Osmonics, Inc.

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Osmonics, Inc.

5951 Clearwater Drive
Minnetonka, Minnesota 55343-8995
U.S.A.
(613) 933-2277
Fax: (612) 933-6141
Web site: www.osmonics.com

Public Company
Incorporated: 1969
Employees: 1,017
Sales: $111.61 million (1995)
Stock Exchanges: New York
SICs: 3569 General Industrial Machinery, Not Elsewhere Classified; 3589 Service Industry Machinery, Not Elsewhere Classified; 3492 Fluid Power Valves & Hose Fittings

Osmonics, Inc. is helping to purify the world. Based in Minnetonka, Minnesota, Osmonics is the world’s largest vertically integrated supplier of reverse osmosis and ultrafiltration equipment, components, and controls, and the world’s second-largest maker of crossflow membrane elements, behind Dow FilmTec. Osmonics manufactures equipment and components used in water purification, fluids separation and handling, removing solids, and concentrating wastes, allowing water to be recycled or returned to the environment. This company pioneered the commercial use of crossflow membranes—and purification processes such as reverse osmosis, nanofiltration, and ultrafiltration—but has avoided the end-use market in favor of either directly supplying customers with complete filtration solutions or supplying the components and supplies for original equipment manufacturers (OEMs).

Osmonics operates manufacturing facilities in Texas, Colorado, Iowa, California, New York, Wisconsin, Arizona, and Paris, as well as its 300,000-square-foot plant in Minnetonka. The company also operates sales offices throughout the United States and in Switzerland, Singapore, Bangkok, and other countries, serving much of the world. Osmonics’ product lines fall into six categories: replaceable filters; crossflow membranes; pumps and fluid handling components; laboratory products; controls and instruments; and water treatment equipment. Osmonics’ products serve six primary markets, including the electronics industry, specifically in the manufacture and production of semiconductors and printed circuit boards. Industrial processing applications generate a large portion of Osmonics’ sales: the company’s equipment and components serve the automotive and finished metals markets; chemical processing, pharmaceutical, cosmetics, and bioengineering industries; photographic and printing processes; pulp and paper manufacturing; and the textile, inks, and dyes processing markets. In potable water markets, Osmonics provides solutions for drinking water, desalination, laundry and car wash facilities, aquariums, pools, and spas. Other applications of Osmonics products are in medical laboratories; petroleum, gas, and mining industries; and food, beverage, and dairy processing.

In 1995, after a decade of growth fueled by acquisition, Osmonics restructured the company and placed all of its subsidiaries under the Osmonics brand name. In that year the company posted revenues of nearly $112 million and net income of $11.2 million. The company, which continues to be led by founder D. Dean Spatz, has been consistently profitable since going public in 1971.

Founded as a Class Project in 1969

D. Dean Spatz, a native of Albuquerque, New Mexico, attended Dartmouth in the early 1960s as an undergraduate studying engineering. Spatz originally intended to continue his education at Dartmouth’s Tuck Thayer business school. As an undergraduate, however, Spatz was involved in researching reverse osmosis techniques, a then-revolutionary technology for purifying water and other fluids. Spatz was given a class assignment to find a way to supply drinkable water, leading him to study osmosis, nanofiltration, and ultrafiltration techniques as part of a government-funded research program. The program included a grant for Spatz of $200 per week, encouraging him to drop his business school plans.

After graduating, Spatz went to work for a company in Minneapolis that hoped to commercialize the reverse osmosis process. Under terms of his contract, the company was supposed to provide Spatz with money to start his own company. “In the first year, I realized they didn’t know how to run a business,” Spatz told Corporate Report Minnesota, “There were no controls, and at the end of the year they admitted they didn’t have the $75,000 they’d promised to stake in my own business.” Spatz next turned to connections at Dartmouth, finding an investor to put up the money he needed. In 1969 Spatz and Ralph E. Crump founded Osmonics in Spatz’s garage.

The founding of Osmonics, and its reverse osmosis technology, came at the right time. By the late 1960s, increasing awareness of the environment was fueling growing demands for environmental responsibility. Calls were made to clean up polluted waters and to develop processes that would safeguard the world’s water supply from further pollution. Reverse osmosis offered promising advantages over such traditional water purification techniques as charcoal filtration.

