7900 Glades Road, Suite 500
Company Perspectives:
As a leading supplier of power conversion products and communication subsystems, we strive to focus our efforts on high-growth applications within four key markets: computing and storage; carrier and enterprise networking; wireless infrastructure; and network access. Through a combination of dedicated design, manufacturing, and service facilities in nine countries, we have the global reach to service the world's leading OEM's.
Artesyn Technologies Inc.--formerly known as Zytec Corporation until its 1998 merger with Computer Products Inc.--is a leading designer and manufacturer of power conversion products and communications subsystems which convert, distribute, and regulate the electricity needed to operate computers, peripherals, office equipment, and communications technology. The Florida-based company is one of the largest power supply producers in the United States and has earned a reputation for quality within the industry and with the high-tech original equipment manufacturers (OEM's) which are its customers. Among those customers are Alcatel, Cisco Systems, Compaq, Dell Computer, Ericsson, Hewlett-Packard, Lucent Technologies, Nortel, Siemens, Motorola, Ciena, and Sun Microsystems. Along with its U.S. interests, Artesyn has plant operations in Austria, Germany, Hong Kong, Hungary, Ireland, and the UK.
Roots in Control Data Corporation
In the mid-1960s, as part of its vertical integration strategy, Control Data Corporation (CDC) opened a power supply plant in Redwood Falls, Minnesota, a small town about 100 miles southwest of Minneapolis. The factory produced power supply units for CDC subsidiary Magnetic Peripherals Inc. (MPI), which manufactured large magnetic disk drives. Engineering, purchasing, inventory control, and production schedules for the Redwood Falls plant and other small-town "feeder plants" manufacturing components and subassemblies for CDC were centralized in the Twin Cities.
In the early 1980s, CDC was faced with rapidly advancing electronics technology and intense competition in the marketplace. In response, CDC implemented a new business strategy. The company began to sell off its low-tech manufacturing operations--such as power supply units, cables, and circuit boards--and turned its resources to product development. From a different perspective, the community of Redwood Falls was at risk of losing its largest employer (the plant had once employed more than 500 people), when the region was already being rocked by an agricultural crisis.
CDC offered to sell the plant to a long-time employee, peripheral products manager Ronald D. Schmidt. His initial response to the idea was negative, but he became interested in acquiring the company when he was assigned to work on a plan to jointly operate the power supply operation with another large computer company. When the joint venture failed to materialize and a buy-out offer made by plant employees was rejected by CDC, Schmidt asked John M. Steel, another peripheral products manager, and Lawrence J. Matthews, head of component development at Magnetic Peripherals, to enter into a leveraged buy out of the plant.
CDC invested $500,000 for 22 percent of the company: an investment to be phased out over a three-year period through a discounted employee repurchase of stock. Schmidt, Steel, and Matthews raised $200,000, and CDC's financial subsidiary, Commercial Credit Co., kicked in $5.5 million in financing. Production would continue in Redwood Falls with the management and engineering offices located in the Twin Cities. Zytec was incorporated in January 1984 with Schmidt at the helm. Initially, CDC continued to provide Zytec with purchasing, inventory, and some corporate support services as well as orders for power supplies.
The Difficult Path to Independence
Schmidt, Steel, and Matthews planned to broaden their business by diversifying into other power supply markets, including minicomputers, engineering workstations, telephone switches, and medical testing and diagnostic machines. The new owners also made a commitment to use Dr. W. Edward Deming's 14 points for management--a philosophy which often received credit for reviving Japan's post-World War II economy--as a framework for making manufacturing changes. In the meantime, the newly independent company was operating under increased demand, while working to establish its own purchasing and production systems and building a warehouse for inventory. Nearly all of Zytec's first year revenues of $66 million were generated from its business with MPI.
The optimism associated with its initial surge of growth and plans for the future was squelched by a dramatic slump in the computer industry and existing manufacturing problems. Zytec began 1985 with $11 million in parts on its shelves and $6 million in unfinished product in the plant. Cycle times--the time from introduction of materials on the plant floor to shipment of product--were getting longer and cutting into already slim profit margins.
