Commentary
by Drs. Russ Henke & Jack Horgan Henke Associates

In the first MCAD Industry Commentary published May 2003 in MCADCafé.com, then-recent yearly and quarterly financial performances of a selected group of public Mechanical Computer Aided Design (MCAD) companies were analyzed and compared. Expectations of future financial performances of these same MCAD entities were documented. The May 2003 MCAD Commentary was followed by twelve quarterly updates in MCADCafé.com, one for each subsequent calendar quarter. URL's on all past articles are available. The entities covered were ANSYS, Autodesk, Dassault Systèmes, UGS PLM, ESI Group, Moldflow, MSC.Software, PTC and Tecnomatix.

Due to the acquisition of Tecnomatix by UGS that closed April 1, 2005, Tecnomatix will no longer be covered here as a separate entity. While MSC.Software will be discussed in the article below, its financials will be omitted from the vendor comparisons because of MSC.Software's ongoing financial restatement issues.

Accordingly, the current article in the sequel recounts the financial performances of the remaining group-of-seven (G7) MCAD/PLM entities for the nominal first quarter of 2006.

Recent MCAD & PLM News Highlights

On March 23, 2006 Autodesk launched AutoCAD 2007 and AutoCAD LT 2007 software. On the same day, the firm announced a major update to its software portfolio, including advanced versions of more than 25 products.

On April 26, 2006 PTC announced it had signed a definitive agreement to acquire Mathsoft Engineering & Education, Inc. (Mathsoft) for $63.25 million in cash. Mathsoft is the provider of Mathcad, software that helps engineering organizations create, automate, document and reuse engineering calculations critical to the product development process, as well as other mathematics-driven processes. Mathsoft sports annual revenue of approximately $20 million and over 250,000 professional users worldwide.

On May 1, 2006 ANSYS announced that it had completed its acquisition of Fluent Inc., a global provider of computer-aided engineering (CAE) simulation software, for approximately 6,000,000 shares of ANSYS common stock and approximately $299 million in net cash.

On May 11, 2006 Dassault Systèmes announced it had completed the acquisition of MatrixOne Inc., a provider of collaborative PLM solutions for the value chain. The all cash purchase price was $410 million in the aggregate, before reflecting cash balances and estimated tax benefits.

MCAD Vendors' Financial Performances in Q1 2006

As a group, the G7 MCAD vendors generated combined revenues of $1.31 billion in the first quarter of 2006, an impressive 16.2% increase over the $1.12 billion in the first quarter of 2005, but a dip of 5.4% from the $1.38 billion in the fourth quarter of 2005 (a seasonally strong quarter). See Table 1.


All of the MCAD vendors experienced year-over-year revenue growth. On a percentage basis, Dassault, Autodesk and ANSYS grew more than 20% in local currency. PTC and ESI Group had lower double digit growth. Moldflow was at the rear with only 2% growth. On a sequential quarterly basis, ESI-Group led with a doubling of revenue. Dassault and UGS had double digit declines relative to their seasonally strong fourth quarter.

Figure 1 below provides a bar graph showing the revenue trend for each of the covered vendors, for the periods mentioned in Table 1.



For the first quarter of 2006, Autodesk was easily the share leader at 34% with Dassault and UGS scrapping for second place (Figure 2).

(As always, it needs to be pointed out that unlike the other vendors in this report, Autodesk earns an important percentage of its revenue outside of the MCAD space. Autodesk does not break out its mechanical contribution. Also, both Autodesk and Dassault Systèmes sell mostly through third parties, while UGS sells mostly direct).


Earnings in Q1 2006 for the G7 were less sanguine (see Table 2). As a group, the MCAD vendors had earnings of "only" $92 million, a 34% reduction from the combined $141 million in the same quarter a year earlier and a whopping 54% drop sequentially from $199 million in Q4 2005. Nevertheless, all vendors except UGS were still profitable in the first quarter of 2006. Autodesk endured the largest year- over-year decline. ANSYS had a 33% gain in earnings versus Q1 2005, while all others suffered declines. On a sequential basis, Autodesk, Dassault and UGS reported significant declines.

Details on Individual Vendors' Q1 2006 Performances


On April 27, 2006 ANSYS, Inc. announced the results of the first quarter the period ended March 31, 2006. Total revenue for the quarter was $46.0 million, a 22% increase for the $37.6 million in the same quarter a year earlier, and a 5.2% increase from the previous quarter. The $46 million was above the high end of the guidance given a quarter earlier. License revenue of $26.7 million, accounting for 58% of total revenue, was a 31% increase year-over-year, and a 9.5% increase sequentially. Maintenance and service revenue was $19.2 million, accounting for 42% of total revenue. Leases accounted for 19% of total revenue, and paid up licenses for 40%, including $3 million in major account sales.

In the quarter, there were two significant seven-figure deals that closed earlier than expected. During the quarter, recurring revenue accounted for 57% of total revenue. Deferred revenue climbed to $57.7 million, an all-time high.

North American revenue was up more than 40%. European revenue experienced low double digit growth. Revenue from Japan was flat, while revenue from the rest of General International grew by more than 20%, led by India and China. Net income for the quarter was $12.9 million, a 33% increase from the $9.6 million a year earlier, although a slight drop of 3% sequentially. The results for the quarter reflect the recent adoption of SFAS No. 123R, "Accounting for Stock-Based Compensation."

On February 16, 2006, ANSYS announced a definitive agreement to acquire Fluent, Inc., a global provider of computer-aided engineering simulation software, in a stock and cash transaction valued at approximately $565 million. Under the terms of the agreement, ANSYS will issue six million shares of its common stock and pay approximately $300 million of net cash to acquire Fluent, subject to certain adjustments at closing. Closing was completed on May 1, 2006. With over 40 direct sales offices and 17 development centers, on three continents, the combined company will employ approximately 1,350 people.

On April 27, 2006 ANSYS President and CEO Jim Cashman stated, "ANSYS is off to a strong start in 2006, as evidenced by our record first quarter financial performance. We believe that our first quarter results are further validation that we are headed in the right strategic direction and that we must continue to focus on execution and delivery of our commitments for continued success in the future. Our first quarter results include the further expansion of a long-term customer relationship that contributed significant incremental software revenues for the first quarter. I am very proud that the ANSYS team was able to stay focused on delivering a solid quarter, while at the same time engaging in planning and finalizing logistics related to the upcoming closing of the Fluent acquisition, which is anticipated to occur on May 1, 2006."


On May 18, 2006 Autodesk, Inc. reported the results for the first quarter of its fiscal 2007, the period ended April 30, 2006. Total revenue for the quarter was $436 million, an increase of 23% from the $355 million in the same quarter a year ago and an increase of 4.6% from the $416 million in the just previous quarter. The $436 million was at the high end of guidance given a quarter ago. License revenue of $349 million, accounting for 80% of total revenue, was an increase of 18% year- over-year and an increase of 3.8% sequentially. Maintenance revenue of $87 million, accounting for 18% of total revenue, was an increase of 47% year-over-year and an increase of almost 8% sequentially.

Combined subscription and upgrade revenue in Q1 2006 increased 36% over last year comparable quarter to $162 million. Record subscription attach and renewal rates drove a 47% increase in subscription revenue compared to the first quarter of last year, to $87 million. Deferred subscription revenue increased $39 million sequentially, the highest quarterly increase ever. Upgrade revenue increased 25% over last year to $75 million. Combined revenues from subscription and upgrades continue to represent approximately one-third of total revenues.

Revenue from new seats increased 19%. Revenue from 3D solutions (Inventor, Revit and Civil 3D), constituting 20% of total revenue, was up 53%. More than 31,000 commercial seats of 3D were shipped in the quarter. Revenue from Inventor family of products was up 17%, as the firm shipped more than 10,000 commercial seats in the quarter. Autodesk estimates that only 10% of its customers have moved from 2D to 3D, implying a reservoir of future opportunity.


The Platform segment, which accounts for nearly 50% of revenue, includes AutoCAD and AutoCAD LT products that service multiple markets. Other segments are Building, Infrastructure and Media/Entertainment (previously named Discreet). The Manufacturing segment (which includes the Inventor product lines) grew 32% year- over-year but was down 2% from the prior quarter. A "guesstimate" of "pure MCAD revenue" would be about $140 million for the recent quarter.


The Americas accounted for 39% of total revenue, Europe 37% and Asia Pacific 23%. All geographies had year-over-year and sequential growth. The Americas, with 30% growth relative to the same quarter a year earlier, was particularly strong, although it dipped 4% sequentially.

Net income for the quarter was $48.5 million, down 36% from $76 million in the first quarter a year ago and down 42% from the $83 million in the prior quarter. The quarter's net earnings included $17 million in legal expenses related to a patent infringement suit which the company intended to appeal.

Autodesk president and CEO Carl Bass said, "Autodesk had an excellent quarter. We drove strong growth across our portfolio of businesses including record results on a number of our most important financial metrics. We continued the rapid integration of Alias into Autodesk, and in March, we launched our 2007 family of products, including more than 25 new releases."


On May 4, 2006 Dassault Systèmes reported its financial results for the first quarter the period ended March 31, 2006. Total revenue for the quarter was 252 million euros (after including a €3.9M write down in deferred revenue), an increase of 28.5% from the same quarter a year earlier and a decrease of 18.3% form the seasonally strong fourth quarter of 2005. The 252 million euros was at the high end of the revenue guidance given a quarter ago.


