Mocon, Inc.

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Mocon, Inc.

7500 Boone Avenue North
Minneapolis, Minnesota 55428
U.S.A.
Telephone: (763) 493-6370
Fax: (763) 493-6358
Web site: http://www.Mocon.com

Public Company
Incorporated: 1966 as Modern Controls, Inc.
Employees: 116
Sales: $25.1 million (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: MOCO
NAIC: 334519 Other Measuring and Controlling Device Manufacturing

Mocon, Inc., is a Minneapolis-based company that provides gas detection, analysis, and control products and services for a wide variety of industries, including chemical, electronics, food and beverage, life sciences, oil and gas, paints and coatings, pharmaceuticals, plastics, and vision care. Mocon's instruments measure the rate at which oxygen, carbon dioxide, water vapor, and other molecules leak through packaging, thereby helping determine the shelf life of a product. Moreover, Mocon is able to help clients calculate the cost-effective thickness of packaging material needed to achieve a certain shelf life. Other products include instruments to sort, weigh, and move pharmaceutical tablets and capsules. In addition to its Minnesota headquarters, the company maintains facilities in Lyons, Colorado, and Round Rock, Texas. About 50 international distributors sell the products, which can be found in more than 60 countries. Mocon is a public company listed on the NASDAQ.

1950s Origins

The man behind the founding of Mocon was Howard (Les) Demorest. Born in Tacoma, Washington, in 1921, Demorest served in the Navy during World War II and later moved to Minnesota to study physics at the University of Minnesota. After graduating, he stayed in the area to become involved in heart valve research at the Minneapolis Veterans Medical Center. He then went to work for General Mills, Inc., in Minneapolis, taking a position in the applied sciences division. In 1957 he began working on the infrared H2O technology that would be at the heart of his first permeation instrument. After five years of effort he had developed a viable device, which he called the Infra-Red Diffusometer.

The Infra-Red Diffusometer was the world's first dynamic instrument for measuring trace amounts of moisture permeating through barrier films, an important aspect in the development of packaging materials. The instrument worked by using a heated saturated salt solution to establish a condition of 90 percent relative humidity at 100 degrees Farenheit on one side of a film and a condition of 0 percent relative humidity at 100 degrees Farenheit on the other side using a stream of warm dry air. When the source of dry air was cut off, vapor from the moist side of the film was drawn to the dry side. The rate at which this occurred was sensed by an infrared detector and provided the water vapor transmission rate (WVTR), which became a baseline value that allowed films to be compared in terms of their ability to serve as a moisture barrier.

As Demorest's research was about to bear fruit in the early 1960s, General Mills sold its applied sciences division, prompting many of the unit scientists to strike out on their own and start companies. Demorest was one of them. Frugal by nature, he was able to start Demorest Instruments in the basement of his home in 1963. He spent another two years developing the Infra-Red Diffusometer before putting the device on the market in 1966. He also incorporated his business as Modern Controls, Inc., and made the first use of the name Mocon.

Demorest took Modern Controls public in 1968, making an initial offering of stock over the counter in Minneapolis. Soon the young company began developing a second product, the Ox-Tran 100, to measure the permeation of oxygen through flexible materials, an important consideration in the food packaging industry. Ox-Tran made use of a Hersch cell, an oxygen analyzer invented by Paul Hersch in the late 1950s. It employed a pair of electrodes immersed in an electrolytic fluid, such as potassium hydroxide. It was the hydroxide ions that was mea-sured moving from one side of a barrier film to the other, where a lead anode was located. The lead then reacted to form lead oxide producing an electric current that was proportional to the oxygen concentration of the sample gas. In this way the oxygen transfer rate of a barrier film could be determined. Ox-Tran became available for sale in 1971.

NASDAQ Listing in the Late 1970s

In 1975 Modern Controls introduced the first multi-cell permeation instruments: the Permatran-W, which measured WVTR, and the Ox-Tran 10/50, which measured oxygen transfer. Two years later the company introduced the first Pac Guard CO2 leak detector. Used in production line quality assurance, the device could quickly detect weak heat seals, large leaks, or even small pin holes in finished products. In 1979 Modern Controls began to offer its first high speed check weigher for the pharmaceutical industry, the Vericap 1200. In that year it also began to import a head space analyzer (the Mocon/Toray LC-700F), used to measure the amount of air space surrounding a product in a package. Also of note in the 1970s, the company moved its headquarters from Minneapolis to Elk River, Minnesota, in 1978 and a year later its stock gained a listing on the NASDAQ.

