The State of Manufacturing® 2014 by Enterprise Minnesota

ÂŽ

2014 A Comprehensive Survey of Minnesotaâ&#x20AC;&#x2122;s Manufacturers Polling & Analysis by Rob Autry, Public Opinion Strategies, Inc.

www.stateofmanufacturing.com

2014 A Comprehensive Survey of Minnesotaâ&#x20AC;&#x2122;s Manufacturers

The State of ManufacturingÂŽ 2014

A comprehensive survey of Minnesotaâ&#x20AC;&#x2122;s manufacturers Rob Autry, Pollster Tom Mason, State of Manufacturing Strategic Consultant Lynn Shelton, Director All rights reserved. Except for brief quotations in critical articles and reviews, no part of this book may be reproduced in any manner without prior permission of the publishers. Special thanks to all of the sponsoring organizations and executives who participated in the focus groups.

Enterprise Minnesota, 310 4th Avenue South Suite 7050, Minneapolis, Minnesota 55415

CONTENTS

Introduction .................................................................................................... 4 Pollsterâ&#x20AC;&#x2122;s Analysis......................................................................................... 9 Poll Summary............................................................................................... 13 Issue Analysis

Keeping Secrets: Protecting Know-How and Other Confidential Information................. 39 Thinking Strategically About Total Rewards............................................... 46 Health Care Ricochet.................................................................................... 56 Planning for Business Transition.................................................................. 64 Does Your Business Strategy Prioritize Talent Management?..................... 72 Training is Back: How Companies are Closing the Skills Gap Now................................ 77

Focus Groups

Winona (Southeast Technical College)........................................................ 84 Owatonna (Riverland Community College)................................................ 98 Anoka (Anoka Technical College)............................................................. 116 Minneapolis (MPMA and Saint Paul Port Authority)................................ 129 Mankato (South Central College)............................................................... 142 Alexandria (Alexandria Technical and Community College).................... 152 Brainerd (Central Lakes College)............................................................... 166 Edina (BMO Harris Bank).......................................................................... 180 Minneapolis (Baker Tilly).......................................................................... 194 Warroad (Northwest Minnesota Foundation)............................................. 208 Bemidji (Northwest Minnesota Foundation).............................................. 222 St. Cloud (Gray Plant Mooty).................................................................... 236 Eveleth (IRRRB)........................................................................................ 252 Fergus Falls (Minnesota State Community and Technical College and West Central Initiative)........................................................................ 268

Selected Cross Tabulations................................................................... 281

INTRODUCTION

Minnesotans who “make stuff” The snowy evolution of the State of Manufacturing® By Bob Kill, president & CEO, Enterprise Minnesota

I greatly enjoy the day each year that Rob Autry, our pollster, travels

from his office in Alexandria, Virginia to unveil the results of the State of Manufacturing® survey at our annual event at the Minneapolis Convention Center. The main appeal of this event is to show how Minnesota’s manufacturing executives describe their attitudes about the economy, their sales prospects, their workforce needs, the impacts of international trade, and a variety of other topics. Over six years, the State of Manufacturing® has evolved into something far greater than an exchange of information and analysis about a 400-sample telephone survey and 14 focus groups. The “rollout” event has developed into a celebration of the diverse community of “people who make stuff” in Minnesota. They gather as serious professionals who value the information and the time together. It’s why we’ve had as many as 400 people show up for the event. 4

This was made clear to us at last year’s event, when an unexpected April storm was dumping between 12-17 inches of heavy, wet snow across central Minnesota, reducing rush-hour traffic to a virtual standstill all across the Twin Cities. We briefly considered adding our reception to the growing list of community-closings that crawled across the TV screens of early evening newscasts, but in the end we didn’t want to disappoint those who would brave the weather and show up. When the event was scheduled to begin, fewer than 50 people were scattered around tables in a room that suddenly seemed very large. We delayed a bit, owing to the condition of the snow-choked roadways. And gradually that audience grew to more than 170 people, a truly astounding number, considering the conditions. There was no reason for them to be there unless they really wanted to. All in all, more than 1,000 people attended the nine events we organized across the state to discuss and analyze the results of the survey. Some other observations about this year’s results: Qualitative research. Our focus groups contribute mightily to the significance of the State of Manufacturing® data each year. To discover why we put so much emphasis on such a labor-intensive process is to understand the combined value of quantitative and qualitative research. Ask any manufacturer who’s watched their sales decline. They’re not satisfied merely to know that sales are down (quantitative research). They want to know why. Is it the economy? Pricing? Performance? Better competition? Ineffective sales people? Those answers can be found in qualitative research. Polling helps us measure the attitudes of manufacturers. Focus groups help us understand those attitudes. This year, our focus group participants provided a clear and resounding understanding of the growing schism about the urgency of workforce issues between manufacturers located in the Twin Cities and those in Greater Minnesota. While workforce readiness was listed as third on the list of urgent challenges confronting manufacturers statewide, the focus group transcripts will show you that workforce issues absolutely dominated the conversations in Greater Minnesota. Virtually all of them expressed growing alarm about the inadequate numbers of young people who are attracted to the well-paying jobs associated with modern manufacturers -- or, who even know about them. They worry that cash-strapped secondary schools have scrapped manufacturing-friendly programs and thereby lost the kind of advisors who might refute counselors (and parents) who perceive no real career alternative to the four-year degree. They’re also concerned that entry level workers (when they can find them) increasingly lack basic soft-skill priorities about showing up on time, showing up at all, or making more than a short-term commitment to 5

their jobs. Solutions. Another positive byproduct of the focus group process was the opportunity to highlight how communities like Alexandria, Brainerd and a wide coalition in Northwest Minnesota receive attention for how they are building productive public/private partnerships to help alleviate workforce concerns. Invariably each focus group highlighted the following characteristics of their success. First, they are led by a diverse cluster of local manufacturing executives who understand their common interests and co-dependencies. They understand that local communities can’t address their concerns if they don’t know about them. They further understand that all manufacturers speaking in one strong voice is much louder than just speaking alone. Second, educators are at the table, typically guided by a strong and engaged local technical-vocational school that understands the value of being responsive to the needs of its local companies. They then provide surrogates among K-12 educators who emphasize the lucrative opportunities within manufacturing. The value of strategic planning. When this year’s poll probed a bit beyond the attitudes of executives and examined some of their strategic behaviors, we discovered a significant link between strategic planning and profitability. Companies that engage in formal programs regarding marketing, strategic planning and quality management processes exhibited sharply better revenues and profitability than those who don’t. Consider this: Manufacturers who work from a formal marketing process expect an increase in gross revenues by a 2-to-1 margin (60 percent-31 percent) over those that don’t. These companies also expect better profitability (46 percent-26 percent). And companies that incorporate formal strategic planning into their processes also project better financials than those that don’t: 56 percent-33 percent for gross revenues, and 44 percent-27 percent in profitability. Thanks. The State of Manufacturing® could not have achieved as much without the selfless collaboration of so many organizations and individuals. As always, we’re grateful to our sponsors, whose financial backing helps us defray the costs of the State of Manufacturing®, whose insights and ideas always contribute to the body of research and analysis, and whose personal outreach always exposes this important research to a new crop of thought leaders. Another strength is continuity. Pollster Rob Autry has conducted the survey in each of our six years. His firm, Public Opinion Strategies, 6

which also lists the NBC/Wall Street Journal poll as one of its ongoing projects, is considered by many to be the top polling company in America. We predicted that investing in a top-notch national pollster would infuse our data with credibility. It did. What we didn’t envision was the kind of time Rob is willing to invest in the State of Manufacturing®. We were indeed fortunate to forge such a productive relationship. We hope it continues. Special thanks, too, go to Lynn Shelton, the director of marketing and communications at Enterprise Minnesota, who has managed the State of Manufacturing® since it was just a concept. It is impossible to overestimate the amount of effort that she and her staff Lynet DaPra, Constance Fantin, and Chris Morse, devote to quietly completing the detail-laden schedule of tasks that comprise the various elements of this project. Sponsors have to be recruited, research has to be organized, and schedules have to be juggled to arrange and fill 12-20 focus groups across the state each year. Then there are 14-20 “rollout” events to arrange and populate, including the massive kickoff at the Minneapolis Convention Center. And that doesn’t yet even contemplate the matter of systematically marketing the results to media, elected officials, educators, regulators, fellow manufacturers and anybody else who should know about them. Or how about overseeing the feat of publishing this 300-page book in incredibly short order? For this this edition, almost 15 hours’ worth of focus group recordings had to be transcribed into 90,000 words, which were then edited, proofed, designed, proofed again, and delivered to the printer -- in less than three weeks. Lynn and her team accomplish this flawlessly every year. They deserve (and get) our admiration and thanks. Lastly, our gratitude also extends to Minnesota’s manufacturers who have made the State of Manufacturing® a much-envied project across the nation. Thanks to all those who take time to be interviewed by the pollster. Thanks, too, to the many, many executives who participated in our focus groups and who attend our (sometimes snowy) reception in Minneapolis and all the rollout events throughout the state. We obviously couldn’t do this without them. And thanks to you, the reader, as you obviously appreciate the value that manufacturing brings to our communities and state.

Thank you to our 2014 sponsors! STATEWIDE SPONSORSHIPS Baker Tilly BMO Harris Bank Doherty Employment Group Granite Equity Partners Gray Plant Mooty Marsh & McLennan Agency MRA – The Management Association REGIONAL SPONSORSHIP The Blandin Foundation MANUFACTURING RECEPTION Absolute Quality Manufacturing Inc. Automated Equipment LLC Central Package & Display Clow Stamping Company Comcast Business Delkor Systems, Inc. GVL Poly Hutchinson Manufacturing Inc. Mactech, Inc. Page 1 Printers PDP Solutions Pequot Tool & Manufacturing Productivity Inc. Stern Companies Stratasys Ltd. W.P. & R.S. Mars Co. Whirltronics Inc.

FOCUS GROUP SPONSORSHIPS Alexandria Technical and Community College Anoka Technical College Baker Tilly BMO Harris Bank Central Lakes College Doherty Employment Group Gray Plant Mooty Iron Range Resources & Rehabilitation Board Minnesota Precision Manufacturing Association (MPMA) Minnesota State Community & Technical College – Fergus Falls Northwest Minnesota Foundation Riverland Community College – Owatonna Saint Paul Port Authority South Central College Southeast Technical College – Winona West Central Initiative

POLLSTER’S ANALYSIS

Growing Confidence Eighty-four percent of Minnesota’s manufacturers are confident about their company’s future, but they’re always keeping an eye on outside inhibitors to growth By Rob Autry

ith a wary eye still watching the horizon for economic and regulatory turbulence, Minnesota’s manufacturers appear to be cautiously poised to grow in 2014, according to the results of the sixth annual State of Manufacturing® survey. While they still characterize Minnesota as being headed down the “wrong track” as a competitive business location for manufacturers, executives statewide express rising confidence in the growth potential of their own enterprises. My firm, Public Opinion Strategies, recently interviewed 400 Minnesotabased manufacturing executives between February 28 and March 13 as 9

part of our look at the State of Manufacturing®. Enterprise Minnesota supplemented this research by convening 14 focus groups throughout the state during roughly that same time period. While the number of manufacturing executives who think Minnesota’s business climate is on the right track remains effectively unchanged since 2011 (41 percent), the number who think the state is on the wrong track has grown from 47 percent to 51 percent over that same period. Despite this, a whopping 84 percent of those same executives said they were “confident” about the financial future of their company, the highest level in the six years we’ve been conducting this study. This confidence is highest (96 percent) among companies with more than $5 million in annual revenue. The percentage of executives who say they are “very” confident (36 percent) represents a significant eight-point spike over the past two years. Similarly, manufacturers are hopeful about the economy. At just seven percent, their recessionary concerns are at the lowest we’ve recorded. Fifty-four percent expect a “flat” economy this year and 37 percent expect economic expansion.

GROWTH

Nearly half (45 percent) of manufacturers expect increases in their gross revenues in 2014, with about 35 percent expecting profits to increase. Barely more than one quarter (27 percent) expect to invest more in capital expenditures. Minnesota’s unfavorable business climate is also seen as a key inhibitor of business growth. Fully 48 percent of respondents said issues “such as taxes, regulations and policy uncertainties” might negatively impact their firm’s growth. Rising health care and insurance costs was next, at 31 percent. This perception most affects firms that have been in operation for less than 15 years (57 percent). Respondents predicted that the overwhelming source of that growth (76 percent) would be through new customers.

WORKFORCE

Virtually all (97 percent) of Minnesota’s manufacturers expect to maintain or grow their workforce in the year ahead. About a third (30 percent) expect their firms to grow, split proportionally between companies in the Twin Cities and Greater Minnesota. Least likely to project growth (21 percent) are companies with less than $1 million in revenue. About a quarter (23 percent) of Minnesota’s manufacturers saw growth in their workforce in 2013, while 62 percent stayed about the same. Significantly, the “ability to attract and retain qualified workers” continues to grow as an increasingly chronic concern for manufacturers, 10

particularly in Greater Minnesota. While 34 percent cite this as a major concern statewide, we have seen its importance steadily increase since 2011. That number climbs to 43 percent in Greater Minnesota. Moreover, two-thirds (67 percent) say it is “difficult” to “attract qualified candidates to your firm’s vacancies,” the highest margin we’ve seen over the six-year life of this series. Manufacturers in Greater Minnesota find this most pressing at 75 percent, a noticeable jump from the 42 percent we saw four years ago and considerably higher than the 61 percent of firms in the Metro area. The difficulty is even more acute in large and more established firms: More than four-fifths of companies with more than $5 million in revenue (82 percent) or more than 50 employees (83 percent) are having trouble finding qualified applicants. Only a few executives (12 percent) expect to lose more than 5 percent of workers to retirement in the coming two years. As a possible response to this shortage, more manufacturers expect to invest more in employee development. A quarter (25 percent) of them predicted they would “invest more in employee development as a percent of payroll” in 2014, seven percent higher than last year. This interest is greatest (42 percent) among companies with more than $5 million in revenue and/or more than 50 employees. A majority of executives expect to increase wages for the first time since the recession. Fifty-four percent said that on average, wages over the last two years have gone up, an 11-point increase from 2013. Thirty-nine percent expect them to “stay about the same.” A whopping 62 percent expect wages to increase in 2014, a 14 percent upsurge from those polled in 2013. Greater Minnesota firms are more likely to say their wages are going up (66 percent) than those in the Metro.

HEALTH CARE

As in all other years, the cost of health care coverage tops the list of manufacturer concerns at 58 percent. Most anxious about health care are companies over $5 million in revenue (66 percent) and companies in Greater Minnesota (64 percent). Government policies and regulations was a close second at 55 percent. Similarly, the ability to provide affordable health care is again the dominant factor in recruiting new employees, overshadowing “salary and wage expectations” by almost 20 percentage points (51 percent to 32 percent). The cost of health care coverage was also named the most important factor (59 percent) when it comes to attracting and retaining qualified workers.

TRADE

Manufacturers are continuing their interest in developing foreign markets for their products, with almost one in four (23 percent) now saying they 11

ship 11 percent or more of their products internationally. This represents an 11-point increase over last year and signifies the highest level we’ve reported in six years. About one third of companies with more than $5 million in revenue ship internationally. “Home-sourcing,” the trend of OEMs bringing their supplier work back from foreign sources, has benefitted 24 percent of Minnesota manufacturers statewide, 34 percent for companies with more than $5 million in revenue. Of those benefitting from home-sourcing, 31 percent said that “shorter lead times” were the primary reason the supply-chain relationships changed.

THE VALUE OF STRATEGIC PLANNING

Companies that engage in formal programs regarding marketing, strategic planning and quality management processes exhibited sharply better revenues and profitability than those that don’t. Roughly half the companies surveyed engage in formal processes for marketing (48 percent) or strategic planning (50 percent). About 37 percent of companies have a formal quality management system, such as ISO. Companies that have a formal marketing process expect an increase in gross revenues by a 2-to-1 margin (60 percent-31 percent) over those that don’t. These companies also expect better profitability (46 percent-26 percent). Similarly, companies that incorporate formal strategic planning into their processes also project better financials than those that don’t: 56 percent-33 percent for gross revenues, and 44 percent-27 percent in profitability. Companies with ISO-like systems expect greater revenues (53 percent-40 percent) and greater profitability 38 percent-33 percent over companies that don’t.

POLL SUMMARY

State of ManufacturingÂŽ Survey Field Dates: March 2014 N=400 Manufacturing Executives Margin of Error: +4.9% * Denotes result less than 0.5%. ^ Denotes rounding. Due to rounding, some figures may be higher or lower by less than one-half of one percent.

Question 1 Generally speaking, in regard to being a competitive business location, would you say that things in Minnesota are going in the right direction, or have they pretty seriously gotten off on the wrong track? 12/08 1/10

1/11

1/12

3/13

3/14

55%

47%

49%

51%

30%

33%

14%

12%

54%

41%

13% 1%

40% 11%

39%

13% -13

41%

7% 1%

RIGHT DIRECTION WRONG TRACK DONâ&#x20AC;&#x2122;T KNOW/ UNSURE REFUSED

Question 2 Thinking about the upcoming year, in 2014, do you anticipate economic expansion, a flat economy, or a recession? 12/08 1/10

1/11

1/12

3/13

3/14

34%

37%

26%

40%

32%

34%

53%

49%

55%

46%

54%

56%

19%

10%

15%

ECONOMIC EXPANSION

A FLAT ECONOMY A RECESSION

DON’T KNOW/ UNSURE REFUSED

Question 3 From a financial perspective, how do you feel right now about the future for your company... 12/08 1/10

1/11

1/12

3/13

3/14

79%

21%^ 21%

78%^ 83%^ 82% 16%^ 17%

82%

84%^

TOTAL CONFIDENT

28%

30%

35%

28%

36%

VERY CONFIDENT

15%

16%

13%

12%

13%

51%

49%

54%

17%

54%

15%

49%

TOTAL NOT CONFIDENT

SOMEWHAT CONFIDENT NOT VERY CONFIDENT NOT AT ALL CONFIDENT

DON’T KNOW/ UNSURE REFUSED

Question 4 As you look to 2014, do you project your company’s gross revenues to increase or decrease compared to 2013, or will they probably stay the same? 12/08 1/10

1/11

1/12

3/13

9%^

23%

44%

51%

47%

11%

29%

30%

25%

12%

15%

21%

10%

22%

3/14

41%

45%^

TOTAL INCREASE

25%

23%

22%

16%

21%

INCREASE BY MORE THAN 10%

10%

44%

40%

41%

44%

48%

47%

32%

15%

6%^

TOTAL DECREASE

INCREASE BY LESS THAN 10% DECREASE BY LESS THAN 10%

DECREASE BY MORE THAN 10% STAY THE SAME

TOO SOON TO SAY/ DON’T KNOW REFUSED

Question 5 And, as you look to 2014, do you project your firm’s profitability to increase or decrease compared to 2013, or will it probably stay the same? 12/08 1/10

1/11

1/12

3/13

3/14

17%

36%

39%

31%

32%

35%

TOTAL INCREASE

21%

17%

16%

18%

15%

18%

14%

16%

17%

INCREASE BY MORE THAN 10%

13%

10%

21%

10%

48%

45%

48%

55%

49%

47%

34%

17%^ 11%

13%

17%

TOTAL DECREASE

INCREASE BY LESS THAN 10% DECREASE BY LESS THAN 10%

DECREASE BY MORE THAN 10% STAY THE SAME

TOO SOON TO SAY/ DON’T KNOW REFUSED

Question 6 And, as you look to 2014, do you project your firm’s capital expenditures to increase or decrease compared to 2013, or will they probably stay the same? 12/08 1/10

1/11

1/12

3/13

20%

19%

24%

32%^ 27% 14%

24%

16%

20%

10%

12%

3/14

28%

27%

TOTAL INCREASE

15%

17%

13%

12%

11%

10%

INCREASE BY MORE THAN 10%

11%

25%

15%

13%

14%

15%

43%

51%

53%

47%

50%

53%

37%

24%

19%

TOTAL DECREASE

INCREASE BY LESS THAN 10% DECREASE BY LESS THAN 10%

DECREASE BY MORE THAN 10% STAY THE SAME

TOO SOON TO SAY/ DON’T KNOW REFUSED

Question 7 Thinking ahead what would you say are the two or three most important drivers of your firm’s future growth? Is it? First

Combined

55%

76%

Choice 23%

Choice 41%

New customers New products

10%

23%

18%

2% 2% 1%

3% 2% 1%

Developing company managers and leaders

Enhancing supply chain relationships Achieving ISO Certification OTHER

DONâ&#x20AC;&#x2122;T KNOW/NOT SURE REFUSED

Questions 8-14 Now, I would like to read you a list of factors that some companies are concerned about. For each one, please rate how concerned your firm is about that particular factor using a scale from 1 to 10, where one means that your firm is NOT AT ALL CONCERNED about it and where ten means your firm is VERY CONCERNED about it. You can choose any number between one and ten depending on how strongly you feel about it.

10 8-10 5-7 1-4 Mean

Increased competition from foreign sources 3/14 6% 16% 23% 61% 4.0 3/13 7% 17% 26% 56% 4.1 1/12 7% 21% 23% 55% 4.4 1/11 11% 20% 30% 49% 4.5 1/10 12% 27% 24% 48% 4.8 12/08 8% 18% 27% 54% 4.2 Managing supply chain relationships 3/14 3% 11% 39% 49% 4.4 3/13 3% 10% 38% 51% 4.1 1/12 4% 15% 39% 45% 4.6 Government policies and regulations 3/14 30% 55% 29% 17% 7.1 3/13 32% 58% 24% 18% 7.2 1/12 33% 56% 29% 15% 7.3 1/11 31% 61% 26% 12% 7.6 1/10 38% 57% 25% 16% 7.3

-- continued -

10 8-10 5-7 1-4 Mean

The costs of health care coverage 3/14 36% 59% 20% 20% 7.2 3/13 44% 67% 17% 14% 7.7 1/12 36% 68% 17% 13% 7.7 1/11 43% 71% 17% 8% 8.2 1/10 42% 68% 17% 13% 7.8 12/08 36% 64% 21% 13% 7.7 Costs of employee salaries and benefits, not including health insurance 3/14 4% 18% 46% 37% 5.0 3/13 7% 19% 45% 34% 5.1 1/12 3% 13% 47% 37% 4.9 1/11 5% 15% 49% 33% 5.0 1/10 6% 16% 46% 34% 5.0 12/08 7% 18% 49% 32% 5.3 The ability to attract and retain qualified workers 3/14 10% 34% 35% 30% 5.8 3/13 9% 30% 32% 35% 5.4 1/12 11% 31% 32% 37% 5.5 1/11 4% 14% 37% 45% 4.6 1/10 8% 19% 27% 51% 4.4 12/08 8% 22% 31% 45% 4.8 Economic and global uncertainty 3/14 11% 31% 46% 24% 6.0

Summary of Concerns â&#x20AC;&#x201C; Ranked By % 10 Concerns

%10

The costs of health care coverage

36%

Government policies and regulations 30%

%8-10

Mean

55%

7.1

59%

Economic and global uncertainty

11%

Increased competition from foreign sources

16%

4.0

18%

5.0

Managing supply chain relationships 3%

11%

4.4

The ability to attract and retain qualified workers

10%

Costs of employee salaries and benefits, not including health insurance

31%

7.2

34%

6.0 5.8

Question 15 What would you say are the one or two biggest challenges your firm is facing that might negatively impact future growth? First

Combined

30%

48%

Choice

Unfavorable business climate, such as taxes, regulations and policy uncertainties

20%

31%

16%

31%

13%

21%

OTHER

REFUSED

19%

29%

Weak economy and lower sales for your products Rising health care and insurance costs

Rising costs of energy and materials for your products Attracting and retaining a qualified workforce

DONâ&#x20AC;&#x2122;T KNOW/NOT SURE

Questions 16-20 Changing the focus somewhat to attracting and recruiting new employees to your firm...I am going to read a series of factors and, after I read each one, please tell me how important that particular factor is to your firm in attracting workers, using a one to ten scale where one means that factor is NOT IMPORTANT AT ALL and where ten means that factor is VERY IMPORTANT. You can choose any number between one and ten depending on how strongly you feel about it. 10

8-10

5-7

1-4

Mean

32%

47%

21%

6.0

Salary and wage expectations 3/14

3/13

1/12

1/11

1/10

12/08

12% 9%

25%

22%

29%

38%

43%

Affordable health care 3/14

3/13

1/12

1/11

1/10

12/08

23%

27%

25%

22%

17%

14%

51%

54%

50%

45%

39%

Competitive benefits package 3/14

3/13

1/12

1/11

10%

12/08

1/10

25%

27%

22%

31%

32%

35%

53%

50%

47%

42%

21%

26%

21%

14%

5.7

5.6

5.9

6.5

45%

10%

6.8

27%

22%

6.7

25%

30%

29%

30%

20%

17%

22%

23%

6.8

6.9

6.5

6.4

36%

21%

6.3

46%

28%

5.5

44%

48%

39%

38%

42%

29%

28%

23%

19%

5.5

5.4

5.8

5.9

6.2

Flexible work schedules 3/14

3/13

1/12

1/11

1/10

12/08

12%

13%

12%

14%

20%

30%

32%

35%

36%

40%

34%

38%

44%

51%

50%

43%

41%

26%

22%

The need to accommodate part time workers 3/14

27%

64%

4.3

4.1

4.5

4.8

5.7

6.1

3.5

Summary of Employee Recruitment Factors – Ranked By % 10 Employee Recruitment Factors

%10

%8-10

Mean

Competitive benefits package

25%

5.5

Affordable health care

23%

Salary and wage expectations

Flexible work schedules

The need to accommodate part time workers

4% 2%

51% 32% 13% 7%

6.7 6.0 4.3 3.5

Question 21 On average, over the last two years, have your firm’s wages, INCLUDING benefits increased decreased ...or stayed about the same? (Split Sampled) 54%^

TOTAL INCREASED

15%

INCREASED CONSIDERABLY

6%^

40% 2% 5% 37%

TOTAL DECREASED

INCREASED A LITTLE

DECREASED A LITTLE

DECREASED CONSIDERABLY STAYED THE SAME 21

3% --

DON’T KNOW REFUSED

Question 22 Do you expect the average wages, INCLUDING benefits to increase or decrease during the next two years, or will they stay about the same? (Split Sampled) 63%

INCREASE

33%

STAY ABOUT THE SAME

3% 1% --

DECREASE

DON’T KNOW REFUSED

Question 23 On average, over the last two years, have your firm’s wages, EXCLUDING benefits increased, decreased or stayed about the same? (Split Sampled) 55%

TOTAL INCREASED

14%

INCREASED CONSIDERABLY

41% 1% 3%

41% ---

TOTAL DECREASED

INCREASED A LITTLE

DECREASED A LITTLE

DECREASED CONSIDERABLY STAYED THE SAME DON’T KNOW REFUSED

Question 24 Do you expect the average wages, EXCLUDING benefits to increase or decrease during the next two years, or will they stay about the same? (Split Sampled) 61%

INCREASE

37%

STAY ABOUT THE SAME

1% *

DECREASE

DON’T KNOW REFUSED

Questions 21/23 Combined On average, over the last two years, have your firm’s wages, (including/excluding) benefits increased decreased ...or stayed about the same? 12/08

1/10

1/11

1/12

3/13

66%^

48%

41%

6%^

13%

14%

10%

21%

13%

11%

46%

35%

33%

32%

35%

27%

38%

44%

46%

44%

43%

3/14

54% TOTAL INCREASED

5% TOTAL DECREASED

14% INCREASED CONSIDERABLY 40% INCREASED A LITTLE

1% DECREASED A LITTLE

4% DECREASED CONSIDERABLY

39% STAYED THE SAME 1% DON’T KNOW --

REFUSED

Questions 22/24 Combined

Do you expect the average wages, (including/excluding) benefits to increase or decrease during the next two years, or will they stay about the same? 12/08

1/10

1/11

1/12

3/13

41%

45%

53%

51%

49%

44%

54%

3/14

48%

62% INCREASE

43%

46%

35% STAY ABOUT THE SAME

2% DECREASE

1% DON’T KNOW *

REFUSED

Question 25 Generally speaking, would you say that as a percentage of payroll your company will invest MORE in employee development or LESS next year compared to 2013, or will it say about the same? 12/08

1/10

1/11

1/12

3/13

16%

19%

18%

17%

18%

13%

10%

12%

69%

67%

71%

72%

68%

3/14

25% WILL INVEST MORE 7% WILL INVEST LESS

67% STAY THE SAME 1% DON’T KNOW *

REFUSED

Question 26 Does your company have an employee development and retention program for your less experienced employees? 31%

YES

68%

DON’T KNOW/UNSURE

REFUSED

Question 27 Looking back on the last 12 months, did your company’s workforce grow, shrink or stay about the same? 1/12

27%^

3/13

22%^

3/14

23%

16%^

16%

14%^

18%

17%

16%

56%

60%

62%

11%

TOTAL GREW

TOTAL SHRUNK GREW A LOT

GREW A LITTE

SHRUNK A LITTLE

SHRUNK A LOT

STAYED ABOUT THE SAME DON’T KNOW/UNSURE

REFUSED

Question 28 In the next 12 months, does your company expect to grow or shrink the size of its workforce, or will it stay about the same? 1/12

3/13

3/14

29%^

25%^

30% 2%

TOTAL SHRINK

GROW A LOT

2%^

5%^

24%

23%

25%

68%

69%

67%

TOTAL GROW

GROW A LITTE

SHRINK A LITTLE

SHRINK A LOT

STAYED ABOUT THE SAME DON’T KNOW/UNSURE

REFUSED

Question 29 What percentage of your workforce do you expect to lose to retirement over the next two years? 12/08 1/10

1/11

1/12

3/13

3/14

10%

71%

76%

17%

12%

11%

10%

77%

78%

72%

87%

Less than 5 percent Between 5 and 10 percent Greater than 10 percent

DON’T KNOW REFUSED

Question 30 How difficult is it to attract qualified candidates for your firm’s vacancies? 12/08 1/10

1/11

1/12

3/13

3/14

43%

55%

50%^ 39%

36%

32%^

18%

14%

17%

22%

29%

VERY DIFFICULT

22%

24%

25%

26%

19%

21%

31%

26%

13%

17%

12%

NOT TOO DIFFICULT

55%^ 40%

36%

26%

45%

28%

58%^

37%

60%

38%

67%

38%

TOTAL DIFFICULT

TOTAL NOT DIFFICULT

SOMEWHAT DIFFICULT

NOT DIFFICULT AT ALL DON’T KNOW REFUSED

Question 31 When looking to hire new employees, where is your need greatest? 3/13

3/14

19%

21%

20% 49%

22%

Entry-level employees

47%

Employees with technical training and experience

Employees with technical training

ALL OF THE ABOVE

Depends

4% 1% 1%

1% 1% 1%

Employees with four-year college degrees

Other

DON’T KNOW REFUSED 27

Question 32 Does your firm have a recruiting relationship with one or more vocational, technical or community colleges or universities? 29% 70% 1% --

YES NO

DON’T KNOW/ UNSURE REFUSED

Question 33 Will the shortage of qualified workers affect your company’s bottom line and ability to meet your growth plan in the coming year? (Split Sampled) 33%

TOTAL YES

23%

YES, A LITTLE

10%

61% 4% 1% *

YES, A LOT

NO MAYBE/TOO SOON TO TELL DON’T KNOW REFUSED

Question 34 Will the shortage of qualified workers affect your company’s ability to meet your growth plan in the coming year? (Split Sampled) 24%

TOTAL YES

15%

YES, A LITTLE

10%

70%

YES, A LOT

5% 1% --

MAYBE/TOO SOON TO TELL DON’T KNOW REFUSED

Questions 33/34 Combined Will the shortage of qualified workers affect your company’s (bottom line and ability/ability) to meet your growth plan in the coming year? 1/12

3/13

3/14

12%

10%

26% 19%

34% 22%

29%

TOTAL YES

19%

A LITTLE

72%

61%

65%

A LOT

NO MAYBE/TOO SOON TO TELL DON’T KNOW

REFUSED

Question 35 Generally speaking, what percentage of your firm’s employees’ compensation costs are related to health care benefits? What is your best estimate? 12/08

1/10

1/11

1/12

3/13

3/14

19%

21%

18%

15%

20%

13%

10%

16%

15% 7%

19%

13% 8%

11%

16%

17% 6%

18%

13%

11%

12%

16% 6%

26%

5% OR LESS

6% - 10%

11% - 15%

16% - 20%

21% - 25%

15%

14%

17%

15%

11%

26%+

17%

18%

19%

14%

15%

13%

DON’T KNOW

19.9%

14.6%

20.4%

19.5% 16.7% 20.7%

REFUSED MEAN

Question 36 How much of your product did you ship internationally in 2013? 12/08

1/10

1/11

6%^

58%

56%

94%

58%

94%

92%

1/12

91%^

3/13

3/14

56%

51%

93%

8%^

52%

89%^

31%

29%

28%

29%

23%

14%

25% OR LESS

26% OR MORE NONE

10% OR LESS

BETWEEN 11% TO 25%

BETWEEN 26% TO 50% 51% OR MORE

DON’T KNOW/NOT SURE REFUSED

Question 37 Is this more or less than you shipped internationally in 2012 or did you ship about the same amount? 1/12

11%

6%^

3/13

3/14

10%

10%^

TOTAL MORE TOTAL LESS

MUCH MORE

SOMEWHAT LESS

79%

80%

ABOUT THE SAME

DON’T KNOW/NOT SURE

SOMEWHAT MORE

MUCH LESS

REFUSED

Question 38 In what part of the world do you see greatest increase in prospective business? 1/12

3/13

3/14

10%

13%

20%

22%

19%

10%

13%

17%

CANADA

12%

CHINA

10% 7% 5% 4%

EUROPE ASIA

MEXICO

SOUTH AMERICA UNITED STATES

INDIA

OTHER

14%

19%

17%

10%

12%

NONE OF THE ABOVE DON’T KNOW/NOT SURE REFUSED

Question 39 Have you gained new business because of “home sourcing” (or reshoring) by your OEM customers? 24% 66% 9% *

YES NO

DON’T KNOW/NOT SURE REFUSED

Question 40 (Asked if gained new business because of home sourcing, N=97) And, what would you say is the main reason why your supply chain relationships changed? Among Home Source

Total

31%

Shorter lead times

18%

12%

Closer relationships/regional suppliers

26%

Total costs versus only product costs

Better inventory management

11% 1%

3% *

DON’T KNOW/NOT SURE REFUSED

Question 41 Does your firm have a formal marketing program? 48% 52% * *

YES NO

DON’T KNOW/NOT SURE REFUSED

Question 42 On a different topic, does your firm have a formal planning process? 50% 48% 1% --

YES NO

DON’T KNOW/NOT SURE REFUSED

Question 43 Does your company have a formal quality management system, such as ISO? 37%

YES

62%

DON’T KNOW/NOT SURE

REFUSED

Question 44 How many people does your company employ in all its facilities in Minnesota? 12/08 1/10 86%

89%

1/11

1/12

3/13

3/14

11%

51-150

83% 8%

86%

85%

6%^

80% 8%

UNDER 50

OVER 150

86%

89%

83%

60%

61%

47%

UNDER 10

11%

12%

26-50

7% --

2% 4%

7% --

2% 2%

9% --

2% 6%

15% 5% 4% 1% 3%

13% 5% 2% 3% 4%

21% 8% 3% 3% 5%

11-25

51-100

101-150 151-250

MORE THAN 250 DON’T KNOW/NOT SURE REFUSED

Question 45 What are your annual business revenues? Just stop me when I get to the category that includes your company’s total annual revenues. 12/08 1/10 47%

56%

1/11

1/12

3/13

3/14

49%

39%^ 48%^ 42%

40%

55%

31%

23%

25%

22%

26%

12%

11%

10%

46%

50%

38%

UNDER $1 MILLION OVER $1 MILLION MORE THAN $1 MILLION TO $5 MILLION

MORE THAN $5 MILLION TO $10 MILLION

MORE THAN $10 MILLION TO $20 MILLION MORE THAN $20 MILLION

DON’T KNOW/NOT SURE/ REFUSED

Question 46 Which one of the following best describes your company’s primary business? 12/08 1/10 12%

15%

1/11

1/12

3/13

3/14

37%

29%

22%

17%

26%

25%

13%

16%

15%

13%

14%

17%

13%

10%

12%

30%

AN ORIGINAL EQUIPMENT MANUFACTURER, OEM PRECISION MANUFACTURING METAL FABRICATION

16% 4%

14%

13%

11%

10%

30%

16%

PROCESS MANUFACTURING PLASTICS

ELECTRONICS COMPONENTS

INFORMATION TECHNOLOGY, IT SERVICE/RETAIL/ SALES

FARMING/AGRICULTURE SIGNS/GRAPHICS/ PRINTING CONSTRUCTION

CONTRACT MANUFACTURING REPAIR

SOMETHING ELSE DON’T KNOW REFUSED

Question 47 How many years has your firm been in operation? 12/08 1/10 --

1/11

1/12

3/13

3/14

1% 4%

10%

13%

11%

12%

10%

71%

60%

71%

69%

70%

13%

11%

* *

LESS THAN 1 YEAR

4-6 YEARS

14%

10%

1% 36

81%

1-3 YEARS

7-10 YEARS

11-15 YEARS

16 YEARS OR MORE DON’T KNOW REFUSED

Question 48 And, in what year were you born? 12/08 1/10

1/11

1/12

3/13

3/14

13%

15%

11%

28%

29%

32%

37% 14% 2%

37% 15% 2%

10%

35%

30%

17%

22%

18 - 24

35 - 44

30%

29%

20%

22%

40%

12/08 1/10

1/11

1/12

3/13

3/14

24%

14%

16%

14%

Question 49 Gender. 76%

83% 17%

86%

Question C What is your job title?

84%

86%

12/08 1/10

1/11

1/12

3/13

3/14

19%

24%

22%

20%

26%

38%

50%

16%

7% 5% 2% 2% *

1% --

21% 6% 5% 1% 1% --

2% -*

43% 13% 5% 6% 2% 1% -*

42% 17% 4% 6% 1% *

2% ---

41% 12% 11%

4% 2% 1% --

1% --37

25 - 34 45 - 54 55 - 64

65 AND ABOVE REFUSED

MALE

FEMALE

40%

Owner

14%

Manager

6% 5% 3% 1% 1% 1% 1% *

President Vice President

Chief Executive Officer Chief Financial Officer

Chief Operating Officer Division Vice President Partner

Director

President of Operations

Managing Partner

Executive Vice President

1% 1% 1% --1%

---*

-3%

* *

----3%

* *

--*

-4%

------2%

Division President

Managing Officer Founder

Controller Chairman

Chief Administrator Executive Officer

Chief Credit Officer Vice Chairman OTHER

ISSUE ANALYSIS

Keeping Secrets Protecting Know-How and Other Confidential Information By: Jennifer Debrow Dean LeDoux Shareholders at Gray, Plant, Mooty, Mooty & Bennett, P.A.1

In today’s marketplace, success against the competition is often

dependent on the development and maintenance of intangible assets, such as trade secrets. A trade secret may consist of virtually anything that is secret and that provides value to its holder as a result. In the United States, trade secrets are primarily protected by state law, unlike other types of intellectual property, such as patents, trademarks and copyrights, which are governed primarily by federal laws. In the 1970s, the National Conference of Commissioners on Uniform State Laws (NCCUSL) developed a model law on trade secrets, the Uniform Trade Secrets Act (USTA). Versions of the law have now been adopted in Minnesota and 46 other states.2 For liability to exist under the UTSA, a trade secret must exist, and acquisition, disclosure, or use of the trade secret must be improper.3 Section 1 of the UTSA defines a “trade secret” as “information, including a formula, pattern, compilation, program, device, method, 39

technique or process, that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”4 This definition also encompasses the concept of “knowhow.”5 Therefore, to be considered a trade secret under the Act, the information must not only hold economic value, but reasonable efforts to maintain its secrecy must be made. Section 1 of the UTSA defines what constitutes “misappropriation” and when it should be considered to have occurred via “improper means.” Remedies for misappropriation of trade secrets include damages, injunctive relief and an award of attorneys’ fees.7 Actions under the UTSA must be brought within 3 years after misappropriation is discovered or should have been discovered through the exercise of reasonable diligence.8 Section 2 of the UTSA addresses injunctive relief available. Generally, injunctions are no longer than necessary to eliminate any commercial advantage gained through misappropriation.9 In other words, courts view the maximum appropriate duration of injunctive relief as the period of time it would have taken the defendant to discover the trade secret lawfully through either independent development or reverse engineering of the plaintiff’s products.10 Additionally, once good faith competitors have legally discovered a trade secret, any injunctive restraints will generally be removed, as the information is no longer considered a trade secret under the UTSA.11 In some cases, an employer may seek an injunction to prohibit a former employee from working in a new job where use of knowledge and skills obtained during employment would be inevitable.12 This is known as the doctrine of inevitable disclosure, which is applicable only in limited factual situations, and has been rejected by some states entirely.13 Courts willing to enforce the doctrine have identified various factors to determine its applicability. They include whether the former and new employer are direct competitors, whether the defendant would have identical duties requiring him to necessarily rely on his former employer’s established trade secrets, and whether the secret is highly valuable to both employers.14 In addition to injunctive relief, a plaintiff may generally seek damages as discussed in Section 3 of the UTSA. Damages may include any actual loss caused by misappropriation, such as lost profits on sales lost to a competitor who misappropriated the trade secrets. In addition, recoverable damages also include the amount of any unjust 40

benefit to the misappropriator (considered to be “fruit of the poisonous tree”).15 Alternatively, a complainant can request damages based upon a reasonable royalty for the misappropriator’s unauthorized use of a trade secret.16 However, there must be sufficient evidence to demonstrate the royalty requested is an appropriate amount.17 Finally, Section 4 of the UTSA addresses recovery of attorney’s fees.18 A prevailing plaintiff may receive an award of reasonable attorney’s fees if misappropriation of the trade secret was willful and malicious.19 On the other hand, if a court finds that a claim of misappropriation was made in bad faith, the defendant may be entitled to an attorney’s fees award.20 In addition to relief available under the UTSA, other potential claims that a plaintiff could allege include breach of contract, tortious interference with contract, breach of a duty of loyalty or fiduciary duties, and violation of the federal Computer Fraud and Abuse Act.21

Practical Advice

Trade secret owners should take appropriate measures that will protect confidential information and avoid preventable issues later on. 1. Evaluate what information constitutes a trade secret. Consider whether the information is known outside the company and whether it is widely known by employees and others involved within the company. Assess the value of the information to your company, and the potential value it may hold for competitors. Also, consider the effort and money spent to develop the information and whether it would be difficult for others to duplicate its development independently. 2. Implement reasonable security measures. Reasonable efforts to maintain secrecy have been held to include advising employees of the existence of a trade secret, limiting access to the trade secret on a “need to know basis” and controlling plant access.22 Computer systems should limit each individual’s access to information actually necessary to perform their role. Physical access control should also be implemented through use of locked file cabinets and storage rooms as necessary. Locations for appropriate disposal of confidential information, such as shred bins for dated hard copy documents, should also be available. 3. Clearly communicate confidentiality expectations to employees. Create a confidentiality policy and distribute it to all relevant individuals. Maintain a current version in the employee handbook or company database where it may be easily accessed. A written policy provides clarity to involved parties and demonstrates a commitment to protection of confidential information, which is important in the event of litigation later on. Train individuals regarding the policy contents 41

and any specific practices necessary to protect confidential information, such as encrypting electronic messages, shredding documents, utilizing appropriate passwords, and conspicuously marking confidential information. Develop methods to monitor compliance with such practices, and follow up with involved parties as necessary. 4. Incorporate confidentiality needs into contractual provisions. Employee contracts should include provisions that require such individuals to maintain confidentiality, and provide notice that disclosure of a trade secret may result in termination and/or legal action. Trade secret protection provisions may be used in conjunction with or instead of non-compete provisions, which are limited in duration and geographic scope. Such provisions can prohibit former employees from continuing business with confidential information after the employment relationship has ended. 5. Develop a response plan to reduce leakage when confidentiality practices have failed. Remember that once a trade secret is known, it is lost. However, certain response measures can help minimize the potential impact of a breach. Although response measures will differ on a case-by-case basis, considerations should include identification of individuals responsible for response actions, identification of potential tools or resources available to investigate and document the extent and circumstances surrounding a leak, and identification of legal resources available.

Special Considerations for Designers/Manufacturers

Manufacturing and design present special challenges for the protection of trade secrets, because of the lack of direct control over all the parties that might have access to the information. As highlighted in the case study further below, design models and manufacturing processes often involve sharing of confidential information with non-employees. Contractor agreements, such as agreements with fabricators, installers, or other companies who provide component parts or processes for manufacturing systems, should generally contain nondisclosure provisions that identify trade secrets and confidential information to be protected, and prohibit the disclosure of such information during the term of the agreement, while also restricting disclosure or use of the information after the partiesâ&#x20AC;&#x2122; engagement or relationship ends. Furthermore, to the extent possible, the practical considerations above should be implemented into contractor agreements as required practices, and the right to audit compliance with such practices should be reserved. Upon the termination of such an engagement or relationship, all copies of operations manuals and other written materials that may contain confidential information should be required 42

to be returned in both electronic and paper format.

Case Study

The recent case of RELCO, LLC v. CFR et. al.,23 handled by our firm, provides a valuable example of the importance of implementing basic trade secret protections for both employees and vendors. RELCO, a designer of highly specialized dairy processing equipment, employed sales engineers who had access to computer files containing engineering designs and drawings, as well as spreadsheet models used to price and sell systems to customers. When one of its experienced sales engineers left the company and went to work for a fabricator, RELCO was surprised to discover that the new company was now competing in the specialized market for dairy permeate and lactose processing systems. And not only were they competing in a market that, before their entrance, had only a small number of players worldwide, they were selling a nearly-identical lactose processing system. RELCO sued both the former employee and the new company for trade secret misappropriation under Minnesota’s Uniform Trade Secrets Act, along with other claims. The Defendants first claimed that they did not possess RELCO’s trade secret information. Sales documents that surfaced during the course of the litigation suggested otherwise, and it was ultimately revealed that the former employee had a computer hard drive containing thousands of RELCO files. The Defendants’ new story became that these documents did not reflect trade secrets because all of the information was generally known or readily ascertainable in the marketplace, that some of the files were given to the company legitimately when RELCO had previously contracted with them to install equipment, and that if any of the information was entitled to trade secret protection, the Defendants never utilized that information. In the lawsuit, RELCO undertook the painstaking process of carefully defining and describing its trade secrets and confidential information, and cataloguing thousands of instances of that information being reflected in the thousands of documents on the former employee’s hard drive, as well as evidence that the new company used this information in their own designs. In a nine-day trial, RELCO showed a jury side-by-side comparisons of RELCO drawing files on the hard drive next to nearly identical engineering drawings purporting to belong to the new company. RELCO also called attention to the title block on each RELCO drawing plainly stating that drawing was confidential to RELCO and could not be used for any purpose contrary to its interests. This served to undermine the Defendants’ argument that, even if they came by some of the drawings legitimately, they were entitled to use them for their own purposes. In addition, RELCO was able to present 43

to the jury its non-competition and confidentiality agreements routinely used, including with the former employee, its confidentiality policies contained in the employee handbook, and other examples of RELCO’s efforts to protect its trade secrets and confidential information. RELCO also relied on the testimony of expert witnesses to make its case. One expert provided testimony about the dairy industry and his experience in research and development in that field. His testimony squarely rejected the Defendants’ contention that the information at issue was readily available through public sources. A computer forensics expert analyzed the former employee’s hard drives and the Defendants’ computer system, and provided evidence of the migration and use of the confidential information. The jury ultimately awarded RELCO nearly $23 million in damages to recover the losses sustained and the profits illegitimately gained by the Defendants for taking and using RELCO’s trade secret and confidential information. But if RELCO had been unable to point to such protection of its trade secrets, it may very well have not received this favorable outcome at trial and the Defendants may have been allowed to profit tremendously from their misappropriation.