Americas accounted for 30% of total revenue, Europe 44% and Asia 26%. Year- over-year the Americas was up 39% (28% in constant currency), Europe 21% and Asia 32%.

During the quarter 7,673 seats of CATIA were sold at an ASP of €12,840. At the same time 8,609 seats of SolidWorks were sold at an ASP €5,165 (up 12%).


On March 8, 2006 ESI Group reported its results for the last quarter and full year ending January 31, 2006. Total revenue in the last quarter was €24.7 million, a 144% increase from the €21.7 million a year earlier and a doubling of the €12 million in the just prior quarter. In US dollars, total revenue for the last quarter was nearly $30 million, up 4.3% year-over-year and up 105% sequentially.

For the entire fiscal year, license revenue was €62 million, a 6.6% increase from the €58 million the previous year. Net income for the year was €4 million, a 21% increase form the €3.4 million for the previous year. License revenue for the year was €48.5 million, accounting for 78% of total revenue. This was a 7.3% increase from the prior year.

The renewal rate of license sales, which is a major indicator of ESI Group's activity, was up a percentage point, to 88% from 87% in fiscal 2004. Service business confirmed in fiscal Q4 the turnaround trend noted the previous quarter, showing a growth of +4.3% over the year (+3.9% at constant exchange rates). France saw high growth (+23%) for this activity, in particular in the energy sector.

In February 2006 ESI Group announced the acquisition of IPS International's service branch (South Korea), with the integration of an experienced team of 14 specialist engineers and doctors. In April, ESI Group announced the acquisition of ATE Technology International activities (China), with the integration of a team of 32 thigh-level engineers and specialists.

Alain de Rouvray, ESI Group's Chairman and CEO, states, "These very satisfactory results show our capacity to continue recording buoyant organic growth whilst improving our profitability. They validate the actions we have implemented, firstly the organisation via Centres of Excellence close to strategic clients for innovative and technological products; secondly an increase in our presence in India and China, for an acceleration in our software development, and in order to seize new deployment opportunities for our integrated solutions".


On May 4, 2006 Moldflow Corporation reported the financial results for its third quarter of fiscal 2006, the period ended March 31, 2006. Total revenue for the quarter was $16.3 million, a 2.3% increase from the $15.9 million in the same quarter a year ago, and a decrease of 3.8% from the $16.9 million from the just previous quarter. The guidance given a quarter ago called for growth in the 12% to 21% range. Product revenue was $9.5 million, accounting for 59% of total revenue, essentially flat year-over-year, but down nearly 6% sequentially. Services revenue was $6.7 million, accounting for 41.5% of total revenue. This was an increase of 5.4% year-over-year and a decrease of almost 1% sequentially.

Revenue from the Design Analysis Solutions segment represented 72% of total revenue and was $11.7 million, unchanged when compared to the same period last year and a decrease of 8% sequentially. Revenue from the Manufacturing Solutions segment totaled $4.6 million, contributing 28% of total revenue, and represented a 9% increase when compared to the same period last year and +10% sequentially. Regionally, revenue in Americas represented 37% of total revenue, while revenue in the European and Asia/Pacific regions represented 29% and 34% of total revenue, respectively.

The company announced a restructuring of its Manufacturing Solutions business unit. Moldflow expects to incur a charge of between $1.0 and $1.5 million from this action.

Roland Thomas, Moldflow Corporation's president and CEO, said, "During the third quarter, we saw lower than expected revenue and earnings due to continued softness in the European market and to a lesser extent the North American market. This softness spanned across both our business units. While sales activity was high in most regions, we did not see this activity translate into deals that closed during the course of the quarter."


On April 14, 2006 MSC.Software Corporation announced that it had filed its Form- 10K for the fiscal year ended December 31, 2004, including the audited fiscal years 2002, 2003 and 2004.

From this filing we learn that:

• The revenue restatement adjustments for these periods primarily resulted in previously recognized revenue being deferred until subsequent periods, as well as certain revenue being reclassified by type. The net effect of these revenue adjustments was to decrease revenue from continuing operations by $14.6 million in 2002 and by $0.2 million in the nine months ended September 30, 2003.
• MSC also made certain non-revenue adjustments to expenses and other accounts related primarily to software development costs, business combinations, pension accounting, valuation of long-lived assets, stock compensation, and the recognition of various expenses resulting from the timing and adequacy of various accruals and allowances. The net effect of the expense adjustments on consolidated audited financial statements increased operating costs and expenses by $5.5 million in 2002 and decreased operating costs and expenses by $1.6 million in the nine months ended September 30, 2003.
• The revenue and non-revenue adjustments, in addition to errors related solely to the tax provision, required MSC to make certain income tax related adjustments, which decreased the benefit for income taxes related to continuing operations by $7.0 million in 2002 and increased the benefit for income taxes by $5.1 million for the nine months ended September 30, 2003.
• After considering all restatement adjustments, the previously reported 2002 net loss of $51.3 million increased $23.9 million or $0.82 per share, and the previously reported net loss of $26.6 million in the first nine months of 2003 decreased by $3.3 million or $0.07 per basic share and $0.23 per diluted share.

On March 31 MSC.Software announced that it has sold its PLM product reseller and services business to TechniGraphics, Inc., a professional consulting and technical software reseller, based in Wooster, Ohio. The financial terms of the transaction are not being disclosed at this time.

Revenue for the years 2002, 2003 and 2004 was $234 million, $253 million and $277 million, respectively. While software revenue was relatively flat, maintenance and service revenue increased 43% in two years. In 2004, revenue was almost evenly split between America, Europe and AP. This reflects growing AP revenue and shrinking US revenue.



On April 26, 2006 PTC reported results of its second quarter of fiscal 2006, the period ended March 31, 2006. Total revenue for the quarter was $200 million, an increase of 14% form the $176 million in the same quarter a year ago and a 4% increase from the $192.5 million in the just prior quarter. The $200 million was at the high end of the guidance given a quarter ago. License revenue for the quarter was $54.6 million, accounting for 27% of total revenue. This was an increase of 3.6% year-over-year and a decrease of 6.7% sequentially. Maintenance revenue was $89 million, accounting for 45% of total revenue. This was an increase of nearly 6% year-over-year and essentially flat sequentially. Service revenue was $56 million, accounting for 28% of total revenue. This was an increase of 44% year- over-year and an increase of 26% sequentially.

Desktop Solutions generated revenue of $131 million in the last quarter, accounting for 66% of total revenue, while Enterprise Solutions generated revenue of $68 million accounting, for 34% of total revenue.


North American revenue was $78 million, accounting for 39% of total; European revenue was $67 million, accounting for 22% of total revenue; and Asia Pacific revenue was $55 million, accounting for 28% of total revenue. NA revenue was up 23% year-over-year, European revenue up 13% year-over-year and AP revenue up 3% year-over-year.

Net income for the last quarter was $10.7 million, down 48% from the $20.5 million in the year ago quarter, but up 43% from the $7.5 million in the just prior quarter. PTC adopted FAS 123 in the fourth quarter of fiscal year 2005, and therefore the GAAP results from the year-ago period do not include the cost of stock-based compensation.

C. Richard Harrison, president and chief executive officer, said, "We executed well in the second quarter of (fiscal) 2006. We delivered record revenue in our Enterprise Solutions category, launched a major release of Pro/ENGINEER, and we have since completed our product integration of Arbortext and Windchill. Also, our new relationship with IBM has already reached a milestone as we closed our first joint transaction under the agreement we announced in January."

On April 26th PTC announced a definitive agreement to acquire Mathsoft Engineering & Education, Inc. (Mathsoft) for $63.25 million in cash. Mathsoft is the provider of Mathcad, software that helps engineering organizations create, automate, document and reuse engineering calculations critical to the product development process, as well as other mathematics-driven processes. Mathsoft has annual revenue of approximately $20 million and over 250,000 professional users worldwide. Based in Cambridge, Massachusetts, Mathsoft has 130 employees in seven countries including the United States, United Kingdom, Germany and Japan.


On May 11, 2006 UGS Corporation announced the results for the first quarter of 2006, the period ended March 31, 2006. Total revenue for the quarter was $273 million, an increase of 8.4% from the $252 million in the first quarter of 2005, but a 16% decline from the $326 million in the just previous quarter. The $273 million was a 13% increase on a constant currency basis. License revenue was $79.5 million, accounting for 29% of total revenue. This was nearly 9% year-over-year increase, but a 30% decline sequentially. Maintenance revenue was $126 million, accounting for 46% of total revenue. This was an almost 13% year-over-year increase, but a 7% decline sequentially. Software revenue (license + maintenance) was up 11%, or 15% in terms of constant currency. Service revenue was $69 million, accounting for 25% of total revenue. This was a 1% increase year-over- year, and a 12% decline sequentially.


Table 7 reveals that the area of UGS growth is clearly cPDm. cPDM revenue increased 29% including acquisitions, or 8% growth without acquisitions, over the same period a year earlier. On a constant currency basis, cPDM revenue increased 33% with acquisitions, or 12% without acquisitions. The Americas accounted for 45% of total revenue, EMEA for 36% and Asia for 19%. Revenue from the Americas was up 11%, from EMEA up 7% and from Asia up 5%.

