On April 6, 2018 NN, Inc. (NASDAQ:NNBR) announced that it would acquire Paragon Medical for $375 million cash. Indiana-based Paragon, a major orthopedic contract manufacturer, had 2017 revenues of $141 million and EBITDA of $24 million. The offer values Paragon at 15.6 times EBITDA on a nominal basis. NN stated that the multiple is best viewed as 9.3X because of significant Year 1 cost synergies including $7.8 million in Day 1 synergies. Details of the synergies were not presented. NN has been an active acquirer of medical device supply chain companies. In 2015 NN bought Precision Engineered Products (PEP), a diversified manufacturer notable for its medical focus. In 2017 NN acquired DRT Medical, an orthopedic machiner. It also acquired Bridgemedica, a device design company, in February 2018. While the Paragon deal multiple may appear high, there is a strategic rationale for NN’s actions. NN’s historic portfolio of industrial businesses have tended to be slower growth and lower potential profitability than medical suppliers. Last summer NN sold its precision bearing company for $375 million, cash still on the books as of year-end 2017. While NN may have paid a premium for Paragon, the move fits with their strategy of swapping businesses with a limited future for medical contractors. In that strategy NN joins Danaher, Teleflex, TE Connectivity, and ITW as American manufacturers changing direction and using significant resources to do so. For detailed information on the transaction please view NN’s presentation: http://phx.corporate-ir.net/phoenix.zhtml?c=110673&p=irol-Agreement Please contact Tony Freeman at tfreeman@asfreeman.com or (917) 868-0772 with comments and questions.
News/Reports
Recent news stories on the possibility of tariffs on Chinese products imported to the United States have focused on industries tangential to medical devices. However, on April 6th the New York Times published a thought-provoking piece on the impact of these kinds of tariffs on medical device pricing. The article suggests that tariffs will likely raise the price of devices in the U.S., although few details or specifics are given. At A.S. Freeman Advisors, our take is more nuanced. Because of its competitive nature, the North American market would be able to absorb much of the fabrication side of the tariff impact, ultimately leaving prices only modestly higher, if at all. More work would flow to non-Chinese facilities, including those in the United States. This will mean that demand for the work of supply chain companies is likely to increase sharply. Of greater concern to domestic manufacturers should be the effect of tariffs on the cost of raw materials sourced from China. It may prove difficult to switch to domestic steel and aluminum, forcing U.S. manufacturers to deal with higher materials prices. Please contact Tony Freeman at tfreeman@asfreeman.com with comments and questions.
Oberg Industries, Inc. has acquired X-L Engineering Corp. A.S. Freeman Advisors advised Oberg on this transaction. Read more
I am pleased to announce the publication of A.S. Freeman Advisors’ “2018 Global Trends – Medical Device and Diagnostic OEM Strategy, Implications for the Supply Chain” annual presentation. The presentation covers: Size of the global device market Industry growth rate 30 largest OEMs and their percentage of the market Trends driving the re-design of medical device product lines Consolidation and its effects on the supply chain Growth of global contract manufacturers Four essentials for medical device contract manufacturers to expand in this environment The presentation is available at no charge. Please visit https://asfreeman.com/pf/global-trends-report-2018/. Additionally, A.S. Freeman Advisors will be happy to present these findings with comments customized to your company. To arrange a date please contact me at tfreeman@asfreeman.com. We welcome the opportunity to discuss these timely issues.
