Fall 2016 issue of Horizons

Fall 2016 A publication by RubinBrown LLP

PLUS u What Lies Ahead in Agri-Business & Ag-Bio The State of Our Economy

u A Big Year for M&A and Private Equity

u Construction is on the Rise, but Labor Issues Cause Concern

u Healthcare Remains Volatile Economically

u Fast Times for Transportation Companies

TABLE OF CONTENTS

Features

1 2 6

A publication by RubinBrown LLP Fall 2016

Welcome from the Chairman & Managing Partner

RubinBrown News

Chairman & Managing Partner John F. Herber, Jr., CPA, CGMA

The State of Our Economy

52

St. Louis Managing Partner Frederick R. Kostecki, CPA, CGMA

Timely Reminders

Denver Managing Partner Michael T. Lewis, CFA, CGMA

Industry-Specific Articles

Denver Resident Manager Gregory P. Osborn, CPA, CGMA Kansas City Managing Partner Todd R. Pleimann, CPA, CGMA

10

25

40

life sciences & technology

gaming Growth Continues Amidst Underlying Weakness 2016 experienced an 1.1% or $219.5 million increase in gaming revenues when compared to the first six months of 2015 not - for - profit Not-For-Profits Services Are Needed in Good Economic Times...and Bad Unique challenges for not-for-profit organizations due to recent economy law firms Law Firms at a Crossroads Law firms experience client pressure in demand for legal services public sector State of the Economy: A View from the Public Sector Mixed metrics, with heavy emphasis on regaining jobs in 2016

real estate Tax Credit Real Estate Developments: Legislative Update The need for affordable

What Lies Ahead in Agri-Business & Ag-Bio Increased demand places stress on supply chain, while innovations prosper

Editor Dawn M. Martin

housing reform is one issue both parties can agree upon

14

Art Director Jen Chapman

private equity

43

A Big Year for M&A and Private Equity The fourth quarter of 2015 boasted high in deal activity, but seemed to evaporated quickly in the first half of 2016

28

healthcare Healthcare Remains Volatile Economically Transforming healthcare industry leaves the market unpredictable colleges & universities Economic Trends in Higher Education Public rhetoric focuses on increases in cost and student loan levels; economic data from the institutions’ perspectives paint a slightly different picture

Designer Brendan Coleman

Horizons , a publication of RubinBrown LLP, is designed to provide general information regarding the subject matters covered. Although prepared by professionals, its contents should not be construed as the rendering of advice regarding specific situations. If accounting, legal or other expert assistance is needed, consult with your professional business advisor. Please call RubinBrown with any questions (contact information is located on the back cover).

17

manufacturing & distribution

46

32

The Economic State of Manufacturing & Distribution

Economic outlook remains optimistic as new ideas and concepts are developed through innovative thinking

36

20

construction Construction is on the Rise, but Labor Issues Cause Concern Spending increases, while employment in construction-related jobs experiences shortages

Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.

49

transportation & dealerships

Fast Times for Transportation Companies The industry experienced record-breaking increases in shipments, higher demand and lower energy costs

Readers should not act upon information presented without individual professional consultation.

WELCOME FROM RUBINBROWN’S CHAIRMAN & MANAGING PARTNER

Generally speaking, it’s safe to say that we’re all feeling better about the economy. RubinBrown surveys our clients on economic conditions every quarter. The news is good! You’ve reported to us that you’re experiencing improvement in your organization’s operating performance. You’ve also told us that your economic outlook for the near future is looking upward as well. Like many of you, RubinBrown is also experiencing growth. We’re on track to achieve our Vision 2020 growth goal. We have solid business plans in place and I’m confident that we will achieve it. While we are focused on growth, we are equally committed to our number one core value, “Superior Quality & Service.” Unfortunately, there are some businesses that lose sight of quality service when economic times improve and business is on the rise. I’m proud to say we have not wavered from our service commitment. RubinBrown’s reputation for superior quality and service is one of our most valuable assets, along with our people. This asset is entrusted with each Steadfast Focus on Client Service... Even in Better Economic Times

John F. Herber, Jr., CPA, CGMA Chairman & Managing Partner

team member and is fiercely protected and enhanced without compromise. Growth, continuity and financial success of the firm and team members result from superior service provided by a cooperative team that promotes the mission and core values of the firm. RubinBrown’s differentiator is simple. We are committed to totally satisfied clients and inspired team members, and earn our clients loyalty each and every day with likable, responsive and technically superior team members. We thank you for your business and hope we can continue to earn your loyalty now and in the years to come.

