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Manufacturing Outlook 2012
November 10, 2011
8:35-8:40AM Introduction – Tom Alongi, UHY LLP
8:40-8:55AM Benchmarking Survey Results – Alan Lund, UHY Advisors
8:55-9:20AM Middle Market M&A – Aaron Witalec, UHY Advisors
9:20-9:45AM Global Manufacturing – Meril Markley, UHY Advisors
9:45-10:10AM Automotive Suppliers – Paul Fontaine, Extended Enterprise Group
10:10-10:20AM Refreshment Break
10:20-10:45AM Aerospace & Defense Suppliers – George Ash, Foley & Lardner LLP
10:45-11:05AM Lending Environment – Michael Dolson & Jeffrey Terrill, RBS Citizens
11:05-11:30AM Concluding Thoughts and Panel Discussion – Tom Alongi, UHY LLP
Today’s Agenda
Attendee Checklist
CPE materials• On-site: pick up at the registration desk• Sign in, complete/return evaluation form, pick up certificate • On-line: email us
Questions• On-site: Fill out question card on top of attendee materials (we will collect later)• On-line: Click the link to email your questions
Keep a look out for a post-event email• Download a copy of the PowerPoint presentation• Link to view the webcast video
Pre-register for 2012 (2013 Outlook)
Get on our mailing list to receive Manufacturing Insider E-Newsletter
About UHY LLP
National Facts• Resources of 14 offices throughout the U.S.• More than 1,000 employees• Nationally ranked as one of the top 20 largest professional services firms by Accounting Today• Currently working with over 100 publicly traded companies• Focus on the dynamic middle market
• Member firms in more than 240 cities in over 78 countries• More than 7,600 employees• Ranked as a top 25 global organization of accounting and consulting firms
International Facts
• 260 employees• Offices in Farmington Hills and Sterling Heights• Ranked 6th Largest Professional Services firm in Metro Detroit by Crain's Detroit Business
Local Facts
Manufacturing Expertise
UHY’s national manufacturing practice serves a variety of manufacturing sectors, including:
- Aerospace and Defense Suppliers- Automotive Suppliers- Consumer Products- Distribution - Industrial Manufacturing
Alan LundConsulting Principal
UHY Advisors MI, Inc.
Benchmarking Survey Results
Last Year we initiated our Manufacturing Outlook for 2011 presentation with the following statement . . . U.S. Manufacturing Crown Slips” . . . “The U.S. remained the world’s biggest manufacturing nation by output last year, but is poised to relinquish this slot in 2011 to China – thus ending a 110-year run as the number one country in factory production.
2012 Optimistic Point of View:– Manufacturing is a bright spot due to the relatively cheap dollar and the
shrinking wage gap between China and the U.S.
2012 Pessimistic Point of View:– U.S. has lost it’s manufacturing competitiveness to China and other
countries.
U.S. manufacturing is at a moment of truth . . .
Probably the Best Answer
Manufacturing Outlook 2012
Kauffman Economic Outlook – 4Q 2011
“Uncertain” was the most frequently used term…
Manufacturing Outlook 2012
NAM/IndustryWeek Survey of Manufacturers – 3Q 2011312 Manufacturers . . . Completed August 31st 2011
Respondents who characterized the economy as Somewhat or Very Positive
Manufacturing Outlook 2012
NAM/IndustryWeek Survey of Manufacturers – 3Q 2011312 Manufacturers . . . Completed August 31st 2011
Expected Growth Rates
Manufacturing Outlook 2012
NAM/IndustryWeek Survey of Manufacturers – 3Q 2011312 Manufacturers . . .Completed August 31st 2011
Concerns for 2012
Manufacturing Outlook 2012
UHY Manufacturing Outlook Survey – October 2011 Optimism:
o Very Optimistic……………………….. 14.3%o Optimistic……………………………… 57.1%
Competitive Advantage:o Responsiveness……………………… 42.9%o Ability to Deliver……………………… 28.6%
Top Challenges:o Controlling & Reducing Costs…….. 71.4%o Increased Competition………………. 57.1%o Improving Productivity………………. 42.9%
Business Indicators: Increasing Production……………….. 83.3%
Manufacturing Outlook 2012
Back to . . .The Moment of Truth:o Currently, U.S. factories competitively produce about 75% of the products
that we consume.o No single country (not even China) can claim to be the factory of the world
that way the U.S. did after WWII.
The Current Facts:o U.S. GDP is 23.52% of world’s economy:
U.S. GDP . . . Billions of Dollars
Manufacturing Outlook 2012
The Current Facts:o Industrial Production in United States expanded 3.2% in 3rd Quarter 2011.o Industrial production measures changes in output for the industrial sector
of the economy which includes manufacturing, mining, and utilities.
U.S. Industrial Production
Manufacturing Outlook 2012
The Current Facts:U.S. Exports
U.S. Imports
Manufacturing Outlook 2012
Industry Indicators - Purchasing Managers Index (PMI)
MANUFACTURING AT A GLANCEOCTOBER 2011
Index
SeriesIndex
October ‘11
SeriesIndex
September ‘11
PercentagePoint
Change Direction
Rateof
ChangeTrend
(Months)
PMI 50.8 51.6 -0.8 Growing Slower 27
New Orders 52.4 49.6 +2.8 Growing From Contracting 1
Production 50.1 51.2 -1.1 Growing Slower 2
Employment 53.5 53.8 -0.3 Growing Slower 25
Supplier Deliveries
51.3 51.4 -0.1 Slowing Slower 29
Inventories 46.7 52.0 -5.3 Contracting From Growing 1
Customers' Inventories
43.5 49.0 -5.5 Too Low Faster 31
Prices 41.0 56.0 -15 Decreasing From Increasing 1
Backlog of Orders 47.5 41.5 +6.0 Contracting Slower 5
Exports 50.0 53.5 -3.5 Unchanged From Growing 1
Imports 49.5 54.5 -5.0 Contracting From Growing 1
OVERALL ECONOMY Growing Slower 29
Manufacturing Sector Growing Slower 27
Leading Concerns:o Sophisticated technologies and processes require a more educated
workforce . . . U.S. is not keeping pace.o Rising costs for corporate taxes, health care and pensions, regulations,
utilities and tort litigation add almost 18%.o U.S. has the second highest corporate tax rate among our major trading
partners, trailing only slightly behind Japan.o Losing import market share to both Asian and European competitors in the
Asian marketplace.
