The State of the Industry: 60 Years and Counting

Ronald L. King

Ron King is a Past President of NIA, the World Insulation and Acoustic Congress, and the Southwest Insulation Contractors Association. He was awarded the NIA’s President’s Award in 1986 and again in 2001. He is a 50-year veteran of the commercial and industrial insulation industry, during which time he held executive management positions at an accessory manufacturer and specialty insulation contractor. In 2004, he retired as the Chairman, CEO, and President of a large national insulation distributor/fabricator. He currently serves as a consultant to NIA on a variety of educational, outreach, and governmental initiatives, including coordinating many association alliance-partnership activities, serving as Chairman and Past Chairman, respectively, of the National Institute of Building Sciences’ National Mechanical Insulation Committee and Consultative Council, and as NIA’s liaison to the Federation of European Insulation Societies (FESI), which represents the European mechanical insulation market. He can be reached at RonKingRLK@aol.com.

April 1, 2015

The United States population has doubled in the last 60 years—has the mechanical insulation industry seen the same kind of growth? Although the industry
was not developing publically-available data 60 years ago, it is fair to estimate that the insulation industry has doubled, if not tripled. Additionally, the
forecasts for the next 2 to 3 years are indicating the potential for double-digit growth (10–15%), which is welcome news after the difficulties created by the
recent recession.

Once again the mechanical insulation industry has shown its resolve and is recovering steadily. The recovery was slow and challenging, varied geographically and
by industry segment, but as a whole is continuing. The industry is primarily dependent upon the national economy and while many signs point to sustained moderate
growth, several economists are quick to point out just how fragile the economy remains. In spite of this, there is reason to be optimistic about the future of the
mechanical insulation industry, which will present opportunities that are both challenging and exciting.

This article will review some of the most notable industry changes that have occurred over the past 60 years to demonstrate how the industry has evolved to
create today’s current industry environment. The only consistency over that period is that change is inevitable, and with change comes new possibilities.

The first challenge is to select a few of the most notable industry changes. The list is extensive and varies according to individual perspective. This article
will focus on 4 areas: the definition of a mechanical insulation contractor, channel conflicts, training/education requirements at all levels, and industry
consolidation.

Defining a Mechanical Insulation Contractor

The industry has evolved since the 1950s and the preceding decades, when contractors were primarily union contractors specializing in mechanical insulation. This
evolution included a growth of the non-union contractor base and many union contractors also becoming contractors/distributors. The rapid emergence of non-union
contractors spurred the development of the independent distribution channel to support all contracting segments and represent manufacturers to the growing list of
mechanical insulation contractors. That trend also led several large insulation manufacturers divesting of their contracting affiliations to avoid customer
conflicts and to focus on product support to all industry segments in a growing contractor market.

The economy over the last 60 years has fluctuated, but overall industry growth has resulted in an increased number of mechanical insulation contractors. In
addition, product development and simpler installation techniques have allowed some applications to be completed by companies whose primary business is not
mechanical insulation. These and other factors have contributed to changing the definition of a mechanical insulation contractor.

How is a mechanical insulation contractor defined today? Would it simply be a company that installs thermal insulation for mechanical systems on a regular or
sporadic basis? Would that installation definition include maintenance, new construction, and retrofit/remodeling applications? It is not as easy to define a
mechanical insulation contractor as it once was. While definitions vary between the commercial and industrial market sectors, and even geographically, following are
a few examples of what constitutes a mechanical insulation contractor. These definitions cover a few different groups of mechanical insulation contractors that
exist in the industry today.

Contractors specializing in and whose primary business is mechanical insulation.

This remains the primary contractor base, but it is very fragmented. Although the exact number of specialty mechanical insulation contractors has not been
determined, it is likely that the number is in the thousands, possibly 5,000 or more. Also, they vary greatly in size and the level of turnover, particularly at the
smaller level, which can be problematic on many fronts. There are a greater number of contractors participating in the commercial segment versus the industrial
sector, and thus the commercial sector represents a greater base of smaller contractors and subsequent turnover.

Facility owners self-performing all or part of their mechanical insulation requirements.

While this practice varies geographically and by facility owner, it remains a viable segment. It is more common in the maintenance arena versus new construction,
but can impact small new construction or turnaround opportunities. The development of removable and reusable insulation flexible covers has been and continues to be
a tremendous asset for industry growth, while also helping to foster, in part, the growth of this mechanical insulation contractor group.

General and or mechanical contractors performing all or part of their mechanical insulation requirements.

Some firms self-perform their mechanical insulation requirements instead of outsourcing them. They are not always consistent in their approach and often reach a
decision based upon internal availability of supervision and manpower, difficulty of the work, schedule requirements, and related cost considerations.

