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Improvements Projected for U.S. Industrial Manufacturers Own-Company Revenue

July 28, 2011
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NEW YORK, NY―The latest edition of the PwC US Manufacturing Barometer reports that despite ongoing uncertainty about the global economy, a vast majority of U.S. industrial manufacturers expect positive own-company revenue growth for 2011 and the next 12 months. While several key factors including higher costs of raw materials and commodities, oil and energy prices, higher costs of services worldwide and the economic impact of Japan’s earthquake and tsunami have contributed to the uncertainty about the world economy over the past 12 months, U.S.-based industrial manufacturers continued to grow international sales in the second quarter of 2011 and are projecting continued strength for overseas revenues.

“U.S. industrial manufacturers are showing confidence in the strength of their businesses by reporting positive expectations for their company revenue, international sales and gross margins, as well as plans for greater spending, even against a backdrop of building uncertainty for the U.S and world economies,” says Barry Misthal, U.S. industrial manufacturing leader for PwC. “While several headwinds are expected to grow over the next 12 months, as cited in PwC’s latest survey, U.S. industrial manufacturers aren’t as concerned about demand over the next 12 months as in past quarters. Furthermore, they are planning major new investments to introduce new products and services, expand their geographic reach and undertake business acquisitions to bolster growth.”

The composite average growth estimate for own-company revenue growth in the calendar year rose to 6.3 % in the second quarter of 2011 from 5.3 % in the previous quarter, the fifth consecutive quarterly increase and nearly four times higher than the second quarter of 2010. Eighty-eight percent of respondents forecasted positive own-company revenue growth for 2011, an increase of four points over the first quarter of 2011 and 23 points over the second quarter of 2010. Of those, 33 % are forecasting double-digit growth for 2011, which is flat compared to the prior quarter, while 55% are forecasting single-digit growth, up four points over the prior quarter and 20 points higher than the same time a year ago. Only 8 % forecast negative growth in the second quarter of 2011, versus 13 % in the first quarter of 2011 and 20 % in the second quarter of 2010.

Looking at the next 12 months, 90 % of those surveyed expect positive revenue growth for their own companies, up a point compared to the first quarter of this year and 17 points higher than the second quarter of 2010. Twenty-eight percent forecast double-digit growth, while 62 % forecast single-digit growth, compared to 33 % , who forecast double-digit growth and 56 % forecasting single-digit growth in the first quarter of 2011.

Gross margins for the second quarter remained positive. They were higher for 32 % of respondents and lower for 20%, for a net plus 12% , which is above the prior quarter’s plus 8%.

According to the report, industry growth estimates for 2011 rose significantly to 5.4 % in Q2 from 3.9 % in the prior quarter of 2011. Eighty-seven percent of panelists expect positive industry growth for 2011, compared to 79 % in the prior quarter and 65 percent in the second quarter of 2010.

U.S.-based industrial manufacturers that sell abroad continued to grow revenue in the second quarter of 2011, with half of respondents reporting an uptick in sales over the past three months, an eight point increase over the second quarter of 2010, but down slightly from the prior quarter. Forty-eight percent responded that sales remained the same in the second quarter of 2011. The projected contribution of international sales to total revenue in the next 12 months increased to 36 % from 34 % in the prior quarter.

“Nearly every respondent noted that international sales were up or the same compared to three months ago, reinforcing our view that with the right strategies, plans and understanding of the various risks involved in doing business overseas, industrial manufacturers can find robust opportunities to drive revenues in today’s global marketplace,” adds Misthal.

Looking at the next 12 months, 48 % of industrial manufacturers expressed optimism about the U.S. economy, down nine points from the first quarter of 2011, but three points higher than the same period in 2010. Uncertainty about the U.S. economy was cited by 45 % of panelists, an increase of seven points over the first quarter of 2011, while seven percent remain pessimistic in the second quarter of 2011, an increase of 2 points from the prior quarter. Thirty-eight percent of U.S.-based industrial manufacturers who market abroad are optimistic about the prospects for the world economy over the next 12 months, a decline of six points from the prior quarter but flat compared to the same period last year. The majority (55 %) are uncertain, up slightly from 51 %, while 7 % are pessimistic about the global economic outlook.

In the second quarter of 2011, 57 % of respondents believed the U.S. economy was growing, down from 65 % in the prior quarter. For the second consecutive time in five years, no panelist believed it was declining. Forty-three percent believed the U.S. economy did not change from last quarter, an increase of 8 % over the first quarter.

