Integware cuts payroll from 120 to 27

The economy is in recovery but technology companies have seen their share of layoffs this year. They blame a variety of causes, from specific fears of health care reform to, more broadly, restructuring.

Tech always has been a boom-and-bust industry, but this year has been a particularly difficult one for employment. The tech hardware and equipment segment, led by Hewlett-Packard, has shed 41,200 jobs, the most announced by North American companies this year, according to Bloomberg.

HP plans to cut 9,000 jobs in North America. The company has not released its Fort Collins employment numbers, though the Northern Colorado Economic Development Corp. has estimated it employs 1,200 to 1,500 people here.

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How many of those jobs HP will eliminate here is unclear, but what is clear is that tech downsizings have not spared Northern Colorado-based companies.

Integware Inc. of Fort Collins has reduced its workforce from 120 last year to 27 this year. Its revenues slid from $15.3 million to $8 million.

Chris Kay, president and CEO, blames uncertainty over health care reform. The company makes software for medical-device companies worldwide.

Specifically, Kay faults a 2.3 percent federal excise tax on medical technology that will take effect Jan. 1. “If you’re a company and you make 10-percent net profit, that means that 23 percent of your net profits are now eaten up by this tax,” he said.

The Affordable Care Act would tax gross sales receipts of more than $5 million for manufacturers and importers of medical devices such as prosthetic limbs, defibrillators, X-ray machines, pacemakers, surgical tools and stents.

The tax is supposed to raise nearly $30 billion in the next decade to fund health care reform, and the medical-device industry stands to gain from expanding

coverage, the Obama administration argues. Opponents say the tax will strain the capital-intensive medical-device industry.

Integware’s layoffs appear to be one of the more extreme reactions locally to health care reform. So, how could a single-digit tax hike lead to a 73-percent decline in employment for a company?

Kay, who bought Integware in 2003, explains that his customers have held off on investments, which has meant lower revenues for his company.

One “multibillion-dollar company” declined Integware’s services, he said, even though it would have realized a sizable return on its investment; it cited health care reforms for its decision.

Top executives at the company, which Kay declined to name, said, “’We’ve got plenty of money, but we don’t know what’s going to happen with the market,’” according to Kay. “’We don’t know what health care reform’s going to do to us, so we’re just going to sit on our money.’”

All this has led Kay to cut labor costs. “These are generally very good, high-paying jobs,” said Kay, noting that most were software engineers and project managers. “These are not basic-wage jobs. I lost a lot of great people.”

The Obama administration claims that health care reform will inject dollars into the medical-device industry, but “our customers, the large OEM medical-device companies, don’t believe that projection will hold true,” he said.

One of those companies, Michigan-based Stryker Corp., which is not a customer of Integware, said last November that the tax played a role in its decision to reduce its global workforce by 5 percent.

Opponents have argued that the uninsured already are receiving medical treatment, which ultimately is paid for by hospitals. Therefore, medical-device companies will not see much benefit from the increase in newly insured patients.

In the future, Kay hopes that struggling medical-device firms will continue to see the value that his company provides, including cutting costs in their operations and getting their products to market faster. He also is hoping that Congress might repeal the tax, though that seems unlikely.

There is, meanwhile, some good news for the local tech sector. Avago Technologies recently said it was likely to proceed with an expansion in Fort Collins that would add 135 jobs with an annual payroll of $5.6 million. The expansion stems from the semiconductor manufacturer’s growing wireless communications business, which involves making semiconductors in smart phones.

Fort Collins, which is giving Avago $4.6 million in tax breaks, must still work out details of an agreement with Avago about how it will rebate the taxes to the company, as well as criteria on maintaining employees in return for incentives.

Steve Lynn covers technology for the Northern Colorado Business Report. He can be reached at 970-232-3147, slynn@ncbr.com or twitter.com/SteveLynnNCBR.