Johnson & Johnson released its Q4 2017 results on January 23, 2018. The company’s Medical Device division reported 6.5% year-on-year growth. Adjusted for acquisitions, worldwide global growth was 2% over the same quarter in 2016 with near-flat results in the United States. Cardiovascular, vision care, and advanced surgical products showed solid revenue gains with orthopedic products and diabetes care sales declining. Alex Gorsky, J&J’s CEO stressed 2018 initiatives include robotic surgery systems and digital devices. Our analysis is that J&J remains committed to revive its substantial but slow-growth Medical Device division via two strategies. The first is to move away from markets where it lacks a strong competitive advantage. Examples include the divestiture of its Cordis cardiovascular products to Cardinal Health and of Codman Neuro to Integra LifeSciences. The second strategy is to bring J&J’s tremendous technical and financial resources to bear in desirable evolving markets where it already has strength such as surgical products. The next two to three years should reveal a realigned J&J product offering. For the complete Q4 2017 J&J Earnings Presentation please visit: http://www.investor.jnj.com/events.cfm
On January 16, 2018 Boeing announced a joint venture with automotive seat manufacturer Adient to supply aircraft seats to Boeing customers. The new company, Adient Aerospace, will be based near Frankfurt, Germany. The action places Boeing in direct competition with suppliers Zodiac and Rockwell Collins. Given Boeing’s historic role in outsourcing key systems of aircraft to Tier 1 manufacturers it seems surprising that it would reverse its strategy during an aerospace supercycle. Boeing lists multiple reasons for the action but one stands out as more immediate than any other – plane sales are being held up by lack of seats. Aircraft seats, particularly profit-generating first and business class seats, are complex, precision assemblies. Recent aircraft deliveries have been held up for lack of seats, and the impact on Boeing’s revenues are significant to say nothing of the stress for its customers. By venturing with Adient, Boeing is taking a half step back on a multi-decade outsourcing strategy. With its supply chain unable to keep pace, Boeing has elected to essentially “in-source” seat manufacturing. For more information on the Boeing-Adient joint venture please visit: https://www.bloomberg.com/news/articles/2018-01-16/boeing-creates-seat-making-venture-to-cope-with-tardy-suppliers
Sales of medical devices increased 6.8% in 2017 from a combination of: Organic growth Acquisitions by major OEMs to round out product lines Currency fluctuations Greater detail will be available with the publication of A. S. Freeman Advisors’ “2018 Global Trends in Medical Device and Diagnostic OEM Strategy and Implications for the Supply Chain” on February 2, 2018. For more information or to schedule a presentation of the results please contact Tony Freeman of A.S. Freeman Advisors, LLC at tfreeman@asfreeman.com or (917) 868-0772.
Manufacturers commonly claim that “our employees are our greatest asset,” but when it comes to corporate strategy, they treat recruiting and retention as tactical issues. Recent data, however, suggest that a long-term staffing strategy and supporting investment are absolutely critical to future success. Last week’s headline of 4.1% U.S. unemployment obscured a number that many precision manufacturers are only vaguely aware of — manufacturing unemployment is at 2.6%[1]. According to classic economic theory, 5% unemployment is considered full employment. Full employment spurs growth, but it also leads to labor shortages, particularly in skilled fields. Labor shortages, of course, drive up wages. Today, the average American manufacturing job pays $21.60 per hour[2]. Federal Reserve Economic Data (FRED) In the precision manufacturing fields the Great Recession tested the ability of executives to control expenses and rebuild order books. Today’s economy presents a different challenge: hiring the right employees to ensure future growth. Traditional hiring, the core of most manufacturers’ staff development program, is increasingly inadequate for those who must hire skilled staff quickly. Manufacturers are seeking solutions in a number of new, long-term strategies. The first method looks back in time. Firms are reviving, expanding, or initiating apprenticeship programs. With the image of American factory jobs shifting from unskilled work in dirty plants to highly skilled positions in NASA-like cleanrooms, it is becoming easier to recruit talented younger workers for training programs. Additionally, some firms have looked at programs aimed not only at training new hires, but at retraining their entire workforce to improve productivity. While the results of these programs are often impressive, they can be slow to flower and costly. An alternative increasingly under consideration is to acquire smaller competitors for their skilled staff. While it can be a challenge to find the right fit of location, market focus, and…
Executive Summary In a laudable strategic and tactical move Airbus acquired majority ownership of Bombardier’s Series C line in a no cash deal. Additionally, Airbus management astutely recognized that Bombardier’s problems could be recast as advantages with their international footprint and supply chain. The Deal On October 16, 2017 Airbus announced it would acquire 50.1% of the equity of the Canadian consortium which owns Bombardier’s C Series airliner. Prior to the deal Bombardier’s market value was $2 billion. Airbus is putting up no cash for its shares and it announced it would move a significant portion of the plane’s final assembly to its plant in Alabama. Analysis The deal is a brilliant gamble by Airbus and a desperate attempt to survive by Bombardier. The C Series regional jet, lauded technologically by aircraft designers, has suffered from poor sales and a near empty order book. One cause has been Bombardier’s chief competitor for the lucrative US regional jet market. Boeing, manufacturer of the market adjacent 737, has been hammering Bombardier in US courts to pay a 300% tariff on Series C aircraft sold in this country. Few airlines wish to commit to a fleet with an unknown price tag so they have stayed away from the modern composite wing Series C, financially crippling Bombardier. Boeing found a possibly unwanted ally in President Donald Trump. The President recently stressed to Canada’s Prime Minister Trudeau that the President strongly supported Boeing’s claim regarding the sale of the “foreign” aircraft (more on this later). Trudeau responded by freezing the purchase of 18 Boeing Super Hornet fighters for the Canadian Air Force valued at $5.2 billion. In August Bombardier leadership looked for a white knight to keep the C Series alive. Airbus offered a no cash deal and ended up with its first regional jet,…
A.S. Freeman will be attending the MPO Summit in San Diego October 18 and 19. Please contact tfreeman@asfreeman.com to meet.