State of the Industry: Moving Forward

Ronald L. King

April 1, 2013

Would you describe 2012 as a year that you are glad is in the
rear view mirror, a ho-hum year, or a year that exceeded your expectations? Is
2013 looking better, are you expecting more of the same, or are you worried
about the industry recovery slowing down? As you would expect, the answers vary
greatly by geographical area and the person you ask.

While the mechanical insulation
industry, and the economy as a whole, is rebounding, the challenges created by
the recent recession continue to impact the industry. Recovery is slow,
stretched out, and not uniform across market segments, the country, by region,
or even by or within a state. The good news is, the industry is slowly
recovering and the signs are there, although a bit weak, for continued moderate
growth. The industry is moving forward.


The gridlock on Capitol Hill over the past several
years has not helped, and may have hindered our nation’s recovery efforts. With
the general election and a portion of the fiscal cliff type issues behind us,
one can only hope that confidence in the economy will gain momentum and
bipartisan efforts will spur economic growth. However, realistically, there are
numerous difficult issues confronting the 113th Congress and the parties’
positions on many of these are vastly different. Those differences, and the
recent history of partisanship, will not help with the uncertainties many
businesses have in our economy. With the recent election, we again heard about
dissatisfaction with Congress and with politics in general. That message does
not appear likely to change anytime soon. Depending on the current Congress’
performance, officials hoping for election in 2014 could feel the impact of
that dissatisfaction. Clearly, meaningful and timely compromise is essential.

Thinking about the state of our industry, while we cannot ignore
politics and the economy, we should focus on what we can directly influence and
adapt to the economic trends in our market. There are reasons for cautious
optimism. Fundamentals are in place to deliver a slow, steady recovery for the
general economy and the mechanical insulation industry. Conditions are,
however, slippery; and in today’s environment, any event could affect the rate
and method of recovery.

Other Industry Factors

Analyzing the
industry across the board over the last year resembled
looking into a crystal ball while riding a
market events did not present a clear industry picture. Consider the following:

  • A small number of relatively large
    projects in a given market area could indicate the market is robust, with no
    end in sight. However, further examination indicates that unless other project
    backlog increases, that area could and probably will be looking at a
    substantially different picture in the foreseeable future. This observation is
    not necessarily new, but the backlog cliff potentially is deeper.

  • The depth and breadth, volume, and duration of contractor backlog varies
    greatly. While it may be better than in 2009–2010, it is not close to the
    levels experienced in 2005–2008. In addition, the profit projection on that
    backlog is weaker than in the past.

  • Lower profit expectations are a direct result of increased competition
    in the number of bidders and normal securement pressures created by a
    recessionary environment. Not only are contractors looking at nontraditional
    markets, they are looking outside their normal geographical operating areas.

  • Generally, margins throughout all channels appear to be down 1 to 2
    percent or greater.

  • Operational cost reductions have been deep to offset the margin and unit
    sales reductions. Time will tell if those reductions will have a lingering
    impact on a company’s ability to maintain and grow market share in a recovering

  • End of calendar year motivations to reduce inventory and/or achieve
    purchasing incentives can provide a false picture for the fourth and first
    quarters, potentially even carrying over to the beginning of the second

  • Attempts to obtain price increases throughout the channels over the last
    18 months have been extremely difficult. Renewed and committed efforts are
    expected to continue in 2013; however, price recovery is not expected to get

  • With the economy showing signs of slow but steady recovery, projects put
    on hold in 2011 and 2012 could begin in early 2013. The impact of those
    projects on the mechanical insulation industry may not be felt until late 2013
    or early-mid 2014.

  • The industrial market has been soft over the last year, while the
    commercial market continues to show signs of a slow recovery.

  • Industry consolidation is alive and well, and expected to continue as
    the economy and industry recover. The distribution/fabrication segment has been
    the most active, as private equity investment and growth strategies have become
    an integral component of the industry. Time will reveal the success and
    sustainability of those strategies. The acquisition process is exciting, but
    the company culture and personnel integration process is where challenges
    appear-and where most of the industry chatter occurs.

Put all of the above factors
together and it appears the industry slowdown has hit bottom; and, while some
areas are not yet experiencing growth, the market appears to have stabilized. A
slow, moderate growth is forecast for 2013 and 2014. It is time to look ahead.

What are the
opportunities and challenges moving forward?