Modern Controls introduced the Ox-Tran Twin and Vericap 1800 products in 1981 and also opened a standard testing laboratory to offer permeation testing services. The company unveiled a carbon dioxide transmission measuring system, the Permatran C-IV, in 1982, which found a ready market with soft drink bottlers, who were replacing glass containers with plastic to eliminate the expense of recycling, cleaning, and sterilization. The one drawback with plastic, however, was how quickly carbon dioxide passed through its walls, leaving the soda "flat." Permatran C-IV helped bottlers to create plastic containers that could better contain carbonated beverages.

Modern Controls made a misstep in the early 1980s when it attempted to diversify its business mix by becoming involved in the manufacture of flat-panel computer displays. The bid failed and the company soon returned its focus to its profitable niche in package testing. In 1983 Modern Controls introduced the world's first computerized permeation instrument, the Ox-Tran 1000. A year later it brought out the AB-1 (AB standing for Automatic Balance). Originally developed for the pharmaceutical industry to weigh and sort tablets and capsules, the instrument found other application weighing individual pieces or parts. In 1985 an improved version, the AB-2, was introduced, as was Vericap 2110, an upgrade of the Vericap 1800. In that same year, Modern Controls began offering a new permeation instrument called Multi-Tran, which tested permeability of such gases as nitrogen, argon, helium, and hydrogen.

Modern Controls continued to fill out its product lines during the second half of the 1980s. After the 1986 acquisition of the Winzen Research film thickness division, it introduced the Profiler product line of film thickness gauges. In 1987 the first Ox-Tran models capable of determining precise relative humidity were put on the market. A year later the first precise WVTR test system, the Permatran-W, was also offered. Modern Control closed out the decade by adding improved Ox-Tran and Profiler models, as well as introducing a leak and burst tester, SKYE, and the PG-1 carbon dioxide head space analyzer. Also of note during the decade was the 1988 retirement of Les Demorest, who was replaced by Bill Mayer. The elder Demorest continued to serve on the board of directors until 1996. He died of emphysema in 1999 at the age of 78. He and Mayer had known each other from their days at General Mills.

As Modern Controls entered the 1990s, permeation products accounted for about 70 percent of revenues, while gauging products accounted for another 15 percent. Revenues in 1989 approached $10 million and net income topped $2.1 million. The company's pattern of increasing sales and income continued until 1992, when Modern Controls encountered a serious drop in international business, which by this point accounted for about 40 percent of revenues. Sales to Germany and Japan were cut in half, resulting in two straight years of declining revenues and income before Modern Controls was able to regain its momentum. Nevertheless, the company was able to continue to pay shareholders a dividend.

Modern Controls also continued to bring out new models of proven products in the early 1990s. In 1991 it introduced the Ox-Tran 2/20, the first modular unit in the line, and the SKYE 2000, an improved leak and burst tester. Further offerings in 1991 included Veritab, a high-speed device to check and weigh tablets for the pharmaceutical industry, and Aromatram, an instrument that determined the transmission rates of organic vapors and gases, including menthol, d-limonene, and propane. In 1992 Modern Controls introduced its first modular WVTR test system, the Permatran-W model 3/30. Also in 1992, the company brought out the HS-751, used to determine the amount of oxygen in the head space of a package.

After dipping as low as $10.4 million in 1993, sales began to creep up in 1994 and 1995, then began to accelerate in 1996 as exports began to rebound despite continued softness in orders from Japan and Germany. The company was well-positioned to enjoy strong growth during the second half of the 1990s. It had plenty of cash on hand to pay for acquisitions and was also excited about the potential of a new process the company was developing, Transorption, which allowed it to conduct permeation tests on substances other than film, such as layers of paint or circuit boards. Moreover, Modern Controls was able to use this new technology to take advantage of a corporate trend to outsource testing, providing it with customers in industries it had never served before. The Transorption technology was a major part of the company's new Consulting & Developmental Services unit.

Company Perspectives:

Mocon is a leading global provider of gas analysis systems designed to assess materials and processes.