RubinBrown Quarterly Economic Benchmark Survey

Economic Outlook for Fourth Quarter 2016

40.45%

17.98%

2.81%

3.93%

Pleasant reading,

34.83%

SIGNIFICANTLY IMPROVED FROM LAST QUARTER

SLIGHTLY WORSE THAN LAST QUARTER SIGNIFICANTLY WORSE THAN LAST QUARTER

SLIGHTLY IMPROVED FROM LAST QUARTER

THE SAME AS LAST QUARTER

www.RubinBrown.com | page 1

RUBINBROWN NEWS

New Brand for Wealth Advisory Services RubinBrown is proud to roll out of a new brand and logo for its wealth advisory services. The new brand, RubinBrown Wealth Advisors, better represents the integrated suite of services offered by the firm. While always providing tax preparation, assurance and consulting services throughout the firm’s 60+ year history, RubinBrown began providing wealth advisory services (branded as RubinBrown Wealth Management) in 2002. The firm’s wealth advisory services offered include portfolio management, tax planning and preparation, personal financial consulting, cash flow planning, retirement planning, estate planning, education funding, charitable giving and family office services. RubinBrown Partner Named Chair of NABA Steven Harris , Partner-In-Charge of RubinBrown’s Entrepreneurial Services Group, recently was named Chairman of the Board of Directors for the National Association of Black Accountants (NABA). Effective July 1, 2016, he will serve a two-year term. NABA is a nonprofit membership association dedicated to bridging the opportunity gap for people of color in the accounting, finance, consulting, information technology and other related business professions. Representing more than 200,000 people of color in these fields, NABA advances people, advances careers and advances the mission by providing education, resources and meaningful career connections to both professional and student members. RubinBrown Partner Named Woman to Watch The Colorado Society of Certified Public Accountants, in collaboration with the American Institute of Certified Public Accountants, recently honored Debbi Warden , a Partner in the Entrepreneurial Services Group at RubinBrown, with the Women to Watch Award. Warden was recognized as a Leader of Note, which is awarded to women on the path to the highest level of advancement. The Women to Watch Awards program recognizes female CPAs who have demonstrated leadership and have made significant contributions to the profession and their communities.

page 2 | horizons Fall 2016

RubinBrown Manager Named 30 Under 30 Chris Tkach , a Manager in the Assurance Services Group at RubinBrown, was honored as one of the St. Louis Business Journal’s 30 Under 30 for his professional achievements and contributions to the St. Louis community. The 2016 class of honorees was chosen by a panel of previous 30 Under 30 winners and the Business Journal editorial board out of more than 400 nominations.

RubinBrown Talent Promotions PARTNERS

Megan Knoblauch has been with RubinBrown since 2006 and primarily works on employee benefit plans serving a number of manufacturing and distribution companies.

Kim Ryan has more than 15 years of public accounting experience. Kim works primarily in the family office and not-for-profit areas. Kim is the Vice Chair of the Not-For-Profit Services Group. Innovation District. Jason also has experience in valuation analysis, research and performing both qualitative and quantitative analysis. Eric Westby has been with the firm since 2005. He serves as the Vice Chair of the Healthcare Services Group. He has more than ten years of experience and primarily serves mid-sized, privately held organizations, specializing in the manufacturing and distribution, healthcare and employee benefit plan audit groups. In addition, Eric has vast experience with due diligence services related to mergers and acquisitions. Jason Mannello joined RubinBrown in 2005 and specializes in financial and economic analysis. He works out of RubinBrown’s CIC office in the Cortex

www.RubinBrown.com | page 3

RUBINBROWN NEWS

RubinBrown Talent Promotions MANAGERS

Mitch McFarland Assurance Services Group Denver

Adam Castellano Assurance Services Group St. Louis

Kara Clement-Bayard Business Advisory Services Group St. Louis

Eric Muskopf Entrepreneurial Services Group St. Louis

Curtis Hoette Assurance Services Group St. Louis

Lindsay Priebe Tax Services Group St. Louis

Katelynn Lomax Entrepreneurial Services Group St. Louis

Jeremy Reiss Tax Services Group Denver

Tim McCarthy Assurance Services Group St. Louis

Jessica Seiffert Tax Services Group St. Louis

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New RubinBrown Talent PARTNERS

Cory Underwood, CFA, CFP® recently joined RubinBrown as a Partner in the firm’s Wealth Advisory Services Group. He specializes in working with individuals and small businesses, helping them in such areas as financial planning, retirement planning, investment management, college funding, insurance, estate planning, risk management, asset allocation and diversification. Bryan Hinton, CPA recently joined the firm as a Partner in its Assurance Services Group in RubinBrown’s Nashville office. Bryan has extensive experience working with the construction industry. He has audited and consulted with general contractors, heavy highway and road builders and specialty subcontractors. Ross Hewitt III, CPA is a new Partner in RubinBrown’s Tax Consulting Services Group. He has more than 20 years of experience, and provides tax consulting for clients primarily in the life sciences, technology and manufacturing and distribution industries.