Conclusion

Although trade secrets can provide great value to a business, they can be the source of equally great frustration when the confidentiality of such information is compromised. Implementation of practical measures to guard trade secrets and awareness of legal remedies available in the event of a confidentiality breach are two key steps toward keeping trade secrets secret. Jennifer Debrow is a shareholder at Gray, Plant, Mooty, Mooty & Bennett, P.A. in Minneapolis, Minnesota, USA. Jennifer heads the Intellectual Property, Technology and Privacy Group at Gray Plant Mooty, which has one of the largest franchise practices in the United States. 2 The most recent addition was Texas, which adopted a version of the UTSA in 2013. 3 UNIFORM TRADE SECRETS ACT, prefatory note (1985). 4 UNIFORM TRADE SECRETS ACT § 1(4). 5 Id. at § 1, cmt. 6 See UNIFORM TRADE SECRETS ACT § 1. 7 UNIFORM TRADE SECRETS ACT §§ 2- 4. 8 Id. at § 6. 9 Id. at § 2, cmt. 10 Id. 1

Id. Robert B. FITZPATRICK, “Non-Compete, Non-Solicitation, and Trade Secret Developments,” 2012, American Law Institute –American Bar Association. 13 Id. 14 See id. 15 UNIFORM TRADE SECRETS ACT § 3. 16 Id. 17 Id. 18 See id. at § 4. 19 Id. 20 Id. 21 See Quentin R. WITTROCK, “Litigation Against Competitors,” Franchise Law Journal, Volume 32, No. 3, Winter 2013, American Bar Association. 22 UNIFORM TRADE SECRETS ACT § 1, cmt. 23 Kandiyohi County District Court, File No. 34-CV-11-396. 11

ISSUE ANALYSIS

Thinking Strategically About Total Rewards

By: Mary Aprahamian, SPHR, CCP Deborah Schultz, GPHR, SPHR MRAâ&#x20AC;&#x201D;The Management Association

Setting the Stage

Delivering powerful resultsâ&#x20AC;&#x201D;that is what itâ&#x20AC;&#x2122;s all about, right? Every organization has strategic goals to reach and competitors to beat. Strong performance is an expectation. Organizations are under tremendous pressure to deliver on business commitments despite outside external influences such as economic challenges, global competitive pressures, changing regulatory requirements, an active war for talent in volatile labor markets, escalating energy and health care benefits costs, and more. Directly connecting business and people strategies to drive measurable results, many organizations are focusing on total rewards strategies to reward and recognize employee contributions. The primary goal of most manufacturers, and most every type of employer, is to attract the right hires, motivate, grow and engage employees, and secure employee retention. Achieving that goal is 46

both vital and required when there is modest room to increase salary budgets and when pay differentiation is even more critical. Some organizations are far ahead of the curve, distinguishing their organizations with a complete focus on total rewards strategy. Some are experimenting with tactics and possibilities or beginning conversations about paths and options. Yet, for others, a total rewards strategy, or the perceived need for one, has yet to hit the radar screen. Our aim is to offer insight, perspective, and experience to prompt thoughts for consideration, or reconsideration, on your total rewards journey.

Increasing Focus on Total Rewards

While there are variations of the term total rewards, one of the more consistently applied definitions is that it represents the broad array of financial and nonfinancial ways an organization invests in its workforce to attract, engage, and retain the people it needs to achieve business success. Essentially, an integrated total rewards strategy offers advantages for both employers and employees. Employers recognize the need to take a more inclusive, or complete, look at their rewards and develop an approach that’s sustainable through varying economic conditions. The volatility of the last several years, as well as continued economic uncertainties, point out the necessity to weather changing business conditions that are often unpredictable. An integrated total rewards strategy can: • Benefit the key elements of talent management—attracting, engaging, and retaining talent. • Help inform employees about choices they must make regarding benefits, work/life flexibility, alignment with an employer of choice, and methods to prepare for the future. • Guide investment decisions for the employer. • Refine the employer-employee relationship. • Enhance the employer brand. • Increase the return on rewards. Along the journey to implement total rewards, organizations should ask questions about how it can: • Ensure rewards are affordable now and sustainable in the future. • Be perceptive to what employees value in the employment relationship. • Use competitive reward strategies to rev up business growth. • Reallocate rewards to maximize return on investment and enhance employee perception. 47

• Recognize and reward high performers and capture, recognize, and reward high potentials. • Differentiate high and low performance results. • Ensure the rewards deliver the intended outcomes without unexpected results. MRA’s research and experience offer this practical view of the components generally considered part of a total rewards strategy: Compensation • Base salary • Incentive pay • Bonuses • Recognition • Pay premium • Pay process

Benefits • Health care • Other group benefits • Retirement • Work/life programs • Paid time off • Wellness

Individual Growth • Advancement • Compelling future • Professional development • Performance support • Succession planning • Lateral career movement • Training and development • Participation in the decision-making process; information access

Work Environment • The work itself • Organizational image • Leadership • Organizational policies • Work/life balance and flexibility • Culture • Affiliation • Manager capability

Just as each manufacturer has its own unique process, every organization has a different way of looking at these and other key components. Regardless of the approach, it is critical to identify, evaluate, and effectively tie together the essential elements, creating the right balance across the quadrants. In exploring and developing a framework, organizations find that they can more readily adapt to changing needs—whether across industries, economies, or geographies. Like most people-related strategies, there is more art than science to combining the elements important for your organization into a 48

tailored package designed to engage employees who create desired business performance and results. As you work toward a total rewards strategy, it is important to think like best practice companies think—consider ideas outside the box. Then, think about design, strategy, and communication inside the box of your organization. Focus on what your organization needs and do what’s best for your organization and your employees. After all, you know your organization, your employees, and the future employees who best fit your culture!

Aligning Total Rewards with Business Strategy

For some organizations, people strategies and business strategies are still not fully entwined. But rewards issues are business issues! One simply can’t function without the other. An aligned strategy is fundamental to making business work and to driving business results. To create an aligned total rewards strategy, critical messages that your organization sends to current and prospective employees should include, but not be limited to: • How jobs/roles are valued in the organization. • What behaviors and contributions are rewarded. • What responsibility rests with the employees for retirement planning. • How the organization helps employees manage health and welfare concerns. • How employees can align their goals and objectives with the organization’s priorities. • What career paths, options, or opportunities for advancement employees can pursue. • How employees can develop new skills or competencies the business needs to succeed. • What flexibility exists in total compensation focus areas as employees move along the employment maturity curve. Examine the following MRA illustration of the various HR systems sustaining organization strategy. While “spokes” are interchangeable among the wheels, each component plays a role in driving both employee connectivity to the organization and business success. Consequently, each has an opportunity to influence the alignment of total rewards with business strategy. After defining your organization’s key principles related to aligning total rewards with business strategy, you can flesh out specific reward strategy elements and conduct a gap analysis, 49

MRA’s Strategic Workforce Management Model

comparing current programs to the new reward strategy and identifying priorities for change. At this stage, it may be extremely important to circle back (or initiate connections if you have not already done so), in order to understand employees’ perceptions and preferences. Challenges may arise if the revised approach to rewards is significantly different from the previous system, or if employees don’t understand the multitude of issues impacting or surrounding your total rewards strategy. Management must address questions critical to achieving alignment: • Will the reward cost structure require adjustment? • Are people costs aligned to deliver required financial performance? • Does the current cost and risk-sharing model raise issues or challenges? • If so, what are the implications? Has there been appropriate scenario planning and modeling? Have you considered everything from variable pay to benefits to workplace flexibility to convenience 50

benefits—all intended to engage employees and drive behaviors to produce business results? Remember that your organization’s journey to implement a total rewards program is a work in progress, not a project with an end state set permanently for the future. Ongoing attention will ensure that your organization remains current and nimble enough to address necessary change or to overcome construction bumps along the way.

Specific Considerations—How Does It Work?

High performing organizations clearly articulate their compensation philosophy. A typical example might be to attract and retain high quality employees by targeting the average or median rate of pay. Staying on top of market pay rates helps ensure an effective compensation strategy. Many organizations participate in salary surveys in order to obtain competitive pay information. But beware of “free” salary data available online and from other sources because this data typically lacks the key information that you need to confirm that the data is relevant to your organization. Some of the key components to look for in a salary survey include a list of the participating organizations, geographic scope of data, how the size of the organization is determined (either by employee headcount, annual revenue/sales and/or asset size), and industry data. Similar to previous years, base pay increase budgets are projected to be a meager three percent for 2014. It’s difficult to effectively reward employees with such a small pool of dollars available for base pay increases. Consequently, looking at the overall total rewards package can help incent and reward employees above and beyond this year’s three percent pay increase budgets. When you meet with employees to discuss their performance and annual pay increase, consider weaving those details into a larger conversation that starts with total rewards. Highlighting all the benefits, special programs, work culture, and professional development opportunities along with the base pay increase helps employees see the total package. Some organizations refer to this as the Employee Value Proposition (EVP). For example, a typical meeting might point out: • Employee’s Current Base Pay = $60,000 • Performance Rating = Average • Merit Increase = 3% of base or $1,800 • Merit increase equates to $69.23 per bi-weekly payroll • Instead of focusing on just the increase, consider expanding the

conversation to include total rewards.

Ideas for Total Rewards Components

There are many examples of total rewards components beyond pay and standard benefits. For example, over the last few years, workplace stress is on the rise, and a lack of work/life balance is a primary concern for many employees. Offering flexible work schedules such as compressed workweeks, job sharing, flextime, and working from a virtual office can help alleviate stress. Compressed workweeks typically allow an employee to work a full-time job in less than five working days. Some examples include four-day workweeks or a schedule with one day off every two weeks. While job sharing presents unique challenges, it allows for a more flexible schedule and a part-time schedule if desired. Telecommuting or working from a virtual office is yet another way to attract and retain employees while reducing stress. Allowing employees to work from home for part or all of their workweek helps them avoid high stress situations like a long commute. To identify what drives employee attraction and retention for your organization, it may be necessary to conduct an employee survey. Every organization has its own culture, unique jobs, and competitive environment. Particularly for some high tech and professional level jobs (e.g., engineers and specialized IT jobs), competitive wages alone are not enough to attract and retain the best talent. Rewards strategies that resonate with these groups include enhanced professional development and career growth opportunities as well as sabbatical opportunities that allow employees time off to take a “deeper dive” into their area of expertise. MRA’s interaction with a wide variety of organizations allows a unique vantage point that reveals novel and creative rewards programs in today’s workplaces. Some organizations are spending time and money to update and improve employee break rooms, offering gourmet snacks and beverages (sometimes free to employees) and installing televisions, computers, and comfortable furniture. Others are more liberally dispensing personal cell phones, and/or boosting reimbursement for personal phones. To allow employees a more comfortable business travel experience, some companies are expanding travel budgets. With increased focus on healthy employees, organizations often implement preventive health initiatives and wellness programs that go above and beyond standard biometric screening. Smoking cessation classes have seen an increase in popularity as well. 52

• • • •

Other unique total rewards ideas include: English as a second language classes on-site Additional personal leave time Supporting employee charitable interests and volunteer work Onsite health clinics

Rewarding High Performers

As you consider your total rewards package, give special attention to top performing employees that are highly sought after by your competitors. Top performers should see significantly higher merit pay rewards than colleagues who demonstrate only average performance. Spot bonuses are an effective way to reward high performing employees. If you use a spot bonus, it’s important that the bonus is large enough to be considered a meaningful reward and that, as budget allows, it is available to all employees. One of the challenges of spot bonus programs is insufficient communication throughout the organization. Ensure that you implement a clear communication plan so that managers are aware of the program details. High performing employees may value more intrinsic rewards like support from senior leadership as well as their managers. Consider options like increased support for technology, physical office space requirements, and other core needs. Working in partnership with its member organizations, MRA has observed substantial opportunity for organizations to improve communication related to employees’ pay. Helping employees understand your organization’s philosophy and how their pay compares to peer organizations can improve employees’ perception of their overall pay. As you weigh the cost/benefit of every total rewards option, invest in features suitable for your organization’s budget as well as those valued by your employees.

Case Anecdotes—Lessons Learned

Many members of our employers’ association, including a strong manufacturer presence, have stated to MRA that their employees do not understand the total value of the compensation and benefits the member provides, or do not appreciate the considerable company contribution made to the cost of their benefits. While employers generally equate compensation with the full package of wages and benefits they provide to employees, many employees identify compensation solely with their salary or hourly wage rather than the scope of the total compensation package. 53

This gap in understanding provides employers with the opportunity to change the conversation from “compensation” to “total rewards.” In this approach employers communicate to employees the components of the total rewards offered: compensation; employee benefits, including vacation/personal time; individual growth; and work environment (culture, affiliation, citizenship) of the organization. This approach also is helpful when considering changes to any individual component of total rewards. By communicating all components of the total rewards offered in a holistic manner, the employer is able to more effectively explain any changes made. For example, an enhancement in compensation may result in a decrease in another benefit. Or, a change to one benefit may impact another component. An MRA member had learned through focus groups that its employees did not value or appreciate the company’s annual holiday party. The member eliminated the annual party and used the amount typically paid for the event to provide a slight increase in the employer-paid portion of its employees’ health care premiums. Another MRA member communicates the total rewards it offers via a total compensation statement prepared by MRA. This member was able to use the information during collective bargaining discussions to illustrate and explain the benefits provided to employees. To outline the value of the training and development benefit that it offers to employees, an MRA member listed the total value of the training benefit available on each employee’s total compensation statement as well as the amount the employee had used during the year. Carefully measuring behaviors, productivity, and people cost are all especially important, and ensuring that goals are clearly stated and aligned with business objectives is absolutely essential. Offering moderate to high rewards with low or unclear expectations leads only to a culture of entitlement, which ultimately causes low performance and retains the wrong people. Conversely, offering low rewards with high expectations deters talent. The bottom line? There is value in adopting a more strategic, comprehensive, and integrated approach to total rewards that includes both financial and nonfinancial rewards. Work to prioritize your organization’s investment in the rewards program according to the needs and preferences of the key talent segments in your organization with a design tailored just for you.

Where Do We Go From Here?

To think strategically about total rewards, address questions candidly and deeply: • How does your organization define total rewards? Do you know? Have you held clarifying discussions? • How does your organization gather employee feedback? How do you know your employees’ perceptions about what they value? • Does your organization truly align, in words and actions, that the leadership of people is a vital business function? • Are you creating a total rewards strategy that reflects what it will take to engage the current as well as the emerging workforce? Identifying the essential elements of an effective total rewards strategy for your organization and implementing that strategy requires dynamism, experimentation, and flexibility, but it can pay off handsomely. Linking people and business strategies furthers organizational success.

End Note

Sources include research, surveys, and consulting conducted by MRA as well as a review of studies completed by large national research organizations such as: Towers Watson, Hay, Aon Consulting, Hewitt Consulting, Melcrum Research, McKinsey, Deloitte, MetLife, WorldatWork, and others. With contributions from MRA’s Kathryn Helmke, SPHR, HR Government Affairs Director.

ISSUE ANALYSIS

Health Care Ricochet By: Jim Johnson, CPCU, CIC, AAI, and Alan Wissbroecker, CSP, CRM Marsh & McLennan Agency

New solutions called for as the ACA threatens to boost workers’ compensation costs

“Change is good” the old cliché goes, but change also can be complicated. We all know that the Affordable Care Act (ACA), as it continues to roll out, has been complicated for employers. Taxes, mandates, benefit sets, insurance exchanges, all these areas are components of the new law. And all could add complexity for employers trying to navigate this new health care landscape. With the change that employers are facing also comes the opportunity to rethink their approach to managing claims, on both the medical and the workers’ compensation side. By creating a culture that places a high value on injury prevention, employers can take the important step of moving beyond managing claims to managing risk. 56

The ACA’s unintended consequences

With any significant change to the status quo comes the risk of unintended consequences. Among the least-understood and seldom discussed consequences for employers is the possible relationship between the rollout of the ACA and workers’ compensation claims. Along with the dramatic changes that the ACA brings to the field of health benefits, it makes sense for employers to review their approach to workers’ compensation claims in general. The ACA is changing the playing field when it comes to health and workers’ compensation insurance claims, but there are a number of factors that employers should be thinking about alongside the impact of health care reform. Medical health benefit costs have long been one of the biggest concerns for employers, both before and after health care reforms were passed by Congress. After 12 years of medical cost inflation that averaged 5 percent to 6 percent annually, it’s become clear that continued inflation at that rate is unsustainable. In that time frame, overall there has been a 65 percent increase in medical costs. In comparison, workers’ compensation costs during that same time have not risen as quickly. Workers’ compensation fee schedules are different. Medical practices make more money from worker’s compensation claims, as much as 35 percent more in some cases. Since every employer must carry workers’ compensation, that system has different dynamics than we see on the health insurance side, where there are widely varying degrees of coverage, including no coverage at all. The ACA changes the equation. More employees will be covered, and many more small and medium-sized employers will begin to offer coverage, to avoid the fees imposed on employers who do not provide health insurance for workers. This will mean that many workers who don’t feel they need insurance coverage, or who were happy with very bare-bones coverage, will now have to have plans that will cost them more in premiums, copays, and deductibles. This could leave the employer with a healthier workplace overall, but there are hidden downsides as well. Even with the ACA changes, workers’ compensation payments will still bring more money to providers, while at the same time charging no deductible to the patient. This could create powerful incentives for some employees and providers to favor a “work-related” diagnosis for injuries and conditions that may not be work related at all. And although it’s too early to measure definitively the effect the ACA is having on workers’ compensation claims, some troubling data is emerging. A new report by the National Insurance Crime Bureau (NICB) finds that questionable workers’ compensation claims are on 57

the rise in recent years. An NICB report released in September 2013 says that while the total number of workers’ compensation claims has decreased since January 2011, the number of questionable claims rose 28 percent between 2011 and 2012. [1] The report concludes that the filing of questionable claims is likely to continue to increase. In addition, the National Council on Compensation Insurance (NCCI) recently released a study on prescription drug use in workers’ compensation claims. The NCCI report found that physician-dispensed prescriptions have more than doubled for workers’ comp claims since 1997, and that the number of prescriptions written per claim is also growing. [2]

Workers’ compensation: a win-win

The advantages of the workers’ compensation model, for both employer and employee, are well known. The employer has the security of knowing he or she will not be sued for injuries that happen on the job. The employee gets medical treatment covered, not only with no deductibles, as noted above, but as long as needed, with accommodations made for retraining if necessary. If an injury creates a long-term disability, that is also covered under the system. Medical benefits plans, on the other hand, require copays and deductibles to be met for physical therapy, repeated visits, and medications, and may not include disability coverage. The “good deal” that workers’ compensation provides employees may become a tempting way to keep their out-of-pocket medical costs down. If an employee is injured while working at home on the weekend, or at an evening softball game or other athletic event, there is the possibility that they will look at the two separate systems and make a bottom-line, economically-driven choice.

The path of least resistance

Employees aren’t the only stakeholders in the system that may see workers’ compensation claims as preferable to regular health insurance claims. As the ACA continues to be implemented, providers will be more overworked than they are now, with millions more patients coming into the system. That will of course mean more income for health systems and insurers, but it’s not clear how physicians and other providers will share in those new revenues. With the mantra of costcontainment still being hammered at by insurers, purchasers and the government, providers may find themselves with more work pressure and little to show for it in terms of compensation. And considering that workers’ compensation fee rates can be as much as 35 percent higher than traditional health insurance reimbursement, 58

another economic calculation may take place by the provider. Any suggestion that an injury could be work-related may be very appealing to those diagnosing the problem.

Beyond claims: a strategy for aligning values

So how can businesses protect themselves from this unintended consequence of health care reform? A smart strategy for businesses would be to find a way to proactively manage the costs of health benefits and workers’ compensation. Key to this is finding an integrated system to manage the risks and costs of employees. This approach looks beyond managing claims to managing risk: how do you prevent, or at least minimize, poor health outcomes by creating a healthy work culture.

Two teams; one data source

A crucial part of risk management and preventing both medical and workers’ compensation claims is finding a single source to monitor claims data from both areas. This will often involve two separate teams under the same roof—one specializing in workers’ compensation, the other in health insurance—who work together. These teams will understand how each area relates to the other. This will help a company stay on top of what is actually happening with claims in both areas, and allow employers to identify problem areas and develop strategies to address them. Insurance brokers can also provide tools that analyze medical claims data to allow employers to detect trends in health care claims. Insurers don’t always share this level of detail with employers, but with a claims data analysis tool, employers can access information on trends in medical treatment sought by employees, giving the company a better grasp of what sorts of claims are being made. Over time, this approach allows employers to track claims data year over year, and therefore spot possible workplace problems as they develop over time. And by taking a “big picture” approach, that is, combining both medical and workers’ comp claims data, employers may spot trends that might’ve been missed otherwise. Experience in spotting trends is important in holding down costs with claims. For example, it’s impossible for a doctor to be certain that a musculoskeletal injury is acute rather than chronic—which can be the difference between a medical claim and a workers’ compensation claim. Combine that with the fact that physicians have a financial incentive to favor listing an injury as a workers’ compensation claim, and it becomes likely, if not inevitable, that a certain amount of claims will be mis-filed. To avoid this (as much as possible), companies can 59

turn to skilled claims analysts who can spot trends and guide prevention efforts that will reduce the risk of such injuries happening. In addition to providing tools on analyzing claims trends, the best insurance brokers can provide employers with training to help supervisors recognize red flags or warning signs when an employee reports an injury. This education helps supervisors know how to investigate claims, how to respond, and how to communicate with employees about claims. By being proactive and prepared, companies can minimize the risk that health problems will slip through the cracks and become a more expensive problem down the road.

Moving beyond claims

Once your claims data is analyzed and issues are identified, most strategies start with the hiring process. Companies should hire within their culture, meaning that potential employees should be tested and vetted to make sure they are a good fit for the company—a worker may be skilled or experienced, but if they aren’t aligned with your company’s values and approaches, they are not likely to be happy in their new position. And that creates a real possibility that the stress of the job could cause problems down the line. Once on board, employees should be fully trained and integrated into the company’s culture. They should understand the values and expectations of the company, and this includes a proactive approach to wellness.

EAP: an underused tool

A smart health and wellness strategy will include an EAP program that promotes employee interaction before there is an issue or problem. If employees can simply check in with your EAP program to find what is available to them, they will be taking a step that could prevent serious health care issues, and therefore prevent claims that could be filed in either the medical or workers’ compensation fields. Many employees never know the range of services the EAP system can provide them until after there’s a problem. Promoting your EAP provider early in the employment process will give workers resources they can use in a preventive way. And although the mental health area is only one part of an EAP’s offerings, employers should be aware that stress and worries about home life can quickly lead to problems with job performance, including distracted workers. It’s not hard to imagine how this could lead directly to on-the-job injuries and workers’ compensation claims. A proactive approach with a worker-friendly EAP program 60

can yield valuable preventive benefits, especially during hard economic times, when family and off-the-job stresses are often even greater.

The advantage of educated employees

Employee education is also very important in helping workers understand when workers’ compensation is and isn’t the appropriate route to go. Educating employees about workplace safety as well as safety at home, having clear and strictly enforced safety standards, and promoting preventive measures like wellness and health management programs are all good strategies for minimizing risk. In the case of an injury claim, companies should have policies in place for investigating the accident; talking to the employee to get their story and gauge their state of mind; and providing guidance on the most appropriate course of care. If a company has a relationship with an occupational health clinic or provider, this can help with communication about the claim and promote a quick and full recovery. However, it’s important to remember that in many states, an employer can provide guidance on where to get treatment for injuries covered by workers’ compensation insurance, but cannot direct an employee to a specific clinic if that employee wants to seek treatment elsewhere. In addition, companies that offer health benefit plans with high deductibles should be aware that such high out-of-pocket costs will make workers’ compensation claims—which have no deductible— more attractive to employees. If your medical benefits plan features high out-of-pocket costs, a way to cover all your bases in this situation is to look at accident insurance. This add-on insurance product can be used by companies to effectively lower the deductible for workers, making it less likely they’ll try to file a workers’ comp claim for a condition that may not be related to work.

The value of ergonomics

Another important way to work with employees on prevention of injuries is to stress good ergonomics in the workplace. Well-resourced insurance brokers can provide safety consultants to visit a company’s workplace and make recommendations on workplace modifications to reduce the risk of stress injuries or other conditions caused by poor ergonomics. At the same time, training can be provided to supervisors and employees at the worksite to help them identify ergonomic risk factors and take steps on their own to address those problems. Although it’s understandable that some employers might have concerns about the cost of addressing ergonomic issues, the savings gained by preventing workers’ compensation claims far outweigh any initial investment in almost every case. Addressing ergonomic issues 61

can consist of very simple fixes such as adjusting a chair, or ensuring that tables are at a certain height; once these small steps are taken, the benefits are permanent. Even if the solutions are more costly, when weighed against ongoing medical claims, the employer comes out ahead by addressing these issues upfront. Musculoskeletal disorders (MSDs) account for 80 percent of all workers’ compensation claims [3], and $1 of every $3 spent on such claims.[4] These kinds of injuries are often caused by poor ergonomics. According to federal estimates, employers spend as much as $20 billion each year on direct costs for MSD-related workers’ compensation, and up to five times that amount for indirect costs (such as hiring and training replacement workers). [5] Remember that most MSD injuries are cumulative by nature; they seldom occur due to a single isolated incident. This makes it difficult to prove the injury is not job-related. Good ergonomic practices reduce the potential for these injuries within the workplace or job site, thereby also reducing the risk of a doctor declaring the injury to be work-related. With musculoskeletal injuries being a main driver of workers’ compensation claims, employers are strongly encouraged to make addressing possible ergonomic problems at their worksite an ongoing priority.

The right blend

By finding the right combination of insurance policies and HR tools, companies can minimize the risk of excessive workers’ compensation claims while at the same time providing their employees with appropriate health care diagnoses and treatment. This can pay off not only financially but also in terms of employee morale and company image. Your insurance broker will work with you as an advocate for a more efficient and safer workplace. By taking a team approach between broker, employer, and employee, all the elements are in place for a workplace with fewer injuries and therefore fewer claims. When problems do come up with claims, the insurance adjustors can handle further investigation; as an employer your focus should be on injury prevention and a healthy work culture. Again, high-quality insurance agents and brokers have the tools to help employers and employees pursue those goals. As employers work their way through the complexities of the ACA, they will see both positive and negative effects of the new law. But smart businesses will be looking at a variety of factors to keep workers’ compensation claims low. Being aware of unintended consequences of the reform law, along with creating a well-designed, comprehensive 62

strategy for managing claims, will make a big difference. ------------------------------------------------------------------------------------------------ 1. NICB report on workers’ compensation claims, 9-13: https://www. nicb.org/newsroom/news-releases/questionable-workers-comp-claimsreport 2 NCCI report on workers’ compensation and prescription drugs, 9-13: https://www.ncci.com/nccimain/IndustryInformation/ResearchOutlook/ Pages/NCCI_NewResearch_PrescripDrugExp.aspx 3. Property Casualty 360 report, 8-11: http://www. propertycasualty360.com/2011/08/05/musculoskeletal-disease-ismajor-pain-in-work-comp 4. OSHA data: https://www.osha.gov/pls/oshaweb/owadisp.show_ document?p_table=UNIFIED_AGENDA&p_id=4481 5. ibid

ISSUE ANALYSIS

Planning for Business Transition The importance of working on â&#x20AC;&#x153;why notâ&#x20AC;? and setting personal goals By: Milo Arkema Baker Tilly Partner Emeritus, Baker Tilly

s the owner of a small or midsized manufacturing company, you have been taking risks since the day you started or acquired your business. But if you are over 50 years old, your most critical risk is (or is quickly becoming) the transition of your ownership in the business. Of course, as you experienced in all other aspects of your life as a Boomer, you have lots of company. Sixty percent of small business owners were born before 1964, and a Baby Boomer business owner will be turning 65 every 57 seconds, over the next 17 years. If you do not have a written plan for transition of the ownership, you are also not alone in that respect. A 2012 research study found that 96 percent of business owners agreed that having an exit and succession 64

strategy is important, yet 87 percent did not have a documented exit or transition plan. There have been numerous articles written in the past few years warning of the coming tsunami of boomer businesses for sale so this is, no doubt, not the first article you have read on this subject. And yet if you do not have a transition plan, the question remains “Why not?”

Understanding your own “why not”

The lessons you learned in the earlier years of building your business are no doubt registered very firmly in every aspect of your being. Winning customers, buying equipment, securing financing, and convincing bankers. Developing key employees and losing some you never thought would go. Fighting cash flow battles, and absorbing the inevitable mistakes that go with business. All this while surviving personally and struggling to expand you own leadership bandwidth. Now thinking about transitioning ownership may seem unnatural to you and, if you have labeled the thought as an “exit,” it may seem like giving up. Boomers of course, don’t give up; we believe in building, transforming, and staying young. A very practical reason that may provide a logical block for you is that it takes all of your time to run the business, and you don’t want to risk allocating time to something that is in the future. Many business owners I have worked with on transition planning are fearful of the “slippery-slope” story. If they start talking about and working on a transition planning with a long lead time, it will be understood by those around them as an announcement. In other words, you will be putting into motion something over which you have little or no control. Like many entrepreneurs, you may identify so closely with your business that the risk of it being understood as announcement causes you to put on the planning breaks. So continuing to focus on the business is the default behavior. Of course an ownership transition implies a “who.” Who will be the next owner, how will that impact me, my legacy, my business, or my loyal employees? All of these “who” options, even if one of them is a family member or key employee, represent new territory to you personally and it is not easy to envision the answers to your questions. Since answering the “who” question at this point is a premature step, it can quickly create a block toward moving forward. Finally, the truth is that you have learned at one time or another just about everything you need to make your business run and thrive. But unless you are a serial entrepreneur, you have probably never executed an ownership transition plan. You have a plethora of “how” questions that you will know the answers to only after you have lived through it, 65

which can lead to frustrating circular thinking. If you are one of the 87%, your answer to the “why not” question may be a combination of these factors or something completely different. In any case, the starting point to overcoming the block is to understand your “why not.” Grab your iPad or a notebook and over the next few weeks, start unpacking your “why not” by writing out your questions, and don’t try to answer them yet. But there is a good chance that you will need outside help.

How to think about transition

I would suggest that the definition of your success in starting a transition plan is to acquire a different personal behavior that will lead you to develop an ownership transition plan. Different behavior starts with different thinking. In other words, you will need different answers to your ownership transition questions than the answers you have been giving yourself or borrowing from others. Developing a transition plan is a process, not an event, and an effective process requires a quarterback or facilitator. Some business owners are able to act as their own facilitator or quarterback—most are not. Most need a thinking partner, someone who has or can gain an understanding of you, and who is capable of seeing the bigger picture of all the stakeholders. So you will need to identify someone who can serve in that role for you. If it is one of your current advisors or professionals who serve you or your business, be sure to make a new agreement with them on their role for this assignment. They may already have an existing technical service role with you, such as tax or legal. But they will need to be capable of acting in both a facilitator role and a technical role and keeping them separate in terms of focus. Once you have enlisted the help of a facilitator/thinking partner, start the first phase of the process either by sharing what you have self-discovered about your “why not,” or by asking your facilitator to help you. Exploring your answers to that question can, with the help of a good facilitator, naturally lead to exploring your personal goals. The combination of answering the “why not” question and exploring personal goals will provide guidance and direction to developing a transition plan. Your facilitator should help you resist the default tendency to translate goals as business goals rather than personal goals for yourself. While your personal goals will, of course, need to be balanced by the specific realities of your business, setting personal goals is critical to helping you develop a personal pathway to the next chapter of your life. That is why I choose to call it a transition plan. It may eventually involve a transition of ownership, but that will only be a part of your 66

more important personal transition. Creating a personal purpose for transitioning the ownership of the business will provide a healthy framework for a successful transition. It will be important to understand that what you create in this starting phase will be a draft. As you move to exploring, considering, and understanding your options for your business, you will always allow yourself to circle back to confirm or revise your personal goals. This is one of the reasons to start early, or at least start now, to give yourself enough runway so that you are not eventually forced to select an option.

Exploring your options for the business

Keeping it in the family. A transition of ownership to the next generation of family members requires a long-term perspective and qualified family members. If you are fortunate enough to have qualified family members in the business, or willing to come into the business, it is probably because you and they have done the hard work of preparation, which for many includes working outside the family business. Determining if your family members are capable of owning and leading the business is the most challenging aspect of this option. The needs of the business should be the primary factor in this determination, not just your personal goals or their desires. Creating a permanent job for a family member, especially as the CEO or president, is never a good reason to transfer ownership to them. A sound decision on this matter requires outside assistance. This may be an additional role of your facilitator, or you may need specialized help. Developing your buyer internally. Succeeding ownership to key employee(s) also requires a long term plan. The first hurdle, similar to that of a family generational succession, is determining the qualifications of the individual(s). Of course, your propensity to take personal risks with non-family owners may change the dynamics of the decision. In addition there are inherent risks in starting an ownership transition process with your key employee(s) that could fail due to issues of value, terms, financing, etc. Your key employees will undoubtedly be one of the value factors for an outside buyer, and you want to minimize the risk of losing them due to a failed deal. Internal buyers, of course, need financing, and that will often include direct or indirect financing from you. For those reasons, you will need an advisor who can act as a facilitator to determine if the economics work for both sides before entering into the legal aspects of an actual transaction. This can be a satisfying option for an owner who has prepared their personal financial situation that allows them to take the inherent risk. I want some liquidity and I want a capital partner. Regardless of the 67

stories you have heard about private equity firms, the right choice of an equity firm can be the appropriate partner to help grow the business to the next level. Depending on the economics of your business, it may allow you to gain some liquidity and still provide you an opportunity to share in the growth of the value of the business. Since a private equity firm typically wants to own a business for a 5-7 year period, you are setting in motion a plan that will lead to full sale of the business after that hold period. Securing mezzanine financing from a private equity fund is a subset of this option. This form of financing could fit the economics of a business with near-term high growth prospects that open the door to a sale of the business to competitor or strategic buyer. I want to maximize the proceeds from the sale of my business. After years of owning and operating a business—and the hard work, commitment, and struggle that go with it—it’s natural to want to realize the highest financial return possible from the transition. A strategic buyer normally provides the fastest exit. A sale to private equity owners may include the requirement that you continue to lead or be involved in the business for some transition period, depending on the strength of the business model and the development of the management team. Exploring these options could necessitate meetings with owners who have already executed one of these options, private equity firms, investment bankers, and potential strategic buyers. Again, your facilitator can be a bridge to identifying and approaching potential firms and individuals who could be helpful. Obviously these meetings are about exploring and understanding options; they are not discussions about a deal. To be sure, the individuals and types of firms included in this list are always eager to talk, even if your succession may be some years in the future. The quid pro quo is that you learn something and they have the opportunity to understand a little about your business. More importantly, it opens a relationship for future business. Understandably you will probably see these steps as high risk and unacceptable, unless you have worked on your “why not” and personal goals. In other words, you need to have a personal motivation that creates separation between you and your business.

Understand the value story of your business

As you move into the exploratory phase and hold meetings over time, you will find it helpful and necessary to develop the value story of your business—that is, the picture of how your business model works and creates value. This does not mean sharing financial statements, even though high-level metrics that indicate the level of success could be a part of your story. Although the sales pitch that you use to sell customers could be helpful, this story will have a different focus. 68

You have, of course, read these kinds of write-ups on competitors or other businesses that have been offered for sale, but you will find it challenging to prepare your own. So again, you will find it necessary to involve advisors, and your facilitator may be able to help you directly or be a bridge to the right resource. Identifying and determining how to crisply describe the key value drivers of your business, as well as how you manage its critical risks, is the backbone of any succession plan and any eventual transaction. When and if you call an investment banker to actually sell your business, developing the value story of your business will be one of their first steps. Creating your own value story for your business before that time is a part of understanding and managing the perception of its value. You will find, as you begin to hone and deliver this story, that it will impact how you lead and manage the business. And when you personally experience the blunt reality that the value of everything you build or create will be determined by someone other than you, it may change how you make decisions. Most importantly, these are additional reasons to start planning early, or at least to start now, so there is time for these benefits to impact your leadership of the business.

Transition plan elements and its execution

A transition plan is neither a long written document nor is it a legal document. It is at least a summary of personal statements, a rough time line, and bullet points of critical elements. The value story is a separate and supporting document or presentation that can be in continual revision. This information can be used to guide your advisors as you begin to execute your transition plan with financial plans, projections, legal documents, etc. This part of the work is tangible, and your advisors will understand how to best implement it. The hard work is the intangible work, and no one can do it for you.

Conclusion

This approach to planning assumes an investmentâ&#x20AC;&#x201D;an investment of your personal time and also the cost of enlisting a facilitator/thinking partner. But the old adage that what you pay attention to and invest in grows, also applies to transition planning. It may be counter to your discipline of controlling business expenses, but you are not the only one impacted when you, by default, choose not to start your transition plan. And you probably will never be able to fully determine the biggest cost of not starting to plan your ownership and personal transition. It will be comprised of your personal opportunity lost and the business value you left on the table when you eventually exited.

The Eight Principles of Succession Baker Tilly International, a worldwide network of 161 independent accounting and advisory firms, recently conducted a Global Business Succession Survey of business owners in 55 countries. The Eight Principles of Succession summarize the interim findings of the survey. They apply whether the transition is to family members, company insiders, or outside parties. To download the survey report or participate in the survey, visit bakertillyinternational.com. Principle 1: Succession is not retirement. Instead focus on growth and opportunities available to you today. Explore options for ensuring the continuity of your business. Principle 2: Start with readiness. The succession process takes time, commitment and motivation. Principle 3: Set your goals before the journey. Establish clear, memorable, and compelling goals to energize those involved in the process. Principle 4: Harmony is a must. Creating, sustaining, and enhancing harmony among key parties (such as family members, managers, or employees) throughout the process is important to achieving your goals and removing barriers to achieving those goals. Principle 5: Price is not first. Biggest concern of survey respondents is “continuity of the business” and “ongoing jobs for employees.” Getting the best sale price is an outcome of the focus on continuity and jobs. Principle 6: Plan early, start earlier. Because succession is about continuity, jobs, and building capital value, you cannot start planning for succession too early. Principle 7: Equality is not equal. When family is involved, a key challenge is finding a balance of participation, ownership, and distribution of wealth. Be fair, rather than “equal,” and base decisions on historical and future contributions of family members. Principle 8: Ask before you get lost. Succession can be a complex process. Work with a professional advisor who can help achieve the best plan for your family and business.

Note: If you’re an owner contemplating the future transition of your business, review “The Eight Principles of Business Succession” outlined here. In short, understand your objectives, create a realistic time line, and develop a process that is right for you. Most importantly, assemble a team of advisors that can walk with you every step of the way.

ISSUE ANALYSIS

Does Your Business Strategy Prioritize Talent Management? Successful talent management strategy starts with leadership By: Lynn Roger, Chief Talent Officer, BMO Financial Group

xecutive leadership teams at companies of all sizes dedicate significant time and resources to develop business strategies and financial plans that focus on long-term success. However, according to a recent Forbes Insights study conducted in partnership with BMO Harris Bank, many middle market companies are not placing equal importance on the people who will execute those plans. The study, “The Talent Imperative: The Essential—and Overlooked—Ingredient for Corporate Growth,” revealed that 83% of the more than 300 private company executives surveyed believe having 72

the right employees in place has a direct impact on revenue and is critical to their growth strategy. Yet, only 9% describe the relationship between their talent management and strategic planning initiatives as “closely aligned.” In fact, talent mapping—the process of comparing existing personnel with future needs—is rare in private businesses. Embedding a talent strategy in the overall business strategy is critical to a company’s long-term success. The process of aligning these strategies must start with top executives if the company is to achieve an organization-wide, people-focused mindset that ignites its ability to acquire and retain top personnel.

Align Talent and Business Strategies

Business strategies typically fail through poor execution, not because they are inherently flawed. Even a detailed plan that focuses on achieving maximum ROI will likely fail without the right people in the right place to follow through. That’s why talent planning should receive as much focus as financial planning. In the strategic planning process, companies must ask themselves, “Do we have the right people, or do we actually need different capabilities? If it’s the latter, how do we go about hiring new employees or developing new skill sets?” Great companies gain strength through the diverse talents, skills, and experiences of their people. Diverse and inclusive workplaces drive peak performance and foster more successful and engaged employees. These top companies have leaders with strong “cultural intelligence” (CQ) that enables them to interact effectively with people of different backgrounds. CQ is a critical skill for better performance, especially for companies seeking to enter new markets in an increasingly diverse, global economy. It’s a challenge to find, hire, and retain top employees. The improving economy has given the most talented candidates more choices, and these individuals are looking for a company that can clearly articulate how it will nurture their career aspirations. This can only be communicated if a formal talent management strategy is in place.

Begin by Securing High-Level Buy-In

A talent strategy must be driven by leadership rather than human resources or the group responsible for personnel management. This is essential to implementing a true “talent mindset.” A talent mindset is the belief that a peak-performing workforce is critical to success for both today and tomorrow, and that great talent is a competitive advantage that holds key benefits for employees and the entire organization. Leaders with a talent mindset are talent scouts and 73

advocates who drive a “people” strategy that embraces diversity and helps future leaders develop the skills they need to be strong enterprise leaders. They actually encourage employees to explore new responsibilities in the company. They know it will strengthen the business by creating a productive workforce with broader capabilities, and will result in more engaged employees who see career opportunities in the company. Embed a Talent Mindset Throughout the Company Companies—with the help of HR and mid-level managers—can help ensure their top executives adopt a talent mindset by: • presenting real scenarios in which talent—or a lack thereof—could affect the firm’s ability to achieve its short- and long-term business strategy, and • emphasizing succession planning and that top executives’ legacies often depend on their ability to identify and develop those who will one day replace them. Employee engagement is key. Leaders must allocate training and development resources during budget planning and create specific action plans to groom the next generation of leaders. The best leadership development programs adopt a “lattice” approach, where future leaders are nurtured to possess a range of capabilities, rather than a narrowly-focused, vertical growth trajectory. Development programs should include talent management modules to ensure that when leaders are held accountable for managing talent on their teams, they’re also being taught how to do it. An agile, versatile leadership team can serve as powerful role models and effective ambassadors for a company-wide talent mindset.

Talent Strategy: Tactics for Implementation

Once a talent strategy is adopted at the highest level, companies can take clear steps to continually evaluate and develop their employees: • Implement talent mapping. Determine where the business is headed in both the short and long term, and identify if there are any talent gaps that must be addressed to achieve these goals. • Review the bench. Closely analyze the demographics and psychographics—including the skills, experience, age, diverse background, attitudes, and aspirations—of your workforce to ensure the company has the right people in place to seize current and future opportunities in the business plan. An effective review requires leaders with strong CQ who understand the cultural nuances of the workplace and recognize that a diverse workforce is a valuable asset. Establish talent roundtables. As part of an effective talent review process, calibrate employees’ potential and performance with leaders 74

from all departments. These discussions are often referred to as “talent roundtables,” where leaders have the opportunity to gain insight into talent strengths and weaknesses and formulate action plans to close development gaps. Individuals should be assessed against a formal set of capabilities and competencies that are critical to success, outlined in a simple assessment template. All companies can align talent and business strategies and establish a people-focused mindset. It’s a journey, often achieved in phases, but the process does not need to be complicated or costly. A successful talent strategy starts with leaders at the top acknowledging—and making widely known—that talent is a critical part of the company’s business strategy.

Client Spotlight: Eclipse, Inc.—Talent Strategy Inspires Company-Wide Innovation

After securing high-level buy-in and incorporating talent discussions into strategic meetings, Eclipse, Inc. has achieved its business goals and embedded a talent management process throughout the company. As a worldwide manufacturer of industrial heating and drying systems, Rockford, IL-based Eclipse, Inc. has focused on innovation to remain at the forefront of a highly competitive marketplace. Integrating a talent management program throughout the company has been key to its innovation. The successful implementation of this strategy occurred via the following steps: 1. Secure High-Level Buy-In Recognizing the need to have a more formal talent management program for the company’s leadership, Eclipse worked with a human resources consulting firm to analyze the business. The effort resulted in the creation of a new executive-level position—Vice President of Talent—to report directly to President Lach Perks. Eclipse recruited Jim Corbett to fill the new role. He designed a program that made talent development and management a continuous process at the executive level that cascades throughout the 700-person firm. In addition to the new position, Eclipse increased emphasis on personal ownership of career development among the leadership team. 2. Align Talent and Business Strategies Talent agenda items now appear as initial discussion points for Eclipse’s multi-day strategic planning meetings so attendees can analyze talent capabilities and needs, and implement plans for key business initiatives. “Talent is a permanent resident on our strategic planning agenda,” Perks says. Talent reviews are also a key aspect of strategy meetings, where key 75

leadership positions are explored in-depth. Meeting attendees identify potential successors and analyze plans for opportunities to develop new leaders. Corbett explains that the process gives Eclipse a sense of succession continuity and helps identify where gaps might exist. 3. Tactics to Embed a Talent Mindset Organization-Wide Corbett designed a talent management system that serves as a vehicle to facilitate and capture talent discussions, including methods to catalog and analyze existing talent in the company. The process began with the executive team successfully completing a cycle in the exercise before presenting it to other levels in the company. After about 18 months, the process cascaded down to Eclipse’s operations worldwide. “This talent strategy helped build understanding and ownership because it wasn’t overnight that everybody got on board and understood how important talent development is, or how to best manage it,” Corbett says. “The strategy has led to the right kind of conversations and decisions over the past five years.” Perks adds that the bar has been raised substantially at the company. “When Jim first came on board, the conversations revolved around the quality of my staff as direct reports to the president,” Perks says. “Now, we’re looking three or four layers down.”

ISSUE ANALYSIS

Training is Back How Companies Are Closing the Skills Gap Now By: Tim Doherty, Chairman, Doherty Employment Group

ou may have already heard the ugly numbers. • Fifty-four percent of employers can’t find qualified candidates for current open positions.1 • For the next 20 years, 10,000 baby boomers a day will reach retirement age.2 1

Pylayev, Mariya. “Make The Industry Skills Gap Work For You [Infographic].” AOL Jobs. AOL/CareerBuilder, 6 Mar. 2014. Web. 14 Mar. 2014. http://jobs.aol.com/articles/2014/03/06/how-skilled-laborshortage-hurts-employers/ 2 “Workforce360.” Randstad’s. Randstad Global, 11 Feb. 2014. Web. 14 Mar. 2014. http://www.randstadusa.com/workforce360/jobs-theeconomy/infographic-the-root-of-the-skills-gap/154/ 77

• Seventy percent of US CEOs are concerned about the availability of key skills.3 • Forty-eight percent of hiring managers admit their company is below its target headcount. My industry—staffing and recruiting—stands on the edge of the skills gap, and we can see the depth of the problem clearly as we work to source and employ tens of thousands of people a year. We saw it during the height of the 2013 retail season, as we responded to a flurry of requests for production help to cover the shortest shopping season in 11 years. We saw it as we hit an all-time high order completion rate in 2013, and we’re seeing it today as orders continue to climb to record levels in the 1st and 2nd quarters, during what is ordinarily a slower time of the year for staffing. I’d like to believe the demand is due to great marketing on our part, but all the signs point to a national talent shortage trend that shows no sign of disappearing.

Skills gap disconnect between employers and job seekers

In a March 2014 CareerBuilder4 survey, most employers blamed the skills gap on four things: • The education system for producing too few graduates in highdemand fields; • Unrealistic candidates with wage expectations out of line with what employers will pay; • Job complexity that necessitates college degrees in positions that were previously held by high school graduates; • New and changing technology that moves more quickly than educators can teach it. Job seekers surveyed by CareerBuilder were in general agreement with this list, but their #2 answer fell much further down the employer list. The #2 skills gap driver for job seekers was seen to be “Gaps in onthe-job training.” The top four employer-identified causes are real problems, as any hiring manager can tell you, and except for reviewing and restructuring job descriptions, there is little that one company can do in the shortterm to change the other problems of education curricula, candidate “Will skills gaps confound US CEO plans to expand in 2014?” Transforming talent: Building bridges between today’s talent and tomorrow’s skills. PricewaterhouseCoopers LLP, 21 Jan. 2014. Web. 14 Mar. 2014. 4 “Companies Losing Money to the Skills Gap, According to CareerBuilder Study.” CareerBuilder. CareerBuilder, 6 Mar. 2014. Web. 17 Mar. 2014. 3

attitudes, or the advance of technology. Let’s focus on what employers can do. In my opinion, there is one immediate magic bullet available to every organization today, and job seekers have put their finger on it: Training. Let’s start by talking about how the costs of training offset the costs of vacant positions.

TRAINING’S BIG COMEBACK How benefits outweigh costs of employee development and training

Corporate spending on employee training took a big dip in 2008 and 2009, but has climbed ever since, to an average 15% growth in 2013.5

While that sounds like a promising bridge across the skills gap, unfortunately the real state of company training programs is not so great. Only about 50% of businesses surveyed by CareerBuilder were planning to train new hires in 2014, up from just 39% in 2012. In another survey6, they found that on average only 52% of workers employed by the companies surveyed received formal training. The same survey found that only 21% of US workers claimed to receive formal training from their companies between 2006 and 2011. So, while the trend is going in the right direction, what’s the hold-up? Bersin, Josh. “The Corporate Training Market Is Exploding.” The Corporate Training Market Is Exploding. The Business of Talent, 30 Jan. 2013. Web. 18 Mar. 2014. 6 “Accenture 2013 Skills and Employment Trends Survey: Perspectives on Training.” Key Findings. Accenture. Oct. 2013. Web 18 Mar. 2014. http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture2013-Skills-And-Employment-Trends-Survey-Perspectives-OnTraining.pdf 5

Training’s ROI: Productivity and retention

In some company cultures, there is skepticism that training is a good investment, underscored by the fear of costly attrition by newly-trained staff. On top of that, there can also be a lack of understanding of how to measure the ROI of a training program. Luckily, some very smart scientists have carried out studies and analyzed data about the impact of training on a business’ bottom line. The studies show clear productivity, retention, and even growth benefits to companies that implement effective training programs. Here are some interesting results we found in our research: • Employees who received training are 17% more productive than those who did not receive training.7 • Employees who received training are more than 6 times more likely to think the company is a ‘great place to work’ than those employees who did not receive training.8 • “A one standard deviation increase in a firm’s annual per-employee investment in education and training (equal to around $680) generates a 6 percentage point improvement in next year’s TSR [total stockholder return], even after controlling for many other important factors.”9 The importance of retention in a strong economy should not be understated. The U.S. Department of Labor currently estimates that the average cost of a bad hiring decision can equal 30% of the employee’s first-year potential earnings. And, according to CareerBuilder, an organization loses $14,000 on average for every job vacant for 3 months or more.10 While some employers believe that training only compounds the loss, it seems clear that not offering training is more risky. The LinkedIn 2014 Talent Trends11 report shows that most active job seekers list “more learning opportunities” as among their top 5 Lachnit, Carroll. “Top Stories.” Training Proves Its Worth. Workforce, 16 Sept. 2001. Web. 17 Mar. 2014. 8 Lester, Margo C. “The ROI of Training.” The ROI of Training. Larta Institute, 8 Sept. 2003. Web. 17 Mar. 2014. 9 Bassi, Laurie J. “Profiting from Learning: Do Firms’ Investments in Education and Training Pay Off?”, ASTD, Sept. 2000. Web. 17 Mar. 2014. 10 Pylayev, Mariya. “Make The Industry Skills Gap Work For You [Infographic].” AOL Jobs. AOL/CareerBuilder, 6 Mar. 2014. Web. 14 Mar. 2014. http://jobs.aol.com/articles/2014/03/06/how-skilled-laborshortage-hurts-employers/ 11 Talent Trends 2014, LinkedIn Talent Solutions. http://business. linkedin.com/content/dam/business/talent-solutions/global/en_US/c/ pdfs/linkedin-talent-trends-2014-en-us.pdf. 17 Mar. 2014. 7

reasons they’re looking for another job. That only emphasizes another takeaway from the report, that more than two-thirds of the North American workforce—while describing themselves as very satisfied or somewhat satisfied in their current jobs—are willing to change if the new job is seen as a better career move. If training can improve productivity and the bottom line while branding your company as a ‘great place to work,’ isn’t it worth a try?