Each company has its unique profile of challenges
and opportunities. There are, however, a few overreaching industry challenges
that may or may not impact an individual company but are critical to the
industry as a whole.

Knowledgeable Employees

Over the last decade, and especially the last 5
years, the industry has lost a great wealth of experienced and knowledgeable
people. Whether the loss was due to attrition, down or right sizing,
consolidation, reorganization, the economy, etc. the loss is real and

The loss and the challenges will primarily impact two areas.

1. Management and Sales

personnel who not only understand their respective company’s strategy,
products, and markets but also the industry are vital. It may sound like a
cliché, but there is big difference between knowing your local market,
products, and customer base versus truly having an appreciation of the industry
as a whole, regionally and nationally. It is like understanding your role but
not how it impacts the bigger picture.

The solution is relatively easy but requires management’s commitment and
investment. Most company management understands the value to invest in people
in the form of continuing educational programs and networking with peers.
Unfortunately, in a down economy, the training and education budget is often
the first area to be cut and the last to be reinstated. Training, education,
and outreach initiatives may not yield immediate returns, but cutting their
budgets is somewhat short-sighted thinking if you are in the business for the
long haul. It is the age-old struggle between short-term earning demands and long-term
earning potential. There is a happy medium between the two, but too often
short-term demands rule.

Find that middle ground. Implement a continuing education program for
all levels in your company. Your program(s) should be inclusive of internal and
external training. Take advantage of industry in-person and electronic training
programs. Allow your team to obtain multiple views on the same subject; obtain
refreshers; and learn about new approaches, technologies, and resources that
are truly available at their fingertips.

Encourage your employees to participate in local, regional, and
national industry trade association meetings. Meeting industry peers,
suppliers, and even the competition is called “networking” and is of tremendous
value. Do not fear it—embrace it. Well-rounded knowledge and relationship
building in all industry segments is education at the highest real world level.
Unfortunately, not everyone can participate in all meetings. Not taking
advantage of the networking opportunities for your current and future
management team, though, is a waste of available and valuable resources, and
potentially restraining the capabilities of your key players.

The industry’s loss of
experienced and knowledgeable people is real, and it can only get worse over
time without a renewed and meaningful commitment to employee training,
education, and outreach programs.

2. Experienced and Talented Craft Personnel

Experienced, skilled people left the industry in
the past few years because of the economy and lack of work. Many believe this
is the major consequence of the recent recession and that, ultimately, a labor
shortage of skilled and experienced craft personnel will occur in the next few
years. Will a prolonged recovery attract them back?

This is a real-world problem that requires action and investment—sooner
than later. Those companies that invest now will differentiate themselves and
potentially have a competitive advantage going forward. As the saying goes,
anyone can obtain work, but profitable execution, schedule compliance, and
customer satisfaction is not a given—it must be earned. That is difficult, if
not impossible, without an experienced and quality workforce, which is not
something that is created overnight. Attracting, training, and retaining a quality
workforce should be of the highest priority for all contractors, regardless of
labor affiliation. Putting off addressing this topic could produce barriers
that may be difficult and costly to overcome.

Again, management struggles
between short-term cost and earnings versus long-term growth and potential
earnings. Without a doubt, it is a difficult topic; and at the forefront of
that discussion is the forecasting of “potential” future business: Will it be
there? If so, when? To what degree can you influence the potential? Will you
have time to obtain quality craft personnel; and, if so, at what cost? Will
that business be competitively attractive? How much business will be available?
These are basic questions all contractors—large or small—face every day. Some
would argue that small contractors have the advantage, for they have been able
retain their workforce where medium- to large-size contractors have not. Others
may agree with that observation but point out the problem of turnover for small
contractors over the last several years, and that the economy could make it
more difficult for them to rebuild.

An experienced and quality
workforce is not created overnight. It is strongly suggested that contractors
examine their workforce availability versus their future demand expectations.
If a potential shortage is a concern, working now to attract, train, and retain
craft personnel may be a wise investment that could yield a substantial return.

Mechanical Insulation Is a Prescriptive Energy-Efficiency
Solution Competing in a Holistic Environment

The need for holistic energy benchmarking and
measurement is being discussed in many circles, including code adoption,
building modeling, high-performance buildings (new and existing),
energy-efficiency tax incentives, and energy standards, just to name a few.
While holistic measurement is probably the most accurate means to monitor
energy use in buildings, there are problematic areas in designing new buildings
and in existing buildings, such as existing product minimum standards, current
codes, information disclosure, modeling assumptions versus real-world
occurrences, etc. This is not an easy discussion, but our industry would be
remiss in not appreciating the forces at work to create and implement holistic
designs and monitoring benchmarks.

