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THE MARKET THAT MOVES AMERICA FINDINGS FROM THE NCMM’S Q1 '17 INDICATOR SURVEY T h o m a s A . S t e w a r t , E x e c u t i v e D i r e c t o r T h e N a t i o n a l C e n t e r f o r t h e M i d d l e M a r k e t
Q1'17 MIDDLE MARKET INDICATOR | ACG WEBINAR | May 3, 2017
THE MIGHTY MIDDLE MARKET
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THE NATIONAL CENTER FOR THE MIDDLE MARKET
www.middlemarketcenter.org
The National Center for the Middle Market is a collaboration between The Ohio State University’s Fisher
College of Business, SunTrust Banks Inc., Grant Thornton, and Cisco Systems. It exists for a single
purpose: to ensure that the vitality and robustness of Middle Market companies are fully realized as
fundamental to our nation’s economic outlook and prosperity. The Center is the leading source of
knowledge, leadership, and innovative research on the middle market economy, providing critical data
analysis, insights, and perspectives for companies, policymakers, and other key stakeholders, to help
accelerate growth, increase competitiveness and create jobs in this sector.
MIDDLE MARKET RESEARCH & DATA EXPERTISE & OUTREACH
EDUCATION
Quarterly Middle Market Indicator
Research and Expert Perspectives
Interactive Benchmarking Tools
Executive Programs
Webinars
Share Research & Discuss Trends
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3
THE MIDDLE MARKET INDICATOR
4
MIDDLE MARKET INDICATOR
OVERVIEW
5
A Quarterly National Survey Cut by Geography and Industry
Q1'17 MIDDLE MARKET INDICATOR
EXECUTIVE SUMMARY
• BY A SUBSTANTIAL MARGIN, THE MIDDLE MARKET CONTINUES TO
LEAD THE U.S. ECONOMY IN REVENUE GROWTH AND JOB
CREATION
• THE MIDDLE MARKET KICKED OFF 2017 WITH RECORD HIGH JOB
CREATION AND REVENUE GROWTH, FUELED IN PART BY A SURGE
IN M&A ACTIVITY
• EXPECTATIONS FOR GROWTH AND JOB CREATION IN THE COMING
YEAR ARE ALSO STRONG
• CONFIDENCE IN THE U.S. AND LOCAL ECONOMIES HIT RECORD
HIGHS; GLOBAL CONFIDENCE HAS REBOUNDED
Source: 1Q’17 Middle Market Indicator Report
1
2
3
4
6
Q1'17 U.S. MIDDLE MARKET
EXECUTIVE SUMMARY
CAPITAL INVESTMENT
64% WILL INVEST
CONFIDENCE
77% GLOBAL ECONOMY
90% NATIONAL ECONOMY
88% LOCAL ECONOMY
REVENUE GROWTH
9.2% PAST 12 MONTHS
8.8% NEXT 12 MONTHS
EMPLOYMENT GROWTH
7.5% PAST 12 MONTHS
6.0% NEXT 12 MONTHS
1.4% SMALL BUSINESS
1.6% LARGE BUSINESS
Source: 1Q’17 Middle Market Indicator Report 7
5.8% S&P 500
Q1'17 MIDDLE MARKET INDICATOR
REVENUE GROWTH
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
US MIDDLE MARKET S&P 500 PE-OWNED8
Source: 1Q’17 Middle Market Indicator Report
*1Q numbers include only companies who have reported.
