Applied Films Corporation
Applied Films Corporation
Incorporated: 1976 as Applied Films Laboratory Inc.
Sales: $112.1 million (2001)
Stock Exchanges: NASDAQ
Ticker Symbol: AFCO
NAIC: 334413 Semiconductor and Related Device Manufacturing
Applied Films Corporation is a leading provider of thin film deposition equipment to the Hat Panel Display (FPD) market, the architectural and automotive glass industry, and the web packaging industry. In addition, the company is pursuing the market for coatings on polyethylene terephthalate bottles. These deposition systems are used to deposit thin films that improve the material properties of the base substrate. The thin films offer electronic, reflective, filter, protective, and other properties that provide critical elements in the composition of commercial and industrial products. Applied Films also markets glass substrates to the FPD industry, which are used as a component in the production of black and white liquid crystal displays (LCD). Flat panel displays are used in a wide variety of consumer and industrial products, including cellular telephones, personal digital assistants, calculators, laptop computers, scientific instruments, televisions, desktop monitors, video games, gasoline pumps, automotive instruments, and other electronic devices. Demand for FPD’s is rapidly growing due primarily to market and technological forces concerning wireless and portable communication devices and the emergence of flat panel computer monitors and flat panel televisions. The company’s web-coated products are increasingly used for decorative packaging to enhance consumer appeal in various products. Web coaters apply a thin film to paper, plastic, or foil that also creates a protective barrier and prolongs product shelf-life. In addition, the company’s large glass systems serve the architectural, automotive, and solar glass markets, which are driven by the demand for energy conservation and alternative energy sources. Applied Films operates its Large Area Coatings division as a wholly owned subsidiary with manufacturing in Alzenau, Germany.
Applied Films Corporation was originally founded on March 2, 1976 as Applied Films Laboratory, Inc. to produce and provide thin-film coatings and coating systems based on planar magnetron sputtering technology and high-speed, inline deposition techniques. These enabling technologies were developed by two of the company’s cofounders, John Chapin and Richard Condon. Chapin invented the planar magnetron, which enabled producers of thin film coated glass and semiconductor chips to deposit sputtered thin film coatings at low cost. Condon innovated the in-line sputtering systems, which were widely adopted by the industry. With these early technological innovations, Chapin and Condon formed Applied Films Labs, Inc. in Colorado with another cofounder, Cecil Van Alsburg, who served as the company’s president and chief executive officer from 1976 to 1998. Chapin served as vice-president of research and Condon as vice-president of engineering.
1990s Merger with Donnelly
Since its inception, Applied Films pursued both thin films research and development and limited thin films production. A large portion of the company’s early business focused on coating monitor screens for IBM laptops. On May 1, 1992, the company merged with the Donnelly Coated Corporation, a wholly owned subsidiary of the Donnelly Coporation of Holland, Michigan, which primarily manufactured and sold fabricated, molded, and thin coated glass for the automotive and electronic industries. As a result of the merger, Donnelly purchased 50 percent of the Applied Film’s outstanding common stock, with the remaining 50 percent owned by the former shareholders of Applied Films. The new company, named Donnelly Applied Films Corporation, operated manufacturing facilities in both Boulder, Colorado, and Michigan until the end of 1993, when it consolidated all its manufacturing operations in Boulder.
In November 1997, the company announced its initial public offering of 1.9 million shares of common stock at the price of $8.50 per share. In connection with the offering, Donnelly sold its 50 percent interest in the company, comprising 1.4 million shares, and Applied Films issued the remaining 500,000 shares. In December 1997, an additional 176,439 shares were issued in connection with the completion of the initial offering. Applied Films planned to use the net proceeds from the offering to repay the debt incurred by investment in new production capacity and working capital. With the divestiture of the Donnelly shares, the company became known as Applied Films Corporation.