Mechanical insulation in any
performance measurement arena is a proven energy-efficiency initiative that
delivers a substantial return. We can calculate the level of energy saved with
software, practices, etc., but how do facility owners or managers measure and
monitor actual results from a holistic perspective? If we know the building’s
total energy usage, we can—by knowing the scope of insulation and use
conditions—determine the savings being contributed by mechanical insulation.
The same would be true for determining the value of replacing missing or
damaged insulation, or upgrading proposed or existing systems. The bottom line
from a holistic perspective is that the success of mechanical insulation is
dependent upon the measurements of the whole building, which are dependent on
many variables. That reality is no different for lighting, windows, air
sealing, high-efficiency equipment, etc., so why is mechanical insulation not
given the same high-profile consideration?

Many of those other measures have, for a number of years, been investing
the resources to determine the impact they have holistically and how that can
be measured/monitored. They have aligned with other industry groups to promote
controls and measurements processes, and invested significant industry research
and marketing dollars within all channels. This is the world in which
mechanical insulation competes daily. Our industry is in a race, and we are
running behind. Acceleration is needed before we are left further behind.

Not considering the value
prescriptive measures like mechanical insulation bring to the table in the
holistic movement could result in significant energy loss as well the loss of
other benefits that affect a building’s performance. The industry needs to
address this challenge/opportunity sooner rather than later to ensure the full
value of mechanical insulation is understood and implemented in all holistic
energy measurement initiatives, from building modeling to code development, implementation,
and enforcement; benchmarking for high-performance buildings; maintenance and
retrofitting, etc. The industry is competing in a different environment than it
has before.

Interestingly, the entire
discussion about holistic initiatives has focused upon the commercial or
building sector. Given the energy savings potential in the
industrial-manufacturing sector, you would think a similar movement would be
afoot. Something to think about?

The Value of Mechanical Insulation for
Conservation of Energy and Water-the Energy and Water Nexus-Requires Attention
and Study

As the National
Institute of Building Sciences has noted, the value of water has never been
considered in making the business case for additional pipe insulation on
domestic hot water piping, thickness, or scope of work. While energy efficiency
is considered, the overriding driver typically is short-term economics,
dependent on frequency, duration, and pattern of usage.

History has proven thermal
insulation for mechanical systems is a simple and cost-effective technology for
reducing heat losses and gains in building systems. As energy codes and
regulations, prescriptive and holistic, become more stringent and building
owners, operators, and tenants strive for higher performing and more sustainable
buildings, designers and owners should focus on how and where to use more—not

Initial studies and analysis
have demonstrated that pipe insulation can contribute toward conserving scarce
water resources, as well as energy, in domestic hot water delivery systems. The
expected useful life of buildings can be 50 years or more. It is significantly
easier and more cost effective to plan for and install proper mechanical
insulation systems at the time of construction than to retrofit or upgrade the
insulation systems later. Likewise, when facilities are being renovated or
repaired, the opportunity to upgrade mechanical insulation systems should not
be overlooked. Efforts to “trade-off” mechanical insulation levels to minimize
initial costs are counterproductive and are better focused on examining the
long-term performance of building systems.

With the anticipated shortage
and escalation of the cost of energy and water, combined with the long service
life of domestic hot water piping systems and the relatively minor incremental
cost of insulation, the potential impact of increased insulation can be
substantial and immediate.

Our industry needs to partner
with other interested parties to confirm the initial studies and determine the
impact of mechanical insulation on both energy and water use on domestic hot
and chilled water systems, and examine the business case and return on
investment. The opportunity is there. The industry needs to be a leader in this
area and not rely on others to do the leg work.

Emissions Reduction

The environment
and the need for emissions reduction have been a subject of much debate for
decades. The role mechanical insulation can play in reducing emissions has not
been fully recognized or appreciated by environmentalists, regulators, or other
interested parties. While the environment has been a center stage topic, its
importance may be gaining renewed attention by regulators.