In the midst of the developing crisis, Schmidt worked to familiarize managers with Deming's concepts. He also brought on board people who were experienced in implementing Statistical Process Control (SPC) and Just-In-Time (JIT) manufacturing techniques: SPC involved the continuous monitoring of the production process in order to identify problems quickly, while JIT involved introducing and moving materials through the manufacturing process with maximum efficiency. Zytec also adopted a Total Quality Commitment (TQC) management approach, which gave all employees some level of responsibility for establishing, tracking, and achieving production goals and objectives.
However, in June 1985, after several earlier cutbacks on new orders, MPI abruptly stopped all shipments. The computer industry had weakened, and sales on CDC's large disk drives had plummeted even further. Production at the Redwood Falls plant was completely shut down for two weeks. Zytec gradually resumed operation, with employees taking salary cuts of 10 to 20 percent. According to George Dixon in Corporate Report Minnesota, "Later that summer Control Data slowly began to place more orders. By then, however, Zytec had begun to get its ruinous inventory and work-in-progress problems under control." They survived the period, according to Schmidt, by living off their inventory. Sales for 1985 had fallen to $48.5 million with losses of $2.3 million.
Reorganization and Renewal in the Late 1980s
Zytec's revamping was put into full gear in 1986. Employee training was accelerated. The factory was reorganized into manufacturing cells to streamline the production process. Quality control techniques were integrated into corporate areas as well as on the manufacturing floor and in the warehouse. Zytec returned to profitability in 1986, but revenues were still falling and the vast majority of orders were still coming from CDC.
San Francisco-based Micro-Tech Consultants, which served the power supply industry, estimated 1986 sales by independent producers to be more than $1.6 billion. With approximately $45 million in sales, Zytec was ranked seventh among U.S. firms. The industry consisted of many small producers with access to the same basic technology, operating under few industry standards, and most often producing custom made power supplies for a single large customer.
Power supplies, an essential element of electronic equipment, basically did the following: switch alternating current (AC) to the direct current (DC) used by electronic systems, provide various levels of DC voltage to subsystems and components, and monitor and regulate voltages to protect the equipment from power surges. However, the stress on the product caused by continuous use, the high level of manual construction, and the dearth of investment in technology had saddled the power supply industry with a reputation for product failure.
By 1987, Zytec was gaining notice, not for its failures but for its successes. The manufacturer had become more competitive with overseas power supply producers in terms of cost, quality, scheduling, and delivery times. Currency exchange rates had also started to favor domestic businesses, and the company gained such customers as Fujitsu America, Tandem Computers Inc., Unisys Corp., Abbott Laboratories, AT&T, IBM, Eastman Kodak, Network Systems, Sun Microsystems, and StorageTechnology. Zytec continued to refine its operations, invest in technological advancements, and diversify its markets over the next few years.
In 1991, Zytec won the Malcolm Baldrige National Quality Award, the Minnesota Quality Award, and the IBM Market Driven Quality (MDQ) Gold Award. The privately held company's revenue grew by nearly 30 percent in spite of a recession. Zytec also expanded internationally with the acquisition of an Austrian power supply manufacturing plant.
By the beginning of 1992, Zytec had 21 customers; less than five percent of business was with CDC. Zytec planned to go public that year, but the initial public offering was canceled due to inconsistent earnings coupled with an unfavorable market for smaller companies. Zytec did win another honor: Industry Week magazine named the Redwood Falls plant one of "America's Ten Best Plants." David Altany of Industry Week said Schmidt's and Zytec's commitment to Deming's quality principles set them "apart from the pack." Nevertheless, the company's bottom line was still wavering: Austrian operations lost nearly $4.5 million and largely contributed to the year-end loss of $3.3 million.