Now Prove It: How to measure training ROI

Our research uncovered many academic papers and equations to reveal training ROI. For larger companies with high-level resources and enough time, these can be easily found online. For small or medium-sized businesses who need practical and implementable metrics, here are two well-developed approaches that can be put into play by the average HR expert: • Measuring ROI of Training by HR Consultant Yodhia Antariksa. This online slideshow provides a step-by-step training evaluation process that is easy to follow on Slideshare, http://www.slideshare. net/nusantara99/measuring-roi-of-training. • Training ROI Worksheet by Lord Corporation. This free downloadable spreadsheet walks you through a training ROI process that lets you measure task compensation, effectiveness, the future value of task compensation and the cost of training. Some math proficiency is required. http://www.workplacebasicskills.com/frame/ free_tools/roi/worksheet.htm

WHEN TRAINING WORKS AS INTENDED Walt Disney’s succession plan success story

We came across some great examples of training success while researching this chapter. I was surprised to learn a fascinating story about a skills gap solution developed quietly and successfully in the 1960s by one of the world’s best-known companies—The Walt Disney Company. Sam Kashner of Vanity Fair12 tells the whole story of the Cal Arts graduates, a handful of talented animation artists who were trained at the California Institute of the Arts in the 1970s in Walt Disney’s Character Animation Program, a school that received nearly half of Disney’s fortune upon his death in 1966. Faced with the retirement of Disney’s original animators, Disney had begun to sketch out his plans for an animation academy that would merge two small art schools in 1961. His specialized Character Animation Program opened in 1975, having enlisted some of the great animators from the Kashner, Sam. “The Class That Roared.” Vanity Fair. N.p., Mar. 2014. Web. 18 Mar. 2014. 12

1930s to teach the next generation. The result was the extraordinary Disney renaissance of the 1980s, with films like The Little Mermaid, Beauty and the Beast, Aladdin, and everything that followed. In Human Resource Executive Online, Peter Cappelli commented13 on the inspiring story, “Disney Co. set up the Character Animation Program, a new and separate initiative that existed nowhere else. Who taught the classes? Disney’s retired animation artists. At graduation every year, the company would hold competitions to see which of the graduates it would hire, and it hired a lot of them. The graduates of this new program arguably saved the Disney Co. and changed the motion picture industry forever.” As Cappelli points out, the Cal Arts students were not subsidized by Disney; they paid their own way and competed fiercely amongst themselves to be hired by Disney upon graduation. Cappelli goes on to describe similar initiatives he’s seen in China and India by companies building schools or technical programs, and contributing the services of experienced instructors to develop the exact skill set they need. The question he asks at the end of his article bears repeating, “Why aren’t U.S. companies doing this?”

A system and a covenant binding schools, employers, and workers in Germany

Looking overseas for ideas on workforce development is not a bad place to start, because Germany, for example, is certainly a great example of planning for production. The German model for creating a skilled worker pipeline is based in its long-standing apprenticeship program14, which evolved from a guild system that goes back to medieval times. German companies are not struggling to fill trade positions in 2014; they rely on a national vocational training system that combines work and training in a 3-year apprentice role. Apprentices work 3-4 days a week and attend classes the rest of the time, exchanging their training for a 3-year commitment to a company. While a program of its kind would be difficult to establish nationwide, Volkswagen is beginning to experiment with the 3-year apprenticeship, and has announced a partnership with a community college in Tennessee. Cappelli, Peter. “Talent Management Column.” Www.HREOnline. com. Human Resource Executive Online, 24 Feb. 2014. Web. 18 Mar. 2014. 14 Capelouto, Susanna. “What Germans Know Could Help Bridge U.S. Workers’ Skill Gap.” NPR. NPR, 8 Mar. 2014. Web. 18 Mar. 2014. 13

The Minnesota training model

In Minnesota, concern about the skills gap and talent shortage is driving funds and interest toward community colleges as well. A recent grant from the Minnesota Department of Employment and Economic Development (DEED) awarded nearly $1 million to St. Cloud Technical and Community College, as well as three manufacturing companies in Central Minnesota that rely on local trained labor. The funds will enable the school and the manufacturers to enhance their training programs. In an article15 in Minnesota Business Magazine, a spokesperson from one of the companies that will receive DEED funds said, “Training is important because we really want our employees to be engaged in the business.” Training as a retention tool—or to enable certification in a valued quality standard like ISO, in order to open new markets—is a tangible benefit in the minds of manufacturers who are building robust training programs into their strategic plans.

Creating our own best training practices

In last year’s edition of The State of Manufacturing®, I covered some of the factors that employment experts cite as contributing to the shortage of skilled workers. The factors we were seeing included: • Intensified testing and screening practices • Exclusion of long-time unemployed candidates • Fewer technical or trade school graduates • Lack of job readiness on the part of applicants • Low wages • Manufacturing needing an image reboot • Aging of populations in outstate communities • Rural loss of younger employable people While all these factors are real issues, I made a conscious decision not to spend as much time on the causes this year, to better concentrate on solutions. In summary, manufacturers need to focus on what can be done here and now to create their own best practices—and their own best pipeline of qualified employees. While studies and surveys and grants and lobbyists can make inroads on issues facing our business, it will eventually be organizations with ideas—together with educators with ideas—who lead us to the next pinnacle of creativity and prosperity. I look forward to watching small connections and collaborations turn into big ideas for Minnesota in 2014 and beyond. “DEED Grants to Help Manufacturers Grow, Address ‘skills Gap’” Minnesota Business Magazine Blog. Minnesota Business Magazine, 30 Jan. 2014. Web. 18 Mar. 2014. 15

FOCUS GROUPS

Winona 9:00 a.m., March 5

Southeast Technical College

What is your gut feeling about the prospects for your business this year? Are things on the right track? The wrong track? • It’s a little too general. Some are and some are not. Overall, yeah I think things are on the right track. But there are definitely some regulation types of things that can be fixed. Some taxation things that can be fixed. Education and training things that need to be fixed. • I have a lot to say about that. • Number 1 is government regulation. I have one good example right here in town. We have a manufacturer that we’ve worked really hard to keep in Winona. They were going to leave the state. We worked with them. They’re expanding and we’re putting an addition on their facility. This is where the rubber hits the road. The facility was supposed to be completed last October. We didn’t get the project started until October and in MN it is a little difficult to complete. So we are going to be a year behind on the project. So a $1.1 million project that’s right now about $250,000 over budget. • We got our lease in place, got our financing in place, and then went for building permit and that’s where … new regulations took effect this year in the Clean Water Act. Before when we had a building like this collective water went into the storm sewer system. We found out you can’t do this any longer. You have to dump it onto the ground polluted, then filter it through the ground and then into the storm system. And that’s added a tremendous amount of engineering costs. We’re a 84

small footprint, a land footprint, so we did not have room for building stormwater pilings on the side, whatever. So we had to engineer a system. That drove up the costs tremendously. After the fact, after you got you’re financing in place. After you’ve made the deal with the tenant, then you’re faced with another $250,000 dollars in cost. Where are you going to get the cash from? The customer is having second thoughts as to why they stayed in Minnesota. • And then you have another factor, the anti-movement which you’ve had for years. • A rail business is involved in guess what…fracturing. They’ve totally moved that industry out of Minnesota, except for some transportation coming in from Wisconsin. They’ve killed it. We had a $35 million plant that was going to go into Winona a few years ago, we couldn’t get permits. Now that plant is in Texas. Good jobs, good tax base, both gone. Had you ever talked to a legislature or anybody about it? • Our local legislatures. What did they say? • (They say) we don’t know. They don’t know? • We are in the midst of an Unsession (of the legislature) right now. So maybe they can “un” some of those regulations? • Well some of these are federal mandates. So the state interprets how they’re going to regulate it and then you get more and more and more. • I think you’re afraid to challenge that. • Yes, because when you do then you’re afraid there’s going to retribution. It pushes you away. • I’m a stubborn old fart. But a lot of us are saying, okay we’re just not going to deal with that, it will just go away. But how many people are going to keep doing this? They’re just not. Having said that, are people in Winona looking to expand in 2014? • My business is increasing but I’m trying to do that within the footprint I have. • I don’t know if long term I would get the return on the investment of expanding what we have. • I do some investment with start-up companies. And the good news that came from this really bad economy is that a lot of people getting laid off are going out to start up their own business. And that’s finally the inspiration they needed to be out on their own. There’s some benefit in a bad economy. I see some very innovative new products coming out. And when a company is small they have an advantage that bigger 85

companies don’t: they can be in the marketplace like guerilla warfare. They can be where you are not. They don’t have to deal with all this government junk. • Bigger organizations have more resources to protect their assets from the government, not from competition. Where they should be putting their emphasis is on customer service, market growth, profitability, how to get costs out of your operation. That is what really creates value. The interference by the government -- and when I say the government it is at all levels from local level to national level – is literally out of control. People who are elected into office literally have no idea about what’s going on. Are those conditions worse than they’ve been? • Continually worse. • Layer upon layer worse. When you get to that local person they can’t make that decision. It has to go all the way back up and then come all the way back down. I was just in Thailand for 14 days and we were looking at equipment. Now we’re going to buy the equipment, but we have to decide where to put it. Where’s the best economical decision for us to put that equipment and run it? Is it in the US? Is it in Southeast Asia? Everybody thinks that these are low-cost countries and that the environments are dirty. You are totally wrong. These are some of the safest countries, from a worker’s standpoint and from an environmental standpoint. But we have a plant in Malaysia. If I have a problem, the local guy comes out, we talk about it and we make a decision right there. I can talk to him, we’ll make a decision, he’ll write it up and take it back and it’s done. Here it’s months, years tied up and then you get all the activists, these guys, trying to stop things. Do elected officials get overpowered by unelected regulators? • Large organizations can only do two things. Whether it’s a government, a religion, a university, they can only do two things. They can make rules. And that’s what they do at the highest level and the executive offices, they’re making policy. Then they reinforce those with a check forward. That’s all they can do. They have no other value than that. You see nobody sits back and says that does not make sense anymore. And so we’re stuck with that. Because you have brick and mortar you’re stuck in the ground and you can’t just pick up easily and move. And you’ve got all these people coming in with regulations and new people are starting to read these new regulations to figure out where you fit in this environment. So by definition it’s not going to get better. It can’t get better without revolution. And I don’t mean to sound like a revolutionary (you kind of did) but things need to evolve or 86

they’ll get broken down to start over again. • I agree. I’ve done incubator work with small companies for quite a few years. One piece of advice that I give to someone starting a business or just coming out of their garage -- don’t tell the government you’re there until you’re financially strong enough. Given all this are you more or less optimistic about the future? • Yes, but that’s based on what I’m doing despite of the roadblocks that keep coming up. • Yeah. • I am a small manufacturer. I have 25 people and I try to fly under the radar. Unfortunately I came to a program here (at the college) that was put on by OSHA, Department of Labor, and some other agencies – I can’t remember which ones. It was kind of like a “we’ll update you on where we’re going and what we’re doing” type of thing. And low and behold, an OSHA inspector showed up like three weeks later. Really? • Yes, walked into our facility and said I’d like to take a look at your operation. And so I’ll never go to another (program), but now I’m on the radar even though I’m a small manufacturer. The flip side of that coin is that even though I am a small manufacturer with only 25 people, and we all wear a lot of hats trying to keep up with all the regulation and what we’re supposed to do and how we’re supposed to do it correctly, is just a tremendous burden. We have to do these things in addition to everything else we are doing. And at the rate that they come out with new regulations, we can’t keep up with that. (To an educator): What’s your sense of the area? Are things slowly getting better? Is there more opportunity? • Well we’re used to the ebbs and flows of business. Usually the downturns are about 18 months long. But this has been one that has been three years, four years. I see it getting better, but I this (MnSCU) system, our whole system is down by five or six percent. MnSCU has 140,000 people, but we’re down. And what do we do? We train people to work and pay taxes, so we can all pay taxes and then redistribute it. But we’re really seeing a struggle. I just came from a meeting. We (MnSCU) have one institution out of 54 campuses that is up. That is St. Paul College and this includes the seven universities. We’re all down. Why? • A combination of things. First, the economy – people are not extending into debt. We’re getting the same headcount we had years 87

ago but they are not taking as many credits. I have to sell a credit and we get reimbursed for that selling of that credit. And we have sold, in 2010 we were at just about 2,000 students fulltime and this year we are down about 300 over the last four years. But it is a strategic downsizing because we can’t continue to grow. Like a business, we have to decide that this is the optimum size this college is going to be and I think we are set financially to be okay for the next few years. But we didn’t plan this. We supply you manufacturers with a work base. And this is what happened in 2003. We’re funded two ways. We have two funding streams, we get state aid and we get tuition. Now our cohorts over across the river (in Wisconsin) get state aid, tuition and they have both the levies. So we are $60 a credit less than (that school) which is the technical college down the river. And we used to have reciprocity, where the students paid the same thing across the state. But that went away about five years ago. So we are competing against Lacrosse at $60 a credit less. In 2003, 66 percent of my budget, which is about $20 million, came from state aid. In the papers you see it as us, these dastardly black-hearted presidents, who are raising tuition. Well we have two funding streams. So what happens to tuition? It used to be 34%. In statute the system is supposed to support us at 66%. Legislators are the only ones who can kind of ignore laws. But here’s where it has gone; we’ve got to replace tuition, and it’s really hurting our system, and it’s the same at Winona State, Mankato State, Moorhead State, Metro State, the University. They are dealing with the same problem. They have a little bit bigger budget so they can offset. But what’s going to hit out here, in the next three to four years, is going to be a crisis. I think you’re going to start hearing about that too. Well when I lose aid, I have to make it up with tuition. That’s the two funding streams we have. And they froze tuition for two years and they are talking about freezing it again. My costs still keep going. We have labor contracts, I have five labor unions involved, and those contracts are not negotiated by me. They are negotiated by the state which typically does not give zero percent increases. So we are facing some serious financial burdens, with the same number of students we’ve had but who are taking less credits. So it’s a challenge for us. Is the market not working? If there is a greater demand for workers, why are they not being supplied? • I think that sounds appetizing for 50 truck drivers. We could train the driver but we can’t get them in the program. • If you open up the Winona Post, everybody’s advertising. At the last work force meeting, what did they say -- 4.3% unemployment in Winona County. 88

• Yeah, that’s part of the problem. • And I think that left 700 people unemployed in the county. Where are we going to go, from a technical aspect and fill these positions? And that’s the truck drivers. We could hire 75 machinists right now. And the only other way we can do that is to grow somewhere else. • I used to say that we have to get the businesses to go out and recruit (into the schools). Fastenal and other companies give full scholarships to students to get them to come just to the precision and machining program. And we still cannot, and I don’t think it’s the instructors. I just think we aren’t getting the people that understand. First of all we’ve lost the farmers’ kids and there aren’t as many kids on the farm anymore either. But we’ve also lost the industrial arts programs in the high schools. There used to be a phenomenal theatre course and kids got exposed to it, male or female, they were exposed to the trades and we just aren’t that way. It’s really a serious transition. So I think you’ll hear the same story across the state at the two-year colleges. • There’s a common theme you hear, you could go your entire high school career and never have the chance to be exposed to manufacturing. Your teachers have not seen it or done it. Your guidance counselors have not seen it or done it. You cut back on your industrial arts and nobody’s even thought of it. The perception is still out there, it’s dark, it’s dirty, it’s dangerous. I’ve toured your manufacturing plant and yours and they’re clean and nice. • Foundries are even clean. • Yes the welding facilities are even cleaner than they used to be. It’s a cultural thing. And then we’ve got a younger generation coming in now that, what was that latest lawsuit where the young girl was suing her parents because she wants them to pay for tuition and child support at 18. I couldn’t wait to get out of the house. I was gone by 17½. And this generation is just hanging around. And there are a lot of good kids, you look at the kids we have here, but as a whole we are not getting the focus of going into an occupation or understanding that. That’s the other thing. If you just depend on the high schools we’re not going to be able to deal with this problem. Because you’ve got people who’ve gone to college, got a teaching degree that probably other than working at a retail place or something like that who really have not been in the heavy industry and don’t understand the industry. And now they’re teaching in the K-12, and they and their counselors have never been out in that real work world. When we’re recruiting we have to educate some of these professionals about industry. It’s a tough battle. • Four or five years ago, the Winona Chamber started up a business in education committee to work with the high schools in the area. And it ended up being like beating your head against the wall at the time. But 89

it turned out to be kind visionary, because now others are doing it too • I’ve been advocating for an overhaul of the K-12 system for quite a few years especially the last two years, junior and senior years. I have a boatload of grandkids of all ages and some of them are in the high school age. And it just seems that the last two years of high school, especially the ones that have achieved quite a bit. They’re floaters the last couple of year and they’re so bored those last two years, especially in the senior year. I have a good example of a grandson who’s a senior in high school and he has a mandatory course of Shakespeare. Well this kid is a hands-on and would rather be out working on his car or whatever and he has to memorize Shakespeare. And he’s just going nuts. First of all he doesn’t understand it, doesn’t understand the language and he has to memorize Shakespeare quotes and passages. Is this a fit for a career? Sure everyone needs a taste of something but when he’s taking a course like this for his last semester where’s that putting this kid for his future development? • Think that that’s a symptom of our system. No one knows. • It’s poorly designed. • I’m watching the STEM Program they are putting in the Heinz Center (in Rochester). It’s like this whole new epiphany, innovation. Twenty years ago I taught at 916 and that is what it was. It was 22 school districts that funded all their money for their technical education programs. And we’re probably a victim of outsourcing through the years and we’ve lost that. From Washington down we talk about resourcing manufacturing jobs. We have to start at the bottom. We have to start at the foundation and build that up because where are these employees? You need material. Well where’re the steel mills?. If the economy really turned on, I’m telling you right now we see shortages all the time. So the supply changes in there. We have a lot of symptoms of a failing system. • And just to elaborate a little on the K-12 system. My youngest son is 23. years old now. When he was a senior in high school he went to these career fairs and I asked him, “What are you interested in? What fascinates you? Is it working with your hands? Is it manufacturing? Is it working with something in the IT world?” He said, “I have no clue.” When he got out of high school, I thought I’m not going to have a kid who lies around the house all day. So I took the initiative and I took him to many different manufacturers. And then I ended up taking him to the military. Well now this kid is a combat arms training instructor for the United States Air Force. So sometimes it’s not only the K-12 system but the parents. Parents need to step up and take an active role in their families and children’s lives. So we can have these groups and meet and discuss these options, but really grab that kid and say, “Look 90

buddy, this is what we’re doing.” And we can’t sit back and let this workforce not become a valuable part of our society. • That is a huge piece. • If I could take a kid and convince him what a wonderful time it is to be young and with some skill sets now, you could write your ticket. There are so many of you looking for that energetic, I’ll show up every day, I’ll work hard and I’ll learn. I know I’ve got to learn the rest of my life. Especially now, it’s more important to be a lifelong learner. This generation should be just absolutely ecstatic about the opportunities they have. But it’s getting them aware of that. And that’s a tough, tough battle. • And one of the things is finding that personality. Because if I can find that personality then we can grow them into whatever they want to do. • Sure. • But it’s that personality, and making sure they want them to come and have that drive and that initiative, and how do you engrain that? • Yeah, that’s a common theme that I’ve been seeing and hearing from many businesses. We look for the right attributes in a new hire and we’ll train. If your heart’s in the right spot, we’ll get you the skills. • Exactly. • I always tell my life story. We have seven kids in the family and we are all in the trades except one, the youngest, who’s a pediatrician. My dad was a baker, my grandfather was a baker. We have two brothers who are machinists; one in aviation mechanics and one in auto body— and they both make six figures. They’re in their late 40s early 50s, hard workers. I see these kids. When you see all the material things, is very frustrating. But I agree that the parents are the ones who will talk the talk, but boy, they do not want their kid to vo-tech or a two year institution. It’s better to go to the university. And then they hear the salary comparisons of somebody. My son’s been out for 15 years and making $38,000 or $42,000 and they hear what a two-year grad can make, if they are in the right occupation, and they work and they show up. • And that’s a major change. The younger folks are not as materialistic as I was. When I went into the work force I was anxious to get my first car. Then I was anxious to get my first new car. I was anxious to get a home. I was anxious to settle down. I was anxious to participate in the American way. Today the American way is a given. There are laptops and PDAs and iPhones. Kids don’t want to work for any of the companies that have tossed out the pension programs and the insurance and the somewhat promise of employment for life. They know that is a fallacy. They don’t trust those companies anymore. 91

And because of the fact that their personal spending is down to such a low level, and they market themselves with Facebook and social networking, they are below the radar of most of the brick and mortars in this country. And to the credit of the Technical College with the new technology initiative that’s been going on and participating in and all that. The future of the nano world, for example, in newer technologies can pretty much be understood electronically. There’s pretty much an app to teach for everything today. So you are really kind of competing with that. So coming back to that, and we add up all these things with this younger generation, and set aside the helicopter parents because they are still there, this younger generation does not have the same motivations. They’re actually looking at their school, educational system kind of like your grandson is, that they’re so out of tune with how I learn that I don’t want to go back to school anymore. And so they’re finding their own. And believe it or not they’re getting educated and they’re actually turning out pretty good as far as getting into careers that they like. Having said that, you have a big, huge investment here, we do as a state, government, community, taxpayer, of bricks and mortar, of infrastructure, of delivering services and your population is going down, your funding is going down, what are you going to do about it? Are you optimistic too? • Actually there was a golden time where we had plenty of funding. • Yeah. • We could engage and we could change angle and it’s much tougher now. And now it boils down to partnerships. To fill that gap of state aid going away we probably have right now about $12 million dollars in federal grants. • So the government is writing checks to you? • The government’s writing checks to us. • And are they tying your hands to do this? • Ahh, it’s not so bad. They are tying our hands with the paperwork. And we’ve got one person who’s pretty well trained to deal with it. But we have about six of those grants going on right now to help fulfill that. But do I look optimistic? Yeah I look optimistic especially as a technical college because I believe it will be a niche that will be phenomenal in the next 10 to 15 years. But you have to decide what size you’re going to be. We’ll be somewhere between 1,700 students and 2,000 students, but our programing will change. We’ll close programs like we’ve always done and we’ll open up new programs. And it’s that connection that we have with you people that helps us do that. • How many machinists do you need? • 50 to 75 92

• You have a machinists program? • Yeah, we have precision machine. • Are you able to supply it? • We take about every student every year. • That is one of the hardest positions to fill in most industry companies. And the thing is that you don’t have those skill levels coming. It’s really hard to find them. • And in many ways we steal from each other. Ron knows that. I mean you guys have worked at probably every electronics company in town and people bounce back and forth. Machinists do the same thing. • In 1977, that one year, it was free. There was no tuition. • Yeah. • Now it’s $168 per credit. • Technical education was free. • And it still is in California. I’m not saying that California is a model state. (laugh) • There’re three of them that are looking at doing that; California, Massachusetts, and Tennessee are going back to the first two years are basically free. But that other line, that 66 percent is going to have to go back up in order to do it. And I don’t know if that’s going to happen. • Yeah, that’s part of what we have to do, as I took this interim position, the first thing I did was to go around and talk to all the trade instructors. I asked, what is the biggest issue you see in getting students in this door? That their numbers are dwindling. And I asked what do you think is the cause of that? And that is lack of knowledge of students, because our demographics are not the middle aged as much as the younger students coming here. Of the knowledge in the high school because they don’t have the technical core anymore. So I think that’s what we need to do. Get into the schools because the parental stigma is still there that my child’s going to university. And that’s okay it’s how we present that. I say to students all the time we all have a pathway. I started out as a nursing assistant. I now have my PhD. I went through a two-year system. Some students step out in two years and decide this is great this is what I want to do. Some go on with their four year. Start with the two years because you can make money as you are going to school. It’s how we are going to present that that is what’s really going to make the difference. Because we are not going to change the minds. • Also we now have a lot of people coming back with four-year degrees that can’t cut it. • Right! And those are the ones who say get a 4-year degree and are making nothing. I got a one- or two-year degree and now I’m making $50,000. Which one do you want to be? • Tell me about you, as employers. I think the other end of the 93

initiative, where we have bodies, are our baby boomers, the people who we’ve got retiring. I’m going to retire at 61. I’m going to do something for another 10 years. I’m passionate about this organization but it’s just time for me to do something else, something different. And I think that there are a lot of us out there that are having trouble getting employed, part of that being because they don’t have the good skill set. But I look at that as another market for us to get people in here to do a one- and two-year program, and we still have the crazy work ethic that, “we’ll show up” and we’ll work 60 hours a week type of thing. And I think that’s going to be another market for you as employers. Granted you may only have a 10-year window with them. But I don’t think they will be jumpers. In talking to some of my friends who’ve retired, it takes six or seven months and then they’re back looking for something. So if we’re creative enough, I think that can be the next initiative. We need to really look at that group to start putting them into some of these programs. • And that’s going to reduce that skills gap. There’s so much knowledge leaving the industry, like tribal knowledge that you can’t teach from a textbook. And we’re going to lose that and anybody who retires, okay, they may go away for a while, but then they come back. • The door’s still open. • Even if it’s 25 hours a week. Take that knowledge and go work with these young guys. Pass it on. • That’s what we do too. And here’s the deal, I have no training cost with them. We bring them back in and boom, they are doing their job. And I can work flexible, so they can go golf or do what they want to do. • The economic situation in the last decade was one with any company with a fixed pension program and strong medical program; let everybody on the payroll go worldwide that was over 50. And the reason they had to do that, is just because of my own experience with the company I was with, we had close to 600 people around the world that were over 50, on a fixed benefit program. With the investment market tanking. We were fully funded; we were faced with people living 20 years longer than when they joined the company. So we were faced with $400 million dollars of additional funding to keep them on the payroll at 65. Bought them all out. Gave them a good severance package, set up an annuity, and got out of it for about $120 million. But the point is that if the company didn’t do that, and every company did that. There’s not a company in the United States that still has a fixed pension program, there might be some universities or government. • So here’s what these kids saw. They saw grandma and grandpa, mom and dad being let go of these great companies to work for and all of a sudden that changes. So when the young kids today ask me 94

where should I take my career? The first thing I say to them is get a course in personal finance. Understand debt and understand the cost of debt and understand where you think you need to go. The second thing is don’t expect your employer to bail you out. You are a tool in their organization. If you’re there for more than three years, you’re a slacker. Because if they have not turned you over because of benefit issues and things like that, then you are probably not worth turning over. You have to treat yourself as if you are a personal company. And everybody that was let go that was over 50 learned that really quick. Any of them started their own companies in order to remain effective. • So there’s a bigger population out there, bigger than your students that could really benefit from retooling themselves and becoming better contractors. Because many of these people started as machinist, and would be very happy to do that. Because they are already getting government supplements from their retirement, their pension programs and that. They are dependable and can work well into their 80s in many cases without missing a beat. And can run circles around these younger guys coming in. What about the workers we can’t attract? What about the quality of the workers you can? • I have a couple of people who have been there for over 20 years. I think one of them can’t even do 3rd grade math. She’s been doing exactly the same job for 23 years. She’s never turned on a computer or a cell phone. I’ve been trying to get my people who are already there educated and we’ve doing some things to try to cross train them. But we are also learning that the people coming in have also gone to school and then dropped out part way through. Like the applicants we are finding. So that’s why some of the applicants either have no training, other than their one job and then the new ones who obviously didn’t finish because they only went partway through their training and then dropped out. So we’re finding a gap in the education with what we’ve got already and what we’re trying to bring in. • Our biggest program is developmental. It would be across the state in two years. You are getting people who have high school diplomas who only have a fourth or fifth grade math level. Their reading skills are horrible. We walk them through, and they see auto mechanic and they want to do that. But you can’t do that unless you spend a semester with math, algebra, and communications and then you lose them. So we are thinking about what classes they can take without needing math and reading skills, which are few especially with the technical manuals. So the K-12 system is letting us down? • I don’t know. Think of the challenge of being an instructor today, 95

and trying to compete with all this stuff that these kids are involved in. I have a three year old grandson who’s just amazing. He can take my smart phone and do a better job at it than I can. It’s amazing! Now you have to change your methodology, don’t get me wrong, the teachers do but the bottom line is that they’ve been in the system a long time and don’t have the computer skills either. And now they are going to deal with these students. So I don’t want to blame them because I think it is a hell of a challenge to compete with technology. • So you’re saying that even within the technical school that even the professors need some remediation as well too? • Oh I think in any organization you may, but… • Is that the same in the other companies too then? With the exiting workforce, was that the question that was on the table? • Yeah, I’ve had a couple of clients use Southeast Tech for what they call “shop math.” • And do the employees like it when they take those courses? • I used to do a lot of that early in my career and at night but it was the embarrassment. They are embarrassed to come in and say “I’m taking math 1” and they are 45-50 years old. It’s embarrassing, a stigma. It’s amazing, we did some training for a company, years ago in the mid 90s and we went in and did the assessment of math, and we had people who had the titles of engineer. Now we all know you can get an engineering title and not have an engineering degree. But it was amazing the levels of math. The employers were amazed. They had engineers who were at the sixth grade math skill level. How they survived? I don’t know. But what we learned there is that when you bring them in you can either do a cohort, if you have a good enough group of people, they’re the same age, they’re all doing the same thing, it’s a little bit safer for them. But I tell you it’s tough to get people to admit that to be quite honest with you. • Yeah, that’s what I’ve seen as well. They come as a group. • We had continuous training from the beginning. When we went to electronic inspection, we had the same thing. We had a guy with an eighth grade education who couldn’t even turn the computer on. I said start with him because after him it gets easier. You would not believe how he boasted about that. “Man I can run a computer now.” It brings some personal fulfillment. I’d really like to see some huge comparison from what you guys do, in the seven county metro area, to us outstate. Because I think you will hear the same thing from us that you would hear from Marshall. And that’s one thing we were talking about at the workforce. Thirteen thousand kids come to this town every year. How many of them stay? We can’t retain them because it seems like Rochester and Minneapolis are getting bigger and bigger than the rest 96

of us. And what can we do here to keep these kids? • We have the same types of issues here. When 75% of your class comes out of a single parent household. • Someone said it’s sad that we have to have someone take a finance class by the time they are out of high school. The curriculum is so challenged in today’s world, and there’s only so much time in the day. Our kids are coming out as not as well rounded in the business sense that they are going to have to have in this world economy we have.

FOCUS GROUPS

Owatonna 9:00 a.m., March 10

Riverland Community College

Are you in better shape today looking forward than you were a year ago looking forward? • Customers care about three things -- price, quality and speed to market. A year ago the industrial markets -- we build an industrial product – so the industrial markets, the capital was just being retained and people weren’t making the investments they are today. So it allowed us during that down time, it allowed us to actually focus on what the price is to the customer? What’s the quality that they’re willing to pay for and then how fast can we get that to them? So this last year has been really customer focused for us and marketing driven, first time in many years for us. So we are wildly excited about what could happen next in the markets beyond even the United States markets as well. Is it enabled by improvements in the economy or is it something specific to your business? • Both. I think the economy has improved in the industrial markets. People are actually making those investments. We actually, we know it has localized our business a little bit more simply because we buy many things and then stick them in boxes. So we talk to our vendors and find out that our vendors are trying to up our price because we’re the ones buying something. So I have to get involved in those conversations so I know that it is somewhat localized to our business, 98

not just for the industry. Because our industry right now is down about 34 and a half percent as an industry and we’re up probably about 21 and a half percent. • Our business is just tremendously stronger this year and, like him, it’s not due to anything necessarily that we’re doing in our marketing effort. I think just the industrial market has come back and they’re actually spending some money. We had some projects that were sent down for long periods of time. We were getting ready to write them off again and then they continued and they came in toward the end of last year and we’re tremendously strong right now. • I agree with what you’re saying. My problem is that I’ve got more work than I’ve got people to do it. I’m literally, right now, my customers are concerned with our ability to deliver the product. It is not that we don’t have the work; it’s that I don’t have the skilled people to do it. • We’re a fabricator and a lot of the work is for (company) and so this last year commercial construction – which a lot of us are tied to – certainly took an uptick. Just because of that, our year was good. • Yeah, I’ll just add that we are finally seeing the long awaited start to the recovery to commercial construction. It really wasn’t as much as it felt. We got some really good pricing this year. But we did start to see an uptick and early signs for next year even more, so very positive. • And I can speak to Ccompany) here in town. We’re about three to five percent up this year, but like (company), we can’t find the people. I started out the morning meeting with six high school students. I never thought I’d be recruiting at the high schools, but I’m there. • How’d you get them to come in? • I went to the high school. • Our business is up but it’s changing, so we’re having to go out after more customers. In the printing industry you’re seeing – it’s not going away but it’s changing a little bit and we can see the business uptick but people are a little more careful with their dollars to spend. So we’re having to go out and try to find new customers and new markets. I would echo the same thing though, we need skilled labor and, as we get busy, to find people with some technical aptitude to run a press, to run bindery equipment, to run all sorts of things is very difficult. Are you still nervous about the economy? • Yes. I think we realize that we’re doing well right now, save labor problems. But we cover a lot of different industries and you’re always worried that just the timing that made it so big right now and you 99

know what’s going to happen in a month or two? We’re worried about two or three months out that it could turn off just as quick.

Does it keep you from planning? Does it keep you from growing or in other ways? • Yes and no. Yes with the long-term capital acquisitions definitely, for some new machines we’d like to do. I just can’t see a year or so that sustains what we’re spending. The other issue, or maybe that’s a short-term issue. • I would echo that. Same thing. Can you do a 12-month forecast anymore? • I would say so. • I would say that they’re – I feel better this year starting out about our forecasts for the remainder of this year than I did last year at this time. Because one of our largest customers approached us at the end of last year and said, “You know if we’re going to increase production X amount, 20 percent or whatever, can you keep up with us? And so we had to say, “Yes, we can. Bring it on. We’ll take care of it.” So. • Was that customer focused in the States or are they a global partner? • I would consider them global but it’s mostly in the States. • (Person) certainly handles two or three of our largest accounts, and I would sell too a little bit of everything. And I would echo what he said about the softness because I just don’t feel like three months out I can say, yeah, we’re going to be where we are now or better than now. But Neal said to ask that. And he probably made me feel the same way for a little bit. But the softness, the feeling that he was trying to tell you about the economy not having a great feeling, that two months from now I’m sure that we’re going to be here. I would feel the same way and it has held me from making capital acquisitions. I did do a fairly serious amount at the end of last year before the Section 179 totals went away, not knowing what they’re going to be this year. I mean that was crucial to “If it’s a good year, let’s use it. It’s here. It’s not going to be here next year.” But in the last few years, since the end of ‘08, we certainly didn’t do things that we would have liked to do. Well, all this, let’s talk about the workforce. What’s the primary issue for you? What’s the biggest problem/challenge? • Well, and I’ve got to keep an eye on the time because I’ve got to leave in about five minutes to go interview a potential candidate. What we’re finding is that at least for us, we’re looking for machinists 100

and that kind of thing. It’s literally an employee market. And I hear a lot of the numbers and I know that we have people that basically do submit applications, would be good candidates. We’d love to make them an offer, but they’re just doing what they need to do so they can keep collecting their unemployment. And the uncertainty about the economy – I have no confidence in that literally – and you can go up as high as you want –that we’re doing what needs to be done in this country to make it literally great and that’s my concern. And it’s become lucrative or more comfortable or whatever word you want to use. I personally can’t understand it and I’ve worked every day of my life. I just I’d go nuts if I was sitting around like that all the time. But that has become the norm, it’s become acceptable and all that kind of thing. So as much as it isn’t an industry thing and education, it’s literally a cultural thing, too. We’re not the same country that we were basically when I was growing up. And I’m not that old. Not that long ago. I mean we’ve changed a lot and it scares me. What part of the workforce is the most challenging? Is it entry level people? Is it skills? • It’s that we have spent the last 20 years and I’ve got a couple of kids that went to college, too, but the fact of the matter is that especially one of my kids, he came out of college and he wants to start at the top and work his way down. And it pisses me off. It’s wrong. That’s not how it works. I mean yeah, all the degree does is say hey, you’ve got the paper skills and you did it for four years, so come on and now we’ll show you what the real world is like. And no they all want to start at the top and then figure out where they actually fit in. And we’ve – I’m sorry – I look around, we’ve created that culture. I was just talking earlier. It’s like when I look at our company, I’d like to see kind of a demographics. If you take any company, any one of your companies, how many people do you really need with college degrees in your company? If it’s ten to twenty percent, that’s a lot. Well why are we sending 80 percent of our kids to freaking college? Why aren’t we... • And the trade school so they can come out equipped. Right? • Yes, and if they choose to do that, our company will offer tuition. If they go, if they want to continue that, why pay for it themselves? If they work for a company for a while, the company will pay for it. Where did that message get lost? You know? I’d love nothing more. I mean my one son, he’s a teacher. But he worked after a few years. They paid for his master’s degree. I didn’t have to pay for it. Why aren’t we communicating that? But get the kids out there. Teach them how to work first and I think, and I’m speaking from experience, but 101

I know my kids probably pissed away half of their college education because they were too young and they went out there and they partied. Yeah, they stayed on the Dean’s List and that kind of thing because if they didn’t the purse strings were gone if they weren’t on the Dean’s List. So they did what they needed to do, but I know that they didn’t get all of it out of it. They’d have waited until they were 20 or 22 and had a couple of years’ experience under their belt, it would have meant a lot more. You get the whole thing.

So the challenge for you then – and I’ll stick with you because I’m about to lose you – is that you can’t find people or you can’t find people who will fit what you – the demands that you have in your company? • Again, right now the again the situation I’m in right now, what we need right now because I literally don’t have the luxury of – I’ve got work that needs to get done today. I’ve got machines sitting in my plant right now because I don’t have somebody to run them that my customers need parts of. Skilled employees? • Yes, somebody that can walk up, run that machine, check the parts and know that they’re good and do it. And show up every day. I mean that’s important, too. And I’ve got those positions right now, so yeah I’m going to interview a guy today. I’ll probably make him an offer and it will be “What do you want to come because I’ve got to have you!” (Wow.) Okay. That’s not a good position to be in from an employer’s standpoint, but that’s squarely where we’re at right now. I need the warm body; I need somebody. But that’s short term. Right now I need nine or ten people and I need them now. Okay. I’m going to have to do some really creative things to get those people even to come in the door. Phase two of that is we’re looking at creating our own apprenticeship program because I don’t see anybody in here, the schools are not providing what we need. Hell, the program was shut down for years. And that’s because of if you want to call it culture and the trade schools and working for a living. So I’m going to get off this soapbox and all. But you get where I’m coming from and I don’t know how many other people share what I’m talking about but – • Yeah. • Yes. • Yeah. • The worst thing is, what are we going to do about it? • I have one question that I’d like to throw out to the group. Being at the Adult Learning Center, we have a multicultural workforce 102

potentially. What should we be doing with people from other countries coming in to go into the workforce? They’re new. Many of them are from a subsistence culture. Many times they don’t know how to work. What can we be doing here in Owatonna to groom them for the workforce? • Are there any volunteer programs that they can go out and just kind of be imbued by that a bit, where you know they can go out for the day and tour, participate and kind of just see that? Because the word cultural is really important and we know as leaders we’re responsible for two things primarily. One is the business for our company and the second is the culture of our company. And with having that cultural diversity and that availability, it is important for us to figure out how to make that available. Right? The melting pot that we are. So how do we tour them around and find out what their interests are and pair them to interest and have those opportunities I guess is the question. We would welcome that. • We have a very smart requirement that people need three months of verifiable work experience that I’ve people coming from all over the world and they haven’t worked anywhere here and it’s hard for me to verify that employment internationally. So you know they get some stable employment, no matter what that is. And you know volunteering at the Salvation Army, some of those things are good on the resume and application as well. • Yeah, and we’ve talked before. We worked well with them, but we do need some basic language skills. We’re not in a position and I don’t think anybody is to translate every document you had into any possible language. So there are some basic English skills needed. And I’m talking basic. And need to be able to read, need to be able to understand some English. • I would agree. I have a couple of guys who certainly have excellent hand skills, but not reading, not good English. • And that’s the key that we’re seeing as well as being able to read and interpret what is on a tag or a work order or something. You just, that’s a real challenge. What is the biggest challenge? Entry-level employees, first job employees? Or skilled employees? Is it all the above? • Skilled • Skilled • Skilled • Skilled • We’ve doubled our lead time just in the last month because I can’t hire welders. 103

• Wow. • Yeah. So that’s it. We can’t find people. • But then there’s the risk of back to I don’t know if I’m going to have them employed three months down the road either. So we’re clearly managing “Well if I could use four today, we’ve got two open positions.” So that’s how we’re managing. And we can get people in the door. So what do you do? • Keep looking. • Work overtime. • We weight our overtimes, we extend lead times, we manage customers which is not a good situation to be in because in our business it’s a fairly quick turn so if they need something they either expedite it or they go to our competitors. You know some people have a specialized product that they can only get from one place or whatever, but no. Say if we’re constantly way in overtime, Saturdays, which our guests don’t like versus what’s our true unit? • We’re looking at some of our temporary staffing agencies in the temp to perm type of situation where you can A) You can bring in a lot and see if they’re a good worker, show up every day and then you kind of get a feel for okay, is that work still going to be there three months from now? We’re highly cyclical throughout the year, so it’s hard to plan for that. Yeah, we’re busy right now. Are we going to be busy in June, July, and August? Those types of things. • We hire all of our people through temp to perm or most of them because we can’t, not knowing what kind of person we’re going to get in it, are they going to be reliable or whatever? We just can’t take the risk. We’re a small company and I can’t hire and fire, so we hire everyone that way not knowing what’s going on. • Yeah, we’ve gone through that too. We’ve hired like 34 new people in the last six months or something like that, and the temporary work staffing they’ve done a fantastic job helping us manage our business and allowing us to try before you buy and you know some of those situations. They do a great job, a great value for us, too. • Yes, and we actually just started doing direct hiring a little bit. About 20 percent of our hiring directly. We had to start doing that to be competitive because a lot of people were able to start finding direct employment and didn’t want to go through a temp agency. Now we’re cyclical as well but we’re a little more, we’re leveling out a lot more than what we were four or five years ago or even three years ago. So we’ve turned to doing some direct hiring and we’ll probably increase 104

that but we still about 80 percent come through a temp agency on a temp-to-hire basis. Does your population base pose a challenge? • Yeah. Winternomics was a challenge for us, hiring people that wanted to drive to where? This winter? I mean ugh, it was really hard for us getting people to want to travel that corridor and come see if sunny Southern Minnesota was really a challenge as we were trying to hire. • We bring in 500 to 700 people a year. It’s always challenging. We get people. We have a strict rehire policy. You know, that’s not the case with everybody but it’s just when you’re hiring on that high volume and you’re in a small town, you do cycle through a lot of people. And we can send it back and forth I’m sure. • A couple other problems, sorry. Shift work so a lot of our openings are second shift so we’ve had to look at some different things going forward - how we’re going to do our shifts differently to make it more attractive for our machinists. We run four tens because people drive from far away. And then we’re dying right now, just turnover on mechanical and electrical engineers so it’s not just low entrylevel. It’s not just skilled machinists and maintenance. It’s also front office, commodity management, purchasing, engineering and this is a company that pays well with good benefits. So it’s tight. • I must say I feel blessed. We have tons of applicants. Workforce Development can vouch for that. We have applications one day and get 350 applications in one day, but that still doesn’t mean that it’s easy looking for people who can run that piece of equipment. That takes quite a bit of knowledge to learn that. Sort of wanting the whole package, someone who could be a general worker in the department and drive a forklift, do a little bit of paperwork plus do a little bit of physical work as well. So finding those skilled workers to run pieces of equipment, different types of equipment, is challenging and whatever Riverland could do to do a little bit more forklift training we would love that. Who from Riverland would like to talk about the challenge from your perspective? • Well there are a number of us in the room. I’m just going to start. From a pupil standpoint, we’re also experiencing a challenge of having high school students choose us for career and technical education. This is a cultural issue going on right now in America where, for so many years, this gentleman has said, we’ve driven people to a four-year education and it’s worked. We’re sending lots 105

of people to a four-year education and they’re not choosing skilled manufacturing as a career right now. And so we’re really working with, helping high schools reestablish programs, trying to find ways to rebuild this network because I have heard a statistic that 75 percent of the jobs in Minnesota by 2020 will only require a two-year degree. • They don’t need all those four-year degrees, they want two-year technical degrees like Verne was talking about. • But 85 percent of all statistics are made up on the spot. • And you can only believe 40 percent of them. • So what we’re really trying to do is we’re trying to rethink how we do education. And speed to market, education is second only to government in moving slowly. And so we’re trying to figure out how to do that faster. That’s part of training and development. They’re trying to figure out how we offer education in sizable packages, whether it’s credit or whether it’s just hourly. We just train people and send them in. We just had a conversation about apprenticeships. • Machining, I’m sorry. And it will be running spring semester at night so we’re hoping that incumbent workers right now who want to get some new skills can come at night, take this machining certificate and then they’ll have some skills to get into a different job. So the thing is when high schools and colleges began to discontinue programs and sell their equipment off, now we have to start all over again. And how do you fund putting that money back into buying equipment and it’s all driven on revenue? I mean we are in the business of education and when we have to have people come in the door and have to have classes, we have to have x number of people to break even just like you’re selling whatever product you’re selling. So there’s a lot of synergy that can happen because you need workers and we need people to be trained to go work for you. So we have to figure out how we do that. And right now there are some old models that just aren’t working and we haven’t been able to figure out exactly how we switch out of that. • I think the challenge with high schools is they don’t have any funding. They haven’t had a wood shop or a metal shop in the high school for five years. How do they put it back in? If they can put it back in, the challenge is how they work with us because the high school credentialing process is different than the college credentialing process, and so it gets kind of convoluted there. The bigger push-back we get is parents, quite honestly, who want to send Johnny or Julie to MSU instead of River. • From my standpoint we still have a metal shop in Blooming Prairie. • Do you? 106

• And the wood is still there. I’ll tell you what. I cannot get anyone there to think about directing a kid your way. • I know it. • Also how many times do they believe that we don’t pay enough, that there’s no opportunity there. There’s no future there. And they can come down to my shop and they can look at a brand new piece of equipment that CNC operated and I don’t think they still get it because they don’t understand it. • And so when you say “they” is it the teachers or the students? • Teachers and administrators. Not the students. No I think if you were talking to the kids from the time they’re about eighth grade on, you’d find the ones that are the more heads and the ones that want to work with their hands. But instead they’re not. Unless maybe they had a really strong parent, maybe an Ag background. Otherwise they’re not getting exposed even. I offer tours every year to those classes. I’ve gotten one in the last six years. • I live outside Blooming and we do have some of the smaller schools that do not like to think about Riverland because we do that full secondary option where kids can go there and they kind of try to steer them away from us and it’s a sad thing. Since it’s not on the record, my boss is here but. But I think it is a big problem you know with some of the schools. We do have a lot of schools that don’t have it. Like we’re talking about the welding. I had April 11th a welding contest where we try to get people thinking welding. We’ll have over 20 high schools come and I try to get businesses and I’ll talk to you about that later about coming down and talking to these students. We’re trying anything we can get, you know short-term training, the workforce with welding. It used to be a two-year program; we’re down to one semester. Getting them the machine. We’re going to try to do that for one semester and see how that works. If it works, you know, hey, we’ll keep going. We’ll try and offer whatever we can get enough students in there. But it is hard to get high school students to think technical skill sets. Too many counselors I’d say are told to push four year versus two year. • I just wanted to add. I think what we find ourselves today, over the last year I spent a lot of time getting to know a lot of people in this room and others in the community, and I think we’ve drilled down to two very basic questions. What are the very specific needs that you have? Is it the type of welding? What type of welding? And how and when do you want to let that training deliver for your employees? I think if we can understand those two questions, we can better serve your needs because we are really working to serve you and meet your needs. And I’m here on campus. 107

What about training for mid-career employees? • Super important. Finding out what people are passionate about, helping them excel in that is unbelievably kind of a new thought in some sense because we’re not engaging our employees the way we want to. And in the last several months we’ve really learned a lot more about that and what we can potentially do to find out what people are hassling about. Then we get the conundrum of what do we do with that? What do we do with that information? Because they’re sometimes young families, so they don’t have a lot of extra hours to go out and get training. So we’re trying to figure out how do we partner with them and their families as well and figure out how to do that. So we’re going to start causing some of those questions. So right, two questions. I wrote them down so we will be specific and we’ll ask how and when we can do that. • Sounds great. Thanks a lot. • Can weigh in from my time at (company) here we had a program for funding education for people that worked, and we never spent the money that we put into it. I mean never, and I assume (company) I think – • Right. Unused benefits. • It’s unused benefits. • People don’t want to take advantage of it? • No. • What’s the reason? • It’s learning. I think a lot of people will come with the expectation that “I got trained in high school; I got trained in technical school and I’m done.” And think about it. Through your career, how many times do you have to reinvent yourself? So really the type of workers that we need are people that want to learn, have that passion to continually professionally develop. And there are not a lot of people out there that do that. Who put $7,500 on the table in tuition reimbursement and no one’s using it. Well what would you do differently? • We talked about it. Some of it was the reimbursement sometimes wasn’t – when we interviewed we found out the reimbursement was a concern because they had to pay for it up front and then they got reimbursed when they got a successful completion of the course. Second thing was the timing was – the young families or whatever. It was time away from their families. And third was what it is. I think maybe a linkage to what good would it do them if they improve? Where was their position in the organization if they got a four-year 108

degree or the master’s degree? • I just want to say we’re doing something with them with their maintenance guys. They’re doing an internship which is really good. We’re helping pay for their education and then at the same time they’re adjusting their hours so with them getting that work, they might be the second shift or the weekends, but the students still can attend school. We had places that’d say hey, we’ll hire them. But they’re getting burned out. You know you’ve got your full work day, at the school and no time to do your homework and then they’re working you all from three or four o’clock till two o’clock. We have to have some guys in. • Is the curriculum all right? I mean are we sending them to World Religions when they want to be a welder? You know? • Yeah. • I was wondering what the heck I was doing at Home Ec. I learned everything there. Why do you let me keep coming here? Are the curricula equating to. I stand on the board of an organization in Costa Rica which we moved 180 jobs out of Costa Rica into the United States because they were so specific, their training was so specific it just didn’t work. The reality is these kids were coming out of high school with very specific training. They knew how to work in their call centers. They knew IT, they knew some of these things and they weren’t getting fed this entire curriculum that didn’t equate. So is that starting to modify? • Our career technical education curriculum is very tight. It teaches just what they need to know. There are very few what I call transfer curriculum pieces in it which is a variety of classes like you’re referring to. But unlike this machining certificate, it’s the basic blueprint, how to do precision tool, how to drilling and cut. It is the classes you need to get out. It’s to train to start. It really is to train to start. • So is there enough value in asking, “Well you’re going to get a certificate.” Is that enough in the minds of our culture to say a certificate’s enough. You know, you’re not going to have an associate’s degree or it’s not a degree. It’s like do Mom and Dad get sold on the fact that yeah, little Johnny and Julie are going to have certificates and that’s enough for them? Is that? • That’s some of the challenge. It really is. • It appears we often have to look to manufacturers to say is that enough because we have to tell our families and our students that, yes, if you don’t complete a two-year program but you earn a certificate, you will still find gainful employment with a livable wage and opportunity for promotion. 109

• Does the piece of paper matter? • Right. That’s one question that I have for you. • In a lot of homes it does. My daughter – • Does it matter to you? • St. Cloud State and we still want her out? I don’t know what I want to do. • Exactly. But what I’m saying is if we can go into, if we can speak to a family like that and truly be able to tell them, “You know what? You don’t need to get the degree because with this certificate you will find employment in our region.” Because we’re finding that’s very important to our students. What we’re finding is they don’t like to travel very much. It’s the winter thing combined with “I’ve grown up in Southern Minnesota my entire life and I really don’t want to leave.” We do find that a lot. The other part of what we’re finding is that many of the tuition reimbursement programs that some of the people in the room and others offer are strictly credit. So if tuition reimbursement were to be a little more flexible to be for hourly training versus credit based training, there’s a lot more that we can do and offer across the region in short pieces. Now we’re working on credit prior learning pieces that could potentially take some of those hourly trainings that may incorporate some of our credit based training topics and we may be able to use them in the curriculum and then the students can turn around and those who choose to go for credit based training could use some of that experience and earn credit for the work that they’ve done already, for the learning that’s occurred. • Well my question is I think mainly to the educational people. The question. Do you find students in high school – we’re talking about getting the high school students interested at the lower levels, but do you find that there are students that aren’t coming out of high school going into technical training programs because they can afford it? • No, I would say the mitigating factor of parents, honestly, we need to. And we’ve taken a lot of strides in that effort, partnering with like the 360 group that we’re with, getting in the high schools earlier, reaching out to parents more broadly saying “These are professional, clean, good paying jobs.” And I would say that that more than cost is what needs to happen. Parents need to see that there will be real opportunities. • I think ultimately addressing that high school issue, we have a really aggressive program of that. But quite honestly the school district has totally bought into it so it’s a new apprenticeship program. We have high school kids that are out working their way through I think it’s seven manufacturers now, 13 or 14 students have just 110

been in second year where they go through and experience all and then getting paid for it, during school hours. And obviously the goal is to get those kids to go on to go to Riverland or wherever and then come back to the manufacturer. But industry’s bought in. The school district has bought in. The parents have bought in and that all germinated from a business education committee that we have at the Chamber that’s met for 15 years. So I mean, they’ve even spoken at the Manufacturer’s Summit put on by the Chamber. So this is a really good program and we want any school district to model this through the Department of Education and the State. It’s a great program and it’s getting kids out into manufacturing, but manufacturing has to buy in. • And manufacturing has to buy in. • And again to your point, we need to – is a certificate enough? I think we look to business to say is it enough. You’re the ones that do the hiring. Does that work for you? I think what I heard was out of 100 people in a room, people said well do you want your child to go to college and basically 95 percent of the parents raised their hands. And so I think if you’ve got two really big issues there. You have a point. • I suppose this doesn’t answer your question about a certificate. I say we need welders. No offense. The welding program and the certificate doesn’t matter much to a student. We have a real specific need. We’re a team only welding. Okay. And so that’s the problem with the certificate in welding to us is that they give a broad base of welding skills and this probably goes for machining as well. I need much more focus. I don’t care if it’s only a six-month program but I need much more focus. • And that’s a perfect example of where if we can build a body of students who need to take welding in Owatonna, and they’re midlevel employed already, and employers are willing to say yeah, we will use their tuition reimbursement to send them to this welding class where they will get a certificate of completion that will list the number of hours and we can list the objectives for that program, we can do that. We need industries in order to be able to do that. We can’t do it with two students and most companies can afford to say I want to put this course on for my two students. But if companies work together and we can build that network of here’s what we need today. We can do it. We can provide it. • One of the things that we hear from a lot of our member companies is all around change and employees who are able to adapt to change. Because sometimes they’re coming in thinking I get this job and that’s all I want to do. And the reality is we all have to, which 111

is connected to life-long employability not life-long employment because there aren’t many of us who can promise that anymore given the volatility of what’s going on. And what I’m hearing around the room, all about playing to the strengths of people rather than having them spend time on things that may not be applicable to what they’re doing. Where do you put the workforce question in the context of other challenges to your business? • Third.

