Space Shuttle
Ground-effect tests
SureScan Pacemaker
Restore Sensor
Zumwalt ship
Top 50 Employers
Industry Losses
Saw Growth
Improved Companies
OEM Employers
The global recession of the late 2000s, fueled by easy credit and inadequate regulation, rocked the industrialized world. While subprime loan losses began to surface in 2007, the real jolt to the overall economy came from the demise of Lehman Brothers in September 2008.
When unrealistically increasing asset prices and the associated bubble in economic demand burst, the result was a significant decrease in international trade, rising unemployment, and a drop in commodity prices, all affecting the electronics market.
Yet the economic backdrop has not changed much. In the United States alone, 2.4 million jobs were lost in 2008 with another 4.3 million lost in 2009. Unemployment continues to hover just under 10%. According to the IMF, domestic GDP decreased 2.5% in 2009. It is expected to increase by 2.7% in 2010 and 2.4% in 2011, although recovery may not truly begin until 2011.
These turbulent times lent greater import to our annual list of the top 50 employers in the electronics industry (Table 1). For the pool of 97 publicly held companies that we analyzed for this year’s report, 2009 was a difficult year (Table 2). In addition, the percentages of these companies that saw gains (Table 3) in key areas also were very small.
The bad news is only 9% of our company pool showed a year-over-year increase in pretax income. On a more positive note, almost one-third of our company pool kept increasing their investment in R&D, and almost one-quarter increased their employee base.
Given this scenario, what can companies do to manage and create an advantage during these difficult times? Seven strategies can lead to success:
• Build strength during good economic times. Conservative financial management, low debt, and high liquidity provide flexibility.
• Overcommunicate transparently with and involve employees, customers, and suppliers in solving problems and looking for opportunities to increase profit. Make it a conversation. Be candid about any challenges to be faced.
• Focus the business portfolio narrowly into areas where you have a clear advantage. Choose internal growth opportunities over external acquisitions, unless you can integrate and consolidate those acquisitions expertly.
• Cut costs, but make them the right costs. Know where the profit comes from and make budget decisions accordingly.
• Cut costs during good times and then use that pricing flexibility during bad times to pick up market share. Walk away from unprofitable business.
• Increase your R&D efforts and budgets. This isn’t a cost you want to cut, as it will impact future results.
• Invest in information systems and use the data to drive value and focus on profit.
The top employers in the electronics industry all have exhibited these traits. In fact, several companies used these strategies to their advantage and to improve (Table 4) their performance and move up higher on our list since 2009.
Two non-OEM companies in particular, Boeing and Medtronic, saw some remarkable gains. For a closer look at some OEM companies (Table 5) that charged up the chart last year, go to www.electronicdesign.com and see:
We also found five “All Star” companies that held flat or showed an increase in employees, sales, pretax income, and R&D: Apple, Raytheon, SAIC Inc., St. Jude Medical, and Synopsys. In fact, Raytheon enjoyed significant gains in all four of those categories.
Boeing Soars 47 Slots
Boeing is the world’s leading aerospace company and the largest manufacturer of commercial jetliners and military aircraft combined. Breaking things down, it’s the number-two maker of large commercial jets (behind rival Airbus) and the number-two defense contractor behind Lockheed Martin.
So, it’s no surprise that the company vaulted from 64th place on our 2009 list to 16th this year. Its additional work in designing and manufacturing rotorcraft, electronic and defense systems, missiles, satellites, launch vehicles, and advanced information and communication systems played a key role in this success.
Boeing is organized into two units: Boeing Commercial Airplanes and Boeing Defense, Space & Security. Supporting these units is Boeing Capital Corp., a global provider of financing solutions; the Shared Services Group, which provides a broad range of services to Boeing worldwide; and Boeing Engineering, Operations & Technology, which helps develop, acquire, apply, and protect innovative technologies and processes.
As a major service provider to NASA, Boeing operates the Space Shuttle and International Space Station (Fig. 1). The company also provides numerous military and commercial airline support services. Boeing has customers in more than 90 countries around the world and is one of the largest U.S. exporters in terms of sales.