Osmosis is a natural process in which a fluid (or gas) passes through a porous membrane. Osmosis occurs randomly: fluids in high concentration on one side of a membrane will pass through to the side with lower concentration until an equilibrium on both sides has been reached. Reverse osmosis is a method for overcoming the naturally occurring osmosis process and its tendency to reach equilibrium. In reverse osmosis, pressure is applied on the fluid, or feed, to force it to pass through a membrane. The membrane contains openings large enough for the water to pass through, but larger solids in the fluid—for example, salt in salt water—become trapped by the membrane. The membranes, housed in disposable elements called sepralators, can be designed, through the use of electron microscopes and other equipment, to select which components of the fluid will be allowed to pass through the membrane. The resulting purified fluid, called the permeate, is then collected. Adapting reverse osmosis to practical and industrial applications also required a method for removing the solids, called the concentrate, so that the membrane could be reused. Crossflow membranes allowed a portion of the feed to be used for flushing the membrane.

Reverse osmosis and the related ultrafiltration techniques offered a superior method for purifying water and other fluids. Osmonics’ first step in developing its business was to design and build equipment based on reverse osmosis techniques with practical industrial applications. In 1969 the company began production of equipment for purifying car wash rinse, removing the harsh detergents from the water. This equipment marked one of the first commercial applications of reverse osmosis technology. By the end of the year, sales of its equipment allowed the company to leave Spatz’s Minneapolis garage and set up shop in a leased, 5,000-square-foot plant in St. Louis Park, Minnesota. The following year, Osmonics extended the reverse osmosis process to other applications. The company installed the first medical pure water system, for the kidney dialysis department of the Mayo Clinic, and developed the first laboratory arid electronics-grade reverse osmosis systems. Ultrapure water was especially necessary for the development of the microprocessor. In 1970 Osmonics also introduced the first spiral wound membrane sepralators, establishing an industry standard.

In the next year, Osmonics moved toward greater vertical integration by setting up its own facilities for manufacturing crossflow membranes. In order to finance the move, Osmonics went public, selling 100,000 shares for $5 per share. The company extended its technology into two new industrial applications: industrial waste oil reclamation and food processing. The following year the company moved to a new 15,000-square-foot leased space in Minnetonka. Through the 1970s, the company obtained several patents, including a basic patent on standard reverse osmosis/ultrafiltration systems. The company introduced its own OSMO sepralators, using membranes supplied by Eastman Kodak, and acquired TJ Engineering, Inc., based in California, which also used the Kodak membranes to manufacture sepralators. In 1973 the company began manufacturing its own SEPA membranes, and would soon manufacture all of the membranes used for its products.

Osmonics continued to introduce new reverse osmosis applications. Among the new applications of the company’s technology were a patented metal reclamation process; the first commercial whey fractionation process, as well as a method for separating milk proteins from whey for the cheese industry; zero-discharge systems for cleaning metal-finishing wastes and recycling the water used in that process; pretreatment systems for boiler feed; the first photography waste recovery system; and procedures for producing ultrapure water usable for injections by the pharmaceutical industry.

Throughout the 1970s, Osmonics’ revenues also grew steadily. In 1974 the company neared $1 million in sales, with net income of $81,000. In 1977 sales neared $2.5 million, with net income of nearly $300,000, and by 1980 the company’s sales topped $5.5 million, with net income of more than $600,000. The company’s production facilities were also growing, to 20,000 square feet in 1973 and to 40,000 square feet in 1978. In that year, the company also purchased a 44-acre plot in Minnetonka in order to build the company’s future headquarters. The company also made a secondary offering of shares in 1976, declared a two-for-one stock split in 1977, and declared a three-for-two stock split in 1980.

Company Perspectives:

Osmonics develops, manufactures, markets, and supports quality products used in high technology water purification, fluid handling, filtration, and separation applications by a broad range of industrial, commercial, and institutional customers. We will be recognized throughout the world as the best single source of these products, because we understand users’ needs, offer them integrated solutions, and provide expert service and support.