What’s first? • Corporate climate. I mean being competitive. We’re run an industrial product. We have competitors and geographies throughout the United States that compete with us and we often are at a loss to try to figure out how we cut our expenses 15 percent to be competitive. Because there’s a real issue when the corporate environment is five to ten percent different 1,000 miles away. Still made in America. That’s tough for us. And then healthcare costs. I mean as an employer, I mean we have a fixed margin of what we can deal with so with these new additions, these new additional costs are being passed on to our employees in some sense and that’s tough for us. I mean there’s just there’s only – just do the math. Right? It’s just pretty much you have to do the math and if the math is wrong, chances are your business is wrong. And when the math is wrong on the corporate level from a competitiveness perspective, the math is wrong. You can’t concoct – And I know there’s New Math. But the math I use is still the same math and so when the math’s wrong... That’s #1. That’s when you’re out of control. I mean talking about workforce. They’re some of the things that we try to control better. Create a fun environment, create a culture and start living with people and their passion and that’s something a little bit more controllable. But when corporate climate is out of control, which I think it is from a tax perspective in this state, you can’t control that. (Well.) Second are healthcare costs. Talk about, would you say second there is education and speed is second to government? Well government took over our healthcare. Good luck. • I put it probably right up there with the economy and the healthcare costs. I don’t remember exactly. It was somewhere right in there. Obviously we’re dependent on the economy to be strong, because if the economy goes, what’s the first thing that goes? Marketing dollars go so there goes our manufacturing. Healthcare’s a big deal to us. If you think about it, the majority of our employees probably are somewhere in the 35/40/45,000 dollar salary range, 112

and you throw a six and twelve thousand dollar deductible on them and they’re that far away from living paycheck to paycheck and they can’t afford the bill. That’s a scary thought for folks and the options are getting less and less of what you can do about it. So that’s a big deal. So it’s somewhere. All three of those are pretty big risks to our business. • Number two would probably be #1, Workforce, #2. Not that healthcare isn’t important of course. We’re a small quarry so we’re very limited on our healthcare you know that we can offer, so that takes out a little bit off the table for us. • Yeah, but one thing to just add is that to give candid feedback. I mean I think we’re all here and we realize that as employers we need to work together. We need to work with Riverland to help train our employees and train people. I feel a little helpless when it comes to this legislation and healthcare costs and the taxes. And not just taxes because I mean you look at what they’re doing. You know I work in human resources obviously, so I see what they’re doing now with some of these other regulations on government contractors when it comes to employees with disabilities and different things. It just seems that we have enough challenges without you imposing more on us. Right? And it seems like it’s just so with the healthcare responsibilities and other stuff it’s like okay, we have this stuff that we understand that we need to work for, and then it just gets put more on. And then you mentioned about unemployment benefits and I don’t want to get into that but we have the exact same thing. “I’m long term unemployed; I’m still getting it. I don’t need to come to work.” We had somebody literally walk off the job and tell us, “It’s okay. I’ll get unemployment.” And it just – and the sad part is he’s right. He probably will because it’s not his fault that we made him come to work. All right. That’s my last statement.

How does international trade impact what you’re doing these days? Is it an opportunity? Is it a challenge? Is it changing? Is it becoming more of an opportunity for you? • More of an opportunity for us. Actually we just partnered with a company. We actually took over, we internalized all our own logistics. We’re having vendors, I mean we have to buy things that are very specific, unique things from all over the world and found out that all those vendors were managing that logistics piece so we actually sourced that with another company that I’ve been doing business with for decades and it brought our costs down about 15 to 16 percent overall managing it ourselves in our own logistics management. Step two was, I cast the vision of now, okay, we’re going to take this 113

savings and now we’re going to actually build things in America and ship that quality all over the world and we’re just starting to cast that vision and there’s so much of that opportunity where people in industrial markets because industrialization happens globally. We’re seeing where people do want “Made in America.” They want to trust that essence of wow, those Americans, they know how to build if we know where to get the right stuff from the start rather than copy the same something that was okay but it really doesn’t meet those requirements that we provide. And so we’re seeing a great opportunity. So first we had to get some logistics and systems in place. How about banking? • We just want our free calendars from them. • I mean the feds don’t allow that anymore. • We don’t have the luxury of being self-financed so I don’t know. It doesn’t matter to us right now. • Anyone else? The banking? • Too many rules. • Too many fees. • I deal with big banks and I deal with little banks and I feel for the banks because of the government regulation that they have to put up with it and that’s the cause of some of my pain. But some things have gotten to just be way harder than it used to be and I mean I’m very bankable. I have people calling on my door all the time. I have plenty of equity, borrow what I need, so I can’t say I ever have any trouble banking. But sometimes the rules and regulations and the extra fees thrown upon me are, it’s just crazy. • The math though makes it hard. The math doesn’t always work. It’s the bank. • I’d just add you know I think you asked earlier what makes Owatonna different. I think last week we had a lenders luncheon where we worked trying to get small business going and then partnership with the Initiative Fund. We had a great dialogue and even with the regulations and the challenges that we all have, we really, I think, came up with some ideas on how to work together to get some results so that if a small business person is trying to get going that we figure out a path and make the financing available. Not that we’re going to solve all of them, but at least the fact that the dialogue got started was pretty huge. • Having been in the finance game for about 30 years with small business, the good news for the people in business, the barriers to entry because of finance, because of the rules, because of the math 114

– very difficult for competitor’s right to compete for your business. That’s into the good news for existing players. The bad news is you’re working with guys that are well financed and have your act together, it’s still harder than it’s ever been, so we don’t – we agree. And again it comes back to how much more regulation can you put on us? How much more cost and uncertainty can you give us and expect us to bet, go along? • The people that are setting those rules and regulations and that oversight are $17 trillion dollars in the hole. I’m just saying. • Bam! • You’re $17 trillion dollars in the hole. We use GAP accounting, they’re $148 trillion dollars in the hole and they’re telling us how to regulate the people that are – that’s crazy. Absolutely preposterous.

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FOCUS GROUPS

Anoka 8:30 a.m., March 11

Anoka Technical College

Does everyone here operate your business from a formal strategic plan? I’d like to get a sense of that. Talk about that process a little bit as you go forward. Yes. My goal is you make it early and you have to live up to it. And you do have a lot of struggles along the way. Around June we set down how the second part of the year is going to play out, based on the first part of the year. What’s going to happen to the economy and so on. That’s been tough. • In our industry, in the aerospace business, our customers give us a firm forecast for three years. We do a 1-year plan and we track it every month. We’re generally pretty accurate. We do a 5-year plan, which is more equipment based, and we always do a 20-year plan which is more personnel based. Where is the company going to be 20 years from now? I don’t know, but I’m not going to be there. • Again, being in aerospace, we did not have the severe recession that others had. And thanks to the state – I never thought I’d say those words (laughter) – we didn’t have to lay off people. We ran 32-hour weeks and then took 8 hours of unemployment for them -- so we maintained our workforce. We’ve not had anybody voluntarily leave our company in 6 years. But we’re seeing an aging population. For years our average age was 49. Now we’re 51.4. My saw guy is 74. He says he’s going to retire at 75 but I’m coaching him not to. We used to think when all these guys turned 60, 62 we’d have a problem, but it 116

hasn’t turned out that way. They keep working. I have three people over 70 and only one of them is talking about retirement, as far as I can see. We’re starting to bring in some younger people, a lot of them Anoka Tech grads. Yeah, the 20-year forecast is something we started doing about five years ago and it has worked out pretty well so far. We’ve added some bodies we didn’t think we would. When you’re a certain size company and you’re projecting out that you’re going to be four times as big, you have to be kind of cautious. Anyone else? Has economic uncertainty or volatility made the 12-month forecast more difficult to maintain? • We always start with a plan but we’re continually adjusting it. There are always so many variables out of our control and we just kind of have to react to them. • We went through a two-year drop (because) we had predicted some growth that did not materialize. • Some of our suppliers can say that too! • All of a sudden we had to scale back. And for the past 18 months it has been brutal. We’ve lost 50 percent of our workforce. Not by them leaving but by us having to cut through attrition because we just plain did not need material. And we are a global entity. We sell across the world and we have multiple facilities and as the economy and the different regions have slowly pulled in, it’s been a drastic effect to us and our supply base. What we’re seeing now as we try to ramp back up, because the dealers quit ordering, the customers quit ordering. The dealers depleted their inventory, so now it’s starting to ramp back up and we’re seeing some pretty good ordering coverage, but our suppliers can’t keep up with us. We’re just barely into this thing and we’re having parts shortages of things you just shouldn’t ever see. Everybody is too nervous to upsize. We’re included. We could add people but we’re not going to add, we’re going to use overtime and balance the different orders. So it’s not a customer order and a stock order, we’ll shove it out and concentrate on the things up front because we’re too nervous to bank on those inventory types of orders from dealers because they can just cut them and then you’re back to where you were. We don’t want to do that. We’re trying to right size the business to where we think it’s going to be and they’re making some strategic moves with product throughout the world to see where it best fits and what facility. Has anyone else had a similar experience? Does uncertainty keep you and your customers from acquisitions or making capital improvements? 117

• Uncertainty is out there. From the 30,000 foot level you have to look at everything. You have to balance cash flow and make sure you are making the right investments -- and the crystal ball is very foggy out there. You have to look at politics and the economy is shifting back and forth. I think manufacturing is strong but I’m always warning my folks to be careful, let’s not bank on it. We don’t know what’s going to happen in the economy, so let’s stay cash strong. I’m nervous because I don’t have the confidence in it. Is that nervousness a legacy of the crash in 2008? • No. I think it goes back 30-some years. The economy changes but technology also changes so quickly. I remember you go 10 years and then you have new CNC machines coming out. Oh what’s that? The all of a sudden the next decade everything’s changing every five years, then all of a sudden it’s every year, to now every few months. What’s out there? Now, it seems whatever you buy is obsolete by the time you get it in. When you’re looking down the road a ways you have to invest in certain ways and you have to put your capital in budgets properly. You can plan all you want, but you’re going to be wrong. But you do the best you can. • And there’s the government. What was it last year, Section 179? They ran it out about a month after the year ended. They allowed us to take out another 1 million dollars? How do you plan like that? I can’t plan the reverse. • Banking, too. Four years ago, after 37 years in business I probably never had a tougher banking relationship. It just froze. And now today, I’ve never had a better banking relationship. The money is just pouring in whenever I want it. But it is scary to think where it will be three or four years from now. Will it go back to where it was, where we didn’t necessarily do anything wrong, everything just got frozen. • Everybody within the bank had things frozen and that started a challenge. We’re making some big investments now but something tightened up again, big time. All things considered, do you think manufacturing is on the right track these days? Or are things on the wrong track? Or is to too muddled to say? • Even if we throw government in it? We have to, don’t we? • Some things are on the right track and some aren’t. Do I think my company is on the right track for its business and for its growth in its industry? Absolutely. These other factors that you talk about are things 118

we just have to deal with. They’re going to be what they’re going to be. And I can complain about them. Sometimes those complaints can effect positive change, but the fact is that I have to get up every day and I have to go deal with it. So we’ll make the best of it. • Yep, you’re absolutely right. When we’re in control of our business we’re on the right track. We have to depend on our customers and they have to depend on their customers. • We kind of are in many regards. We keep hearing the infrastructure is failing. We’ve got gobs of stuff that’s got to be done, and we’re stuck in a political environment that is ripe for implosions. We’re very nearly headed to a third world country status in the next few years if things don’t change. I really believe that. What kinds of change? • You cannot have a population rely on the government to fund the way they live. Where so few us that actually work are funding the majority that don’t work. The money’s not going to be there. They can’t just keep printing it. And that’s what we’ve done and it just scares the hell out of me. • We feel our opportunities today are better than they’ve probably ever been in the past, but we feel we’ve got some completion that’s better than it’s ever been in the past. We used to be one player and we had maybe 30 competitors, then it got down to 20 and then 10. It just seems like the top couple that are competing with us it’s just tougher competition that way. There’s a good side and bad side to that I guess. We feel we have good opportunities. • I agree with a lot of what you are talking about. We all obviously work in businesses that are still in place and active. We’ve got to take all challenges as just that: challenges. But there are a lot of things out there that you can’t control. And we’re concerned about them, too. But in the end you’ve got to get up and get into your business and do what you can within your business as counter measures against what’s happening there. Because ultimately that’s the main goal, satisfying your customers. The question is what happens to that money that comes from your customer that goes to you and the government and the bank and everybody? How do you extract the most value and provide the most value to your customer? It’s a scary environment out there and there are infrastructure issues and a lot of issues out there. But in the end you’ve got to get up and go to work every morning. I have 200 people, how do I get 200 people motivated each day to come to work and do what they can to help take care of our customers? We first took on this project in in 2009, just after the economy went 119

south. How do things look to you today, compared to where you thought they were going back then? • Our business is a much better business than it was five years ago. When things started to turn a little bit five years ago, we started investing. We invested in equipment. We invested in ways to improve our business. And so we said here’s what’s happening; we’re a contract manufacturer, 90 percent of our work is done based on our customers’ needs. We just said let’s invest in the business and focus on improving our business. I think it helped us make our way through and get better at what we do. Over all, we look at our business more on an annual basis then we did before but we really look at it on a quarterly basis. With lead times being six or seven weeks on most of the stuff we do. A year is eight turns of business. That’s a long time! And so we focus more on quarter than we do on years. You have to have an annual plan, give it to the bank, we’ll see you in a year, but otherwise we focus on a couple of quarter and that’s it on a tactical basis. • I think in ‘09 we just kept making adjustments for things going down the wrong direction. But it just got worse and worse for us and now it’s almost gone the opposite. We make an annual projection, and it’s going a little better and we bit off a little more so it’s almost the extreme opposite. So we are happy. There are some market factors that sometimes get in the way of manufacturers. Let me read them – and you tell me which of them give you the most heartburn and why: Competition from foreign sources? Supply chain relationships? Government policies and regulations? Costs related to healthcare? Employee costs and benefits not related to health care? The ability to attract and retain qualified workers? • The one we have the least control over is the government. • Government. • Yes and you can throw healthcare in there too. Anybody know what your healthcare will be next year? No? We projected a 40 percent increase because we have no idea. • I completely agree; government is #1 and healthcare is #1a -- they go together. But in the end we’ll find a way to make it work. How do you find a way to make government work and healthcare too? Hard to pass that number onto your customer. • We’ve got some declining contracts. • I’ve got a question. I don’t want to make this too much of a leading question. But the implications of you guys talking about government; is that it either is/was better than before and it’s worse now or that it has to change. Was it better before and what do you see in the future 120

and how is that going to affect that? You’ve got business taxes, you’ve got minimum wage, you’ve got healthcare, you’ve got all these issues and you say you don’t have any control over that. But somebody’s got to get control of it. You’re not going to sit by and let your business go down the drain. I know that. • From our perspective I think there are two answers. Yes I think government was less intrusive 20 years ago. But the part that we see as the real hang-up is that the federal government can’t get a budget put together for six months. As a business, if we did that we would be gone. We would be out of business in a heartbeat. We need a federal government that says here’s our five-year plan. We, as democrats and republicans, have a consensus that this is the stuff that we have to get done. It’s not happening. And that’s the uncertainty. • We try and take advantage of tax situations, as I’m sure every business here does. You have to make decisions based on need but you also have to make decisions based on the tax situation. We don’t know what’s going to happen from six months to six months and it does impact our decisions. We become more conservative because of that. • It’s just the change of tax rates at the top, for our OCIA group, there’s just less money to invest. Less result in cash to invest after distributions. The rates of distributions, required distributions to pay taxes, our owners of our group don’t take money out other than to pay taxes. But the tax burden has been raised. It’s almost 20 percent greater than it was four or five years ago of what comes out. And it’s legit! It’s real money based on calculations etc. That’s 10 percent less capital that I have available for investment or training or whatever else it is. So I’d say the most direct impact that we’ve got is right there. The planning is there too. Is the 179 going to happen? It’s timing of deductions but boy it’s awfully attractive when it’s next year and you know it’s going to come back and it’s not going to be over seven years and where’s it going to happen. For us as much as anything, I’ve got 10-15 percent less capital to deal with each year because it’s going out for taxes. • We’re in the middle of an audit from our accounting group right now and even more to us is the state. We’re right in the middle of this goofball thing of whether or not the state’s going to charge taxes on warehousing. And I know there are lobbies working on that now and maybe that will be resolved. Driving to work you hear that the House and the government want to try and get this resolved immediately and you have the Senate saying we’ll wait until after March 15th. As a manufacturer that’s an insult! First off, if you’re going to pass it, pass it. Just do it! If you’re not going to do it than don’t do it but don’t get into this argument of whether it’s something that should be resolved now or later. This is just another governmental situation that leaves 121

some question of uncertainty and you’re right. It comes down to how much money is going to come out of my owner’s pockets as a result of that and how much money are we going to have to reinvest into our company. And when we reinvest into our company, we’re talking equipment space, which ultimately means people. • From the ammunition industry obviously legislation is the #1 that drives a lot of what happens in our industry in regards to gun control, legislation on led and supply chain would be the #2 thing I would pick for us. Because there are not a lot of people that do what we do around the world and make the materials we need in order to produce ammunition. So legislation is tied to the supply chain with many of the things we try to bring in to produce our product. Because it’s pushed a lot of those people out of the country and you now have to buy a lot of those materials overseas. Do metropolitan companies have an advantage over rural areas regarding work force issues? • There is a difference. For us, we can fill our machines trades and welding programs, that’s not an issue. Where in the rural areas trying to get interest is a big problem for us. Now I suppose a lot of people in here might say yeah you can fill it but we want more and more and more and that’s simply trying to keep our process going 24 hours a day which doesn’t really work that well in education. There is definitely a difference between rural and urban and the opportunities we have to pull in the students. • We just like to know where we are and we don’t even know until July 1st what our budgets will be. We can be more responsive and in part, due to the help from folks in this room who help us with supplies and equipment. But there’s definitely an urban-rural mix as far as getting students in the door. What is the biggest issue that you are facing today? Is it attracting entry-level workers? Or is it mid-career training and advancement, internal kinds of training? • That’s not a problem. I think people are set. It’s finding new people and then finding the new generation that will just show up on time. But then you still have to take them and train them. When I went to college I got basics and then you went to work. Now you specialize in what you want to do. Same things with schooling here. You get the basics on how to run things here but you still have to have people that are responsible and understand that they go to be there. That is the biggest thing.

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I’m getting from you that the challenge is the attitude from the incoming worker as much? • It’s an entitlement thing. And going back into society. • And lifestyle. We do a drug test and basically we weed out 65 percent of the applicants right there. • No kidding? Really? • Yes, and I think most of these people would agree. • Yeah. • And we tell them we are going to drug test them and they go do it? (laughter) • We feel it is improving as far as workforce. We are doing better today than we were 5-10 years ago. We’d like to see it better, but we feel it is going the right direction and there’s more interest in the industry. Maybe because of the economy? • The best thing I hear is when I have a new employee or a younger guy who’s going to buy a house, I’m like that’s awesome you need to do that. You get that commitment that you’re going to be here and you’re going to be serious now. • We’re not having the drug issue, so to say. I used to years ago when I ran another company. We made them pay for drug test themselves and that weaned out pretty quickly who was going to go spend $75 on their own. If they passed it I’d reimburse them. If they didn’t… But we’re not having the problem with employees and retention in my division. What I’m struggling with is that we set a wage that’s pretty decent. And we’re starting to reach that point where I’m afraid I’m going to cap out. Let’s talk about trade. The national trend, if you read the Wall Street Journal and other business journals, there appears to be a trend to bring products back home from China, India and other formerly cheap labor competitors. Do you see that? • In some areas, yes. In the past few years we’ve moved a facility from Japan back to Georgia. But I think it’s going to be another 10-15 years before the pay starts to even out. Now in China, it’s starting to come up for them. But they have a long way to go. • We’ll fix that next year if our healthcare jumps up then we will be strapped with more costs. It isn’t going to even out. Right now we are going on the right path but all of a sudden we’re going to increase our costs and all of a sudden they’re going to go, hey there more competitive over there. We are going to kick ourselves. • The government’s making things incredibly interesting. Let’s go there. What’s the biggest challenge with health care? Costs? 123

• I’d hate it if I was certain it was going to go up 40 percent next year. That just would make me upset right now. I’m sure it will but I don’t know? • None of us know. Nobody in this room knows. • One thing that we know is that it won’t go down. • And that is the fact. And whether or not it goes up five percent or 10 percent in the next years, in the next four years it’s probably going to be up 20-40 percent. Take a look at past history. It’s constantly going up. It’s a sea of money in that insurance industry. And when there’s a sea of money all it is are people fighting over it and how they can get it. And I’m sorry, but that’s driving costs up. No doubt about it. • It’s the uncertainty. If we all knew all of our costs were going to go up 20 percent per year, we’d hate it, but at least we’d know it. • Well in a way that is really going to hurt us along those lines too. We’re right next door to each other and we could actually see these people literally walk back and forth between companies. Probably a similar situation. It will go up for the last couple of years we’ve only had a 45 percent increase and our ownership has kept what the employee actually pays the same. They’ve absorbed the cost. The time is coming when they stop absorbing the cost and they’re going to pass it onto the employee. And that’s when it’s going to hit. It’s not going to happen this year or next year but those days are going to come. Similarly, with all the discussion on raising the minimum wage. Every job at my company is above the minimum wage, significantly. But as the minimum wage creeps up and suddenly there’s a job they don’t have to drive as far for, it might just be $1.00 less per hour, we will start to feel that kind of pressure. I’m not going to have to raise my wages as a result of the law, but I’m probably going to have to raise them as a result of competition with other industries right now that I am not competing with. How is it as an HR issue? Do employees have a sense of what’s coming? • I think they’re a little nervous about the healthcare and they keep asking me whether or not we are going to keep providing healthcare and how’s that going to all pan out? But when they come in for an interview they are looking for benefits. People who aren’t employed want benefits right away. A lot of people might come in and take a job they wouldn’t take otherwise and we might see some movement in the workforce because of that? And the plan is we train them and then they either find something that pays more or offers something better or is closer to home. So we try to employ people that live in the area. You have to have different strategies for it. We try to employ people 124

who seem to want to settle down and don’t look for a career movement necessarily but would be happy with something that’s going to pay them a comfortable salary and have the benefits. • Yeah the healthcare side is tough. Obviously healthcare got into the business and became part of what a business provides to its employees vs. what was provided otherwise a long time ago. We have to deal with the system. I think every business owner or leader at some point would like to say you know maybe this isn’t the worst thing to have out of our hands. Or let somebody else take care of it with the knowledge that the government’s going to mess it up anyway. But at least it would not be ours to deal with. Something to compete with other employers on. On the benefits side, it’s much simpler to deal with money than it is with benefits and where they are going to go. How many employees have said, you know I get it my wage is where it’s supposed to be, but my benefits aren’t and I need to go someplace else because I like the benefits. And you think if I really looked at this it is probably not a better deal but you can’t do that. You never know the whole package. It’s tough. • I think one of the things that keeps people with us today are the benefits. Now if it negates everyone evenly across the board I think it’s a whole different playing field at that point. What are the primary drivers of growth in your companies? Is it acquiring new customers? Is it growing your existing customers? Is it new products? Is expanding foreign markets? • We’re very different than most people here. We only have three maybe four major customers. And they are starting to realize that there aren’t any more aerospace shops. We started a relationship with (a large company) three years ago and it took us two years to ship our first part. And it took us another year to get turned on so we could do our first quality inspection. Nobody can afford to do that from scratch. So, our business, all we have to do is wait for the attrition of all those other guys in the industry that can’t do it, and it’s happened. We recognized that there are no more 20-man machine shops anymore that are selling flight critical product anymore. First of all you have to carry a 50 million dollar liability insurance policy. Now we’re a 50 man shop and in another three years there won’t be any 50 man shops. Because of the paperwork and overhead costs. So our business is going to grow because we have to. Through acquisition or through sales increases? • Probably not acquisition. After all, you don’t want to buy a shop that’s going under in our business. But they are going to build ore 125

airliners. China is buying tons of them all over Asia. We’re at kind of a golden age. But we’re very different in that respect. I think we’re going to continue to grow that way. The 20-year plan is for ten-fold growth. I will say one thing, 15 years ago we had 52 folks. Now we have 51 and we’re doing about 2 1/2 times the sales volume. My labor content is under nine percent now. Did you envision that when you did your 20-year plan at that time? • No. I had built a factory in Mexico when we were at 27 percent labor. Anybody here into continuous improvement manufacturing? Anybody not? Because you’re going to be gone. That’s what we’ve done. • We gain market share through supplier consolidation. We almost never get kicked out. It can happen, but it usually might be one project, one program, one person doesn’t like something. For the most part we just keep standing through the whole process. As the process gets more complex the paperwork becomes a larger project, your labor content is going down but the breakdown of that labor is a little different. I’ve only been out of the business 10 years. Ten years ago the percentage of time people spent making parts was much greater than it is now as a percentage overall. Now it’s front end contract review getting it all right, back end, flow-down all the other services you have to do and there’s this little sliver in the middle of machining and guess what, all those shops that fell out could pretty much do that. They just couldn’t do the front and the back. And so by doing the front and the back well, companies and business grow, there’s still a ton of price pressure, so you need to continuously improve but the real opportunity is with your existing supply base and if you’re in the aerospace business, there’s consolidation there. • I think with us there will be a lot of opportunity with acquisitions. I see a lot of succession problems out of these smaller businesses. Who’s going to take them over? They’re too big for the small guy, and the smart guy with money does not want to get involved so I think they could be good growth opportunities. • Our overall corporate strategy is to win in China. So we see China as the goose that laid the golden egg for the next few years. That said, 50 percent of what I produce here is produced over there. And that’s going to continue but that also going to fund different things back in the States. Seventy percent of our sales that we experience out of Minnesota are government contract based. So when the government’s at these, we can’t work with each other, you’re not doing infrastructure or roads or buildings it’s a direct impact to us. Because without these government contracts, the contractors are not buying equipment. So it’s 126

kind of the trickle-down effect that we see here. From where we were three or four years ago from where we’re at today. • My answer to the growth question is acquisitions. Manufacturers appear to be a hot commodity with the political class these days. They like to laud the folks who “make stuff,” as the bedrock of our economy. Do you sense you are getting more talk than action? • We don’t trust them. I can tell you that from the top guy down we do not trust them. • We do not need politicians as politicians. We need business people as politicians. And I understand the inner workings of the economy and it does not make sense. We need someone who knows what they are doing. • We were asked by one of our senators if he could come in and visit. I gave it a lot of thought and talked to a lot of the shareholders and we decided to say no. Because the only person who’s going to benefit from that visit is him and not us. And we told him why. • Yeah, we’ve turned down visits as well. You get a pat on the back and the hand in your pocket and you just have to decide what value is it? Whose photo-op is it? • We’re in a 30,000 square foot expansion; we’re bringing in another 3 million dollars’ worth of equipment. I’m going to have to hire in. I’ve already had to hire 10 and I’ll be hiring another 15 people here in the course of the next three months. And probably another 10-15 more over the next year to two years. Again you can imagine how I feel when we’re doing that all on our own, and I hear the big whoop-dedoo, when they go out and recruit another company to Minnesota with 40 new people -- and they are going to get a $750,000 forgivable loan, which to me means grant. Where’s the Governor for for my ownership? I tell you what: if I had the ability to I Dream of Jeannie “snap” my company out of Minnesota, I’d do it in a heartbeat. Where would you go? • Warm weather. (laughter) • You guys caught me on an emotional moment. It is definitely a push button probably for everybody sitting at this table. You hear about these photo-ops to go out and get somebody else to bring them in here and the reality is that there just doesn’t seem to be that real caring concern about the groups that are coming on in, every day, every morning, fighting the fight trying to make something positive happen in Minnesota, hire people, enhance them. It is the American dream. I wish it was the state dream that was being kept in our state. 127

• That’s a good point. Five years ago we had three facilities here in Minnesota now we’re down to one. But I don’t see anybody at the state government or federal government really working to resolve these issues. We can double the capacity of that facility in six months to a year. Double. People included if the government would work and fund some of these infrastructure projects that have got to be done. These are very well paying jobs for these areas. For me it’s very frustrating since it’s all I’ve done for 32 years. This is what I love to do. I’ve never met a better shop nor had better people, in all those years, as I have here. And I’ve worked quite a few places across this country. So it’s not people, it’s the people that are leading us. And I’m very passionate about this. I really believe we need to grow jobs, real jobs. Everyone talks about the minimum wages, I’m not talking about minimum wage jobs I’m talking about $25-$35 dollar an hour jobs with full benefit. I’m talking jobs where people can raise their families and send their kids to school if they’re careful about how they do their funding. It’s here, I have the facility, I have the people, I’ve got the infrastructure the one thing I don’t have is orders. • You want someone who’s going to listen to us and understand. And not go to the masses of people that are on the bottom end. They have to go to us that are supplying jobs.

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FOCUS GROUPS

Minneapolis 3:00 p.m., March 11

Minnesota Precision Manufacturing Association (MPMA) and Saint Paul Port Authority

The MPMA group engaged in a lively discussion last year about where things were headed. Let’s start as you sit here today, we’ll start with you (name), how does life look in terms of your business today vs. what it was a year ago? Seems to me you were looking to do some more business in Costa Rica. What happened? We did a cost justification on putting a facility in Costa Rica and at this time it just didn’t pay for itself. That was an investigation we did and took four trips down there. Business down there is continuing to grow, but at this time it just wasn’t worthy of the dollar spent. The payback wouldn’t be there. Is that in part because the economic environment here is improving? • No. More that the equipment needed and the investment that would have to be placed down there would have such a long payback that it just wouldn’t really be worth it. Not saying that there is not benefit from other companies from moving down there, mine would just not be advantageous. So what’s your overall sense? Has Minnesota’s business climate gotten back on the “right track?” • In some areas I definitely think we are in some areas and other areas I think we should learn from our mistakes. 129

• I would say that everybody out there is fairly nervous, maybe cautious is a better word, as to what they invest and what they look for in business today. It all depends upon the laws. We have one right now, which I don’t know if it was repealed yet or not, that was the warehousing tax that Minnesota is putting on. That can cause us to be less competitive. • That and the B to B taxes. Everything that I do today is now taxed and it wasn’t prior to July 1st. It’s been a very difficult thing to deal with. • I was just at a leadership group meeting before this. And of the seven people in the room everyone said they’re flatter down right now and I would say we’re in that same ball game. A year ago things were a little more optimistic or at least I was more optimistic. But this year we’re just cautious. I agree with your wording, people are not feeling the visibility of business being out there in terms of what our government’s going to enforce or to us. • We’re flat in everything this guy said and that’s what the owner says too. They’re worried about what’s coming our way tax wise. Related to that, I think there was a time six or seven years ago when most people around this table would say that they could confidently forecast for a year in the future. • That’s what I’m hearing and seeing in the business too. That’s what I’m hearing in talking to a lot of people. • Last year we ended up very, very well. January and February we came in shy of our forecast, March looks like we are going to exceed our forecast and April we’ll probably exceed it also. But we watch it very closely and that will probably get us to about break even for the first three months. Really? And to what do you attribute it? • Typically March and April are usually some pretty strong months for us. So I think that’s just kind of inherent to our business. But the scary part is January and February. The high end manufacturers, or I should say OEM manufacturers, they were a little on the slow side. Not totally uncommon, so I’m not going to jump off any cliffs yet but it is concerning. Just concerning. When you come in a few 100,000 light you kind have to question why? But it’s looking good now. As you consider growth, what factors might drive growth? New customers? New products? Trade/ISO issues? Supply chain relationships? The economy?

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• For us it is new products. And growth in some other products. But pretty much new products are the driving force for us. • For us too, new products. We design a small design group. We design valves for people and we’ve seen that slow down. • New customers. Do you grow by geography? Have you gone out and looked at different sales territories or are you growing just from within from where you were already serving? • A little of both. We’re probably about 55 percent international and that makes a big difference in what happens with our growth. We expanded into China last year a little bit. In January we hired a parttime person in China. So most of the growth has been in China. A year ago it was probably Europe. But we’ve also opened an office in Japan, we have two employees there. How much is market uncertainty that comes from what we see either at the Capitol in St. Paul or in Congress? How much does that contribute to your level of uncertainty about how you make decisions in your business? Does it matter? • I think it matters a lot. If I understood your question correctly. I think our economy was just starting to come around. Paul spoke to it, last year he had more optimism. I think it was just starting to come around. Then all of a sudden, we as Minnesotans have now had to deal with these taxes which influence us tremendously. And now we’re going to spend our money moving forward and how we can predict the future. Taxes? Regulations? • Yes. • Absolutely. • Affordable healthcare is also a big squeeze. Healthcare? • We are a very small company. We are not self-insured; we are part of a small group plan. So the amount of transactional fees and expenses that we will incur will probably be in the neighborhood of $50,000 this year. And that’s a big impact on a small $5 million company. Do you feel like you’ll get some relief once the exchanges take hold? • No. 131

If I were to split up the three things that government does in relation to business: regulation, tax and we’ll separate out healthcare. Which is the one that gives you the most heartburn? Is it taxes? Is it regulations? Is it healthcare right now? Or all of the above equally? • It seems like all of them. • Yeah. I know on a personal level at work, we are all self-insured and because our insurance is worth $12,000/per person, and that the government has decided that nobody deserves more than $8,000 worth of insurance, I’m going to get $4,000 added to my W-2, as well as everybody else at work and we get taxed on it. What about the availability of workers? • We’re running out of machinists. • We even went back to having an engineering apprenticeship. We not only have the machinists apprenticeship they now have a full engineering apprenticeship. Because you just have to and you have to take that responsibility on if you are going to go. • And the Tech schools are trying really hard but in an 18-month crash course, you don’t get a Grade “A” person out of there. You get a beginner -- an absolute beginner -- and you have to take on the responsibility to train. Is it sometimes better to recruit someone with that level of training or is it better to just to find a smart person that you can train yourself? • It’s nice to have the training. When you’re really starting from scratch, that’s impossible. • When you’re really starting from scratch, that’s almost impossible. We tried and it took me about four years to convince our owner that we needed to go through the Tech Schools, so we started about a year and a half ago and we picked-up five or six 2-year degrees. And at least they understand when I talk in offset or I talk feed range and things like that. Whereas temps don’t have a clue. Another focus group talked about how students are graduating from high school lacking even basic skills. They talk about the fellow who was out and wanted to do auto repair, and was out and ready to do the auto repair program, but couldn’t do the basic math test requisite to get into that program. Was that your experience here as well? • We were teaching them math, we were teaching them English, we 132

were teaching most everything. • I just finished up on the Governor’s workforce council in education and that was the big push. That was my big beef too. I grew up on a farm, and everybody around worked 2nd shift at Caterpillar or John Deere where I’m from. So you just knew that that was always a good life. But that’s all gone now. And how do we get the parents and the kids trained starting at a very young age to make them aware of this. It’s not just we’re going to send you to a four-year college. • We need the counselors at the school to not be pushing something unreasonable. • When we did the National Manufacturers Estate through NAM, and for part of that, we invited schools and in talking to those schools, the counselors, they’re not necessarily opposed to it but they are feeling pressure from the administration of the school and the parents thinking that it needs to be the four-year degree that they are pushing. • I assume that everyone is kind of familiar with Alexandria, Minnesota? They’re actually in the process of building a new high school. And the communities really got together, and I’ve got to say I’ve not been totally involved in this one, but they went to the school as they’re building the school and saying, you guys need to change. You need to get the kids ready for jobs besides through four-year colleges. The workforce is out there, everybody wants technical people and they’re having a hard time finding them. So there’s a whole, and I can leave these with you if you’d like, but there’s a whole bunch of companies within Alexandria area that have donated equipment, donated funds, donated a lot of stuff to the new school, I think in total they had $5 million just in donations to the new high school. From that they are also going to go in with career paths. I think they’re going in with four blocks per day or something like that, I forget how exactly, and then they get to choose different career paths. And they have engineering, manufacturing technologies, natural resources, health sciences and human resources and they have different academics below each one of them, business communication and entrepreneurship. And then they have the freshman academy. But they are going to have machine tools in there and robotics in there. People coming through to go to all the programs, there will be all glass windows; they’ll actually see this equipment running as they go through to their sons’ or daughters’ games. So they’re actually looking for some huge growth. But that’s kind of the business that we’re doing, trying to get people involved at the high school age because I’m kind of a fossil in a way. When I went to school we had VoTech where everyone could spend different quarters in different areas and that’s what actually got me interested in machining. But this is how you get kids involved and I think it’s kind of cool. 133

How does it happen? Did it just happen out of critical mass or out of people at the VoTech up there? • I think a lot of this came from the businesses in the community that have just been begging to get people and start back at the high school level. We did the Tech College stuff, I’m also on the board for that for the Machine Technology Tool Program there, but they kept saying we can’t get the kid interested. The counselors aren’t showing them what’s out there, so no fault to the kids. They’ve been playing video games and they don’t know what manufacturing is. And our media doesn’t always help us so well on that. Saying all the jobs are going to China or a low cost country. So that was one way of the business getting together and getting the kids interested and so far it is going pretty well. • Something to add to that and we talked a lot about this at the Governors Workforce Council are the technical schools in the state, starting with the mPower was the first and the Right Skills now started at Dunwoody and that’s like a one semester program where they cram a year in and then you can go on from there. They’re NIM Certified. So everybody is teaching the same way so that teachers have to become NIM Certified and the students all take a basic program and they get this NIM Certification, I believe. I was at White Bear High School talking with Kristine Wehrkamp and I met her through this program and I said why can’t high schools get NIM Certified? Because if I get a 2-year AA degree of some sort by the time I get out of high school, why can’t I get a NIM Certified 1-year, one semester, 2-year, whatever, technical degree of some sort from the high school and start them even earlier? What was the answer? • They loved the idea! They absolutely loved the idea. And my big push in this whole thing, and I was in the Right Skills Now a year before that, was let’s make it stackable. Because you work, I worked for quite a few years and Red was my boss. Everyone should feel sorry for me. (laughter) You’re taking a lot of hits today. (More laughter) For 12 years I worked at Caterpillar and they had a rule before I could hire somebody from the floor. They had to have a four-year degree. I watched so many young people get their 2-year degree and have to throw out every single credit and then start over with a four-year degree. And I’m an industrial technology major out of Iowa State. They gave me credits for building a garage, I had machining, I had plastic injection molding, I had sheet metal, I had electronics and electricity, hydraulics, I had everything. They gave me credits. Go look at some of the credits four-year colleges give. Why can’t you make a 2-year degree almost completely stackable into a four-year and help everybody out? 134

Do you talk to 916, at Century? Do you talk to them? • Not Century, they got rid of their machining program a long time ago but I work with Sheryl Daumier from St. Paul Tech and they graduate, I don’t remember from last summer whether it was 50 a year or 50 a semester. But right now, they are getting all their teachers NIM Certified and they are putting on an entire 2nd shift to emulate 1st shift as far as the number of graduates. So they’re doubling their machine tool. It’s a really good idea. • And that worked out nice because they work for four hours and then they go to four or five hours of class every night. And because they got into the mPower, that class was all paid for. So they weren’t getting a lot but they could still make a living. And that really was a drawing card for really good people. • And that was St. Paul Tech, and they even told me they were going to copy Hennepin and were going to put in an entire 2nd shift of machining so we can have people working during the day and going to school at night. How much of the challenge in your business is getting employees, or helping employees get additional training so that they can move up in the organization? Are they ready to take that on? Do they want to do it? Do you have the relationships with the Vocational Technical schools to have that happen or is it just not an issue? • Three or four percent want to do it. That’s probably the more difficult part. Finding the resources, I’d say for a while, was probably a problem. But I think there are a lot more resources out there now, for the training. But getting people to want to go for a few hours a couple nights a week is tough. Do they just not see the payday at the end? • No, they just can’t see it. • Yeah. I know when we were at CAT we were hiring welders and we had 150 welders there. And as I was hiring welders and after one year found out that they were dropping out. They were on 2nd shift. And so we made a stipulation that you will get fired if you do not get your 2-year degree. And it worked, every single person finished. Really? • Yeah. And that’s what I’m hearing too. Companies are grabbing people before they’re done with their 2- year degrees and they never finish. Robert Musgrove has mentioned that to me numerous ties. Up at Pine Tech. 135

• Is it fair to say that although workforce is a challenge you feel like there is something you can do about it? As opposed to taxes and healthcare. Where you don’t feel like you can do anything about it. So there’s that fence of frustration? • That’s a good statement. • The schools are always willing to work with us. They’re always willing to change their curriculum and what do you guys need? What do you guys need? They’re right in there with skills of work and the Government Workforce Council and everything else. But the government is like, WOW, what do we do? • That stems down a little bit. As the parent of a teenager going to school now. I remember going to school and shop class was mandatory. Shop and Home Ec and life skills class and now they don’t offer it because of funding. You have to take an art and a music. But no shop class anymore at the 8th and 9th grade levels. So you’re getting young people who aren’t exposed to it so they don’t know or have an interest. • Yeah. I’d like to say we have a need to get rid of the hobby classes and get some life classes. Some things that you can support yourself. Music is great and art is great but a machinist is going to make more money. So they’ve got to replace them with those cheap hobby classes that just hurt our kids’ and our future. • And I think that that is maybe why you don’t have young people today bridging into trades because of that lack of exposure at a young age. • Yep. Let’s get a career going for these guys even in high school instead of a hobby. Even woodworking is just a hobby really. You could jettison woodworking could have a little bit because there are a lot of cabinet shops and things like that, but I tell you, welding machines and things like that…. It seems that the worker shortage is becoming more chronic in Greater Minnesota. • Especially, as we talked earlier, the smaller communities that don’t get a Wal-Mart, Menards in town, there’s very little reason for people to go to the small town that doesn’t have much anymore. And they’re dying on the vine. It’s tough. I was telling him the story, I have a big engineering contract and I hired a guy from the north shore and he was saying that the young people were moving out at such a rate that even the county couldn’t even find people to drive their snowplows a couple of winters ago. Because they don’t want to be there. I mean there’s just nothing for them there, so what do they do, they move. The farming communities are shrinking. There’s nothing you can do about that either. It’s reality. 136