Founded in 1916 and based in Chicago, Ill., Boeing generates about 60% of its sales in the Americas. The U.S. Department of Defense (DoD) generates about 80% of its revenues. NASA and international defense agencies, as well as satellite markets, are also customers. Its chief competitors include the European Aeronautic Defence and Space Company, EADS N.V. (Airbus), Lockheed Martin, Northrop Grumman, and Raytheon.
While Boeing’s pretax income dropped 56.7% from 2008 to 2009, its sales grew by 12.1%, and its R&D expenditures increased by 71.1%. However, its R&D expenses for 2009 included $2.7 billion of production costs related to the first three 787 test aircraft, which cannot be sold, due to the extensive and unique modifications made. Without these 787 production costs, total R&D would have been flat to 2008. These costs also impacted the decrease in pretax income.
With a global economic recovery underway, there are tangible signs of improvement in the commercial airplane market. Passenger air traffic is increasing, led by emerging markets, and freighter traffic has rebounded strongly from severely depressed levels. The financial outlook for the world’s airlines has improved noticeably. Many airlines aggressively cut costs and capacity during the recession and are making sure they have the most efficient airplanes with which to compete during the economic recovery. The backlog of order deferral requests is decreasing while order accelerations are increasing noticeably.
Improving market conditions and the disciplined approach taken in managing production rates are paying off. Plans to increase the production rate on both the 777 and 747-8 have been implemented, and 787 deliveries are expected to ramp up over the next several years, which should continue Boeing’s market leadership in wide-body commercial airplanes.
The 737 continues to exhibit a solid backlog and continued strong demand, and a decision will be made shortly on a possible rate increase from its current production level of about 31 airplanes per month. This decision is not insignificant, as the long-term market outlook, customer contracts and lead times, and supplier contracts and lead times must be thoroughly analyzed.
With respect to the 787, the Dreamliner has completed key flight test milestones such as flutter, stall, and ground-effect tests (Fig. 2). On March 28, the static test unit successfully completed the ultimate load test with a fully pressurized cabin. First delivery is expected in the fourth quarter of 2010. Total firm orders for the 787 at quarter-end were 866 airplanes from 57 customers. The total production rate is expected to be ten 787s per month by the end of 2013. Three per month will be assembled at the expanded Boeing Charleston facility, which is now well into construction.
The 747-8 began its flight test program during the first quarter of 2010 and completed initial airworthiness testing. The program ended the quarter with three airplanes in the flight test program. Initial delivery is expected in the fourth quarter of 2010, and the first intercontinental delivery in the fourth quarter 2011. Meanwhile, The 737 and 777 programs continue to deliver solid performance and make solid productivity gains.
On the defense side of the business, the DoD and other U.S. government agencies continue to face significant budget pressures. However, both the fiscal 2010 defense budget and the fiscal 2011 budget request contain strong support for the majority of key programs, including the F/A-18, P-8A, the Chinook, Apache, and Osprey rotorcraft, and the brigade combat T modernization program. There is strong demand internationally for core defense and services products, including fighter jets, C-17s, the rotorcraft lineup, and 737-based military derivatives.
Boeing’s airborne laser performed the first “speed of light” shoot down of an in-flight ballistic missile target. The P-8A successfully completed weapons ground vibration testing, which paves the way for in-flight testing and verification of its weapons capabilities. And, Boeing has demonstrated that its A160T unmanned rotorcraft system can resupply forward operating bases, reducing risk for our armed forces.
Medtronic Shows Some Heart
As the world looks to technology for healthcare solutions, Medtronic climbed from 48th on our 2009 list to fourth this year. After all, it is the global leader in medical technology for alleviating pain, restoring health, and extending life for people with chronic conditions.