Connect with us on Social Media

Connect with RubinBrown Recruiting

www.RubinBrown.com | page 5

FEATURE

THE STATE OF OUR Economy by Chris Kuehl

This can be a very awkward time to get an accurate impression of the economy’s performance – at least if one listens to the ranting and raving of the political classes. The fact is that voters in general react to what they are afraid of and respond to the gloomiest of messages. This is especially true of candidates that are challenging the status quo. They want to paint a very distressing picture so that voters will want to “throw the bums out” and start anew. This leaves the casual observer with a very negative impression of the economy; but, fortunately, the alert readers of this publication are anything but uninformed and are certainly not casual observers. Recent data has been generally more upbeat than it has been and certainly more positive than the campaigns would have us believe. Several major economic indicators are up and that is more than we have seen in over a year. Granted, some are flatter than not, but at least they are not crashing into negative territory. The better news is that among the positive indicators are some that are considered forward looking and that sets up further improvements in the months ahead. Among those that are trending positively are new automobile/light truck sales. The caution here is that while it is still trending positively, the rate of growth has slowed down considerably and it is unlikely the old pace will return. A record 17.5 million cars were sold in 2015 and thus far 2016 has not been quite as robust. The pace is still faster than it has been in many years and this contributes to the improvements in the industrial production numbers. An even better indicator at the moment is housing stats as they have continued to grow and this is a sector that bolsters many others. Home prices have risen, which has been good news for the existing homeowner and it may allow them to buy new abodes they have had their eyes on. The only cautionary note at the moment is that permits have started to slow a bit. The question now is why. The demand for new homes is strong enough but there are issues with finding enough workers to build these new homes. This has been a significant factor as far as asking for new permits – there is a backlog of demand in many cities. The industrial metal numbers also improved as there has been a demand increase from both the sectors that use the material and from investors that are using the metal commodities as a hedge. This is not the same story as far as steel is concerned, but the decline in consumption is not yet all that drastic. There has been a slowing in vehicle manufacturing and only a slight increase in construction related demand.

www.RubinBrown.com | page 7

FEATURE | The State of Our Economy

When we look at the level of capital investment, we feel a bit happier. When there is too much unused capacity, the desire to buy machinery or hire is reduced and now we are seeing that businesses are investing more than in the past. The business community is still reported to be worried and cautious, but the fears about Brexit have faded somewhat and there is slightly less apprehension about the coming election. The lending environment remains strained as banks are pulled between their desire to loan and the regulatory pressure to reduce risks. The durable goods numbers have not been unduly affected by the aerospace sector this year although there is some caution from month to month. A good sales period for Boeing will make the durable goods numbers look awfully good and then the next month they can look awful as the sales taper off. The general equipment part of the durable goods data looks stronger than it has been. This has not been the story as far as factory orders are concerned as these are mostly consumer goods as opposed to the longer lasting industrial goods. The import numbers can make this a volatile sector as there are many substitute goods coming into the U.S. via imports that can cut into demand for domestic output. The strength of the dollar has meant that imports into the U.S. are as cheap as they have been in years but it also means that exports are harder to market. The latest data from the Credit Managers’ Index (CMI) is stronger but with cautionary notes. The growth has all been in the favorable categories like sales, applications for credit, dollar collections and amount of credit extended. There is still a lot of trouble in categories like collection activity, disputes, slow pays and bankruptcies. It is positive, but with caveats.

The metals that are watched the most closely are steel, copper, aluminum and to some degree, nickel (as far as steel use is concerned). The aluminum demand is up as aerospace has been a growing sector but copper has been languishing with a slump in demand from telecom. The best news this month comes from the interconnected trio of capacity utilization, capital investment and durable goods delivery. The rate of utilization seems to have stopped declining at about the mid-70s. This is still far below the ideal of between 80.0% and 85.0%, but the stabilization is a good sign. The sweet spot as far as capacity utilization is concerned is between 80.0% and 85.0% because when usage is below 80.0% there is slack enough to halt hiring or capital investment. Companies seek to wait until there is a solid demand before they pull the trigger on more people or machines. Once utilization creeps over 85.0%, there start to be shortages and bottlenecks and business is often slow to add capacity until they feel certain this is a trend on which they can depend.

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The CMI is modeled after the Purchasing Managers’ Index and has the advantage of being predictive by dint of the way that credit managers see the world. Purchasing managers are always more interested in the state of their customers’ business 90-120-180 days from now – or whenever they are scheduled to pay. That forward-looking orientation carries into the index and right now the prognosis is good for modest growth the rest of the year. The TranSystems Transportation Activity Index is slipping hard, but most of this seems to be related to a slow shipping season this past summer as retailers tried to decide what the holiday shopping season will really look like. This index looks at all the modes of

transportation – ocean, truck, rail, air and others.

The transportation sector is always something of a harbinger of things to come in the economy as nothing happens without something being moved from one place to another. The index had been trending positively for a while and now has hit a snag. The hope is that it is a temporary one. The overall sense is as positive as it has been in months (almost a year). This is contradicting the gloom and doom from political circles, so it may be wise to pay little attention to the rants and focus on what one’s own business activity is telling you. Right now there appears to be more seeing progress than not.