Do you see that in Alexandria at all? You have this bastion of great manufacturing right in the middle of the state but do you see it around you? • I would assume there’s some of that around there but like in Alexandria we really don’t have that. It seems to be thriving. I’d like to go back a little bit on the training portion there a little bit. I hate to back up everybody. We actually do have what we call a Leadership Academy. Where we have people from all shifts and we run five shifts. So typically I think the next graduating class, this is year two and I want to say there are probably about 35 people in it of different leadership differences. Because our people are aging and you want to try to promote within. So we actually have a Leadership Academy that was created two years ago. Well, part of it was through the school and part of it was through grants through the school that we had received for the training. And they have very specific areas that they work on. So that’s actually helping. A good example is when I interviewed somebody five years ago for a position. And I interviewed that person about two months ago for the same position and it was night and day difference on this gal. The way she came across. She was so nervous previously. I think she’s actually grown up as she’s aged obviously. I think the skill set that she got with the training has really, really enhanced and improved her. I would go from a 1 to a 10 and she actually did get the position by the way. It was that much remarkable. So training within your organization, I would encourage it. It does cost money but sometimes you can find funds out there to offset some of those costs. And that was working through the local tech college to get some of the grants. • I think if you take a look at the other states that are really after manufacturing. I would say Ohio is one of them, they went after the aircraft industry. They have researched 12 different buildings set around the state in the research. One is doing on composite, one’s doing it on structure, one’s on machining, one’s on lean, and they are placed around and they’re not only helping the small businesses but they’re helping the Tech Schools with the latest technology, so the Tech School does not get mucked in and this is the best. They’re actually out there helping them. They’ll come right into your business and help you process a report. So the states down there, and consequently I think the last year I when was down there they had acquired 65,000 jobs in the aircraft industry, manufacturing, because they had been doing this for years. And I think if the state wants to do it, we have so much medical business in this community, if they put a research, I heard Chicago just got a big chunk of this money that the government coughed up, this $70 million, for their research center and a friend of mine is going to run 137

that. And why doesn’t this state put a priority on this instead of waving at us all the time? Why doesn’t it? • I worked with Pawlenty for quite a while, and Pawlenty’s righthand man in that. And I thought we were getting something going. But then he went out of office. They talk a lot but they don’t do anything. I mean some of these states, they understand that wages for machinists here, working at McDonalds, is down here. I mean it’s income, it’s tax money coming in. We don’t see that in this state. Do you feel there are inconsistencies between what elected officials say and what they do with regard to manufacturing? People who “make stuff” seem to be getting a lot of love from politicians these days. Are they backing it up? Or is it just PR? • Some of the things the EPA is doing are ridiculous. • I heard something, this goes all the way back to Reagan who was considered business friendly, but starting with him there have been 2,300 new regulations since his term as President. That’s a lot! And it’s taken quite a turn. Even though they say that they’re all behind it. • When Norm Coleman was in there we could go directly to his office and get results. I had a lot of research money that came through there. The only thing you had to learn is how much time it took and then when they wrote out the check they would send it to somebody, like say the Army, they would take 25 percent of it and then give you the rest after writing out the check. But the little guy can’t afford to chase that all down. If it was in the state and there were some regulations, so if you needed something to do, something new and you didn’t know how, you could go to them and sometimes you had to pay 50 percent of the money to develop new technologies or something, but I think that’s the way you are going to keep things going. Otherwise it’s just, to me, like they’re just not doing much for you. • I grew up on a farm. Every farm, our parents were always involved in the local legislatures. And even though my mom’s in Iowa, she’s got four kids in four states, she says this is what’s going on in Iowa. Write your legislators for your three states about the same thing and just tell them you live on the Iowa border, which we do, or the Illinois border in Iowa not in Minnesota. So, but still we’re farmers. So I write them a lot but I write them about business too. • It’s interesting. I went to a day at the Capitol with the Minnesota Chamber of Commerce a couple of years ago. We make appointments with representatives during that day. And I remember I wanted to speak to the ones that represented the areas I work in, so I was speaking to 138

them about business issues. And they wouldn’t make appointments with me. I had to see ones that represented where I lived instead. Really? • Yeah, you can’t write anybody outside your area. • That might be changing a little bit. I’ve gotten some pretty good responses from my work legislators, especially this year. I don’t know why they’ve changed. But up until this year, or two years ago I guess I would say, I got very little response back, very, very little response from my work legislators. But my home legislators believed in what I believed in so you still wrote them but it didn’t seem to do quite as much good. We talked a little bit about trade. What do you think of that trend we read about the Home Sourcing or Home Shoring trend? • We would lose valves to China and literally three years, four years later, they just came back. And how it started was with the dental industry. Because that’s super high quantity and we’ve got a division out in Grand Falls, they would lose 50 and 100,000 valves at a time to China and we would think, oh no. Because that plant is only 25 people out there, but boy they really put out the work. And within six months their customers were sending them the China valves to take them apart to put American O-rings and Japanese O-rings in them because they were leaking within weeks of them being put in. And they did that for a couple of years and it was still cheaper. They finally said, the heck with this, and they went right back to Grand Falls. So that’s a great story. • Yeah, I worked for 12 years with the Chinese and into China and I left (company) six years ago to go to my current company and they were $2.00/hour for a welder in China and there was a design center in India where you could send your design over, get them back the next day, they’d work over night it was actually pretty efficient. They had industrial engineers who would do all your time studies and put them together for you, but right now I’ve still got friends in China that I still work with quite a bit and a welder is now making $6.00/hour and they are rethinking whether we want to make stuff in China to ship all over the world. Right now it is, let’s just make it in China for China and not send any more work over there. Because going from $2.00 to $6.00/hour and our welders at (company) are making around $20, that’s enough to make it not pay anymore. That’s great. And that design center in India, they’re closing it and moving it to Rapid City. Is that cool or what? Because it got too expensive. • In 2012 we were being pushed by our medical community to put a plant in China. So I was in charge of doing the research. At the end 139

of the day there was not one penny advantage to being there. There’s a 19 percent back tax. Every bit of value you add, you have to pay the government 19 percent tax. The average turnover is 30 percent a year because they have no allegiance to a company. They will go down the road for five cents and the infrastructure wasn’t there. Depending on the market you are in. So when we got done we showed the customers that and since then the fuel, the shipping has gone up, but at that point there was no advantage to manufacturing parts for us in China. Did that surprise you at the time you did it? • Yeah, at the time we did it, it did. Everything isn’t as rosy. In fact, they’re losing a lot of the low cost stuff to African places now. They have a tremendous engineering plant over there. They’re graduating in engineering, and they will be a force to be reckon with. But I think a lot of things are going to turn around and be manufactured at the point of youth because of the $3.65 cost of gasoline. And the time. (Company) has made the wings for the 777 since it’s started and we were having joint venture with Asia and we showed Boeing. It took 16 weeks out of the time to ship my boat over there, again put it together and get it back here. They redesigned and poof, it was here. So that tie and shipping is becoming a big issue. Anybody have anything as we wind down here that you’d like to talk about here that we didn’t? Or any benedictions you’d like to put in the meeting? • Maybe watch, because I’ve worked in Illinois for (company) also, right when I left 6 years ago, Illinois raised their state income tax 50 percent. It went from three percent to four½. Now that does not sound like much when you say, oh we’re seven or eight or whatever it is but my property taxes that were $12,500 for the exact same house I have here and it’s $2,300 here, so the property tax is where they get you. But when they did that, everybody went up in arms. So they reconvened and they talked for a year and then they came back out and said in the article mmm, we can’t cut a penny. So it remains. So then Caterpillar got six states offering to move their world headquarters to their state and give them all these benefits and so did John Deere. And that’s the only two big companies, I’m familiar with down there, big ones. They actually went to the governor and legislature and said we’re going to leave unless you drop our taxes back down, and they didn’t. So now the little people, and I know a bunch of people have business there right across the river from my parents and stuff and they’re like; oh man, why in the hell didn’t I relocate when I expanded into Iowa? And they’re talking about moving to Iowa. Be careful, the state legislature 140

here has to be careful not to become Illinois. And Illinois on one hand is doing things like you talked about in Chicago, with that big training center and stuff but then they do stuff on the other hand. Because I know Caterpillar bought these Bucyrus Mines in Milwaukee and the mining division of Caterpillar out of Decatur is 10 times the size of Bucyrus. And in six months they moved their world headquarters up to Milwaukee and now you don’t have to pay Illinois taxes. And the moved the engine division over to Little Rock, AR. They moved Motor Graders to Little Rock and they moved Excavators, which put 1,500 people out of work in Aurora, where the plant I was at, cut the plant size in half, down to Houston. Because they all said come here, we’ll give you all the breaks. And so (company) has moved like 6,000 jobs out of Illinois in the last three years. • (Company) has got the deal on that new research center going into Chicago. And one of the by-products of that, is if you look at the bottom of who’s already signed up to be members, you’ve got Boeing, Caterpillar, 3M, all of them. And you pick up that they want to do business, because they know it can be done up here and it’s a big deal. If you get those research centers in here that are developing technology for certain industries, you bring a customer base in to town. And everybody will get an advantage from it. Do they do it independently? Do they do it through schools? • They do it right in the research center. And then if John Deere wants to have something developed, a lot of times they’ll pay for half of it and maybe the rest of the members will chip in if they want to be part of it. And it brings customers and it brings new ways to do things in the area. It’s not just an isolated thing that happens.

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FOCUS GROUPS

Mankato 9:00 a.m., March 12

South Central College

Generally speaking, as you look at the totality of your business situation in Minnesota right now, do you think manufacturing is headed in the right direction? • I’d say you’re on the right track going forward. I think manufacturing can grow, I think more things can get involved in that, safety has become a bigger issue on our side. Do you feel better about the prospects for your business today than maybe you did a year ago today? • Yeah I’d say so, much better. Anyone else agree or disagree? • I would agree. I say our current state is not necessarily where we want to be, but I would say our future state is exactly going in the right direction. We’ve got a lot of challenges that face us that continue to be competitive but certainly in the right direction. Is there still too much uncertainty in the market to let you forecast for a full year out? • Yeah. • I think the market is slightly more predictable than it’s been. You have to do a 12-month forecast. Doing a three-year forecast is still “iffy.” But I think there’s more stability than there’s been. 142

• Companies like us, in particular, we don’t make anything. What we sell is our service. If you don’t have your own product the world’s a little more difficult I think. • We’re a job shop. I would agree. If we tried to do a 12-month financial estimate we’d be lucky to hit it plus or minus 20 to 30 percent probably. • Yeah, same thing. We do it, for the sake of trying to plan for hiring and things like that. But by the end of February we’re redoing it. It lasts about two months and then we get a feel for the next quarter and go from there. Has that been since the economy fell apart five years ago? Or was that a trend that was already building? • No it definitely has shifted in the last five years. But you know anytime you’re selling services like that you’re at the mercy of some fairly large customers a lot of times so things can change quickly. Even their forecasting isn’t always bankable. • Joe, you’re in that same world right? • Yeah we are and I know what they’re talking about. We seem to have the problem of securing enough employees to get the work done in time. Companies like Kettle Corn maybe, they’re taking a lot of employees to run their business, maybe a couple hundred or so. Even there you lose that entry level group of people that we employ. So it’s a struggle trying to find workers to keep up the demand. What about the economy in general? Do you think the economy’s going to expand in the coming year or contract or stay about the same? Any sense of that from your perspective of running companies? • In our industry it feels to me to be pretty stable, we’re in the electronics industry. But it’s not an expanding economy, on a worldwide basis in my opinion. There are not really a lot of new gadgets. So we’re living in what I think is a fairly static environment and we’re launching new products to gnaw away at growth. But our strategy is acquisition. Market consolidation. Is that happening everywhere? Where will growth come from – expanding, finding new customers, offering new products? • We do find we have to find new distribution to sell our product and go outside the US. Like last year, Canada was a big grower for us but not a lot in the US. It stayed pretty steady and we expect the same this year.

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Do you still hesitate on capital expenditures and things like that that you might take on if you were more confident? • Oh absolutely. • We’re a job shop like several others that are here. From our perspective it’s more about how stable are the customers that we’re working with and how certain are their product groups and then what type of contractual agreements or long-term arrangements can we make with them? If we can secure some of those things we would be more than happy to make some investments. The economy is one piece of it, but there’s also a lot going on with regulations, taxations, some ruling on the minimum wage that we’re still not sure about. What’s the impact of the healthcare going to really do to us? Some of those things really play into decisions that we’re making for larger investments. But expanding the building and really expanding the business -- I think those have really been tabled for quite a few years now. • The lesson of the last eight years has been going easy on fixed, at the expense of variable. When variable may cost you a bit more but it gives you the flexibility on a down side. Probably everybody ended up with excess capacity for quite a while that ripped the bottom line apart. We sell capital equipment as well as use our own equipment with the same people we sell capital equipment to. And you can see in the eyes of our customers how they laboriously review the acquisition of a piece of equipment. • Well certainly if you watch the markets they’re reasonable stable. There’s been a fallback but it’s been a run up again. I still think that it’s Washington. You know there’s in-fighting and it’s polarization. In our case we had our healthcare all squared around, we had a good program and then it was ObamaCare and the legal beagles said you can’t go forward with this. And we were right on the verge of launching it. Politicians seem to love manufacturing these days. Are you seeing any evidence of it? • No. I’m driving in this morning and what’s the news all about? They’re going to re-write the rules on overtime. Well that throws all of us into a tizzy. What is that going to do to us? And it’s just one more thing and it’s constant change, constant change. And I think the politicians look at us as the Golden Goose. • No, it’s more like an opportunity for them. • It’s write a new rule on every regulation. Whether it’s EPA or whatever. Let’s just keep writing regs. • And even if it was better, the perception out there from everyone we do business with is negative. And it’s going to be that way. Even if it was improving, which I don’t think it is, the perception is it’s not. 144

Is the regulatory climate worse than it was, say five or 10 years ago? • Yes. How do you deal with it? • Add non-value added people to deal with things like complication, regulation. • You can’t keep up with it. You have to add resources to support it. • It forces us to be less lean than we’d like to be. • Somebody mentioned indirect people. That really hurts. We’re trying to get more time on direct labor and reduce the overhead. Sometimes I feel like manufacturing is the government’s new play box. You hear them talk about it and all the guys are jumping on the bandwagon, about what you said, manufacturing and stuff, sometimes in the back of my head I just feel like this is just another place where they can get in and kick the sand around. Whether it’s the healthcare or the overtime or any of this stuff, it just seems like someplace else to get in and run around. • A manufacturer said to me the other day, what they seem to forget is that every time they start a new regulation or make a new rule I now have to track and record that from now until hell freezes over. It goes on forever. You got all that record keeping and you’ve got to have somebody manage that. • And I don’t think most people’s bottom lines are strong enough to make up for it. I know in the case of our business it hasn’t been poor, poor, poor worker. Our benefits have kept up, our wages have kept up, and you still have to compete. And in the last 12 months, good Lord, recruiters must be calling in how many times a day? We’ve had to really scramble to retain people and fortunately we have. Let’s talk about that. Where is the pressure point on employees? • Oh those guys we just steal from the other companies. (laughter) It’s the entry-level people that you want to bring in to train. Does everyone face that same challenge of finding entry-level people? • Oh I think for us the entry-level person is more difficult to employ from a life skills standpoint. But realistically for us, it’s the skilled worker. And we beg, borrow and steal those people from each other. And the ones we steal from each other aren’t the most desirables. Maybe they have life skill issues as well. But that’s what’s available and so it is difficult for us to find entry-level, skilled employees and mid-level skilled employees to fill those needs up. 145

Is a high school education sufficient? Or are you looking more toward a technical school education? Or a four-year degree? • We place a certain value in advanced education at some level. Our founder was a graduate of Dunwoody. I think it’s important to be able to find people who have some level of post high school education. If for no other reason than life skills. When maybe mom or dad isn’t part of waking you up in the morning to get you off to high school. You start to learn things. You start to have to figure out if you have money in your own checkbook and things like that. That’s sort of part of motivation for work. Is anyone’s productivity lessened because they can’t find adequately trained employees? • At the entry level it kind of depends at what you’re looking at. When I look at entry level, I’m looking for someone who is familiar with business, can read a tape and a blueprint. There are just certain things, and we really don’t, looking at our business I really don’t take a guy off the street, that wouldn’t be our preference. And if you’re doing that, then you better look for somebody’s who’s trainable and who you can make that investment in. But if I was looking for someone to fill a job, just about anything in our business, I’d be looking at somebody who has some experience. I wouldn’t be taking somebody just off the street and bang I’m going to make you a welder. I want a welder that’s welded someplace. Same thing for just about anything, press break operator, laser guy. You’re not going to go take a 12-week course, like you would for tooling or something like that to be laser operator. You have to have the experience. • We’re to a point where we’d love to have that opportunity to find that experience, but it’s just not out there. So now we’re selecting based on values and culture, bringing them into our system and then we’re going to train them to the needs that we have. We’re sitting in a school that has developed a fine reputation for providing skilled workers for companies. How have you found the relationship with Minnesota’s vocational technical schools being feeders for you? Is it a productive one? • We’re tapping into everything that we can get but it’s not enough. So it’s not to a point where we can rely on it but we’re certainly utilizing it where we can. • We have one gentleman who’s working part-time and going to machining classes over here and that’s working out fine. But I can see the school’s standpoint too. So the schools can’t just say let’s throw together a course or something to train people because there are so 146

many different makes and models. It’s a hard niche to fill. • Flexibility is important. Flexibility with schedules. I don’t only want our second shift people to go through like a mechatronics program or something. I would love to see flexibility, schedule wise, so that maybe somebody in our maintenance department on our first shift would be able to take part in that program as well. And I know that’s a big challenge. But, flexibility with customized training is really going to be more and more important to us as well. • And it’s not just the hours. We run three shifts and we have the same thing. Can people on all shifts have access to the education that SCC can offer? You don’t have to be full-time to follow theirs which makes it very difficult for somebody who is full-time pouring iron and wants to better themselves and get into maintenance to do it at the same time. I’d love to see SCC working with the alternative student that’s just going to bite away at a little bit at a time. • To continue off of that as well, on-line training, for us at least, is not the greatest. It doesn’t usually suit our employee or potential employee all that well. And it also does not suit the skills and the things that they need to acquire. And like I said before, life skills are such an important ingredient and so that sociability of the actual classroom or the physical “I’m here,” I think, is very important. Other groups have mentioned that students are not well prepared for school. They need remedial work in math and reading and writing. • If you try to rely on them saying they have a high school diploma without doing any initial testing in the first place, you will probably find you’re getting people who can’t read and do basic math. • We do, too. And what about the other issues, like drug testing. • You’d be amazed at the number of people that take the test anyway and know that they’re going to get bounced out hoping that they fall between the cracks. It just surprises me. • Yeah, some of them are playing the system; some of them are just plain uneducated. Oh I smoked a joint a couple of weeks ago and I should be fine. We had one come into our reception desk recently and filled out the application and asked if they could take the drug test today because they thought they’d pass. (laughter) • I read 30 to 40 percent of your workforce is probably doing some kind of recreational drug. So be prepared. • We do random testing and I can tell you as you ramp into random, the ability to cheat the test is just amazing. You just have to get better at 147

figuring out the cheats. • I talk with the company that does our randoms. I hear about companies where 40, 50 percent of the employees when they do random will fail. And I’m just flabbergasted because we test random and we over test, we don’t test the same group, we test on different time periods plus pull in an extra 10 percent so people know that I’m not going to get once this year and we very seldom have any issues. What do you do when somebody, what’s the pathway you take when somebody doesn’t pass a random test? • Refer them into a treatment program. As long as they go the treatment program they retain employment. • And if they refuse, you terminate them. • I’d like to make one note on that. You know we as employers don’t decide what the treatment is. We send them to a specialist who does. And with the free and easy use of marijuana going throughout the country now, what you find that a lot of the time, the treatment is nothing. If they had tested positive for marijuana then they go there and they don’t go through any treatment. They say, oh, it’s just a one-time thing. Now what do you do as an employer? I don’t agree with that because they just got hurt. Well I put those two and two together and that costs me money in my work comp, but even when the treatment center’s saying this isn’t that serious and they’re back to work two weeks later after they’ve been tested. I’ve had that experience one time only, so I don’t know if that’s just a fluke or what? What do I do as an employer at that point? I’m as worried for their co-workers as I am for them. • We see similar situations when we do have positives or something like that, if somebody does. We send them in for a chemical dependency; they don’t go right to treatment. And sometimes it just comes back that the guy doesn’t have a problem, it’s not an alcohol abuse problem with history behind it, and then it just really comes down to if you want to smoke pot, you can’t work here. It’s that easy. We’re going to keep testing you and just make a decision now and save us the trouble of having to go through this. Let’s talk about training for mid-career employees. • I think it’s necessary. Are people willing to do it? I think so under any certain terms. But that gets harder if they’re trying to hold down a full-time job and make advancements in the company. • We will reimburse them if they hold a defined level or grade average or something, but quite frankly most of it has been extra courses and stuff like that, seminars. I can’t think of the last time somebody actually 148

took a night class. But I think people want to move up but they don’t know what the path is. And it’s a big step on their part, too, because they have to make that commitment. You know there are no guarantees. You know this job may or may not open up three to five years down the road and meanwhile I’m going to have to work fulltime and I’m going to have to go to night school and I’m going to have to foot the bill until I can get done. So it’s a big commitment for the employee. • At our company of the three generations that we’re mainly employing right now, Generation Y is more interested in that because they’re less interested in doing the same thing for more than five years. But whether or not they have the initiative to go and figure out which direction they want to go, the challenge is that they need to have their own motivation to do that. You can lay things out for them as Tom was suggesting but most people won’t follow something that you researched for them, and they say they have interest. They really need to do that on their own. I mean we support it if it supports the company but you don’t find it too often. • We’ve had a lot of opportunities over the last few years for people to move up in our company. And we find more often that they don’t want to. Whether it’s because they don’t want the responsibility or the time commitment type of thing. So I would say that’s a struggle for us from an internal perspective. How do you try to inspire them to take advantage of these? • Well a lot of times we pull people aside and say hey I think this would be a good fit for you so apply for it. A lot of times they tell us, nah, I’m happy where I am. • Yeah, we have a lot of the same issues. And even to get the reimbursement for continuing education, we offer it but very few take advantage of it. I’d like to talk about some heartburn issues, issues that create challenges for you. Tell me what you think: Foreign competition? Supply chain relationships? Government policies and regulations? Cost of healthcare? Cost of employee salaries? The ability and attract and retain qualified workers? • For us it’s the foreign competition. It started quite a few years ago. Again the electronics business moved offshore, primarily to Asia. You’ll read that things are coming back maybe to Mexico a little bit. And the supply chain automotive is moving hugely into Mexico. It’s already hit us but it continues to be a constant fight. And that’s strategically our biggest fight, the globalization of offshore movement.

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Re-shoring? • It’s incremental. It’s small and slow relative to what was a fairly massive exodus. • I think it will move slowly. Because when you’re trying to work your source as a supply and there’s a 12-hour time difference and depending on if you’re bringing things on a boat vs. an airplane the time is huge! I don’t think it will ever come back to where it was. It’s less today about wage than about proximity. There will always be a disparity and that’s why Mexico picks it up. We’re getting pretty good growth in our Mexico operation. But it’s a constant struggle. Anyone else? • For us it’s definitely government regulations and healthcare. For example, yesterday our union rejected our latest contract offer. And one of their reasons was that they wanted guaranteed healthcare. And it’s like are you not even reading USA Today? It says right there that we pretty much have no choice. So you’ve got all this government involvement in your business today and all the extra taxes and things that go along with that. And then you’ve got labor unions and such that are another arm of the current state and they’re not even speaking the same language. So for us right now, that’s major heartburn. But I think that we have not been as creative as we’re going to be. What about ObamaCare? Does it represent an incremental solution? • No. • It just shifted who chooses not to have healthcare. • It increases premiums. We’ve had decent health insurance each year, now especially this last year, our deductible goes up, our premiums go up. I can’t see one positive thing coming out of it so far unless there’s going to be some light at the end of the tunnel. How do you plan for it? • You can’t because I don’t think where it’s at today is where it will be in November. October first we all start this all over again. And in our case, as I said before, we worked over the last couple of years to get a very good plan. In the old days you had two or three plans but they never matched what every employee really wanted. And so we figured out a way to do a specific policy geared to each employee and fund it and so forth and put money into an account that they could draw against. And we had a lot of satisfaction with it. It worked for us and it worked for them. Back in September we modified that plan to what was economical for us and economical for the employee. But it was deemed 150

that under ObamaCare that if you gave employees who had insurance with you a stipend, now you had to give that same stipend to all the other employees who did not have insurance. Well that shot the plan completely out of the water. • The big frustration for us, and we obviously had something similar to (company), what’s really frustrating to us is that is the amount of money, and it was about $10,000/per employee per year, we don’t have the opportunity to offer that pre-tax anymore. That probably hurt more than anything. Because now for the employee it gives them a bad taste. For us ObamaCare has added a cultural distaste for the employer. So our employees look at the company as the bad guy in this. Because they’re going to come out of the whole deal with less and that’s all they care about. • And they think the company is taking it from them (Yes!) and putting it in their own savings account. (Right!) And in our case it all went to the insurance companies.

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FOCUS GROUPS

Alexandria 9:00 a.m., March 13

Alexandria Technical and Community College

What’s the lesson of successful manufacturing in Alexandria that other communities can learn? Why does it work so well? Is Alexandria a place where communities have learned to work with and for manufacturers? And if so, what’s the lesson? • From an outsider’s view the lesson is participation. The new high school’s a great example. I think that the manufacturer’s role is to have manufacturing better represented in its true sense. That’s just one example that we see from the outside. The other is the tight connection between the college through an outreach and manufacturers connecting. And being part of the Job Skills Partnership Board we judge the colleges, and Alexandria Technical is way ahead of a lot of its peers in the way they go after shared grants to further the workforce. • Well I mean a few things. One, I think we are very fortunate to have Alexandria Technical Community College here and it’s been here for a long time and it’s been of great value in the community in terms of drawing talented people into the community and exposed them to it and oftentimes they stay here. But also for the incumbent workforce to create a training platform not just for customized training but programs, one and two- year programs that they can pick up skill sets that are immediately applicable in a work setting in productive ways. It’s not underwater basket weaving or advanced navel gazing. And I think we’re fortunate that the freeway comes through out town. But we’re also fortunate that it’s not beholden to one employer, that there’s a number of large 152

companies like 3M or ITW Heartland that have chosen our community to conduct business but also that there’s been a vibrant, you know it’s a hotbed for the packaging machine industry. And there are companies that were entrepreneurially founded that then became professionally managed and you know we’re able to transcend where ownership owns a job; they own a company that built a company. And so there’s an abundant group of people that have done that and there are some terrific manufacturing companies that have gotten to scale and have prospered and grown from there and created other opportunities that transcend manufacturing but also some of the professional services and retail type growth. You know I do think organizations like the Alexandria Area Economic Development Commission played a tremendously vital role in that they’re one of the hubs where people can come together to collaborate, not just for their business but as groups of people getting together to think through issues and challenges and not just view the challenges but also the opportunities. And so I think Bob’s right. I can’t remember the phrase he used about participation or whatever the theme was, but I think that’s right. I think that we have credible institutions and individuals within the community that can gather people and get them to collaborate, cooperate and serve a broader interest that goes beyond today. We’re not in survival mode. We’re thinking about how to thrive. What about from the perspective of economic development? • You know I think it’s this partnership. We’re all well-connected. The college used to have a slogan that they used, “Everything connects to everything,” and I think that you look at this community; that is so true. Education’s at the table with Economic Development. Manufacturers are at the table with education and economic development. Our political leaders are at the table with all of us. You look at some of the special initiatives that we’ve done. We’ve started to kind of move the bullet in the same direction. It’s just a wonderful partnership and a collaborative effort in this community and we start to feed off each other with some positive synergies and direction and that’s the benefit of this community. What role has the school played in all of this? • I think it would go back to Ron actually the history of this place, back in 1961. It really started to be driven to be a partnership between the community and the college and then the college was responsible for making sure that we were training employees to drive the economic vitality of the major industry sectors in this community. We’ve maintained that. I mean we’ve really attempted to be very visible in the kinds of conversations that happen around the community. You know you talked about being at the table. We talk always about being at the table. 153

Yesterday we had, or Monday we had a meeting of the manufacturing group that’s impacting the new high school. I think seven or eight manufacturers were there. They’re taking time out of a busy day to show up at a meeting to talk a little bit about donating equipment to a brand new state-of-the-art high school that’s going to focus on manufacturing technology right inside the front door behind a large glass wall. Now those things used to be in the back of the building and now we’re putting it right up front right next to the art center. That tells you something about the importance of that sector in this community, and with that being at the table thing two things can happen if you’re not at the table. #1 you don’t know what’s happening today with regard to the conversations, but even more importantly you don’t know what they’re thinking about for tomorrow. And I think that’s really the culture that’s pulled everybody together here, of the fact that we know that the future’s going to be made by all of the players in this community and we’re very interested in the college serving as a convener for a lot of those conversations. We’ll pull people in for manufacturing breakfasts. We’ll support the kind of things that the manufacturing and healthcare and hospitality and retail sectors all are interested in doing here. But that’s really a part of our role to be at the nerve center of those things happening regionally. Anyone else? • Yeah. I’d like to add something: Alexandria Technical Community College is kind of a unique two-year campus in the fact that the majority of our students don’t originate here. They come from other places and so approximately 60 percent of our students come from more than fifty miles away to come here. So we’re a destination two-year campus instead of a campus where you just draw individuals from the community. People come to school here for one of our signature programs and then they stay. They get connected with industry and I think that’s important. We talk about talent and so we’re drawing from a larger geographic region to train individuals than just this geographic region right here. What should legislators know about manufacturing that they might not fully understand? • I do tell them to maybe spend more time thinking about how you can do things that inhibit growth or that promote growth in the manufacturing sector, and I think too often the focus is on what promotes it and there’s typically a big political component to it or a lobbied agenda behind it that I think an area that’s underserved is looking at. Based on the current framework of laws and regulations, what things are out there that inhibit growth and vibrancy in the manufacturing sector? And I think there are some real opportunities there. 154

Anyone else? Anything you’d want to say? • There’s been a lot said in particular about unique and new taxes on business and I think that message has started to be heard. Right? The House has acted on the repeal of some, I think, pretty ineffective taxes such as the Warehousing Tax, etc. And I think when you get into areas of tax policy and you’re passing unique taxes -- business service taxes that your neighbors don’t have -- you’re putting yourself at a competitive disadvantage. I think the same can be said for small business owners. Last year they looked at unique new taxes on the business, raised their marginal income tax rate and I think the one that was kind of a cherry on the top was a new estate and giving tax. So I think business owners felt a little bit picked on with it and I think they felt unwanted. When you take all three of those things together and that their business income is flowing through and being picked at and I think a lot of them would have said, “That’s fine. I’m okay with paying a little more marginal tax to help us get through a tough patch. I’m prosperous; I’m doing well.” But then you put, we’re going to put additional business-to-business taxes on and we’re going to put a unique-in-the-nation gift tax on you as well. I think the business owners just feel unwelcome by this particular administration. Let’s talk about your businesses. Will you be more profitable this year than last? • It’d be more profitable but it’s coming off of a poor year so it’s a little bit deceiving there. • For us, revenue. We will be increasing revenue. However we are going to be investing more into the company, so profitability will be -- we already know it -- negative by millions of dollars vs. coming out ahead. So we are definitely reinvesting into it to stake out new markets that we’ve identified and in creating those products that are needed for those markets to address those market needs. We will definitely see an uptick in our revenue, but overall our profitability will be down. Is your confidence based on your industry or is it about the economy in general? • I would think that for us it’s more about the availability or the market demand that is untapped right now for certain laboratory instruments that we build and produce vs. it being because of the economy picking up. There’s just definitely a need when it comes to... Well more actually could come with healthcare. Some of the healthcare things are looking obviously for cheaper tests, cheaper ways of doing things, and that’s some of the instruments that we provide can allow for that. So I suppose it could indirectly you know because of that. 155

Profitability? • We expect to be a bit more profitable just based on a more balanced demand for our offerings. That’s manufacturing in the engineering component to what we do and the engineering, demand for engineering services is much stronger this year than it was a year ago. A lot of industrial OEMs are investing and so that creates a better balance and should elevate our profitability. • Yeah, I know in our narrow focus it seems like industrial OEMs are investing more in some new products and that. Of course last year it was more fine-tuning and revising things that had been launched in 2012, so I really can’t comment on the broader economics. • I see our profitability increasing this year just on the coattails of the rest of the economy. But we’re also going to do a lot of that through improved efficiencies. Due to the labor shortage, we’re going to just have to get better and do more with less. • I’d agree with that one, too. I think we have partly and it’s just some larger customers and more repeat business. But also the employees that have now been with us longer so becoming more efficient in how we do things. Is growth coming more from increasing orders from existing customers, finding new customers, expanding your product lines? • For us it’s all of the above. It really is. And some of that is through acquisitions, expanding the product line, but also taking care of current, existing, very good customers and acquiring new ones. • I agree. It’s all of the above. I mean there is, kind of going back to the last question too, the lack of employees. We’re going to see more profits this year. We need to become more efficient. We need to be more focused. We need to find better ways of doing things or investing more in cap acquisitions. Customers. We’re taking care of our customers. We do a lot of package handling companies so those -- because people are buying more online --there’s more demand for shipping UPS, FedEx. So that’s increasing. They don’t want the bad. I mean what they got last year because they couldn’t keep up with the Christmas Season, so they’re investing much more into their infrastructure, so we follow along with that creating new products for them and so we will see new markets. We also deal a lot with the airlines. Airlines are starting to buy equipment now so -- but we need people, so we need to work on efficiencies within our own facilities. Do you feel like you’re getting more stability out of your ability to forecast revenues or forecast the markets for your company? • Oh yeah. We are absolutely horrible at forecasting. It’s so 156

unpredictable. You think you’re creating a product that there will be a need for in the market because you’ve done some marketing research on it only to deploy that product and find out yeah, you’re too late because in the science industry the stuff is evolving like every year. Right? So who’s to say someone didn’t come out with something better than you while you were designing your own mousetrap? That’s the dilemma we have. So sometimes we think it’s going to bring in a lot of money for it and you only maybe sell ten of them vs. you’re forecasting a 100 of them kind of thing. So we’ve run into that especially in the industry that we’re in because of the advancements that are happening constantly in global science. • I mean it’s just such a dynamic economy, and this is the world we live in from here on out. Looking out a year ahead of time is nothing more than a guess. Three or four months out is probably as good as you’re going to get. Does that make you less confident about making capital investments in the company? • No. More nervous but you know it is the reality, so you can’t choose not to invest because you know you’re not confident, 100 percent confident in your outlook. But yeah, it makes a little more nervous, but you still have to make the investments. • The ditch always close to the cliff. • Yeah, and being in the packaging industry, our customers don’t seem to plan as well as they used to also. And when their demand goes up, they want everything yesterday. They want an install built, installed as soon as they can get it. And so again, the forecast how do you forecast that? You know you don’t know. All of a sudden the phone rings one day and here’s the order or orders. And that’s what happened. They don’t have the luxury of knowing exactly what their market is doing, and when all of a sudden it upticks, they need production and then now they need equipment. And so we have to be really proactive to meet that demand. Are they reasonable about it? I mean if they– • Sometimes. But most of the time not. I would say most of the time not. They want more on time? • Well it’s millions of dollars to them. They don’t get a project put in line and up and running in a month, that’s a ton of money for them. I mean they almost can’t even put a price on it. And then they lose. If they don’t get that product out there in time, in the end they’re going to lose. They’re behind their competition whatever that might be. 157

• The whole decision-making framework has shrunk up as well so they delay making a decision until they have what is as much information as they think they can possibly get at which point they’ve eaten up any time you’ve got to actually build the equipment. So they want it delivered in a month and it takes five or six months to build. So I mean it’s just... • From a forecasting standpoint– • Yes. • It’s an awesome... • So how do you cope with that? Just that the whole market is having to do the same thing so they’re not going to get it faster from one of your– • I don’t think the packaging industry is unique in that fact. I mean we have some long lead-time in equipment, which makes it difficult. But in the plastics you get molds to build I’m sure until the two-week mold time happens and customer isn’t going to be happy with it. • Well, everybody’s in that boat. • I think what you said was they, are they accepting of that? • They can be, don’t have to be, sometimes aren’t -- often. But I do think there’s a little bit of a mountain you know that’s going on as businesses evolve and you get used to the external forces impacting on you, the change in that is... Someone mentioned about “kind of got used to being out on the edge.” And you look at mountain goats and they exist on the precipice and I think business has been moved more into finding, stretching your comfort zone and saying, “Okay. This is our footing. This is our situation.” And you calm yourself down about it. You get used to it, you acclimate and you make decisions based on it. It also drives “Where do you have to improve this organization?” in terms of having better agility, better speed, better precision, leaner operations. But on top of that, the message that you bring to the market place doesn’t sell on why this expectation of X in terms of time has to be X plus five. You know you just get good at your punctual responses to educating and kind of calming down, why the timing is what it is. Is it an advantage to be able to respond to that fluctuating marketplace an advantage? • It sure can be. If you’re unable to do it, you might fall off the edge. Goats do fall off the edge. • Well you need to educate your customers on what your business is and what their expectations are. • I think it has grown. I absolutely do because customers... I think the rate at which... There’s always been demand for improving the time, improving quality, improving delivery, improving price. But they’ve become so much more aligned in resource courts asking for that. But I think that the tempo is a bit faster and you kind of adjust to that, too. You 158

actually come to expect it. You know what a really successful business does is they start pushing themselves instead of waiting for external forces to impact them so that they’re doing it on their terms and in a way that’s planned and compatible with their culture and their resources and their people and their methodologies. There seems to be a growing split in workforce needs between Twin Cities-based companies -- and companies in Greater Minnesota. How it is here? • No, it’s a struggle. And you know we have good partners here. There’re just not enough. In the K-12 School System, they’re just not given enough exposure to manufacturing in general with grad standards and whatever else the constraints are. They’re having a hard time getting people interested. And I’ve got two kids in the high school and I know that it’s tough. One of them really likes his machining and welding class, but there are not a lot of hours in the day for them. So I believe that the U of M is saying now they need four years of math class. All the way up to the seniors they’ll be taking math. All those things take away from some of those electives. And then of course there are a lot of electives and in the school they’re competing for where they’re going to send the students. Do you have job openings that you can’t fill, that are making you less profitable than you might otherwise be? • Right now, yes. • On and off. But it’s an ongoing concern and several times throughout the year I’ll be in that situation. • Ours is because of the science aspect of it. It’s hard to get someone that is an optics engineer to move to Alexandria. So when it comes to manufacturing and stuff like that, the mechatronics program here has been great in partnering with them, giving me a lot of good production support for the manufacturing side of things. But it comes in the other areas of our business such as like an optics engineer. You can get one of them but then you have a trailing spouse who wants to come you know obviously move with and you have to try to find them a job. That’s where you run into a problem. We had a great candidate out of California. The trailing spouse was a professor. We got him an interview down at St. Cloud State and you know just trying to hopefully -- but it didn’t stick there so therefore we did not receive the candidate. So that’s the dilemma that we run up against, those very unique skill sets. • I just have a question. Do you find -- would you use an engineer remotely if you can’t find someone to move or is that not really a good option that makes sense? 159

• Last week I was down in the Twin Cities. We’re going to be setting up a Twin Cities office in hopes of being able to attract talent to the Twin Cities. That way the trailing spouse will have a better shot at finding a job down in that area, so yes we are setting up a satellite office down in the Twin Cities. • Okay. • To try to. I mean the optics position has been open for almost two years and it’s such a core piece of what we do so. • That example right there, fragment of development is our biggest concern. Now all of a sudden you’re starting to lose your investment in your community because of the workforce issue we’re seeing now more and more with companies. • You’re talking about setting up the office in... • Yeah, you lose an investment in your community whether it be bricks, mortar, equipment, capital investment because of the workforce issue. We’re seeing that more and more. It’s not just (company). It’s other companies in the area. Anyone else have workforce observations/issues? • I think in this part of the world, too, there is just a little bit at the margin particularly in the trades, more pull towards North Dakota. So if it’s at the margin but if somebody wants to go live out there in a hotel and motel for ten days at a time, they can double their income. And so especially for young and unattached people, it is a viable option to just go be a laborer out in Brocket. Absolutely. • And people see that here? • There are contractors in St. Cloud that are flying crews out weekly for ten-, twelve-day gigs and doing work out there and rotating them back to their family for four or five days. So there is a labor impact of just that great big boom that’s going on out in North Dakota. And it’s more pronounced here in Northwest Minnesota than it is in some of the rest of the state. • You see that in any of your companies? • Less so in our companies. We do have a company in Fergus Falls as well. So again I would say it’s at the margin for those types of things, but if you can weld, if you can machine -• If you’re in the construction trades at all -• Exactly, then you have valuable skills and you have option value to do that kind of work. What about the idea of people improving their expertise inside your companies by acquiring new training or new things so that they can move up? 160

• No. • Yes. • When we need training a lot of times the school offers different trainings that we can use. • People will do it? Employees will take advantage of it? • They seem, yeah, interested in any opportunities that are out there. • Yeah, we have internal training program that we’ve had in place for over 20 years and which really helps in terms of elevating skill sets that people have and providing opportunities for people at entry level, unskilled, no real connection with manufacturing world can create a career within the organization. But the customized training, we’ve used that a number of times with Alexandria Technical and Community College. For groups, there’s an offering right now that’s on Wednesday nights from six to nine. It’s the Introduction to Basic Industrial or something like that but covering electrical and fluid power and machining and we have a couple of people that we’re sending to that. I think it started last week so it’s on Wednesday nights and runs for three months I think till June 8. And I think it’s a really great program. I actually wish we had seen it a little sooner than we did because there’re probably six people anyway that we would like to have sent to that. What’s the profile of the person that you would like to send to that class? • They will have been with the company for two or three years, probably have been through our certified molding operator training program and have expressed interest or have worked some in some of the technical support areas like spending some time in maintenance or the tool room. You know they’re not a maintenance employee; they’re not a toolmaker but they’ve had some exposure to that. So you know they have some manufacturing experience and some value-added skills. Someone said that two thirds of the students that she gets into their programs are unable to do minimal writing, mathematics and reading. Are you seeing that? • No. • Writing. In fact, technical writing. This generation is used to, you know, they’ve come up in their early twenties, they’re very good at the jargon or texting type lingo and you try to have them interact with a customer and write them a technical bulletin on how to do a process or how to service a machine. They really struggle. • OMG! • I have to say their company emails have capital letters and punctuation. 161

• Yeah, there you go. What about drug testing? Someone said that 65 percent of his applicants fail the drug test … • I think that’s always an issue. I mean we drug screen. We lose people because of that. • Does 65 percent sound high to you? • I think that seems high but it’s out there. I mean we see that more in our entry-level grinding positions and things like that. However we struggle with the manufacturing jobs, the engineering, trying to find people. So we have a lot of openings and there aren’t people out there. • I think it can cluster a little bit, too, in terms of if you don’t have a program and then put one in maybe you lose a bunch. But then the word’s out that they do test and you get a different culture by that, so I would say you know I wouldn’t generalize the 65 percent, but I would say yeah, of course there are. And there are ones where one buddy says, “This is a place where they don’t do drug testing and you can work here and no one’s going to hassle you about that.” So of course you create a safe environment for that sometimes unintentionally. You may attract a segment of the workforce unknowingly to it. So that sort of thing happens. We saw that when we put in a program and we lost a quarter of our employees and you had to think, “Is it going to be worth, you know is it going to be worth putting this program in?” Well the answer at least for us was long-term for the culture and when we get it we said we’re going to offer treatment for those of you who want to go through it and give you some help on your programs and then hopefully a year or two later you’re attracting a different segment of the workforce. But it’s hard to go through. • Yeah, it’s the recent, ongoing push for the further legalization of marijuana, whether medical or otherwise isn’t going to help the situation. • Yeah, I’ve heard that a lot. • Yeah, quite a bit. And you add all sorts of complexities then to it, but then suddenly you have someone fail the drug test but was it from medical reasons? Is it because their spouse or significant other has medical issues and they come up second hand, which is enough to put you over the edge. • And there’s Xanax available on the Internet, too. • Yeah. That part of the equation is you don’t hear about that down in the legislature around the discussions over further legalization of marijuana and such. It just doesn’t get brought up. • Well what trial lawyer could be against it? • Yeah, true. 162

• • • •

Yeah, well absolutely. Yeah. Mold is gold. Yeah. I saw it at a construction trade industry a lot.

Let’s talk about some manufacturing heartburn issues. I’m going to list a half dozen factors that might affect your business. Tell me what you think. Increased competition from foreign sources; supply chain relationships; government policies, regulation; costs of healthcare; employee salaries; and ability to retain or attract qualified workers. What do you think? • I think it is tied between healthcare and the ability to attract and retain qualified employees. And the healthcare is just such an unknown. It’s a large cost component and it’s -- talk about not being able to forecast a year you know... • Yeah. • And you have so little control over that and it’s just -- heartburn’s not a bad way to put it. It’s a heartburn issue. • Well (name) brought in someone to of our Enterprise Minnesota peer councils to teach us about the new healthcare, and at the end of the presentation they said, “Well, check back next week because it’ll probably change.” So it’s hard to know what. Is it the Affordable Care Act? Is that something you fear? Is it something that will just become a cost of business or what? • It would be dramatically different five years from how it is today. I have no idea what but it’s not going to be the way it is today. It’s so unsettled right now that you know, but who knows where it’s going to settle into. • There’s no way to plot. Were you going to say something, Bob? • Well I mean, like everybody sees, it keeps getting delayed for political reasons, different things get delayed. Like the 15-99 employees won’t start till 2016, so they’re trying to delay things more on a political level. And I think for the last renewal cycle that we went through, I think there were a lot more surprises that we had with employers who saved the actual taxes and fees that are being put into premiums or funding levels if you’re self insured that now they have to pay as part of this Affordable Care Act. Suddenly there’s been a little bit more of -- I think the reaction to most employers is there’s obviously a frustration and pain and they’ve got to pass this on to the employees because they can’t absorb any more of these additional costs. So the Affordable Care Act is making it more unaffordable for their employee workforce, so it’s cutting into, you know, we talk about wages and talk about increasing wages for employees. Well 163

it just takes off the top end of what the employee can make because you have to have them absorb some of the cost because there’s no other place to put these dollars. So I think that’s going to continue over time. But then you talked about how innovation’s going to come out of some of this, which I hope will be a residual which will be a much more of a long-term plan, that people have to find a more cost effective way to deliver healthcare than is delivered today. That’s going to take time, so in the short term there’re going to be cost increases. The hope long term is more innovation that comes in that’s going to decrease some of those costs but I don’t see that coming any time soon. • It’s personally discouraging how little this bill is tied into your employers. • Mmm hmm. • That if and through all the discussions the Affordable Care Act it is always included and tied into this it’s going to come through your employer. And it’s a pipe dream that you break that connection out of there. There’s no real rational reason that it should even be delivered, that your insurance should be delivered through your employer. But as long as it is, then it’s kind of at the whim of the legislature now. • No I mean they’re talking about the end of the job lock. So it seems like that’s separate. • Well. • There’s no more job lock. • One of the interesting things that I see going on right now is think of actually the last few years, healthcare costs have been a little bit more controlled and when you read about cost of healthcare inflation et cetera, be it with the uncertainty of it was going on in the market and I think the ability to point in other directions -- private insurers really took this opportunity to raise rates really good even though costs weren’t going up. And I think you had legitimate reasons to do it. Right? Which is, now you’re not going to be able to drop somebody with a pre-existing condition from coverage. Now maybe lifetime coverage caps are coming off, so they don’t know how to underwrite it and so they’re throwing that at the premium and at the same time. I think they know they’ve got good political cover to do that. Right? Blame the politicians for it going up, but let’s get a 20 percent rate increase this year. So that’s part of what I think might shake out, too, but actually what’s going on in the core economics, better controlling healthcare expenditures is fundamentally good and part of the way we look at it is let’s get a wellness and wellbeing program going because in the end, our costs are going to drive what we pay. And so we can complain about the premiums or you can try to get to work on the cost side of it and hopefully that arrives at a sane place in the end. 164

Does anyone do wellbeing? Does anyone have a wellness or a wellbeing program? Does it have -- does it work? • I’m actually doing but it’s too early to really tell you whether it does or doesn’t. I know it exists but I couldn’t tell you what the impact is. • I’m not going to comment on that. Does it affect productivity? • No. No, pretty much about health and you know HSAs and in encouraging people to take care of their own health and be responsible for themselves and trying to provide a better life for them and then it benefits the company as well. Not to ignore that but you can believe that, but that you’re helping people to be better for themselves and their family away from the workplace and then it just helps them at work as well. But that was never, had never entered into that portion of it at that point. However again, introducing the HSA portion of it, people had a vested interest with a higher deductible and using their own money instead of just going in and saying, “Well, insurance will pay for it.” “Well that’s my money” and they took care of themselves. Not that they didn’t go in because they didn’t want to spend the money, but they didn’t need to. I think a real, another way of looking at it versus just, “What the heck? I’ll go in.” • Yeah, connected the patient to the market. They just say that that was great. • Yeah. Do something with program insurance. • You know I will say and I mean this. I think the most honest statement uttered by a politician in this point so far, was Nancy Pelosi when she said -- which I never would -- but she said, “We have to pass the bill to find out what’s in it.” I give her the Truth and Clarity Award for this century anyway to this point because that was truth. She was right about that. And at the time I heard it I thought it was insane. You hear what you just said? But it’s proven true.

