“The State of Manufacturing”

Scott Bjornstad, Regional Business Development Leader, McGladrey

© 2012 McGladrey LLP. All Rights Reserved.© 2013 McGladrey LLP. All Rights Reserved.© 2012 McGladrey LLP. All Rights Reserved.© 2013 McGladrey LLP. All Rights Reserved.

2013 McGladrey Manufacturing & Distribution Monitor

National Association of Manufacturers 2013 CMA Summer Meeting

Presented by Scott Bjornstad, McGladrey LLP

July 29,2013

Strategies for Growth: 2013 Monitor Results

© 2012 McGladrey LLP. All Rights Reserved.© 2013 McGladrey LLP. All Rights Reserved.

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About McGladrey

80+ year history

Fifth-largest provider of accounting, tax and business consulting services in the U.S.

We provide services to more than 8,000 midsize manufactures and distributors across the nation

75 U.S. offices; offices in 85 countries worldwide

6,500 professionals nationally, 32,000 worldwide


Economic Update

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6Source: Bureau of Economic Analysis, NAM calculations using Moody’s Analytics simulation model

Real gross domestic product(Chained 2005 dollars)

2008 2009 2010 2011 2012 2013 2014

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Real GDP Forecast:↑ 1.8% (2011)↑ 2.2% (2012)

↑ 2.1% (2013)↑ 3.2% (2014)

NAM Forecast


Source: Bureau of Labor Statistics

Employment situation

2009 2010 2011 2012 20136

7

8

9

10

11

12

13

14

4%

5%

6%

7%

8%

9%

10%

11%

Durable Goods Nondurable Goods Unemployment Rate

Millionsof workers

Unemployment rate

7


Source: Bureau of Labor Statistics

Manufacturing sectors with the largest net employment gains

Chemicals

Petroleum and coal products

Miscellaneous durable goods manufacturing

Electrical equipment and appliances

Miscellaneous nondurable goods manufacturing

Food manufacturing

Primary metals

Plastics and rubber products

Machinery

Fabricated metal products

Transportation equipment

1.1

2.8

5.5

7.3

11.9

20.3

45.0

46.2

124.4

178.7

182.6

Manufacturing sectors with the largest net employment gains YTD, in thousands of employees

(December 2009 to June 2013)

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Source: U.S. Census Bureau, National Association of Home Builders

Housing market situationHousing starts, permits (in thousands of units)

NAHB Housing Market Index

2005 2006 2007 2008 2009 2010 2011 2012 20130

500

1,000

1,500

2,000

2,500

0

10

20

30

40

50

60

70

80

Housing Starts Housing Permits NAHB Housing Market Index

9


Source: Institute for Supply Management

ISM Manufacturing Indices

2008 2009 2010 2011 2012 201320.0

30.0

40.0

50.0

60.0

70.0

Purchasing Managers Index New Orders Index Employment Index Inventories Index

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The 2013 Manufacturing & Distribution Monitor

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Fielded - March 2013

Report release - June 19, 2013

1067 total participants

80% private or closely held businesses

12% private equity-owned businesses

C-level executives

- 51% CEO

- 29% CFO

Demographics/Profile of participants


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The McGladrey Monitor is considered the “the voice” of M&D in the middle market

Strategic partnerships with 118 trade associations to leverage the Monitor results (i.e. National Association of Manufacturers, National Association of Wholesale Distributors, Illinois Manufacturers’ Association, etc.)

