U.S. corporate executives are often chastised for sitting on a lot of cash. But the slow and uneven recovery from the recent financial crisis and economic downturn has given them good reason for doing so.
“As demand started to weaken across our markets, we’ve reduced manufacturing to align with the new level,” says Patrick Ward, CFO of Columbus, Indiana–based Cummins. But that hasn’t stopped the engine manufacturer from making new investments. “Growth is not going to be linear at Cummins,” Ward explains. “We’re going to go through cycles, and we need to be flexible in how we execute our strategy. This is a tricky time period.”
Ward is recognized as the best CFO in the Machinery segment by the buy- and sell-side analysts who voted for Institutional Investor’s 2013 All-America Executive Team, our exclusive ranking of the nation’s best CEOs, CFOs and investor relations professionals and teams. And Cummins’s CFO isn’t alone in mastering the crosscurrents of a tricky period.
Even as many executives have decried the lack of clear economic, tax or regulatory policies in Washington, other corporate leaders on this year’s All-America Executive Team have deftly adjusted to uncertainty — unafraid to strike bold deals, prepared to make painful cost cuts. Through a year marked by a persistent euro zone crisis and increasingly volatile growth in emerging markets, along with the fiscal clouds hanging over Washington, these executives navigate powerful — and often conflicting — business and economic forces. They not only prevail, they prosper.
“We’ve had to be very prudent,” says Stacy Smith, CFO of Intel Corp. But, he adds, “we’ve also had to maintain the courage of our convictions and continue to make investments, even in the midst of a rocky macroeconomic environment.”
In fact, he notes, it’s important to recognize that uncertain climates can benefit a company that knows how to look for the unique opportunities such periods can bring. Adapting to today’s often-austere environment means recognizing that it can offer up not only the best bargains but also plum chances to pull ahead of the pack.
“Paradoxically, uncertainty really opens up opportunities to distance yourself from your competitors,” says Smith, the best CFO in Semiconductors according to the buy side. “When we invest in our factories and extend our leadership over the rest of the industry, there’s an advantage in that. When we make those investments at the same time that others pull back, we get a much bigger advantage.”
For many of the companies included in this year’s ranking, a similar reasoning has led to major acquisitions, but Smith says Intel’s biggest bet has been on its own factories, where the company invested $11 billion in 2012. The firm has also been investing in its product portfolio, as it moves to respond to a tectonic shift in technology. Santa Clara, California–based Intel is best known for manufacturing the microprocessors that power most personal computers, but as PCs have forfeited ground to tablets and smartphones, it was forced to shift gears over the past year.
“We’re going through a complete transformation,” Smith says, noting that in 2012 Intel began selling silicon for phones and tablets for the first time.
He also points to the development of Ultrabooks, next-generation notebooks that run on Intel processors. In August 2011, the firm announced a $300 million fund to support companies developing hybrid laptop-tablet devices matching Intel’s specifications: the Intel-termed Ultrabook would be a superthin notebook with tablet characteristics, such as a touchscreen and long battery life. The first Ultrabooks were unveiled in October 2011.
Making the transition from one generation of technology to the next can be tricky, as Intel’s financial results attest. Net income for the first three quarters of this year fell 11 percent, to $8.5 billion from $9.6 billion for the same period last year, while revenue was essentially flat at $39.9 billion versus $40.1 billion for the earlier period. Nonetheless, says one buy-sider, “management has realized where the industry is heading and is making every effort to deliver excellent products in these high-growth areas.”
When he announced Intel’s third-quarter results, CEO Paul Otellini blamed a “tough economic environment” — in the U.S. and Europe, not surprisingly, but also in key emerging markets, particularly China. Smith says, however, that Intel has no plans to shift away from China, the largest PC market in the world, or other still-growing regions, despite their recent volatility. He notes that prices of personal computers in developing markets recently fell below an average level of eight weeks’ income, a threshold that typically signals a spike in demand.