Plumbing and HVAC contractors performing all, or part, of their mechanical insulation requirements.

This contractor segment is most prevalent in the small commercial market, and they simply include piping and or duct insulation in conjunction with their
traditional scope of work. There are some signs this may be increasing, especially in the HVAC segment, as sheet metal contractors pursue establishing exterior duct
insulation as an integral part of their scope of work.

Multi-craft and service-offering companies offering mechanical insulation as part of their package.

This approach, while not necessarily new, has emerged as a significant player in the maintenance segment of the industrial market. This has also led some
specialized mechanical insulation contractors to include competitive multi-craft and service offerings as part of their company profile. A concern is that
mechanical insulation could get lost in the overall mix and just be another offering, versus being a primary area of focus. This group is in essence crossing over
traditional industry lines and creating multiple channel conflicts.

Contractors whose specialty is in other areas offering mechanical insulation to compete with other segments, i.e., the multi-craft company.

This is similar to the multi-craft contractor, but these companies are motivated for competitive reasons to offer mechanical insulation to a single or small
customer base, although they do not consider mechanical insulation as part of their normal service offering. Again the concern is that mechanical insulation will
get lost in the overall mix.

While individual opinions as to the need or value of these contractor groups will vary based on market focus, they have certain benefits. They increase the
number of insulation-offering companies and create an incentive to promote insulation, which supports industry growth. Of course, there are also potentially
problematic repercussions. Channel conflicts may become the norm versus the exception, particularly among contractors whose primary business is mechanical
insulation, and also for distributors/fabricators. Additionally, there are a few common dominators among these contractor groups, such as the demand for and
competition for a skilled work force with a good working knowledge of insulation systems, and the need for training and skill assessment. Due to the demand for
quality workmanship, the competition for workers may get even more intense. This will also increase the need for training to produce workers with sufficient
knowledge and skill.

Defining what constitutes a mechanical insulation contractor is not a simple task, and presents certain obstacles as well as the potential to affect positive
change by helping to grow the industry. The need for and opportunities to provide educational programs and tools are abundant—the difficulty is how to be
inclusive of all groups for the benefit of the overall industry. It can be difficult to reconcile industry objectives with company or group objectives. If industry
contractor profiles are changing, industry associations may have to devise programs to be inclusive of a broader contractor base and changing market.

Distribution Channel Conflicts

Independent distribution became a major component of the industry beginning in the 1960s, and today it is the central link in moving products from the
manufacturer to the ultimate purchaser or customer. Distributors have become vital to the insulation industry, and distributors/fabricators are the source of
approximately 95% of the materials consumed in the industry.

When discussing channel conflicts, it is important to keep in mind that the industry has generally defined itself as including all insulation materials or
systems utilized on mechanical systems. This includes all piping systems, process equipment, tanks, boilers, chillers, HVAC systems and exterior ductwork, and
sometimes interior duct lining in the commercial and industrial market segments.

While the distribution channel conflicts may be considered minimal in comparison to the contracting sector, they are nevertheless present, constantly changing,
and challenging. Some mechanical insulation materials, especially in the plumbing and HVAC industry, are available through plumbing distribution houses, sheet metal
duct fabricators, and big box stores. Although there is nothing new of significance in this area, the potential impact of industry crossover or consolidation
between segments bears monitoring.

Mechanical insulation fabricators, while not necessarily full-line distributors, support the non-fabricating distributors and locations. They also provide
products/services to the multiple contractor groups that in some cases have traditionally flowed through the distribution channel. Not all distributor locations are
fabricators, but in some cases, distributors support fabricators.

The development of the removable and reusable insulation flexible cover segment is a prime example of where individual components or finished product sales may
be creating channel conflicts with traditional fabricators or distributors. In addition, depending upon the product included in the fabrication process,
manufacturers may be supporting multiple legs of the distribution channel—distributors, distributors/fabricators, or fabricators.

It is important to consider that some mechanical insulation distributors/fabricators also offer non-insulation-related products or services to other industries.
Product or service diversification is not unique and offers many advantages. In addition, some distributors/fabricators support customer requirements by acting as a
service provider, thus providing supplier convergence options. This is more relevant in the maintenance, repair, and operations (MRO) market in the industrial
segment, but is also practiced in major commercial MRO-type opportunities. Convergence in the distribution market is not as popular as it was 15 years ago, but it
is still a viable option to be considered. Multi-craft contractors are in essence practicing contractor or craft convergence. What will be the trend in the
distribution or fabrication channel?

