Description

Flanders Corp. is the largest domestic manufacturer of air filters. These products are used in commercial and residential heating, venting, and airconditioning (HVAC) applications as well as in "clean rooms" for a variety of industries including semiconductors, pharmaceuticals, and nuclear material processing. The Company has successfully consolidated a highly fragmented industry. In recent periods Flanders has initiated various plant consolidation programs which should enable the Company to generate sharply improved EPS. Flanders has an unusually strong client base including Wal-Mart and Home Depot, as well as Abbott Labs, Motorola, Intel, Merck, Upjohn and Westinghouse. Furthermore, the Company received a favorable rating from Consumer Reports.

In 1998 and 1999 Flanders earned (on a fully diluted basis) $0.24 and $0.21 per share, respectively. In 2000, the Company, which incurred a variety of non-recurring charges, earned $0.10 per share on a continuing operating basis. In the fourth quarter, Flanders adopted unusually conservative valuation reserves which included a sharp jump in both inventory and receivable allowances. These actions resulted in a technical default on certain loan covenants which should be shortly resolved.

The shares appear unusually attractive on several basis. First, in 2001 I expect the Company to generate revenues of about $215 million and earn at least $0.30 per share. Importantly, by the second half of the year, the EPS run rate should be comfortably north of $0.40 per share as the Company starts to benefit from a significant $6 million plant consolidation program which included a meaningful head count reduction. Book value equals about $3.85 per share following the non-recurring charges booked at year end. Secondly, insiders are major shareholders owning about 43% of the 26 million outstanding shares. Recently, the two key insiders exercised options on 2.3 million shares. Lastly, the Company has hired Paine Webber to explore strategic options, which certainly includes the outright sale of the Company. Comparable companies have been acquired at over 1x sales.

With estimated EPS of $0.30 in 2001 and about $0.50 per share in 2002 the shares on a purely fundamental basis appear very attractive. I think that a $5 valuation (which would equate to 10x '02 estimated EPS and a Price to Sales Ratio of about .6) is a readily achievable twelve month price objective. Attaining this level could be accelerated by the Company's acquisition, which, based upon insider ownership and recent insider buying, would appear to be an attractive exit strategy for key management.

Catalyst

The Company has hired Paine Webber to explore strategic opportunites to enhance shareholders' value.