There are many drivers behind
that renewed attention. Shifting weather patterns across the United States and
the unusual severe storms of the last few years certainly play a role. The
federal deficit reduction and budget discussions also may be impactful. As the
political parties debate the proper balance between revenue increases and cost
reduction, the concept of implementing some type of tax or penalty on emissions
could gain momentum. After all, if companies are taxed for positive behavior
(e.g., being profitable), why not tax them for negative behavior, such as
producing emissions beyond established permissible limits? The concept is
simple, but achieving consensus and implementing and monitoring compliance
raise complexities. Putting aside politics and addressing the complexities of
such a plan, however, could be beneficial to the industry.

Education at All Levels of Facility Design and
Management To Address the Deficit in Understanding of Mechanical Insulation

Buildings and facilities are complex systems built
from ideas, experiences, technologies, and practices brought together by different
disciplines, users, and needs. It is of critical importance that decision
makers at all levels understand the cost/benefit variables for mechanical
insulation systems to make informed decisions on which technologies to
prioritize and implement to achieve energy efficiency, emissions reduction, and
other goals.

Education and training within
the building professions should be aimed at facilitating the entire life cycle
of buildings, from concept to design, construction, commissioning, occupancy, modification/renovation,
and deconstruction. In each period within the life cycle, particular segments
of the building community must be engaged and have the requisite knowledge to
adequately address the needs of that stage. Historically, the primary education
focus has been in universities, colleges, and trade schools; but efforts have
been minimal in the case of mechanical insulation and, potentially, other

For years, a deficient understanding of what mechanical insulation is and how it could be used has impeded
policy makers, design professionals, facility management, and others in
industrial and commercial sectors in making a supportable case for increased
use and maintenance of mechanical insulation. To those in the industry, it is a
“no-brainer.” The frustration with others’ lack of understanding or
appreciation is real.

After a recent presentation, I received the following message:

“I wanted to let you know that
we are working on an energy audit for the local Veterans Administration
Hospital. They have missing insulation on multiple steam-to-hot water
converters and also on their chilled water pumps. I’m using your insulation
calculator today to arrive at numbers for those Energy Conservation Measures. I
probably would have let that slide before I saw your presentation.”

Without a doubt, an increased
educational focus on mechanical insulation is needed in the private and public
sectors, including higher learning institutions. Implementing and maintaining
an aggressive, meaningful, and sustainable education and promotional campaign
in today’s economy is not easy, given financial and other resource demands; but
if the industry wants to influence positive change and long-term, sustainable
growth, it cannot afford to sit on the sidelines. Education will provide
long-term benefit for all industry segments.

The Bottom Line

The economy is recovering. Many are forecasting
commercial and industrial construction to increase by mid-high single or
moderate double digits in 2013 through 2016. The question is not if, but at
what pace and where does the mechanical insulation industry fit in the recovery
cycle? The industry is historically one of the last sectors to feel the impact
of a downturn, and unfortunately one of the last to reap the benefits of a

The potential for mechanical
insulation to play a significant role as a tool to achieve the goals of the
building community—energy efficiency, emissions reduction, sustainability,
water conservation, safety, personnel protection, improving the work environment,
etc.—is immense. However, the lack of sufficient data to support its potential,
combined with deficient understanding of what mechanical insulation is and how
it could be used, impedes policy and decision makers from making a supportable
case for increased use and maintenance of mechanical insulation. The
opportunities are real, and the need is now. The industry must recognize it is
competing in a different environment and not rely solely on historical
marketing and educational practices.

The National Insulation Association (NIA) and its members face
challenges, but these are stepping stones to a brighter, prosperous future. The
NIA World is abundant with experienced leaders, financial and human resources,
technology, the foundation for making change, and a rich history of addressing
and overcoming challenges. We need to harness our resources, work together, and
make things happen.

In last years’ State of the
Industry, I observed, “Unlike any other time in my tenure in the industry,
there has never been a more important time to come together and aggressively
address the opportunities disguised as challenges. The mechanical insulation
industry for years has been somewhat if not solely dependent upon the economy?
[We need] to accept and embrace whatever the economy provides, but we can also
positively influence the mechanical insulation industry’s role in the future
economy. We are in a position that we have never experienced. Mechanical
insulation needs a voice, and we need to be heard? The industry’s time to make
a difference, to influence the increased use of mechanical insulation, is NOW.”

This is an exciting time, and we need to invest in our future. The
industry is moving forward and your help is needed on many fronts. Don’t sit on
the sidelines—get involved.