Channel conflicts will more than likely continue to develop with shifting market shares, industry crossover, and consolidation. Defining what constitutes a
mechanical insulation distributor or fabricator may be an easier task than defining a mechanical insulation contractor, but it may not be as simple in the future.
Whether these channel conflicts are healthy for the industry is a matter of perspective. Many think of crossover as one directional, but it actually offers
opportunity to both parties. Channel conflicts can certainly drive market creativity. As an example, utilizing varying product names for the same product
potentially creates a larger universe of potential customers. The bottom line is channel conflicts are inevitable and probably heathy for the industry as a whole,
though they can present difficulties.

Consolidation

Consolidation is not new, but it is currently very much alive and well in the industry. All segments have been affected: manufacturing, distribution/fabrication,
and contracting. Since private equity’s entrance into the mechanical insulation industry, consolidation as a strategy has visibly increased and is well suited for
private equity firms that support the consolidation business model. The industry has a fragmented contractor market, no clear number of national
distributors/fabricators, and multiple manufacturers for the same or competing products in a market that invites innovation and has over time exhibited consistent
growth. While consolidation can be an exciting opportunity and rewarding to many, it can present challenges to all industry segments. The buying, selling, or
merging component is the easy part. Merging of the cultures, implementing new operational and marketing procedures and strategies, and the fear of implementing
operational synergies are the more difficult components—these can take months or even years for the impact to be fully realized.

Private equity generally expects higher returns in a shorter amount of time than other investors. They must feel confident that they can achieve their objective
or they would not be investing in the industry. For many years the mechanical insulation industry was not attractive to private equity, but in the past decade it
has become more enticing, and all indications point to continuing this trend for the near future.

Of course, private equity firms generally have an exit strategy to ensure that they get the value of their investment—whether it be a public offering, the
sale of the company or components of the company, a merger, or further consolidation. Whatever the exit strategy may be, the evolution and impact to the industry
will continue. Is consolidation healthy for the industry? New and expanded investment in the industry is certainly good, private equity brings increased financial
discipline to the industry, consolidation can foster industry crossover opportunities and potentially support industry growth, training and similar type
initiatives. Conversely, many can easily point to the negative impact consolidation can bring. The long-term impact of private equity in the insulation industry
remains to be seen.

Training and Education Are Needed at All Levels

Driven by attrition, consolidation, and downsizing/rightsizing—among other factors—the industry has lost many talented and knowledgeable people over
the last 5–10 years. Particularly during the recession, the industry lost many skilled craft personnel. Now, the challenge is to attract people to the
insulation industry and educate and train a skilled and competitive work force. No industry segment, regardless of labor affiliation, is immune to this issue. This
problem is further exacerbated by the need for additional workers to meet the rising demand of an improving economy.

Though many companies are currently adding bright and talented professionals, the fact remains that the industry has lost years of experience that will take
years to replace. While one could argue that advances in technology have made more information readily available, this cannot replace decades of hands-on
experience. An individual with general mechanical insulation knowledge may be able to use the Internet to search for more specific information, but this cannot
replace specialized knowledge obtained through proper training. It is crucial that knowledge obtained by experienced professionals is passed on to the next
generation.

In regard to the severity of the shortage, the following figures may be useful. In 2012, NIA developed an estimate of the total number of employees in the
mechanical insulation industry. At full employment, it was estimated the field workforce totaled approximately 80,000 craft personnel. As an example, assume the
industry lost 15% (12,000) of that workforce due to the recession, and the industry is going to grow by 10% in comparison to 2012 within the next the next 3 years.
That equates to the need for 20,000 personnel—and that figure does not account for normal attrition or turnover. Considering these estimates, the demand for
skilled craft personnel is large, if not overwhelming.

Regardless of a company’s labor affiliation, investment in training is essential to meet the demands of the future. Many organizations, associations, and
companies have excellent training programs, but it takes time to complete those programs. The shortage of skilled craft men and women will only get worse over time
without a meaningful and continual commitment to recruitment and training. The pressing question and preeminent challenge is how to recruit people to a career in
the mechanical insulation industry. At first glance, the mechanical insulation industry is often not appealing to younger generations and other novices, and it is
in competition with other industries for talent. While the loss of skilled and experienced project workforce personnel cannot be corrected overnight, it is
important to act now by implementing recruitment programs.

While part of this effort can be made through advertising, it is not the sole answer. Current recruitment practice is to reach out to transitioning military
personnel, community and career colleges, high school and secondary education facilities, and a host of other organizations. What needs to be determined is how to
best reach out through these channels. Various segments of insulation and related industries should collaborate to provide career pathways and industry-recognized
credentials that will yield the skilled workers that are needed.