Medtronic develops and manufactures a wide range of products and therapies with an emphasis on providing a complete continuum of care to diagnose, prevent, and monitor chronic conditions. Each year, its therapies help more than 7 million people. Its key business units include Cardiac Rhythm Disease Management (CRDM), Neuromodulation, Spinal and Biologics, Diabetes, Cardio Vascular, Surgical Technologies, and Physio-Control.
A leading maker of implantable biomedical devices, the company makes defibrillators and pacemakers that shock the heart to help it beat normally. Subsidiary Medtronic Sofamor Danek makes spinal implant devices, and its neurological division makes neurostimulation devices and products that treat urinary incontinence. Medtronic Cardio Vascular produces catheters, stents, valves, and surgical ablation technologies used to treat vascular and heart disease. Medtronic also makes devices for diabetes; ear, nose, and throat (ENT) conditions; and emergency medicine.
Founded in 1949 and headquartered in Minneapolis, Minn., Medtronic does business in more than 120 countries with regional headquarters in Switzerland and Japan. Its chief competitors include Boston Scientific, Johnson & Johnson, and St. Jude Medical.
While its pretax income dipped 10.1% from 2008 to 2009, its sales increased by 8.0% and its R&D grew by 6.3%. If you adjust for certain restructuring charges, litigation costs, and in-process R&D, the company would have shown double-digit pretax income growth, more in line with the sales increase.
Medtronic’s strategic vision is its “One Medtronic” strategy: reaching within and across all operating segments to make its whole greater than the sum of its parts. The main tenets of this approach are:
• Driving sustainable long-term growth through innovation
• A strong focus on improving operating margins
• Delivering EPS growth and disciplined capital allocation
• Aligning the organization for market-leading and consistent execution
The company’s growth strategy is focused in three areas: protecting and growing share, developing new and existing markets, and expanding geographically. For example, strong international growth was broad-based with Western Europe, Greater China, Other Asia, the Middle East and Africa, and Latin America, as well as five of its seven segments delivering double-digit fourth-quarter results, driven by multiple product lines.
Medtronic currently does not expect Europe’s economic situation and the possible reduction of European healthcare budgets to have a negative impact on 2011. Also, the company does not feel that the rumored pricing constraints regarding pharmaceuticals in Europe will impact its products.
Its Atrial Fibrillation (AF) Solutions and Structural Heart businesses performed well in Europe. The CRDM Implantables business had a very strong fourth quarter in China and Other Asia. In Europe, its two drug-eluting stents, Endeavor and Resolute, continued to take share. The Endovascular business had another quarter of solid double-digit international growth, driven by the continued adoption of Endurant, AAA, and Valiant thoracic. Balloon Kyphoplasty grew in Western Europe as turnaround efforts began to have an impact.
In the Neuromodulation segment, Pain Stim, DBS, and Uro/Gastro experienced double-digit growth in Europe and Central Asia. Diabetes saw strong pump growth in the fourth quarter in Western Europe and Other Asia, driven by the expanded launch of the Veo insulin pump.
In AF Solutions, Medtronic had good results at the stock AF trial at the American College of Cardiology (ACC) and at the Heart Rhythm Society (HRS). The Arctic Front (catheter system) submission was completed in March, and the company hopes to receive Food and Drug Administration (FDA) approval later in 2010. Progress is also being made toward U.S. approval of the Ablation Frontiers catheters, which is anticipated in the second half of 2011. Medtronic intends to be the first company with on-label indications for all stages of AF.
In the fourth quarter, the company achieved the number-one position in the aortic transcatheter valve market, taking meaningful share even with competition from Edwards Lifesciences and Abbott Labs. Regarding the CoreValve U.S. IDE, discussions with the FDA are going very well and the trial is expected to begin this summer. Medtronic also completed the acquisition of Invatec late in the fourth quarter. Invatec is expected to contribute to the growth of the Cardio Vascular segment in 2011, adding important new products to adjacent areas of the Coronary and Peripheral Vascular businesses.
Medtronic recently announced its intent to acquire ATS Medical. This move has been very well received by customers around the world and will be particularly important in many emerging markets, where there continues to be a strong demand for mechanical valves.