Zytec finally went public in November 1993. The stock was sold at $10.375 for a total of $9.2 million. The Austrian plant still generated a small loss in 1993, but the company's earnings were on an upswing. Zytec-designed and collaborative power supplies, the product segment with the highest profit margin but the longest development time, brought in 78 percent of revenues in 1994. Customer-designed power supplies, a low-risk and low-margin segment of business, contributed 13 percent of revenues. The remaining nine percent was generated by the repair and service end of the business. Zytec's power supply repair operation was the largest in the United States: they handled the products of more than 200 manufacturers. The bulk of the service business was dedicated to one customer, Hewlett-Packard, via Zytec's California repair facility. Overall, Zytec's revenue for 1994 grew by 41 percent to $128 million.
Mid-1990s Forces Affect Zytec and the Industry
In the mid-1990s, the power supply market remained highly fragmented with over 350 manufacturers. According to a 1995 John G. Kinnard & Co. report, two industry trends were likely to benefit Zytec. Many original equipment manufacturers--which accounted for about half of the power supply market--were shutting down their internal power supply operations finding it more economical to purchase the product rather than to manufacture it themselves. In addition, as power supplies became more complex and the industry became more automated, increased design and capital costs made it more difficult for the smaller independent power supply manufacturers to be competitive. Only a small percentage of U.S. manufacturers--Zytec among them--had annual revenues of more than $100 million while the vast majority of U.S. power supply makers had annual sales of less than $10 million.
A different trend in the electronics industry, one of demand outstripping capacity, had a negative effect on Zytec in 1995. A shortage of power semiconductors shut down production on several key projects early in the year. Zytec compensated by seeking out additional suppliers and redesigning some products, but the supply problem kept year-end earnings down in spite of significant revenue growth.
Schmidt, Steel, and Matthews, the leaders of the buy out from CDC, still owned about 35 percent of the company in 1995; other employees owned an additional 10 percent. Since the IPO, Zytec stock had hovered around the initial offering price, but in 1996 the stock experienced some volatility: first, due to earnings estimates, and then later because of an online bulletin board notice. Other activity included two stock splits and a postponed public offering.
The opening of a new manufacturing plant in Broomfield, Colorado, and an expansion of the plant in Redwood Falls helped alleviate Zytec's capacity problems. Zytec also acquired a magnetic components plant, the primary supplier for its Austrian operation, from the Hungarian government in 1996.
Zytec's 1996 revenues were $228 million. Net income rose 103 percent--if a one-time tax gain was excluded--to $7.9 million. In its 1996 10-K report, Zytec contributed its recent surge in sales to sole-provider opportunities with original equipment manufacturers for the Internet and data communications marketplace. Zytec also reported that its service and logistics business had been doubling each year, and the company was seeking additional customers in that growing area.
As more complex electronics technology drove the need for smaller and more efficient power supply systems such as the ones Zytec manufactured, the company focused on its product offerings. By the mid-1990s, they had hundreds of components and performed advanced diagnostic and power management functions. In 1996, Zytec established a distributed power architecture (DPA) office in Richardson, Texas. DPA is a process that allows greater flexibility when adding electronic components or upgrading hardware. The developing technology had been commonly used in telecommunications and was finding expanded applications in data networking, large volume data storage, and high-end data processing markets. Based on industry forecasts, Zytec expected the DPA technology to be an important expansion of its business in the future.
1998 Merger with Computer Products Inc.
The power source industry remained highly fragmented, however, with over 350 manufacturers in North America alone. With little room for major growth, power supply product firms began eyeing consolidation through acquisition as key to remaining competitive. A Zytec competitor, Computer Products Inc. (CPI), had done just that, spending most of the mid-1990s buying up smaller companies. CPI then set its sights on Zytec. Finally, in 1997, Zytec agreed to team up with CPI in perhaps the most significant move of its history. When the merger was completed in 1998, the newly combined company became a leading power supply product manufacturer with over 6,000 employees. The firm's name was changed to Artesyn Technologies and headquarters were moved to Boca Raton, Florida. Joseph O'Donnell--CPI's CEO--took the same position at Artesyn and co-chaired the firm with Schmidt. O'Donnell commented on the firm's name change in a 1998 South Florida Business Journal article, stating that "the new company we are forming is the largest for power systems and power supply in the communications industry. We build the power that drives workstations and personal computers. The 'Art' part of Artesyn describes the craftsmanship we provide in our products. 'Syn' stands for the synergy of the two companies."
