales). This multinational company operates eight manufacturing facilities in the U.S., Europe, Japan, Brazil and Australia, and has sales offices across the globe.
Year 2000 revenues were in the $243 million range, representing a ten-percent increase over the previous year. Analysts' estimates for fiscal 2001 project a seven-percent growth in revenues. Earnings per share for the year were $1.21, up 15 percent compared to $1.05 for the prior year, representing a 11.353-percent profit on pretax earnings.
Cuno reported record second-quarter results this year including worldwide sales of $60.2 million, up two percent from $58.99 million in 2000, while local currency sales growth was seven percent. Net income for the second quarter swelled to $4.5 million from the $3.9 million reported in 2000. Fully diluted earnings for the period were 27 cents per share, up 17 percent over the 23 cents reported for the prior year. (Foreign currency translation effects decreased sales by $3 million.)
New product sales were $11.2 million, representing 19 percent of total sales volume. Earnings before interest, taxes, depreciation and amortization (EBITDA) were $9.2 million, during a time when the company made two small acquisitions in France and Australia.
Looking Around
Mark G. Kachur, Cuno's chairman, president and CEO, was president and chief operating officer of Cuno as well as senior vice president of Commercial Intertech at the time of the spin-off. Kachur also spent 20 years in senior management at Pall, a leading competitor. Kachur's strong industry and technology experience have helped to focus and redirect the company.
A self-proclaimed "band leader," Kachur believes in hiring the right people and getting out of the way. "We [Cuno] have gone from no recognition to a world leader in our peer group," says Kachur, "I spend my time positioning the company [and] on new product development."
Kachur credits much of the company's success over the last few years to an experienced and capable management team. "We're all aligned to the same goals, and our compensation is tied to those goals," he says.
Kachur is an advocate for developing a knowledge-based workforce, providing opportunities for employees to develop personal and professional skills. Cuno has taken advantage of state-sponsored training programs, including on-site English as a Second Language (ESL) classes, speaking skills, and statistical quality control. While the competition is scrambling to hold the bottom line and planning cuts in key positions, Cuno is moving ahead with staff training and hiring.
The worldwide market for air and liquid filtration is estimated to be in excess of $24 billion annually. Company executives describe Cuno's market mix: potable water, a $2.5 billion market, is growing at eight to ten percent annually. The fluid filtration market is about $1.3 billion, and currently growing in the range of three to four percent a year. The health-care market is about $1.2 billion, growing at about seven to eight percent per year.
The residential/drinking water (potable) market remains a stable growth avenue for Cuno. Culligan is a strong competitor in this area, a sister brand under the Vivendi umbrella, along with U.S. Filter Corp. Says Dermid Eagan, a Culligan spokesperson, "We strive on an ongoing basis to ensure world-quality product quality, [with] a full range of water treatment products and excellent post-purchase service." Culligan is counting on customers purchasing its products based on overall value. Cuno seeks to create value and capitalize on customers' repeat purchases.
Learning from earlier market-mix corrections, Cuno developed a strategy to position the company with less reliance on the fluid-processing market. Six years ago this more volatile market segment accounted for approximately 50 percent of sales; it now accounts for about 32 percent of sales. (Potable water accounts for 42 percent and health-care sales, 26 percent). Today Cuno's more balanced approach adjusts for slower growth capacity and fluctuations in the market, allowing greater focus to be devoted to higher-yielding industry segments.
Significant headway is being made in the health-care field, especially the life sciences. "The outlook is extremely bright," says Kachur. "Several new Cuno products were recently launched into the [life-science] market and complement new drugs under development which already specified Cuno's products." A double-digit growth rate is projected for this year and next.
Kachur's strategy is to penetrate emerging markets and seize strong market share (30 to 40 percent) in niche markets. Spending in the life sciences and biotechnology industries has accelerated with advancements in these emerging markets.
Centralized positioning certainly has not hampered Cuno's ability to access the life science and biotechnology industries. "Especially in Connecticut there are several important start-up [companies] that will become big players [in the future]," says Kachur. Forging partnerships with these companies is a key goal in order to work closely with those doing the vital investigation and development. These partnerships allow Cuno to assist in developing solution-oriented products that are proprietary in nature and then marketing them selectively to companies with similar needs.
This certainly speaks to the filtration/separation industry's unique "enabling technology," explains Richard C. Eastman, managing director for research of Robert W. Baird & Co. Inc. The technology "enables other industries to manufacture increasingly higher-quality products and services." Cuno capitalizes on this theme by getting into the mix early, being available from the beginning with front-line solutions and then maintaining the relationship for long-term development opportunities. Human genome research and development offers an opportunity for additional growth.