Net loss for the recent quarter was $19 million, compared to a loss of $8.2 million in the first quarter of 2005, and compared to a net gain $12.9 million in the just prior quarter. EBITDA for the quarter was $48.1 million, compared to $46.7 million a year earlier, and compared to $92.7 in the just prior quarter. Also on May 11, UGS announced that India's Tata Consultancy Services (TCS), a leading global services organization, joined the UGS Partner Program as a UGS System Integration Alliance Partner.

Tony Affuso, chairman, CEO and president of UGS, said, "UGS' solid results were led by overall software revenue growth and our relentless focus on customer success which is at the heart of our leadership and vision of enabling global innovation networks. Today, one year after closing the Tecnomatix acquisition, we announce an exciting competitive win at Northrop Grumman that underscores our momentum as the market leader in digital manufacturing."

MCAD Vendor Stock Performances

In the most recent quarter, the combined stock prices of the MCAD vendors rose 33% in absolute dollars, and 34% in average price, over the first quarter of 2005. This compares to an average increase of 11% for the major stock indexes over the same period. Percentage-wise, MSC.Software had the greatest year-over-year increase at 79% with ANSYS a strong second at 58%. Autodesk and Dassault Systèmes also had growth over 20%, while PTC increased almost 17%. Moldflow was the only decliner at minus 1.8%.

On a sequential basis the combined stock prices rose 7% in absolute dollars and 9% in terms of average price. This compares to an average increase of nearly 6% in the major stock indexes. ANSYS was the growth leader at 27% with MSC.Sofwtare and Moldflow had good share price growth at 17% and 12%, respectively. Autodesk was the only sequentially decliner, down 10%.




Forecast Guidance from Individual MCAD Providers

All of the MCAD vendors are forecasting year-over-year quarterly growth for this next quarter. ESI is most bullish. Dassault, Autodesk and ANSYS are projecting low double digit growth with PTC approaching double digit growth. On a sequential basis Moldflow and ESI Group are the most optimistic.


As guidance ANSYS expects revenue in the next quarter of approximately $41 to $42 million. This guidance excludes the impact of the acquisition of Fluent Inc. announced in the first quarter of 2006. This compares to revenue of $46 million in the quarter just completed. Guidance for the fiscal year is in the range of $178 million to $180 million. This compares to $158 million for 2005.

ANSYS Forecast Update:

On June 5, 2006 ANSYS announced additional financial guidance for the second quarter and full year of 2006 to include the recently completed acquisition of Fluent Inc.

Second Quarter 2006 Guidance:

ANSYS currently expects the following for the quarter ending June 30, 2006:

    * GAAP revenue of approximately $57 - $60 million
    * Adjusted (non-GAAP) revenue of approximately $64 - $65 million
    * GAAP diluted earnings per share of $0.07 - $0.15
    * Adjusted (non-GAAP) diluted earnings per share of $0.36 - $0.37

Fiscal Year 2006 Guidance:

ANSYS currently expects the following for the year ending December 31, 2006:

    * GAAP revenue of approximately $248 - $257 million
    * Adjusted (non-GAAP) revenue of approximately $268 - $274 million
    * GAAP diluted earnings per share of $0.49 - $0.78
    * Adjusted (non-GAAP) diluted earnings per share of $1.58 - $1.60

As guidance Autodesk expects revenue in the next quarter to be between $440 million and $450 million. This compares to $481 million in the quarter just completed. For fiscal year 2007 Autodesk expects revenue to be between $1.81 billion and $1.85 billion.

Carl Bass commented, "Our business strategy and strong product position enable us to benefit from important business trends including the increasingly globalized nature of business, the rise of emerging economies, the massive worldwide development and repair of infrastructure, and the increased desire for sustainable or "green" design. Our business is sound, and we are increasing our business outlook to reflect the current environment."

As guidance Dassault expects (before inclusion of MatrixOne) that revenue in the next quarter will be in the range of €260ÿ million in comparison to €252 million in the quarter just completed. For fiscal 2006 the outlook is €1.105-1.115 billion. With MatrixOne included the figure, the next quarter rises to €275-280 million and the goal for the year becomes €1.175-1.185 billion, representing 25 to 26% growth in constant currencies, with about 7 points of growth from MatrixOne before deferred revenue write-down adjustments.

Thibault de Tersant, Dassault's Executive Vice President and CFO, stated, "We are updating our full year objectives with our revenue objective unchanged and our EPS objective slightly lowered as our better first quarter performance was offset by the change in our Japanese yen exchange rate assumption. MatrixOne will, however, have a slightly higher dilutive impact in 2006 than we originally estimated, simply due to the fact that the transaction could possibly close six weeks earlier than we had initially assumed."

As guidance Alain de Rouvray, ESI Group's Chairman and CEO, commented, "2005 was a significant year for ESI Group in terms of its realizations, both financially, where figures confirm our profitable growth, and in terms of our sales and technical activity. Not only have we been observing a very positive basic trend for 'realistic simulation' accounting for product-process interaction, but 2006 should furthermore see the initial benefits of actions undertaken in 2005; in particular, the intensification of Virtual Manufacturing (VM) solutions with the continuing deployment of the PAM-STAMP 2G, ProCAST and SYSWELD offer. Lastly, the recent strengthening of our positioning on the high-growth markets of Korea and China should also contribute significantly to the growth of our simulation activity and the development of new integrated industrial solutions projects.

All of these positive factors lead us to a sales growth target of 10% to 15% for the current financial year and support the prospect of achieving annual sales of 100 million euros in the medium term. This increase in activity will allow us to improve the amortization of our fixed costs. Similarly, the integration of our recent acquisitions will generate further synergy effects. We therefore anticipate a further improvement in profitability, with an operating margin target of 8% to 10% for 2006 and 15% for the medium term."

As guidance Moldflow expects revenue for its full fiscal 2006 year to be approximately flat when compared to fiscal 2005 revenue, which was $64.4 million. This would translate into revenue of $16.5 million in the next quarter, compared to $16.3 million in the quarter just completed, and compared to $18.3 million in the same quarter a year ago.

PTC's revenue forecast for the next quarter is between $205 million and $210 million. For the fiscal year ending September 30, 2006, PTC expects revenue to be between $810 million and $820 million.

CEO Harrison commented "At the midpoint of (fiscal) 2006, we remain enthusiastic about our fiscal 2006 targets, as well as our ability to achieve longer- term financial objectives of $1 billion in revenue and $200 million in non-GAAP operating income by 2008."

MCADCafé.com currently tracks the financial performance of multiple public companies in the Mechanical CAD market. Eight (8) companies were chosen for the author's initial May 8, 2003 Commentary. Four of these companies (Autodesk, Dassault Systèmes, PTC and EDS PLM Solutions -- now UGS, a privately held company) represented approximately 85 percent of the total revenue in this grouping, and each of these four companies offers a wide array of software and services products across the entire design to manufacturing space. The remaining four public companies (ANSYS, Moldflow, MSC.Software and Tecnomatix) offered specialized software/services products in specific MCAD niches and together they created the remaining 15 percent of the total group-of-8's revenue. Indeed, these latter four companies frequently partner with the initial four to provide end-customers with broader solution suites. Tecnomatix has been acquired by UGS and hence has been removed from this report. For the author's August 2003 Commentary in MCADCafé.com, a ninth company, the ESI Group, was added. All nine were studied thereafter for comparison purposes. The combined worldwide total annual revenue of these companies is over $4 billion, not an insignificant sum. But it is, in fact, less than 3% of the ~$190 billion spent annually on all types of software (source IDC). So why study MCAD companies at all? The key to MCAD's importance lies in the leverage its users apply to create the everyday durable goods with which we are all familiar: automobiles, trucks, military gear & weapons, appliances, farm & construction equipment, aircraft & aerospace vehicles, etc. In short, MCAD is arguably responsible for enabling today's manufacturing industries, which are the centerpieces of creating real productivity and wealth creation in every modern economy. Understanding the comparative MCAD revenue content of various vendors is not merely academic. For example, it helps observers better understand the likely future competitive MCAD strength of each vendor relative to its peers in such areas as amount of money available for R&D, for potential new acquisitions, for financial stability to weather economic cycles (see Economic & geopolitical discussion below), and for other key business factors. In comparing financial performances of the four largest MCAD companies tracked by MCADCafé.com, it's instructive to account for the actual MCAD content of each. For example, the revenues of Dassault and PTC can arguably be considered 100% MCAD in nature, whereas Autodesk's total revenue is only partially made up from its business in MCAD. Some Autodesk revenue stems from another segment which provides systems and software for creating and animating imagery. Even in the remaining largest portion of Autodesk's total revenue, derived from its Design Solutions Segment, is divided among solutions for Manufacturing, GIS, the building industry, and the platform technology group. Only the solutions of the Manufacturing Group (Inventor, AutoCAD Mechanical, Mechanical Desktop, Streamline, Point A, etc.) might be thought of as "pure" MCAD revenue. It should also be noted that the companies have different business models. IBM, both direct and through Business Partners, is the exclusive marketing and sales arm for Dassault Systèmes high end product lines: CATIA, Enovia and Delmia. The IBM channel also carries SmarTeam solutions in a non-exclusive basis. IBM records the end user revenue and pays DS a royalty of approximately 50%. DS subsidiary SolidWorks is sold through value added resellers. Autodesk sells its products overwhelmingly through valued added resellers. The other MCAD vendors sell mostly on a direct basis. Direct sales result in greater percentage of end user revenue recognition but also involve higher cost of sales and risk. UGS annual revenues are right there at similar levels as the world's other MCAD revenue leaders Autodesk, Dassault and PTC. For purposes of our discussion, we considered the revenues from the remaining public companies (ANSYS, ESI Group, Moldflow, and MSC.Software) to be 100% MCAD.