165

FOCUS GROUPS

Brainerd 3:00 p.m., March 13

Central Lakes College

As a manufacturer, in your business, are things in Minnesota and the nation going in the right direction? • I think it is going in the right direction. In our industry it’s probably, since I’ve been there, the longest good stretch, if I can say it that way, of business. It appears that it is going to continue. We don’t have a lot of negative comments from our customers, so that’s a good thing. But as I was telling Twyla here, we started the last two recessions by investing in the business heavily. We haven’t done that yet, so I think the recession is going to hold off. I mean overall, I think it is going to…there are a couple reasons -- large awareness by not only, I think, the general public but the government officials. Nobody’s doing anything to hurt us yet. We see a lot of opportunities out there with our customers and technologies that we haven’t been able to bring to the forefront over several years. Those technologies are finally -we’re able to use it today, so there are a whole lot of positive things happening. Is it part of a rising economic tide in America or is it specific to your industry? • I would have to say yes, it is. However, the manufacturing sector probably started climbing out of the hole, if I can say it that way, earlier than most and is staying up in the game as far as we don’t see any real bruising downturns here in the near future. But there are some other 166

things that are coming down the road that I have questions on. I think that business is good. We’re getting a lot of orders, a lot of new customers. Having to try to keep up growing to the point we don’t have to turn down business, so that piece is good. As far as finding employees or people of talent to work for manufacturing, not nearly as good. Therein is the biggest struggle -- the employment of the people. I think in general, things are going well. I think if you drilled in any one particular area you might find some challenges, and I agree with -- employees are a challenge. Some of the commodity prices that we’re seeing are challenging. We have to pass on some price increases to our customers. On a positive side, they seem to be absorbing them and we’re still getting orders. So right now, that’s looking fairly good as well. I think to follow up on your other comment about is it based on what’s going on with the economy and the country, in our business because we support the recreational vehicle industry -- like snowmobiles, ATVs, boats -- I think it is tied to a positive outlook on the economy as well. As you look at manufacturing in Brainerd as a whole, what do you think? • Certainly in our business, we’re seeing things going the right direction. I would wholeheartedly agree. You see some -- on average, everything’s going in the right direction. There are some things that are going in the wrong direction, but overall it’s been leaning to a more positive effect in our business. I think locally -- I’m just looking around and seeing some of the things that are going on and the people that I talk to -- it seems like in general things are going the right direction. Out here, at least, we’re seeing some tourism increases. We’re seeing some construction coming back. There’s a fair amount of work going on locally and businesses are -- retail is starting to do a little better than it has in the past. • It wasn’t that long ago there was a recession. We all got a lot smarter. We leaned up. We got what we needed to do and we figured out ways to really cut expense. Just because things are picking up, we’re not really fattening things. We’re still running pretty lean to stay where we are. • Cautious. • Yeah, we’re cautiously optimistic. We’re not adding a lot. We’re just working as lean and as smart as we can. Do you find that caution leads you to more conservative forecasts? • The last couple years, we’ve been able to stick with it all the way through the year. I think this year is probably going to be about the 167

same as what we were last year. I mean, we’re looking at it maybe a little bit softer, because we’ve had pretty good rates over the last actually three years. I guess I’m being cautiously optimistic with my budget this year for that reason. • I would say the same thing. We’re cautiously optimistic. It used to be we’d put a forecast together. We wouldn’t really temper it much. We’d say yeah, we think we can hit that and then we’d hit it. Now we’re going the right direction, just not as much in the right direction. It’s still a good path, but it’s not as fast a growth. • In our industry it is, because it’s heavily related to commercial and residential construction. So it’s only had one direction to go -- up. But go up and -- but it hasn’t been this meteoric rise like it did previous to the recession. What factors will lead to more growth than other factors? New customers? Existing customers? New products? New marketplaces? • Our growth’s mostly on capacity. We have opportunities out there that we’re turning down daily, and that’s because of capacity. Is it plant capacity, people capacity? • Both. Always about both. • Which industries most want the work? • We’re very diverse. Aerospace is going crazy. We have a rep out in Seattle that could double his business with us. We have twenty customers out there now, but we don’t have the capacity. The capacity there is partly equipment, but it’s mostly high-end, skilled workforce. We can’t add that work without that level of people. Is that part of the Boeing supply chain? • Yep. Not just Boeing. We do Airbus. We do parts for a lot of the small jets too. Medical in some areas has been real strong for us. We’re not in the direct medical stuff. It’s more of the lab equipment and things like that that’s been real strong. The firearms industry has obviously been bananas for a long time. That’s stayed steady. Well, it peaked I think now. It’s probably just leveled off. But yeah, we just got done with a week in Dallas visiting customers and brought back opportunities we can’t do. I don’t know why we were there to be honest. It was 27 degrees when I got there. • Forty degrees warmer than here. • That’s true. But yeah, I think a lot of it is economy based, but being diverse, you can kind of ride the economy changes quite a bit too. But our biggest thing right now is investing in people and training. We have a full-time person that’s just involved with employee development now. 168

Every employee that we hire, they give them a path of training that carries him through his apprenticeship, through his first few years. They do that with all existing employees too. We use Enterprise Minnesota quite a bit and other resources for bringing those skill levels up. And the college, obviously. I think we’re going over to Staples next week or the week after to do our push for this year or whatever. Get our fair share. Yeah. It gets harder every year. Let’s talk about workforce issues. Does everybody have a full complement of workers right now? • No. • Not even close. • We’re like they are. We could use the CNCs, the machinists. We’re okay in welding just now. But even a general labor pool needs to be an elevated pool from what it was years back in manufacturing. It’s not the same. You need more skill. Everything requires the computer readings and the calculating skill that it didn’t used to have. People that show up every day. We have over 100 temps. We’re working mandatory overtime every other weekend. We’ve grown 102 percent in four years. It’s leveling off a little. It’s starting to feel a little better. We’re maxed busy. My concern is that people working so much overtime, it gets to be a piece of their regular income. Then when you do finally get to the point where you can cut it back -- because overtime cuts profit. You really like to try to balance that. There’s been no balance of that this year. Is it fair to say that’s not really slowing you down? • Thank goodness we have temp agencies than can keep us. Then what we do is strap our lead people a little heavier because they’ll work a weekend shift. So I have ninety guys in now on a weekend shift and probably ten to twenty full-time temps. Here’s how we do that. We take the weekend temps and we run them for about a month so you’ve got eight days of watching them work. You have a clue if they’re any good. Some people have kind of a natural aptitude. You know they don’t have the educational background in it. Those are the guys we’ll pull as the full-time temps. Run them for full-time employment for thirty days, and if they make that thirty -- that looks good to everybody -- then they’re the ones we’ll roll. So it’s kind of like a feeder tube. For us, that’s been working best as we can kind of see what their abilities are, but we still lose a lot of people with the weekend shift and the turnover. Turnover of our regular employees, but not anywhere near the -- we’re trying to pull them in so fast. 169

• We’ve had to become more creative, I think, all the way around. Not only working with the shifts -- trying to schedule people into shifts, obviously overtime is one of those tools to use. But we’re also looking at robotics and automation and that type of thing and switching around our production. Our production people, all we want them to do is production. No set-up, no anything. Just run it and go. We have to put it in select times when that can be done. So there are a lot of changes going on, no doubt. • You bet. Added three robots this year. Now we need people that can program them. That’s the next step. Anybody feel that productivity and profitability are hurt because you don’t have enough trained employees? • Well, absolutely. The overtime’s killing us. • When you hire people through a temp agency, you pay them more because it’s marked up. It might be a breakeven because they’re not on your insurance. But they’re not as productive. They’re being trained, so you’re not getting the bang for the buck that you would if you had people that knew what they were doing. So there’s one way that it’s shorter. The second one it means extra lead people to train them, and those people are working extra hours or overtime, for an elevated pay, to get them to come in and be willing to continue to do that. It stresses everybody. Let’s talk about soft skills, attitudes, alarm clock issues, longevity of employment and things like that. • The attitudes can sometimes play into things. I think that it can be helpful if it’s the right kind of attitude and it can really hurt, I think, a lot on our floor. We see that if someone has a poor attitude, it can bring the group down, and we can see it affect some of the other people and even our production sometimes. Do you get a sense that’s generational or that it’s always been with us? • I’m going to be glad to retire in a few years. • I think to some extent it might be generational, but to another extent we, like Twyla, are bringing in a lot of people through the temp agencies. I’m just not sure if that population of people we’re drawing from maybe is the cream of the crop either. • Absolutely. There’s a reason they’re not full-time employees. It’s either background or history or life chaos. Some of them have done jail time or they’re just out. We hire felons. It depends on the felony. I don’t want to run them full hire. I want -- for the protectiveness of the entire 170

force. You watch out for everyone. But if they’re not going to steal us blind and they have felony for theft, we’re looking at them. We need employees. What about drug testing? Someone said the other day that 65 percent of applicants in his company fail the drug trust. • Two ways to answer that. Yes, we do a drug test, and that’s after we’re going to roll them over to being full-time. But anybody that’s got any brains at all knows that they can drink whatever they drink and go on down and take a drug test and pass. I mean, if they don’t know that much, they’re maybe not smart enough to be working. So yeah, you can drug test. That sends the message that we’re a drug-free workplace and we expect them to know that. But can they work their way in anyway? Well, certainly. Temp agencies have had it tough. They’ve probably got a phone because everybody’s got a phone, but they don’t have cars that work. They don’t have any cash in the bank. They don’t have anything to fall back on. Times have been tough. So those unemployed people that we’re trying to pull back in need more assistance. They struggle harder than guys that have been employed for a while. So it’s a tough group to help. We had a guy last weekend that sat in our lunchroom for three hours and finally someone said, “I don’t think he’s got a way of going anywhere. He’s got nowhere to go.” We took him to Lutheran Social Services. After his shift? • But he showed up for work. He managed to get up there, and he didn’t manage to catch a ride when he left, and there he sat. He may end up being a good worker; I don’t know. I’m kind of watching him now because he’s kind of flagged up there as a guy I want to pay attention to. Life has been hard. • We’ve certainly gone through our share of temps in the years and have some today. But one of the fortunate things in our business is that we went from a peak of so high to so low that when we (lay off) some employees, we were able to selectively keep the ones that we wanted to keep. As we’ve been growing, our growth hasn’t been nearly as quick. So our employee struggles aren’t nearly as acute as some people’s because our growth has been more controlled. I wouldn’t mind 100-percent growth, but that’s not something we’re seeing. But even today we see the same thing with the temp employees. You have to really put a little effort into them. Because part of that cautionary practice we have now, we don’t hire anybody unless they come through a temp service. We just have to evaluate them first. It’s been too hard on our company to (lay off) people to put them on without making sure 171

they’re going to be a potential long-term employee. So that’s a change in behavior, but we don’t have the issues of trying to find people. We’re not hiring that many people right now. Does the use of temporary employees hurt your lean progress? • Yes. When we leaned, we were a lean machine a few years ago because that was the way you stayed afloat. Now because of growth, we can’t afford to -- we can’t work our existing force enough hours. We just can’t possibly work them enough hours to manage to keep up. So with the growth we’ve had, there’s no choice but to hire the best of the worst. That’s a horrible way to say that. Now, it would help a whole lot if schools and places really pushed manufacturing so that kids that are in programs thought it would be a really cool thing to go and make stuff. But we don’t do that very well anymore. It’s my impression that you do it as well here as anywhere with the big show that you have. • Well yeah, but it’s not good enough. • It’s changed a lot in the last five or six years in the efforts that Twyla and we’re all involved in. We are at least getting the high schools -we’re getting the tours now. We’re getting colleges to come over every year and that kind of thing. So we are getting a lot more awareness, and that’s putting money in the bank for the next generation. But it’s necessary if you don’t do it at some point. I think that this area, we’ll say it’s done a really good job of getting involved. • Our schools do a good job. Invariably, if you walk into a crowd and you say, “Do you want your kid to be a four-year-degree student or do you want him to be a mechanic,” where do you think the hands are going to go up? Until adult parents change that mindset, we’re fighting uphill big time. The schools get it, and they’re going to start putting people back on to teach, but until people find the value of a plumber earning more money than a four-year-degree teacher, it’s going to be very difficult. (To an educator): Are you getting the numbers and the quality of student that you want? • Not yet. I’ve only been here since 2013. In MnSCU, in its career and technical education, we saw an enormous gouging of the resources necessary in career and technical education because many parents, as Twyla said, did not see the value. Therefore they elected legislators that were told they did not see the value, and therefore we got dumped. We had approximately a 90-percent gouging in the finances over the last -- between 1996 and 2007ish, right around there. We had about a 172

90-percent drop in funding at K-12 in the career and technical areas. That’s pretty much down to almost nothing. It is going to take some time to get back up there, but we are starting to see some high school principals, some middle school and elementary principals, some superintendents actually get it. But it’s going to take a lot of time, and that starts at a young age. We are starting to see a lot more students -- I wouldn’t say that we’re seeing enough students -- that want to come into our doors. We’re having to do more promotions, more grants, more work -- twice the amount of work -- to get the same students that we had. This is true statewide, not just regionally. If we think about twenty students and we spent this many resources to get twenty students maybe six to ten years ago, now we’re spending this many resources to get that same number of students just to walk into our doors or even show interest. The quality of student -- one of the technical college presidents mentioned in one of our focus groups that something like twothirds of the students that matriculate into a program lack basic reading, writing and math skills. • Overall, in MnSCU two-year schools, 40 percent of those that enroll do not have the reading and writing and English skills to even graduate high school, yet they did. So they do not have college entrance capabilities to read, to write and to do the arithmetic. So the three Rs are not there. So we are spending a significant amount of our resources in remedial education from the K-12 level. However, having said that, we’re doing a pretty good successful rate of getting that, but that takes time. So we are getting that. We are seeing the drug-testing thing. I just had to sign another letter this week, because we do have a drugtesting policy in a few of our programs, and I had to sign another letter this week that we lost another one. But given that, we’re trying about five or six different programs to see where we can fit it in. There is a new student out there. There is a difference in the 2014 graduates in comparison to mid-1990s graduates or mid-2000s graduates of high school programs. It’s not the same student as it was. Why? • Part of it, it could be a generational thing. I think a large part is a generational thing. But a large part of it is because in the 1980s and 1990s, there was a large focus on parents getting jobs and being successful or having been portrayed as being successful as a result of a bachelor’s degree. So that took its time. Those parents then passed that on to the next generation ten years later. The next generation, ten years later. Then over time our economy shifted, but the rhetoric didn’t 173

shift. So now the rhetoric is slowly finally shifting. In the fall of 2013, we actually saw MDE, K-12, finally admit that there is a shift and K-12 actually has put out a video and a series. They are starting to talk about maybe the four-year path isn’t what we necessarily need to be pushing. Maybe everybody doesn’t need a bachelor’s degree in liberal arts. • It may be certificates and diplomas. • It may be certificates and diplomas are the way to go. • Degrees that aren’t necessarily two- or four-year. • That was an advertising strategy for them for enrollment. Let’s face it. Even MDE needs enrollment and they need to do some PR in order to maintain their numbers, to maintain their status. So part of that was our level of education is here. We are in Minnesota. We have the highest standards possible. There’s a difference that we’re finally starting to see that messaging, and we always need this help getting this out. Having standards doesn’t mean that you have to have a bachelor’s degree. We have associate’s degrees. We have certificates. We have diplomas. We have extremely high standards in those career pathways. So the definition by a parent’s point of view of standards is, in today’s world, what level? But you can have standards at every level. So we’re trying to get that message across, but it is a difficult message to get across. It doesn’t get across in one breath. You have to talk to one parent and then another parent and another parent. • One of the observations we have in our industry about housing might be linked to that. We’re seeing trends in home ownership rates. The theory is that a lot of kids -- people, first-time homeowners -- are going through and looking at making that purchase. They saw their parents go through a foreclosure like a lot of them did. I think there might be some of that same going on with career choices. They saw their parents go through this offshoring and all the manufacturing decline. My dad was a mechanic at a manufacturing facility. He got laid off and then we got foreclosed. You see the rates. The people with four-year degrees, unemployment never rose above 3 percent. They see those numbers and they’re going to be a hard sell to get back into these industries, because the industry over the last fifteen, twenty years took such a big dive. I think it’s not just going to be selling it to schools. You’re going to have to do a generational sell to get it to be changed. • That’s so unfair because the four-year-degree people are out working at the 7-Eleven. • Yeah, because when you can choose the two employees, you pick the ones with degrees because they’re the ones that are hirable. That’s the statistic, so that’s what people are quoting. Let’s switch subjects. What about foreign competition? 174

• Recently, we’ve seen more work coming back than we’ve seen going away. So it’s not as variable. • I agree. We source offshore, and we’ve seen some of our work come actually stateside again. It’s just easier to control in a certain sense where it’s right next to you. You don’t have to worry about the delay and the days and all that. So it’s more convenient, and the price point is getting similar. • Our struggle with foreign is our sourcing. China in particular, the domestic market’s gotten to the point where we’ll order a container of material this month and we won’t receive it until December because their capacity is consumed with domestic demand, which is fine for them. Which keeps the foreign competition at bay because everybody else will see those lead times and they’re not going to be able to enter our markets with those lead times. What about government -- policies, regulations? • To me, my comment earlier about investing large amounts of money and then going into recession, I guess that’s the thing that keeps me wondering at what point -- in a year or two years from now, should we be investing? What’s going to happen with the economy -- I mean the government? What’s going to happen with taxes? When are we going to start paying back the debt and all of that? It’s all looming out there. From my personal observation, I think it’s about 2016 and we’re going to hit that wall. Between now and then, do I really want to invest a couple million dollars or not? There’s some uncertainty there. That’s one of my… • It’s so uncertain. It’s got to get corrected at some point. The ObamaCare and everything that goes with it. We don’t even know what that’s going to cost us. Is it taxes primarily? Regulations? What are the things that you’re facing that make it more difficult to do business? Or is it just something we’re all used to and it’s just the price of doing business in America? • In our situation, it probably isn’t so much regulatory. This last year or with this last health insurance, we had to pay about $63 per participant for ObamaCare. Now next year, I don’t even know what’s it’s going to do next year. But it’s those kinds of things. We know those things are going to come down the road. We know taxes are going to go up -- they aren’t going down. That’s the federal government. Then you have the state government who’s not going to get any money from the federal government. They’re going to have to raise taxes. The trickledown theory -- we’re going to see it all the way down to the city and 175

the municipal. We know it’s going on. • And those payroll taxes. What about the prospect of the Affordable Care Act? • I think for us it goes back to what we said before about putting people on. We’re going to make darned sure we need that person longterm before we hire somebody to a full-time position, because we don’t know. I think that’s the biggest overriding thing. A challenge for manufacturers is that there’s no certainty and there’s no -- it’s a flip of a coin with the way the politics go these days. There’s no compromise. There’s no middle. There’s nothing that gives you some confidence that at least it’s going to go along a steady path. It’s going to go left or right, left or right. You never get a chance to plan anything. That’s what I see is this uncertainty. People just don’t want to make a decision until they absolutely have to. So what do you do? • You hire temps. Since the big recession when we had significant layoffs at our company, finally this year our unemployment compensation rate has gotten to a point where it’s more comfortable than it has been in the last number of years. Therefore, we have 20-25 percent of our staff as temps so that we’ve got that in case we have to let somebody go. Then we don’t have to pay their medical insurance and all that. • I think your comment about the unemployment tax -- we saw the same thing happen for us. Our unemployment insurance went down about 60 percent. I’ve been bugging our representatives, “When’s that going to go down?” This was my second year of bugging them. They said, “Oh, well next year we’re going to do it. We’re going to drop it.” Then I asked them how much, and it was more than half is what they dropped it. That’s where the tax uncertainty and that type of thing comes in. As an example, workers’ comp, I think for us, came down about just under $70,000 -- $60-some thousand. That was half. I mean, depending on what size you are, that’s a pretty significant dollar amount. So if that comes down and then something else goes up by $100,000, I’m still behind in the game. To me, we’re going to be paying for it. There’s just no other way. I know it’s coming; I just don’t know how and when exactly. • It definitely makes you more conservative of your growth plans. It’s a big question mark in Minnesota and federal. • I think it’s going to hurt the self-insured, for sure. I think it is not going to get any better than this. • I don’t notice much with ObamaCare. 176

• Not so far. • Not yet. • It’s early. That $63 penalty -- birth to age twenty-six, suddenly they could be married and have six kids. But if they’re birth to age twentysix when their parents work for us, we would insure them. I thought that was going to kill us, and we didn’t see much from that. Stewart Mills was out and said, “Oh my goodness.” That hit them -- that to age twenty-six piece, because that was a lot of extra people on their insurance. I don’t know how you guys did with that. We didn’t feel that much. But all that. Part of what makes us so cautious is when they can do stuff like that. I mean, they can do stuff like that. So you need to be pretty sure you’re on really solid ground and have some financial backing to take care of the next whoosh they might spring. Another heartburn factor is just the overall cost of employees and benefits without regard to healthcare. • We just had this conversation at work before I came over here. It was related to the minimum wage. We don’t pay the minimum wage; we pay above that. But for a lot of our jobs, if the minimum wage goes up, our lower-end wage is going to have to go up. The calculation about what happens with the minimum wage isn’t really the real effect. It’s what happens to all those people in that margin of entry-level jobs that are just above it, because it brings the whole market up. So that’s the heartburn for us right now. We don’t have any other heartburns in terms of benefits outside of healthcare. The rest of it is all… We raised our starting wage. Now we all have to be friends in this room. We all want that pool of people -- the best of the temps. So of course, we went up to 12 bucks an hour, and that made a difference. When we were at $10, it’s like -- you go up to $12 and right away you notice you get a better quality of employee because that’s the ones they’re sending out. When you do that, then that compression factor pushes an entire plant to some degree. So those are very expensive. So be careful, Twyla, because when you guys published in the paper your average pay is $17 or whatever it was in that article, the guys walk in and go, “They’re making $17 at starting pay.” No, they’re not. What factors are most important as you contemplate attracting and retaining employees? • It used to be insurance. They don’t care anymore. Our marketing tool was our good insurance. Well now, everybody can get MinnesotaCare and ObamaCare. Nobody cares. So now I’m starting to rethink that. That used to be a real pulling tool -- was a low deductible, very affordable. The company paid 95 or so percent of the premium 177

or 90. We’ve always been very generous in that realm. Now it’s not so important. • I’d say time off. What do you guys think -- money or time off? • Flexibility and time off. Flexibility and time off. Pay is a big part of it. • We’re cautious about bringing people on and you’re working overtime, and they don’t like that. They want the flexibility. So it’s kind of a fight that you’re fighting yourself to some degree on that. • Just an observation. I think it depends on what level you’re at in the pay scale. The flexibility and time off -- people that are higher on the pay scale, that’s what they want. • Well, they’re your guys with longevity. Pretty good vacation schedule. • Opportunity for growth. Training. A chance to get somewhere beyond… Do people generally take advantage of internal opportunities for training that will enable them to move up in the company? Oh yeah. • Absolutely. • Definitely. Even existing employees, when we offer it, everyone takes it. • How much of your advancement is within as opposed to outside hiring? • Almost all of it with the exception when we can find experienced help, we bring them in. I think all of our -- we haven’t hired anyone for engineering or any of those areas outside. We bring them from within all the time. • I’m sure I’m being very cautious if I say 95 percent of our advancement is internal. • Partly because it’s been a long time since we’ve had that opportunity through education to pull in people that are trained. But it is one of the things that our employees value -- the internal… Does everybody anticipate growing the workforce in the coming year? • We’re going to back off a little from what we did last year. I think we added -- for us, it was a lot -- thirty some people last year. That’s a strain on our human resources area. We don’t have a very big department there and everything else. So this year our strategy is to probably cut that in half as far as the number of new people and then grow around that. We’ve got to automate more, utilize it more hours. Expand our other shifts, things like that. 178

Are retirements affecting life as you… • Not yet. • Right now we’re meeting every week with a group of us for succession planning for half a dozen people. They just all happen to be key people. Carlo and I are two of them. You have to look out five to ten years, and it’s going to be an issue, definitely. We have some highend employees that are in that same category, some people who’ve been there a long time. They know the equipment and they know the production side of things. Are you facing retirement issues? • We’ll lose an occasional -- I think in the next five to ten years, we may have more people in that category. Whether they really decide to go or not will depend, I suppose, on whether we can be flexible with hours and schedules or more part-time work. That will remain to be seen. Our workload is growing. You asked that question. Probably we’re between 10 and 15 percent over last year. Think about us reconvening in five years. How will things look? Will they be as good? • Yes, because it’s Brainerd. I don’t know if I can say that about any other area of the state. But we’re very blessed in our community. In particular, we have the Chamber, we have the educators, and we have businesses and we are all a group going in the same direction. We’re aligned. I don’t think every community has that blessing. For us, I’m very optimistic that we are going to continue to meet our need and address those things as they come up. But we’re unique.

179

FOCUS GROUPS

Edina 8:00 a.m., March 14

BMO Harris Bank

We have bankers here, so let’s start with banking. How do the bankers here feel about the prospects for manufacturers? • From my point of view, manufacturing, I think in Minnesota, has changed dramatically in the last four or five years. It’s due to a lot of things, but mostly the economy. So we had to get smarter. Manufacturers had to get smarter about how they do business. What’s happened now is manufacturing is pretty lean from their production to output. Every new revenue dollar that comes in from the top drops to the bottom line, primarily, as long as they’re not at capacity. So I think manufacturing from my point of view and what we’re seeing from our clients is that we’re growing. There’s more need for capital, more need for employees. But what’s happening, I think sometimes, temps are being brought in instead of the full-time worker. So that’s causing opportunity for manufacturers to pull in workers and then let them go when they don’t need them. As projects ebb and flow for them, it’s easier to manage. That’s what I’m seeing from our customers. • I’m going to kind of piggyback off of that. I think that our customers have become very efficient at running lean operations over the last couple of years. I think that that’s benefited them significantly in 2013 overall. This doesn’t hold true for everybody, but I would say overall, companies that I work with were more profitable in 2013 than in previous years. Outlook for 2014 for the most part to me seems to be pretty positive. I think one of the things that people have mentioned 180

was a challenge last year, which I’m still continuing to hear is a little bit of a challenge, is for them to find skilled workers. I think that will be interesting to see how that continues to move forward, if that’s something that becomes easier. How has the evolution of manufacturing affected their banking relationships? • I think as far as their banking relationships, I think during the economic downturn, obviously, companies were very reliant on their banks. It’s kind of a running joke with banks is that banks are there when you don’t need them and not there when you do need them. Everyone’s nodding. • That’s not a joke; that’s real. • I mean that’s kind of the industry overall perspective of banks. Those customers that still managed to get through that and we managed to maintain really strong relationships with, I think it really strengthened a lot of the relationships as well. To show that we stuck with people through the rough times is also a way to help strengthen the relationship. As far as banking, what we’re seeing in the market right now is a really aggressive banking market right now. We have a lot of customers who have signed on to maybe two-, three-year deals last year who are already potentially looking to refinance just because the rate environment is one right now where you can really capitalize on low rates. It’s a very competitive market. Banks are back out there wanting to grow their assets, and you’re definitely feeling that out in the marketplace. Let’s reach out to the customers. How is it for you? I can’t imagine that your forecasts are easier than they used to be. • I think the banking industry has become so much more competitive, part of it because of the turnover within the industry. I’d be interested to see if you think that’s a positive or a negative, but I find more of the banking relationships saying, “What can I do to help you grow” than “Where’s your forecast?” We’re doing quite well right now, but the focus seems to be more on what are your growth plans, how can we help you and how do we structure it than where do you think you’re going to be in six to twelve months. That’s changed, obviously, a great deal. These folks have had a fair amount of turnover just from our relationships. I’m getting calls from people that have left other banks and so on. I think it’s becoming a lot more competitive, and I’m sure you’re finding more and more people in the same spaces that you’ve competed in in the past. I’d be kind of curious as to what that new 181

competition means as well amongst all the banks. What do you think? • I think competition -- all banks now are flush with cash. Not all -- I shouldn’t say that. The money is sitting at the fed, overnight, billions of dollars. We’re getting less than 25 basis points, so if we can reinvest that somewhere with a loan, we can increase our profitability significantly. Crazy pricing has gotten back to this marketplace in my opinion. Relationship pricing is about bringing in new business for banks. We have to redeploy that capital into the marketplace. Some banks are more aggressive than others, and that’s why we’re seeing some of that crazy pricing, in my opinion. There’s still a level of uncertainty about the economy, right? • Actually, we’re fortunate we don’t have a lot of capital expenditures. It’s a low-capital business that we’re in, so that’s not our concern. We’re more tuned into what’s the nature of the economy and whether it’s growing or not. We’ve been fortunate in that we’ve been able to tap into enough markets that we haven’t had a big hit recently and have had a few good years of growth. The problems come back to more the labor side that you were mentioning. That’s more of a concern for us. Do you have a sense of capital investment? • Our biggest concern is space. We’re growing out of our building. Our big capital expenditure would be a building. Then obviously, can we maintain that size that we’ve grown to and expect to grow to is the biggest concern. • We are in a fairly insulated vertical market with aerospace, one that’s growing. So the economy isn’t as big of a driver. Our biggest question is where to spend the dollars that we’re investing and where are we going to get the most bang for our buck rather than wondering if it’s going to be something that works out. (To a banker): Are you finding that people are reluctant to make investments that they might once have made? • I would actually say that it’s a little bit of the opposite. I feel like I’m seeing the companies I’m working with starting to spend. When you talk about on the building front, I’ve seen more deals come through this year with existing commercial clients where they’re now wanting to expand their space on the real estate side than I have -- I mean, that was completely dry the last couple of years. Now people are calling up saying, “I think it’s time that we expand the building.” All of those 182

things are what leads me to be fairly optimistic, because I am seeing people starting to invest in new ERP systems and new buildings, new machinery, new equipment. So that’s probably part of what leads me to be a little bit more bullish. We seem to be encountering a growing split between outstate Minnesota and metropolitan Minnesota with regard to -- we’ll talk about this in a minute -- workforce issues. • For every hour you drive from this spot with your GPS, it gets progressively more challenging to find workforce. Workforce is somewhat the common denominator. If you can’t add people, you can’t sometimes bring on new opportunities. It’s going to restrict you in thinking about building a new building. Not that you’re not loyal, but there’s a lot more loyalty within an Alexandria or Brainerd or Willmar from stealing from the guy you’re going to see in church on Sunday. So it’s really difficult. Then yesterday in both focus groups, they pointed out that to find a skilled worker you often have to find two jobs, because they’re younger people and they have a spouse and they’re working, and if you can’t find jobs for both they’re not going to move to Alexandria and want to live on a lake. It gets much, much more challenging. Then you get to the northwest, and the oil fields are a great attraction. They really compete. In fact, I would think even from Brian’s location, there’s a feel for that that when you get up to even St. Cloud, they start pulling toward the Bakkens or even on up into Canada. It is much more challenging, and I think a lot of manufacturers just reached the -- they just can’t take on new opportunities. We hear that in Greater Minnesota more heavily than we do in the metropolitan area. Anyone else have a similar experience? • I think it comes down to just like your personal investment. How scarred were you four years ago when your stock mark went down 40 percent? Our owner is very aggressive, and he just told me yesterday he wanted to buy a facility down in Florida. I’m like, Florida? Miami, because he’s down there. He’s talking to somebody who’s rich and says this is where you export from -- Miami. Why wouldn’t we build a building down here? I’m more of a conservative by nature. I’m thinking startup costs, how long it’s going to affect cash flow and how it could bleed to death our existing business that’s going very well. I think it’s just more of -- I want to be optimistic because our business is going really well, but it seems like almost the kiss of death when you start building. We’ve seen that in corporate America in the cities. As soon as a new building goes up, it’s -- we’re being named Plastics 183

Processor of the Year in Plastic News. Three years later, they’re not even around. I don’t know. I think the labor is the hard part, trying to find manufacturing engineers and trying to find quality engineers. The younger people seem if they can make a year’s worth of salary in three to six months up in the oil fields, that’s all the farther their goal is. I have enough money to get me through a few more months, then they quit and come right back into the temp circle later. But no, I’m optimistic. All of our markets are growing. I need to find different sources. China is getting really expensive and continues to go up, so I need to probably get closer to like a Mexico and try to find those people and find some new international contacts because I can’t be competitive in the US for some of these fabrics and so on that we do. I need to get it closer to home. Let’s talk about the workforce. Are you less profitable right now today because you can’t find enough qualified people to work on the floor of your production facilities? • I would say today we’ve struck lightening in a bottle, I think, in the last six months. All of a sudden after looking for years, we finally found a few good people in a row, so it’s kind of the opposite. We hired them because we found them, and profits are down because we’re bumping into each other a little more, expecting at some point we’re going to find it difficult to retain somebody that’s good. So we grabbed them because they were there, and it’s affected our profits a bit. We’re trying to learn how to work with the larger staff and make it more profitable. Was it luck or was it something that you did that ended up very successful? • I think it’s a bit of luck. I think it’s a bit of a concerted effort to try to attract, to be more aggressive, to try to meet -- our talent is getting pinged quite often from sharks in the water, hitting them with huge wages or benefits. We’re just trying to match those, but at the same time, I think there are a couple key business closings not too far away, south side of Twin Cities, that some talent just became available. Some people unhappy or some other companies pushing harder and people get unhappy. The other thing, we found a couple young guys right of trade school that we’re trying as well. So all of this kind of happened at the same time. We’ve gotten eight new people, I think, in the last four months that we’re trying to get up to speed all at the same time. For sixty-eight people, that’s kind of a large percentage. • I think professional managers are key when you’re losing people. I hired a VP of operations a couple months ago, and he has a human 184

resources kind of a background with technical skills. Just him getting people involved that are making 13 bucks an hour and respecting their ideas and so on I think will help us to retain some of those employees we would have lost with the old manager that I had there. I think that just kind of opened up my eyes. I felt that. I knew that. I didn’t know if I could afford it at the time to bring in a VP of ops level, which is a six-figure kind of a job, but I can already see a difference that people are more engaged. They feel more appreciated. We had people jumping for a quarter to another company or fifty cents. Why wouldn’t they? Now I’m seeing it’s a big change. I think as you get more competition for the $13, $14 an hour -- and even the middle managers. I can only do so much as president of the company. You need that next tier down to have that same approach to knowing people’s names and hearing their ideas and so on. I think it’s going to make a big difference for us. • Tom, we’re seeing everything that they’re talking about. That’s what we’re seeing from our member companies. They’re investing in training, especially managerial training, and compensation plans being much more creative to look at the total rewards in order to attract talent. Then there’s a big move for knowledge transfer within the organization. Not only at the top, so they don’t want to call it succession planning, but they want to call it knowledge transfer. They’re looking at all the different levels making sure that they’re well trained. If somebody did leave, there’s somebody there that can step up. Again, the distinction between outstate Minnesota and metropolitan Minnesota -- in Winona last week, [company name omitted] has seventy-five machinist openings right now that he can’t fill. That’s amazing to me, and he’s not as profitable. They’re very profitable, but he’s not as profitable because he can’t fill those jobs. Do you guys see that at all? • We were fortunate. We had a consolidation last summer. We shut down our Chicago production facility. It had 120 jobs. Half of them went to China and half of them came to Bloomington. We had to absorb them over the summer, and we used temps to test people and find out who the best were and kept it and did it over a little phasing, so it worked out pretty well. It didn’t hurt our profitability, and we were able to absorb that. Although now I notice we’re doing more things on the intangible level, trying to make the workforce happy. As a matter of fact, I just bought my second foosball table. • Would you like a third? With a broken goalie? All you have to do is pick it up. 185

That’s a retention strategy more than a recruitment strategy -- the intangible thing. • Correct. I guess we’re fortunate in the sense that in MinneapolisSt. Paul, there are about five or six other hearing aid manufacturers, so there’s a lot of movement between companies. • Labor wise, I think we’re finding it more difficult to find good people as opposed to maybe six months to nine months ago. There are not as many applicants, or they don’t have the skills that you need? • Applicants and then the quality. We’ve found that we have to be really, really picky to get the people that want to be there. That’s kind of what we’ve found our strategy to do business, and we’ve been on the other side. We just hired anybody that came in the door and had all the problems that came with that. So that’s some of our own business planning that’s slowing us down a little bit. But I think we’ve been looking for two more welders, fabricator-type people, for about three weeks now. Before, we probably had thirty applicants for that type of position. We were lucky enough six months ago to get really good people too. You mentioned the growing use of temps in the marketplace … • I like it because our workers’ comp, when we got our statistics for people when they got hurt, were thirty days into the job. So we’re using -- we’ve gotten away from the word temp -- and say contractor now. That was one of the ideas of the VP of ops, which he’s right. Temps sound negative. Contractor makes sense to me. So we use them for sixty to ninety days. If they get injured, that’s not on our workers’ comp mod. But at the same time, we have fairly high turnover in our job. It’s a very demanding job. I like having the contract agencies. They also do the drug testing and stuff for us too. When we did get away from that because we were in such a desperate need for people, we said, “Just walk in the door and fill out an app.” We interviewed them right there and hired them right on the spot, but that came back to haunt us on the injuries and that front. So we did away with that rather quickly. Do you use temps? • We do in our assembly area. It’s much less-skilled labor. • Just throwing it out there. I do like it. The connotations are a little bit better. • Yeah, we’ve hired through temp agencies -- temps and direct hires. Typically, it’s the people with the vast experience who aren’t okay with going that route. We bite the bullet on those ones. But often times, our 186

inspector levels or our operator levels, we’ll try to hire as contract-temp employees. Does the use of temps affect their bankability at all? Do you look at it? Is that something that you look at? Is there a ratio built into that or something? • No. It’s not something I would analyze. Certainly, we discuss it with clients. We ask how many employees frequently just to get an idea of where they’re at. Sometimes they will indicate, “We use temps or contract workers for a percentage.” So they’ll give us, “I have sixtyeight full-time and twenty-two contract workers.” Something of that nature. But it’s not something we’re going to analyze. I think that as risk, from our perspective, I hadn’t thought about that. • It’s interesting that you bring that up because I too hadn’t thought of it. I’m saying to myself, “Well, should I be analyzing that? Is that a bigger risk factor?” No. I will now go back and think about whether or not that is something I should be thinking about. • But you have to go back and look at seasonality then too. • Yeah. • Do you consider turnover rate at all when you review a company? • No. I say no, and that’s another thing that I’m thinking to myself -here’s another thing that maybe makes sense. • It depends where it’s at. If it’s at the higher-end level, yeah. The last few years, I had a client that really did well. One partner died; the other one retired. But they brought in somebody to run the business. When that turned, yeah, that had some impact on our thought process because they didn’t adjust quickly enough to the market changing. This was like ’09/’10. So there was concern there. From that perspective, yes, but not if you have unskilled labor or even maybe skilled labor -- assembly line worker type or somebody who’s running a CNC -- no. • To piggyback off of that, I would say it would be something that we would consider if it’s within an industry that that is a big risk factor. For example, within the trucking industry, the turnover rate for truckers is -- I think the average is like maybe one to two years. I was just talking to someone the other day who was saying that if you have your trucker for two years, you know you have him for life, because they’re turning over all the time. In an industry like that where that is such a big, big deal, we would want to make sure that it’s within the industry norm. But there are many other risk factors that we are going to be considering ahead of that unless, it’s up at the management level. Then that is something that we’d be very… • But there is good turnover and there’s bad turnover. To me, if I’m a bank, it’s give me the results and I don’t care how you get there. But if 187

you got rid of two bad purchasing agents and a manufacturing manager and I have three new people, that’s good. I think it would be really hard to gauge, like you said, outside of an industry norm what turnover is, because there are so many stories behind that. At the end of the day, is it working? • I’m kind of seeing both sides of it having some staffing customers seeing their business kind of pick up quite a bit. Then some of the manufacturing customers who have steered away from some of the staffing industries because they are looking for key people. They don’t feel that they can get that through going that route. We just want to find good people that are willing to learn that we can train to fit in versus maybe six, nine, ten months ago of just finding a body to get in and help us increase some of our productivity. It’s a little bit more cautious, and they had their best year ever last year trying to increase efficiencies and some of the management training. Trying to take a step back and set, I guess, more of a foundation to get the good people in, developing more of a long-term strategy starting now versus trying to just get more bodies in the door. What about drug testing. It’s an HR issue. Somebody mentioned a couple days ago that 65 percent of applicants in his plant fail the drug test, which was shocking to me. • We clearly say that we can do random testing at any point in time in our handbook, but we don’t. No. They go through the contract agency and test, so we really don’t see the fallout. I mean, there are a lot that do fall out. When we bypass the contract agency for our hourly workers that we administer our own little test, yeah -- I mean, I can’t get a good read. The people I think are on drugs, aren’t. When I sold the business up in Brainerd, they had a drug policy and we didn’t. He goes, “What do you think, Brian?” I said, “I don’t have a clue. I could lose half my senior staff. I have no idea.” But yeah, it’s a real issue. But like I said, I think it’s the right thing. I’ve had that lapse a few times, and I think that’s wrong. It’s real out in Maple Lake, where we’re at. • Yeah, we do drug testing. We just added that this year doing it on new employees. Of course, the temp agencies do that on the way in. But even anybody we hire off the street or find, that’s now a new process. We send them through that. At this point, haven’t had anybody that we’ve screened and brought them to the hiring point and have them fail that. • We do testing with all new hires. I don’t know what the results are. I’m not aware of any major problem that it’s causing. • We don’t do it. • The weird thing is they do it for our hourlies and the office has 188

never had to go through that because they didn’t go through the agency, so what does that tell you? • We see the numbers that are doing drug testing. It’s usually for the people that are going to be operating equipment. That’s all they really care about. • As opposed to creating your strategy. • Sometimes that’s the most creative. • Saying you don’t want to test your… • I’m a results kind of a guy. If it works, whatever, keep it going. Let’s go to another heartburn issue -- heartburn or opportunity issue -- which is competition from foreign sources. Is that something that’s on your radar at all? • I can speak for our company. No, at this point it’s not. I was at a company seven, eight months ago that that was huge. Different vertical market -- Caterpillar parts. Caterpillar was our main customer, and we were just getting hammered by foreign markets. Had not seen the impact of reshoring. • Had not? • Had not. Anybody else have that issue? • Bad news. I was the controller. I moved into a treasury function, and I spend a lot of my time now handling government regulations. It’s crazy. Some of the stuff I’ve had to do in Illinois to just submit a bid there is ridiculous. It’s overwhelming. You mentioned regulatory before, and my suspicion is that the companies have been holding back because they’re afraid of the uncertainty and what’s going on. But it’s gotten to the point where it just wore us down. You have to do something, and so you just ignore it or get around it or deal with it. But it’s terrible. It’s terrible, but do you sense that it’s worse? It’s getting worse? • Oh yeah. New requests all the time. How about you guys? • Where do I start, to be honest with you, on that issue? We could go down the ObamaCare trail, and I’m not even going to touch that one. Because we’re going to hit it next. • Yeah. Just one real concrete example though. We had brought in a new machine. I’m probably not the right guy to speak. My owner would probably have a better explanation. But we had to bring in a 189

machine. Because there’s a symbol on the back of the electric tag on the back of the machine -- this is a new regulation -- we had to bring in an electrician and do some studies on that particular machine. It ended up being $1,500 and we got nothing for it. They sat behind the machine, did nothing, wrote a report and -- boom -- $1,500. That’s one machine. We’re considering moving our business 500 yards to a new building, and the current regulations state that every machine that we have in our facility would have to have the same thing done, being that it’s a new facility, at $1,500 per machine. An added cost to a potential move, and we’re trying to expand. We’re trying to grow, and this is a barrier to our growth. You talk about jobs creation. Well, here’s some money we could be spending for jobs and instead we’re spending it to -- I guess we’re creating jobs, just not for ourselves. It doesn’t help our profitability. Yeah, big, big problem. • Not necessarily us, but it’s more or less our customers that are affected by government regulations. We do, let’s say, some work for the VAs. They’re spending more money in building and putting money into their facilities. That’s helping us. ObamaCare, which I’m not the expert on by any means, but what I hear from our customers is their spending is going to be less. The amount of linen used is going to be less. So they’re trying to decide if they’re going to expand their business or not. They expect 25 percent growth or something, and what’s the reduction? They don’t know what it’s going to be at this point. So they’re hesitant of what they’re going to invest in their own facilities. Let’s talk about healthcare. What’s your sense of how ObamaCare might affect your business and maybe the market in general? Any sense at all? • We were able to dodge that a little bit because we have a higher average wage than a lot of companies, so we were just over the cusp of that. So it’s not going to affect us directly, but I have my own opinions indirectly. I’m not a big believer in it. I don’t know. I think that remains to be seen what that does to our customer base. But directly, it’s not going to impact us a great deal. • There’s a certain level of red tape where I think our -- making sure we’re not in an area of non-compliance because of the new regulations behind the Affordable Care Act, that we now have to consider some things that we didn’t consider before. Our agent is going to have to work harder. We’re going to have to make sure we’re dotting some Is and crossing some Ts where we’re not doing anything wrong and we’re not doing anything sketchy, but there are some things that -- we’re a company that’s always given good benefits along those lines. It’s already a cost, so we’re not really going to see a huge jump in cost. But 190

just from a regulatory amount of time spent and energy to make sure we’re in compliance is going to be a lot of time for my HR people. How are the cost of salaries and benefits affecting for your profitability? • Not including healthcare. I know our workers’ comp is out of control, and I think people start seeing that if they’re injured they get light-duty work and things like that. So it becomes appealing almost. So you kind of try to align between from a management standpoint and employee friendly to -- don’t be too accessible. If they almost have too light a duty, I almost just would rather not see them in the building because it’s almost a perceived benefit if you’re slightly injured. But healthcare is by far the biggest cost. It was out of control for years, and ObamaCare and so on isn’t necessarily going to drive that up any higher, but it was already too much. So I don’t think that’s as much -- I think it’s still getting the person and knowing that that’s just a cost of doing business. Then trying to keep them safe and managing the workers’ comp side of things. The political will seems to be wanting to raise the minimum wage kind of dramatically -- both state and federally. Does that have an effect, even though you probably don’t have a lot of minimum wage people? Does that have an effect at all in the way you might do business? • The manufacturing economy has been so strong, you couldn’t find anybody and say minimum wage in the same sentence for probably most manufacturers would be my guess. If you’re saying minimum wage, there’s a chance they’re not even getting in the door. So it’s more the service economy -- restaurants. • Yeah. That word hasn’t been uttered since I started trying to find people. Are we still dealing with a lot of global uncertainty? • Not really for us. Like I said, I need to get out of my suppliers in China just because their prices have gone up so considerably over the years. But we’re kind of more in a leisure industry with our floating docks and so on, so that’s still a luxury item for what we’re sending abroad. It doesn’t really come into play for us. • We actually have a risk manager at our corporate office in Denmark. I just spent some time with him a month ago. He was more concerned with our business continuity plan and maintaining production than he was with external events like whether the China economy is going to 191

burst or there’s a big war in the Middle East. I don’t know if you can plan for those things. You can maybe think about it but not much you can do about it. • The stock market helps. What factors affect your ability to attract and retaining employees? • Salary. You have to be competitive on the benefit package, and that’s just an equalizer. But I don’t think anyone’s jumping pro or con because you have a little bit better benefit package. It’s all about the money it seems. • I’m not losing anybody over benefits, but I have had some issues with attracting talent by not -- whether it’s people don’t know what their benefits are, and that’s part of the problem with the healthcare and all that is it’s so complex and everybody has an HRA, HSA, this, that and the other thing. All it boils down to is what’s coming out of my check, and they really don’t think about the benefit on the backside. I guess ultimately, it’s how much I get paid is what’s important. • I’m seeing a lot of our groups from the health insurance side and the salary trying to get together a better package, communicate it more effectively, sharing more and more benchmarking reports, industry specific, regionally specific of what our competitors are doing. What are we seeing so they can have those conversations when they’re extending an offer of, hey, this is where we’re at. This is what we see as a benchmark of HSA, HRA, high-deductible health plans more than traditional co-pay plans. Regardless of what you have, it comes down to either, A) the individual employee or, B) how much are you covering for my spouse and my kids that come on. We’re seeing more and more separation of -- we’re just going to cover me, the employee, and have my spouse either go out individually or have it through their employer. Seeing the family participation drop off simply because employers can’t continue to pay the large sum of the premium for the spouse and the children on the backend. If it’s even pay, which everyone seems to be competitive in that space, depending on the due diligence that the workers do, it kind of filters down to that next level. But how you package it, how you deliver it has been a big portion for what our groups are trying to do. So it’s a trend? • I guess I would say they’re a little bit more consumers at the point of hire now than previous years. They’re maybe not the most educated, but they’re kind of Monty Hall Let’s Make a Deal kind of at that point. • I think that’s the thing. There’s a big separation from the $13 an hour employees -- “Do you have benefits?” “Yep.” “Sweet.” And then 192

you get the quality manager or you get some of this next tier and then they’re doing their due diligence. That’s where I’ve really worked with the HR person and say let’s get that benefit package front and center. Let’s brag about it. Let’s make it easy to read and not hide, like, “Yeah, we have benefits and hopefully you don’t ask me another question.” It’s just more of yeah, here’s what we have and so on. I am a fan of giving extra outside of our vacation policy. I probably shouldn’t, but vacation time is precious. So when I bring people on I just say, “Hey, between you and I -- don’t tell anybody else -- we’ll just do another week off the books.” If he says, “I have a vacation coming up in two months,” say, “That will be between you and I. Enjoy it.” Those are things that will go a long way -- just an extra week. Because starting all over and you have fifteen, twenty years of experience, and getting one week your first year, two weeks the second year, I’m like, we’re crazy. That’s silly. • I was just going to ask you if that’s something that you’ve seen as being more important as well to the younger generation of hires. • Coming in a couple hours later or leaving early one day for kids’ events or things like that… • These are hourly positions? • These are more office people. • More exempt positions that you have core hours kind of a thing? You can flex in the front and back? • Right.