Unit Labor Costs are playing a smaller part in manufacturing decisions… o What Are the Major Concerns?
Talent Availability, Market Accessibility, Innovation, Regulations, Intellectual Property Protection, Barriers to Entry and Exit
Manufacturing Outlook 2012
Aaron A. WitalecTransaction Services Manager
UHY Advisors MI, Inc.
Middle Market M&A
U.S. Mid-Market Deals (2006 – 2H 2011)
20
0
750
1,500
2,250
3,000
0
20
40
60
80
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2006 2007 2008 2009 2010 '11
No. Deals$ in billions
U.S. Mid-Market Deal Value & Volume (Less that $500MM)
Value VolumeSource: Thompson Financial
Global M&A Value & Volume (1999 – 2010)
21
0
1,000
2,000
3,000
4,000
5,000
0
90
180
270
360
450
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
No. Deals$ in billions
Global M&A Volume & Value
Enterprise Value ($ bil) Number of DealsSource: Thompson Financial
Pent up demand Pent up demand
Demand release
Capital Invested & Deals Closed (2006 – 2011)
22
Leverage & Equity Contribution (2001 – 2Q2011)
23
3.2x
3.7x 3.8x
4.3x
5.0x4.7x
5.8x
4.5x
3.2x
4.3x4.0x
4.6x
25%
30%
35%
40%
45%
50%
0.0x
2.5x
5.0x
7.5x
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1Q11 2Q11
% EquityDebt / EBITDA
Leverage Multiples & Equity Contribution of Middle Market LBOs
Senior Debt / EBITDA Sub Debt / EBITDASource: Standard and Poor's Leveraged Commentary Data
Add-On Deals as % of Total Deals
24
Number of PE-Backed Portfolio Companies
25
Number of Funds Closed & Total Capital Raised
26
PE Investors Sitting on $466B of Dry Powder
27
Funds Currently in the Market
28
Is Now a Good Time to be a Seller?
Trends appear to imply we are on the edge of a strong M&A market which is increasingly expected to favor Sellers
Well-capitalized position of Buyer groups
Reasonable financing for healthy mid-market deals
Increasing transaction multiples
Increasing deal volume
Focus on add-on acquisitions
Many new funds
PE “overhang” - $466B of dry powder
29
Reasons for Failed Deals
Valuation gap in pricing
Unreasonable Buyer / Seller demands (non-price)
Lack of capital to finance
Economic uncertainty
Lack of trust
Insufficient cash flow
Lack of information / transparency
Customer concentration
Tax implications
30
Business was misrepresented
Lawyers
Accountants
Business failure
Excessive capital expenditure requirements
Cultural issues / conflicts
Unexpected costs
Employee opposition
Trade barriers / protectionism
Pre-Sale Positioning
A Good First Impression Goes a Long Way
Engage Experienced Professionals Early in the Process
Communication with Employees
Put on Your “Investor Hat”
Address Various Functional Areas
o Financial
o Tax
o Legal
o Other
31
Pre-Sale Positioning (Financial)
Prepare pro-forma financial statements and cash flow projections that
o Eliminate private company expenses and one-time charges
o Add retroactive cost savings
Have tangible support for all add-backs
Understand the value of the company
o Recent deal multiples
o Available debt financing
o Calculation of efficiencies
Formulate a clear description of the company that portrays the company in the most favorable light
Organize documents in a clearly structured “data room”
32
Top 10 Due Diligence Areas of Concern
Comparison of forecasted volumes in financial projections to published sources
Contract volume and pricing for existing customers (loss contracts, price give-backs)
Reasonableness of cost assumptions used in financial projections as compared to historical trends, particularly in a restructuring environment
Carve-out considerations (e.g., reasonableness of allocations, stand-alone cost assessment, supply and shared services arrangements)
Accounting for tooling (expensed or capitalized)
Accounts receivable (debit memos, short-pays, retros, give-backs, disputes)
Inventory valuation (excess, obsolete and slow-moving)
Accounting for employee benefit programs (vacation, post-employment benefits, assumed liabilities)
Accounting for idle assets
Accounting for unrecorded liabilities (union issues, multi-employer pension plans) and other contingent liabilities (e.g., warranty)
33
Pre-Sale Positioning (Tax)
Stock vs. asset purchase
Fixed vs. contingent purchase price
Estate planning and achieving the best tax basis by shifting wealth to children
o Grantor Retained Annuity Trust (GRAT) is a powerful and tax efficient wealth transfer tool
o A GRAT allows a person to share the future appreciation of an asset with the next generation with gift tax minimized.