Late 1990s: New Ventures
In 1997, Applied Films began marketing thin film coating equipment to FPD manufacturers, netting $2.8 million in sales. In 1998, net sales of thin coating equipment rose significantly to $13.9 million, proving that the company had found a profitable niche. At the same time, the company began relocating its thin film production coaters from Boulder to its new Longmont, Colorado, facility to improve operating efficiencies and its competitive position. The company believed that its dual capability in thin film coatings and thin film equipment provided the foundation for significant future growth.
In May 1998, the board of directors of Applied Films elected Thomas T. Edman as president and CEO. The former president and CEO, Cecil Van Alsburg, continued with the company as chairman of the board. Edman previously joined the company in 1996, serving first as vice-president of market development and then as executive vice-president and chief operating officer. Before joining Applied Films, he had been the general manger of the High Performance Materials Division at Marubeni Specialty Chemicals, Inc., a large Japanese trading corporation. With a new CEO in place, the company intended to pursue continued growth of its coated glass business in three ways: (1) attempting to be a low- cost producer through the building of its own coating systems and achieving production efficiencies by means of technology; (2) leveraging and strengthening its key relationships with many of the world’s leading FPD customers; and (3) seeking strategic business partnerships to increase its customer base and manufacturing capacity.
In June 1998, Applied Films entered into a 50/50 joint venture in China with the Japanese firm Nippon Sheet Glass Company, Ltd., the world’s largest supplier of substrate glass for flat panel displays, to produce thin film coated glass for LCD displays. The benefit of this agreement for Applied Films lay in facilitating greater access to its key customer base in Southeast Asia, where 90 percent of the FPD finished goods manufacturing was located. The agreement stipulated that the joint venture would operate in Suzhou, China, where Nippon operated a plant that manufactured LCD substrate glass and provided thin coating services. The strategic partnership was expected to improve customer service through just-in-time delivery and to reduce labor and transportation costs. Under the agreement, Nippon would contribute its Suzhou coating line to the joint venture, while Applied Films would provide one of its thin coating systems. The financing of the joint venture totaled $6.4 million with each of the partners contributing 50 percent of the capital. Applied Films anticipated that the venture would give it a manufacturing foothold in Asia from which it could expand operations.
The new company, Suzhou NSG-AFC Thin Film Electronics Co. Ltd., represented a new step in forging stronger ties between the two companies. Previously, Applied Films had entered into a relationship with Nippon to provide much of the coated glass needs of Nippon’s customers. Applied Films was a major international supplier of thin film coated glass for low-information-content liquid crystal displays (TN LCDs), which could be found in watches, calculators, video games, toys, and other electronic products. The company also supplied thin film coated glass for higher information content black and white STN LCD’s, which are typically used in cellular telephones, pagers, and digital personal assistants. This three-year arrangement provided a basis for Applied Films to sell its coated-glass products with the help of Nippon’s marketing power. This initial arrangement was particularly important in assisting Applied Films to expand its capacity in the STN market, which had more challenging quality requirements.
Applied Films is a leading supplier of thin film coated glass and physical vapor deposition equipment to the information technology industry, particularly flat panel displays (FPD), roll coaters for use in the deposition of capacitor and barrier films, and large glass coaters for the production of thin films used in the architectural and automotive industries. Flat panel displays are found in a wide variety of consumer and industrial products, including cellular telephones, calculators, pagers, video games, office products, and laptop computers. FPDs have also been identified as a potential replacement for the CRT in televisions and computer monitors.
At the same time, the company began entering new markets with its coating equipment technology. Applied Films saw the emerging plasma display panel (PDP) industry, which represented one of the fastest growing segments of the FPD market, as particularly important. PDP’s were more sophisticated and technologically advanced in providing high information content. It appeared to provide the means to produce the large thin high-definition television screens that the industry had so long anticipated. Because the PDP industry anticipated that between four and eight billion dollars would be invested in PDP production facilities during the following five years, Applied Films aimed to become a major supplier of thin film coating equipment to this emerging market. Overall, Applied Films appeared to be well positioned in a high-growth market. Flat panel displays were abundant in numerous commercial products and were expanding with the emergence of flat panel, high-definition TV’s and computer terminals. In addition, the market for higher resolution FPD’s was expected to expand to such applications as on-board navigation devices for automobiles and commercial airplanes, instrumentation, medical electronics, personal digital assistants, and other products.