PAST 12 MONTHS
9.2% U.S. MIDDLE MARKET
14.0% PE-OWNED FIRMS
5.8% S&P 500*
DEAL-MAKING ACCELERATED MIDDLE
MARKET GROWTH
Source: 1Q ‘17 Middle Market Indicator Report
9
Made Acquisition
Past Year No Acquisition
Past Year
Mean revenue growth
15.0% 7.3%
Mean employment growth
11.2 6.3
Projected revenue growth
12.6 7.5
Projected employment growth
8.9 5.1
CONSTRUCTION COMPANIES GREW
ESPECIALLY FAST
Source: 1Q ‘17 Middle Market Indicator Report
10
10.2 7.0 6.0 6.4
12.6 8.1 7.1 5.1
11.4 10.2 5.3 6.8
20.5
10.4 7.8 9.8
2016 Q4
7.3 4.2 4.6 5.7
9.3 5.8 6.2
4.2
9.4 8.3 4.3 4.2
16.6
9.7 7.0 8.1
REVENUE
EMPLOYMENT
• 49 % expanded
into new markets
• 34% acquired
another company
(vs 17% the year
before)
• Excluding
construction,
middle market
growth was
8.4%
THE RISING TIDE LIFTED ALMOST ALL
BOATS
Source: 1Q ‘17 Middle Market Indicator Report
11
1Q 2017 1Q 2016
Performance improved
70% 60%
Performance was unchanged
25 34
Performance deteriorated
5 6
Q1'17 MIDDLE MARKET INDICATOR
INDUSTRY REVENUE GROWTH
Source: Dun & Bradstreet
12
Q1'17 MIDDLE MARKET INDICATOR
REVENUE GROWTH FORECAST
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
U.S. MIDDLE MARKET PE-OWNED
8.8% U.S. MIDDLE MARKET
13.9% PE-OWNED FIRMS
NEXT 12 MONTHS
Source: 1Q’17 Middle Market Indicator Report 13
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
U.S. MIDDLE MARKET LARGE
SMALL PE-OWNED FIRMS
PAST 12 MONTHS
7.5% U.S. MIDDLE MARKET
11.8% PE-OWNED FIRMS
Q1'17 MIDDLE MARKET INDICATOR
EMPLOYMENT GROWTH
1.4% SMALL BUSINESS
1.6% LARGE BUSINESS
Source: 1Q’17 Middle Market Indicator Report 14
Q1'17 MIDDLE MARKET INDICATOR
INDUSTRY EMPLOYMENT GROWTH
Source: 1Q’17 Middle Market Indicator Report 15
Q1'17 MIDDLE MARKET INDICATOR
EMPLOYMENT GROWTH FORECAST
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
U.S. MIDDLE MARKET PE-OWNED FIRMS
6.0% U.S. MIDDLE MARKET
11.0% PE-OWNED FIRMS
NEXT 12 MONTHS
Source: 1Q’17 Middle Market Indicator Report 16
CONFIDENCE, INVESTMENT PLANS,
AND CHALLENGES
17
Q1'17 MIDDLE MARKET INDICATOR
ECONOMIC CONFIDENCE AT RECORD HIGHS
18
20%
30%
40%
50%
60%
70%
80%
90%
1Q
'12
2Q
'12
3Q
'12
4Q
'12
1Q
'13
2Q
'13
3Q
'13
4Q
'13
1Q
'14
2Q
'14
3Q
'14
4Q
'14
1Q
'15
2Q
'15
3Q
'15
4Q
'15
1Q
'16
2Q
'16
3Q
'16
4Q
'16
1Q
'17
GLOBAL ECONOMY NATIONAL ECONOMY LOCAL ECONOMY
U.S. ECONOMY
90% 89% PE-OWNED
LOCAL ECONOMY
88% 91% PE-OWNED
GLOBAL ECONOMY
77% 85% PE-OWNED
Source: 1Q’17 Middle Market Indicator Report
40%
32%
19%
16%
16%
12%
12%
5%
EXECUTIVES FORESEE MORE
DEAL-MAKING IN 2017
Source: 4Q’16 Middle Market Indicator Report 19
Past 12 Months Extremely/Very Likely in Next 12 Months
42%
41%
25%
25%
22%
21%
21%
14%
Introduce a new
product or service
Expand into new
domestic markets
Make an acquisition
Add a new
plant or facility
Expand into new
international markets
Take on new debt
Open a new line of
credit
Be acquired/merge
with another company
Q1'17 MIDDLE MARKET INDICATOR
CAPITAL INVESTMENT PLANS
40%
45%
50%
55%
60%
65%
70%
75%
1Q
'12
2Q
'12
3Q
'12
4Q
'12
1Q
'13
2Q
'13
3Q
'13
4Q
'13
1Q
'14
2Q
'14
3Q
'14
4Q
'14
1Q
'15
2Q
'15
3Q
'15
4Q
'15
1Q
'16
2Q
'16
3Q
'16
4Q
'16
1Q
'17
PE-OWNED U.S. MIDDLE MARKETSource: 1Q’17 Middle Market Indicator Report
FIRMS PLAN TO INVEST.