34
Pre-Sale Positioning (Legal)
Assess risk of pending and current litigation
Review key contracts for change in control and assignability upon sale of a business
Ensure the corporate records have been properly maintained
Review all liens or security interests encumbering the assets of the business
Review intellectual property rights
o Confirm title to patents, trademarks, and copyrights
o Ensure that all intellectual property was created as a “work for hire” or that proper assignments were completed to assure that the company owns the intellectual property
o Evaluate the strength and value of the intellectual property
Hart-Scott-Rodino
35
Pre-Sale Positioning (Other Items)
Fill key positions in the management team in order to ensure an efficient process
o Buying company vs. investing in management team
Non-compete / non-solicitation agreements for key employees
Transaction bonuses for key employees tied to valued received
Be able to convey why you are selling now
Due diligence on the buyer!
o Can the buyer close the deal?
o How solid is the buyer’s financing?
o Committed fund vs. pledge funds
36
Meril MarkleyTax Principal
UHY Advisors TX, LLC
Global ManufacturingOpportunities and Pitfalls
Overview – Global Manufacturing
Factors motivating foreign investment
Deferring income offshore
Destinations and structures, including the BRIC countries
UHY International
39
Non-Tax Factors – Opportunities
Proximity to markets, suppliers Greenfield, acquisition, or joint venture
40
Non-Tax Factors – Criteria
Qualified, stable workforce Transparent legal system Transportation infrastructure Ease of doing business (legal, regulatory) R&D capabilities Investment incentives Financial accounting standards
41
Non-Tax Factors – Pitfalls
Opaque legal system, corruption Difficulty in enforcing contracts Inadequate protection of intellectual property Lengthy start-up/registration period Rigid labor market/social charges Local investor or content required
42
Tax Factors – Opportunities
Corporate tax rates lower than U.S. Few taxes (e.g., corporate, individual, VAT,
customs duties) Ease of tax compliance Local incentives such as tax abatements,
foreign trade zone Withholding taxes low or reduced by treaty Transfer pricing
43
Tax Factors – Pitfalls
High corporate tax rates (>30%) Complexity of tax system Corruption in tax administration Stamp duties/capital taxes High withholding taxes High social security taxes Lack of double taxation treaties Transfer pricing
44
U.S. Tax Planning – Opportunities
Deferral One level of tax/foreign tax credit Qualified dividend income
45
Deferral
46
Opco manufactures widgets Opco sells widgets to Salesco, which
sells to customers
Transfer pricing to accumulate profits where tax is lower
Defer income and U.S. tax until dividends are paid to Holdco and USCO
Accumulate profits in Holdco for future offshore expansion
USCO
Holdco
OpcoSalesco
Customer
Products
Foreign
U.S. Tax Planning – Pitfalls
Elimination of deferral Expiration of key exceptions to anti-deferral rules Individual shareholders of S Corporations and
LLCs Failure to make “check-the-box” elections “Toll charge” on transfers of technology Expiration of preferential rate for “qualified
dividend income” of individuals
47
No Deferral – Deemed Repatriation
48
Holdco accumulates profits and lends cash to USCO
Treated like a dividend from Holdco to USCO
USCO
Holdco
OpcoSalesco
Customer
Products
Foreign
Loan
No Deferral – Foreign Base Company
49
Opco doesn’t qualify as manufacturer
Purchases from or sales to a related party
Deemed dividend to USCO
USCO
Holdco
OpcoSalesco
Customer
Products
Foreign
$
No Deferral – Branch Rule
50
Opco doesn’t meet requirements of manufacturing branch
Actual branch or disregarded entity
Deemed dividend to USCO from Salesco
USCO
Holdco
Opco
Salesco
Customer
Products
Foreign
$
One Level of Tax – Foreign Tax Credits
51
CTB No CTB No CTBTaxable income 100.00Foreign taxes 30.00 Dividend income 70.00 70.00 Foreign w/h tax 7.00 7.00 7.00US tax (35%) 35.00 24.50US tax (15%) 10.50Excess foreign 2.00 (3.50) (17.50)
tax credit (limitation)Unusable credits 30.00 30.00
Effective tax rate 37.0% 40.50% 54.50%
USCO
Opco
US Individuals
Foreign corporate tax rate is 30%Withholding tax on dividends is 10%
Attractive non-BRIC Jurisdictions - Opco
(no particular order) Ireland UAE (Dubai) Singapore Switzerland United Kingdom
52
Attractive Jurisdictions – Holdco
(no particular order) Cayman Islands Cyprus Netherlands Luxembourg Singapore United Kingdom
53
A Look at the BRICs
54
RussiaBrazil India China
BRIC Summary
Country Tax Rate
Rank*
Brazil 34.0% 127
Russia 20.0% 123
India 32.5% 134
China 25.0% 79
Countries at similar stage of economic development
Predicted to be dominant economies by 2050
Account for ¼ of world’s land area and more than 40% of population
Together make up 17% of total international trade
*World Bank survey of 183 economies with ranking based on 10 areas of business regulation; courtesy of Mike Wasinski and Jack Easton of UHY Hacker Young (United Kingdom). Tax information is derived from International Bureau of Fiscal Documentation
Brazil Rankings
Overall Ease of Doing Business 127th
Starting a Business 128th
Construction permits 112th
Registering property 122nd
Getting credit 89th
Protecting investors 74th
Paying taxes 152nd
Trading across borders 114th
Enforcing contracts 98th
Closing a business 132nd
Brazil
57
Corporate income tax rate 34% (combined)Dividend withholding tax rate 0%Withholding tax on royalties 15%-25%Value added tax rate 17 or 18% (ICMS)Thin capitalization rules YesTransfer pricing Yes (non-OECD)Number of tax treaties 31Tax treaty with the U.S. No
Russia Rankings
Overall Ease of Doing Business 123rd
Starting a Business 108th
Construction permits 182nd
Registering property 51st
Getting credit 89th
Protecting investors 93rd
Paying taxes 105th
Trading across borders 162nd
Enforcing contracts 18th
Closing a business 103rd
Russia
59
