Profit Power!

Dec. 21, 2004
IW's top 50 U.S. manufacturers leverage operational prowess for superior profitability.

Savvy investors know there's always a hedge in a down market. Companies that buck the trend and deliver dependable -- if not spectacular -- earnings year in and year out. For large manufacturing companies balancing a mix of resources and expertise, operational excellence is one of the best secret weapons in an uncertain market. A well-executed operational strategy -- think of the Toyota Production System, or Dell Computer Corp.'s reinvention of the supply chain -- is a competitive advantage that maximizes margins during boom times and pulls market share from less-agile competitors during down times. While dramatic cost-cutting might boost the bottom line in the short run, superior operations continually rationalize resources to deliver market-leading products and services at competitive prices. With foreign competitors cranking into high gear, the operational skill of U.S. manufacturers could well determine the future of American industry. To single out those manufacturers that are capitalizing on their operational expertise, IndustryWeek examined both the profit-generation ability and the asset-management ratios of the 500 companies included in this year's IW U.S. 500 list of the largest publicly traded manufacturing companies in the United States. We selected 50 top performers by comparing financial performance during the past three years (1999-2002) in six areas: revenue growth, return on equity (ROE), profit margin, asset turnover, inventory turnover, and return on assets (ROA). Because such measures can vary dramatically by industry, we made some minor adjustments to ensure that the segments represented were proportional. Of course past performance is no guarantee of future results, but IndustryWeek's Best Manufacturing Companies have done well over a three-year period when most firms have faltered. As a group the top 50 achieved a median ROE of 27% in 2002 and a ROA of 12%, compared with a median ROE of 8% and ROA of 2% for the other 450. The leading manufacturing companies posted median revenue growth of 6% over the most recent fiscal year when the total sales of most other U.S. manufacturers declined. Sure, the list includes many of the usual suspects: Merck & Co., Dell, 3M, PepsiCo and Johnson & Johnson, are all among the $10 billion-plus companies that we've singled out. A few others rarely find their way onto anybody's "best" lists. How did the Altria Group make our top 50? With almost $19 billion in sales last year, the company's Philip Morris USA division markets just over half of all cigarettes sold in the United States. International tobacco sales accounted for another $28.6 billion in sales. With such exposure the company's stock takes a hit with every multi-billion dollar tobacco verdict, and bounces back on each successful appeal. Beyond its legal problems, Philip Morris is fighting a price war against discount cigarette makers (whose market share has grown from 2% to 10% in just 5 years) as well as against counterfeiters that have emerged following new, tax-induced price increases. In the face of such challenges Altria remains operationally sound, posting net earnings of $11 billion on just over $80 billion in sales in 2002. A balanced portfolio helps. The company owns 86% of Kraft Foods (purveyor of Kool-Aid, Oscar Mayer, Maxwell House, and Jell-O brands), and over a third of London-based brewer SABMiller PLC. The largest company by far on our list, ExxonMobil Corp. chalked up a mind-boggling $204.5 billion in annual sales in 2002. Beyond petroleum, the Dallas-based company is deeply involved in businesses ranging from specialty chemicals and liquefied natural gas to copper mining. From an operational perspective, ExxonMobil oversees a global supply chain that encompasses offshore platforms in some of the planet's most inhospitable regions; a logistics network of supertankers, pipelines, refineries and trucks; and 43,000 retail sites that sell its products under the Exxon, Mobil and Esso brands in over 100 countries. Despite a 4% decline in sales from the previous year, ExxonMobil posted net income of $11.5 billion in 2002 and delivered some of the highest shareholder returns in its industry. There's nothing like dynamite competition to drive extraordinary performance. Among the largest manufacturing companies in the top 50, Colgate-Palmolive Co., Kimberly-Clark Corp. and Procter & Gamble Co. (P&G) all go head-to-head in the marketing-intensive consumer-goods sector. Diapers have become a particularly messy