Investment Bank for the Manufacturing Sector InterOcean Manufacturing Survey Edition InterOcean Advisors LLC 117 North Jefferson Street Suite 205 Chicago, IL 60661 www.ioadvisors.com
InterOcean is a boutique investment bank focused on serving middle market companies in the manufacturing sector. Advisory services include: Sale and Divestiture* Acquisition Capital Sourcing of Debt and Equity* Strategic Advisory www.ioadvisors.com *Securities offered through StillPoint Capital, LLC Introduction In order to provide a detailed picture of the current landscape in the manufacturing sector, InterOcean Advisors has released its inaugural InterOcean Manufacturing Survey. InterOcean surveyed the top executives of major players in the manufacturing sector asking detailed questions about the state of their industry during the last twelve months and for predictions for the next twelve months. The surveyed companies operate production facilities in InterOcean s key manufacturing verticals (aerospace & defense, automotive, building products, capital equipment, flow control, metals and plastics & packaging). Questions touched on revenue growth and growth drivers, M&A activity, changes in the business environment and perspectives on current and future market conditions. The data in this report includes information from responses garnered through the survey. As this is the first edition of the report, historical comparisons are not possible, but interesting trends emerged in the data nonetheless. Here is a breakdown of some of the key findings from the survey: Roughly 73% of manufacturers surveyed believe revenues will improve in the next twelve months with 16.4% expecting the increase to be by more than 5%. Very few respondents have seen reductions in costs over the past twelve months with only 14.5% seeing declines in raw material costs and seeing declines in labor costs. M&A activity seems poised to escalate with more than twice as many respondents reporting plans to sell a business in the next twelve months compared to those that sold a business in the last twelve months. Nearly 30% of respondents believe entering new markets or producing new products has been their biggest growth driver in the past twelve months. Over 70% of respondents experienced no change in the amount of production outsourced in the last twelve months and no respondents indicated a change greater than 5% (in either direction). In the future, the InterOcean Manufacturing Survey will be conducted on an annual basis to provide insight into how the manufacturing sector is evolving. Information pertaining to the identity of recipients, their firms, and the underlying companies remains completely anonymous. Information from all respondents was aggregated by InterOcean prior to distribution. InterOcean Manufacturing Survey 2
Spotlight On: LTM Revenue Respondents experienced mixed revenue results in the last twelve months with over 40% posting changes in excess of 5%. Spotlight On: Revenue Forecast Consistent with leading indicators, such as the PMI, which have been predicting growth in the next twelve months, manufacturers surveyed are expecting strong revenue performance. Change in Revenues (LTM) Forecasted Change in LTM Revenue (in 12 months) 20.4% 16.7% 13.0% 29.6% 20.4% 16.4% 56.4% 16.4% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 7.3% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Spotlight On: Post-Recession Revenues Respondents supported reports of a slow rebound from the recession with 60% reporting revenues greater than before the decline. Spotlight On: M&A Sentiment Roughly half of manufacturers surveyed believe the M&A environment changed little over the last twelve months. However, more than 30% did see moderate improvement. Pre-Recession Revenue v. Current Revenue Change in M&A Sentiment (LTM) 75.0% 6 45.0% 3 34.6% 3.8% 1.9% 53.8% 5.8% 15.0% Lower No change Higher Significantly Worse Moderately Worse About the Same Moderately Better Significantly Better InterOcean Manufacturing Survey 3
Merger & Acquisition Activity M&A activity was lackluster in the first half of 2013 despite many positive indicators: strategic buyers had strong balance sheets, debt and valuation multiples were returning to pre-recession levels and private equity was sitting on a significant amount of dry powder. Perhaps not surprising, results from the survey indicate that M&A activity will likely increase in the next twelve months. More than twice as many respondents reported plans to sell a business in the next twelve months compared to those that sold a business in the last twelve months. Furthermore, more businesses reported expectations to make an acquisition in the next twelve months than those that reported making an acquisition in the last twelve months. Sold a business/division in LTM Expect to sell a business/division in NTM 9.1% 22.2% Yes No Yes No 90.9% 77.8% Acquired a business/division in LTM Expect to acquire a business/division in NTM 25.9% Yes No 61.1% 38.9% Yes No 74.1% InterOcean Manufacturing Survey 4