Corporate income tax rate 20%Dividend withholding tax rate 15%Withholding tax on royalties 20%Value added tax rate 18%Thin capitalization rules YesTransfer pricing Yes*Number of tax treaties 78Tax treaty with the U.S. Yes
*New transfer pricing law takes effect January 1, 2012 with transition period running from 2012 - 2014
India Rankings
Overall Ease of Doing Business 134th
Starting a Business 165th
Construction permits 177th
Registering property 94th
Getting credit 32nd
Protecting investors 44th
Paying taxes 164th
Trading across borders 100th
Enforcing contracts 182nd
Closing a business 134th
India
61
Corporate income tax rate 32.445% (combined)Dividend withholding tax rate 16.22% on companyWithholding tax on royalties 10.5%Value added tax rate State taxes (e.g., 10%)Thin capitalization rules YesTransfer pricing YesNumber of tax treaties 84Tax treaty with the U.S. Yes
China - Rankings
Overall Ease of Doing Business 79th
Starting a Business 151st
Construction permits 181st
Registering property 38th
Getting credit 65th
Protecting investors 93rd
Paying taxes 114th
Trading across borders 50th
Enforcing contracts 15th
Closing a business 68th
China
63
Corporate income tax rate 25%Dividend withholding tax rate 10%Withholding tax on royalties 10%Value added tax rate 17%Thin capitalization rules YesTransfer pricing YesNumber of tax treaties 95Tax treaty with the U.S. Yes
UHY in the BRIC Countries
64
RussiaBrazil India China
Diego MoreiraUHY [email protected]
Nikolay LitvinovUHY [email protected]
Sunil HansrajChandalbhoy & Jassoobhoy [email protected]
Melanie ChenUHY China [email protected]
Where in the World is UHY?
UHY International Member Offices
*UHY Advisors, Inc. and UHY LLP are independent U.S. members of UHY International
Resources on UHY.com
Doing Business Guides for each country Global Transfer Pricing Guide Global Directory Checklist for International Expansion Profiles of Member Firms and links to their websites
66
Contact Information
Meril Markley, International Tax Principal
Chair of Tax Special Interest Group for UHY Int’l
UHY Advisors TX, LLC
713-407-3206
67
Paul FontainePresident & CEO
Extended Enterprise Group
Challenges and Opportunities for Automotive Suppliers
Extended Enterprise Group (Overview)
Operations Performance (Productivity, Efficiency and Yield Performance)
Distressed Supplier Management (OEMs)
New Product Launch Support (OEMs, Tier 1 and Tier 2)
Supplier Capacity Analysis and Risk Management (Operations Focus)
69
Discussion Points
Here we go again – “Lest We Forget”
Supplier Challenges 2012 and Beyond
Supplier Opportunities 2012 and Beyond
Closing comments from an Operations perspective - the need to execute every hour of every day
70
Here we Go “Again” (Lest We Forget)
We cannot forget the difficult lessons learned during the recession; it requires fundamental change in the way we think about business.
The speed at which volumes dropped was unprecedented; 40-60% reductions over a three-six month period.
Many companies failed to react quickly enough; didn’t understand the “system” was failing not just the industry.
71
Here we Go “Again” (Lest We Forget)
Key Lessons:
The Balance Sheet is important - those companies that had strong balance sheets were able to take advantage of opportunities during the recession. In some cases purchasing “assets” at massive discounts.
Diversification did not protect us - in automotive, every OEM was impacted by the crisis and no platform / product went unscathed.
72
Here we Go “Again” (Lest We Forget)
Key Lessons:
Cash flow is king - finding ways to improve cash flow became the most important task for many companies. Manufacturing “velocity” drives cash flow.
The recession reinforced (again) the need to focus on operations and business fundamentals.
Leadership is critical to success and in times of crisis it can make the difference between survival or extinction.
73
Here we Go “Again” (Lest We Forget)
Key Lessons:
Inventory is not cash - finding ways to reduce inventory investment was one of the key enablers to improving cash flow.
Agility and flexibility are critical to success - they are an operational necessity as the ability to support dynamic demand changes transparent to costs is now a key goal. Asset agility (capital and people) are going to be a key differentiator going forward.
74
Here we Go “Again” (Lest We Forget)
Key Lessons:
It is operations that make history, so you better find ways to measure and manage performance in as close to real time as possible
Productivity - Cycle time achievement with the appropriate labor investment.
Efficiency - Uptime and Asset Utilization
Yield – First Time Capability
75
Supplier Challenges 2012 and Beyond
Ability to support the projected demand that is beginning to materialize. All OEMs are increasing projections for 2012 and beyond.
Where did all the capacity go? How did we ever build 16M units? Everywhere we go, suppliers are struggling to meet demand.
Understanding your “demonstrated capacity” is essential as it will provide a roadmap for action related to OEE improvements.
76
Supplier Challenges 2012 and Beyond
OEMs are getting smarter, they are beginning to understand that suppliers are “overselling assets” based on the desire to manage downside volume risk. No supplier wants to be caught with under absorbed assets. (Can we say GMT 900?)
They have begun to focus on much more detailed supplier capacity analysis that looks at shared asset load and demonstrated capacity. This will require a new “transparency” as they attempt to manage supply chain risk.
77
Supplier Challenges 2012 and Beyond
Finding ways to optimize capacity over the life of a program and finding ways to phase capacity investment with revenue (volume) will create interesting issues for OEMs and suppliers as the later pushes back on Cap Ex investment without volume guarantees.
Suppliers can speak intelligently to the risk and OEMs have a huge list of companies that failed during the recession due to this issue.