Economic & Geopolitical Factors

Frequent readers of the authors' Commentaries will recall our quarterly discussions of economic and geopolitical factors that we believe have been causing high-anxiety in high technology industries in the United States and elsewhere around the world. We have often noted that, after eight years of an improving technology environment, the last five years have moved the country in the wrong direction.

These last five years have resulted in far more than a baker's dozen enervating political and economic factors here in the US: (1) unremitting extravagance and unwarranted tax cuts in the face of the shift from US federal budget surplus to deep deficit, (2) the definite long-term trend of a rich-get-richer, poor-get-poorer US income distribution, (3) sluggish net job growth below the requirements of US population increases, (4) a net US disadvantage in globalization, (5) weakened US environmental stewardship and deteriorating US infrastructure, (6) the ballooning real and psychic costs of war, in lives and treasure, (7) reduced worldwide and domestic admiration for US leadership, with an astonishing lack of accountability, (8) the weaker US dollar, (9) elevated energy, oil & gas prices, (10) a deteriorated domestic NASDAQ market that has never returned to 2001 levels, (11) ongoing corporate fraud, (12) indictments and criminal investigations in both the White House and Congress, (13) double-digit rises in the cost of US health care and ongoing increases in the number of US uninsured, (14) stunning US federal incompetence (cronyism, disaster relief, Medicare drug plan, nation building, ), (15) reduced US civil liberties and personal privacy, (16) unrelenting illegal immigration, and (17) record US trade deficits growing each year, requiring the US to borrow billions of dollars every week from abroad.

Alas, recent developments have not improved the situation.

Let's just consider Items (1) and (2) above. Worsening inflation in the US continues to steal US consumers' purchasing power and mocks the stagnant multi-year flatness of US workers' compensation. The Fed is so worried about inflation in the US, that for the 16th time in two years it raised interest rates, this time to 5% on May 10, 2006. Yet average Americans must react to their own paychecks and benefits, weighed against highly-volatile costs, like housing (higher mortgage rates), health care (Item (13) above) and gasoline (Item (9) above). For all but the wealthiest Americans, the latter volatile costs have outpaced paychecks since 2001.

Then inflation news got worse a few days later. On May 16, the government reported that wholesale prices jumped 0.9% in April, the most in seven months. Then the Labor Department reported on May 17 that the consumer price index swelled 0.6% in April, topping all forecasts. More importantly, the "core CPI" without food and energy also gained 0.3%.

Although the "recovery" from the 2001 recession is now nearly four and a half years old, the average wage in the US has nevertheless lost ground to inflation since 2001. So despite big statistics such as, "The US Gross Domestic Product advanced at a 4.8% pace in the January-to-March 2006 quarter, marking a rebound from the feeble 1.7% rate in the final quarter of 2005", we simultaneously realize that people's wages are not keeping up with inflation. No wonder the president's polls (see Item (7) above) are now at their lowest level of his tenure (31% approval = to his Daddy's lowest number, with some other fresh polls now at 29%). Some 69% of the people polled now say the nation is off track. Op-Ed columnist Thomas L. Friedman made this comment in the May 17 New York Times, "Those polls can't possibly be accurate. I mean, really, ask yourself: How could there still be 29% percent of the people who approve of this presidency?"

Well, at least the government is acting to get that ballooning federal deficit under control! (Item (1) again!). What's that you say? Congress agreed on May 12 to a five-year, $70 billion tax package that would extend deep cuts to US tax rates on dividends and capital gains, effectively locking in all the president's first-term tax cuts through the end of the decade? And Bush said he signed it enthusiastically once it reached his desk on May 17, 2006?

"We have a train wreck waiting to happen," said C. Clint Stretch, director of tax policy at the accounting giant Deloitte & Touche. "You cannot grow your way out of these (federal) deficits," said Senate Budget Committee Chairman Judd Gregg (R- NH).

Oh well, everyone benefits from tax cuts, what the heck! What's that you say? Most Americans will not benefit? Most of the cuts go to a tiny minority of wealthy Americans? Yep, the Center on Budget and Policy Priorities says the average middle- income household will get a $20 cut, while those making more than $1 million a year will get nearly $42,000. (See the red bars of the graph below to learn who benefits).


As Molly Ivins of the Creator's Syndicate said on May 18, "The $70 billion tax cut is part of a continuing right-wing fantasy going back to the Laffer Curve (circa 1981). Of course, clinging to demonstrably false economic precepts is understandable when you (stand to) benefit from them, but at some point reality does intervene."

Oh by the way, the latest tax cut bill also commits an estimated $53 billion through the middle of the 21st century to help those same high earners shift their existing savings into tax shelters. This foreshadows big federal deficits far into the future.

Let's turn to enervating Item (3) above. Alas, the pace of adding new US jobs continues lukewarm at best (see graph below). California's economy posted a net loss of 2,600 payroll jobs in April. Even after the recession of 2001 ended, with the millions of jobs lost in the US in 2001, 2002, and 2003, it took till part-way into 2005 before a single net new job was added in the US, the slowest post-recession jobs' recovery by far since WW II. Over the last year, the monthly job additions are still tepid, compared to the eight-year period of 1993-2000, when 230,000 jobs were added on average every month for 96 months! That's like an NBA star averaging a "triple-double" every year for 8 straight years!


Outsourcing of US jobs continues unabated (Item (4) above). While outsourcing to Asia still tops the list (India, China, Philippines, Singapore and Malaysia), lately Eastern European countries such as Bulgaria, Romania, Slovakia and the Czech Republic are getting into the act, shifting work from both the US and Western Europe. A low-cost, highly educated workforce, combined with solid infrastructure, economic and political stability, geographic proximity and fewer security concerns are just some of the factors helping Eastern Europe. For example, Bulgaria's educational system ranks fifth in the world and 11th in mathematics, with one of the highest numbers of information technology-certified professionals per capita. General Motors, Capital One, Ford Motor Co. and Lockheed Martin, have already outsourced information technology work to Bulgaria. In early 2006, Hewlett-Packard announced plans to open a global delivery service center in the Bulgarian capital to provide remote infrastructure management assistance to HP clientele in Europe, the Middle East and Africa. Expected to be fully operational next year, the center will employ about 1,000 Bulgarians, primarily multilingual engineers and programmers. Outsourced jobs in Bulgaria provide average base salaries of about $373 per month, well above the Bulgarian average monthly salary of $190.

Another sure sign of worsening US economic trouble is the recent surge in gold prices and other precious metals. The price of gold rose to a fresh 25-year high on May 10, 2006 as investors sought a safe haven amid a weakening US dollar (item (8) above) and worries over the administration's most-recent sword-rattling confrontation this time with Iran. Historically, gold is considered a truly desperate refuge against serious currency weakness, inflation and financial instability. Gold is trading now at levels not seen since the Reagan era. Many investors are now turning to gold; they don't think US inflation is under control, because the US economy is now much more leveraged (i.e. debt-ridden) than it has been in the past (items (1) and (17) above).


During the week of May 15-19, China slightly loosened the tether that binds the Chinese yuan to the US dollar. A stronger yuan implies a weaker dollar, as does the general strengthening so far in 2006 of the euro and the yen (see Item (8) above). But unless the falling US dollar is paired with reductions in the US federal budget deficit, more harm than good is done due to rising interest rates. That's because the foreign investors who finance the administration's "borrow as you go" budget (see Item (1) above) are likely to demand higher returns to invest in a depreciating US dollar. To keep interest rates in check as the US dollar falls, the administration tries to use smoke & mirrors to persuade investors not to believe what they see: a US dollar that is declining even as the US does nothing to curb its federal borrowing.

Meanwhile, the US housing market continues to slow. On May 16, 2006, the Commerce Department said US housing starts nationwide dropped 7% to 1.85 million in April, down for the third straight month, as rising mortgage rates showed signs of tempering demand. In the San Francisco Bay Area, home sales tumbled to their lowest level in five years in April as a chill continued to creep through the region's housing market. The Nasdaq Composite closed at its weakest level of the year on May 16, 2006. Then Wall Street skidded even lower on May 17, when the Dow Jones industrial average suffered its biggest one-day loss in three years, and the Nasdaq composite index turned negative for 2006. The Dow and Nasdaq lost another 77 and 15 points, respectively, on May 18. Then on May 22, the Nasdaq fell 21 points to 2,173, its weakest close in 6 and a half months.

The Nasdaq has really never recovered since 2001, despite claims of the "robust US economy" by administration spokesmen. It's still more than 15% below its level of January 21, 2001, just to choose a date (Item (10) above). The Nasdaq also remains 57% below its high water mark historically.

Of course, anyone who drives in the US has experienced the outrageous rise in gasoline prices in the US, exacerbated by the needless US conflicts with Iran and Iraq (items (6) and (9) above). Worse, Californians now pay 48 cents more for each gallon of regular than other Americans do, with the state's average reaching $3.37 on May 10, 2006. But the price of gasoline is way up across the US.


The latest New York Times/CBS News poll in mid-May showed that 63% of respondents had cut back on their driving because of the gas price increase, and 56% had cut back on other household spending. No wonder the University of Michigan's consumer-sentiment index for May 2006 plummeted 8.4 points to 79!

