Sensor Electronics can sniff out profits

When I introduced you to Alan Petersen Sr. 13 years ago, he was 64 and had a well-stocked bank account from the 1988 sale of a company he had co-founded and built to $20 million in revenue from the sale of fire-detection systems.

In short, there was enough cash lying around to finance a comfy retirement at his Minnesota lake cabin and Florida winter retreat. Trouble was, he quickly discovered that entrepreneurship was his only hobby.

And so he had started another company in 1992, this one a designer and manufacturer of gas-sniffing sensors used primarily by the oil and gas industry to detect toxic and explosive gases in the production and refining process.

By the time I stumbled across the business, dubbed Sensor Electronics, it was headed for $1 million in 1995 sales with a line of sensors used to detect methane, hydrogen sulfide and nearly 20 other gases.

There has been considerable change since then: The Edina company has added sensors to monitor nearly 100 more dangerous gases and expanded its reach into a variety of industries ranging from semiconductors to pharmaceuticals to medical devices.

The result: a 21 percent annual growth rate that hoisted 2007 sales to $10 million.

Some things never change, however: Petersen, 76, still flunks retirement, remaining CEO of Sensor Electronics. Oh, he jets down to Florida regularly, leaving his son and business partner, Alan Petersen Jr., in charge. But he can't seem to stay there very long.

The company's strong revenue growth has been accompanied by an 18.2 percent annual growth in pretax margins, an impressive record considering that the oil and gas industry accounts for 30 percent its revenues while fierce competition from about 50 companies in that sector has held price increases to an annual growth rate of less than 1.5 percent.

The challenge of finding niche markets with which to expand profit margins is one reason why his job is a tad more exciting than solving crossword puzzles, Petersen Sr. acknowledged.

The first diversification target was the semiconductor industry, where only a half-dozen companies compete to monitor the dangerous gases used in chip production. That market, largely involving semiconductor manufacturers in Korea, generates 40 percent of Sensor Electronics' sales, the company's largest revenue source.

Next came state-of-the-art sensors to detect such flammable hydrocarbons as methane, propane and butane and maintain the company's position in the petrochemical market. The sensors replaced an older technology that Petersen Sr. described as "just one step beyond the canaries they once used to identify methane threats in coal mines."

That patented design led the company into another niche: monitoring the levels of gas concentrations used by medical device companies to sterilize their products. The design not only cut a week out of product-to-shipment cycle, but also reduced by five to seven days the time required to verify the effectiveness of the sterilization process, Petersen Jr. said.

Additional markets for the design have followed. Railroad companies now use it to assure the safety of welders against flammable diesel fumes when they are repairing cracks in fuel tankers. And manufacturers of dry-cleaning equipment use it to monitor the explosive chemicals used in the cleaning process.

"They're small markets, but the technology is proprietary and commands a higher price and a wider profit margin," Petersen Jr. said.

Petersen Sr. is unabashedly proud of the progress: "The fact is, our gas detectors often are superior" to the competition's, he said. The proof: "Competitors often buy products" for inclusion in their systems.

What's next? Well, Sensor Electronics is supplying sensors for a pilot project that could lead to another sizable market: A manufacturer is testing a system that would use carbon dioxide to drug meat animals prior to slaughter as a more humane approach.

More imminent is a device the company is developing to detect even the lowest levels of toxic gases now beyond the reach of current products. The reason: Today's equipment is largely designed to identify higher, flammable levels, rather than the lower, but still toxic levels that endanger humans.