Over the next 12 months, more than half of panelists (52 %) are planning major new investments of capital, an increase of three points over last quarter and 19 points higher than the same period last year. The increase marks the sixth straight quarterly increase in spending projections. Operational spending is also expected to increase, with 88 % planning an increase, up from 86 % in the fourth quarter of 2010 and 80 % in the second quarter of 2010. Operational spending plans are led by new product or service introductions, which was cited by 60 %, an increase of 11 points over the prior quarter. This was followed by an expected increase in spending on information technology (48 %), business acquisitions (45 %) and geographic expansion (43 %).

Seventy-three percent of respondents expect to participate in new business initiatives, with 45 % planning merger and acquisition (M&A) activity over the next 12 months, an increase over the prior quarter of nine points and four points, respectively. This M&A activity response was the highest rate in four years and was ranked equally with planning to expand to new markets abroad, which increased from 33 % in the prior quarter. Plans for new facilities abroad rose 13 points to 35 %, while plans for joint ventures (38 %) also rose.

Fifty-two percent of respondents plan to add employees to their workforce over the next 12 months, up slightly from the first quarter of 2011 and five points higher than the same period last year. The percentage of participants who are planning a net reduction stayed the same as the second quarter of 2010 at 7 %, but increased from 3 % in the prior quarter.

“With concerns that the U.S economy may have stalled in the second quarter of this year and a number of barriers being cited that have the potential to limit growth in 2011, industrial manufacturers are looking to the M&A market to fuel growth,” continued Misthal. “The right deals can not only add scale but build efficiencies and help businesses gain access to new markets.”

Concern over oil and energy prices contributed to 70 % of panelists citing this as the greatest potential barrier to business growth over the next 12 months, rising five points from the prior quarter. Oil and energy price concerns outweighed legislative and regulatory pressures, which was cited by 60 %, versus 54 % in the first quarter of 2011. Taxation policies showed the biggest increase over the prior quarter, up 20 points to 53 %. Concerns about demand continued to decline for the third consecutive quarter to 40 percent. A third of the panel (33 %) cited decreasing profitability, up 11 points from the prior quarter.

In the second quarter of 2011, 33 % of U.S.-based industrial manufacturers reported higher costs, and 8 % reported lower costs for a net plus 25 %. This compares to the prior quarter when a majority (51 %) of U.S.-based industrial manufacturers reported higher costs, and 8 % reported lower costs for a net plus 43 %. In the second quarter of 2011, 28 percent raised prices and only 7 % lowered them, for a net plus of 21 %. This compares to the prior quarter when 43 % raised prices, and only 11 percent lowered them, for a net of plus 32 %.

“As rising commodity costs continue to pressure the bottom lines of U.S. industrial manufacturers, there is an obvious need for companies to look at their current operational effectiveness and cost management programs,” adds Misthal. “Stronger, updated programs that reflect the current environment of higher commodity costs can uncover real opportunities to make business adjustments that offset these challenges.”



Japanese Disruption and Impact on Affected Companies

Overall, 70% of U.S industrial manufactures either sell in Japan (67 %) or manufacture in Japan (30 %). Nearly half (47 %) of U.S. industrial manufactures surveyed responded that their company has been directly affected or expects to be affected over the next 12 months by the Japanese earthquake, tsunami and nuclear fallout. Overall, the impact on these 47 % of industrial manufactures was cited as severe by 11 % and moderate by 32%. A production disruption inside Japan was cited by 50 % and outside of Japan by the same 50%, while a sales disruption in Japan was cited by 57 % and outside Japan by 43 %. Thirty-nine percent of panelists noted an overall revenue drop off from these events.

The disruptive events in Japan caused panelist companies to examine their own worldwide business continuity plans for supply chains (40%) and for operations at company sites near a nuclear plant or in earthquake zones (32%). “One time events like the tragic situation in Japan have ramifications that extend across business communities as well,” said Misthal. “We’re seeing more companies look at their own worldwide business continuity plans for supply chains and the geographical risk of their operations.”



About the Manufacturing Barometer

PwC's Manufacturing Barometer is a quarterly survey based on interviews with 60 senior executives of large, multinational U.S. industrial manufacturing companies about their current business performance, the state of the economy and their expectations for growth over the next 12 months. This survey summarizes the results for Q2 2011 and was conducted from April 7 through July 14, 2011.

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