Meanwhile, big oil continues its grotesque march to record profits as it has for the last five years. Exxon recently reported first-quarter 2006 net income of $8.4 billion on sales of $89 billion. Chevron reported Q106 net income of $4 billion on sales of $54 billion. Oil execs always point out that the companies' profit margins are "only" in the 9% range, only "slightly higher" than the US corporate average. Of course they never mention to the public, except when touting their stock to their shareholders, that oil companies sport a return on capital employed more than double the average return on capital employed for all US industrial companies. In 2005, Exxon's ROCE was 31%. Collectively, the five largest oil companies (Exxon, Chevron, ConocoPhillips, Shell and BP) enjoyed an average ROCE of nearly 27% percent in 2005. Why not use some of this largess to build more refineries?

Crude oil -- gasoline's main ingredient -- has traded for more than $60 per barrel for most of 2006, reaching as high as $75.17 in April. Yet oil company profits have soared by a far greater percentage. Perversely, rising gas prices may also be shoring up crude prices. Although the cost of crude usually helps determine gasoline prices, and not the other way around, the two sometimes support each other, with each barrel of oil becoming more valuable as gas prices rise.

No wonder the administration wants to keep the vice president's 2001 energy policy conference an ongoing secret!

And talk about "unintended consequences." Due to the higher prices for fossil fuels, the US nuclear power industry now believes it has its best chance in years to come back to life and overcome skeptics to build new nuclear plants. Apparently the US nuclear industry already has as many as 20 nuclear plants planned across the country, worth upwards of $60 billion. Of course, the industry has a spotty past record at best of opening nuclear plants on time and on budget. And one other small consideration -- what to do with the nation's pesky radioactive waste -- a question that has dogged the US nuclear industry for decades.

Since the "peak" of the world's oil supply has probably already occurred, "big oil" also ought to be plowing most of its profits into developing and perfecting renewable energy sources, rather than focusing on exploiting the dwindling world oil supply. And the US government should insist on it, along with promoting conservation. In recent days, US Senate Democrats introduced new energy legislation to cut US oil consumption significantly by 2020 by boosting sales of alternative fuels, providing incentives for purchases of hybrid vehicles and researching next-generation energy technologies. It would create a national renewable portfolio standard for electric power requiring 10% of all electricity to come from renewable sources by 2020.

This "Clean Energy Development for a Growing Economy (EDGE) Act" is drafted around five core principles:

• Transforming American's vehicles and infrastructure
• Protecting American consumers and businesses
• Leveling the playing field for clean energy technologies
• Real government leadership for clean and secure energy
• Diversifying American energy sources, investing in the future

Senator Maria Cantwell (D-WA), the lead sponsor of the bill stated, "It's time that we simply stop talking about energy independence and start running with a plan that also makes America more secure and more economically competitive." Senator Pete Domenic (R-NM), Chair of the Senate Energy Committee, criticized the plan for its "absence of any effort to increase American energy supply."

Well, at least corporate fraud is starting to taper off, especially in high-tech (Item (11) above). What's that you say? Boeing just agreed on May 15, 2006 to pay $615 million to end a probe into alleged defense contracting scandals. A former high- level manager at Cisco Systems Inc. in San Jose CA, accused of insider trading for allegedly tipping off his two brothers to pending acquisitions, reached a settlement with SEC regulators on May 16, 2006. Hundreds of thousands of dollars in fines were levied. The Cisco manager apparently learned of five impending acquisitions and shared the information with his younger brothers before it was publicly released. The younger brothers bought shares in the targeted companies and sold them after Cisco announced the deals, reaping $400,000 in illegal profits. On May 18, Abbott Laboratories was accused of vastly inflating prices of its drugs as part of a fraudulent billing scheme alleged to have cost government health programs more than $175 million over 10 years. The lawsuit is the latest in a series of whistleblower claims against drug manufacturers. Settlements in other cases have totaled more than $3.1 billion in recent years.

The Enron trial grinds on; at press time, Enron founder Ken Lay and former Chief Executive Jeff Skilling are still accused of defrauding investors by concealing Enron's shaky finances while selling millions in company stock. The Enron defense attorney Daniel Petrocelli gave a worrisome quote at trial, "If Skilling and Lay weren't just using common, legal business practices, we might as well put every CEO in jail." Oh boy. Occurring early in the current administration's first term, Enron's bankruptcy was the biggest in US history at the time. It raised the curtain on a "pageant" of corporate greed led by the likes of Tyco's Dennis Kozlowski, and WorldCom's Bernard Ebbers, just to name two more notorious cases.

Meanwhile, some 17 public companies nationwide (many high tech) have been identified by the Securities & Exchange Commission as at risk for having backdated stock options, according to a report released May 19, 2006 by the Center for Financial Research and Analysis. Regulators are investigating whether companies broke securities and tax laws by backdating stock-option grants to coincide with the lowest possible price, thereby illegally maximizing the amount of money executives can make in exercising options. Another 3 companies were added to the list on May 22. If federal prosecutors find that executives illegally backdated grants so that the "strike" prices on their options were artificially low, those executives -- or board members who approved the practice -- could be charged with criminal fraud, an attorney said. "This has become the issue du jour for the SEC and federal prosecutors," said the securities lawyer, who spoke on condition of anonymity.

Finally, three makers of computer memory chips just agreed on May 12, 2006 to pay $161 million to settle a class action lawsuit accusing them of conspiring to hike prices. Apparently, all three semiconductor companies have pleaded guilty to felony price-fixing charges in federal court as part of an antitrust case that has netted more than $731 million in fines.

Hmmm … guess corporate fraud continues after all …

Well, at least Congress is getting a handle on the president's authorization of warrantless domestic wiretapping, which sidestepped the lawful albeit secret court set up by the 1978 Foreign Intelligence Surveillance Act (FISA) you know, the story that leaked to the public in December 2005 (Item (15) above). What's that you say? There's more? On May 11, 2006, USA Today disclosed the apparent existence of an even more massive domestic intelligence-gathering program? Approved by the president, the effort seemingly began in secret soon after the 9/11 terrorist attacks. Since then, the National Security Agency is said to have been collecting call records on tens of millions of personal and business telephone calls made in the United States. Apparently, Qwest, the nation's fourth-largest phone company, was the only one of four telephone companies that rebuffed US government requests for the company's calling records, because of "a disinclination on the part of the authorities to use any legal process." The three other big phone AT&T, BellSouth and may have secretly complied with the National Security Agency to build a vast database of calling records, without warrants, to increase NSA surveillance capabilities. A few days later, Verizon Communications Inc. and BellSouth Corp. began denying key points of the USA Today story. The denials leave open the possibility that the NSA directed its requests to long-distance companies, or that call data was collected by other means. The NSA program is so classified that the American people may never know the truth. We also learned recently that a little-known US government spy agency that analyzes imagery taken from the skies has been spending significantly more time watching US soil (The National Geospatial-Intelligence Agency).

Worse, Americans who raise legitimate questions about secret and/or warrantless invasions of privacy find their patriotism impugned. Hey, FISA is neither quaint nor irrelevant; it's the law! And anyhow, under FISA, the government can eavesdrop for 72 hours before seeking a warrant (which is almost always granted). So why do it illegally?

Rather than accept blame itself for the illegal surveillance, the administration is seeking to prosecute the journalists who reported it! Attorney General Alberto R. Gonzales raised the possibility on May 21, 2006 that New York Times reporters could be prosecuted for publishing the existence of the warrantless surveillance in December 2005.

Meanwhile, the Department of Homeland Security is late on releasing to Congress reports on 118 security plans for mass transit, rail, aviation, ports and borders. One late report assesses the impact on travelers' privacy and civil liberties from the Transportation Security Administration's proposed Secure Flight program, which would pre-screen passengers by computer. That report was due March 13, 2004. Another late report focuses on threats from international air cargo; it was due June 15, 2005. Congress also wanted an update on the criteria to be used to consolidate names on the terrorist watch list; that report was due in June 2005.

We need to recall the words of Benjamin Franklin, "Those who can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety." This line is frequently quoted these days by Richard Ben-Veniste, a member of the 9/11 Commission. You remember the 9/11 Commission: the distinguished bipartisan panel that the administration stonewalled for months until the 9/11 families intervened? The 9/11 Commission finally issued its full report in July 2004; its report became a best-seller. Among its 41 recommendations to the administration was to set up a civil liberties board as a watchdog to oversee privacy and civil rights compliance within the executive branch. And then 17 months later in December 2005, the 9/11 Commission issued a public report card on the government's response to the entire 41 recommendations. The average grade assigned to the government -- was a "D".

Update on Item (3) -- Sluggish net job growth below the requirements of US population increases:

On June 2, 2006, the Labor Department released the latest US job numbers. It turns out that May’s lackluster results further confirmed the downward trend discussed in the foregoing paragraphs on Economic and Geopolitical Factors. Payrolls only increased by a measly 75,000 in May, well below the 174,000 expected by economists. Worse, the latest revisions also reduced job gains previously stated in the past two months -- by some 37,000. April's payroll gains were revised lower to a subpar 126,000 from 138,000 initially reported. See the graph below that shows the unmistakable downward slope of net US job creation for the past four months:



The retail sector shed 27,100 jobs in May. Analysts said the combination of rising gas prices and slowing home appreciation made consumers rein in spending. Manufacturing lost 14,000 jobs. US wage growth was again soft, with average hourly wages for May up just 0.1% from April (while the consumer price index swelled 0.6%).