Restructuring for the 1980s

By the beginning of the 1980s, Osmonics had expanded into the 16 markets that would form the company’s core. The recession of the early 1980s, however, cut into the company’s growth. As purchases of capital equipment dried up, Osmonics’ sales faltered. Spatz was forced to scale back the company, from 100 to 80 employees. Spatz also determined to restructure the nature of Osmonics itself. “Even though it was great fun to be personally involved in projects and closing deals, I knew I had to put more effort into growing sales,” he told Corporate Report Minnesota. Spatz set out to restructure the company from one that relied entirely on sales of capital equipment. Instead, he led Osmonics toward achieving a 50 percent split between capital equipment sales and the more predictable sales of components and supplies. Osmonics also built a 100,000-square-foot facility, consolidating its research, engineering, manufacturing, and administrative operations. Then Spatz led the company on a course of acquisition that would boost Osmonics’ product offerings and the company’s revenues from $5.6 million in 1982 to nearly $47 million by 1991.

The company’s new direction helped to re-energize its sales. By 1983, the company’s revenues jumped to $8 million. Osmonics made the first of its acquisitions that year, acquiring Hytrex and that company’s disposable cartridge filter product lines in an exchange of stock from Hoechst Celanese Corporation. The following year, Osmonics acquired a company called Flotronics, which made coalescers and metallic and ceramic microfiltration filters, allowing Osmonics to expand its laboratory business. The company’s next acquisitions, of Aqua Media International Inc. and Aqua Media of Asia, Ltd, in 1985, brought the company into international sales, particularly in the rapidly developing economies of Asia. Osmonics broadened its line of pump products by acquiring American Pump Company and its air diaphragm pumps. The company also purchased a stake in Poretics Corporation, bringing in that company’s tracketch microfiltration membrane. The 1987 acquisition of Boston-based Vaponics, and its Bangkok sales office, helped Osmonics expand its distillation business in the medical, laboratory, and pharmaceutical markets.

Osmonics also established offices in Switzerland and Singapore to broaden its share of the global market. Rounding out the 1980s were two more acquisitions, of Orec, based in Phoenix, Arizona, and that company’s ozonation product line; and Mace Corp., based in Upland, California, from Michigan-based Humphrey Products Co., complementing the company’s line of Teflon pumps and flow control components. Amid these acquisitions, Osmonics continued pursuing technological advances internally, patenting its sepralator housing and cap, a flow control manifold, the Spiraflex crossflow sepralator, and the SEPA CF test cell.

Building the Osmonics Brand in the 1990s

In 1990 Osmonics announced its largest-ever contract, for $3 million with Boeing Corp. Osmonics continued its acquisition drive with the 1991 purchase of Eastman Kodak’s Fastek division, which produced rolled filters, membranes, and other filtration and purification products. The Fastek product lines, similar to Osmonics’ own lines, were sold primarily to Kodak, and under terms of the acquisition, Osmonics would continue to supply Kodak. By 1992 Osmonics’ sales broke the $50 million mark, and the company prepared a major acquisition. In 1993 Osmonics acquired Milwaukee-based Autotrol Corp. for $45.5 million in a stock-swap merger, helping to raise Osmonics’ 1993 sales to $89 million, with net income of $7.9 million.

Between 1994 and 1996, the company announced several new acquisitions, including Lakewood Instruments, based in Phoenix Arizona; Desalination Systems, Inc., of Vista, California, in a stock swap worth some $30 million; Western Filter Co., of Denver, Colorado, for approximately $7 million; the remaining 18 percent of Poretics, giving the company 100 percent control of that subsidiary; and, finally, Aquamatic, Inc., a $12 million maker of water treatment equipment specialty valves and controls based in Rockford, Illinois.

Osmonics’ program of acquiring developing companies, developing new technology, and expanding its capabilities into new markets had raised the company’s revenues to $112 million by 1995. In that year, the company moved to enhance its image by consolidating its subsidiaries under the Osmonics name—a move designed to enhance its recognition as a company that had grown from an exotic pioneer to a vertically integrated supplier of mainstream technology.