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
News/Reports
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.
Executive Summary United Technology Corporation’s (UTC) offer for Rockwell Collins reflects UTC’s history of using merger and acquisition for strategic re-positioning. While expensive, a successful transaction should place UTC in an enviable market position among aerospace suppliers. The Deal On September 4th, 2017 United Technologies Corporation (UTC), one of the world’s largest precision manufacturers, announced it would buy Rockwell Collins for $30 billion in cash, stock, and assumed debt. Some criticized the deal as too expensive and brought on by the threat of activist investors pressuring UTC management for better performance. A longer term look shows the Rockwell Collins deal is the latest action in a disciplined M&A strategy that should continue to refresh UTC’s prospects for decades to come. Precision manufacturers of all sizes can learn from UTC on how to effectively sell and buy businesses with an eye to long-term performance. For some time UTC has faced complaints from shareholders for underperforming other industrial firms. There is some truth to the complaint: Source: ChartIQ. Since 2011, UTC shares lagged the broad market. Why? Lack of growth. The company, net of discontinued operations, grew revenues at a gentle 2.4% per year. Profitability similarly lagged, primarily due to the decline in US military spending. Three separate deals reflect UTC’s attempts to expand in the more desirable commercial aerospace markets. Goodrich In 2011 UTC acquired Goodrich for $18 billion. Out of the tire business for years, Goodrich’s $8 billion in annual sales come from landing systems, one of nine core technologies found in most aircraft. At the time of the deal, Wall Street pilloried UTC management for paying too much. Hindsight shows that, though expensive, Goodrich (now part of UTC Aerospace Systems) is a highly profitable contributor to UTC. So, a step in the right direction. Sikorsky Sale In 2015 UTC…
Medical Product Outsourcing (MPO) has published its annual report on the Top 30 companies in the Global Medical Device marketplace. The ranking of companies includes reporting on industry trends of the past year. The piece features Tony Freeman’s insights on the performance of Medtronic, Johnson & Johnson, Becton, Dickinson and Company, and Stryker.
MedPlast, Inc. announced it has acquired Coastal Life Technologies (CLT), a San Antonio, TX, contact manufacturer, assembler, and kitter of medical devices and procedure sets. Financial terms were not announced. The acquisition by private equity-backed MedPlast compliments MedPlast’s acquisition of Vention Medical’s Device Manufacturing Services earlier this year. A.S. Freeman Analysis: MedPlast’s acquisitions give the company the scale and range of services perceived as necessary to hold direct-to-OEM relationships. The acquisition of CLT expands MedPlast’s capabilities to offer complete devices as well as manage inventories for customers. Increasingly, contract manufacturers are rounding out there offerings to ensure they can deliver a complete device directly to the marketplace. For more information on the transaction please go to PR Newswire .
After twelve years as Managing Director of Manning Advisors I am pleased to announce the formation of A.S. Freeman Advisors, LLC based in New York City. A.S. Freeman provides merger and acquisition advisory services to specialty materials, specialty chemicals, and precision manufacturing companies around the world. In addition, A.S. Freeman offers strategic consulting services to firms valuing companies and markets. This is an exciting time in the high-value manufacturing markets. Value creation, new fields, and evolving economics are topics executives must consider as they guide their companies. A.S. Freeman provides the external perspective managers often require. Please get in touch to learn more about our offerings and experience. I look forward to speaking. Best regards, Tony Anthony S. Freeman President A.S. Freeman Advisors, LLC www.asfreeman.com (917) 868-0772 direct