Nasdaq Update (Item (10) above):

On June 12, 2006 the tech-heavy Nasdaq lost 44 more points and closed down another 2% at 2091. The Nasdaq has now (in just one month) lost more than 10% of its recent "local" high on May 08, 2006. Market-savvy analysts call a drop of 10% percent or more a full-fledged "correction", not just a momentary aberration. The Nasdaq is now 24% below where it stood on January 22, 2001, a level to which it has never come close since. Do readers think that this latest June 12 Nasdaq level does not affect/reflect the economic prospects for the tech-heavy MCAD Industry?



Update July 6, 2006:

Over the last month or so, more information has become available that reinforces the geopolitical and economic commentary in the foregoing:

June 29
Good work if you can get it: Former Goldman Sachs CEO Henry Paulson filed to sell about $500 million worth of Goldman Sachs stock shortly after the US Senate voted to confirm his appointment as Bush's Treasury Secretary number three. Moreover, a generous government rule also makes Paulson exempt from paying taxes on any capital gains on the stock sale, eliminating a tax liability of up to about $200 million for Paulson.

In an ongoing crusade to control incessant inflation in the US, the Fed put in place its 17th consecutive quarter-point rate hike since June 2004, lifting the overnight interest rate to 5.25%.


June 30
In Q2 2006, the S&P 500 and the Nasdaq fell 1.9% and 7.2%, respectively. The Dow barely broke even. The Nasdaq is also down for 2006 six-months-year-to-date. The National Association of Purchasing Managers' Chicago group said its index of regional business activity slowed to 56.5% in June from 61.5% in May. Moreover, the prices-paid component of the index leapt to 89% from 76.9%, indicating sharply higher costs for manufacturers. Consumer spending slowed sharply in May as the continuing rise in gasoline prices left Americans with less to spend on other items. A barrel of light crude stood at a remarkably expensive $73.93 to end the quarter. Durable goods orders dropped 0.3% in May after a sharp 4.7% drop the month before, according to the Commerce Department, the first back-to-back declines in two years.

The Republican-dominated US Supreme Court today struck down the military tribunals set up the Bush administration to try the detainees being held in Guantanamo Bay. More than a narrow ruling, the decision is a reaffirmation that the law is what the US Constitution, the statute books and the Geneva Conventions say it is - not what the president wants it to be.

Federal prosecutors want Enron founder Kenneth Lay and former Chief Executive Jeffrey Skilling to fork over nearly $183 million in light of their convictions for perpetuating one of the biggest corporate frauds in US history. In a court filing, prosecutors asked US District Judge Sim Lake to order the newly-convicted felons to turn over that amount "in proceeds of the fraud conspiracy," which includes bonuses, Skilling's gains from stock sales, and Lay's use of loans from Enron to pay down much of his $100 million in personal debt in 2001. Lay, 64, and Skilling, 52, were convicted of defrauding investors and employees by repeatedly lying about Enron's financial strength in the months before the company plummeted into bankruptcy protection in December 2001.

Meanwhile, Richard Scrushy was handed felony convictions today in a state bribery scheme linked to his days as chief executive of HealthSouth Corporation. Acquitted last year of directing the HealthSouth fraud, Scrushy remains a defendant in major civil cases involving allegations of a $2.7 billion accounting scam at the rehabilitation chain he once ran.

A bevy of studies was released today that reveal the state of retirement across America as bleak in the best case and depressing in the worst case. For examples: more than 43% of Americans are not saving at all, and only a third of Americans are saving enough to maintain their standards of living in retirement; 28% of current workers and 12% of retirees are not confident about having enough money in retirement even to pay for their medical expenses; a vast majority of US employers are planning to curtail their retiree medical plans for current and future retirees in the next five years; regardless of their ages, genders, household incomes and education, 38% of surveyed Americans say they expect their retirement to be "financially difficult."

Things are not as bleak for most CEO's, such as Pfizer CEO Hank McKinnell for example. Since taking over Pfizer in 2001, he has been paid $79 million in salary and also paid pension benefits worth an estimated $83 million. Yet the drug giant's stock has fallen by more than 40%. "Corporate compensation in America is now offending a lot of people needlessly and it ought to be fixed," Berkshire Hathaway Vice Chairman Charles Munger said recently. "CEOs and boards should be a lot more sensitive to the current [economic] environment, and not have the wretched excesses of executive compensation hitting the headlines at the same time they are laying off 50,000 people."

As if the overwhelming oil oligarchy is not enough: Water is "the first and last great commodity," said Phil Flynn, a senior analyst at Alaron Trading in Chicago. Water still doesn't have a publicly-traded market -- nothing similar to the oil futures which help dictate market prices. But with the US population headed for the 300 million mark later this year, and the world figure above 6.5 billion, "people theorize that the next great competition over supplies will be for fresh water," said Flynn, adding that the supply of drinkable water is becoming tighter and tighter. At some point, "it's going to be the oil market of the future," he said.

General Motors' largest shareholder is pressing the troubled American auto giant to speed up its turnaround effort by forming an alliance with two foreign car companies, Nissan and Renault, which would pay $3 billion for a 20% stake in GM. On its own, GM is in the midst of closing all or part of a dozen plants and cutting 30,000 jobs as part of its restructuring effort.


July 3
The Commerce Department said spending on construction projects fell 0.4% in May, marking the biggest decline since September 2004. The drop was unexpected; economists had forecast a 0.2% gain in construction spending. April outlays were also revised lower to a 0.2% drop from the 0.1% decrease previously estimated. Also, the Institute for Supply Management's June survey showed that the index fell to 53.8% in June from 54.4% in May.


July 5
Enron founder Ken Lay passed away today, while vacationing in Aspen. He was 64. Facing decades in prison, Lay had displayed no signs of ill health throughout his four-month fraud trial. Just before Enron became a scandal-tainted punchline, the company was the single largest contributor to President Bush, who nicknamed Lay "Kenny Boy." But White House press secretary Tony Snow said today that he hadn't discussed Lay's death with the president. "The president has described Ken Lay as an acquaintance", said Snow. Some legal experts said that Lay's death may render the government's criminal victory null. Regardless, his estate apparently remains the subject of civil lawsuits by the Securities and Exchange Commission and former investors and Enron employees, which could still proceed. Unless, of course, someone issues a posthumous pardon.

Dow Closes Down 76, Nasdaq Closes Down 37 -- Concerns over North Korea's nuclear ambitions and a new record for oil prices ($75.19 per barrel) sent stocks lower today and added to Wall Street's ongoing worries about the economy and interest rates. North Korea defied .stern warnings. from the US to launch seven missiles on July 4, including a long-range Taepodong-2. Since January 2001, this US administration has consistently refused to conduct 1:1 talks with North Korea. Gasoline futures also jumped 6 cents on July 5 to settle at $2.28 a gallon. With refiners fetching the equivalent of $95 a barrel or more for gasoline, "A refiner doesn't have to be disciplined in the buying of crude," explained Tom Kloza, an oil analyst at Oil Price Information Service in Wall, NJ.


July 7, 2006

US employers increased payrolls by a tepid 121,000 in June, providing ongoing evidence that companies are reluctant to bulk up their work forces in the face of high energy prices and slowing economic growth. The count of new US jobs added in June fell well short of economists' forecasts for an increase of around 175,000 new positions. "When you only have 121,000 jobs being added, that sounds pretty puny," said Ken Mayland, economist at ClearView Economics. "On the face of it, this is somewhat disappointing; the job picture is consistent with other barometers that suggest economic growth is slowing," he said.


July 13

Stocks plunged for a second straight session today as Wall Street battled a storm of negative factors - soaring oil prices, interest rate jitters and the slowing US economy. The Dow Jones industrial average dropped almost 167 points, bringing its two-day loss to 288. The Nasdaq Composite finished the day at a nine-month low.

Escalating violence in the Middle East carried oil to near $77 a barrel, a new record high, following a fresh escalation in Middle East tensions. US gasoline prices are also setting new records. Bogged down in Iraq and having neglected the Middle East peace process for five and a half years, the current US administration appears powerless to help ameliorate the situation there. The same may be said of increasing belligerence by Iran and North Korea.


July 14

Surging oil prices pulled stocks sharply lower for a third straight session today, with bland corporate earnings and weak consumer data further dampening the economic outlook. The Dow Jones industrial average shed 396 points in the past three days. The Dow tumbled 107, or 1% today, to 10,739. The blue-chip index fell more than 121 points July 12 and lost almost 167 points July 13, and after today is just 21 points from turning negative for the entire year-to-date 2006.

The Nasdaq composite index declined another 17 points today to 2,037, down 4.35% for the week, and now stands at a 14-month low.

Crude oil futures reached an intraday record of $78.40 a barrel today as Israel intensified its attacks on Lebanon, further raising concerns about potential supply disruptions throughout the Middle East. Crude eventually settled at $77.03 a barrel, up 33 cents, another record close.

Retail sales fell in June, as did consumer confidence for July. Moreover, investors are increasingly concerned that the recent spate of corporate Q2 profit warnings is still another indication that the US economy is headed for a downturn.


July 21

Posting a loss for the third straight week, the tech-laden Nasdaq dropped 19 points to 2,020 today after plunging over 41 points on July 20. The 2,020 level was the lowest finish for the Nasdaq since May 17, 2005, when it closed at 2,004.