This year we issued a total of 23 reports- Manufacturing & distribution report

- Distribution-only report co-branded with the NAW

- Food & beverage report

- Consumer products report

- 13 state benchmark reports

- 6 customized association reports


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Topics covered in the 2013 McGladrey Monitor

Business conditions

Business optimism

Corporate objectives

New products and services

Sales growth and strategies

Cost expectations and maintaining margins

Workforce

On-shoring

Information technology


15

Business conditions year over year

2009 2010 2011 2012 20130%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

40% 10% 3% 5% 7%

52%

66%

53%56%

61%

9%

24%

45%

39% 32%

Five-year business conditions

Declining Holding own Thriving


16

Business conditions year over year

2009 2010 2011 2012 20130%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

40% 10% 3% 5% 7%

52%

66%

53%56%

61%

9%24%

45%39% 32%

Five-year business conditions

All Manufacturers NAM

8% 6%

61% 62%

31% 31%

Decline Holding steady Thriving


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F&B businesses are most likely to be thriving

Industry Sectors 2009 2010 2011 2012 2013

Aerospace — — — 34% 20%

Automotive (OEM and aftermarket) 53% 45% 29%

Biotech, life sciences, medical equipment and supplies 25% 37% 47% 45% 38%

Building materials 6% 8% 32% 28% 33%

Chemicals, petroleum and plastics 13% 33% 49% 40% 33%

Computers, electronics, electrical components and appliances 9% 17% 52% 41% 29%

Energy and cleantech — — 62% 48% 19%

Food and beverage 19% 49% 47% 47% 40%

Furniture and fixtures 16% 32% 34% 23%

Industrial and commercial machinery 5% 21% 62% 43% 27%

Metal fabrication 6% 15% 48% 41% 19%

Textiles, apparel and accessories 21% 35% 16% 20%

Transportation 5% 28% 49% 50% 27%

Wood, paper products and printing 7% 16% 31% 29% 31%

Other — — — 41% 33%

Percentage of thriving businesses


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Key findings

Business optimism

Growth challenges

Workforce

Business proximity

Technology


Key finding ‒ Business optimism

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Key finding ‒ Business optimism

World economy

U.S. economy

Your industry

Your company

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

50%

62%

78%

90%

17%

47%

71%

83%

33%

49%

73%

85%

201320122011

Business optimism year-to-year

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Business optimism by NAM respondents

World economy

U.S. economy

Your industry

Your company

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

30%

43%

65%

84%

33%

49%

73%

85%

All respondentsNAM respondents

Business OptimismNAM Respondents vs. National Aggregate

21


22

Optimism highest among thriving businesses

Percentage that reported optimistic or very optimistic All businesses vs. Thriving businesses

World economy

U.S. economy

Your industry

Your company

41%

61%

87%

98%

34%

49%

73%

85%

All businesses Thriving businesses


Key findings ‒ Regulatory and policy affects on growth

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Key findings ‒ Regulatory and policy affects on growth

Increase in capital-gains/dividends

Increase personal tax rate highest-earning bracket

Skills shortages

Material/Components pricing

Federal deficit

Increase in payroll taxes for SS/Medicare

Implementation of Obama care

Government regulations

52%

52%

57%

63%

67%

69%

71%

74%

43%

46%

40%

28%

27%

28%

24%

15%

1%

1%

2%

8%

2%

1%

1%

8%

4%

1%

1%

1%

5%

2%

4%

3%

Limit or Significantly limit No effect Improve or Significantly improve Don’t know

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Regulatory and policy affects NAM respondents

Increase in capital-gains/dividends

Increase personal tax rate highest-earning bracket

Federal deficit

Increase in payroll taxes for SS/Medicare

Implementation of Obama care

Government regulations

65%

60%

75%

74%

67%

87%

52%

52%

66%

69%

71%

74%

All respondents NAM Respondents

Regulatory and policies that will limit or significantly limit

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Sales changes (% of businesses)

Non-U.S. Sales NEXT 12 months

Non-U.S. Sales PAST 12 months

U.S. Sales NEXT 12 months

U.S. Sales PAST 12 months

63%

57%

69%

82%

31%

29%

10%

7%

6%

14%

21%

11%

Increased No Change Decrease

26


27

U.S. sales changes (averages and medians)

U.S. Sales Past 12 Months

U.S. Sales Next 12 Months

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

7%

8%

5%

6%

AverageMedian

NAM 6%

NAM 5%

NAM 7%


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Non- U.S. sales changes (averages and medians)