Capacity and sharing information about it will be one of the key supplier/OEM issues.
78
Supplier Challenges 2012 and Beyond
79
Extended Enterprise GroupSupplier Capacity Analysis
Capabilities
Inputs Outputs Outputs
Supplier Challenges 2012 and Beyond
80
Work Center Summary Understanding Constraints
Supplier Challenges 2012 and Beyond
81
Period Summary-When and Where Capacity is a Risk
Supplier Challenges 2012 and Beyond
Launch Excellence has been the buzz for years, and rightfully so. The challenge now is to do it even faster, at a higher frequency and with less resources.
Program management, APQP execution and efficacy in the launch readiness processes will be the key. Pfmea, control planning, error proofing are all ways to identify and manage risk. Given the criticality of resource optimization (OEE) identifying and addressing these issues in the launch process sounds like a no-brainer, but it still is not happening.
Where has all the talent gone? There is a shortage of experienced program managers.
82
Supplier Challenges 2012 and Beyond
83
Speed to QDC Failure to meet targets drives
variances
Cost Target
Time
$ $$$
Supplier Challenges 2012 and Beyond
Supply chain risk management will be another key challenge for the industry and for all manufacturers.
Financial challenges have drained the inventory swamp and the buffers that existed between the supply chain partners have been significantly reduced. With reductions in these buffers, any disruption in supply has an almost immediate impact on operations.
84
Supplier Challenges 2012 and Beyond
The higher up the supply chain you are the greater the risk that a disruption below will negatively and rapidly affect your operations. The challenge is finding ways to measure the risk and detect it before impacts your operations.
Finding ways to redeploy and reuse core assets will be a key, life cycles and volumes make it difficult to fully amortize capital costs.
Phased asset deployment, phased process plan.
85
Supplier Opportunities 2012 and Beyond
Suppliers have and continue to consolidate operations and improve operations. Better margins are ahead.
OEMs are faced with tough decisions with respect to sourcing. They know that the key to long term cost management lies in the supply base as it accounts for over 60% of total costs. Successful suppliers will continue to win work and grow.
Accelerated product life cycles, faster and more frequent model changes may lead to bringing some work offshore back home as the inventory pipeline complicates change management.
86
Supplier Opportunities 2012 and Beyond
Service work will take on new focus. OEMs make significant profits from aftermarket operations - suppliers need to find ways to improve service part fulfillment and embrace this challenge as an opportunity.
Technology will be a key enabler to support operational management challenges, it will get cheaper and faster to deploy. Business intelligence key to success.
87
Operations Count
Executing on the factory floor every hour of every day is not easy. The challenge for everyone is to develop the best team. Companies that focus on this critical element of the business will win all the time.
Make your metrics matter. Don’t measure what's not critical to the business. Link metrics with financial measures that make sense. Simple, fast and relevant -that is the key.
Purge the wall paper, if you don’t use it, don’t make it,lean metrics.
88
Operations Count
Improve speed to detection in every element of your business. The ability to measure and identify variances in every aspect of your business are essential differentiators and will lead to improve profitability.
Compression leads to compromises that you live with every day. Raise the bar, and hold it. Leadership owns it and they are accountable when things gone wrong.
OEE is not a swear word, understand it first and then measure it and improve it every day.
89
Supplier Challenges 2012 and Beyond
90
Real Time Costs / Risks Speed to Detection
$
Time
It’s not often an industry is given a second chance. As leaders we can learn from the painful time we have just come through; we can take advantage of having the opportunity to do it right this time.
Find some way to remember what we have come through and never ever let it happen to your company again.
91
Moving Forward with Confidence
Summary of Key Points
Lessons learned, we cant forget
Capacity management (return on capital)
Transparency (capacity, supply chain risk)
Launch excellence (speed to QDC)
Supply chain risk management (no buffers)
LTAs replace with performance contracts
Leadership wins all the time
92
Contact Information
Paul Fontaine, President & CEO
Extended Enterprise Group
248-881-0844
93
Refreshment Break (10 min.)
94
George W. AshPartner
Foley & Lardner LLP
Aerospace and Defense Suppliers
96
“May you live in interesting times”Ancient and Chinese, or Modern and Western?
State of Government Procurement and the Aerospace Industry
Becoming a Successful Supplier
Pending or Proposed Changes/Trends in Government Procurement
96
Overview
97
Future Clouded by Uncertainty Government Procurement: Has experienced record growth Cuts were implemented with more cuts coming Will the Joint Select Committee on Deficit
Reduction reach an agreement, or will sequestration occur?
Federal procurement directly affected by politics
Overview
98
Democratic Suggested Cuts to Save Money: Eliminate the V-22 Osprey Tilt-Rotor Aircraft Eliminate the Space Tracking and Surveillance
System that supports missile defense Reduce funding for the Defense Weather Satellite
System Terminate the Joint Light Tactical Vehicle
What Will Get Cut?
99
What Will Get Cut?
Secretary of Defense Panetta 5-year budget to be submitted in February will include $250 Billion in cuts
But required to reduce $450 Billion Even after cuts, DoD will still have a budget of
$400 Billion plus So there is opportunity, but increased
competition likely
100
Commercial and General Aviation
U.S. airline industry contributes $750 Billion to the Gross Domestic Product
Net exports create more than 7,000,000 jobs In 2010, there were 400,000,000 leisure travelers
and 300,000 business travelers in the U.S.