Yet another challenge that Intel faces is the looming May 2013 retirement of Otellini, the top CEO among his peers according to both the buy and sell sides in our survey. (A replacement has not yet been named.) Smith asserts that the timing of Otellini’s departure is a further reflection of the company’s faith in its new strategy: “He feels like the strategy and the course we’re on as a company is the right direction, and he’s confident in the next generation of leaders.”
In the case of Danaher Corp., a Washington-based conglomerate whose products range from microscopes to water disinfection technologies, battening down the hatches and preparing for little-to-no growth in 2012 set the stage for an unexpectedly successful year. Danaher ranks No. 9 among the Most Honored Companies in the survey; its top executives garnered eight first-, second- or third-place finishes for the Best in Their Industry segment according to both buy- and sell-side analysts.
“We came into this year with a grounded view that, at best, this was likely to be a low-growth year on the top line in light of the challenging macro situation,” says H. Lawrence Culp Jr., Danaher’s CEO and the most-admired chief executive by both the buy side and the sell side in the Electrical Equipment & Multi-Industry sector. Now Danaher is poised for low-teens earnings growth year-over-year, Culp adds, “in no small part because of that grounding at the outset.”
This “grounded view” led to equal measures of cost-cutting in the U.S. and new-product development and acquisitions in such high-growth regions as Brazil, India and China. The moves have paid off: Danaher’s net earnings for the first nine months of 2012 rose 13 percent from the same period in 2011, to $1.8 billion from $1.6 billion, on a 17 percent increase in revenue, to $13.3 billion from $11.4 billion.
“When we look at environments like this, we tend to see opportunities,” says Culp. He notes that both the post-Lehman and post-dot-com periods yielded good opportunities, and Danaher continues to seek these out in the current environment. During the past 18 months or so, he reports, the company has spent more than $2.5 billion in new acquisitions “that will set us up going into 2013 quite well.”
Three acquisitions in particular, he says — the purchases of Belgium-based Esko, a supplier of packaging, design and display finishing; X-Rite, a Grand Rapids, Michigan–based manufacturer of color-matching products; and Carlstadt, New Jersey–based Pantone, which also focuses on color selection and matching — have helped Danaher build a strong position in what it calls “product identification,” which Culp describes as “our best growth engine in industrial.” The purchases followed close on the heels of Danaher’s biggest acquisition in decades: the February 2011 purchase of Brea, California–based Beckman Coulter, a maker of biomedical testing products, for $6.8 billion.
Culp says Danaher has since directed its M&A dollars outside the health care sector. Two thirds of Danaher’s acquisitions in the past 18 months have been in three of the company’s five non–health care segments: environmental, industrial, and test and measurement.
Hoping to escape slow growth and volatility in the U.S. and Europe, the firm is now looking for acquisitions that will deepen its penetration into emerging markets. Last August, for instance, Danaher bought Hangzhou Dingli Environmental Technology Co., a Chinese distribution company, and made it part of Danaher’s water analytics business.
Uncertainty is inescapable, Culp notes: “A lot of us have become accustomed to political and regulatory uncertainties; we just try to take the most sober assessment possible.”
Of course, it helps to be positioned to benefit from new regulations. For example, new water-quality regulations have generated fresh demand for Danaher’s municipal wastewater and drinking water plants. Similarly, Culp expects the Patient Protection and Affordable Care Act will boost the company’s diagnostic businesses, as some of roughly 30 million newly covered patients seek care.
Another company that braced for macroeconomic weakness and profited as a result is Memphis, Tennessee–based International Paper Co.The world’s largest pulp and paper maker began rethinking its strategy as far back as 2005, as the paper industry came face to face with its secular decline. “While we were the largest company in our industry, we weren’t satisfied with the returns we were making,” says CEO John Faraci.