Dr. Chris Kuehl Managing Director, Armada Corporate Intelligence 816.304.3017

ckuehl@armadaci.com www.armada-intel.com

Dr. Chris Kuehl provides forecasts and strategic guidance for a wide variety of corporate clients around the world. Kuehl is the chief economist for several national and international organizations – Fabricators and Manufacturers Association, National Association of Credit Management, Finance, Credit and International Business and the Business Information Industry Association. He is also the economic analyst for several state accounting societies – Missouri, Kentucky, Tennessee and Kansas. Prior to starting Armada in 1999 he was a professor of economics and finance for 15 years – teaching in the U.S., Hungary, Russia, Estonia, Singapore and Taiwan. He holds advanced degrees in economics, Soviet studies and East Asian studies. Kuehl is the author of Business Intelligence Briefs and Executive Intelligence Briefs – both publications from Armada.

www.RubinBrown.com | page 9

LIFE SCIENCES & TECHNOLOGY

What Lies Ahead in Agri-Business & Ag-Bio by Jason Mannello, CFA, CLP

C limate change, population growth and rising global incomes are impacting supply and demand in agriculture and food production. Rising populations and incomes are increasing demand for food, while climate change, and more specifically increasing climate variability, is putting stress on the supply chain and inserting uncertainty and risk into ag-related production. However, innovation and other positive forces in agriculture and plant sciences are working to ensure a safe and secure food supply produced in a sustainable manner. RubinBrown has identified some recent trends that we expect to continue, if not accelerate, into the future.

These are the areas we believe will significantly impact the industry going forward:

∙ Rapidly expanding avenues of innovation

∙ An explosion in ag, ag-bio and ag-tech investment

∙ The globalization of ag-related investment

∙ Increased adoption of ag-related innovation

Expanding Innovation Channels Innovation channels in ag-related industries are expanding in scope, and the pace of innovation is accelerating. There have been major breakthroughs over the past century, beginning with the “discovery” and adoption of hybrid corn in the early part of the twentieth century, to advanced seed breeding techniques and genetic modification at the close of the twentieth and beginning of the twenty-first century.

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Annual VC Investment in Ag-Related Tech

While these are still highly relevant technologies and areas for further innovation, the breadth of innovation in agricultural production is expanding into other areas such as microbials and precision agriculture. Microbials are microorganisms such as bacteria that can be beneficially applied in ag production to provide desirable outcomes such as improved disease resistance or improved efficiency in the uptake of nutrients from soil. The BioAg Alliance, a partnership between Monsanto and Novozymes to research and commercialize sustainable microbial products, is a recent example of the potential for microbials in the market. Precision agriculture is another major area of opportunity. Increased computing power and the integration of networked hardware and software (i.e. the “internet of things”) has made precision agriculture a reality. Precision agriculture, broadly speaking, is the use of historical data, satellite imagery, drone and robotic technology and real time or near real time production data to better manage and optimize production activities. Precision ag integrates one, some or all of these aspects into decision making and management processes. The pace of innovation is also accelerating. Breakthroughs in genetic sequencing, enhanced computing power and the connectivity of hardware and software solutions is speeding up the innovation cycle in agriculture. Potential solutions can now be identified, tested and validated faster than ever before. The digital nature of some of the new areas of innovation, such as those in precision agriculture, also creates a much faster iteration cycle than what was historically experienced (for example with traditional breeding or genetic trait development).

$5B

$4.6 B

$4B

$3B

$2.4 B

$2B

VC INVESTMENT

$0.9 B

$1B

$0.5 B

$0.5 B

$0.4 B

$0B

2010

2011

2012

2013

2014

2015

Source: AgFunder.com, AgTech Funding Report 2015: Year in Review

Continued advances in traditional innovation channels, combined with the introduction of new innovation channels is harboring in an unprecedented era of developments in ag-technology. Growth in Ag Related Investment There has been an explosion of ag-related investments over the past couple of years. Multiple factors are driving this including: the recognition of supply and demand dynamics for the global food supply chain, the rapid expansion in innovation and the increasing adoption of innovation. This increase in investment is highlighted in recent venture capital data. As depicted in the graph above, there was an explosion in ag-related investment in 2014 and 2015. While the growth in investment will, in all probability, slow down going forward, we expect investment to continue to grow and be more in line with 2014 – 2015 levels than 2010 – 2012 levels. The broadening of innovation channels (such as into IT hardware, software, drones, etc.) provides many new avenues for investment, but also increases the supply of investment

www.RubinBrown.com | page 11

LIFE SCIENCES & TECHNOLOGY

On a larger scale, we see strategic alliances and mergers and acquisition activity on a global scale as well. Since December 2013, Monsanto (U.S. based) has partnered with Novozymes (Denmark based) through the BioAg Alliance to research, develop and commercialize microbials. Syngenta AG (Swiss based) and ChinaChem (China based) were working toward completing ChinaChem’s acquisition of Syngenta by the end of 2016. Also, Bayer AG (Germany based) and Monsanto recently announced an agreement to merge, which once completed, will create one of the largest leaders in global agriculture. Globalization in ag investment is likely related to globalization in general, but also, in our opinion, correlated with the other observed trends of increasing innovation and overall increases in investment. While we don’t anticipate the U.S. losing its lead in ag-related investment any time soon, like the other trends, we do expect to see increased globalization of investment and commercialization continue. Adoption of the Latest Innovations Finally, the end result of increased investment and innovation is ultimately the adoption of beneficial new technologies and systems. Arguably, ag-producers have historically been viewed as slow adopters. However, as new technologies get proven out, the next generation of ag-producers begin to manage operations, and early adopters increase the diffusion of technology, we anticipate that new technology adoption will increase, including an increase in the rate of adoption. Ag-producers and other entities in the agri-business value chain will always face challenges: climate change, climate variability, cyclical input and output prices and a need for sustainable production practices.

as tech investors are now “venturing” into territory once reserved for life sciences focused investors. The significant increases in investment should be a major positive factor for the industry as the capital supports the research, development and commercialization of new technology and helps improve yields, production economics and production security in the decades to come. Globalization of Ag Related Investment There is an increased globalization in investment, across the size and maturity continuum. At the venture level, investment is still predominantly North American based, more pointedly U.S. based, but over 40% of 2015 deals were outside of the U.S., including a respectable number in India, continental Europe, the United Kingdom and Israel. The Yield Lab, a St. Louis, Missouri based ag-tech accelerator, recently announced its expansion into Ireland (the Yield Lab Galway).

