18 minute read
One Gone, One Restructured Two U.S. remanufacturers transformed in 2019
by: Charles Brewer, Actionable Intelligence
Last year, two of North America’s largest remanufacturers, Clover Imaging Group (CIG) and LMI Solutions, were forever changed. After acquiring a new strategic investment partner, CIG was restructured and sold, while certain parts of the business filed for bankruptcy. LMI fared much worse. After going into receivership, the firm’s assets were sold off and operations shut down. My company, Actionable Intelligence, which follows the market for printing hardware and supplies used in the home and office, covered all of the news as it broke.
Founded in the mid-1990s, CIG and LMI were in the vanguard of companies that established the North American remanufacturing industry. Regional remanufacturing began in the late 1980s and experienced hypergrowth in the 1990s as digital printers became a feature in offices and, increasingly, in homes. The industry hit its stride in the early 21st century and thousands of remanufacturers were thriving. But things have been tough in the industry for the past decade and the number of firms that remanufacture has dwindled to a few hundred. Calamity struck CIG and LMI at about the same time after each lost a key customer, proving just how tenuous the situation is for even the largest players.
Piercing the $1-Billion Mark
It took a while for LMI’s business to grow, but things were different for CIG. Originally known as Clover Technologies Group, CIG quickly grew to become one of the world’s largest remanufacturers. CIG was founded in 1996 and, by 2004, was ranked 36th on Inc. magazine’s list of the 500 fastestgrowing privately held U.S. companies. According to The Hard Copy Supplies Journal, the firm’s revenue grew 642% to $68 million in the period between 2000 and 2003.
In 2005, CIG became one of the first remanufacturers with revenue approaching $200 million after acquiring Ricoh Printing Systems America’s (RPSA) compatible supplies divisions, which included assets such as the Dataproducts brand. It solidified its position as an industry leader through
acquisitions and expanded into new markets. It established various overseas subsidiaries such as Clover Technologies Group Australia and Clover Technologies Group Asia Pacific, which operated a factory in Ho Chi Minh City, Vietnam. By 2010, CIG was the world’s largest remanufacturer in terms of revenue with more than $450 million in annual sales. In April 2010, Golden Gate Capital, an $8-billion private equity investment firm, took a controlling position in CIG and also acquired a smaller U.S.-based remanufacturer, West Point Products. The two remanufacturing firms, which initially operated separately, focused on different channels. CIG supplied its Dataproducts line and private-label products to some of North America’s largest retailers, including office superstores, consumer electronics stores and mass merchandisers, as well as to the region’s largest office-supplies distributors, like SP Richards. West Point supplied its premium line of remanufactured cartridges to office technology dealers and IT VARs, and expanded its presence to other companies in the managed print services (MPS) market. As the two firms were integrated, what emerged was a true omnichannel player that dominated the North American markets, as well as certain markets in Europe.
With its proven record of identifying strategic acquisition targets and successfully integrating these new businesses, CIG leveraged Golden Gate Capital’s deep pockets to fuel more M&A activity. In 2013, CIG became the first remanufacturer to crack the $1-billion mark and expanded its business beyond cartridge remanufacturing to include collecting, refurbishing and marketing telecommunications and wireless devices. CIG expanded its printer parts business and made strategic investments in several large empties brokers, which provided the firm with an important competitive advantage — an endless supply of cores — and it allowed it to offer comprehensive reverse-logistical support to its customers.
CIG’s last major acquisition within the remanufacturing industry came in 2014, when it purchased Micro Solutions
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Enterprises (MSE). We estimate that, at the time of the acquisition, MSE was North America’s second-largest remanufacturer, with more than $100 million in annual sales. MSE had made acquisitions in Europe and operated sales offices in South America and the Middle East. The firm marketed a line of premium remanufactured cartridges and competed with CIG in the markets that had been targeted by West Point Products before it was subsumed into the larger company. LMI’s ‘One-Stop-Shop’ Strategy
With CIG’s acquisition of MSE, LMI Solutions became the second-largest remanufacturer in North America, a position it maintained right up until it closed last August. The firm was founded in 1992 as LaserMasters LLC and was acquired in 1997 by Gary and Lisa Willert. Although the company did not enjoy CIG’s meteoric rise, it emerged from the Great Recession as a strong competitor in the mid-market segment, and successfully competed with MSE and West Point for business in the dealer and MPS channels.