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FOCUS GROUPS

Minneapolis 3:30 p.m., March 14

Baker Tilly

I’ll start by asking Mark, from Baker Tilly who works with a lot of manufacturers across the board in different kinds of manufacturing at a level that we don’t always get to see, what’s your view of what’s going on in manufacturing now with what the trends are? Is it a good time to be a manufacturer? • Yes. I think, from what I see with the clientele right now, a lot of my clients are having good years. After the recession, they have figured out how to manage to profitability and that seems like an obvious goal all the time. Like that’s always been the focus the past couple of years, to make sure we’re running profitably. I think the challenge now is how do we grow the company? Now that we figured out how to be as lean as we can and manage the bottom line but not under grow the top line. I’m seeing a lot more commentary now on, “Hey, we’re creating profits.” “We’re a closely held business.” “The tax rates are up. How can we minimize taxes?” So, that’s been the picture. • I see you looking at me. I don’t think we are expecting this to be a better year than last year. We are heavily oriented on exports, especially to Asia, and our experience with China is kind of, from a policy level they’re kind of reducing their focus on growth and so that’s had a direct impact on us. So I think we’ll have a profitable year, but-- for instance, 2012 is a record year for us primarily due to Asian investments and that’s -- we’re not seeing that. • I think the first half of the year looks good for us. Second half, if you 194

read the economic indicators, it’s mixed. Since we’re capital equipment in the metal industry and the wood industry, it’s going to be heavily dependent upon what those indicators say as far as the second half of the year, so we’re preparing beforehand in every way we can to make the most of it the first half and see how it goes in the second. • It’s considerably better than last year in our experience, probably mostly driven by the aerospace and defense, primarily the aerospace industry. We’re just being inundated with-- I mean, it’s a good problem but it’s a challenge we’ve got. We’re getting to the point now when we quote things, we actually expect we’re going to get it. Yeah. It’s been that way for a few years. • I would say, one of the challenges you have as a small business is events that are not typical of the broader marketplace can impact you good or bad. So for (company), the second half of the year will be better than the first half and it will be better than ‘12. However, based on economic indicators, we’re projecting that our business will slow down the second half if you remove a few aberrational factors that will be very positive. Are those factors part of your industry or are you thinking about broader economic--? • Broader economic factors. U.S. industrial production, I think, will slow down the second half of the year, which has an impact on every manufacturer, but there will be several positive things that will happen for (company) that will help offset that. Interesting. • I think it’s going to be considerably better for us for a couple of reasons. Our major market is a governmental body – schools, parks and recreation, colleges, and universities – and this great recession has really hurt a lot of these people because their tax base went down and it laid a lot of people off and the emphasis was surviving for a lot of them. It cut a lot of their labor force. And we’re starting to see that it’s settled down and they’re even starting to hire a few people back. One of the things I’ve noticed is it’s getting a little harder for us to get certain parts in a reasonable amount of time. That’s good from a manufacturing side in that more and more people are busy. Actually, last year, our sales decreased from the year before, which is still a remnant of the markets we sell to, but this year I have a feeling that things are going to be better for us. One of the big factors for us is that synthetic turf is a big part of our business and we’ve got some really good equipment for that and becoming more aware with the people that have this that they need to maintain it. The past was: you buy a synthetic field; you don’t have to mow the grass, 195

you don’t have to fertilize it; you don’t have to do anything. Well, I don’t know of anything made by man that doesn’t require maintenance. We talked about potential troubles within the economy. Is it more difficult to do 12-month sales forecasts than it used to be? • I’d say that things are happening quicker. If you read indicators; they change month to month. They can swing up and down much more than they used to. Then they go-- You look at the purchase, the PMI, and then you go, “No, you should look at now the CMI instead.” So now you look at the CMI and then whatever the CMI says, the PMI is going to say a month later. So okay, now I’m doing that. But things are just changing much, much quicker. Plus, so much of our business is international. We’re 50 percent international and 50 percent U.S, so I’ve got to look at the total globe now; not just the U.S. market. And my supply chain is global. I get 75 percent outside of the U.S. so I’ve got to look at the supply chain time and what affects my suppliers more. • We create one but we modify it as we go because, like you said, the environment is dynamic and if you know you’re not going to make budget three months in, in some category, good or bad, you need to adjust for that and adjust your spending accordingly. So we still do 12-month budgets but we’re looking at them every month saying, “Is this still good?” and then adjusting forecasts. • I’m trying to look at things on a quarterly basis with capital equipment. People stopped thinking month by month. Is there still a good sense of uncertainty out there? Does it affect your decision-making? • It certainly affects my customers more than me. We’re not doing the capital investments, it doesn’t really affect us that much. • We’re in the capital equipment business ourselves and what we-From a strategic point of view, we try to work our strategy regardless of knowing that there are going to be cycles. In terms of investing human resources and things like that, we try to stay on that even though there are the ups and downs. Our businesses is like it’s very long and very hard to forecast, but for us-- Has it always been like that? • Yeah. It is more uncertain because it’s global now. It used to be more domestic, but now you have to -- anything can happen anywhere. I mean within reason we’re not going to go crazy as a small business but we do try to stay on our five-year strategic plan even though the cycles are going quarter to quarter; we may not look so good.

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I’d like to talk about several issues here that we’ve come to call the heartburn issues for manufacturers. They’re either opportunities or sources of heartburn. One is the evolution of foreign markets. • It’s a challenge for us. We’re not seeing as much competition from Asia. The re-shoring initiatives, what we’ve seen, really made Mexico attractive on anything that has a reasonably high labor component. So we benefit maybe more so now than before in terms of doing engineering or design work, maybe doing bridge solutions, but then we face stiff competition with Mexico when the products mature. • If you think about competition globally, we’ve always had mostly from European competitors and it’s only been the last couple of years that the Chinese have now come along. Of course, they began with inferior products but then catch on quite quickly in their quality randomly. We have different complexity and sizes of product and they’ll start on the small end and move their way up. So we keep innovating to stay ahead of them on a global basis. But our competition has been primarily European. • Well, as far as suppliers go, we’ve had some suppliers offshore for decades and we would like shorter lead times, but we adjust for it and prefer doing it that way because of the cost advantages. So we have to stay with it. • For us, the biggest thing is just the uncertainty and the cost of the employee and part of that is healthcare. Our contracts with customers allow us to pass raw material increases on to the customer but not the increased cost of labor. So anything that has a large degree of labor in any part-- We’re contract manufacturers. People hire us to build stuff. Anything that has a large component of labor we’re hesitant to commit to long-term contracts, which makes us hesitant to commit to capital that would be -- that don’t have a high labor requirement with it. And we’ve been growing, oh 14 percent the last couple of years, which is relatively strong, but any time there is a high labor component, we watch that and we’ve been doing more and more with robotics as a way to combat risk associated with an uncertain labor cost. • I think the tax credits that the government has helped at year end and so when it’s the possibility of amending, we see some increased activity year end. Let’s talk about some HR issues as potential heartburn issues. Does anybody here have less revenue or less profitability because you can’t find skilled labor? • Absolutely. • We build. We sure run prototyping and development. That’s what we live on. It’s nice when job projects we bring in repeat, but our average lot size is probably five pieces; so it’s short. It takes a high level of skill to get 197

not, you know, people-- Our people, our machinists and toolmakers have all been through tech school programs of some sort and we hire a number of younger guys as well. What you hope for with that, you hope you have good clay that you can build with. A lot of it is probably the soft skills and the things, say attitude and initiative and self-starting and the curious things that-- That’s been incredibly challenging to find people that have that whole niche. And we were just talking the other day that, years back, the kind of magic thing you looked for. You looked for a farm kid and it’s-- they got a lot of that. There aren’t many farm kids around anymore. I think the modern-day farm kids don’t fit the old mold. They don’t fix anything. They’re just-- Things have become so automated. • My farm kid’s a controller. You know what I mean? That’s what he chose to do. • But I think, we were -- I was just looking at some-- We’re looking to add talent so we could-- And that is affecting our model right now but we’ve made quite an initiative to try to do that, working with a couple of recruitment types and it’s been a pretty dismal thing so far. I mean, we’ve looked over the last year. I’ve hired nine people; I have two of them. Actually, more than half of them we terminated within the 90 days because they’re not going to get there. Then there were a couple that were actually quite good; we would’ve liked to have kept them but one of them moved back to Iowa. Couldn’t do anything about that, too far to commute. The other decided that he would rather be in sheet metal. Couldn’t do anything about that either so. The other challenges we’re really looking for, for us, we’re really looking for second-shift or off-shift positions which it makes it tougher yet to find somebody that has the talent and has the desire. Do you have jobs open right now? Where do you look? • We have a recruiter that’s looking effectively everywhere for us. Actually, one thing I had that -- I’m nervous about this going forward -- I had a second-shift toolmaker that had been with us for 8-9 years or so. He was very, very good. Not CNC literate necessarily but very talented and a very skilled guy. We had a time last fall where his hours were down to like 42 hours a week and because of, especially the second shift, where we were just, we didn’t have -- we were controlling our overtime and things. He was very distraught over that because he needs 50-55 – that’s what he’s built his life around. So he went to another employer and they -- things sounded better. It turned out after like three months of working -- and that was strictly under-utilizing his talent but it was more of a production-level thing, 12 hours a day, 7 days a week -- that was too much for him. So he came back and we were back and I thought everything was going great. Well because he had his name out 198

in the search and actually it turns out it’s one of our customers that has had lay-offs or retirements and things -- they brought him on as a secondshift toolmaker at $37 an hour. Well, that’s a decision I wasn’t ready to make yet because it messes up your whole pay structure if you do that. I guess this company is in a different situation. They need the toolmakers to support their production, so I can’t fault them but in effect, if you throw enough money at it, you’ll attract people. • The recent machining positions that we’ve filled have all been through referrals. • And we’re stealing them off of other companies just like yours. I mean, the most recent one we got drew a heavy counteroffer; he chose to come anyway but I bet the counteroffer was high 30s. • That’s been our most successful-- We have a program in place where the current employees, if they make referrals they get paid for that and if they’re still here in six months, they get another spiff for that. That’s been probably the most effective. But we’ve pretty well gleaned that, the stuff that-- When we first started that program, it was phenomenal, but it’s you know I think the people that are out there, that they’re willing to recommend-- Actually, we’ve had a couple that have come through that have known people and are people who really haven’t been with us a long time and we really trusted their judgment 100 percent. Don’t go there! • Well, that’s a big issue, especially machinists. And I think, since the intended target of this is legislators and educators kind of thing, here’s a great slice into the situation. Don’t go there! I spoke in my high school probably six months ago now at their Career Day to advise the kids on all these different careers. There were like 20 people there and I was talking to a gal who’s the head of the CDC, I guess, in Minnesota and she hires master’s degree epidemiologists starting wage $35,000 a year. Most of our starting machinists make 50, 60 grand and more if they want to work a lot. Right? I don’t know but it seems like that’s a better gig but it’s not making it down to either the kids in high school when they’re making a decision or the parents to say, “You can have a great career in manufacturing and make plenty of money.” You know? So I think the problem is kids just aren’t going to school anymore for it. Maybe it used to be the farmers’ kids. Farmers said, “Hey, you’ve got to have a better living than I’ve got and this is the way to do it, so go get your tech degree” and they’ve made their way, but now our average age on technical talent continues year after year to move up and up and up and at some point, these guys are going to retire whether they choose to or by force –their health won’t handle it – and then I’m looking at it and saying, “We’ve got to figure this out within ten years where we’re going to get talent to do these jobs.” • Well, what we’ve done is we’ve been trying to get really talented 199

people that frankly poach their friends off of other companies and that’s what we’ve been doing to grow that side as best you can. So our business is a little different than yours in that we’re not doing really short-run stuff, so you try to develop process and really put the intellectual firepower in on the front end so that somebody with a lesser skill set can then run that job in production. The lesser the requirement, the easier it is to access those people. It’s less to pay, so it’s more profitable for us. We can pass savings on to the customer. So mostly combating it that way because we’re $50 million in revenue and 400 employees. We can’t change the fact that kids are going to their high school guidance counselor or their parents and they’re saying, “Get a four year degree.” I think that trend has to be reexamined because even if I look at friends that I went to school with, a lot of them have four-year degrees. They have a lot of debt and they don’t have a better job than a machinist and they’ve only been out of school 15 years and they’re still getting whipped by the machinists in terms of earnings. So I think there needs to be an understanding at the state level. We’re a state that has a lot of higher education, especially a four-year degree, which works great for some of our industries. It doesn’t work real well for manufacturing because I’d rather have a two-year degree technical guy that’s creative and has initiative and one of you guys were talking about the drive and the curiosity – that guy’s way more valuable to our business than the average four-year degree graduate in our state right now. • We have to do job rotation and cross-training and outsource. That’s how we cover our issues. The U.S. and Europe -- you know I’m just beginning to learn a little more on their operations, but of course the technical situation over there is different, how they treat the machinists and internships. We have a number of internships at our operation there and they stay on there for a period of time and go through a rotational program. • That’s a great point about the culture, though. Like a friend of mine, brilliant engineer, he almost moved to Germany because of the respect he got when he worked in Germany for a few months because, “You’re an engineer. Oh…” Everyone’s excited about that. When he says that’s his job in the U.S., no one could care less. So it absolutely impacts people. It impacts the decisions that they make. • Well, this is-- Because I’m not a participant, but one of the reasons we pursued actively the state colleges and universities is to be a part of this. And three years ago, zero were part of it. Then there were three; then there were six; now there are seven or eight families included as they’re starting to understand exactly what you’re saying. They have to get more active in recruitment. The school is bringing back manufacturing and Dunwoody almost canceled. They’re back now to 77 people coming out 200

of it. But it’s bigger with 5,000 openings and the schools are graduating 40 or 50 each. • In Greater Minnesota, it’s even more exasperating because there’s no place to steal them from. • Yes, that’s right. • It is important for all of us to reach out to those institutions because they’re starting to hear that manufacturing-- They get driven by how many students they can turn out and they need the help of the manufacturers sitting around this table so that they’re developing and providing the right kind of classes and skills that you need, which is different than it was five years ago. • Well, we’ve even been involved in our kind of local area with St. Michael High School saying, “Hey, we would be glad to partner with you guys, with your classes, and if they want to build a mold in their shop and bring it in, we’ll spend the money and energy to shoot parts in our plastic molding machines and let them really see how the process all works.” But even the engagement in those schools – that’s not their focus. I hate to say it but I think that they almost think if a kid gets a two-year degree, they somehow failed. That’s the culture. • I think they’re controlled by so many other factors though. We think about the minutes that need to be spent and the budgets that the schools have – that’s the hard part; but that is the nut you’ve got to crack. • I don’t know. All I know is that -- So we actually home-educate our children and part of it is because to us, education is about producing a child that’s ready to be an adult in the society they live in. That’s our paradigm, right? If these kids are graduating from 13 years of education and are unqualified for jobs in our economy, that’s a problem. It’s a problem. • It was an interesting statistic brought up by one of the tech school presidents that – and I didn’t know this – that 65 percent of people who enter their program need remedial work in math, reading, and writing – and those are the people that are coming into the program. So it also says they aren’t even ready to go into the training. • That’s right. I think what they were saying about the quality of the candidate now that goes to two-year is not the same as it was 30 years ago and that’s a problem. These aren’t bad jobs and we need talented people to get that degree and I mean, I can think of half a dozen to a dozen guys that have two-year degrees, 15 years’ experience and are making over $100,000 in our company right now, big contributors, guys that are respected, guys that I sit elbow-to-elbow with as a CFO and value their opinion and talk about stuff and teach them what I know and they teach me what they know as we’re trying to problem-solve. I mean, that’s a good job but that doesn’t get out. Part of it is we as manufacturers need 201

to message that more -- but it’s hard because a lot of us are so small. It’s almost like we need an industry association targeted specifically at high school freshmen/sophomores to say, “Hey, there are jobs in this. Do you want to get a four-year degree and be a teacher and earn $35,000-40,000 out of the game, or do you want to earn $66,000? Has the use of temporary employees now become a way of life? • It hasn’t worked for us. • Too high of a skill level that you need. Right? We use temps. We always try to wean -- There’s the internal conflict between finance that likes temps. I like them because our demand week-to-week can fluctuate quite a bit based on customer orders and it’s a difficult situation when you cut somebody’s hours and they can’t pay their bills, right? You’re either going to lose them, they’re under additional pressure, or you have to let them go yourself. So the temps are a nice way to handle that cushion. Operations likes permanent employees because they have a better understanding of what needs to happen and less training is required. So one of the things we’re debating right now is how do we either level out the shop better so there’s less volatility or is there a way we can make more robust training programs where the temps can come in, if you will, already programmed with more knowledge that they get before they hit the floor? We have to solve the problem one way or another. But the issue, at least for us, is the volatility of demand. • Even with the union facility, we’re able to bring in a temp if the union doesn’t have a qualified person. But again, they’re really so-so. We’ve brought in a temp now and one day he’s there and the next day he wasn’t; didn’t know why. We had to find out why and we’re trying to get everything out for the month. So from a manufacturing standpoint, we want to avoid that as much as possible. • I think the real challenge with hiring, certainly with temps, I think it goes all the way back to tech schools and things. And there’s a lot of us probably that it almost seems like there’s almost something evil about it, but there are some very, very smart people that have done a lot of work in the area of aptitude testing and truly doing it and that it’s viable. It’s true. I mean, that’s what I’ve realized a while back. We use the NTMA’s aptitude assessment with our machinists and toolmakers. It’s pretty effective for us once you get to learn what to look for. But the challenge is if you can have the same teacher - same instructor trying to train a new applicant and somebody that has absolutely no mechanical aptitude for what we do at all, everybody’s just frustrated. Where you can bring in somebody that is gifted and has an aptitude for it and they’re just a joy to teach. They pick up on it; they like it. Manufacturing is not for everybody, but I don’t know what the percentage is. This notion that you can go on any street corner 202

and just randomly pick out a guy, “Oh, here’s the next machinist. He’s going to do great.” Probably not, I mean, any more than randomly going to a street corner and picking out the next concert pianist. I mean, they could work and do all kinds of things; if they don’t have a gift for it, they won’t be good at it. I’m looking for gifted people and that’s what-- I think the schools could do a lot better job of identifying gifted people. • Or people that are better geared towards a certain degree. And I’d agree on the machining side of our business 100 percent. The molding side we can use a lot lesser talent. • Yeah, certainly. You can teach somebody to run a molding press in a couple of hours. That’s not-- And frankly the best talent like that – they won’t be satisfied doing that for long. They’re going to be a bad employee in no time. • That’s 100 percent correct. • It could be a walk down the road when you look at the capital equipment and going more and more towards computerization and the youth interested in that aspect. If you could tie the two together, the machinery with the creativity of programming to produce the product or components that interest the level. I was at a conference recently and we had as a subject the Millennium Generation. It was almost split down the middle. The senior-level people thought the millenniums were difficult to deal with and to train and no hope and the millenniums think the old people are crazy. So, that’s the way it ended. • That was the resolution. Somebody mentioned the average age in the workforce. Are retirements going to exacerbate workforce challenges for you? • I see that as a short-term issue right now for me and that could last for a couple of years. • I see it as kind of a positive because as a lot of these baby boomers are retiring and facilities we work with bring somebody new in and they want to change things, that’s always good. Coming from a sales and marketing background, we’re sales; we’re change agents. We want to show people how to do things better no matter what the field is. And I think that’s going to actually loosen some of this up where we can’t change anything because this is the way we’ve always done it. So I feel kind of positive about that. The other thing is, we were talking about your lack of finding skilled labor. That’s not necessarily a big problem for us because we’re outsourcing more and more of our manufacturing. But from the feedback that you’re saying is it’s going to be more difficult because most of ours are short runs and if you don’t have the people to make these things for us, it’s going to create some problems. So we’re all kind of interrelated and I may not feel the effect as much because I’m a much smaller 203

company, but if you’re having these problems, you’re probably not going to be wanting to make these smaller runs because it’s not efficient for you. • I think he’s right. I think the way we compete against overseas isn’t with cheap labor dollars; it’s with speed and it’s with engineering. This speed issue is one where we need a higher degree of skill and lots of them in order to do it. If he’s going to make five pieces of something, the guy or gal that makes those five pieces really needs to know what they’re doing on all five pieces. For us, if we’re going to offer engineering services or if we’re going to make difficult parts, right now we can beat Mexico or we can beat China by saying we can get this right the first time and get, like for our medical device company. We can get your product to the market faster and that’s going to save you a lot of money. The problem when we drop these skilled workers is we compete less well and frankly what I’m concerned about is that we’ll compete less well than Mexico or China who are developing the abilities right now that we have to stay ahead of. But we’re missing this kind of middle row of people that are going to grow in to be those 20-, 30-year veterans that are creative, that are driving, and that are trying to create change. They’re missing; that tier is missing. And I think that it’s a risk to this country if we don’t have that nationwide. I assume the problem is greater than just Minnesota. If we’re missing that tranche, it will allow these foreign competitors to beat us at things that we’re good at right now. We’ve talked in other groups about drug testing, more than I expected. One fellow mentioned 65 percent of applicants in his plants fail the drug test. Any similar experiences? • I don’t know our status. • We haven’t been drug testing for many long years, so we don’t-• We started drug testing about two years ago and all the tertiary evidence of drugs in the plant has disappeared. We lost some employees who, rather than take the test, chose to leave; but I don’t know the people applying that know they’re going to have to take a drug test and then fail. I have not-- So I don’t think we’ve seen anything that high but we do drug test now. • We haven’t. There certainly wouldn’t be 65 percent. I think by the time they get through our process of employment, people are weeded out before they ever get to that. That’s like the last step before they--we hire them and we then give them a letter and then they have to take the drug test. I haven’t had anybody -- nobody’s failed, that I can think of, in the last two years. I think I’ve had two people that just decided not to take the drug test and I can only presume-- I don’t know why. They just decided they were going to stay where they were or do something different. • Somebody said in one of the other ones that the person said they’d 204

take it but they wanted to take it right now. • “It’s Friday night. Yeah, I better do this right away.” That’s hilarious. • The only experience I have is running other companies in other states and that ran only about six percent. But what was sad was the people that I had let go, I went and had lunch at McDonald’s and the person that waited on me was the one I had to terminate. So they didn’t have a very good program, either. Another topic: how might the implementation of the Affordable Care Act might affect your business? • We actually renewed early, last year, so we could watch for 12 months to see what was happening, so we kind of just delayed that because there’s so much uncertainty. I’m sure other people-- I’m sure I’m not the only one at the table that did that. • We did the same thing. We’re just -- that bought us into November in our case. My broker told me that, and actually in our health insurance meeting he told all of our guys that the way things stand now, they could expect that the premiums-- We cover a lot of the costs of the health insurance, but they could expect a 35 percent increase next November, basically the same coverage. For us, it really does depend on-- I think we need to be careful as employers about how paternalistic you are. There are all kinds of issues around that, but how health insurance became an employee benefit is kind of an interesting study on how that all worked. I mean, we don’t offer to pay their car insurance. It’s like a different deal here. I think, from a competitive standpoint, I really don’t know in our industry, I really can’t imagine employers dropping their healthcare and paying the fine even though it is a big expense but we need to-- Especially if we tie that together with how tough it is to get good people. That’s looming on the horizon. I really don’t know. • I’ve got a different perspective. Last year, because we were really still struggling to profitability, I dropped the health insurance. It didn’t make people happy but they all stayed and now, with MNsure and stuff, I had some of the people, “You should look at this.” Part of the problem is I’m paying these people more than their minimum wages and stuff and as a consequence, they’re in a higher category and they’re not going to be able to get the tax breaks from the State of Minnesota or the federal government. So I’m kind of between a rock and a hard place. If we can bring back enough volume and profitability in the future, I would consider it. And I’m going to be fined because it’s such a small company; we’re under those limits, but it’s going to be a problem. And I suspect it’s going to be a problem for some other small companies like mine. You’re not able to come up with a solution. Some of them have gotten a private insurance and it’s-- I’ll give you one example. One person said, 205

“Five people in my family and for me to get insurance, catastrophic insurance, it’s going to cost me $400 a month with an $8,000-- you know before it starts paying.” Well, that’s not easy to resolve and that isn’t taking care of the normal doctor visits and things like this. I’m a firm believer in healthcare for everybody because it takes away a tremendous psychological effect if you don’t have coverage. None of these health programs around the world happened overnight and we’ve gone through you know, due to World War II, that was one of the ways you were able to reward your people because you couldn’t raise their wages. So I don’t think we have all the answers but this step is something that can be of benefit if we can get all these wrinkles worked out. Which brings up another question. What are the issues that most affect your ability to attract and retain employees -- salary and wage expectations, affordable healthcare, competitive other benefits, flexibility in work schedules or the ability to accommodate parttimers? Others? • I think you’ve got to add culture to that because we just, like, the gentleman that we just hired whose current employer tried to counter our offer and keep him – with quite a bit more money, chose to come over anyway at the proposal that we gave him and a lot of it was because of the culture that he believed we had that he wanted to be part of. What did he like about it? • Well, again it was a referral thing, so we recruited him through people that already knew him and they enjoyed working at our company and enjoy going to work and they explained to him ‘this is how it is” and-• We’re willing to be aggressive in order to grow. We want to be a part of that, too. • I would certainly agree with the culture part of it. That’s huge and probably somewhat tied with that is, within limits, the flexibility, allowing employees some flexibility in scheduling and things like that. We always have pretty much done that. We don’t have a necessarily rigid “If you’re not there at six, you’re late” kind of a thing. I think that it’s something we did address at (company) that we tweaked our healthcare or health insurance cost-sharing on that to tie it. What we had done before was we took our costs and divvied it up amongst the employees in the single group or married group so that basically the single people were paying -- and I should say younger people -- were paying more than what their cost really was. And that was affecting us. Especially if we’re looking to attract some of these younger guys, a lot of the younger guys come in and they don’t care about the healthcare at all. It’s not even on their radar. They’re just looking for a challenge and a good wage. And if you have 206

that balancing out -- or what we have are age-rated premiums -- so that made a huge difference. But then you do have the guy with five kids. And arbitration’s a big deal for them. Part of that then becomes they may like their job and they like their wages but they don’t have health insurance, they’re willing to go someplace else just to be provided that benefit even if it’s less money because that’s one of those big variables of risk that you never know. So if I can eliminate that problem, then I’m more open to going someplace else. I think it’s going to affect the really smaller manufacturers more than people like you with 400 or 500 employees. One last question. Let’s say we’re back here in five years. What’s your sense of how you will look back on the previous five years? Will it have been a good time to be in manufacturing? • My prediction is that there will be fortunes made and fortunes lost. It’s going to be a very dynamic, changing time period. Some companies will do really well and gobble up companies that don’t adapt very well. So it depends on what happens to each of our businesses. For those that can adapt quickly, I think we’ll say it was good. I think if we can’t adapt quickly, we’re going to say it was really rough. • I certainly agree with that. Also, it’s really amazing to me that the whole fiscal cliff discussion has changed and went away. It didn’t go away. We’re in a world of hurt. Our whole lives could be when there is good stuff going on that-- The piper’s getting paid. It’s just when. • Yeah, it’s just scary. It really is. We are a nation of idiots, so it’s all I can say. • Except for us in this room.

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FOCUS GROUPS

Warroad 9:00 a.m., March 17

Northwest Minnesota Foundation

What’s different about being a manufacturer in this part of the state that others may not know about? What’s the good part about being a manufacturer up here? • I think that all the businesses up here, for the mass majority, are growing. There are jobs, I look at those of us around the table there’re opportunities. Being a manufacturer in the NW part of the state is actually a great opportunity for anybody who wants to work. Is it because the economy is better? Is it because the industries here are better suited toward their industries? • I think “Yes” on all of them. Because we’re diverse. I look at Polaris and the recreational, I guess Roger I’d call it recreational? Commercial and recreational. I mean our sales in housing, is it booming? It could be better. One of the challenges we’ve got is the transportation network. We’re not close to interstates so we’ve got to be real creative. That’s why we’ve got our own fleet of trucks here. Because we don’t get a lot of “drive by” here in Warroad for transport. • Yeah, that is one thing we deal with up here. Is that we’re the end of the line. • Yeah, freight’s an issue. Do transportation costs make you less competitive? 208

• It’s an additional cost but it does not make it necessarily less competitive. • Transportation for us, along with the tax climate and some other things is why a lot of our growth has been out of state. We’ve got five facilities across the border between Grafton and Fargo, facility in Ripley, TN, and VA. Those are things that impact us. And as we look for continued expansion, anything major, we’re going to look outside. What about housing? Still an issue? • That’s probably one of our biggest issues right now as far as recruiting. We have the jobs and sometimes we even have the people, but there’s no place to put them. We’ve had three people quit in the last couple of weeks simply because they can’t find a long-term place to live. They’ve been in hotels and trying to find someplace, but can’t. Why aren’t suppliers building more housing? If there’s demand, shouldn’t there be supply? • Polaris and (company) are doing some work together. Part of it is availability of builders. They’re busy with projects. We’ve gone outside the area to find developers interested, you’ve got a multiunit going in there, you guys have done stuff in Thief River. It’s getting them willing to take a risk, put some housing up, you know make the investment up front. Because there is some housing but a lot of it is older. And price point is a challenge, so we need some multi-family. • We’re working with the State of Minnesota, the Greater Minnesota Housing Fund. We put a pot of money together to help incentivize builders to essentially risk free put in a spec house. And then when they sell it they pay us back and then they can pick a draw to build another house. That’s one effort. We have a local county housing fund that we use to incentivize individuals. And I have a meeting next week to look at some other alternatives. How long have you been doing this together? • The Roseau County Affordable Housing Fund, about a decade or so, but this recent one is about a year old. • We’ve got a house built in Warroad that’s under contract. You guys have a house under way. • And then the 40-some unit is starting this spring and they’re breaking ground. • I’m not personally involved in them. I looked at one a couple of years ago and actually as an individual investor and your only 209

money in it was your waiting for the tax credit back. You can go across the border and you’re 6 percent better off right now. So as an investor it’s tough to look right now in Minnesota. There just isn’t that kind of margin in it.. Just because the economy is so good? • Tax breaks. They’re at four percent and we’re at 10. That’s six percent. • We’ll hire again this year over 300 folks just to stay flat. Because our normal turnover, we’re down about eight percent turnover at this location. Three hundred just to stay flat? • Yeah. We’ve got a little over 2,100 folks between the plant and corporate office. So you run eight percent, you bring on summer hires, some of those convert to full-time. See you and I do some of the same things. • Yeah, we talked between (names of companies), we essentially moved people between the facilities. • Taking 200 people for all these companies, technically, we gained about 200 people. How did that work? • We just counted how many you hired and how many you lost and we went around the table and I wrote it down on a piece of paper. The math came out is that for all the employers out here we gained 200 people. • And this housing is the issue here. We can keep people. • I think we had over 500 job openings. • Yeah. Unfilled jobs seem to be an issue in manufacturing in general throughout Minnesota. • And we have the people issue here too. • Yeah, once you can find the person, then it’s the housing. Because we have postings that have been out there for a while. And it’s not all machinists, it’s even just general labor too. • It’s all levels. General labor up to technical people. We’ve had some of them open for months. But housing is not our only issue. Applicant flow is a big issue. • But part of the housing problem in Warroad probably stems from the last 4 or 5 years of recession that we’ve been in. • Yep. 210

• That’s the reason builders are slow to take some risks in building houses. • You talk to (company) and some of the others and they’ve got jobs. They’re not looking for work. Particularly they’re not looking for a state program that has a bunch of hoops to jump through. They’re saying why would I do that when I’ve got (name) here who wants me to build him a house. I’d rather work with (name) directly than work through this fund and all this stuff. So we’re trying to work around that. Maybe there’s a different angle to approach it. But it’s just trying to get folks up here. Is there a possibility that you would jointly form your own construction company to do that if that were an issue? Or is that too extreme? • There’ve been some conversations. Should we relook at doing that again. Interesting. In addition to housing in North Dakota, much of your employee challenge is related to job opportunities in North Dakotas? Somebody can go over there and kill themselves, live in a hotel for a while, make pretty good money and then come back. • We had some of that early on. Folks went out and did that for a while and they came back and said don’t go do this, it’s not worth it. • The one place I do see it is internships and summer college ones. It used to be we’d get applicants from North Dakota and you don’t get many from say the Twin Cities area who are interested in coming up here, but out of North Dakota it used to be an open book that they’re willing to travel. But now they can go back home for college summers and they can make $20/hr. at McDonalds and live at home. So those are tough. • Yeah, I would say for us it would depend on the job. The much more skilled trade, welders for sure is where we saw it early on too. They would leave and then they’d come back. They can make as much money as they can carry but the lifestyle is not depending on what their personal situation is. • The big shift is the amount of money they can make from Williston to Roseau? Is it huge? • Oh yeah it’s big! • Just going across the border the money’s good. • You get across the border, you see a bump you get the tax differential. Minnesota vs. North Dakota. The intern is an interesting issue. We have not had trouble recruiting them, our issue for interns is finding a place if they don’t have mom and dad here local, where 211

do they live? So we rent apartments all year long just to have them for those 3 to 4 months. Because last year this plant had 19 interns, they hired four and the rest of them will be hired because of their earlier years of schooling. So now we’re starting a flow working with SDNU and UND where we’re attracting. And the young man or woman who was here last year says hey, you’ve got to go work at (company) when you get your internship. So we don’t have to do a lot of heavy recruiting for them, they recruit themselves because they have good experiences. I’m sure you’ve seen the same thing? • Yeah, we have the same thing where we have target schools that we work through for internships, finding them is not the problem, housing them is. So we’ve done the same thing, rented apartments all year long or if we’re lucky enough to find a house we could have four or five students living together like a little dormitory. Is it easier to retain employees than to recruit them? There seems to be real loyalty to the quality of life. • No, for us I would say and depending on what part of their life they are in, if it is a young family and starting off with a couple of kids, they are perfect. They’ll stick around because the school systems are good, the intertwining for a spouse to network is good. If it’s a young kid out of college who maybe does not have a significant other and is maybe looking for one, those sometimes do not work out all the time. But yeah, I think a lot of the ones we’ve hired in the last couple of years, they’ve loved it here. Quality of life, the school systems, bringing up their kids in a smaller area with still lots of opportunity for different things, extracurricular, organizations and things like that. • I am in a group working on economic development. What’s missing? We’re that close to being a great place to live, work but there are some gaps that we’ve got. Roseau has a very strong school. Warroad has struggled. Recently we’ve had some declining of population. Is this K-12 schools? • Yeah, K-12. But there’re some opportunities there. You look at shopping. You look at shopping, as you’ve got that young family and that’s great. But some people don’t want to make that trek up to Grand Forks, to Thief or to Bemidji. They want to be closer. So if you can get them, that is great but that can be a challenge. Amazon and Zappos and these things have helped tremendously. People’s ability to shop and do things. Hockey town USA. You know Roseau and Warroad both have great tradition in hockey. And that whole 212

Olympics thing with TJ and Gigi has been a great attraction for folks. And we’ve been inundated with phone calls of people who want to come up here, what jobs are available and then the question, but what about housing? Because they want to bring their kids up to get enrolled into the programs starting at Mites and all the way up with prodigies to be part of a hockey tradition. So because of the presence of hockey you’ve gotten calls? • Yes. Is that an opportunity to help you find qualified workers? Are the qualifications of workers a challenge as much as just warm bodies? • Some careers. PLC, Mechatronics we’re doing a lot of work now we’re doing some internal stuff. We’ve partnered with technical schools and that’s not unique to us. Because our facilities in Fargo are doing the same thing with North Dakota College of Science. Partnering with Mechatronics which is a very strong certification to your certification for maintenance, mechanical, electrical, technical, fluids, hydraulics and all that stuff. If you can’t bring the people here, the other option is to go to where the people are, especially with the bigger companies. You’ve moved out and gone in different directions. Do you see that as a trend more and more? • Part of our core purpose in the communities where we live and work is to provide employment. But as we look to the future we have to understand, where’s the population? What’s the tax base? What’s going on with S Corp and the impact of that? So the family has to make decisions and say how much do we invest in Minnesota, or do we look at North Dakota or do we look at other places? I know I’ve had conversations with some of your leadership about the challenge and how much you expand. And maybe it’s not Roseau? Maybe it’s Spirit Lake or other places? Pollsters like to ask a question that determines the mood of the respondent. It’s called the “right track” “wrong track” question. From your perspective, what’s the answer? • Coming from a low point, yeah. • You’re coming from an awfully low point right now so it seems like it’s in the right track right now. • I think from a manufacturing side, yes. But there are a lot of external influences going on with the legislature of both State and 213

Federal. And I don’t want to get on the Healthcare Reform issue • The taxes of what Governor Dayton and stuff have impacted this state and continue to with the legislature. It makes it difficult. We’ve had a fairly good 12 months across the whole organization. This plant got back to 40 and a lot of overtimes. This week we’re back on 32s, but this is pretty typical of us. Actually, normally we’re back to 32 hours four or five weeks ago. So it’s been delayed and some departments are still going to work 40s this week, certain products. But I would agree, like Brian, it’s on the right way but there are a lot of opportunities. • We’re doing really well. Our hours have been crazy to the point of where in the summer we would have more work than we know what to do with. We’re killing people with overtime. We’re to the point of, “what is the right size for Roseau?” We’d love to expand and do all those things but there’re a lot of external factors, logistics, housing, applicant flow, so based on that we don’t see the applicant flow changing significantly if the housing doesn’t. So we’re trying to figure out what that right size is that we can support steadily in Roseau without hurting our employees. Could you do more if you had more people? • Yep. We’re doing a lot of things right now to work within our means if the applicant flow and housing don’t change. So we’re doing a lot of things with Lean and just trying to figure out what products are best suited for Roseau with processes and the number of people we’ll need. A lot of companies leaned up during the recession. They learned they could accomplish more with fewer people. • I would say you can as long as you do it the right way and sustain it. I think that when the economy was first starting to go down we did a lot of things quick and just made decisions without getting people involved. Whereas now we’re taking a very different approach, where we’re taking it a lot slower, smaller pieces, getting the people who are doing the jobs involved to help figure out a way to make them sustainable. Because the changes we made quick, that we needed to make at the time, weren’t necessarily sustained. • I want to go back to the right track question. I know that (company) is going to be in the same situation, as far as wood furnaces, the direction of it, I suppose, guessing maybe 70 percent of the outdoor wood furnaces are built in northern Minnesota. I’m not sure exactly of that number. I kind of know where we are and I’m just kind of throwing in some numbers from (company) and that. 214

The Federal Government, the EPA has got that NSPS Legislation going. What is that? • New Source Performance Standard for Residential Heating. • They’ve got us strung out. They are no longer going to let us build a certain class of furnaces and EPA is suggesting that they might change the limits on emissions on that so that even the ones we build now that are qualified won’t be. • This is Federal. And they’re proposing it might be next April that they could add the dagger of death to the outdoor wood furnace. • Is this just one particular? Is that what it is? • It’s just on emissions. • Just recently there was an article in Forbes magazine, you know wood stoves are really a small niche market. But that article stated that, it was an editorial, that the amount of pollution that they want us to comply with is, second hand smoke, and an automobile is 3,000 times greater than the amount of pollution that they want us to get to. Really? • That’s the gist of it. • They haven’t even really set that. • Yeah and here we set a regulation we are supposed to comply with in April and we don’t know how to test to it right now. So what happens you put product out that is not well tested and all of a sudden we have to base our whole manufacturing, our whole product line on an untested product. And when this last stuff comes we felt really uncomfortable putting some of the product out because to comply with the regulation we had product that that we’re field testing it. And are you getting no relief from anybody? • No, no, we’re not going to, I don’t know what we’re going to do in April, I just don’t know. • And you don’t know what to do. There’s nothing to plan for. • You know we’ve developed another product line. • …that’s what the guy does. • Then again, okay it’s a new market for us and to get into that new market, that costs money, you don’t just go developing a new product line and all of a sudden it’s consuming your, it’s paying your bills. • That gets back to the comment about during the tough times, 215

increasing your productivity. When you operate in an environment such as this, it’s hard to realize that because you’re afraid of letting too many people go because you know when things come back it’s going to be tough to replace those people. • Yeah, your company is your people. And if you let your people go, you don’t have a company. • And (company) is a good example of that, with not doing any layoffs just letting attrition work. But then you get to a point where all of a sudden now you need people and those people are gone, they moved out west or wherever the jobs are. So they removed it from your… • No we have to be really careful but they test us. And they haven’t been around for a couple months now. That was about two years ago, two years ago and they haven’t been back which is ridiculous because they saw a movie. • It’s the whole overreach of regulators who aren’t elected in all aspects of manufacturing whether it’s transportation or production, I mean, you guys have got all sorts of things because of your vehicles and safety. I mean we’ve got issues working with Energy Star and the Passive House. Some of it’s good, but a lot of it just adds cost to our manufacturing. • Yeah, because we’ve got the attention, I mean, well, Senator Klobuchar was here two or three weeks ago and I spent over an hour and a half with her and her staff and they were very responsive when I brought up, and other people brought up issues. You know, and they’re doing it, but I think you guys talked about the wood stove, it’s so small in the scheme of the whole economy, it’s hard to get enough critical mass to really move that direction and once it’s going one way. • If they were saying with automotive the same directive that we’ve got with wood furnaces everybody would be wondering what are going to drive next month. • Yeah, exactly. • But because we’re small they can stomp on us well not put us on the paper. • Not to mention the fact that there’s no sell-through provision. • Yeah. • Whatever we ship to the dealers today has to be off of their lot by May 1st of next year. • Because they said that phase two was our sell-through and now they’re saying well they’re not even going to guarantee that that’s what we’re going to be going to. 216

• And were supposed to be designing product to match their regulation. Wow! Who would know, maybe you do, about the number of how much of the wood stove products are manufactured up here and how many jobs? Is there anybody that keeps track of that? • It’s a small enough industry where you don’t have any data out like that. About 70 percent (would be a good guess) manufactured and then so. • I would suggest that our legislators sit back and say about the stove industry, so what they go broke they’ve got (company)’s employers to absorb their people, you know. That’s not the way to think about things. • That’s probably the mentality. • Yeah. • But see, you we need to diversify manufacturing up here. We can’t just put all our eggs, because for years when they’ve been up we’ve been mediocre. We’ve been up and we’re booming and you guys have struggled. I mean we’ve both seen that. Diversified economy is really the way to be done and we need all cylinders fired-up. Digi-Key, Arctic, Polaris, us, all of us around this table and there’re others. Jim’s not here from (company). We all need to be producing. Is drug testing an issue in retaining or attracting employers? • We’re pretty open and have been but we expect it. So I don’t think we get the applicants that know they will, we’ll get a few. But it’s not an issue we see. • We have some issues, to say we don’t, no. • Do you people drug test? • Yeah, we’ve got random. • So you do random and you do pre-employment. Right? • Yeah. And the random is by choice, it isn’t scheduled. If we have a situation we go to it but we really don’t… • You go to the individual? • Well in an accident or something. But we have the ability to do a random but we generally just, we haven’t. • We have pre-employment, we have random on safety sensitive positions. (Yeah) Accident of course. We do all parties involved if an accident occurred, and then of course we do noble suspension testing. • You guys do DOT? • Yep, and the DOT. 217

• DOT’s are mandatory. One of the guys in St. Cloud said he’s so frustrated because all the guys he thinks are on drugs aren’t. (laughter) Here’s just the list of the heartburn issues: Competition from foreign sources. Is that an issue up here for your companies? Has it been? • It’s the entry into the markets. Folks from Europe. But it’s nothing that keeps us awake at night. They’re heavy into contemporary and other unique areas. • Probably more for driving commodity prices more than anything else. The fact that they are using so much of these commodities in other places can drive commodity prices up for me and that’s an issue for me. Because 35-40 percent of what comes into my place every year goes out for materials. Interesting. Anyone else have similar experiences? • I’d say that we do have competition from overseas for our products. I mean we have competition from Thief River. But we’ve seen a lot of people try to enter the market saying our side-by-side type vehicle our razor type vehicle. Like I saw something, and I’m not exact on the numbers, but in February where we had like 30 new entries into that market in the last year. No names or different things coming out of China or Japan. Different type vehicles trying to sneak into that market. (Interesting) What about the cost of healthcare coverage as a heartburn issue? Is it more now than before the Affordable Healthcare issue was passed? Is it less? More of an uncertainty? What’s your sense of that? • Well it’s more because of taxes, plain and simple. • Significant. Particularly as a self-funded plan. We pay out everything. So what’s your sense of where we’re going to be in three years as the cost of healthcare affects your ability to run business? • It’s a significant issue! • And we’re starting to see now some of these MNsure programs, the management of this stuff, the reporting, the child out of wedlock is an automatic reporting issue for us. Because they’re going to go to the hospital and then the hospital turns to us and we have to fill our stuff out and it’s automatic now. I figure in, and we’re not a big company, but I think we’re going to have a fourth of an HR person’s time just to deal with this as they start to learn how they 218

can get subsidies and how they can get help. And the one we just had from, and I don’t know the details because it’s new and stuff, but it sounds like because of financial reasons, has to schedule payments with the hospital they have a mandatory where they have to go through MNsure and so then it comes back to us and then we get the paperwork on it and have to give them some information and then they go back around. First time that one’s happened. And we’re just going to see more and more of that stuff going on. We’ve got a qualified plan, but they probably can’t get the federal subsidy. But yet there’s other stuff out there that they’re going after. So a big part of the fear is uncertainty? You don’t know what’s going to happen. • Well you know what’s going to cost us more, we just don’t know, I’m thinking a fourth of a person’s time? It could be a full person’s time. Look at the time for you guys. • Yeah, we have a person kind of watching healthcare reform all the time. (Really?) Yeah! Right now we have, and I would not say 100 percent of her time but, that’s a big bulk of her job is just kind of keeping tab on that and what’s happening and how it will impact us and trying to be proactive about some of that stuff. It’s a big deal. Another heartburn issue is the uncertainty in general for the ability to forecast. It’s probably a little different the bigger the company, but since the economy went south are forecasts just shots in the dark over 12 months or are we back to where you can do that? • Well I think part of this is something that I’ve been involved with for 2½ years. I think forecasting is a shot in the dark right now and I think a lot of it is, and this is starting to show up more and more, and when I bring this up a lot of people say they don’t really even know about it, but that is phone call issues. Okay. I can’t believe that people aren’t seeing this?!? I’ll give you an example, there was a 500 sq. mile area in Indiana that we could not call. We had a sheriff’s department, in Indiana, called into us looking for tracks. We couldn’t call them. I could not call the state police out there. So that materially hurts your ability to sell? • Horrible! Literally we’ve looked at do we move? If we do, where do we go? We can go down to the cities and probably get the calls coming in but our calls go up in the winter and we literally just flat-line. We had days where we would not get any phone calls. (That’s really interesting. I’d like to talk to you more about that.) 219

It’s something and a lot of people just don’t even realize it. Our whole system is based on incoming calls. We do have internet, we’re worldwide, we have tracks in over 100 countries and we see it more now from Canada where people are calling down and they can’t get through. Could you do a voice over internet protocol calling system? • No. We’ve tried that, we’ve tried it with faxing. So we have just a couple of minutes left here. Let me ask, say we’re back here in five years having this same conversation. Knowing what you know now, knowing what you think about all the things we’ve been talking about, is it going to be a better time to be a manufacturer in five years? Or will it just be a lot different? • I anticipate it will be better and I do that based on the sort of curve we’re on. One of the challenges is going to be, we talked about bringing people in, and we’ve got major retiring/aging population up here. If you look at the demographics this self-generator boom is NOT coming out of the schools and stuff. So that is a concern of mine. Do you see that here in your company too? • Oh yeah, we see it now. When you look at the headcount, the number of kids graduating out a Roseau, Warroad, Lake of the Woods, it’s down. So we’re going to have to be even more vibrant in attracting folks up here to maintain the same level of production/ headcount in facilities. Do you know when, when do you see the fall-off? When supply won’t meet demand in terms of production? • Well I think that’s where we’re going, and we’re going to have to become more efficient. I don’t know if I can give you an actual crossing point, but it’s coming. Because we have to look at what we can automate, we’ve got a made-to-order product, so a lot of times you can’t do a lot of automation. Same as yours, you’ve got to have the flexibility on the lines based on the product coming down the line. We’ve got the same issues. You can only automate so much. • Yeah, we’re looking at creative scheduling. You go back and as we start seeing retirements, do we start creating four-hour shifts? Someone who can stand on their feet and work because you know they’ve got the content knowledge somebody that’s been here 3040 years maybe they’ve got to work a four- hour shift and that’s all 220

they can do because of physical. Their body can’t handle more. So we’re talking those types of things. We’re going to have to get really creative.