Furthermore, Medtronic has a very robust product pipeline. Investments in R&D are delivering innovative technologies across all major markets. This rich pipeline positions the company well to deliver consistent market-leading performance.
In CRDM, Medtronic launched its Advisa MRI SureScan Pacemaker (Fig. 3) in Europe at the end of the fourth quarter. The company hopes to launch its REVO MRI SureScan Pacemaker in the U.S. in the first half of 2011. The pricing premium on these two devices is expected to mitigate pricing pressure and drive share. In high power, Medtronic launched its Protecta family with SmartShock Technology in Europe and anticipates launching these devices in the U.S. in the first half of 2011.
As shown at HRS, the Protecta defibrillator with its exclusive SmartShock algorithms reduces the delivery of inappropriate shocks, the leading clinical feature request from physicians. The launch of REVO MRI and Protecta in the U.S. depends upon on the resolution of FDA issues relating to Medtronic’s CRDM facility in Mounds View, Minn., which appears to be going well.
With respect to Cardio Vascular, Medtronic is on track to bring its Resolute drug-eluting stent to the U.S. in 2012. The results of the Resolute All-Comers trial, which compares Resolute to Xience (Abbott Labs), will be announced in Paris at the EuroPCR cardiovascular gathering. Medtronic also recently launched the Integrity bare metal stent in international markets. So far, it has received an extremely favorable market reception.
Integrity is a unique platform as its continuous sineusortal wire design provides significant improvement in flexibility, stent profile, and overall deliverability. Later in 2011, Medtronic is expected to launch a drug eluting stent (DES) version of Integrity in international markets.
In the fourth quarter, the company received approval of its complete SD stent, which treats peripheral arterial disease in the iliac arteries. In Endovascular, Medtronic expects to launch its TALA AAA and thoracic stent grafts in Japan in the second half of 2011.
In Spine, Medtronic is completely refreshing its posterior fixation systems with the combination of Solera, Vertex, and TSRH 3Dx. Solera, its next-generation posterior fixation system, has received outstanding feedback during its initial trialing period. The broader rollout of Solera will occur in the back half of 2011. In addition, its DLIF system, with the Clydesdale implant, is gaining momentum, growing more than 30% in the fourth quarter.
In Kyphon, Medtronic expects to launch various components of its next-generation kyphoplasty system (vertebra restoration process) throughout 2011, including the Xpander 2 balloon in the back half of the fiscal year. In Japan, kyphoplasty presents a very lucrative but longer-term opportunity. In the U.S., the company feels it has a competitive advantage with the nature of its products versus the competition (CareFusion and Stryker) and that it is well prepared to market and sell that advantage.
In Biologics, Amplify (for lumbar spinal fusion) has been scheduled for an FDA panel on July 27. And in Neuromodulation, Medtronic launched the Restore Sensor (Fig. 4) in Europe late in the fourth quarter. This innovative spinal cord stimulator’s proprietary adaptive stem feature automatically adapts stimulation by responding to changes in body position and activity.
Medtronic recently announced the start of the U.S. clinical trial and expects to bring this device to the U.S. market in 2012. Also during the fourth quarter, the company’s DBS therapy for epilepsy received an FDA panel recommendation for approval. Medtronic anticipates FDA approval later in 2010.
In Diabetes, Medtronic has launched two second-generation, sensor-integrated pump platforms. In international markets, Veo, with its unique low-glucose suspend feature, represents an innovative leap in closing the loop. In the U.S., the launch of Revel, with its new predictive alerts, is off to a good start. These two innovative pumps extend market leadership with the industry’s only sensor-integrated diabetes management systems. In June, the results of Star 3 will be presented at the American Diabetes Association (ADA) meeting in Orlando.
And in Surgical Technologies, growth was driven by the recent launches of NIM 3.0, Midas Rex MR7 and Synergy Cranial 2.1. Medtronic launched the PEEK plasma blade in the fourth and expects to launch the O-arm 3.1 in 2011.