By the end of the 1998 fiscal year, the company’s net sales rose by 55.8 percent to a record of $53 million compared with $34 million in 1997. This sales and earnings growth stemmed largely from increased sales of thin film coated glass and continuing significant growth in sales of thin film coating equipment. Nevertheless, despite this impressive growth, the company anticipated slower growth for 1999 due to adverse economic conditions in Asia, where the majority of its customer base was located. Indeed, from 1997 through 1999, sales to international customers ranged between 78 and 85 percent of the company’s gross sales. The company’s primary markets were China (including Hong Kong), Korea, Japan, Taiwan, and Malaysia.
Restructuring for a New Millennium
In response to the Asian banking and currency crisis, Applied Films unveiled a restructuring plan in August 1998 to reduce costs and improve operating efficiencies stemming from lower sales in Asia. The company’s cost containment measures included closing one of its five thin film production lines, laying off 27 production workers, cutting back production of thin film coated glass to five days a week with no overtime, and reducing executive management pay by 10 percent. At the time of the restructuring, Applied Films had 275 employees. The company had begun to see the sales slowdown during its last quarter of 1998 and Wall Street analysts expected the company to fare worse in the coming months. By late January 1999, few companies had been hit harder by the Asian financial crisis than Applied Films. The company reported that its second quarter sales had plummeted by more than 50 percent from the previous year, recording a net loss for the quarter. The company had recorded sales of $6.2 million for the quarter compared to sales of $13.2 million for the second quarter of 1998. As a result of the continuing slowdown in sales, the company cut another 20 workers and reduced its production levels.
Nevertheless, by the fourth quarter sales began to improve due primarily to the company’s joint venture with Nippon in Suzhou, China. The joint venture instituted a 24-hour-a-day, seven-days-a week operation late in the fourth quarter of fiscal 1999, its first quarter of operation. In August 1999, the company forged another strategic partnership when it signed an exclusive agreement with Information Products Inc. (IP) to provide it with coated glass for the rapidly growing touch screen market. In return, the agreement stipulated that IP would sell its coated glass products exclusively through Applied Films’ distribution network in China and Hong Kong. The market for touch screens had been experiencing explosive growth, primarily driven by demand for Personal Digital Assistants. The global market for Personal Digital Assistants was estimated to be about $400 million and was expected to grow at an annual compounded rate of 21 percent. The strategic partnership with IP enabled Applied Films to enter the high-growth touch screen market, a new growth area for the company.
In December 1999, the company announced that it had executed its first multi-million dollar contract with a Taiwanese company to produce an ATX-700 Sputtering System, its latest development in equipment platforms for the FPD and PDP markets. The ATX-700 system represented a design innovation with its ease of automation, lower particulate levels, and lower cost of ownership to plasma display panel manufacturers.
On March 9, 2000, Applied Films offered 3,066,500 shares of common stock at $23.50 per share. The proceeds from the sale were anticipated to raise $55.1 million, which the company intended to use for working capital, including the production and sale of coating equipment, expansion of production capacity, debt reduction, financing of research and development, and funding of potential acquisitions. The issuing of new shares of stock signaled growing confidence by the company concerning its prospects for future growth. This confidence was bolstered by a significant increase in the company’s fiscal 2000 third quarter net income which rose by 464 percent to $1.6 million compared to a net loss of ($386,000) for the same period in fiscal 1999. The company attributed the strong earnings to increased demand for its thin film coated glass products driven by growth of applications in wireless communication devices.
- The company is incorporated in Colorado as Applied Films Lab, Inc.
- The company reincorporates in Michigan as Applied Films Corporation and merges with Donnelly Coated Corporation of Holland, Michigan, becoming Donnelly Applied Films Corporation.
- The company ceases operations in Holland, Michigan, consolidating all operations in Boulder, Colorado.
- The company reincorporates as a Colorado corporation.
