by Maureen Flanagan
For more than half a century, Numatics, Inc. has been a leader in the development and manufacture of pneumatic components for automated machinery used by a wide range of industries. The company first gained a worldwide reputation with its precision lapped spool and sleeve assembly, one of many innovative firsts developed by Numatics for the pneumatic power industry. The company now has the largest U.S. market share in its core product of 4-way pneumatic directional control valves and globally ranks sixth among manufacturers of pneumatic components.
Numatics has been an innovative, profitable company, with sales that have outpaced the fluid power industry index for more than a decade. The current uncertain economic climate led the company to look for ways to maintain and grow its leading market position. As a result, in a November 29, 2001 transaction, Numatics refinanced its senior debt with financing from American Capital Strategies, Ltd., (Nasdaq: ACAS), a publicly traded buyout and mezzanine fund with capital resources exceeding $1 billion.
"Numatics provides critical valve components to drive the ever increasing automation needs of machinery markets throughout the world," said John H. Welker, Numatics President and CEO. "American Capital's financing enables Numatics to maintain its solid financial grounding as it continues to expand and enhance its products and take advantage of growth opportunities."
Pneumatic power, which uses compressed air to provide the force required to move machines and their parts, is used in a wide range of industries from packaging applications, bottling plants, automotive assembly and parts operations to medical OEM equipment, petrochemical plants, printing presses, and machine tool service. Increasing levels of productivity and automation as well as the drive to reduce labor costs have spurred demand for fluid power, which includes both pneumatic and hydraulic.
The fluid power industry is vital to worldwide automation systems. In 2000, the industry had estimated shipments of $12.5 billion domestically and $40 billion worldwide. Pneumatic power accounts for 18% of the industry and has attained a strong competitive position in relation to hydraulic power. Pneumatic power, for example, is more appropriate for applications that require clean operations such as for medical components, food packaging and semiconductors. Integration of electronic controls into pneumatic systems greatly increases pneumatic system flexibility. And, since pneumatics components are almost always less expensive than hydraulic parts, manufacturers are increasingly turning to pneumatic systems to realize cost savings.
As a leader in its market, Numatics offers a complete line of pneumatic products. These include a wide range of pneumatic directional control (PDC) valves that control the direction, pressure and flow of the air. Valves are the most complex and critical component of a pneumatic system and represent almost 65% of the company's revenues. The company also makes actuators or motion control components that serve as the "arm" in an automated process by converting fluid to mechanical power. A third line are products that clean and regulate the air as it enters the pneumatic system, known as the air preparation group. One of the company's key strengths is its broad product portfolio - Numatics makes 90% of valve products available in the industry, 70% of actuator products and 85% of FRL products. This allows Numatics to configure subassemblies to meet any customer design on a wide variety of applications.
Founded in 1945 by William Carls, the company established its dominance in the market with the introduction of a "lapped spool and sleeve" PDC valve in the 1950s. This type of valve has inner ("spool") and outer ("sleeve") components of identical material and mass that expand and contract at the same rates. The components are sealed by a minute clearance between the two parts that provides an air bearing. This avoids metal-to-metal contact, allows frictionless movement and eliminates heat and wear as well as the need for lubrication, resulting in extremely long product life. Compared to many competitors' products, which are marketed to perform 30 million cycles, Numatics products typically perform up to 200 million cycles, and have been known to exceed one billion cycles. Although the patent on the lapped spool and sleeve product expired in 1973, the manufacturing process to achieve the required tolerances remains a closely guarded trade secret that competitors remain unable to duplicate.
Embracing a growing market, Numatics also develops the electronic components that control the valves. These components allow a computer to direct the airflow and monitor the production process.
The company's products are sold to 9,000 customers though 167 international direct sales representatives and a network of over 110 distributors. Numatics has established partnership agreements with manufacturers in Europe and cultivates relationships with large end-users and machinery manufacturers in North America to get its products specified on their machines. Unlike its competitors, the company gives its distributors exclusive distribution rights and hires sales people who are qualified to provide expert advice on incorporating fluid power components into automation machinery. The company maintains interactive relationships with distributors and offers intensive training programs.
Based in Highland, MI, the company employs 785 employees and maintains facilities at 24 locations in 11 countries throughout the world.
The growth of Numatics has been spurred by a top-flight management team. In 1990, the management led the buyout of the company when it was sold by the founder. Five years later, management bought out its equity partners to acquire a more complete ownership stake in the company.
"As lenders retreat during this unsettled economic time, ACAS is increasingly taking the senior debt position to enable companies like Numatics to accomplish their financing needs, " said Mark Schindel, American Capital principal. "We are pleased to support this excellent, well-managed company that keeps the wheels of industry turning."
In the November 29, 2001 refinancing, American Capital provided a package of $31 million in two senior term loans. American Capital invests senior and subordinated debt in middle-market companies in need of capital for growth, acquisitions, employee and management buyouts, liquidity and recapitalizations. Since 1997, ACAS has invested more than $880 million in 56 companies in a wide range of industries. Several investments have been in manufacturing companies that serve the power industry.
In 1999, the market for pneumatic directional control valves in the United States was $490 million. The sales for pneumatic systems - and fluid power in general -- closely follows capital spending trends. Though tracking the weakening economy in the short term, industry analysts predict that trends toward automation and the presence of fluid power products across the spectrum of industrial applications will result in a 3% to 4% growth rate over the next five years, putting the worldwide fluid power market at nearly $50 billion by 2005.
Numatics is well positioned to benefit from market growth. A major focus of the company's marketing strategy is to cross sell its expanding product offering. The ability to offer a complete system, particularly one that eliminates the need for lubricants, gives Numatics a definite competitive edge. It also enables the company to diversify its product line with increased sales of motion control products and FRLs. The company's deep and loyal network of distributors and broad spectrum of product applications are major assets in implementing this growth strategy.
Most importantly, pneumatic systems will play a vital role as automation continues to drive industry operations throughout the world. Furnishing the pneumatic valves and components that keep the wheels of progress turning, Numatics, Inc. looks toward an air-powered future.