But.... While non-fuel costs are 33% lower than 30 years
ago, U.S. airlines have lost $50 Billion since 2000
101
Growth of 15.3% in pre-owned business jet retail sales in first half of 2011
Typically new aircraft sales follow used aircraft sales Hiring in aviation industry up 40% in first half of
2011 Boeing’s facility in South Carolina provides new
supplier opportunities Currently Boeing has 286 Michigan
suppliers/vendors with over $560 Million in annual purchases
Commercial and General Aviation
102
Commercial and General Aviation
Impacted by:o Economic growth, wealth creationo Fuel priceso Environmental Regulations and Feeso Emerging Marketso Replacement Demando Securityo Government Regulation
So, will there be a “double dip” recession, or are we on a recovery track?
103
Becoming a Successful Supplier
Extract from “Contracting with the U.S. Federal Government, Understanding the Risks and Rewards”
Entire PowerPoint deck addressing additional topics of “Avoiding Operational Pitfalls” and “Compliance” available at: http://www.foley.com/files/tbl_s84Highlights/FileUpload562/411/ContractingwiththeFederalGovernment.pdf
104
Are You Eligible to Perform?
Awards are issued only to “Responsible” Contractors.o A responsibility determination is made by the Contracting Officer
prior to award. Focus is on: Ability to perform the contract requirements (do you have the (i) financial
capabilities and (ii) experience, managerial abilities, and technical acumen to perform the contract?)
Past performance record. Good corporate citizen (high integrity and ethics). Capacity to satisfy the contract’s performance requirements, in light of your
experience and other commercial and business commitments.
Once awarded a contract, it is essential that you exercise proper compliance. Failure to do so may lead to draconian penalties, in addition to suspension or debarment (i.e., a prohibition on receiving future government contracts or subcontracts).
First Step
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Getting Government Business
Several Key Steps:o Target Your Market (Customer Base): What products and/or services can
you offer and who are your potential customers? Initial review can include Federal Agency Forecasts and other U.S. government Budget
Materials. Publicly available information on fedbizopps.gov and omb.gov.
o Build Customer Relationships Network with U.S. government officials to understand your customers’ requirements and
help shape their future needs. Utilize project demonstrations, success stories, or provide industry education.
o Ensure that your performance record is beyond satisfactory Maintain Internal Controls and safeguards to ensure proper performance.
o Work with congressional delegation and other interested governmental officials to advocate on your behalf.
Second Step
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Differentiate Products and Services to show value-added and overall government return on investment.
Pursue sole-source opportunities where you have a unique product or service the government needs.
Work with other complimentary contractors or businesses in subcontracting or teaming arrangements to:o Obtain introduction to a particular customer, or
simply to expand business.
Getting Government Business
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Understanding Agency Contracting Procedures
You will deal with a Contracting Officer (CO), generally the only individual with the ability to obligate the U.S. government in contract, and later modify, amend, and/or terminate that contract.
o CO works with a host of government officials in overseeing all aspects of contractual activity from award to contract closeout: e.g., Contracting Officer’s Technical Representative (COTR); Auditors and Quality Inspectors; etc.
o Again, these agents of the CO generally do not have authority to change the contract’s terms and conditions or order extra work.
Third Step
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Traditional, Full Scale Procurementso Sealed Bids
• Full and open competition using Invitations For Bids (IFBs).
• Sealed bids submitted and then publicly opened and awardee announced.
• Award made to responsible bidder, who provides responsive bid with lowest price.
• Generally used for standard commodity items.
Understanding Agency Contracting Procedures
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Negotiated Procurements Full and open competition using Requests For
Proposals (RFPs). Agency will award to offer or who provides “best
value.” (Total evaluation of price and all other factorssuch as technical superiority, quality and past performance, when analyzed under the RFP’s evaluation criteria).
Agency can have discussions with offer or about their proposals.
Most common non-commercial award; used when cost-technical tradeoffs are likely or complex items.
Understanding Agency Contracting Procedures
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Commercial Item Contractso The government has a stated preference to acquire
Commercial Items. This includes the acquisition of commercial services.
o Seeks to more closely resemble acquisition policies in the commercial marketplace.
o The definition of a Commercial item is not limited to “commercial off the shelf.”
o Rather, for example, if the good is “of a type” that has been sold, licensed, or leased, or offered for sale, license, or lease, it will constitute a commercial item. The expansive definition, including the treatment of product modifications and commercial services, is found at FAR 2.101.
o Commercial item contracts are “streamlined” to resemble non-government commercial contracts – far fewer clauses and flowdowns; exemption from many typical requirements.
Understanding Agency Contracting Procedures
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Appreciate the Different Types of Government Contracts
Two Primary Types: Fixed Price and Cost Reimbursement: Each has various sub-types.
Fixed Price (FP): Government agrees to pay certain price for product or service at time of award. o Contractor bears the risk of excess performance costs.o However, greatest profit opportunity if contractor can
manage/reduce the costs of performance.o Sub-types include: FP contract with economic price
adjustment (based on fluctuating labor or material costs); FP incentive contract (increased profit if meet certain schedule or technical milestones).
o Government commercial item contracts are done on a FP basis.
Fourth Step
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Cost Reimbursement (CR): Government agrees to pay contractor’s “allowable” costs incurred during contract performance. – “Allowable” costs are determined by FAR Part 31 and the
terms of the contract. Many costs incurred in the ordinary course of a
contractor’s commercial operations are not allowable under CR government contracts.
– The FAR also addresses the proper allocation of Direct Costs and Indirect Costs under government contracts. Accounting system should be able to distinguish between
Direct and Indirect Costs.– CR contracts usually include a “fee” which is your profit for
the contract.– Reduced cost risk for contractor, but more limited profit
opportunity.
Types of Contracts
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Cost Reimbursement (cont…)
o Fee (profit) is capped depending on the type of CR contract and the item procured.
o Sub-types include: Cost plus fixed-fee; Cost plus incentive fee; Cost plus award fee; Time and Material; Labor Hour.
o CR contracts are used when the contract requirements are not defined well enough to predict the costs of total performance, or where the risks would be so high that it would be difficult for the government to attract companies to compete for award (e.g., R&D contracts).