- The company makes its initial public offering of 1.9 million shares of common stock.
- The company forms joint venture in China with Nippon Sheet Glass Co., Ltd.
- The company acquires the Large Area Coatings division of Unaxis Holding Ltd for $60 million in cash and 673,353 shares of Applied Films’ common stock.
In October 2000, Applied Films announced that it had entered into a definitive agreement to acquire Large Area Coating (LAC), a division of Unaxis Holding Ltd of Zurich, Switzerland. Applied Films, which purchased the division for $60 million in cash and 673,353 shares of its common stock, completed the acquisition in January 2001. The company planned to operate LAC, located in Alzenau, Germany, as a wholly owned subsidiary. LAC included the former Display Coatings division of Balzers Process Systems GmbH and the Web Coatings, Architectural, and Container Barrier Coatings groups of Leybold GmbH. Both Applied Films and LAC produced physical vapor deposition equipment for the flat panel display industry. In addition, LAC provided roll coaters for depositing capacitor and barrier films and large glass coaters for the production of thin films used in the architectural and automotive industries. These specialized coating films were designed for application on windows and windshields to help stabilize hot and cool temperatures in offices and automobiles. The acquisition brought Applied Films a staff of 110 technical staff, access to more than 200 patents, a large backlog of orders for equipment, and greater opportunities in the web coater, barrier coating, and glass coating equipment markets. Also of importance was LAC’s strength in the coating of color filters, which served to enhance Applied Film’s position in the plasma display market for flat-screen TV’s. LAC also offered coating technology equipment that put a protective film coating on such products as plastic soda and beer bottles and potato chip bags to lengthen their shelf life. The purchase of LAC helped Applied Films in building diversification in geography and products, more than doubling its market share in the display market to 45 percent.
As a result, the acquisition of LAC considerably altered the amount and nature of Applied Films’ revenues. The majority of revenues stemmed from the sale of thin film coating equipment to producers in the display, architectural glass, and packaging markets. The company sold its equipment to manufacturers of flat panel displays, which were used in the production of laptop and desktop monitors and to producers of plasma display panels, which were incorporated into hang on the wall televisions. The equipment sold to the architectural glass industry was used to produce large glass panels for the construction of commercial buildings, skyscrapers, and automobiles, and for the generation of solar energy utilizing sunlight. The company also sold equipment to the web-packing industry for the manufacture of rolled films, which comprised plastic or thin foil requiring a thin film layer application to enhance the protective barrier of the package in order to extend the shelf life of perishable foods. The marketing of equipment to the bottling industry that extended the shelf life for beverages in plastic bottles also substantially contributed to revenues.
Despite the stock market’s precipitous decline in 2001, which hit technology stocks particularly hard, the company’s net revenues for the year rose to $112.7 million, a 167 percent increase in revenue over the previous year. The revenue increase resulted from equipment sales stemming from the acquisition of LAC, renamed Applied Films Germany. The company projected that its long-term growth would be driven by its ability to provide thin film process technology and equipment for emerging technologies in the flat panel display and bottling industries. Until 1997, the company had focused primarily on the sale of thin film coated glass. Subsequently, Applied Films devoted substantial resources to the development and sale of equipment for thin film coating, which appeared to offer the most significant opportunities for growth. Although the acquisition of the Large Area Coating business provided additional expertise and diversified products, the company operated within a highly competitive industry. Most of Applied Films’ competitors had substantially greater financial, technical, marketing, and sales resources. Nevertheless, Applied Films had positioned itself well for future growth with a diversified range of products, an aggressive research and development program, and operations in Alzenau and Hanau, Germany; Brussels, Belgium; Hong Kong and Shanghai, China; Seoul, Korea; Tokyo and Osaka, Japan; and Taipai, Taiwan.
Applied Films Germany.
Ulvac Japan, Ltd; Anelva Ltd.; Samsung/Corning; Merck Display Technology; Wellite; General Vacuum; Von Ardenne; British Oxygen Coating Technologies Corporation; Tetra-Pak.
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—Bruce P. Montgomery