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However, recent trends are helping to overcome these challenges and we anticipate seeing these observed trends continue into the future. Global demand for food and food security, combined with supply chain dynamics highly affected by climate variability and a long- term need for sustainable production will be the driving forces behind this. These trends are also all inter-related and can potentially form positive feedback loops that will help sustain them going forward. Innovation, investment, globalization and

adoption will, over the long-term, improve agricultural productivity, food security and sustainability in productive means. Finally, ag-related activity will continue to be an economic driver and provide many new business and economic opportunities for industries once thought to have no connection to agriculture.

RubinBrown’s Life Sciences & Technology Services Group RubinBrown provides specialized accounting, tax, and business advisory services to animal health, human health, renewable energy, and plant sciences companies around the country.

Jason Mannello, CFA, CLP — St. Louis Partner-In-Charge Life Sciences & Technology Services Group 314.290.3216 jason.mannello@rubinbrown.com

Chester Moyer, CPA — Kansas City Partner Life Sciences & Technology Services Group 913.499.4445 chester.moyer@rubinbrown.com

Eric Janson, CPA — St. Louis Partner & Vice Chair Life Sciences & Technology Services Group 314.290.3295 eric.janson@rubinbrown.com

Rodney Rice, CPA, CGMA — Denver Partner Life Sciences & Technology Services Group 303.952.1233 rodney.rice@rubinbrown.com

Josh Leesmann — St. Louis Manager & Vice Chair Life Sciences & Technology Services Group 314.290.3204 josh.leesman@rubinbrown.com

www.RubinBrown.com | page 13

PRIVATE EQUITY

A Big Year for M&A and Private Equity by Ben Barnes, CPA, CGMA

T he mergers and acquisition (M&A) market experienced its largest transaction year in 2015, with buyers dishing out over $4.3 trillion on M&A deals. The fourth quarter of 2015 itself boasted $1.3 trillion in deal activity. This momentum, though, seemed to quickly evaporate in the first half of 2016, as the M&A market seemed to have paused to catch its breath. Nonetheless, while some industry segments have struggled to keep pace with the 2015 precedent, outlooks remain upbeat for the final months of 2016.

According to Pitchbook’s Q2 2016 PE Activity Report , median fund size grew approximately 50.0% year-over-year, with nearly 90.0% of funds meeting their fundraising target. Additionally, median deal size for Q2 2016 was nearly $40 million, and median platform buyout deal size was reported at just over $120 million. B2B and B2C companies accounted for 35.0% and 20.0% of deals, respectively, trailed by IT deals (19.0%) and healthcare deals (10.0%). North American firms captured 56.0% of the 1,325 Q2 2016 deals. Following the recession, the private equity industry experienced six straight years of investment expansion. As uncertainty and anxieties mount regarding a future economic downturn or recession, many firms have begun to alter their investment approaches and strengthen their portfolios accordingly.

Private Equity Update Private equity firms enjoy favorable

conditions for continued investment growth, even amidst global economic concerns.

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Add-on investments have become increasingly popular, as opposed to new platform investing. Instead of chasing mega- deals with high valuation multiples, firms are opting for smaller, less risky and cheaper deals to add value to their portfolios. Many of these less risky deals feature middle market sellers, often priced at a lower multiple than their mega-deal relatives. According to Pitchbook, the median EV/EBITDA multiple for investments with an enterprise value (EV) under $25 million dropped to 5.3x, while the median EV/EBITDA multiple for investments with an EV between $25 million and $250 million dropped to 6.5x. However, our recent experience suggests that these multiples are on the low end of the range currently at play in the middle market. Additionally, many private equity firms are restructuring their strategies with themed investment approaches. Firms adopt a theme after considering their own expertise and prior successes, then choose to specialize in that selected realm going forward. By centering its focus, a firm is better able to detect the macro indicators for its particular investment thesis – before other, more diversified private equity shops. Such an approach can help expose investment opportunities sooner, as well as enable a firm to fully capitalize on industry and market nuances to help facilitate returns. Thematic investing and its inherent cost- effective synergies also render a private equity firm more attractive to the growing number of limited partners (LPs) looking for specific industry exposure. Our recent experience indicates that private equity firms with well thought-out investment themes have been far more successful in sourcing and closing deals than those firms which consider themselves “generalists.” Furthermore, as LPs search for less traditional and more lucrative ways to get involved with

Private equity firms are turning to technology to strengthen their portfolios

general partners (GPs), levels of co-investment have risen.