battleground for P&G (Pampers and Luvs) and Kimberly-Clark (Huggies). Following a price war that forced Kimberly-Clark to lower its earnings estimates in recent quarters, the latest salvo involves claims over which disposable training pants toddlers can wriggle out of most easily. There's no sagging in the fashion footwear industry. With extensive subcontractor networks, Nike Inc., Timberland Co., and Skechers USA Inc. don't own much in the way of production. But that doesn't make the task of designing, manufacturing and delivering quality product to retailers any less challenging. Timberland is celebrating its 30th anniversary with record first quarter revenues and earnings -- up 20% over the prior year period (12% excluding currency fluctuations), with strong expectations for the remainder of the year. Branching out beyond its work-boot heritage, over a quarter of Timberland's sales come from apparel and accessories. Although sales declined slightly in 2002, Skechers has been a tear since getting its start just more than 10 years ago. The footwear designer has carved out a formidable $945 million fashion niche. Today the company directly and indirectly distributes its brands at department and specialty stores in more 100 countries. Asset-heavy Cintas Corp. is a different kind of apparel company. The Cincinnati uniform maker offers custom measuring, individually labeled shirts and jackets and regular laundry service to its 500,000-plus business customers. The company boasts a remarkable record of revenue and earnings growth over 33 consecutive years. During the past five years alone, sales grew at a compound annual rate of 22%. Despite its record, Cintas remains vulnerable to employment fluctuations. When U.S. employment falls by a hundred thousand people or more in one month, a good percentage of those are hanging up Cintas uniforms. Several printing and publishing companies made IndustryWeek's list of elite manufacturers, including newspaper publisher Gannett Co., and sign and adhesive-label maker Avery Dennison. The largest check printer in the United States, Deluxe Corp. won accolades for both earnings performance and corporate governance practices over the past year. In spite of a slow decline in check usage, the St. Paul, Minn., company posted record net income in 2002. Through a combination of capital spending and cost-saving initiatives, the company expects the positive trend to continue this year. Another publisher, San Antonio-based Harte-Hanks Inc., prints and sends out direct-marketing pieces as well as coupon and advertising circulars. It has leveraged its expertise at helping its customers target consumers with its own customer-relationship management software and related services. Although sales have been flat, the business remains highly profitable; in the most recent fiscal year Harte-Hanks recorded earnings of $91 million on sales of $909 million. Requiring another type of special handling, two companies in the top 50 have found a profitable place in the operating room just as an aging baby-boomer population is beginning to go under the knife for replacement parts. In 2001 Bristol-Myers Squibb Co. spun off Zimmer Holdings, based in Warsaw, Ind. The company is No. 3 in the orthopedics market; it designs and sells reconstructive implants that help hips, shoulders and elbows recover from trauma or disease. Zimmer announced an 18% sales increase in the first quarter, citing success in promoting its less-invasive surgery procedures and technologies. The company currently is bidding to acquire Swiss medical-device maker Centerpulse AG (formerly Sulzer Medica). Not far away in Kalamazoo, Mich., lies one of Zimmer's direct competitors. Stryker Corp. manufacturers hip and knee replacements, endoscopy devices, spinal screws, bone growth products and powered surgical tools. The company reported a 15% sales increase, excluding the positive impact of foreign exchange rates, in its first quarter. IndustryWeek honored two of the company's manufacturing operations with Best Plants awards in recent years. One frequent standout did not make IW's list. Despite a steady earnings record General Electric Co. (GE) fell short in asset utilization, reporting an asset turn ratio between 0.2 and 0.3 over the past three years. Still, all factors considered, the company was in the top 20% in our rankings. And the famed GE discipline has carried over into other noteworthy companies. 3M is lead by chairman and CEO W. James McNerney, Jr., and Polaris by president and CEO Thomas C. Tiller, two of the most successful chief executives to rise up through the GE ranks.

