manufacturing outlook 2012 · 2011-11-17 · nam/industryweek survey of manufacturers – 3q 2011...

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

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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


Kauffman Economic Outlook – 4Q 2011

“Uncertain” was the most frequently used term…


NAM/IndustryWeek Survey of Manufacturers – 3Q 2011312 Manufacturers . . . Completed August 31st 2011

Respondents who characterized the economy as Somewhat or Very Positive


NAM/IndustryWeek Survey of Manufacturers – 3Q 2011312 Manufacturers . . . Completed August 31st 2011

Expected Growth Rates


NAM/IndustryWeek Survey of Manufacturers – 3Q 2011312 Manufacturers . . .Completed August 31st 2011

Concerns for 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%


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


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


The Current Facts:U.S. Exports

U.S. Imports


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


Contact Information

Alan Lund, Principal


[email protected]

248-204-9447

18

Aaron A. WitalecTransaction Services Manager


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

Contact Information

Aaron Witalec, Manager


[email protected]

586-843-2587

37

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


Construction permits 182nd

Registering property 51st

Getting credit 89th

Protecting investors 93rd

Paying taxes 105th

Trading across borders 162nd


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



Construction permits 177th

Registering property 94th

Getting credit 32nd

Protecting investors 44th

Paying taxes 164th


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


Starting a Business 151st

Construction permits 181st

Registering property 38th

Getting credit 65th

Protecting investors 93rd

Paying taxes 114th



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

[email protected]

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


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


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


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


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


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


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


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


79

Extended Enterprise GroupSupplier Capacity Analysis

Capabilities

Inputs Outputs Outputs


80

Work Center Summary Understanding Constraints


81

Period Summary-When and Where Capacity is a Risk


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


83

Speed to QDC Failure to meet targets drives

variances

Cost Target

Time

$ $$$


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


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


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


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


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

[email protected]

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


102


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

105

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

106

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

107

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

108

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.


109

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.


110

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.


111

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

112

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

113

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

114

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

115

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

116

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

117

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?

118

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

120

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

121

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

122

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

123

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

124

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

125

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

Contact Information

George W. Ash, Partner

Foley & Lardner LLP

[email protected]

313-234-7147

126

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

131

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.

[email protected]

248-226-7737

Jeffrey Terrill, Senior Vice President

RBS Citizens, N.A.

[email protected]

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

[email protected]

586-843-2581

144

Panel Discussion

manufacturing outlook 2012 · 2011-11-17 · nam/industryweek survey of manufacturers – 3q 2011...

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