This shadow capital does not factor into a private equity fund’s fundraising total, but can give the providing LP a more prominent voice in fund decisions and help lower fees. Of the $619 billion raised by private equity firms in 2015, shadow capital accounted for $161 billion. Industry Spotlight: Tech The tech industry has firmly taken its place as one of the favorites of private equity in the first half of 2016. Disregarding tepid predictions for investments in tech, private equity firms dabbling in the industry have thrived since January 2016. Accounting for only 11.0% of all private equity buyouts just 4 years ago, technology represented a record-high 46.0% of buyouts in the first half of 2016. As fear of a possible recession or pull back looms, private equity firms are turning to technology to strengthen their portfolios. Particularly popular are stable sectors such as corporate software providers, which enjoy high recurring revenue models, strong macro tailwinds and cycle resistance. The list of technology companies currently owned by private equity firms includes notables such as Veritas, Qlik Technologies, Cvent and Dell among others.

www.RubinBrown.com | page 15

PRIVATE EQUITY

Fundraising At the June meeting of the Federal Open Market Committee, members

In Short In light of abundant capital, a competitive deal scene and uncertainty about economic trends, private equity firms have proactively begun to modify their investment strategies. Through middle market add-on investing and themed investment strategies, firms continue to enjoy present success while preparing themselves for the future. The tech industry has become a highly attractive market to private equity firms, dashing gloomy early- year predictions. In the current low interest rate climate, an extremely high percentage of funds are reaching their fundraising targets as the private equity world adapts and thrives. Mergers and acquisitions are expected to remain very active for the rest of 2016 and into the foreseeable future, barring a significant economic event. Multiples are expected to remain relatively high and the market will likely continue to favor sellers.

“agreed to leave the target range for the federal funds rate unchanged at one quarter to one half percent.” While borrowing rates remain low, private equity firms continue to find success fundraising. In the first half of the year, investors closed a record-setting 54.0% of funds at levels above their fundraising goal. Furthermore, only 21.0% of funds fell short of their goals in the first half of 2016 – down 7 percentage points relative to the first half of 2015. Second quarter capital raised by private equity firms topped 2015’s corresponding time frame by nearly $30 billion to bring median fund size up to just over $322 million. In addition, the amount of dry powder – unallocated capital available to fund managers – has risen to $818 billion, up from the 2015 ending balance of $745 billion.

RubinBrown’s Private Equity Services Group RubinBrown offers private equity firms and their portfolio companies an integrated suite of business services aligned across the entire private equity life cycle.

Ben Barnes, CPA, CGMA Partner-In-Charge Private Equity Services Group 314.678.3531 ben.barnes@rubinbrown.com

Jeff Sackman, CPA, CGMA Partner & Vice Chair Private Equity Services Group 314.290.3406 jeff.sackman@rubinbrown.com

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MANUFACTURING & DISTRIBUTION

The Economic State of Manufacturing & Distribution by Jim Mather, CPA, CGMA

W hen reading and listening to many of the lead stories and headlines about the manufacturing and distribution segments of our economy, there appears to be a great deal of emphasis on the negative, including the loss of jobs and unfavorable activity overseas. However, while reviewing the financial results of RubinBrown’s clients and contacts over the past year and first two quarters of 2016, coupled with the entrepreneurial optimism of business owners and management teams, we are happy to report that the industries appear to be doing very well. Many companies have worked diligently since the challenges experienced in 2008 to control costs and work efficiently while enhancing quality and customer satisfaction. Management continues to focus on growth, expansion and innovation to enhance earning potential and value.

There are numerous examples of growing revenues through expansion domestically and even internationally. Companies have enjoyed access to very favorable lending arrangements which have provided opportunities to make strategic acquisitions and expand product or service offerings and revenues. A substantial amount of merger and acquisition activity driven by private equity investors has occurred over the past 18 months. Management teams are also contemplating investments in capital equipment including technology enhancements and facility upgrades to support expansion.

www.RubinBrown.com | page 17

MANUFACTURING & DISTRIBUTION

Focus on Talent Many organizations have taken steps to grow the next generation of talent through internships, partnerships with local colleges and universities and the support of trade and technical schools. The industry must enhance the perception of the “manufacturing job” or career path from that of many years ago. Today’s manufacturing jobs often require substantial technical knowledge, advanced training and specialized skills that command excellent wages and provide many with successful careers. Despite what many perceive to be a declining segment of our economy, manufacturing and distribution is very much a driving force providing quality jobs and amazing new or improved products that are delivered and made available to consumers in very creative and efficient methods.

Manufacturing and distribution, like many other industries, continues to be challenged with many of the same issues including: ∙ Difficult domestic policy, regulation and taxation (including state and local compliance) ∙ Complicated and costly health insurance coverage and compliance

∙ Continued lack of quality workforce

∙ Weakening export sales due to the strengthening of the U.S. dollar

∙ Challenges in growth and expansion

Despite these challenges, the economic outlook remains optimistic as new ideas and concepts are developed through companies trying to inject innovative thinking throughout their culture. Innovation as a Driver Successful companies are encouraging their workforces to be more innovative than competitors, listen more closely to customers and gather better information (via big data, internet of things and analytics) to make better decisions and investments. Companies must work harder to cultivate a culture of innovation at all levels of their business. This allows for the growth and development of talent to keep pace with the complexity of production processes and new technologies available to them and their customers.