How IW Picked The Best Manufacturing Companies To identify the top contenders, the IndustryWeek formula factored in revenue growth and profit margin over the past three years, with 2002 results weighted most heavily. We also considered three-year performance in four other financial ratios: Inventory turns (cost of goods sold/average inventory): Indicates how frequently a manufacturer's inventory is sold over the course of a year. Measure varies dramatically by industry; operations with higher inventory turns will require less capital to finance their business. Asset turnover (revenues/total assets): This ratio measures how efficiently assets produce sales. Comparing two companies in the same industry, the firm with higher asset turns is using its assets more productively. Return on assets (net income/total assets): Another measure of asset utilization, ROA brings profitability into the analysis. Return on equity (net income/shareholders' equity): ROE shows how successful management is at maximizing the return on shareholder investment in a company.
Top 50 Performers
IW U.S. 500 Rank Company Name Revenue
(U.S. Millions)
Profit Margin (%)
1 ExxonMobil Corp 204,506 5.6
7 Altria Group Inc. 80,408 13.8
12 Merck & Co. Inc. 51,790 13.8
14 Procter & Gamble Co. 40,238 10.8
15 Johnson & Johnson 36,298 18.2
16 Dell Computer Corp. 35,404 6.0
21 United Technologies Corp. 28,212 7.9
30 PepsiCo Inc. 25,112 13.2
40 Johnson Controls Inc. 20,103 3.0
52 3M Co. 16,332 12.1
60 General Dynamics Corp. 13,829 6.6
62 Anheuser-Busch Cos. Inc. 13,566 14.3
63 Kimberly-Clark Corp. 13,566 12.3
75 Nike Inc. 9,893 6.7
80 Colgate-Palmolive Co. 9,294 13.9
107 Gannett Co. Inc. 6,422 18.1
144 Maytag Corp. 4,666 4.0
146 Mohawk Industries Inc. 4,522 6.3
151 Lexmark International Inc. 4,356 8.4
153 Harley-Davidson Inc. 4,302 13.5
156 Avery Dennison Corp. 4,207 6.1
164 Hormel Foods Corp. 3,910 4.8
178 Enterprise Products Partners LP 3,585 2.7
183 American Axle & Mfg. Holdings Inc. 3,480 5.1
186 Ecolab Inc. 3,404 6.2
200 Stryker Corp. 3,012 11.5
212 Wm. Wrigley Jr. Co. 2,746 14.6
245 Cintas Corp. 2,271 10.3
276 NVIDIA Corp. 1,909 4.8
281 International Game Technology 1,848 14.7
290 Alliant Techsystems Inc. 1,802 3.8
306 Hon Industries Inc. 1,693 5.4
312 Universal Forest Products Inc. 1,640 2.2
332 Polaris Industries Inc. 1,521 6.8
352 Patterson Dental Co. 1,416 6.7
359 Zimmer Holdings Inc. 1,372 18.8
380 Blyth Inc. 1,289 6.6
383 Deluxe Corp. 1,284 16.7
392 Thor Industries Inc. 1,245 4.1
396 Monaco Coach Corp. 1,223 3.6
405 Timberland Co. 1,191 8.0
407 Barr Laboratories Inc. 1,189 17.8
419 Lancaster Colony Corp. 1,130 8.1
422 Donaldson Co. Inc. 1,126 7.7
426 Tupperware Corp. 1,104 8.2
447 Ametek Inc. 1,041 8.0
458 Quanex Corp. 994 5.6
474 Skechers USA Inc. 945 5.0
486 Harte-Hanks Inc. 909 10.0
495 Waters Corp. 890 16.6
By The Numbers
2002 Performance (median)
Top 50 Remaining 450
Profit Margin % 8.0 2.1
Return On Equity % 27.2 7.6
Revenue Growth % 6.2 -0.3
Inventory Turnover 7.0 5.9
Asset Turnover 1.3 0.9
Return On Assets % 12.5 2.4

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