Recovery Engineering, Inc.

9300 North 75th Avenue
Minneapolis, Minnesota 55428
U.S.A.
(612) 315-5500
Fax: (612) 315-5505
(800) 787-5463

Public Company
Incorporated: 1986
Employees: 345
Sales: $71.2 Million (1997)
Stock Exchanges: NASDAQ
Ticker Symbol: REIN
SICs: 3589 Service Industry Machinery; 2899 Chemical Preparations, Not Elsewhere Classified; 3569 General Industrial Machinery, Not Elsewhere Classified; 3400 Fabricated Metal Products

Recovery Engineering, Inc. (Recovery) is an industry leader in the design, manufacture, and marketing of small-scale drinking water treatment systems, which are sold under the PUR brand name. It is the fastest-growing company in the household water filter industry, claiming the number one brand of in-line water filters and the second leading brand of all household water filters sold in the United States. Recovery’s products include a line of self-monitoring water filters for household use, portable drinking water systems for outdoor enthusiasts, and the world’s most energy efficient line of desalinators for sailors and military personnel. PUR household water filters are offered in a variety of configurations, including pour-through pitchers and dispensers and in-line faucet-mounted, countertop, and under-sink filter systems. The company competes with brands such as Rubbermaid, Culligan, Mr. Coffee, and Honeywell. Its 1997 market share was greater than the combined market shares of all other competitors, excluding Brita, a division of Clorox. Recovery Engineering’s products are distributed through approximately 26,000 retail outlets in the United States and Canada, including Wal-Mart, Sears, Target, Costco, Kmart, Macy’s, and Walgreens. In 1994 Business Week named Recovery Engineering one of the 100 best small companies in America.

Channeling Resources in the 1980s

Brian Sullivan founded the Minneapolis-based company in 1986 after raising $400,000 from private investors. The 24-year-old Harvard economics graduate grew up in Baltimore learning business from his father, Richard Sullivan, who ran the Fortune 500 Easco Corporation, a $600-million-per-year company. In a Twin Cities Business Monthly interview with Laura Silver, Brian Sullivan said that his father “... provided an example of what you could do—that the only limitation really was yourself.” He further explained that following the example of his father and his father’s friends, Sullivan assumed that “he would one day run his own company too.” After graduating from Harvard, Brian Sullivan moved to London to work for Smith Barney, followed by a move back to the United States and a stint with a New York investment bank. While employed there, he was responsible for the successful turnaround of a manufacturing firm previously overwhelmed by debt. During this period he met Bill Wanner, a Minnesotan whose father had invented a prototype of a manual water desalinator. It was a small, hand-operated device that could make potable water from salt water. Earlier desalinating devices had been cumbersome motorized contraptions, and although a Canadian company had been working on a similar desalination invention, their technology had not yet reached the level of development that Wanner’s work had produced. Wanner recognized an opportunity and was looking for someone to develop his fathers’ invention—someone who could effectively organize a company to manufacture and market the devices. “When this [desalination] became known, [Paul Wanner] was looking at hiring some other, much older, individual who had a strong background and a lot of business experience,” reported investment banker Robert Fullerton, according to Silver. One of Sullivan’s professors from Harvard, who knew all the parties involved, intervened and recommended Sullivan over the other individual who had been considered. Sullivan seized upon the opportunity to run a company and hastened to form Recovery Engineering, Inc., recruiting a young Canadian engineer, Dick Hembree, to help him. Hembree became vice-president of engineering for the company. Sullivan and Hembree succeeded in buying Wanner’s ideas in exchange for a 40 percent stake in the firm. Offices and manufacturing facilities were established in a 30,000-square-foot Minneapolis plant.

A defining moment occurred for the company when in 1986 it won a $500 million contract with the U.S. Navy to develop a portable hand-pumped saltwater desalinator for use on its life rafts. It had taken two-and-a-half years to prepare the request for the proposal, followed by an eight-month bidding process. While working in Canada, Hembree had been experimenting with high-pressure seawater pumps and the processes involved in desalination. Having moved to Minneapolis in order to provide technical and design expertise for the company, and having developed a purification method comparable to Wanner’s, Hembree began work to produce a model to fit the Navy’s difficult specifications. Company officials and engineers recognized the enormous engineering and financial risks involved, especially following the explosions of several of their early models, but the modified designs proved successful. They delivered the Navy’s desalinator in 1988. Their model was capable of producing up to 35 gallons of water a day, and reduced the energy needed to purify seawater by 90 percent.

