Conn. defense contractor riding out the waves
The Hartford Courant
SIMSBURY, Conn. — Phonon's customers want to make radar that sees out farther than anyone else — longer than the opponent can see.
The technology that Phonon produces, crystal wafers that conduct both sound waves and electricity, was invented in the 1960s for defense purposes, but that's a tiny part of the $2 billion marketplace. The same technology is used today in remote key fobs, cell phones, wi-fi receivers, GPS systems, wireless modems and more.
"They're made a million a day in Asia and sold for 10 cents," said Tom Martin, president and a co-founder of Phonon Corp.
His company took another tack and stayed with defense. "Everything we make is custom," he said, and the assemblies start at $100 and can sell for more than $100,000 each.
Instead of millions of parts, Phonon makes 10-piece orders, maybe 100. On average, a part takes 100 man-hours to produce.
"We don't have much in the way of competition," Martin said. Phonon sticks to highly niche markets, he said.
Nearly everything they make is sold to defense giants: Raytheon, Lockheed Martin, Northrop Grumman. In turn, those companies sell radar systems to the Pentagon or to allies that use the Patriot Missile defense system or buy U.S. military airplanes.
Tim Zeier, director of the Patriot systems ground program for Raytheon, said Phonon has been the sole supplier for its parts since the early 1990s. "Patriot's been fielded since the early '80s," he said. "A supplier with this longevity speaks for itself."
Spokeswoman Roopa Bhide added: "Unless they meet our very stringent, highest standards, they would not continue. They know everything they do is critical and people's lives depend on them."
Phonon, which was funded 31 years ago by a French company interested in gaining access to the U.S. defense market, still has all four of its original founders. In 1989, the local founders bought out the French partner.
In those first eight years, most of the time Phonon did not make money.
But from 1990 on, every year has been profitable. Until this one.
That's because budget pressures led the defense appropriators to cut money from an upgrade to Patriot missile systems in this year's budget. It's not a direct consequence of automatic budget cuts known as sequestration, but without the pressure to cut spending, this cut would not have come, Martin said.
"The U.S. Army wants this, the administration wants this," he said. "They're going to have to do these upgrades."
The recession had no effect on Phonon, and annual revenues hovered around $15 million in 2010, 2011 and 2012. But this year, revenues are down by about half. The Patriot Missile system parts accounted for about half of sales.
He said, "We've known all along that's one of our big problems," being so dependent on one program.
But Phonon did not slash its staff, which had grown to 85 people. They had a smaller layoff, and now are at 74 workers.
"We don't want to lay off our engineers, which are a key, key resource," Martin said. About 60 percent of the staff is in production, and there are 17 engineers. Many are doing research and development this year.
He also is keeping more production staff than he needs for current orders, letting them build up inventory.
The only other time in Phonon's history when there were layoffs was in 1991, at the time of the "peace dividend," when Pentagon spending shrank at the end of the Cold War.
The company went from about 40 people down to 23 back then. But the peace dividend meant its competitors moved over to consumer electronics, clearing the field for Phonon.
Martin said business in 2014 will depend on next year's budget, and while he thinks the sausage-making won't be pretty, he expects in the end, this will just be a budgetary hiccup.
"I think it's going to be a terrible fall" in Congress, he said. "No action, all theater."
Martin is 72, and he's been looking to sell Phonon to another defense company for a few years. "We have had offers. We've turned them down," he said. "I wasn't getting the price I wanted." He said now he thinks that's partly because he wasn't ready to retire.
Now is not a good time to sell, but he said in a few years, young managers will be ready to take over. He will only sell to a company that promises to keep the Connecticut factory and staff in place.
Connecticut is a great place to find talent, he said. About two-thirds of the engineers they have hired over the years are University of Connecticut graduates. He has a Ph.D. in electrical engineering, as does another founder (and another is all but dissertation). They hire right out of school and train the new employees. He said enlisted sailors who worked on Groton's submarines make wonderful test technicians. Skilled electronic assemblers are plentiful.
"There is no way it can be an iron-clad assurance," he said, but he will look for a sense he can trust the buyers to keep the operation where it is.
Martin, who said he is an engineer at heart, is attached to the company that has been his life's work.
"There are a thousand ways a business can die and just a handful of ways it can keep going," he said. He credited the company's success to "luck, and right decisions and a lot of perseverance."