Select Changes in the Business Environment Change in Regulatory Environment (LTM) Change in Product Demand (LTM) 5.5% 10.9% 7.3% 9.1% 12.7% 50.9% 29.1% 30.9% 4 Significantly Worse About the Same Significantly Better Moderately Worse Moderately Better Significantly Worse About the Same Significantly Better Moderately Worse Moderately Better Change in Amount of Production Outsourced (LTM) Change in Raw Material Costs (LTM) 7.4% 74.1% 18.5% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 4 4 12.7% more than 5%) between 0% and 5%) between 0% and 5%) more than 5%) Change in Labor Costs (LTM) Forecasted Change in Industry/Market Size (in 12 months) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 56.4% 38.2% 4 45.5% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% InterOcean Manufacturing Survey 5
Growth Drivers in the Last Twelve Months InterOcean s survey asked respondents to name their most important growth drivers in the last twelve months. Responses were aggregated into seven categories: Expanded Sales Effort, Operational Improvements, M&A, New Products/Markets, Improved Market Conditions/Demand, Increased Capacity and Other. New Products/Markets, Expanded Sales Effort and Improved Market Conditions/Demand were cited significantly more than any other growth drivers, accounting for 27%, 23% and 21%, respectively. Increased Capacity 4% Other 5% Expanded Sales Effort 23% Improved Market Conditions/ Demand 21% Operational Improvements 11% New Products/ Markets 27% M&A 9% Other Changes in the Business Environment in the Last Twelve Months In addition to the changes in the business environment already presented, the survey results suggest a steady to improving climate over the past twelve months in many of the other business environment categories polled. Decreases in competition both domestically and abroad, a better market for senior debt lending and an increase in the reshoring of manufacturing led the trend. The responses also signaled a potential rise in inflation with increases in labor and raw material cost and pricing, despite low 2012 and 1H 2013 inflation rates of 1.7% and, respectively. Change in: Availability of skilled labor Availability of unskilled labor Competition from foreign entities Importance of technological advancements Market for senior debt lending Union activity / sentiment Significantly Worse Moderately Worse About the Same Moderately Better Significantly Better 5.5% 2 65.5% 9.1% 3.7% 11.1% 66.7% 18.5% 7.5% 11.3% 75.5% 5.7% 1.9% 54.7% 34.0% 9.4% 7.8% 51.0% 35.3% 5.9% 2.0% 13.7% 76.5% 7.8% Change in: Amount of production outsourced Inventory levels Labor costs Level of competition in industry Pricing Raw material costs Reshoring of manufacturing Volume (units, lbs., etc.) Significant Decrease (e.g. >5%) Moderate Decrease (e.g. 0% - 5%) Moderate Increase (e.g. 0% - 5%) Significant Increase (e.g. >5%) 7.3% 7.4% 16.4% 9.3% 18.2% 74.1% 4 38.2% 53.7% 4 18.5% 34.5% 56.4% 27.8% 32.7% 9.3% 12.7% 4 4 5.6% 61.1% 31.5% 1.9% 10.9% 7.3% 47.3% 2 12.7% InterOcean Manufacturing Survey 6
Aggregate Respondent Information The InterOcean Manufacturing Survey also included questions regarding the size and industry of each respondent. Responses indicated that roughly 30% of businesses surveyed had LTM revenue greater than $100 million, roughly 35% had LTM revenues of between $25 million and $100 million, and the remaining roughly 35% had revenues of less than $25 million. End Markets Respondents Serve Healthcare, 6.3% Test, Measurement and Controls, Mining, 6.3% 2.6% Information Technology, 1.1% Housing, 3.7% Other, 5.3% Aerospace, 7.4% Agriculture, 7.4% Automotive, 11.6% Food & Beverage, 6.3% Energy/Oil & Gas, 13.2% Electronics, 4.2% Consumer Products, 5.8% Commercial Vehicle, 7.9% Commercial and Industrial Construction, 11.1% InterOcean Manufacturing Survey 7
InterOcean Advisors LLC InterOcean Advisors LLC is a Chicago-based investment bank dedicated to providing high quality M&A and capital markets transaction advisory services to companies in the manufacturing sector. InterOcean advises corporations, private business owners, private equity groups and management teams on middle market transactions including sales, divestitures, acquisitions and leveraged buyouts. InterOcean s senior bankers have over 100 years of collective M&A experience. Coupled with deep industry knowledge, this experience facilitates the identification of both key value drivers and qualified buyers, thereby improving the likelihood of a transaction closing at a premium value and on a timely basis. For additional information on this newsletter or InterOcean s services, please contact one of our specialists: Bill Doepke Jack Gonder Email: wdoepke@ioadvisors.com Email: jgonder@ioadvisors.com Phone: +1 312.698.6904 Phone: +1 312.698.6926 Nick Newlin Bob Wujtowicz Email: nnewlin@ioadvisors.com Email: rwujtowicz@ioadvisors.com Phone: +1 312.698.6918 Phone: +1 312.698.6906 Terra Corporate Finance Alliance InterOcean is the exclusive U.S. member of the Terra Corporate Finance Alliance, a growing international alliance of investment banks with operations in North America, South America, Europe, the Middle East and Asia. Through this network, InterOcean has developed a global reach uncommon for a middle market investment bank and can offer enhanced access to, and identification of, potential transaction parties across the globe. = Regions covered by Terra member firms www.terra-alliance.com = Member firm headquarters Mellenthin & Co. InterOcean Manufacturing Survey 8