Types of Contracts
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General Services Administration (GSA) Multiple Award Schedule (MAS) Contracto GSA managed program where contractor’s commercial
supplies or services may be listed under one of many GSA Schedule contracts organized by particular product and service categories and sub-categories.
o Prices have been negotiated in advance by contractor and GSA Contracting Officer.
o Any agency may purchase products or services from a vendor’s Schedule contract through the task or delivery (purchase) order process.
o There are a number of pricing and other compliance considerations.
o The government expects to receive the contractor’s best price (contractor must have a system in place to ensure this).
Types of Contracts
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Develop a strategy that allows you to:o Market specific products to specific agencieso Understand the roles of the key players, the
procedures used, the types of contracts and the risks involved
o Consider being a subcontractor as a way of entering the market
o Make infrastructure investment to be successful
Becoming a Successful Supplier Wrap Up
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Government Procurement Uncertainty in Government Funding Ashton Carter Memos Export Control Reform DoD’s Increased Demand for IP Enhanced Compliance/Enforcement Small Business Program Enhancements More Requirements for Commercial Item
Contractors
Proposed or Pending Changes/Trends
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Uncertainty in Government Funding
Impact on contract awards has been apparent for past year What major programs will be affected? Will sequestration occur? Has Congress created a monster it
can’t control? What will ultimately be the impact of
reprogramming?
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Several Memos on “Better Buying Power: Obtaining Greater Efficiency & Productivity on Defense Contracting”:o Cost controlo Stable production rateso Incentivize productivity and innovationo Fixed Price Incentive Firm Target (FPIF) contracts will
50/50 share line and 120% ceilingo Promote competitiono Improve “trade craft” in acquisitiono Reduce non-productive processes
Ashton Carter Memos
119
Export Control Reform
Balancing commercial and national security issues
Does current system do either? Four “singles”
o Single export control listo Single licensing agencyo Single enforcement-coordination agencyo Single information-technology system
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Listed in Ashton Carter Memo as enhancing competition
DoD proposed revision to DFARS Part 227 and related clauses
Recent trend toward “only paying for IP once,” even in commercial item acquisitions that call for modifications
See, for example, Air Force Space and Missile Systems Handbook at: http://mil-oss.org/resources/us-airforce_acquiring-enforcing-governments-software-rights-under-dod-contracts.pdf
DoD’s Increased Demand for IP
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Enhanced Compliance/Enforcement
False Claims Act – FY 2010
Total settlements and judgments $3 Billion Qui Tam settlements and judgments $2.4 Billion Relator’s share $385 Million Matters under investigation at
beginning of FY2011 1,246 Total recovery since 1986 $27.2 Billion
Notable contractors paying in FY2010: GlaxoSmithKline, Allegan, AstraZeneca, Novartis, Bell Helicopter, Textron, University of Phoenix, Hewlett Packard, Louis Berger, Northrop Grumman
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FY 2009/FY 2010
AF Army Navy DLA
– Suspensions 73/91 134/133 12/25 48/140– Proposed Debarments 86/68 112/125 39/38 163/169– Debarments 63/206 117/170 44/78 131/166
At the same time, civilian agencies (DOT, DHS, USAID, SBA, GSA and even DoJ) have been criticized for failing to take timely and effective suspension and debarment action
Suspension and Debarment
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Small Business Eligibility Abuse
More than 5,000 firms have been kicked out of small business contracting programs in the past yearo 4,000 HubZoneo 1,000 8(a)o 50 SDVOSB
30 firms and individuals suspended, proposed for debarment or debarred for small business contracting status abuse
Small Business Program Enhancements
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Small Business Program Enhancements
SBA Proposed Rule, Small Business Size and Status Integrity, 76 Federal Register 62313, October 7, 2011
SBA Proposed Rule, Small Business Size Standards, 76 Federal Register 63216, 63510– Increased the small business size standard for 15
industries in NAICS Section 51, Information– Increased small business size standards for 37 industries
in NAICS Section 56, Administrative and Support Waste Management and Remediation Services
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Requests for cost or pricing information to justify price
Weakening of the presumption of IP rights in commercial item acquisitions, e.g., DFARS Final Rule, Presumption of Development Exclusively at Private Expense, 76 Federal Register 58144, September 20, 2011
Application of FAPIIS to Commercial Item Contracting
Reporting of executive compensation and first tier subcontract awards
More Requirements for Commercial Item Contractors
Michael DolsonSenior Vice President
Jeffrey TerrillSenior Vice President
RBS Citizens, N.A.
Lending Environment Update
What a Difference Two Years Make!
Manufacturing is relatively healthier, and financing is relatively easier…
Then…… Now……Immense industry uncertainty Some uncertainty but significantly lessShort-term projections impossible Medium-term projections possibleCrisis management Proven management qualityHigh debt/low liquidity Reduced debt/moderate liquidityLosses or weak profitability Generally high profitabilitySick banks/scarce capital/tight credit Healthier banks/revenue starvedMost banks ration credit exposure Most banks willing to lend
Loans Are Growing
129
Commercial and Industrial Loan Growth
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%Se
p 05
Dec
05
Mar
06
Jun
06
Sep
06
Dec
06
Mar
07
Jun
07
Sep
07
Dec
07
Mar
08
Jun
08
Sep
08
Dec
08
Mar
09
Jun
09
Sep
09
Dec
09
Mar
10
Jun
10
Sep
10
Dec
10
Mar
11
C&
I Loa
n G
row
th (%
)
*Quarter-over-quarter change in aggregate C&I loans reported by banks with assets over $1B. Source: FDIC
Portfolio Fitness Improves
130
Default rates continue to decline
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Dec-07 May-08 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11
Def
ault
rate
by
Prin
cipa
l Am
ount
Ratio of Downgrades to Upgrades
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
Dec-07 May-08 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11
Dow
ngra
des/
Upg
rade
sThe market’s fundamental fitness has improved steadily over the past several months. By June, the lagging 12-month loan default rate fell to a three-year low of 0.91%, well below the historical average of 3.67%. Concurrently, the ratio of downgrades to upgrades has improved considerably, with recent upgrades far outpacing downgrades.