Eyeing the communications industry as key for future growth, Artesyn focused its energies on supplying products related to both wireless and Internet infrastructure. As part of its strategy, the firm released new products including the SimScope, a Web-based power supply design simulation tool. The company then purchased Spider Software Ltd., a Scottish manufacturer of products used to facilitate communication between various networks, computers, and wireless and fixed wire telecommunications instruments like pagers, routers, servers, and telephones. The acquisition--completed in 2000--gave Artesyn a strong foothold in this growing sector of the industry. The firm's purchase of Azcore Technologies that same year also bolstered its holdings in DC-DC converters used in DPA technology. During 2001, the company acquired Real Time Digital, a manufacturer of digital signal processor (DSP) software and high-density DSP board products used to control information from circuit-based public telephone networks to packet-based Internet networks.
Strategic Alliances for the New Millennium
While revenue climbed to $690.1 million in 2000, increasing from $594.2 million recorded in 1999, Artesyn began to experience hard times during 2001 and into 2002. In June 2001, the firm announced that it planned to cut its employee base by as much as 15 percent and also implemented a cost-cutting strategy in order to combat weakening market conditions that caused the firm's sales and profits to plummet. In December of that year, Artesyn sold is Solutions division to Solectron Corporation for $33.5 million. As revenues continued to fall during 2001, Artesyn turned to Bruce Cheng, founder of Delta Electronics Inc., a leading power supply, electronic component, and video display manufacturer. An investment group led by Cheng pumped $50 million into Artesyn and also brought the potential for possible joint ventures and partnerships between the two businesses.
While many of the markets that Artesyn operated in remained weak, O'Donnell remained optimistic about future profit gains. Claiming that the firm's restructuring operations were successful, the CEO stated in a January 2002 press release that the company's objective was "to emerge from this slowdown as a much stronger competitor" and that he believed that Artesyn was "well-positioned to benefit from the eventual pickup in end market demand." However, whether Artesyn would emerge profitable on its own or through another strategic merger remained to be seen.
Principal Subsidiaries: Artesyn International Ltd. (Cayman Islands); Artesyn North America, Inc.; Artesyn Netherlands B.V. (Netherlands); Artesyn Technologies Communications Products, Inc.; Artesyn Delaware, Inc.; Azcore Corporation; Artesyn Asset Management, Inc.; Artesyn Communication Products Investment Inc.; Artesyn Communication Products, LLC; Artesyn Delaware LLC; Real Time Digital, Inc.; Artesyn FSC, Inc. (Barbados); Artesyn Austria GmbH; Artesyn Austria GmbH & Co. KG; Artesyn Holding GmbH; Artesyn Technologies Asia Pacific Ltd. (Hong Kong); Artesyn Ireland Ltd.; Artesyn Cayman LP; Artesyn Holdings (Ireland) Ltd.; C.P. Power Products (Zhong Shan) Co., Ltd. (China); Artesyn (U.K.) Ltd.; Artesyn Communications Products UK Ltd. (Scotland); Spider Software Ltd. (Scotland); Spider Software, Inc.; Artesyn France S.A.R.L.; Artesyn Germany GmbH (Germany); Artesyn GmbH & Co. KG (Germany); Artesyn Elektronisch Gerate Beteiligungs-und Germany Verwaltungs GmbH; Artesyn Hungary Elektronikai kft; Artesyn Technologies Intellectual Property (Hungary); Licensing Liability Company; Artesyn Energy Systems S.P.A. (Italy).
Principal Divisions: Power Group; Communications Products Group.
Principal Competitors: Emerson Electric Co.; Lucent Technologies Inc.; Power-One Inc.
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