In light of the changing mechanical insulation contractor base, channel conflicts, and industry consolidation, the importance of educational and training
programs has never been more relevant than they are now as the next industry growth cycle begins. One of the fundamental problems with attracting more individuals
to the mechanical insulation industry is that the benefits of mechanical insulation are not often recognized, and there is a lack of sufficient awareness about the
design, installation, and maintenance of mechanical insulation systems. Basic and continuing education at the college, university, and trade school levels is a must
if the industry is going to fundamentally change how mechanical insulation is viewed. The need for recruitment, training, and education is not new, and has long
been on the list of industry priorities. The enormity of the challenge is great, but not addressing it is simply not the answer. To address this challenge, the
industry must focus on developing solutions to these issues to attract the labor needed to meet demand.

Opportunities and Challenges

The mechanical insulation industry, like any other industry, is continually evolving and presenting new realities and trends that must be dealt with. When the
market is trending down, the focus will be on difficulties, and when the market is trending up, the current industry challenges will be put aside to address the
business demands of the day.

The industry is on the rebound from the recent recession and projected revenue and earnings over the next 2–3 years are trending up and are potentially in
the low double-digit category. Meeting that demand will and should be the primary focus of any company, but it is important to not lose sight of long-term
objectives. Taking action today will help sustain growth and lessen the impact of any future softening of the market.

The following examples present opportunities to take action and help strengthen the mechanical insulation industry in the long term:

Code Adoption and Enforcement

Help drive the adoption of the latest code(s). Every time you see an older version of any standard, point out the difference and simply inquire as to whether the
facility owner wants to use an outdated standard that may be detrimental to the operational and resale value of the facility. If you see where a standard or code is
not being enforced, ask why. Facility owners likely do not want to knowingly have any portion of their facility not meet the minimum code requirements.

Code inspection and enforcement has been a problem for years. That is often the result of an insufficient number of code officials lacking a thorough knowledge
of insulation systems. The industry should consider developing programs and including code officials in its education and training initiatives.

Bad or Outdated Specifications

Bad or outdated specifications have and continue to hamper advancements and code compliance in many arenas. If you encounter one of those specifications, let
manufacturers know so they can educate the specification developers. Many manufacturers are putting renewed and expanded efforts in specification development, and
any help in identifying areas that need to be addressed would support industry growth and upgrading opportunities. In addition, it is important to prevent improper
“value engineering” of insulation systems, which prioritizes cost over proper insulation. This is not only detrimental to the project or application in question,
but it could allow others to believe those practices are acceptable on other applications.

Energy Conservation and Emission Reduction

Energy conservation and emission reduction will always be part of the industry’s economic future. As seen in the past, when energy prices go down, the focus on
energy conservation wavers. The industry must do its part to prevent that from happening and keep energy efficiency and environmental protection discussions front
and center. The insulation industry needs to resolve to be recognized as a consistent leader in these areas in new construction, retrofit, and maintenance
applications.

Educate Facility Owners and Managers

Provide information to facility managers and owners on the real risk of not having a timely and proper mechanical insulation maintenance program. Do not assume
they understand the risk and the potential return on investment of implementing a consistent and meaningful insulation maintenance program.

Data Development

Support industry efforts in developing data that is related to mechanical insulation in the world of sustainability, the energy-water nexus, life-cycle analysis,
the green movement, etc. The potential of mechanical insulation’s contribution to those areas is great and should not be taken for granted.

Holistic Versus Prescriptive Measurements

Holistic building measurements as well as labeling and performance-based codes continue to gain momentum. The industry has historically operated in a
prescriptive environment. Help support programs that address how prescriptive initiatives can and will work in a holistic measurement world.

Dissemination of Information

When looking back over the last 60 years, or even the last 10 years, the most significant change has to be in technology—especially the new methods of
disseminating information. Teletype and fax machines have been replaced with the Internet, email, text messaging, and social media. There is an unending quantity of
information available to all individuals at all times—although the quality of information can be difficult to ascertain. With all the advances and options
available, however, come new challenges. Relying only on digital information sources can potentially be detrimental. It is best to implement internal training and
educational programs, support industry educational endeavors, and combine those with the unlimited information that is available electronically—producing a
winning formula that can help drive revenue and profit growth.

Conclusion

It seems safe to be at least cautiously optimistic about the next few years based on the industry’s resolve to address the slow times, the improving national
economy, increasing bid activity, industry consolidation and investment, the low interest-rate environment, promising forecast spanning several years, upward
manufacturing trends, and improving energy independence. There will always be variances between different companies, industry segments, and geographic regions; this
is an exciting time that is full of opportunities. The actions of individuals, companies, and industry associations will determine the future of the industry.

The last 60 years have seen many changes and varying but consistent growth over time—what will the next 60 years look like? With fresh ideas, commitment,
hard work, and industry resolve and unity, the mechanical insulation industry is poised for continued growth and prosperity.