Non-U.S. Sales Past 12 Months

Non-U.S. Sales Next 12 Months

0%

1%

2%

3%

4%

5%

6%

7%

8%7% 7%

0% 0%

AverageMedianNAM 3%

NAM 5%

NAM 6%


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Price changes in next 12 months (averages and medians)


Costs trends consistent across business types

Types of Costs Respondents expect an Percent of businesses

Inventory/material/components

Decrease 9%

No change 7%

Increase 84%

Transportation/fuel

Decrease 2%

No change 9%

Increase 89%

Energy/utilities

Decrease 5%

No change 15%

Increase 80%

Cost of debt

Decrease 6%

No change 56%

Increase 37%

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Key finding ‒ Workforce

31


Key finding ‒ Workforce

Employment changes in next 12 months (all businesses)

1.6 % increase

4.4 % increase

4.3 % increase

% of Increase for NAM responses:Total employees 4.0%U.S. employees 4.7%

Non-U.S. employees 1.1% 32


Thriving businesses will lead 2013 hiring

Percentage of businesses expecting employee increases in next 12 months

Non-U.S. employees*

U.S. employees

Total employees

26%

23%

25%

46%

59%

59%

62%

79%

81%

Thrivng

Holding steady

Declining

Thriving - 6.9% total employee increase (average)

Holding steady - 3.6% total employee increase (average)

Declining - 1.2% total employee decrease (average)

Thriving NAM respondents indicated a 7.1% total employee increase (average)

* based on businesses currently with non-U.S. employees33


Workforce – Employee costs are a concern

Other benefits

Health care costs

Wages

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

72%

91%

93%

28%

7%

5%

1%

2%

2%Increase No Change Decrease

Healthcare costs are expected to increase by

an average of 10.2 percent!

Wages to increase by 3.5%

Other benefits to increase by 3.4%

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Workforce – Percent of increase for employee costs

Other benefits

Health care costs

Wages

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

76%

94%

94%

72%

91%

93%

All respondents NAM respondents

10.2 % average increase

NAM- 11.2% average increase


Percent of increase




35


36

NAM 5% 44% 44% 6% 1%

Many businesses are have trouble finding skilled talent

Percentage of businesses finding the talent they need

All Businesses

Distributors

Manufacturers

6%

6%

6%

51%

58%

47%

37%

31%

40%

6%

5%

7%

Always Most of the time Some of the time Rarely Never

43%

51%


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Internal training is key in developing skills

Percentage of businesses using the following techniques to prevent or address skills

Internal training and skills-development programs

Collaboration with vocational/technical schools

Collaboration with colleges and universities

Apprenticeship programs

Outsourcing activities for which skills are lacking

Collaboration with trade associations

Collaboration with high schools

Recruiting talent from outside the United States

Other

Not doing anything to address skills gaps

78%

33%

31%

22%

21%

18%

14%

6%

5%

10%


38

Specific capital-expenditures changes in the next 12 months


39

Specific capital-expenditures changes in the next 12 months


Key finding – Business proximityKey finding ‒ Business Proximity

40


41

Importance of business proximity

Customers

Engineering, R&D, product development

Supply chain

16%

28%

13%

12%

13%

14%

20%

15%

28%

52%

31%

41%

1%

13%

3%

1 = Not important 2 3 4 5 = Very important


42

Importance of business proximity to NAM respondents

Customers


Supply chain

19%

24%

12%

15%

13%

16%

20%

16%

29%

22%

18%

26%

21%

25%

16%

1 = Not important 2 3 4 5 = Very important

Customers


Supply chain

16%

28%

13%

12%

13%

14%

20%

15%

28%

52%

31%

41%

1%

13%

3%

All respondents

NAM respondents


43

On-shore vs. Off-shore

All businesses

Manufacturers

Distributors

87%

85%

92%

9%

11%

4%

5%

5%

4%

Relocate some U.S. operations/functions overseas-offshore

Not likely Somewhat likely Very likely


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On-shore vs. Off-shore

All businesses

Manufacturers

Distributors

87%

82%

95%

10%

12%

5%

4%

5%

1%

Bring some operations/functions back to the United States-onshore

Not likely Somewhat likely Very likely


Why the optimism toward a manufacturing comeback?