In the years following the recession, LMI experienced some of its strongest revenue growth. In 2013, the company had $52 million in sales and the next year the company began to make key acquisitions. Seeking to become a “one-stop shop” for dealers and firms marketing MPS programs, the company set out to offer low-cost refurbished printers and parts along with its remanufactured cartridges. In 2013, LMI purchased Global Printer Services (GPS), the largest independent U.S. refurbisher of HP and Lexmark printers, and then acquired a second printer hardware remanufacturer, Printersdirect. The next year, LMI purchased Parts Now, one of the largest printer parts vendors and refurbishers in the United States. Following the acquisitions and some organic growth, Gary Willert said in an interview with ENX Magazine that his company would have more than $100 million in sales in 2015. In subsequent interviews, he indicated that more acquisitions should be expected. Unfortunately, that would not be the case. Things Turn South
We estimate that both CIG and LMI reached their respective high-water marks in 2015. By the second half of 2016, however, each company was reallocating assets and word spread that they were seeking new investors.
In August 2016, Reuters reported that Golden Gate Capital was looking to sell CIG. Morgan Stanley was hired to help explore a sale that Reuters said could be valued “at roughly $1.5 billion, including debt.” Apparently, a suitable buyer could not be found and it seemed that there would be no sale. Moody’s Investors Service downgraded the debt rating of CIG’s parent company, 4L Technologies, in 2017. The rating agency changed its outlook to negative after determining “the company was mired in a multiyear contraction of sales and profitability.” Moody’s reported that 4L’s revenue was off 8% as profits suffered “significant erosion.”
The Moody’s downgrade came as CIG lost business to competitors in various industry segments. The firm was feeling relentless pressure from low-end compatible products imported from overseas that had become widely available online. These so-called “clones” had grabbed market share from many of CIG’s largest customers, such as Office Depot and Staples which, in turn, hurt CIG. The firm was also feeling pressure from OEMs, especially HP. Having lost market share for years to remanufacturers, including CIG, HP and other OEMs developed new channel programs to help their consumables better compete with remanufactured cartridges. Although LMI’s troubles were not as well chronicled, it became increasingly clear that the firm was experiencing extreme difficulties. Like CIG, LMI was under pressure from cheap imports and from the OEMs’ channel programs. The firm was also feeling more pressure from CIG, which began to take business from LMI’s larger customers like Konica Minolta Business Solutions. Some of LMI’s troubles were also selfinflicted. It had difficulties integrating its new assets and, within a few years of being acquired, the operations at GPS, Parts Now and Printersdirect had been shut down. By 2016, key defections at the company were underway and, within a year, most of LMI’s management team increasingly became members of the Willert family or others close to the family. Outlook Improves
With annual revenue declines of approximately 15% and accelerating, LMI struggled as it entered 2018. The firm was relying heavily on cartridge remanufacturing for revenue after exiting the refurbished printer and parts markets. Cartridge sales were down, however, after a 2017 fire at the LMI plant in Guanajuato, Mexico, damaged numerous production lines and destroyed millions of dollars in inventory.
LMI worked with KMPG to find a strategic investor and in August 2018, it announced Turnspire Capital Partners had taken a position in the firm. Gary Willert stayed on as CEO and Turnspire brought in Sebastian Bretschneider to sit on the LMI board. Bretschneider had helped orchestrate a successful $52-million recapitalization program at Katun in 2016 when he was Katun’s CEO. Gary Willert was confident that within a year or two, LMI’s annual revenue would be back to With CIG’s acquisition of MSE, LMI Solutions became the secondlargest remanufacturer in North America, a position it maintained ... until it closed last August.
