Outlook brightens for middle market US companies

In the past year, senior executives of US companies with $1 billion in annual revenue or less have become a lot more optimistic about the US economy and the future of their businesses, a KPMG survey found.

Of the approximately 350 executives polled this year, 73% said their companies are generating higher revenues than a year ago, and 78% expected revenue to increase yet again next year. In 2012, 58% of respondents reported increasing revenues.

The majority of the respondents (58%) expected the US economy to improve at least moderately over the next year.

“Middle market companies have experienced some positive momentum in the past year, and business confidence is growing,” Brian Hughes, partner and national leader of KPMG’s Private Markets Group, said in the introduction to the survey’s findings.

“These companies are gaining a sense of stability … and there is no question that they will look to raise capital or debt, or put pent-up cash in play to invest in growth,” Hughes said.

The National Center for the Middle Market at Ohio State University also found increasing revenues among companies generating $10 million to $1 billion in revenue per year. The center reported that, in the second quarter of 2013, 65% of US middle market companies generated positive gross revenues over the past 12 months. That’s up from 62% in the same quarter in 2012.

About 200,000 companies are part of that market segment, according to the National Center for the Middle Market. Representing one-in-three domestic jobs, the middle market is a critical engine for the US economy.

The KPMG study found that the number of executives planning to raise capital or debt in the next year inched up to 41% from 38% who raised funds in 2013. And 60% expect to increase their capital spending over the next year.

Nearly half of the respondents (48%) expected to invest more in geographic expansions, up from 22% last year, while they projected fewer investments in information technology (31% vs. 43% last year), new products or services (26% vs. 39% last year) and acquisitions (26% vs. 34% last year).

Geographic expansions within the US were the most popular with 83%, followed by emerging markets with 55% and developed markets outside the US with 30%.

A majority of the respondents (55%) expected to add US jobs in their companies over the next year. That’s up from the 45% who said they increased US headcount in the past year.

Despite the increasingly positive outlook, executives of mid-size US companies also see challenges ahead, but the kinds of growth barriers and threats that worry them have changed. Labour costs concern them a lot more than a year ago, while only 7% worried about access to and managing capital, down from 15% a year ago.
 
The top ten growth barriers executives of mid-size companies expect to face over the next year:

• Regulatory and legislative pressures (33% vs. 25% last year)
• Pricing pressures (32%, same as last year)
• Labour costs (20% vs. 12% last year)
• Lack of customer demand (19% vs. 21% last year)
• Increased taxation (17% vs. 11% last year)
• Risk management issues (16% vs. 11% last year)
• Lack of qualified workforce (16%, same as last year)
• Staying on top of emerging technologies (14% vs. 13% last year)
• Energy prices (10% vs. 15% last year)
• US dollar strength (10% vs. 13% last year)

Related CGMA Magazine content:

“Hiring Optimism up Amongst US Finance Professionals”: US companies’ concerns about hiring have dissipated in the past year. More finance professionals expect their organisations to add workers, according to the latest American Institute of CPAs Business & Industry Economic Outlook Survey.

—Sabine Vollmer (svollmer@aicpa.org) is a CGMA Magazine senior editor.