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RubinBrown Holds Successful Manufacturing & Distribution Summits

Hundreds of manufacturers and distributors across the country gathered in September in Denver, Kansas City and St. Louis for RubinBrown’s Manufacturing & Distribution Summits. Attendees were illuminated on current trends in the industry through presentations on the global economy and the newest technology and innovations that are impacting businesses.

The events were co-sponsored by Commerce Bank and HuschBlackwell.

RubinBrown’s Manufacturing & Distribution Services Group RubinBrown’s Manufacturing & Distribution Services Group is nationally recognized for superior assurance, tax and consulting expertise coupled with solid international business knowledge, exceptional inventory management and process improvement services.

Jim Mather, CPA, CGMA — St. Louis Partner-In-Charge Manufacturing & Distribution Services Group 314.290.3470 jim.mather@rubinbrown.com

Kaleb Lilly, CPA — Kansas City Partner & Vice Chair Manufacturing & Distribution Services Group 913.499.4417 kaleb.lilly@rubinbrown.com

Rick Feldt, CPA, CGMA — St. Louis Partner & Vice Chair Manufacturing & Distribution Services Group 314.290.3220 rick.feldt@rubinbrown.com

Russ White, CPA — Denver Partner & Vice Chair Manufacturing & Distribution Services Group 303.952.1247 russ.white@rubinbrown.com

Mike Lewis, CPA — St. Louis Partner & Vice Chair Manufacturing & Distribution Services Group 314.290.3391 mike.lewis@rubinbrown.com

www.RubinBrown.com | page 19

CONSTRUCTION

Construction is on the Rise, but Labor Issues Cause Concern by Chris Daues, CPA

W hen you think of the economy, how do you think it is doing? Everyone, from Wall Street to your neighbor, seems to have an opinion. Specifically relating to the construction industry, here are the facts so you can form your own opinion. National Construction Spending Since 2011, construction spending in the U.S. has steadily increased to approximately $1.2 trillion in 2015, which is a 9.6% increase from 2014 to 2015. Specifically, private (portion of the economy controlled by private individuals or organizations) construction spending has increased 11.4% from 2014 into 2015, while public (portion of the economy controlled by the government) construction spending only increased 4.4%.

In a March 2016 press release from the Associated General Contractors of America (AGC), a trade association in the U.S. construction industry, construction spending for the rolling 12 months in January 2016 totaled $1.14 trillion, which is an approximate 3.0% increase from the rolling 12-month total in December 2015.

Spending on multi-family residential construction increased 2.6%, private

non-residential construction increased 1.0%, and public construction increased 4.5% from December 2015 to January 2016.

page 20 | horizons Fall 2016

National Employment While spending has increased to an eight-year high in 2015, employment in construction-related jobs has not surpassed pre-recession (2008) levels as demonstrated by the graph below, which has caused a labor shortage in the industry. However, unemployment rates within the construction industry have decreased to an eight-year low of 7.5% in 2015. So you may be asking yourself, how do we have an employment shortage if the unemployment rate within the industry is so low? This is an indicator that while the majority of those individuals in the industry are working, there is still a significant number of workers that left the industry during the recession and have not yet or may not return. State and Metro Employment On a state-by-state basis, several states have seen double-digit increases in construction employment from January 2015 to January 2016, including Nevada (10.0%), Hawaii (16.0%) and Rhode Island (13.0%).

Additionally, other states showed strong employment increases like Colorado (5.0%), California (7.0%) and Tennessee (9.0%). There were several states, including Alaska (-9.0%), Kansas (-2.0%) and Wyoming (-5.0%), that had decreases in employment over the same time period. From a metro level, several metro areas have seen double digit increases in employment from January 2015 to January 2016 including Sante Fe, NM (16.0%), Miami, FL (13.0%) and Las Vegas, NV (11.0%). St. Louis, MO (5.0%), Kansas City, MO (8.0%), Nashville, TN (9.0%) and Boulder, CO (8.0%) were among other metros that also showed strong employment increases. There were several metros, including Albuquerque, NM (-3.0%), Cheyenne, WY (-8.0%) and Tuscan, AZ (-1.0%), that had decreases in employment over that same time period.