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$100 million. He also suggested that the North American third-party supplies industry offered various opportunities and Turnspire was considering making other investments to support LMI’s growth. CIG also had its own good news to share in August 2018; Moody’s reassessed 4L’s debt rating and raised its outlook from negative to stable. A lead Moody’s analyst said CIG had improved its operating performance, particularly the performance of Clover Wireless. However, while the new operational efficiencies were recognized, the announcement underscored just how much CIG’s business had shrunk. According to Moody’s, during the period from June 2017 through June 2018, CIG’s revenue totaled $825 million, which represented about a 22% decline from the high of more than $1 billion that the firm had achieved immediately following the acquisition of MSE. Although CIG’s sales continued to decline, the company received more good news late in the first quarter of 2019. In March, two of the “big three” credit rating agencies, Standard & Poor’s (S&P) and Moody’s, issued positive credit ratings for 4L after the company said it would refinance its debt. Finding 4L’s debt was stabilized, S&P explained that while CIG’s sales were slipping, “moderate revenue declines will enable modest improvement in credit metrics” through the end of the year. Moody’s seemed to agree and reaffirmed its ratings from the previous summer despite CIG’s declining revenue. Both S&P and Moody’s commented that they expected CIG’s revenue would improve during 2019, though neither firm explained why. Fortunes Shift
Despite all the good news, rumors persisted during the first half of last year that sales were dropping at both CIG and LMI. Each company remained exposed to the adverse effects of growing new-build cartridge sales, and HP’s success weaning dealers off remanufactured cartridges continued and grew. If the rumors proved to be true, the implications were enormous — the rating agencies could rethink their positions on CIG’s debt and Turnspire could cut its losses and pull its LMI investment. And that is just about what happened.
The triggering event came last June after HP and Xerox formed a new technology alliance. Xerox tapped HP to provide it with A4 and entry-level A3 print engines based on the laser technology HP acquired from Samsung in 2017. The deal also called for Xerox to manufacture the toner for these devices, as well as other HP machines. While nothing was ever said officially, the deal resulted in changes to Xerox’s nonbranded consumables business. For years, Xerox had marketed a line of third-party cartridges for use in HP LaserJet machines along with SKUs for units from other OEMs. After partnering with HP, Xerox cut its orders for LaserJet remans, which left CIG and LMI reeling.
Within weeks of the HP/Xerox announcement, LMI began shedding jobs, including positions in the sales group. In early July, an LMI representative confirmed for Actionable Intelligence that the company had cut some positions because of a “reduction in sales due to the HP OEM program.” At the time, sources close to the situation said that LMI was bracing for orders to fall as certain parts of Xerox’s channel network, such as Xerox Business Solutions (XBS), transitioned from remanufactured cartridges to HP’s OEM consumables. Sources indicated that LMI’s business with Xerox was worth between $10 million and $15 million, which represented a significant amount of LMI’s total sales. After learning about the layoffs at LMI, we read Bloomberg reports that said CIG was “exploring strategic options” and had “brought in law firm Kirkland & Ellis LLP and investment bank Jefferies LLC to evaluate balance sheet alternatives and strategic options.” According to Bloomberg, CIG told its debt holders that two large customers — “one from wireless and one from imaging” — were expected to cut orders. The value of 4L’s debt dropped more than 25% when the news broke. We also learned that CIG’s total revenue for 2018 was $820 million, a drop of about 25% in just three years. The Aftermath
Reaction to the news came swiftly. The day after the Bloomberg article was published, Moody’s lowered 4L’s rating from “stable” to “negative.” The rating agency said it might further lower its outlook on the debt, which included 4L’s $65-million revolving credit facility and a $650-million term loan set to mature in May 2020, if CIG lost another major customer or if its cash flow was hampered. As the summer progressed, things looked increasingly gloomy for CIG. Its falling debt rating and other financial problems became big news and it drew the attention of the Wall Street Journal and talking heads at CNBC, as well as others from outside the industry. It appeared for a while that CIG was heading for bankruptcy.
Seeking to reassure customers that the company was stable, CIG CEO George Milton and President Eric Martin issued a letter in mid-July saying it was business as usual at the firm. In an interview with The Imaging Channel published on July 22, Jim Cerkleski, chairman of the board for Clover Holdings, said the firm had the “right strategies necessary to remain strong,” adding that CIG had “enormous After partnering with HP, Xerox cut its orders for LaserJet remans, which left CIG and LMI reeling. Within weeks of the HP/ Xerox announcement, LMI began shedding jobs ...
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liquidity.” Days later, Cerkleski gave a bullish assessment about the future of his company at a meeting of the International Imaging Technology Council (Int’l ITC). Attendees at the meeting later said that Cerkleski told them that CIG had found a new strategic investor and the company was authorized to once again make acquisitions.
