2015 Operating Benchmarks Report Review

Edward J. Curry, a principal in the consulting firm of Curry & Hurd and a former Chairman of MCAA, recently reviewed the results of the 2015 MCAA Operating Benchmarks Report during a webinar on July 28. The report, published in May, shows 5 year financial benchmarks from 2010 through 2014. The Measurement, Control & Automation Association (MCAA) is a North American trade association whose members manufacture and distribute instrumentation, systems and software used in industrial process control and factory automation around the world.

65 total companies participated in the report—16 of them channel partners. Data from 59 companies was actually used in report. Data from six companies was excluded because of dominance in their reporting group or from incomplete data—five years historical data is required from each company. The data is reported for manufacturers in size categories (Group 1 = companies over $100M in sales; Group 2, those $30-100M; Group 3 are companies $10-30M; and Group 4 are the small companies under $10M). Channel company data is reported separately.

This report looks at the publically available data on biggest public companies in our industry (many not US-owned). The data shows the strength of the recovery of the larger companies following the economic downturn. While there was very little revenue growth (less than 1%) on the net sales from these public companies between 2013 and 2014, they had substantial operating profit (11%) and 14.6% Operating Income as a percent of revenue. According to Mr. Curry, during the economic downturn in 2008-2009, these companies cleaned out some of the "operational cobwebs "in order to prosper and now we can see that improvement.

In looking at their individual performance, we see a cluster of pubic firms showing 5-10% of Revenue Growth with Operating Income (as a percent of sales) at 14-20%. A couple of companies have been consistently above those marks—Ametek and Danaher who are perfecting the art of blending in new companies that they acquire and improve their profitability. Another fact about the information that we see from the public companies is that many are international companies headquartered outside the US and they have different accounting standards that may distort what we see from their reported data.

Consistently over the years we have seen some abnormal numbers coming out of the Group 2 ($30-100M companies). Mr. Curry believes it is possible that these companies include some that are integrators rather than developers. MCAA plans to look into the nature of the companies and review their reporting to try to identify the genesis of those trends.

The report contains trend graphs over the five years comparing the four manufacturing groups. This year we noted that there was a dip in General & Administrative Expenses for both of the smaller company groups (Group 3 $10-30M and Group 4 under $10M) while the larger companies have maintained a very consistent level over the years. The smallest companies have the highest percent of G&A relative to sales because they lack the leverage of the larger organizations.

Conversely, the smaller companies showed a continuation of increased spending for R&D where the larger companies remain at a fairly low level as a percent of sales. It should be noted that the larger companies can acquire technology through M&A activities. Indeed, the data shows that when there are other economic pressures on companies, the absolute R&D spending can become a discretionary expense. We saw that R&D dollars dipped for both the Group 1 and Group 2 (larger) companies in 2013 and were back up in 2014 while there has been a fairly consistent increase in spending for both the Group 3 and Group 4 (smaller) companies over the five year period of the report.

Looking at the Income from Operations, the leverage of the larger companies is evident as there is a clear and sustained upward trend (incremental as it may be) for the larger companies while the smaller companies bounce up and down depending on the economic pressures that occur.

The report shows that the larger companies turn inventory at a pace (7.5 times per year) twice that of the smaller companies because they have the tools, including JIT manufacturing, to do so. Smaller companies, turning inventory at a rate of 3-4 times per year have much larger inventory to carry and have to bear the costs of that inventory—a cost that might justify some of the expenses of developing the tools that make the larger companies more agile.

Conversely, the larger companies have longer collection periods than the smaller companies. This is certainly an indication of the fact that payments on bigger projects are harder to collect through the period of the project. The stretched-out nature of those large projects makes the implementation of actions to improve collections unfeasible. Our expert also noted, however, that larger companies are increasingly employing the tactic of holding back on payments to smaller companies who have little leverage to collect.

Mr. Curry, noted to the audience of nearly 40 executives who attended his recent webinar on the MCAA report that he believes that the Standard Deviation pages which are included in the report are likely the most important source of information that a company can look at to understand where their own performance fits. The tables for Gross Profit, Expenses and Operating Income show the $Mean (the sum of dollars reported by all companies in a size category divided by the sum of dollars reported for net sales and expressed as a percent) and the Company Mean (the average of calculations made for each company where dollars reported are divided by net sales). Additionally, there is a minimum and maximum reported (which are the lowest result of the company mean calculation and the highest result respectively). And finally each chart shows the standard deviation which shows how widely the calculations are dispersed above and below the average company mean reported. Since all five years are reported for each of these calculations, one can see not only the change over time but whether the reporting is getting more or less tightly bunched around the average.

In the section of the report specifically devoted to the channel partner data, we noted that the inventory turns (not unexpectedly) are higher than the biggest of the manufacturing companies—about every five weeks. Looking at the collection period for both accounts receivable and for commissions, the channel firms seem to have become quite aggressive in their collections having pushed both categories down by 3-4 days on average over the past three years.

Finally, looking at the standard deviation charts for the channel firms, we note that the minimum operating income as a percent of total margin can be negative (and sometimes a pretty large negative number) as it was also shown to be in the group 3 and 4 companies for manufacturers which demonstrates those companies which are likely family-owned businesses which have different profit forces in play.

The Operating Benchmarks Report is published annually by the Association in May and has been analyzed by Mr. Curry for the MCAA members for more than 25 years. A company does not have to belong to MCAA to participate in the report, although there is a cost of $2,500 to do so where there is no cost to MCAA member companies. The full report is ONLY available to those members which contribute their data as are the slides from the recent webinar on the topic.

MCAA exists to help the management teams of process and factory automation product and solution providers run and grow successful businesses by offering timely, unique and highly specialized resources acquired from shared management benchmarks and strategies—like the annual Operating Benchmarks Report—where proprietary company information is secure. For more information, visit www.measure.org.