20
MIDDLE MARKET CAP EX PLANS ARE
ROBUST AND CONSISTENT
% of Revenue Invested in Capital Expenditures
16%
Last 3 years
17%
Next 3 years
Revenue
$10M - <$50M
$50M - <$100M
$100M - < $1B
15 13 20
Revenue
$10M - <$50M
$50M - <$100M
$100M - < $1B
16 16 20
DEPRECIATION AND INTEREST
DEDUCTABILITY HELP FUND INVESTMENT
Source: 4Q’16 Middle Market Indicator Report 22
Revenue
$10M - <$50M
$50M - <$100M
$100M - < $1B
11 12 16
Revenue
$10M -
<$50M
$50M -
<$100M
$100M - <
$1B
10 11 14
13%
Depreciation Accounted for Each Year as Percentage of Revenue
12%
Interest Deducted Each Year as Percentage of Revenue
RETAINED EARNINGS ARE THE BIGGEST
SOURCE OF FUNDS FOR CAP EX
Funding of Capital Expenditures
43%
24%
20%
11%
2%
Revenue
$10M - <$50M $50M - <$100M $100M - < $1B
46 41 40
23 24 25
20 20 18
10 11 14
1 4 2
Retained earnings
Equity
Debt
Incentive or subsidy
Other
Q1'17 MIDDLE MARKET INDICATOR
CHALLENGES
TALENT AND REGULATION ISSUES ARE TOP OF MIND FOR MIDDLE MARKET LEADERS
Source: 1Q’17 Middle Market Indicator Report 24
RECENT RESEARCH
IMPROVING CASH GENERATION
7
25
WORKING CAPITAL: MIDDLE MARKET
EXECUTIVES ARE SATISFIED …
Satisfaction with Working
Capital Management
24%
51%
23%
2%
Extremely satisfied
Very satisfied
Somewhat satisfied
Not Very/
Not at all satisfied
BUT THERE ARE HUGE DIFFERENCES IN
WORKING CAPITAL MANAGEMENT …
225 171
117
465
306
220
121 173
240
0
100
200
300
400
500
600
700
800
900
1000
5th 25th 50th 75th 95th
Days o
n H
an
d
Percentile of Materials Firm Sample Group
Working Capital Metrics of Materials Firms with $100M-$1B Revenue, 2016
AR
INV
AP
… AND COMPANIES ARE TYING UP
MILLIONS OF DOLLARS UNNECESSARILY
$172,980
$69,746
$54,664
$131,646
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
$160,000
$180,000
$200,000
5th to 25th 25th to 50th 50th to 75th 75th to 95th
Cash
Ben
efi
t
Improvement to Working Capital by Percentile Change*
Cash benefit of just
one day’s improvement*
A/R $274,000
Inventory $260,000
A/P $260,000
Total: $795,000
*Based on a $100-million-in-sales materials company with average debt
THE NCMM’S NEW CYBERSECURITY
RESOURCE CENTER
Dedicated to helping middle market companies
manage cyber risks
http://cybersecuritycenter.middlemarketcenter.org/
MIDDLEMARKETCENTER.ORG 30