Dell Computer Corporation stock tumbled $2.19 today, or 10%, to $19.91 after it said aggressive price cuts in the personal computer market would cause the company to miss forecasts. Dell has approximately 26,000 employees in the US these days; over the last three years, Dell has created nearly 40,000 offshore jobs.

The Dow Jones industrials ended the week up only 129 points, despite a one-day surge of 212 points on July 19 solely due to investor optimism that long string of Fed interest rate hikes may soon be nearing an end. Federal Reserve Chairman Ben Bernanke predicted that the US economic slowdown would help ease inflation pressures in coming months. Oh, great! Some observers felt the market was hearing everything positive Bernanke said on the 19th and ignoring his many caveats.

On July 20, Ford reported a second-quarter loss of $123 million, or 7 cents a share, down from a year-ago profit of $946 million, or 51 cents a share. In June, Ford's worldwide sales dropped 6.9% even as passenger car sales rose from a year ago. The truck side, which is key to profit, fell 14%, with the F-series pickups, the best-selling vehicle in the US, off nearly 10%. The month was even more difficult for Ford rival General Motors, which reported a 26% decline in June in US sales alone.

In the first actual charges to come out of the widening stock-options scandal, criminal and civil actions were filed July 20 against two former executives of San Jose CA Brocade Communications Systems for securities fraud. The two were charged with concealing millions of dollars in expenses, overstating the company's income and falsifying records of stock options grants. A third Brocade executive faces civil charges. The SEC and US Justice Department are now investigating at least 80 companies for backdating options and failing to properly account for them. The count was only 17 companies being investigated as recently as May 19, 2006.

The United Nations reported on July 18 that an average of more than 100 civilians per day were killed in Iraq during June 2006, registering the highest official monthly tally of violent deaths since the fall of Baghdad in 2003. Meanwhile, the new war among Israel, Lebanon and Hezbollah widened unchecked during the last 10 days. There could hardly have been a better moment for the annual meeting of the Group of 8 to prove its worth. Instead, it showed how pointless these “leaders” are. It did not take Bush's unwanted shoulder massage of Germany's Angela Merkel or his awkwardly open microphone to display the huge gap between the summit meeting and political reality. The entire G8 Meeting was a useless exercise.


July 28

Confirmation arrived today of the relentless slowdown in the US economy that we've been commenting on for months. The US Commerce Department officially reported that the nation's gross domestic product grew only 2.5% in the second quarter, less than half than in the first three months of 2006. Q2 growth in consumer spending halved, and Q2 residential investment suffered its steepest decline in six years. Meanwhile, the Commerce Department also reported that the core price index for personal consumer expenditures, which measures the price of consumer goods and services, excluding food and energy, surged at an annual rate of 2.9% in the second quarter, up 38% from the first quarter. Add in food and energy costs, and inflation is even worse. Perversely, the GNP news bolstered today's prices of stocks, as it raised investors' myopic hopes that the Federal Reserve will stop raising interest rates, never mind the declining GNP's enervating impacts on jobs and inflation. Along with the latest GDP report, the government also issued annual revisions today that showed the GNP was less than previously estimated for 2003, 2004 and 2005. The main reason for the downgrade: business investment in computer equipment and software was less than previously reported.

Following on the heels of the reports in the original May Commentary regarding the oil industry's first quarter's results, Exxon Mobil, the world's largest publicly traded oil company, reported a 36% gain in second-quarter earnings this week, bolstered by outrageous oil and gas prices in the United States, China and India. Net income for the quarter rose to $10.36 billion, from $7.64 billion a year earlier. The only time Exxon's quarterly profit was higher was the fourth quarter of last year (after Katrina). Exxon revenue climbed only 12% in Q2 2006, to $99 billion, yet yielded a 36% increase in profits - hmmm … good business if you can get it! The $99 billion in revenue was second only to Exxon's third quarter of last year.



Combined, the top five oil companies, Exxon Mobil Corp., BP PLC, Chevron ConocoPhillips and Royal Dutch Shell PLC, “earned” $34.6 billion in the second quarter, also 36% more than the same period last year. Through the first half of 2006, the five companies have “earned” $62.8 billion, demonstrating the industry's current moneymaking prowess now that energy prices and profit margins appear likely to remain at heights that truly seemed far-fetched as the Clinton years ended.

Since oil prices have climbed even higher in July, peaking at $78.40 per barrel, Q3 2006 probably will be even more prosperous for the oil companies than Q2. Remember all that talk in the Republican-laden Congress in recent times about a windfall profits tax? Ha-Ha. The US Senate held hearings with oil company executives last year without taking any action against the industry. While these executives repeatedly point out that “they don't set the price for crude oil”, they nevertheless continue to accept larger and larger bonuses as their companies reap the benefits of the ballooning profits at the expense of hapless drivers everywhere. One more item for US voters to remember in November.


August 4

Well, Wall Street traders got their wish Friday when the US labor Department issued its payroll report for July. US job growth in July was again way below expectations. Employers added jobs in July at a miserably slow pace for the fourth consecutive month, providing the strongest evidence yet of the country's weakening economy. "I would be absolutely astonished if the Fed raised rates next week," said chief US economist for High Frequency Economics Ian Shepherdson hopefully. "The loss of momentum in the economy is all too evident." But investors nevertheless pushed stocks lower on Friday after all, unwilling to trust that the labor report was enough to keep the Federal Reserve from again raising interest rates.

Of course, stock market players' concerns pale in comparison to the ongoing dispair of millions of US workers lucklessly seeking jobs during the last five and a half years. And those who have jobs have seen their weak earnings growth continuously fall behind increasing inflation.

July's bad news continued. The unemployment rate, which usually moves in tenth-of-a-point increments, when it moves at all, jumped two-tenths in July, to 4.8%, the highest level in five months. Indeed, for the unemployed, finding another job is getting harder. The average number of weeks spent looking for a job grew by more than a week in July, to 17.3 weeks, the largest monthly jump since last August. At the same time, 1.3 million of the unemployed, or more than 18%, were out of work for 27 weeks or longer, an increase of 200,000 since June.

While the US economy deteriorates, while the federal deficit balloons, and while many parts of the world are in flames, the Republican-laden Congress again focuses on, you guessed it, repeal of the estate tax for the richest Americans!

For his part, Dick Cheney is inappropriately butting into Alaskan state politics, urging legislative leaders there to approve a controversial bill to allow three of the top five oil companies to build a new $20 billion natural gas pipeline. Of course, the oil companies are demanding billions in tax breaks, even though these same oil companies are swimming in profits (see the July 28 update above).

Amid all these troubles, George W. Bush left Washington today for another Texas vacation. You know - like the past vacations in Texas when he ignored the briefing that "Osama Bin Laden is determined to strike in the United States" (August 6, 2001), or like when he ignored Cindy Sheehan's protests about IRAQ, or like when he ignored the threat and subsequent devastation of KATRINA - that kind of Texas vacation. He'd better watch out this year; he may just miss the approaching end of the world, as many Christian "end-times believers" think the current Middle East wars are definite signs of the coming Armageddon.


August 11

As many predicted, the Federal Reserve on August 8 suspended its two-year crusade of raising interest rates, a policy shift based on the investment community's astonishing "hope" that a painful US economic slowdown will eventually subdue inflation. After 17 consecutive increases at every Fed meeting since mid- 2004, the central bank voted this week to hold its benchmark interest rate steady at 5.25%. In a rare display of uncertainty, the Fed committee was not unanimous in its decision. One reason is that today, inflation is still far from subdued. Core inflation is running about 2.9% higher than one year ago, the biggest year-over-year jump in 11 years (and core inflation excludes rising food & energy costs!).

Speaking of pain, Laurence H. Meyer, a former Fed governor and now an economic forecaster at Macroeconomic Advisers, predicted that it would take a truly significant economic slowdown to actually reduce inflation. For that to happen, he said, unemployment would have to rise for a sustained period. For example, to reduce inflation by one percentage point, the US unemployment rate would to rise by about two percentage points for a full year. Too bad for those laid off!

Indeed, if the Fed cracks down harder on inflation, it risks throwing the US economy into an actual recession, not just a slowdown, which would leave workers whose wages have hardly kept up with price increases in still worse shape. And with energy prices up sharply, many workers, whose pay increases have lagged far behind productivity gains, already have far less disposable income for other purposes.

And, as the Labor Department also reported on August 8, productivity already slowed to an annual rate of increase of 1.1% in the April-June 2006 quarter. Productivity is the key factor determining living standards. Strong growth in worker productivity, which occurred often during the last five years, should allow businesses to pay their workers more (although businesses seldom did so in the last five years; most of the benefit went to corporate profits) without raising the prices of business products (which they have been doing, especially recently, causing inflation).

Meanwhile, on August 10 Wall Street withstood the news of a terror plot targeting commercial airlines. But European markets tumbled as British authorities said 24 people were arrested in a widespread plan to destroy numerous international flights, and reacting, the US raised its terror alert to the highest levels ever for air travelers.

While airline stocks fell on August 10, overall US stock averages nonetheless went up that day! Wall Street also benefited from lower crude prices, which fell on the belief that reduced travel in the coming months might curtail demand for fuels. A barrel of light crude settled at $74 on August 10, down $2.35.