International Paper sold $11 billion of assets, about one third of its total at the time. It divested from over a dozen companies to focus on global paper and packaging. “We traded business diversity for geographic diversity,” explains Faraci, the top CEO in Paper & Packaging for both the buy side and the sell side. He oversaw acquisitions in the BRIC quartet of Brazil, Russia, India and China — purchases that paid off as those regions continued to grow while developed markets only slowly recovered from the recession of 2007–’09. Not only did the company enjoy higher top-line growth from emerging markets, more of that growth fell to the bottom line. In 2000, International Paper posted sales of $29 billion and had 113,000 employees. In 2013, Faraci predicts, it will achieve close to that figure in sales, with only 70,000 employees.
Negotiating from such a position of strength, IP’s deal makers can choose to be aggressive. In February the company made its first hostile takeover, the $4.3 billion acquisition of Temple-Inland, an Austin, Texas–based corrugated packaging and building products company.
Polaris Industries, a Medina, Minnesota–based manufacturer of off-road vehicles, motorcycles, snowmobiles and small electric vehicles, is another company that has managed to defy the weak economic climate and broader uncertainty. Its net income for the first nine months of 2012 rose 37 percent, to $224.2 million from $163.7 million in the same period in 2011. Revenue jumped 23 percent, to $2.3 billion from $1.8 billion, in the same period. By the end of 2012, CEO Scott Wine says, the company will have doubled its revenue since 2009.
Judged the best CEO in Leisure by the buy and sell sides, Wine credits his company’s success to finding “growth through adjacencies” — that is, continually branching out into new, related vehicle markets. As sales of recreational vehicles started to dip at the end of 2008 and in early 2009, for instance, Polaris signed a partnership with Bobcat Co. to develop work vehicles for the North Dakota–based construction equipment company. More recently, in mid-2011, Polaris bought low-speed electric vehicle manufacturer Global Electric Motorcars from Chrysler, and three months later acquired Goupil Industrie, a privately owned Bourran, France–based electric vehicles maker; neither deal’s terms were released. Wine predicts a big future for the electric vehicle space: “We’re trying to diversify to similar areas of vehicles, but new customer bases.”
Of course, growth requires investment. In the same three-year period that saw Polaris double its revenues, it also doubled its R&D spending to 4 percent of revenues. Sure enough, its market share during that time in side-by-side vehicles — the small two- or four-person four-wheel-drive off-road vehicles that comprise one of Polaris’s main business areas — doubled as well. The company’s self-described “vitality index” shows that 73 percent of its revenue in the third quarter of 2012 came from products launched within the past three years.
Like other members of this year’s All-America Executive Team, Wine is pushing for more business outside of North America. In July, Polaris announced a joint venture with Eicher Motors, a New Delhi–based vehicle and motorcycle company, to make products for countries throughout South Asia. Wine says Polaris is seeking to do “something similar” in China.
Still, Wine shows caution about pulling the trigger on big investments: “We budget very conservatively, because we are concerned about Washington and the strange decisions they’re making. If the results get better, we’ll spend more throughout the year.”
Semiconductor company Broadcom Corp. has found it necessary during the past year to make its top executives more available to shareholders questioning its decline in profitability. In the first nine months of 2012, net income fell by 30 percent, to $468 million from $673 million for the same period the previous year, despite a 6 percent increase in revenues, to $5.9 billion from $5.6 billion for the same period in 2011.
“You want investors to understand not just where your numbers are, but how you think and the choices you make,” says CFO Eric Brandt.
Broadcom develops the semiconductor chips that undergird wired and wireless communications: Its chips drive modems, set-top boxes, the switches that constitute the infrastructure of the Internet, and wireless devices like tablets and smartphones. The Irvine, California–based company has no manufacturing arm — 77 percent of its 11,200 employees are engineers devoted to R&D — and counts as its major customers Apple, Cisco Systems, Dell, DirecTV and Samsung, among other tech companies.