Change in Construction Employment by State in 2015

OVER 10.0% 0.1% TO 5.0% 5.1% TO 10.0%

–0.1% TO –5.0%

OVER –10.0% –5.1% TO –10.0%

Source: Associated General Contractors of America; agc.org

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CONSTRUCTION

Annual Construction Spending

$1,200M

$1,112.4M

$1,077.4M

$1,005.6M

$906.4M

$906.5M

$850.5M

$823.5M

$900M

$809.3M

$788.3M

$768.6M

TOTAL

$729.5M

$635.7M

$591.6M

$571.1M

PRIVATE

$600M

$505.3M

$501.9M

PUBLIC

$314.9M $304.0M

$308.7M

$288.9M

$286.4M

$279.3M

$276.1M

$270.7M

$300M ANNUAL SPENDING

$0M

2008

2009

2010

2011

2012

2013

2014

2015

Source: U.S. Census Bureau, Construction Spending Report

Unemployment by Position The AGC surveyed its members in September 2015 and received over 1,350 responses. Of the responses, 59.0% had total annual revenue of less than $50 million. Companies were asked what their most difficult positions were to fill. For hourly employees, they responded that carpenters, sheet metal installers, concrete workers and electricians were the most difficult positions to fill. For salaried employees, project managers, estimators and engineers were the most difficult to fill. Offsetting Workforce Shortages The aforementioned survey summarized how companies are compensating for the worker shortage. Primarily, companies are increasing base pay and providing incentives and bonuses in response to the labor shortage. In addition to increasing compensation, companies are also using more subcontractors and staffing agencies. While companies are discovering ways to mitigate the labor shortage issue, they face the potential risk of relying on workers unfamiliar with the proper safety procedures and policies at a higher cost.

Additionally, per the published 2015 Workforce Development Plan , the AGC is working at the federal level on several issues to revive the labor force in the construction industry. Specifically, efforts to reform and reinvigorate the Perkins Act are being made so there is a new emphasis on increased funding and more flexibility for school officials to teach in- demand skills sets. The plan outlines, among several initiatives, increased trade related courses being offered to high school students through the community college system and immigration reform. Material Costs Each month, the AGC publishes data summarizing the producer price index (PPI) for key construction related outputs. The PPI measures the average changes in prices received by domestic producers for their output. The PPI of several key raw materials for the construction industry have increased marginally over a 12-month period from January 2015 to January 2016 including flat

page 22 | horizons Fall 2016

National Construction Employment Statistics

30%

7,000

22.7%

20.7%

6,597

6,301

20%

6.000

UNEMPLOYMENT RATE (%)

15.3%

13.5%

10%

5,000

16.0%

11.4%

8.3%

15%

4,000

7.5%

NUMBER OF EMPLOYEES (THOUSANDS)

3,000

0%

6,701

5,654

5,611

5,728

5,939

5,467

2008

2013

2009

2010

2011

2012

2014

2015

Source: United States Department of Labor, Bureau of Labor Statistics

glass (5.9%), cement (5.6%) and gravel/crushed stone (5.7%).

∙ On average for all clients, backlog increased on average 40.0% from 2014 to 2015

However, other key components have seen significant declines including diesel fuel (-34.6%), steel mill products (-19.2%) and copper and brass mill shapes (-17.6%). While the industry saw slight increases in some key components, the drastic decreases in other key components should help mitigate the increases in wages being offered due to the labor shortage. Key Client Metrics Upon examining data from RubinBrown’s client base of general contractors, subcontractors and specialty contractors in Colorado, Kansas, Missouri and Illinois, we noted several trends: ∙ For contractors with more than $100 million in annual revenue, average gross profit decreased from 13.0% in 2014 to 12.2% in 2015 ∙ For contractors with less than $100 million in annual revenue, average gross profit decreased from 19.1% in 2014 to 18.8% in 2015

Economic Forecast In looking at the crystal ball, the next two years appear to get even brighter from a spending standpoint. Ken Simonson, the Chief Economist of AGC of America, estimates that total construction related spending in the U.S. will increase 6.0 – 9.0% in 2016 and another 5.0 – 7.0% in 2017. Specifically, he estimates that both private residential and private non-residential will increase 5.0 – 10.0 % and 5.0 – 8.0% in 2016 and 2017, respectively. Simonson further estimates that multi-family residential spending will increase 8.0 –12.0 % in 2016 while single family residential spending will only increase 6.0 – 9.0%. He cited that multi-family growth is primarily driven by low vacancies and the increasing popularity of the urban areas.

www.RubinBrown.com | page 23

CONSTRUCTION

Big Picture Overall, the construction industry is demonstrating several positive signs.

However, the positive momentum will be slowed if the labor shortage is not alleviated in the near future.

the next two years appear to get even brighter from a spending standpoint

RubinBrown’s Construction Services Group We provide services to general contractors, specialty subcontractors and related companies in the construction industry.

Ken Van Bree, CPA, CGMA — St. Louis Partner-In-Charge Construction Services Group 314.290.3429 ken.van.bree@rubinbrown.com

Chris Daues, CPA — Denver Manager Construction Services Group 303.952.1276 chris.daues@rubinbrown.com

Matt Beerbower, CPA — Denver Partner & Vice Chair Construction Services Group 303.952.1252 matt.beerbower@rubinbrown.com

Zach Fritz, CPA — Kansas City Manager Construction Services Group 913.499.4416 zach.fritz@rubinbrown.com

Mark Jansen, CPA, CGMA — St. Louis Partner & Vice Chair Construction Services Group 314.290.3208 mark.jansen@rubinbrown.com

Graham Ryan, CPA — Kansas City Manager Construction Services Group 913.499.4441 graham.ryan@rubinbrown.com

Bryan Hinton, CPA — Nashville Partner Construction Services Group 615.685.0391 bryan.hinton@rubinbrown.com

page 24 | horizons Fall 2016