But current successes aside, there are some very real challenges that present themselves for Cuno. According to Eastman, Cuno shares some challenges with the filtration industry in general over the next year or so, including "currency translation weakness [that] curtails results." Exposure in the European and Asian markets is adversely affected by the strong U.S. dollar, and in particular the weak Euro. In addition, a weak U.S. economy can wreak havoc on the bottom line.
Over the last 12-months the general industrial economy has slowed significantly, but Cuno "management has done a nice job of managing the bottom line," says Eastman.
Facing the worst U.S. manufacturing economic environment of the last decade, Cuno CFO Frederick C. Flynn has both eyes on the bottom line. "We are rigorous in cost-containment and management strategies," he says. In facing off against Goliath-sized competition, Flynn says, "We have to be nimble and opportunistic, remaining focused on where we apply the technology. We have to work harder to find balancing mechanisms to sustain earnings and growth," siting travel and entertainment spending as one category that is regularly reviewed.
Looking Ahead
Cuno's strategic plan includes a strong focus on organic growth. Heavy investments have been made in research and development. "Competing with top companies that are almost four times your size is a considerable challenge," says CFO Flynn.
Many competitors have focused on acquisitions as a key growth channel. But there has been considerable trouble integrating acquired companies into the big picture with the bottom line ultimately suffering over the last year. Top runners include Cuno competitors Millipore and Pall with 58.5 percent and 53.6 of their business, respectively, conducted in the international marketplace.
Flynn acknowledges that Cuno's focus on new product development and marketing is a different approach from the mainstream - but one that is working. Cuno has invested approximately six percent of sales into R&D, with its major competitors investing just between three and four percent. Although the larger companies are investing more absolute dollars, the turnaround in number of new products to market is a considerable achievement for Cuno.
Last month a large Cuno competitor, ESCO Technologies Inc., acquired BEA Filtri S.p.A., an Italian supplier of filtration products to the pharmaceutical, health-care and beverage markets, with expectations of broadening ESCO's micro-filtration market share in Europe.
Cuno too has made a substantial investment in the European market and is expected to continue this effort into 2002. Currently harvesting 13 percent of annual revenues from Europe (as opposed to 55 percent from the U.S., six percent from Latin America and 26 percent from Asia), Cuno's enhanced investment on the Continent has "a very large upside," says Kachur. The impact of the ESCO merger is not yet known, but will depend "on their ability to fully integrate the new company," notes Flynn. Cuno completes one or two small strategic acquisitions a year.
Foreign markets as a whole reflect approximately 45 percent of Cuno revenues. The continued need for filtration is global and industry experts estimate that there will be continued growth particularly in the Pacific Rim and Latin America. Kachur speculates that the international market could begin to outpace U.S sales within three to four years.
Kachur outlines the future outlook for each of Cuno's three principal market areas:
- Residential water - "There is an increased concern about and greater demand for quality drinking water. Thus the products developed are of increased value to the customer. For example, the life of a filter for the competition is one month; with our company it's three months. There is less waste, less disposal, creating a huge market with growth potential. The customers keep returning to purchase replacement filters," Kachur says, creating a continuing market need.
- Health care - "Current involvement with pharmaceutical, biopharmaceutical, diagnostics applications and involvement with filtration and separation applications related to the human genome project creates significant growth opportunities," Kachur explains. "There is a greater need for drugs developed through biopharmaceutical processes, and ultimately positioning in the early stages of development of drugs that ultimately could become the miracle drugs of the future."
- Fluid processing - "North America is in a state of consolidation, so the focus has shifted to foreign markets, particularly in the emerging nations," notes Kachur. "There is great growth potential around the world. Demand for high-end filtration applications will grow as global industrial expansion occurs." Worldwide population growth and increasing environmental awareness (and imposed standards) are an additional factor here.
Finally, Cuno's investors appear to be satisfied with the company's results, with 70 percent of available shares in the hands of corporations. Despite a challenging market environment, Cuno on the whole has met expectations.
"Fluid filtration is expected to continue growing through the discovery of new applications, the implementation of new standards and the emergence of new technologies," says analyst Eastman. If Kachur were to give his wish list for the future, it is pretty clear that it would include a stabilized U.S. economy. That, and"Lower taxes would always help, too."
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