But industry demand has been “roughly flat,” says Brandt, the sell side’s favorite CFO in Semiconductors. Even so, the company expects to pull in about $8 billion in revenues this year, up from $7.39 billion in 2011.
Like other members of the All-America Executive Team, he says his company expects to grow despite difficult conditions by broadening its offerings and growing its market share. In Broadcom’s case, that means focusing on smartphones and tablets — what Brandt calls “the right parts of the market” — and partnering with the most successful companies in those spaces.
In February, Broadcom completed its $3.7 billion acquisition of NetLogic Microsystems, which makes high-performance semiconductors for use in 3G/4G wireless infrastructure and other next-generation Internet networks. To round out Broadcom’s portfolio of wireline access products, in April the company paid $195 million for BroadLight, an Israel-based manufacturer of chips used in fiber optic networks.
Even as it searches out new avenues of growth, Broadcom has not been squeamish about exiting less promising businesses. In early 2012 the company pared down its consumer electronics business in broadband by quitting the Blu-ray- and digital TV–chips spaces.
Still, Brandt maintains that the company’s focus, even in these uncertain times, is on investing, not slimming down. Although he acknowledges that in the current environment “it’s very hard to decide whether you’re buckling down or investing,” Brandt insists, “we are firm believers that you pick up share in down markets and you hold share in up markets.”
In New York, CBS Corp. is also shifting gears to deal with a changing landscape. The television broadcasting network’s CEO, Leslie Moonves — who receives top accolades in the Media sector from both the buy and sell sides — is reducing its reliance on advertising revenue in favor of content licensing as broadcast television audience numbers continue to decline. “We now consider ourselves much more of a pure content company,” Moonves told analysts in December 2012. “Our world has changed drastically in the past few years.”
During the third quarter of 2012, 44 percent of the network’s total revenues came from nonadvertising sources, growing from less than 30 percent five years ago. Total revenues for the first nine months of 2012 were $10.8 billion, up 3 percent from $10.5 billion for the same period in 2011, while net income advanced 28 percent, to $1.2 billion from $935 million.
Although fees paid by cable, broadcast and other service providers that transmit CBS content accounted for only $250 million of total revenue, Moonves expects that figure to quadruple to $1 billion within five years.
Digital streaming is another nonadvertising revenue stream that CBS is seeking to tap, through content-licensing deals with Amazon.com, Hulu and Netflix. Analysts estimate that these arrangements already generate amounts similar to what CBS gets from cable and broadcast licensing. In November, CBS announced that it would extend its licensing agreement with Netflix International to stream CBS shows in Canada, Ireland, Latin America and the U.K.
International syndication, especially to emerging markets, provides another source of potential growth. Revenues here topped $1 billion in 2011, double the amount earned in 2007. In August, CBS signed a deal to partner with international media company Chellomedia, which will take its programming for the first time to Eastern Europe, the Middle East and Africa.
But emerging markets are no panacea, as engine maker Cummins well knows. Indeed, the global climate has been particularly tough for the company to predict, says CFO Ward, causing it to twice lower its growth targets for the year. With first-quarter earnings, Cummins projected revenue for the year could rise to roughly $20 billion, which would have represented growth of about 10 percent over 2011. By the time Cummins released its third-quarter results at the end of October, however, the company projected 2012 revenues would come in at a more modest $17 billion, about 5 percent lower than 2011’s total.
Ward says that shaky markets have led Cummins to cancel projects, though
he declines to specify which ones. Still, he insists that the company will continue to invest even in lean times in areas such as cleaner engines and infrastructure, particularly in emerging markets.
“Often the decisions you make in the most difficult situations — like we had to make in 2008, and like we’re making right now — impact how you perform in the growth phase,” notes Ward.
Better days lie ahead.
America's Most Honored Companies will be feted at a dinner and ceremony on March 6, 2013 at the Mandarin Oriental in New York City. Visit www.iiawards.com for additional details.