Sales in 1996 increased to a record $14.8 million while net income topped $3 million for the first time in company history. Business continued to grow in 1997, as revenues improved 15 percent to more than $17 million and net income 21 percent to $3.7 million. To keep pace with demand, Modern Controls in 1997 expanded its sales force and made changes in its geo-graphic distribution to better serve the markets for its products.

Sales did not improve as expected in 1998, however. Revenues slipped to $15.1 million, although Modern Controls was able to produce net income of $2.3 million, a healthy 15 percent return. Long in the market for acquisitions the company was finally able put some of its cash to use by completing a pair of acquisitions. Modern Controls bought Austin, Texas-based Microanalytics Instrumentation Corporation in early 1998. At the close of the year it picked up Boston-area Lab Connections, Inc. The addition of these analytical instrument companies provided Modern Controls with technology in chromatography and mass spectrometry, and opened up new marketplaces for the company, such as chemical analysis, drug discovery, aroma/odor studies, and life sciences.

For years the company had been informally known as Mocon, and in May 1999 Modern Controls formally changed its name to Mocon Inc. Business also rebounded, as the company recorded sales of $17 million and net income of $2.9 million. Mocon's performance was also recognized by Forbes magazine, which ranked the company 177 on its annual list of 200 Best Small Companies in America.

Son of Founder Takes Charge in 2000s

In April 2000 Mayer retired and was replaced as CEO and chairman by the son of Les Demorest, Robert L. Demorest, who for the prior several years had served as Mocon's president. He took charge of a company that was in solid shape. In 2000 it recorded its 20th consecutive year of profitability, with sales improving to $17.3 million and net income to $3.3 million. It was also well-positioned for continued growth, as the consulting business continued to gain credibility in the marketplace, and the technology acquired through acquisition was being used to improve older products and spur renewed sales in them. In addition, Mocon improved the software interface on some of its instruments to increase speed and accuracy.

Mocon completed another acquisition in 2001, paying $3.6 million for Questar Baseline Industries Inc. of Lyons, Colorado, from Questar Corporation. Baseline offered gas analysis and monitoring instruments for use in the oil and gas exploration, industrial hygiene and safety, and other applications. The addition of Baseline technology bolstered the gas detection and chromatography business it had added in previous acquisitions. Despite difficult economic conditions in 2001, Mocon continued to prosper, increasing revenues to $19.3 million and net income to $3.4 million.

Mocon also made additions to its product lines in the early 2000s. It began selling the first Permatran-W WVTR instrument in 2002 and offered the Ox-Tran 702 in 2003. Mocon also acquired the Vaculok product line of vacuum-insulated panels in December 2003 but soon thought better of venturing too far afield from its core gas detection and measurement businesses and sold the Vaculok assets in July 2005. Another acquisition, the purchase of Lippke GmbH in Germany in January 2004, was more in keeping with Mocon's successful business model. For more than three decades Lippke had been Mocon's main European distributor. Its addition greatly enhanced Mocon's sales and service capabilities in Europe and could also be used to import new products to the U.S. market.

After hovering in the $19 million sales range for three years, Mocon enjoyed a surge in 2004 and for the first time topped the $25 million mark in sales, along with $2.4 million in net income. Moreover, its operations in Texas, Colorado, and Minnesota were all reorganized to operate more efficiently. Mocon continued to spend money on research and development to spur growth organically. New products included hand-held analyzers that found a receptive market in the food and beverage industry. In addition, Mocon still had sufficient money on hand to make strategic acquisitions. The company, a dominant player it its niche market, was clearly well placed to enjoy ongoing growth.

Principal Subsidiaries

Microanalytics Instrumentation Corporation; Lab Connections, Inc.; Baseline-Mocon, Inc.; Mocon FSC, Inc.; Paul Lippke Handels-GmbH Prozess-und Laborsysteme (Germany).

Principal Competitors

Agilent Technologies, Inc.; O.I. Corporation; PerkinElmer, Inc.

Key Dates:

1963:: Les Demorest founds Demorest Instruments.
1966:: Business is incorporated as Modern Controls, Inc.
1968:: Company stock is floated over the counter.
1971:: The Ox-Tran oxygen-permeation measuring device is introduced.
1979:: Modern Controls stock is listed on NASDAQ.
1982:: Permatran introduced.
1986:: Profiler product line is introduced.
1988:: Les Demorest retires.
1999:: Company changes its name to Mocon, Inc.
2000:: Founder's son, Robert L. Demorest, becomes president, CEO, and chairman.