That eventual triumph allowed Sullivan to quickly raise another $1.5 million privately, in order to develop the product for the commercial marketplace. Sullivan intended to extend the application of its unique desalinators by making them available to military and civilian sailors, as well as to aviators. Early models had been impractical for lifeboat use, with enormous motorized units pumping at pressures of up to 1,000 pounds per square inch. Recovery’s version was a lightweight portable desalinating pump that could be hand-operated by a single person. The pumps operate using a process of reverse osmosis, by forcing water through a semipermeable membrane with a lever driven piston that blocks the salt but allows the liquid to pass through. Water is circulated behind the piston as well, balancing the pressure on the piston’s face, requiring little exertion to operate.

Fifteen Minutes of Fame in 1989

Recovery made People Magazine in 1989 and was covered by Charles Kuralt for CBS News when one of its products was responsible for saving the lives of two people sailing around the world. A Florida couple, William and Simone Butler, endured 66 days adrift in the Pacific Ocean, 1,200 miles off the Costa Rican mainland, following an attack on their 40-foot yacht by whales. The yacht sank and survival under such conditions for the couple, without potable water, would usually amount to a time frame of 10 to 12 days. Fortunately for the Butlers they were able to grab their Recovery Survivor-35, a manually operated seven-pound pump for converting saltwater to fresh water, along with a small amount of food and some fishing gear. They subsisted for more than two months on raw fish and the three liters of potable water that William Butler extracted from the Survivor each day. Sullivan contacted the family after hearing the CBS News report, congratulated them on surviving their ordeal, and told Silver in an interview that they [the company engineers] wanted to “look the desalinator over,” adding “We were looking for scientific data: what was its condition after usage.” The device was proven reliable, and Recovery’s reputation was given a substantial boost.

A second product line was introduced in 1990. Geared to campers, backpackers, international travelers, military personnel, and others accessing fresh though potentially contaminated water, the company offered portable water purifiers. Recovery developed its proprietary Tritek disinfection technology, sold under the PUR label as the Traveler, Explorer, and Hiker, which allowed for instant portable disinfection of drinking water, making it microbiologically safe for consumption. In 1993 Recovery raised $4 million through an initial public offering in preparation for expanding into the household filtration products market. Just prior to 1993 Recovery redefined its mission, deciding to focus on becoming “the dominant manufacturers of consumer drinking water products in the world,” Sullivan told Silver. In that year the U.S. Environmental Protection Agency had identified microbiological cysts, especially cryptosporidium, as contaminants likely to occur in 55 percent of the nation’s surface waters and in 17 percent of the nation’s municipal water supplies—as evidenced by the 1993 outbreak of cryptosporidia in Milwaukee, Wisconsin’s water supply, which caused 400,000 people to become ill with symptoms of diarrhea, vomiting, fever, and stomach cramps. Since that time sales of residential filtration and purification systems have soared. By 1993 Recovery was earning $5.3 million on sales of $10 million, having increased sales 86 percent over the previous year, and growing to $16.7 million in 1994 following the EPA reports on the hazards of potential cancer-causing chlorine byproducts in addition to high levels of lead, pesticides, and herbicides entering sources of drinking water. Consumers were becoming increasingly aware that even after municipal treatment, water treated with chlorine to kill waterborne microorganisms could be causing certain cancers and other health problems. The type of fluoride used in treating water was also disputed by some—sodium fluoride, with possible deleterious effects was being used in municipal supplies instead of calcium fluoride, which is the form natural to the human body for healthier teeth and bones. Outdated household plumbing could also contribute to lead-tainted tap water. The EPA reported that up to 25 percent of American household water supplies contained unsafe lead levels, making a huge potential market for purification and filtration systems.

Company Perspectives:

Our mission is to establish PUR as the leading brand of consumer “water filters in the world. To accomplish this mission, we will execute the following strategies: We will determine where consumers’ needs are unmet and create proprietary technology based on solutions to address these needs; we will offer consumers “good, better, best” models that provide the highest performance and highest quality of any products in the category at prices sufficient to generate above average gross margins; we will distribute products through relevant retail channels and offer derivative products to minimize channel conflict; we will build awareness of the PUR brand and drive sales through aggressive consumer advertising, promotions, and in-store merchandising; we plan to become the low cost manufacturer of products in our categories by designing products for manufacturing and investing aggressively in appropriate capital equipment; and we will initiate product development in other areas where related consumer needs are unmet.