Cheap U.S. natural gas and other increased energy production are helping to power U.S. factories more efficiently, with gas especially providing inexpensive raw materials for U.S. manufacturers of plastics, tires, certain pharmaceuticals and other petrochemical products.

Higher wages in China and other foreign export markets are making outsourcing less profitable to U.S. firms.

Congressional approval in 2011 of trade agreements with South Korea, Colombia and Panama and other agreements being negotiated now with Asia and Europe are promising to open more foreign markets to U.S. products.

High U.S. unemployment is relieving pressure on factory owners to increase wages, helping to make U.S. labor costs more globally competitive.

Major technology advances have steadily boosted factory efficiency and worker productivity.

Source: AP- April 4, 201345


Key finding ‒ Technology

46


Enterprise asset management

Product lifecycle management

Supplier management system

Manufacturing execution system

Transportation management systems

Financial management system

Warehouse management systems

Other

Social media applications

Business analytics

Mobility solutions (including tablets)

Enterprise resource planning

Customer relationship management

Internet and web applications

0% 5% 10% 15% 20% 25% 30%

2%

5%

7%

9%

9%

11%

12%

12%

13%

15%

16%

17%

22%

25%

IT new purchases or major upgrades (% of businesses)

Key finding ‒ Technology

27% of NAM respondents stated that they plan to

purchase /make a major upgrade to Internet and

web applications

47


68%

26%

6%

All businesses

Not at risk/Some risk Neutral At risk/Very much at risk

Technology – Data risks

66%

27%

6%

Manufacturers

70%

25%

6%

Distributors

Perception of information/data risks (% of businesses)

68% of NAM respondents also believe they are not at risk/some risk

48


49

Majority of businesses use social mediaPercentage of businesses using social media for business activities

All businesses

All manufacturers

NAM

4%

4%

5%

15%

13%

13%

40%

39%

38%

12%

13%

15%

25%

27%

26%

3%

4%

3%

Extensive use Moderate use Some use Plan to use No plans to use in future Don't know

59%


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Best practices of thriving and growing companies Continuous improvementThere is a strong correlation between those companies that consistently deploy process improvement and quality programs and those that are thriving.

International expansion and exportingOverseas sales are recognized by thriving companies as a key driver for growth. Companies that have expanded their customer bases outside the United States tend to have better financial performance.

Training and productivityTraining the workforce to operate increasingly sophisticated technology helps close the skills gap and increase productivity. Not surprisingly, most thriving businesses will provide internal training and skillsdevelopment programs.

Information technologyInvesting in new or upgraded information technology allows these companies to develop innovative products, decrease cycle time and increasing productivity. Management can also invest in software to gainaccess to corporate performance information that they can translate into actionable plans, thereby giving them a competitive advantage over their competitors.

Measuring procurementStrategy sourcing practices allow businesses to manage their vendor relationships by measuring and tracking their procurement delivery and costs. On-time delivery is rated a top priority for thrivingcompanies.


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Questions?


For a copy of the full 2013 McGladrey Monitor Report please visit our website at www.mcgladrey.com

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Contact me

Scott BjornstadSenior DirectorMcGladrey [email protected]

mailto:[email protected]


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This year we will also be issuing State Benchmark Reports (SBRs) for the states that meet the minimum sample size requirement.

Those states are:

- California - Illinois

- Indiana - Iowa

- Maryland - Minnesota

- New York - North Carolina

- Ohio -Pennsylvania

- Texas -Washington

- Wisconsin


Example State Benchmark Report (SBR)

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Example State Benchmark Report (SBR)

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Each participant will receive a Customized Benchmark Report (CBR) which compares their results to the national aggregate and those within their industry sector.


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Example Customized Benchmark Report (CBR)


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Example Customized Benchmark Report (CBR)


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U.S. sales changes by business condition