Raytheon Senses Opportunity
Raytheon, a 2010 “All Star,” showed growth in employees, sales, pretax income, and R&D. It provides electronics, mission systems integration, and other capabilities for sensing, effects, and command, control, communications, and intelligence (C3I) systems, as well as mission support services in the U.S. and internationally.
The company operates in six segments: Integrated Defense Systems, Intelligence and Information Systems, Missile Systems, Network Centric Systems, Space and Airborne Systems, and Technical Services. Its technology platforms include Sensing, Effects, C3I, Mission Support, Homeland Security, and Cybersecurity.
Raytheon regularly places among the Pentagon’s top 10 prime contractors. Its air/land/sea defense offerings include reconnaissance, targeting, and navigation systems, as well as missile systems (Patriot, Sidewinder, and Tomahawk), unmanned ground and aerial systems, sensing, and radars. Additionally, the company makes systems for communications (satellite) and intelligence, radios, cybersecurity, and air traffic control. It also offers commercial electronics products and services, as well as food safety processing technologies.
The U.S. government accounts for around 88% of sales. Integrated Defense Systems and Missile Systems are the largest dollar sales segments with Network Centric Systems and Space & Airborne Systems not far behind. In fact, these four segments make up 82% of sales. Integrated Defense provides the highest operating margins (15.5%), with Network Centric and Space & Airborne not far behind (14.0% and 14.1%).
The company was founded in 1922 and is based in Waltham, Mass. Its competitors include Boeing, Lockheed Martin, and Northrop Grumman. Compared to 2008, its 2009 sales grew 7.4%, its pretax income jumped 16.2%, and its R&D increased 9.3%.
The U.S. Air Force awarded Raytheon’s IIS segment a contract to develop the next-generation ground control stations for GPS. Known as GPS OCX, the program will provide anti-jam capabilities to fighter jets, ensure future air traffic control systems, and facilitate the advancement of commercial GPS applications. IIS also had strong bookings on a number of classified contracts during the quarter, including a major classified program. The segment is very solid and continues to grow.
The company’s IDS business delivered good growth and strong margins. The U.S. Navy awarded initial funding for the third Zumwalt ship (Fig. 5), a meaningful step toward addressing any questions about the outlook of this successful program. It’s performing well, and the advance technologies that Raytheon is developing will support the U.S. Navy and other navies in the long-term future.
The Missile Systems segment booked a major classified program in addition to a number of significant bookings for the Missile Defense Agency, the U.S. Navy, and the U.S. Army, as well as international customers.
Also, Raytheon won a contract with the Office of Naval Research to continue its cutting-edge work on the Compound Semiconductor Materials On Silicon (COSMOS) program. The company will be able to deliver even more affordable sensor systems, while continually delivering world class performance.
In Cybersecurity, it won a contract to provide critical experimentation and test for the U.S. government’s cyber security capabilities. It also was awarded the final phase of the Defense Advanced Research Projects Agency (DARPA) contract to develop speech and language processing technologies to recognize, analyze, and translate speech and text into readable English in real time.
The bulk of the growth in Cybersecurity is expected in 2011 as some smaller programs start to bear fruit. Raytheon is using what it does internally with its own systems to prevent “zero day intrusions” to develop products for the commercial market on a larger scale.
International sales are growing at a double-digit clip with Cybersecurity a strong factor, and they are expected to make up around 24% of total sales in 2010. There is strong, broad-based international demand for each of Raytheon’s businesses, innovative solutions, and technologies. For example, SAS booked a contract for the production of advanced electronics systems for the Egyptian Air Force F16 fighter jets.
Raytheon continues to pursue “out of the box” projects such as Tempwave. In California, it has an experimental one-acre orange grove where it is testing a technology to raise the temperature in a clean, “green” manner to eliminate the problem of frost for fruit and vegetable growers. If it works, the company sees a huge market opportunity in the U.S. and already has strong interest from Canada.