Entering the Household Market in the 1990s

Surveying the industry, Sullivan determined that the bottled water business had boomed, while competing companies had tried and failed, for some reason, to provide filters for residential drinking water. In 1994, Recovery offered a faucet-mounted water filter. Consumers had indicated that they were concerned about whether filters prior to PUR’s filtration system really worked, and how to know for certain if they did not. Responding to these fears, Recovery added an automatic-safety-monitor technology to show the consumer exactly how much life the filter had remaining. The device worked by automatically shutting off the cartridge when used up, keeping maintenance to a minimum. The company then targeted customers in the United States and Europe and those in developing countries in order to address separate sets of concerns. Products to be sold in America and in Europe were developed to accommodate taste, odor, color, and such chemical contaminants as lead. In Mexico, Brazil, Indonesia, Korea, and other countries where infrastructure lags behind need, the water quality is often unsafe to drink unless boiled, at best. Consumers in those areas frequently have to buy water or wait long periods for water to be purified. Recovery utilized its Tritek technology to offer developing countries a safe in-house alternative. Increasingly, public concern over potentially dangerous contaminants in both private and municipal water supplies was addressed, making the option of home point-of-use water treatment desirable. In 1996 PUR introduced a countertop water filter system and its PUR under-sink water filter system in 1997, with filter cartridges having a useful life of four to six months. The under-sink systems measured approximately nine inches high and offered greater contaminant reduction and longer filter life than the faucet-mounted units. Both types of units employed carbon block technology. Also in 1996, Recovery began marketing its initial pour-through water pitcher which held approximately a half-gallon of water. Further developments resulted in the production of the PUR PLUS pitcher and PUR PLUS dispenser, the only gravity-fed water filters capable of filtering microorganisms as small as cryptosporidium and giardia lamblia. These products incorporated a three-stage filtration cartridge which used activated carbon, ion exchange resin, and a microfilter, and had a useful life of one to two months. In 1997 the company claimed a 28 percent market share, while Brita claimed 57 percent, and Recovery’s stock price shot from $6.25 to $31.50 per share, after the company spent $20 million on a marketing campaign to promote the PUR brand name. In February 1998 the company began airing a 30-minute infomercial featuring the PUR PLUS pitcher, designed to generate direct and retail sales by educating consumers about the advantages of its products over those of competitors.

Recovery established an international distribution agreement in 1996 with Groupe-SEB, one of the world’s leading suppliers of small household appliances. Groupe-SEB distributed products to over 80 countries under the brand names Rowenta and T-Fal, and was under agreement with Recovery to distribute PUR household water filters in all countries outside North America and Japan. The company also distributed to outdoor enthusiasts and international travelers through a network of outdoor and travel stores, and through mail-order catalogues. Sales to foreign military forces and others were made through approximately 30 distributors located in Europe, Asia, and the Middle East. Other avenues of distribution included advertisements in consumer and trade publications, participation in consumer and trade shows, a periodic newsletter, and promotions through retailers.

The company made large investments in product development, capital equipment, and advertising and promotional expenses. Sales increased 114 percent in 1997 from the previous years revenues, but the company reported a loss of $3.5 million, down from a loss of $12.5 million in 1996. Gross margins had been adversely affected by costs related to entering the household water filter market, including investments made in designing and implementing automated manufacturing and assembly processes, together with the cost of conducting manual assembly operations pending the installation of such automated processes. The enhanced manufacturing capabilities due to these expenditures were expected to be offset by future efficiencies in production.

A second public stock offering was completed in April 1998, netting approximately $33.2 million. Proceeds from the sale were intended to provide additional capital resources for covering the expansion of operations and the introduction of new products. The company launched an innovative pour-through water filter offering a higher level of protection against contaminants. The new products were certified to remove dangerous microorganisms previously available only from in-line systems relying on water pressure, and were affordably priced at less than $40. The pour-through segment accounted for 65 percent of all consumer water filters sold, or roughly five million units annually, according to company reports.

Recovery also introduced a new faucet-mounted water filter that incorporated further advancements in its carbon matrix filtration technology, which filter volatile organic compounds (VOCs) such as trihalomethanes, a byproduct of chlorine and organic matter. The EPA had determined that VOCs can lead to cancer, as well as cause damage to the liver, kidney, nervous, reproductive, or circulatory systems. Recovery expected that the increased sales of its units would result in very significant increased sales of replacement filters as the base of owners of PUR brand products continued to grow. The company also expected that as penetration increased and old systems were replaced, the market for systems could grow to eight to ten million units.

According to John D. Fisher of Minnesota Technology, Recovery reportedly employed 36 people in its research and development department—which, Hembree reported, “represents more research and development than all of our other competitors combined.” Reasonably assured of the company’s dominance in the industry, Hembree added that “It’s because we figured out what consumers really wanted and designed a good product to meet the demand.”