Of course, that was just a day after the oil company BP announced that a corrosion problem was forcing a shutdown of its pipelines serving Alaska's Prudhoe Bay. Oil prices immediately shot up, with oil temporarily gaining more than $2 a barrel, to nearly $77, and gasoline rising five cents a gallon in some cities. Why BP was so negligent in its inspection protocol is not yet revealed. Not surprisingly, Republicans were quick to use BP's travails as yet another reason to whip up hysteria to drill more in the US. But of course, everyone but the right wing knows that even all-out drilling everywhere in the US and off our coasts would never dent America's oil appetite. The US has only 3% of global oil reserves, yet we consume 25% of the world's oil. Only alternatives to fossil fuel will save us.

But maybe most Americans don't, in fact, know facts. A large number of Americans remain apathetic or just plain ignorant about geopolitical issues, and these sad-for-democracy conditions do not seem to be getting better. As recent as late July 2006, a Harris Poll reported that 50% of Americans now seem to believe that Iraq had weapons of mass destruction after all when the US preemptively invaded over 1200 days ago, up from 36% who thought so in February 2005. Meanwhile, 64% still believe that Saddam had strong links with Al Qaeda. Part of the reason, of course, is the current administration's incessant propaganda. In many cases, facts are either labeled "junk" science or simply lied about: stem cells, global warming, tax cuts, income inequality, Iraq, etc.

Alas, there was some good news this past week. The defeat of Senator Joe Lieberman at the hands of Connecticut businessman Ned Lamont should send a message that voters are at long last angry and frustrated over the US presence in Iraq. Lamont said he ran against Lieberman because he was offended by Lieberman's continuously cheerful (and inaccurate) descriptions of what was happening in Iraq and Lieberman's sanctimonious denunciations of Democrats who have criticized the administration's handling of the Iraq war.

And other good news: the unlikely duo of Tony Blair and Arnold Schwarzenegger this week agreed to collaborate on cleaner-burning technologies and to explore an emissions-reduction program to attack global warming that would combine mandatory controls on greenhouse gases with market incentives. For his part, Blair claimed he was not really defying his good friend George Bush. The "governator" was more forceful, saying that the Bush administration and Republican Congress have shown no leadership on the issue (gee, there just might be an election coming up in CA). The Blair/Schwarzenegger agreement again dramatizes how badly the current administration in Washington lags both Britain and California with Bush's lame program of "voluntary pollution reductions".

And finally some good news regarding Israel, Lebanon and Hezbolla: late in the week, the United Nations Security Council finally produced a formula to end the fighting in Lebanon. Of course, while the diplomats dithered, hundreds of Lebanese and Israelis died, one-third of Lebanon's population was uprooted, and new layers of anger and fear were sown on both sides of the border. (Remarkably, after Bush initially gave Israel the green light to keep attacking, and later supplied additional smart bombs to the Israeli air force, Bush didn't even speak on the phone to the Israeli prime minister till August 11, more than a month after hostilities began).


August 18

On August 17, the Congressional Budget Office said that unanticipated tax receipts so far this year will likely allow the 2006 federal deficit to come in at … hold on ... "only $260 billion". But the deficit will begin to rise again next year and will continue to balloon further unless Bush's string of past tax cuts for the wealthy is allowed to expire on schedule. Otherwise, even the most optimistic assumptions, including no more major disasters and reductions of US forces in Iraq and Afghanistan -- reveal a stream of red ink that would create still another $2.5 trillion of debt (above the current debt of $8 trillion) over the next 10 years and average at least $254 billion a year, according to budget office calculations. (Recall that when Bush first took office in 2001, the US was running yearly fiscal surpluses). Indeed, budget office figures showed that the administration's spending is increasing by 7.7% this year alone, easily outstripping US economic growth. In fact, even in the best case, the federal budget will likely hang around 20% of the country's gross domestic product through the bitter end of the Bush presidency, up from 18.5% of GDP when Bush first came to office. Some conservative!

Also on August 17, a federal judge ruled the Bush eavesdropping agenda to be both illegal and unconstitutional. She wrote that Bush has violated the 1978 Foreign Intelligence Surveillance Act (FISA) when he told the NSA to spy without a warrant on international phone calls. She offered a cutting condemnation of Bush's attempt to place himself beyond the reach of Congress, judges or the Constitution. "There are no hereditary kings in America and no powers not created by the Constitution," wrote Judge Anna Diggs Taylor of the United States District Court in Detroit. She noted that the 1978 FISA law was passed to disallow this type of abuse of power and provided ample flexibility for collecting intelligence. Instead of simply abiding by the 1978 law after this ruling, Bush's lawyers are now trying to have the suit thrown out on national security grounds. In this case, the administration told Judge Taylor that merely arguing its case would expose secret information. The Judge said this argument was "disingenuous and without merit." No sooner had her ruling been issued, than Bush's crowd in Congress began calling for new laws to defeat the Judge's objections. Republicans pointed out that Judge Taylor was appointed by Jimmy Carter. (Judge Taylor's decision was a sequel to the Supreme Court's decision in June 2006 in Hamdan v. Rumsfeld that struck down the administration's plans to try detainees held in Guantánamo Bay, Cuba, for war crimes). The Republicans' ridiculous efforts to undermine the August 17 eavesdropping ruling will unquestionably proceed, but for now, one solitary judge has done what the US Congress has studiously avoided doing.

And also on August 17, another federal judge ordered strict new limitations on tobacco after finding that cigarette makers engaged in a decades-old conspiracy to deceive the public about the dangers of smoking. The deception, Judge Gladys Kessler of Federal District Court for the District of Columbia said, resulted in "an immeasurable amount of human suffering." Judge Kessler ordered the companies to stop labeling cigarettes as "low tar" or "light" or "natural" or with other "deceptive brand descriptors which implicitly or explicitly convey to the smoker and potential smoker that they are less hazardous to health than full-flavor cigarettes." The judge said she regretted not being able to punish the companies further. Cigarette makers, the judge said, profit from "selling a highly addictive product which causes diseases that lead to a staggering number of deaths per year, an immeasurable amount of human suffering and economic loss and a profound burden our national health care system."

More bad news for workers. On August 18 Boeing said it must begin shutting down production of its C-17 cargo plane, because the US Congress has not funded new purchases. The decision may ultimately affect 5,500 Boeing employees in Arizona, California, Georgia and Missouri who are directly tied to the C-17 program. But the result will first hit the 25,000 employees of the nearly 700 companies in 42 states that supply parts and systems for the plane, Boeing said. "The C-17 is one of the Defense Department's most successful acquisition programs ever," said Ron Marcotte, vice president and general manager of Boeing Global Mobility Systems. "But we can't continue carrying the program without additional orders from the US Government."

Even though the UN Truce in Lebanon is less than a week old, helicopter-borne Israeli commandos landed near the Hezbollah stronghold of Baalbek over the August 19-20 weekend and engaged in a lengthy firefight in what the Lebanese prime minister, Fouad Siniora, called a "flagrant violation" of the cease-fire. The United Nations issued a statement that Secretary General Kofi Annan also considered the raid a violation and was "deeply concerned. The Israelis said "the aim of the operation was to disrupt terrorist activities against Israel and to prevent arms from being transported to Hezbollah from Iran and Syria." Moreover, Israel still intends to try to kill the Hezbollah leader, Sheik Hassan Nasrallah, according to an anonymous senior Israeli commander.

And the last news item for August 18: In each poll released since the Brits foiled the alleged Trans-Atlantic terror plot - CBS, Gallup, Newsweek, Pew, Zogby - Bush's approval rating remains mired in the 30's. Apparently the incessant terror fear mongering doesn't work anymore, no doubt due to the fact that the administration has squandered billions of dollars and thousands of lives on IRAQ while neglecting critical security enhancements within the US.






Comments? Feedback? Tell us what you think about this topic, or share any additional information you may have on the subject! Submit your comments to: Email Form.

About the Authors

Since 1996, Dr. Russ Henke has been president of HENKE ASSOCIATES, a San Francisco Bay Area high-tech business & management consulting firm. The number of client companies for Henke Associates now numbers more than three dozen. During his corporate career, Henke operated sequentially on "both sides" of MCAD and EDA, as a user and as a vendor. He's a veteran corporate executive from Cincinnati Milacron, SDRC, Schlumberger Applicon, Gould Electronics, ATP, and Mentor Graphics. Henke is a Fellow of the Society of Manufacturing Engineers (SME) and served on the SME International Board of Directors. He is also a member of the IEEE and a Fellow of ASME International. In April 2006, Dr. Henke received the 2006 Lifetime Achievement Award from The CAD Society, presented by CAD Society president Jeff Rowe at COFES2006 in Scottsdale, AZ (photo below). Full press release: http://www10.mcadcafe.com/nbc/articles/view_article.php?section=CorpNews&articleid=260489

An affiliate of the HENKE ASSOCIATES team since 2001, LA-based Dr. John R. (Jack) Horgan co-authored this May 2006 MCAD Commentary. Dr. Horgan's prior corporate career has included executive positions at Applicon, Aries Technology, CADAM and MICROCADAM, as well as a stint at IBM. Dr. Horgan is also an editor of EDAcafe Weekly.

Since May 2003 the authors have now published a total of forty-one (41) independent articles on MCAD, PLM, EDA and Electronics IP on IBSystems' MCADCafé and EDACafé. Further information on HENKE ASSOCIATES, and URL's for past Commentaries, are available at http://www.henkeassociates.net.