* Syndicated leveraged loans. Source: S&P Leveraged Commentary & Data
Risk Tolerance Returns
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Leverage ratios level off and remain well below pre-crisis levels
After rising sharply in the first quarter of 2011, leverage ratios have begun to stabilize. A disconcerting weakening of the market’s credit standards was evident in the first quarter, as appetite for loans far outpaced demand. Although the market’s default profile remains strong, lenders have maintained some degree of credit conservatism and have not returned to the level of risk or structural weakness which characterized the market in the years leading up to the downturn.
* Analysis reflects highly leveraged loans. Criteria: L+225 and higher; media loans excluded. Source: S&P Leveraged Commentary & Data
0
1
2
3
4
5
6
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1Q11 2Q11
Leve
rage
(X:1
)
FLD/EBITDA SLD/EBITDA Other Sr Debt/EBITDA Sub Debt/EBITDA
132
Rates Stay Low
Companies Now Have Higher Expectations
Lower all-in costs (primarily of credit)
More flexible terms and conditions
Longer End Maturities
Reliable access to capital (especially long term)
Demonstrated commitment to the industry/transparency & predictability
Financial strength and stability of the bank
Quality Relationship Managers with industry-specific knowledge
They are searching for…
61% of mid-sized companies would now consider a new bank provider, up from 41% in December 2009.
Source: Greenwich Associates
Current Financing Paradigm
Focus on the business model/positioning
Increased due diligence
Focus on cash flow/profitability v. revenue and assets
Reduced credit pricing and willingness to extend longer terms
Willingness to loosen credit structure but only so far
Receptive Market
Selective Market
Difficult Market
Market Type Market Characteristics
The Business Model Matters
Positioning within Market Sectoro Competitive position, capacity, customer leverage and pricing power, possible
proprietary products/processes, R&D/Solution delivery, supplier risk
“Sustainability” and Diversityo Consistency of past and projected product profit margins, contracts in hand,
scalability of cost structure
o Diversity of products, customers/predictability of demand
o Likely steps in period of economic stress
Quality of Management and Depth of Management Bench
Financial Capacityo Capital, leverage, and liquidity
o Debt service capacity
o Capital Expenditure requirements
Steps to Success
Make sure your Bank Understands Your Businesso Detailed Historical and forecasted informationo Business Model and Industry
Partnering with a reputable accounting firm and include in your Banker meetings
Update yourself on enhancement programs (MEDC, SBA)
Understanding how your Bank analyzes your companyo Key metrics used and how calculatedo Debt capacity of your company
Pick the right Banking Partner.
136
At the end of the day…
Banking competition is back–especially in the local market.
Well positioned manufacturers with proven management teams operating within a reasonable capital structure, should generally
expect to receive the capital they need, under commercially acceptable credit terms, and with reasonable accommodations
for special requirements and needs.
THE BUSINESS MODEL MATTERS.
RBS Citizens Value Proposition
Worldwide resources of a Global Banking Network, with branch locations in over 50 countries
Traditional Relationship Manager-centric service model – “The Trusted Advisor”
Senior Bankers with significant experience and roots in manufacturing
Primarily locally-based credit decisions A World-Class and Comprehensive Commercial Product Set,
delivered locally Strong Community Engagement and Investment, led by the State
President
“Around the Corner, Around the Globe”
Contact Information
Michael Dolson, Senior Vice President
RBS Citizens, N.A.
248-226-7737
Jeffrey Terrill, Senior Vice President
RBS Citizens, N.A.
248-226-7785
139
Thomas V. AlongiPartner
UHY LLP
Concluding Thoughts
Concluding Thoughts
M&A Market should continue to improve for sellers in 2012, even with the U.S.
experiencing sluggish growth in the 3% range. If capital gains remain low, 2013 will also see additional improvement for
sellers. Lots of cash on the sidelines that must be put to work in 2012.
Global Markets Opportunities abound in oversees markets with continued growth in the
BRIC countries. Execution in these countries will continue to be difficult due to the political
and turbulent economic environment. Proper planning a necessity for success in oversees markets
141
Automotive Global outlook will be brighter than domestic outlook, but domestic sourcing
should remain a bright spot for U.S. suppliers. Industry consolidation will continue as OEM’s downsize number of direct
suppliers. “Build where you sell” OEM directive will continue to help U.S. suppliers.
Aerospace & Defense Certain defense contractors will feel the impact of government cutbacks. Aerospace might be a bright spot due to aging aircraft fleets. Boeing’s new plant in the south should provide additional opportunities for
companies located on the East Coast.
142
Concluding Thoughts
Banking Low interest rate environment will continue to provide
favorable economic catalyst for CAPEX, and business in general.
Bank lending will continue to loosen up, but with a keen eye on free cash flow.
More focus on the business plan and the management team, “the new normal.”
143
Concluding Thoughts
Contact Information
Thomas V. Alongi, Partner
National Manufacturing Practice Leader
UHY LLP
586-843-2581
144
Panel Discussion