The situation at LMI was worse — far worse. On Aug. 12, LMI’s lender, MidCap Financial, initiated proceedings at the Superior Court of the State of Arizona to place the remanufacturer in receivership. The move came after LMI informed MidCap that continued operations might not be sustainable because of the partnership between Xerox and HP, which mandated that XBS dealers must use only HP-branded cartridges rather than remanufactured cartridges provided by companies such as LMI. On Aug. 19, the court issued an order appointing MCA Financial Group as receiver to dispose of LMI’s assets. Where Things Stand
Time has confirmed the validity of Cerkleski’s remarks to the Int’l ITC gathering. On Nov. 21, CIG’s executive leadership team and Norwest Equity Partners (NEP) entered into an agreement with 4L Holdings Group, which is owned by Golden Gate Capital, to acquire the CIG business unit. Although the announcement of the agreement did not disclose any financial terms, the Wall Street Journal reported that NEP paid approximately $215 million for the firm.
CIG also made a new acquisition last year, although it is not clear if the deal is a sign of things to come. Prior to the NEP transaction, CIG announced it would purchase LMI’s assets which, according to the court filings, sold for $3.75 million in cash. The purchase included all inventory, including raw materials and finished goods, as well as equipment. CIG also purchased LMI’s customer lists and order histories, as well as a wide range of other material related to business operations. As for LMI’s employees, details about their fate were scant, but it seems CIG will continue to employ some LMI workers. Since the sale closed, however, Static Control Components, which competes with CIG, has announced it has hired Gary Willert and other members of the Willert family.
As the year came to a close, Actionable Intelligence learned that the NEP deal was part of a broader prenegotiated bankruptcy package that allows for the reorganization of 4L and for the firm to “equitize” all of its $644 million in long-term debt. Bloomberg reported on Dec. 11 that the bankruptcy covers 4L’s remaining “U.S. operations in a deal that would give its lenders ownership of a reorganized company.” According to the report, part of the proceeds from the CIG transaction will be “used to partially repay lenders” and the bankruptcy court would oversee repayment. In addition to 4L, various CIG-related entities filed Chapter 11 petitions, including Clover Technologies Group, 4L Holdings Corp., 4L Technologies, Clover Ithaca Properties, Clover Wireless, Refurb Holdings and Valu Tech Outsourcing. Our Take
Although there is the potential for some channel conflict, taking on NEP as CIG’s new strategic investor seems like a shrewd move by the CIG management team. Among NEP’s many acquisitions is the megadealership Marco Inc., an office technology dealership based in St. Cloud, Minnesota, with about $500 million in annual sales. CIG’s management team insists there will be no integration of the two firms; nevertheless, it seems quite likely that these two NEP holdings will be able to leverage certain synergies.
As it firms up its position with one of North America’s largest office technology dealerships, CIG has also taken steps to expand its business on Amazon. Last year, the firm overhauled its Amazon storefront, which features a range of remanufactured and new-build cartridges. The firm says it is not using the Amazon platform to sell direct. Rather, it has revamped its Amazon presence to better support its customers that do business on the platform. When we checked, we noted that at least a dozen vendors, including Amazon and daisy-CIG, are currently marketing CIG’s products through the Amazon storefront.
Although many of the competitive pressures noted above show no signs of abating, it seems CIG is in a good place. Its revenue will continue to fall before stabilizing, but there will always be demand for remanufactured cartridges. It is safe to say that CIG, one of the industry’s largest remanufacturers, is destined to be around for many years to come. n Charles Brewer is president and founder of Actionable Intelligence. With more than 20 years covering technology, he was previously an editor for Inc. magazine and ComputerWorld, and managing editor of The Hard Copy Supplies Journal. Actionable Intelligence launched its website in 2010 and, today, it is a destination site for news and analysis related to the hardware and consumables markets. Brewer is a popular industry speaker and presents regularly at various events in China, Europe and North America. He can be reached at (508) 528-1297 or cbrewer@action-intell.com. Visit www.action-intell.com. It is safe to say that CIG, one of the industry’s largest remanufacturers, is destined to be around for many years to come.