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FOCUS GROUPS

Bemidji 9 a.m., March 18

Northwest Minnesota Foundation

How did this year turn out? Better? Worse? • Better. • Business started coming back stronger than I anticipated. • I think our business is tied to the stock market a lot, and the stock market was doing very well. People who buy our products were doing well with the stock market, so they bought. • We were a little better too. • Probably similar. Customers are spending more. • Our business is up slightly. I think the cause of it or part of it is the industry is doing better. There has been some help -- write-offs and what not. People are building more commercial buildings and what not, more infrastructure commercially, DOTs, that sort of thing. Have forecasts become more difficult? • I’d say forecasts are directionally okay, but where we get our opportunities, we have to seize them very quickly, and we can’t project that. We can’t plan for it. We’re tied to recreational businesses. When we have an option to go after something, it hits pretty quickly for us. It can be 20 percent of our revenues. • We still run quite lean. We end up having to run a lot of overtime to take on some of those things and then try to cut costs back. Look at where processes can be improved and see what kind of capital we have

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to buy to keep and sustain the product line. Let’s talk about the general national economy versus the Bemidji and surrounding area economy. • I think it’s slowly going in the right direction, but it’s taking its time. We see a lot of offshore -- we probably all do -- offshore competition. It seems like some of the retailers and people are starting to buy American made, so that’s slowly coming back. But as you put that into projections and things, you definitely want to make your projections -- the one thing we’re doing as a small company is we’re really trying to diversify more and more into new markets. New markets, new products. I’m just as confident that we’re going to get into new markets as I am that the economy’s going to grow. We can’t just rely on one thing. What about uncertainty? Is it still a factor? • It’s kind of confusing when you see the stock market go in big swings from day to day and week to week, so I think there’s uncertainty. • I think the economy is based on optimism, and I still think generally there’s a lack of optimism with what’s happening. You hear a lot of things still about healthcare, so people are not quite as optimistic as they were fifteen years ago. • A lot of things forced on business now in healthcare, minimum wage being talked about. If you’re managing a business that sells labor like we do, that’s a challenge and you’re not sure where it’s going to end up. You’re not sure. The minimum wage goes up, so you need to raise your rates significantly, even though we’re higher than the minimum wage significantly, we still have to keep that gap above it. Are we going to be able to raise our prices to offset it, or will the overseas manufacturers be able to get back in even though we’ve been making gains on them. Let’s talk about your ability to attract and retain qualified workers. Is that an issue in Bemidji? • Huge. • It’s the new constraint. It’s not new, but it certainly is a constraint. You may want to grow your business, maybe even add on space and so on, but if you can’t get the people -- Bill and I were talking about it yesterday -- you’d commit suicide if you did it. You’d end up trying to try and pay for it and you don’t have the people to support it. • Yeah. • For sure. • We have both skilled -- different groups of employees and different 223

types of skills. It’s a challenge all the way through for us. Specific sheet metal aircraft workers, which is an issue. Even machinists and just the helping hands. It seems like it’s a challenge all the way through. • I was just going to add, really it’s clarifying people, because Bemidji has a significant amount of people that are unemployed and living in poverty. When you try to match with the employer’s needs, I think it’s qualifying whether there’s -- one word would be skilled and the other would be they don’t have to be necessarily skilled but they still need to be at work on time and be able to do the job. So it’s just clarifying that we need people, but we need people who are in the workforce either with skills or ready to go to work. • When I hire people, my focus is not so much on a specific skill, because it pretty much comes to the fact that it’s a lot easier to hire a really good person with basic skills. Just like you said, show up on time, work hard when they’re at work, aren’t distracted. I mean, the list goes on, we all know. All those basic things. I can teach somebody how to take this part and run this machine, or put these two together, or read the drawing, but to teach them to come to work on time. To me, that’s a bigger problem. So I focus on what kind of qualities does that person have. We can figure out the training. • From my perspective, and it’s working in workforce for a long time, it’s having people with the behaviors that match the values of the workplace. If we can identify that, then we can put the right interventions for level of skills needed in a variety of different work. So it’s starting out with the basic behaviors and then figuring out which pathway people go on. For many companies, it is that entry-level, getting in the door, starting with the basic job and then being able to move up through on-the-job training or through some other kind of skill development to get higher-level work. • At some point, we have to start breaking through a huge question. Why the hell do these people want to go to work when they can survive very effectively without going to work? During the recession, we were trying to get people. We couldn’t get them because they kept extending the unemployment. There wasn’t the motivation. Something circulating that in the state of Minnesota that a family of four, if they’re making over $25,000, they start to lose income. If they’re making $25,000 as a family of four, they can get benefits that take them up to $53,000. People are starting to learn that, and they’re not going out and wanting anymore. They don’t want overtime. I bet I have fifteen or twenty people right now trying to get me to fire them so they can have unemployment. We have to start taking up -- I said to Senator Klobuchar -- she didn’t hear me but -- before the recession, 4 percent was the national average that they shot for unemployment. During the 224

recession when it was at 9 percent, they started saying 6 percent will be the acceptable level afterwards. Remember what was happening before the recession? We’re all meeting in groups because we’re not going to have enough people because all the baby boomers are retiring. What the hell are they talking 6 percent for? They should be talking 3. If a presidential candidate can come out and say, hey, we’re going to pull this country together and we’re going to put everybody to work. The acceptable unemployment’s going to be 3 percent as a goal, we’ll put people to work. Then the companies aren’t paying for them, and the companies need people. I think that’s something the whole country… • That’s a false stat to begin with, too, because of the chronically unemployed that they pull off, but there’s another 5 or 6 percent that are just not even looking for work. It’s the people that you’re talking about. • Pete said that at that meeting with the Senator. • That’s the problem with statistics nowadays. For me personally, it’s like you hear a number and you don’t even really waste any time thinking about it because you don’t believe it. They carve this out. It really depends on whose mouth it’s coming out of and what image or what they’re trying to portray. So what is the bigger issue here? Is it the ability to recruit trained workers -- people that require a specific skill -- or just people that have a work ethic that will come in and work for you? • (Name) needs trained people. I’ll take people that have a work ethic and are willing to come to work. I’ll train them. • It differs between the different companies. I need entry-level people that have a work ethic and can show up. That’s why we’ve gone to outsourcing our temporary labor, because we bring five in, we lose three. It’s a continuous cycle. It’s getting a little better because we’re screening with the temp agency. • I just think it’s socially acceptable today to be this chronic unemployed person. They spend their whole day going from one social service office to the next -- energy assistance, rental assistance, medical care, food shelf, welfare department. I have an example. My hardest working lady down in (company) -- she and her husband were trying to buy a house. She’s working overtime, and I fill out the paperwork. She came to me. She goes, “I didn’t qualify for that loan because I make too much money.” I said, “Damn. You work eight to twelve hours of overtime a week. You’re there. You come on Saturdays. You come.” I get so fed up with -- especially when you go -- not in Bemidji -- but you just get a few miles out and these trailer parks are just full of functionally unemployed people. When I grew up, it was food, clothing and shelter. Those aren’t even in the top-ten anymore. It’s the 225

cell phone, the iPad, the flat-screen TV, the fancy car, your drugs, your booze. Food, clothing and shelter -- that’s a right now. It’s not even expected that those are in the top three. I get so disenfranchised. You just look out there and there’s -- North Dakota. North Dakota should be negative unemployment. How can you be unemployed in North Dakota? Just on the news today, they’re looking for 70,000 people in western North Dakota. I’d close the welfare offices in North Dakota. • Yeah, and they can’t get enough people. It just doesn’t make sense. • They offer free bussing. • Another thing that upsets me about (company) is Bemidji has industrial parks, infrastructure, all the utilities. We have beautiful property in the industrial park and the technology park. We have an unbelievable airport, a school and a hospital. So why does (company) invest in Fargo and not Bemidji? They were born and raised in Minnesota. Is it our tax structure or is that the people that live in this community they don’t care to employ? Or is it they fear the population? If you guys are having trouble drawing, they probably will too. • From an employee standpoint, it’s a factor, especially depending on what type of skills they have. If you’re looking for a welder, good luck to that, because they can go out to North Dakota and make really good money. So you have to figure out how to either outsource it or bring somebody in part-time. So if you are looking for those certain skills, it makes it harder. All of us are trying to do the same thing: if you can figure out how to have your products and services out there, it’s a benefit. But from an employee standpoint, people have an opportunity to go out there and make a lot of money. • There’s a large group of people our age that for whatever reason fell down on their luck in Bemidji. There’s a gentleman that’s a close personal friend of mine, and he actually worked at (company). He worked at a couple different -- he was a real estate guy in town. Now, he goes out there for ten days. He drives a water truck, and he’s making $75,000 a year. He has a beautiful wife and family, and he goes, “Why wouldn’t I, at age 55, just go out there for ten days and then come back?” Back and forth. • So does he spend his money back here even though he works out there? • He’s one of the few people that -- if you’re twenty-one and you’re gambling and drinking -- because I know, my son’s out there too. • Too many temptations out there. Somebody mentioned that 65 percent of his applicants fail a drug 226

test going in. Is that a factor here? • Yep. • It’s terrible. • I kind of think I recruit people that probably aren’t in the category of taking drugs, but I see it. It goes right back to those socially unemployable people, and there’s a large percentage of them here. We don’t particularly have a problem because our average employee is like fifty years old. Some twenty-somethings that I’ve had to sit down and talk to. What about outsourcing? • For factory, assembly-type workers, yeah. • That way you can get them, test them, and see how good they are. • It boils down to internal resources. We just don’t have the resources to have that be a full-time job, so that’s why we contract it out. It costs us a little more from an hourly wage because we’re paying premium. • We had a gap with our labor, and outsourcing was tough to find in the local area for us. Once we did get that established, it’s helped us because we got spread so thin that when those opportunities come along, you want to be able to grab them quick. Without that resource, it really made it difficult before. Now when those opportunities come along, we can -- the more primary people that are working the business are able to get on those. So it’s helped us. It’s been a while since we had that available to us. • From an overhead standpoint, it’s so much easier to manage because basically within the first ninety days, you try to identify do you want to keep them or what are the issues that they didn’t tell you. So if you have a temp agency, it’s you know what -- Bill’s not working out. Send somebody else. Then you don’t have the paperwork and all of the headaches of unemployment and everything else you’re going to find. You’re almost forced into it. The sad part is pretty much all of us around this table are somewhat competing for the same type of people. We want somebody that works hard. So if you call on the same temp agencies, it has to be a challenge for them to say, “Well, do I send it to (company) or where do the person’s skills match up?” • There are plenty of people. I think it’s figuring out which ones want to work and which ones don’t want to work. I think it would be a gross generalization to say nobody wants to work. It’s trying to figure it out. What I was just going to add to the temp conversation that almost every manufacturer I work with uses some kind of staffing agency. Some are starting to do both staffing and hire direct because if you have folks that are underemployed -- they’re working, they’re working hard but they’re not making enough money to support themselves -- it’s tough for them 227

to give up a job over here to go to work for a staffing firm. There are both positives and negatives with that kind of picture. It’s figuring out how to dissect the workforce to figure out which people do want to work, and then what is the best way to bring them into the company. A lot of experienced, good workers are going to be retiring at some point soon. • I agree. It’s getting harder to find people. We’re trying to get in with a well-established company in North Dakota. It creates opportunities sometimes because back on the drug testing, they’re doing hair follicle testing now. As soon as they bring that in to the applicants -- I forget the statistic -- but it was like 65 percent of them are basically done with the process. They know they won’t pass. So a hair follicle is a lot harder to pass. So that’s creating some… • What’s hair follicle? • Well, they’re taking, basically, for drug testing… • A lot more residual. • So they’re taking hair follicle samples -- it’s harder to -- they’re going to know if you’ve taken drugs in a longer period of time. So that’s creating opportunities in some cases for us in Minnesota. They’re having a shortage in Grand Forks or Dickinson because they can’t find people because the manufacturers out there are competing against the oil field welders and things like that, so we’re getting some work from that. But I’m embarrassed to say we are going to add drug testing this year. But we have had lots of internal arguments at our companies that if we added drug testing, 50 percent of our people wouldn’t pass. But we’re doing it this year, and it is what it is. We’re going to deal with it because it’s not a good thing to have from a safety standpoint or liability or treating your other good employees right. Is foreign competition less of an issue than it was two years ago or is it still out there, in any way that you want to describe it, either for your suppliers or for your customers? • I think it’s still out there. Part of the problem is nothing’s static either. What we find is the communication to get the exact specs that we look for in a very difficult part to design and manufacture, we may save 20 percent when everything’s done and find out it’s junk. What we’ve done is we’ve taken back the little bit that we have had offshore. We’ve taken more back. So it is definitely out there and certainly in the customers’ eyes, they’re still expecting those quotes with some LCC content, and they want a better deal every day. • In our business, the inexpensive items are absolutely coming from Mexico or overseas. But as far as the custom work, there were 228

companies trying to buy from China and bring it in. We’ve been able to halt that -- staying with us, so that’s good. • We’re seeing greater, but we have a Mexico plant so we have some options there with specific customers because they do the same thing we do here in Bemidji. It gives us an avenue, but we’re seeing it both ways. We brought some stuff back. Our customers are getting stuff back from China because of quality issues. • We’re seeing less from China and that area and a little more from Canada. Canada? • I think the dollars are getting a little further apart again, and I think that’s a big influence. Back ten, twelve years ago, it was quite a bit more. Maybe it was more than that years-wise, but back then it was a 23 percent difference, and there was quite a bit of competition from Canada. When the dollars leveled out a little closer, we did a lot more business in Canada. Now we’re starting to see that kind of trickle back. • Are your products included in NAFTA, so there’re no tariffs? • Correct. • I’d like to go into Canada except NAFTA didn’t cover the stuff that we do with fabric. I’d love to go into Canada. Even Mexico, I think we could compete on the high-end stuff. But we have 18 percent tariffs. What about government -- taxes and regulations? • I just see a trend. Obviously, the paperwork that’s required. Every week there’s another survey, there’s another report, there’s another license. I see it on the local level, I see it on the county level and the state level. They increase the utilities, the power and the tax on the power. My Senator says, “Oh Bill, you’re just rattling the cage.” It’s just stupid. We sell wild rice. We hadn’t had a food-handler license in fifty years. Then they implemented, in order to sell this packaged food, $35 a year. Now it’s $50 a year. Every single year -- we have billboards on the road. It used to be $35 a year. Each one of them is $135 a year. • Tax on the billboard? • It’s a license with the Minnesota Department of Transportation. You have to have a license. Actually, the signs are on my own property so I pay property tax. This year, the company sent out a survey, “How much do I pay for lease on it?” Is there a sense that the regulation or just the government intervention is greater nationally down or locally up? • All of the above. • We have issues with compliance. We have issues with wages 229

coming through again. When I say wages, not even just the thought that we have to look at the minimum wage law change. We are still struggling from the 2008 downturn where we couldn’t hire anybody because everybody that got unemployment got a special program from the state of Minnesota to go get training and/or school for two years. We couldn’t hire them. They didn’t want to come to work. Why would they give up the dollar? Things like that. Now with healthcare and benefits, well, that changed overnight with ObamaCare. The thing about that is nobody knows what that’s going to do to business. Today we have a certain carrier for medical. That’s going to change overnight too. If we get more and more pressure to see that more and more Medicaid and Medicare folks are going on the rolls, that’s going to change the pricing. The statistic that is staggering that I just saw two weeks ago -- today in this country at the federal level, we have between seven and ten million people over the next year to two years that will be Medicare/Medicaid eligible. You guys probably know where I’m going with this. At the same time, look at generation XYZ, ABCs who don’t grow up now until they’re 35. Still living in mom’s basement. What’s wrong with that picture? We have more and more people retiring that are competent, that have the skills, that have the work ethic. The people coming out can’t even read. I want to tell you, by the year 2029, that number of Medicare and Medicaid people grows ten times. That’s not that far away. What’s that going to do to this world as we know it for business with the complexities that we face? There are going to be a lot of issues there for us. • I have faith that we, as private enterprise, will figure it out. I have no faith the government is going to stop in any way intervening into the business. We’re going to have to be sharper. We’re going to have to be more adaptive to change. We’re going to have to look at new ways of doing what we’re doing, which is what we do every day, but I don’t see that changing one bit. It’s just going to be more difficult for us. • It seems to me part of the whole struggle in the Senate and the House is because government doesn’t know what their role is. They’re trying to figure it out of where do they really fit in this whole thing. How that happens, I personally haven’t seen who sits in the White House or Congress be able to determine that. I don’t know. • It’s the leadership skills that are lacking in government and making a really hard decision that’s going to make a lot of people upset at you in the short-term to solve a long-term problem. That’s a good transition. One of those hard decisions -- whether or not you agree with it -- is the Affordable Healthcare Act or ObamaCare. Does that represent something that five years from 230

now we all might be grateful for? • We wanted to do healthcare before the recession. If the recession wouldn’t have hit, we would have after thirty years of not having it. We came back out with affordable healthcare and started talking about it, and we moved forward and we did it. Then the government backed back off and we said screw that. We can’t fool with that anymore. We’re keeping it and going forward. I think a lot of that would happen through competition because of the baby boomers retiring. A lot of good things would happen if we could get these people back to work. Now you’re talking the Republican message, which is keep the government out of it, let the economy roll and businesses will help take care of it and so on. How is the cost of employee salaries and benefits, not including healthcare, giving you heartburn? • Because we have competition from overseas, the concern is our price could get too high. I mean, I could raise the prices but whether our customers buy it or not, I don’t know. It comes down to competition. • In my company, I just feel I have an obligation to keep several high school students, several university students and then several middleaged people and several seniors. I have a cross section. I was brought up that when you’re in high school, you are learning a skill so you are paid a lower rate. You get into college, you make a little bit more. You get a college degree, you’re going to make more. So by leveling that field, the government, once again, is going to soften the workforce to say that if you’re functionally unable to have a skilled job, we’re going to increase the minimum wage. There’s zero motivation for you to go out and go to a trade school. How can I learn to be a machinist? How can I learn to be a machine operator at (company)? I think it’s totally the wrong direction because the government softens society and it goes right back to that, “What’s government’s role?” These politicians -- it’s fun to hand out money. Here’s some energy assistance. Here are some food stamps. You’re popular when you hand it out. I want the contrary. I think if you’re healthy and you can work, the motivation should be hunger to get out and get a good job. If you’re developmentally disabled or if you’re sick and you’re elderly or you’re a baby, we have to take care of those types of people. But if you’re in those prime working years and you don’t have a skill, you go to school and get a skill. Otherwise, you go hungry. How do you change that? • You never will. This government has… 231

• The government is the one that’s looking out for the wrong people. The pendulum is swinging so far the other way, like the statistics and things that are coming up. Back to your question on politics, I think there are a lot of people that get into politics for the right reasons and the right intentions, but then back to the leadership and things like that, they get into a situation and how do they vote? They vote the party. They don’t fight for what’s right. They don’t have common sense. They lose it. Pretty soon we have two parties that are just fighting back and forth. It’s good to hand out money -- Bill said that excellently. Then they get reelected. It’s all about being a part of the system, so then that system gets bigger and bigger at the expense of whom? Us around this table. Did anybody’s health insurance around this table go down? No. Ours, for the most part I think, went up. Why? So we can pay for the people that didn’t have it. Sooner or later, something’s going to break. • The handouts from the government should be helping people. Give them assistance to find a job or make good decisions in finding the work instead of just -- giving people money is like feeding hungry people ice cream instead of fruits and vegetables or something that’s more sustaining. Why don’t they come up with a plan that instead of giving -- we’ll give you money if you go work at this business. You know what I mean? The business gets free labor. I mean, this is a pretty wild idea. • I think that’s a good idea. • I mean, it’s a great idea. It seems wild with the state we’re in right now. Here, we’ll write you a check. But if you want this check, you need to go show up at this workplace and put in six, eight hours a day. Then we’ll give you this check. The workplace gets the labor. Instead of them sitting at home watching TV and getting the check, they’re actually learning some skills and contributing. It’s not that hard, but it seems wild. • When you look at what are the barriers for business, it’s a whole system of government. Part of it’s maybe tariffs and taxes, but part of it’s the workforce system. It’s this whole huge thing that almost becomes how -- you can’t fix everything. I really think it’s you folks picking one thing or two things that you can do something with and doing it. That shows people in government that there is another way to do work. Because I know -- I’ve sat in a lot of rooms, probably thirtyfive years, and we talk about many of the same things. But unless we do something, nothing will change. It’s the action that comes with it. I think you have a really good idea there, so take that idea and how do we put it, add it and do something that there’s a pilot or something where we really can see can this work. Can we do something better, and then show Amy Klobuchar or somebody that’s willing to listen 232

and look at what we’re doing. My only -- the Minnesota Innovation Institute is starting to do some good work in Bemidji and Beltrami County. I think that’s one of the things it is doing is showing that they can do work or train or educate in a different way. Showing who what? • When the Senator was up here I was talking to her, but it’s changing the way education maybe provides their services. It’s integrating the workforce into that system and how can we really change. Jim, you know this as well, better than I. • When we’re trying to drive change that doesn’t occur today, naturally the systems --shaking it up saying we’re going to need a collaborative so that business can drive change at all levels, whether it’s the schools, the high schools, the two-year institutions, which don’t exist around here, to give us the skills that we need to develop. Any one of us could do our own thing. We could sustain, we could train, we could do our thing. The problem is how do you sustain that in a region that’s all calling for the same thing. So we have to pool our resources together and say, “Let’s shake it up a little bit. Let’s make sure we drive those changes.” • All of this kind of sounds pretty negative, the last ten, fifteen minutes here. But I think the reality of it is there is a huge potential in the region. That’s the positive way to look at it, right? I mean, we could be in a town of 12,000 people in Wyoming where literally there’s 12,000 people and there’s nobody, and we don’t have -- you know what I’m saying? In other words, the potential is there are people sitting here, sitting in their houses, so how do we get them to go to work? What is it? Is it bringing in some type of manufacturing that’s simple enough for all those people because they don’t have any skills? What is it? Training all those people? See what I’m saying though? There really is. • It started out focusing on skill development, and I think we’re moving on the rope. What I’ve heard from many manufacturers at the table, but beyond this, before I came was, “We need people with the right behaviors to start with to walk in the door.” So my vision would be how do we hook that on to the Minnesota Innovation Institute that employment part where we’re really assessing, figuring out where people go and even connecting it with the Education Institute, who’s putting together with our group a high-tech training center. That could be a production center where you did real work there, and you started to put people into a work environment and then put them out into the workplace. • We were talking about China, and to me, that’s the same thing. I’ve never personally been to China, but I have the Internet, right? There are 233

lots of people over there looking for things. That’s why we send things over -- they’re willing to work cheap. We kind of have the same thing here, or we should, potentially. We have people that are -- what’s the problem? I think part of the problem is they’re subsidized. They don’t need to work. That should get reduced and then give them something to do that’s productive. • I’m afraid with Affordable Healthcare, we’re giving them another motivation. Now these people that have never had healthcare -- I think so many people thought all they were going to have to do was pay the small premium and they were going to get healthcare. The first time they go to the doctor and they say, “You have to pay for it.” “But I have healthcare.” “Yeah, but you have to pay for the first $6,000.” They go, “What?” Now if they don’t work, they’ll get it for free and they won’t have any deductible. What the hell do I want to work for and have a $6,000 deductible? There went more money out the window. There’s more motivation not to work. • There always is going to be this group on the bottom -- whether it’s 2 percent or 3 percent -- that are never going to work, and I don’t care… • It could be 10 or 15 percent. • Let’s say there are those on the top that are highly motivated, and there are those in the middle that we’re going to need to provide something. That certainly needs to be designed. This is probably crass, but let the 2 percent on the bottom sit there and put our efforts into those that we have some hope of getting into the workforce doing good work. We could create in Beltrami County -- this is the marketing side -- a whole image of we have the best workforce in Minnesota. But it takes vision and it takes our efforts to put that together. It’s going to take lots of different interventions. • For some, there is no motivation, and I don’t care what you do, because I’ve worked with some of those people. I’ve gone to their house and picked them up and taken them to work, and they still didn’t get to work. There is no motivation. It’s the ones, I think, putting our energy and resources on those that we can. Maybe that in itself will change something. I know we can’t do 100 percent and make a change. You have to figure out the 80/20 rule or whatever it is. • I think it would be helpful to know that number, and it might motivate manufacturers or other businesses to say, “There is a number here. There is a potential that we should focus on.” But if that’s 100 people. Is it 100 people or is it 3,000 people? You know what I mean? That changes the motivation to focus on the group. Let’s say we’re back here in five years talking to each other. Will 234

this area -- will your business be in a better financial footing, will you be a more robust business in five years given what your instincts tell you today or not? • We’re all in business and we all -- that’s what we strive for. We wouldn’t be here if we didn’t think we were going to be better five years from now. But once again, stock market uncertainty, the minimum wage, the Affordable Care Act, the government rules and regulations, just what the state of Minnesota did to businesses last year which raised the taxes just a ridiculous rate in the dark days of the depression. Now they’re trying to roll them back. The knee-jerk reactions -- if I was a politician, “Okay, you know the businesses are down. We’re going to have to cut the state budget by 20 percent. There’s going to be some pain across the board. Now all of a sudden, everybody’s doing a little bit better. Okay, let’s get the money back.” I think the government did exactly the wrong thing in the last legislative session. • I think in this region, we have a lot of entrepreneurs. We have a strong entrepreneurial spirit. You maybe can slow that down, but you’re not going to crush it. We’re going to be strong. Our company will be stronger in five years than we are today. It’s your ability to adapt. It’s your ability to learn. I love what Jim said earlier -- it’s not relying on the government to fix your problems. You have to try to do what you can to keep them off your back, but how do you adapt and how to you find those opportunities? If you don’t, you won’t be around in five years. • One last thing too, I think, as you look forward, I’ve maybe seen the first real signs institutionally that education may have a chance to change around here. I saw an article maybe two weeks ago that the University of Minnesota has branched off by itself. They’re saying, “We’re not getting enough money from this governor. We have to figure out some different things.” MnSCU’s under the watch right now to look at all its campuses to either shut down or show a plan that will show that MnSCU is responding. I think locally there has been some sense of urgency, maybe for the first time, to show from the high school levels up that they need to respond and do things, A) to keep kids in our own backyard, which is huge, and, B) to help with job skills in this region that has so many great entrepreneurs.

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FOCUS GROUPS

St. Cloud 1:00 p.m., March 19

Gray Plant Mooty

We’re seeing growing distinction on some issues between the challenges manufacturers face in greater Minnesota and the ones that are faced in the metropolitan areas about access to employees, primarily, and things like that. Where does the St. Cloud area fit into that? • My sense is that St. Cloud in particular has some advantages of being a regional center, or being a more balanced economy, and then also really benefits from that 45- to 60-mile proximity to the Twin Cities. So as a regional center with that kind of freeway proximity to the Twin Cities, we don’t suffer it as much in St. Cloud. We do see it in the smaller communities, the communities of 10,000 or 15,000, especially as you get further away from the Twin Cities, then the human-capital equation gets more difficult. It gets more difficult to attract and retain people to those sites, trailing-spouse issues, et cetera. • I think you want to recruit a quality manager to Morris or Fergus Falls, you’ve got to find two jobs, and they might both be professionals. So you have to find a job for the spouse, and that makes it really difficult. • Then there’s a risk-reward format issue there, too, that if for some reason for one of those spouses it doesn’t work out, then it’s a bigger problem than if you’re in the Twin Cities where you just go down

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the street and get another job. So it’s not just the attraction; it’s the retaining and it’s the risk that you take to get somebody to move. Then you put that in the context of the last five years, the real estate issues of being upside down, et cetera, it’s just been a much less mobile work force than it maybe was 10 or 20 years ago. • Well, (name) probably grew his business by farm kids. There were probably plenty of farm kids at one time to draw from, and that’s a disappearing or gone group. • We used to get them within a 10-mile radius, and now we’re finding that we have to go out to the 15, 20-mile radius. To find more technical people, it gets more difficult. What’s interesting is we’re finding that there are a lot of people that work for corporate accounts that are really getting fed up with it, good people, they’re getting fed up with working for corporate accounts and they want to drop down to a smaller company because they don’t have to go through all the mess that they have to go through in reporting to here, reporting to there. Actually, we’re looking right now for an HR person and we’re shocked at what we can find close by, the people that have gone the route with corporate accounts and they want to get away from them. So maybe in a smaller town, if there are some bigger manufacturers in the area, maybe that’s a plus, too, because it gives us people we can choose from. Are things becoming a little more controllable than in other years, more predictable? • I don’t know if predictable fits in that much, because there’s constant -- changes are faster, and I think you have to adapt to the changes faster. Did it turn out the way, the year turned out good. And I’m wondering why -- there’s a lot of, we do work for a job shop; we do work for a lot of OEMs. It seems that the OEMs are opening up quite a bit more. • Probably that more of the big manufacturers want to outsource. I don’t know if there’re any more people looking at hiring in manufacturing, but a lot more people are looking at outsourcing what they can’t do good themselves. So I think that’s where we’re seeing a lot more of that happening. • The market space we’re in is experiencing recovery. We had a very good year last year, and we’ve had a very good first quarter, expecting that trend to continue, actually. We’re doing a lot of additional diversification now with this new parent company. So the rules are quite a bit different for my business now that it’s owned by a very large public company that’s going into brand new market space, space that they haven’t been in. We are pioneering this space 237

for them. • 2013 was what we expected. The company historically has focused on the educational market, and that always lags the markets. When we look at that, in the next several years we see additional funding that’s going to happen in that area. But we’re also now expanding into multiple other markets, and the beginning of this year has been phenomenal for us. • We kind of see everything. The attitude is much more positive than it’s been in the past. • It was pretty consistent with the previous year. I think overall we’re starting to see a lot more bigger jobs being quoted. Rather than the onesie-twosies, we’re seeing big, big, big projects starting to develop again, which we had in the past, which has been really good for us. Also the work force, I think, is starting to come around on the manufacturing side. I’m working with the schools directly to help get their interest level going down at that level. So if there are good jobs in our area, good careers that you can have, that is starting to really take hold. The machinist program in the school is really filling up nice, so they need some good students from that. • We’re seeing a mixed bag based really upon an industry. To give you some sampling of that, I think that the companies that were a little bit more aerospace or defense-oriented kind of got clocked a little bit in the fourth quarter based upon federal uncertainties. But then you look at anything related to energy and agriculture still continued strong. Building products were going strong. The consumer was maybe getting back a little bit. So you almost had to narrow down to the vertical -- and like you said, the lag in public education, the lag in municipal spending is sort of the same way. So that’s starting to maybe come back and stabilize a little bit from where it was a few years ago with property tax values. We couldn’t really say there is one big thing driving the whole economy, but you could really kind of drill down and sector specifics. Health care is another one where there is a lot of consolidation going on. Every health system in the state was trying to figure out, “What am I a part of? Am I big enough to achieve scale in the Affordable Care Act?” And then behind the scenes in their operations, they were consolidating their laboratories and they were saying, “This is how we’re going to compete in the future.” And that impacts the labsupply companies and things like that as they go into it. So I don’t think it was a good year for capital spending in laboratories, for instance, where traditionally health care has been strong. That’s a little bit of a breakdown of how we experienced 2013. • I was thinking about your question. Of course, it’s individualized 238

between all of our companies. Being in manufacturing, (company) is primarily about 80 percent medical: implants, instruments that surgeons would use; and then we have aviation products that make up the majority of the rest of our business. So from a business standpoint, personally in the business we did fine, we grew last year. But I will tell you the uncertainty that I have is looking at both the state and then the federal. It seems to me that the things I have been part of and communicating with other people about, people are either talking about just the state or just about the federal. I’ve had legislators out to my place and, of course, there are state legislators that want to talk about the state, and I understand that. But I always put in there the federal context, because that’s really where an employer like me gets nervous. I was at an industry conference two weeks ago and though a mandate for employers has been pushed out twice now -- and I don’t think anybody understands health care. But how I relate to it, anyhow, is from a manufacturing job shop. We bid a job for a customer for 1,000 pieces and then they come back and say they only want 100, then I need to adjust my costs. So I see that same thing, as the simplest analogy I can come up with, was what’s happening in health care. They said it was going to be this big a few years ago from the federal level, and we’re only getting a small piece of that pie. People can understand that, but the repercussions -- I’m not getting worried about it, but the question I put in front of my executive group is, “What are we going to do if we see a 50- or 60- or 70-percent increase in our health care costs, what decision are we going to make?” Because I don’t want to make that decision when it’s in front of me and surprises us, and that might not be for a year or two, who knows when. And it might just trickle in, you know, the frog in the pan of water. That’s one big concern I have from a business standpoint. Of course, the state is getting on board and changing taxes around. The fee-to-be taxes hit (company) hard. My question now is, are they going to give me back the money that they took from me last year with that services tax? That was going to estimate the cost (company), one company alone, about $150,000 a year. We bring in all kinds of people to fix our machines, service them. We’ve got 50 CNC centers. It’s a steep tax. Tax is tax, but when you start adding up all the local, state and federal, and then the fourth-tier tax which nobody wants to talk about but that’s taxing businesses, it’s not taxing the rich. And I try to educate my employees on that. But all of that uncertainty, we’re moving ahead in spite of all of that, how we’re going to grow our business. But it’s not a smooth sea. There’re a lot of checks and balances, is how I would say it. Very unnerving, is the way I put it. 239

Uncertainty was a huge concern in last year’s poll. Are you seeing more clarity? • Well, I’m feeling good about it right now. Our proprietary brands are more premium-based. The economy has really helped people spend a little more money on the best brands. The contract manufacturing, I’m really trying to weave our way out of that because you’re only as good as your most desperate competitor. I think the economy has changed a little bit in that customers now are looking at value as opposed to just pure price, because I think a lot of our competition that wasn’t very good is no longer with us. So the strong survive, to a certain extent. I don’t know, I mean, contract manufacturing is just scary. You don’t know who you are competing against, you don’t know how desperate your biggest competitor is. I like the proprietary brands a little more because you can control that. As far as the haze goes, it’s just trying to outwork the next guy and slash costs where you can. But in our case, resin prices have gone up 23 percent in the last 16 months. So you have to weigh the balance of passing on those price increases to your customer and then opening up the door to a competitor that, again, is now more desperate than he was before. It’s a flip of a coin how much you can pass on versus how much you can absorb. • I’ve got an interesting one with us. We’re in the steel industry, so we watch the steel commodity price pretty close. Back in 2008 we saw about a doubling in the steel costs in three months. Then it flattened out, and we lost it all in two months. So we were back to losing anything we started out with. This last year, we were expecting prices to go up, they were telling us the prices were going up. We’ve seen a steady deterioration all year long last year. So we look to the mills, what’s happening? Mills are now running at 75-percent capacity, all of them. They say they’re not making any money, but all of a sudden they shifted, and now they’re making money. They’re starting to see where they’re making money because their prices have dropped, too. So we’re seeing a gradual decrease in the price of commodities. The price of iron ore is down, the price of fuel is down, transportation costs are actually down. We’re seeing a lot of those things that are dropping back down from the extreme high we had in 2008 and 2009. So we’re leveling off, finding where things are, where commodity prices are now. But there’s always something else that’s going to come in there and raise the price. If you look at employment, if I were the one trying to figure out the employment trends and trying to figure out what’s happening now, I’d go berserk, because the numbers aren’t looking like they used to look. In 2008, say we needed 10 employees to do 1,000 units. Today, 240

we’re getting those 1,000 units done with seven people. How do you measure those things, plus the quality is better, delivery is better. And there are so many things that come in, and the technology has changed so much. The steel industry, the term has come in, you’ve heard the term high-strength steels? High-strength steel, the way it is, a quarter-inch piece of steel one foot square weighs 10 pounds. Now what you can do is you replace that 10-foot square with a 3/16 piece of material and it weighs 7 ½ pounds, 25 percent less weight. That’s each truck going down the road. To get the 4,000 square feet, 40,000-pound load, now you only have 30,000 pounds. The mills are not producing as many tons, but they’re producing the same number of square feet. So all these equations you’re looking at mean what? So if you’re under the old plan of looking at equations, tons per hour for steel, you’re producing a square foot per hour, you’re not producing the tons; you’re producing more parts, you’re not doing it in the same hours; you have equipment that does things different, you have quality that better be better or you’re not going to be in business. So these uncertainties of what your measurement tools are have just changed. How many people plan to increase the number of employees in their plants this year? • We’re on a growth streak right now. We’re moving ahead. The haze of uncertainty is there, but I refuse to put my head in the ground and hide. So I’m going to move ahead. We have already added about 10 or 12 people in the last, I want to say, three months and we’ll probably add another 12 people in the next three months. • A lot of my job is to go out and meet with a lot of businesses in the community, especially manufacturing, and I’ve heard that as a general rule, that practically everybody is increasing their employment. Going back to the work-force issues, they are having some work-force issues in the quality of the people they’re getting. But I think we’re a little lucky, going a little bit into what Pat said about our area still has some pretty good work ethics and skills coming in from the farm or whatever. There are some advantages there, but I think that’s going away, but it’s still there. Or they’re growing into the space they had to drop off in manufacturing from a few years ago. • Just a comment that kind of goes back to your question about central Minnesota and the technical-school sets available, et cetera, and finding people. I think that what we found and are going to continue to look at as we go forward – and in my past I’ve had very good luck with it – is to look at using virtual offices, finding the best 241

people that you can and, if possible, can you convert that position into a virtual position. In a lot of cases, you can do that with the technology that’s available today. All of a sudden, you start accessing the United States as a market or the world as a market for talent versus just central Minnesota. So we’ve really got two needs. One is in the skilled area and the other is in just the pure manufacturing area. And we find that for that, if you were a small rural community south of St. Cloud, there appear to be a fair amount of people that are available. I think somebody mentioned before – I think you said, Leo – that the radius is moving out. We’re finding that same thing. You have to look at a much larger area in order to get them, but they are there. • What we’re seeing from our members is, number one, they are hiring again; number two, they are investing in training again. And a lot of that has to do with retaining the employees that they have. They want to do more engagement activities, but because a lot of organizations are looking at virtual employees, we’re getting more requests to do a hybrid of training where we do a portion of the people on site at their location and then use technology to reach the other people that are in remote areas. • I think there’s been a change, too, in the rural area, the number of farm kids available. I’m from a small town in western Minnesota so when I moved from the cities out to Maple Lake, I thought I’d find all these hard-working farm kids. There aren’t any. Either farming has been so successful, or people aren’t having as many kids and they’re gone and so on. I thought I’d have a pool of this hard-work ethic group out there, and I thought I was right back in St. Louis Park again with the same kind of quality. I love them to death, but it’s not a really good quality pool I’m drawing on; it’s the same people that, as soon as they make enough money that they can live pretty well for three weeks, they’re gone. And those same people circle back again, or head up to North Dakota. It’s a struggle to find good, hard-working people. Last week, I think the key one of the things that I think I’m really going to be happy with is I hired a VP of Operations with a strong humanresources background that personalizes and gets to know people’s bosses. Money is one thing, but acknowledging that you’re John and not that guy, or hey you, I think that’s going to serve us well. Any open jobs around here? • Every day we are looking for four people on first shift and two on second, and every day there are probably four or five people that don’t show up.

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Entry-level jobs or trained? • Direct labor, this is all direct labor. And as soon as it snows, it’s just a reason not to come in. • This is really interesting what I’ve seen these last two years, or really a year. We started our lower-level people out through temp agencies. So we refer them to the temp agency, tell them get yourself signed up, come on to work. Then we can find out if they really want to be around and if we want them. We have taken on quite a few younger people now, and we’re almost shocked at how much better they are than people we picked up in the previous five years. • These are people that are 18, 20, 21, 22. I don’t know if they are experiencing hearing from the graduates from high school after 2008, 2009 that things aren’t as rosy as what they’ve been told in school, and they don’t want to go to the big city. I think there are a lot of reasons for it. But it’s a different mentality of these people that we’re getting now, and we think that they could possibly stay around. Probably the biggest detriment rural Minnesota has to employment and growth is the lack of women that want to be out in a rural area. So if we can find women for these guys -• (Laughter). • There could be a new consulting practice at Enterprise Minnesota. • That could be a new topic all on its own. • If you want to have a small-town girl and be successful in a small town, you’d better figure out how you can get future salary plus for women, because the studs will follow. • (Laughter). • Following up with that, two spouses, you have to find a job for two. • We do the same thing. We started doing that midyear last year, using a temp agency. And it’s a great way to get people. It uses the selection criteria, it gets away from -- it finds people that are dedicated enough. And then we worked a deal with them where if we retain them for six months or so, the fee structure becomes very, very minimal. • Plus statistically on the workers’ comp side, accidents happen in that honeymoon period, too, so you keep that off your mind. • I would say that we would have more sales and make more profits with better-skilled labor. So it’s a combination of getting the people in, and not just machinists for, I call them the professional positions or whatever you want to call them, but the engineers, the quality people. Just office support, the quality of the people, that’s hard even in Monticello for us to really find that broad skill level so it supplies the entire organization. Then once we get whether it’s a machinist 243

or an engineer in, to bring their skill level up, that’s where the lag period comes in. They are just not coming in with the right level of skill. How big is the challenge to find the right people with the right training? • It’s stature in manufacturing. I’ve been working with eighth-grade classes over the last years. It’s stature in manufacturing. Obama says every kid should go to college; I disagree. Why didn’t he say there are a lot of manufacturing jobs out there for those of you who want to develop technical skills and have a meaningful standard of living? Manufacturing has to gain its stature. I graduated from high school a long time ago, and the minority was going to college because the trades were earning what a college degree was earning. And there was stature in the trades, the whole school system, post-World War II industrial. • I’m definitely hearing that and it’s kind of a surprise because that’s not the way I grew up, because manufacturing jobs have always paid pretty well. • You’ve got to draw the youth to manufacturing. The trades have got to go back to the school system and create that farm club where they are coming out of school wanting those jobs in factories. • I think we have to do a better job having our high schools come into our facilities, too. • We’ve been hosting visits. My factory, I’m sure like all the rest, is highly automated. We’re computer-challenged. I’m the only guy in the company that can cut a circle on a table saw. If they can’t make a part with a CNC tool, they can’t make a part. There’s a tremendous amount of math and technology on the shop floor. • It strikes me that there’re workers out there -- you mentioned unemployment, but the soft skills are lacking so that getting them into the plant may not be the issue, but keeping them there is the other issue. We’re hearing from a couple of industries, too, that the failed drug tests, the percentage that fail the drug tests, is unbelievable. Someone said 65 percent of the people that apply for jobs fail the drug test. • I heard even a higher percentage for a company here in St. Cloud. It floored me. • We haven’t had an issue with that. You’re making me ask myself why. I don’t know. We do a drug test, physical test. We have a pretty extensive hiring process; it’s lengthy, meaning an average person 244

coming into (company) will meet at least three times at the company with different people. I do know that that drops a lot of people out, they get frustrated. I’m going to dig into that question. We don’t see a high percentage of that. • I can’t call it very well. I think that this table’s all that side is, and it’s the opposite or wrong. • I’d say probably one out of three for us have probably failed the drug test for our direct labor. • I’ve got a good question coming from that. Going up here, I was on the phone about a gentleman, a temp, that we really think is good, and he’s from a rural area and he’s going to stay around, we hope. And we’re putting him on. The temp agency does a drug test for us and it’s okay. So he’s going to come to work for us, then we put him through a drug test again. He failed. What do you do then? Do you ignore the person because you lost people; do you look at that they are good, and your people think they’re good and they want them. What do you do? Wipe him out forever? Or do you work on a policy and put them to school and have them test for a while because they are probably at a point where they have to change their way of thinking and that sort of thing, too. We don’t know what we’re going to do with this one. • We always offer people help, professional help, and we’ll help pay for any kind of treatment they want to go through, and they can choose that; and if they don’t choose that, then they need to leave the organization. • OK. Is that pretty normal? • It is. • Well, to me, if he’s missing a lot of time away from work, it’s on. But a lot of people drink too much, too; so it’s like, well, OK, now all of a sudden you’re on your high horse about pot is evil and you can’t hold down a job when, in fact, they are still good. So it doesn’t mean to have to put them into a 90-day program. You either have a drug policy, in my mind, or you don’t. And you have to live by it, you have to live by that policy, and you can’t make exceptions. I’m sure Steve would probably agree with that. • I do. You have to be consistent. • I think when you get out into a lot of rural areas, you won’t have anybody. You talk about going up north in Bemidji, I think you have a lot more problems trying to employ people up there that don’t have a drug problem. And you do -- I don’t want to say maybe around here kind of thing, I don’t know. But it’s something that the employer has to deal with. Do we say no to all the things, OK, or do we have a program where we work with the people; and if they can’t follow the 245

rules, then they’re out. Let’s switch to some other issues. How about increased competition from foreign sources; where are you on that? We hear a lot about re-shoring. • Our major competitors, large competitors, have all their -- we’re in the time business, so they have their clocks made in China and then shipped over here. Our counter to that is, “Hey, we’re built in a rural community in Minnesota,” and USA, United States made, and also then the quality aspect of what we have. What we try to do is engineer the products so they have features that others don’t have, and we’ve been quite successful with doing that. • I’d say over the last five years, in our industry, there was a big push maybe 10 years ago in the medical to go overseas. Prior to that, it was the aviation world, through the ‘90s. I would say that trend, from our perspective, when we deal with our customers, it’s pretty well full reverse where they are not going. (Company) is making a big push that their new president, has said, “We’re going to have a presence.” That’s just because they had such a low presence before that; they had to make some move towards it. Again, we deal in the very high-technology side of the products, so it’s a niche that we created where we focused on that specifically because we don’t want to become the commodity and machine. I couldn’t answer it on the commodity side, but from the machine standpoint I think a lot of that stuff is still going out. But the really high-precision, small quantities, they’ve tried to do it but they’ve been unsuccessful in many cases and they end up back. • How about supply-chain relationships? • Again for us, I’ll throw in the FDA made a strong push in 2008 that was a game-changer. The regulatory requirements started to really -- and (company) was leading it. And there were many companies that didn’t catch up with that. Say your question again, I’m sorry; my brain went -• So the regulatory requirement, we’ve been on a steep incline there. Now there is a tremendous amount of pressure -- we have suppliers and we have controls over them, but we’re basically being looked at the same as (company) looks at us, and that’s been a couple of years now where they’ve been getting serious about it, and they’re getting real serious about it now. • Yes, just more knowledgeable about our suppliers. We would do a quality audit, and we’re ISO certified. So we go to a supplier, maybe on a plating job. That whole industry, the plating, that part of the industry always has lagged behind the machining industry, 246

for whatever reason. But the requirements that they have to hold themselves to is really narrowing the field for who we can go to and who we can use, because we’re coming in saying, “You have to look like what we are.” Because (company) is basically saying, Your supplier is -- and they want to actually go in to our suppliers, and we’ve been fighting that out for several years now. They were as bold, a few of the customers at one point, to say, “We want your vendor list.” And we said, “No, you can’t do that.” But that whole thing is opening up. Last year – if you’re not in the medical side – for the first time, we were required by the FDA to register all of our products, all of the part numbers, everything we make for every customer. Before that, we were just required to be FDA-compliant, meaning they didn’t know who we did work for. Now they’ve got a list of every manufacturer in the United States of every part we do. So what their plan is, in my opinion – I can never get a confirmation from our customers – but you can see the writing on the wall. They are putting this network together behind the scenes so that the FDA, I believe we’ll see the day when legislation changes and they’re going to walk right into my shop – and we’ve seen bits of that – and so they’ll audit the products we’re making, find out who we’re making it for. And if they find a problem here -- and we’ve had that from (company). (Company) had a recall last year, several million dollars, because the supplier got audited by the FDA and it pushed it backwards. So the writing is on the wall, the warnings are out. Our customers, the OEMs, are raising the rhetoric. So it’s a tremendous amount of pressure going out to our vendors, and that’s our biggest challenge from a cost standpoint. Because these guys are smaller companies. You know, we’re about $25-30 million in revenue, and we’re dealing with $2-3 million companies that just can’t take tens of hundreds of thousands of dollars to put in quality systems and buy equipment and do all the things that it took us years, quite honestly, to build. And then there’s a whole group of machine manufacturers like me who didn’t do and weren’t doing what we’ve been doing, and they are getting caught behind the Eight Ball, so they are in a really tight spot. That amount of pressure, along with the taxes, that’s where my haze comes from. During the downturn some OEMs got crazy demanding. Does that continue today? • I think you should tell your suppliers they’d better get ready, because right after a recession the big agricultural companies, AGCO, Case New Holland, up and down the line, said, “I don’t care where you are in our supply chain, you have to get ISO certified.” 247

The last two years, we’ve helped companies as small as eight employees get their ISO certification, and as large as 700, because they were down here. The food industry is the same way. So I think that suppliers should get ready to get their certifications up to certification level, not compliance level. Because compliance means nothing. It’s just a figment of your imagination that you’re compliant to something. • Quite honestly, the compliance – I’m going to say this the right way, you’ll probably have to edit this a lot – the compliance part of it is easy to get. You can pay someone to come in and get a certification, get the ISO words and whatever it is, because that’s the way it was for years in manufacturing. If you were ISO certified, it got to the point of so what, that doesn’t mean anything. It’s gone deeper than that. You have to have the certification, but then, I mean, backing it up, the things that we are getting audited on and gigged on, it’s just amazing to me. • I think what you’re saying is you have to follow the rules. • Yeah, you have to follow the rules. It’s simple. You say, “I’m going to do this.” Well, then, do it. We’ve always done that. You always have gaps in things you’re working on, but that’s the hardest part on getting that part of the message to our suppliers, is, “We know you’re certified, we don’t need a check mark that. But we’re going to come in and we’re going to check this, this and this,” and then you do it; and then it’s like they almost say, “Wow, you’re serious about this.” Well, our customers are serious about it. • I have one on ISO. We were ISO certified, we went the route of ISO certification. We found that our margins are going down with those ISO certifications. Because we were working with corporate America, bigger companies, and they were working us on every little thing. And they said, “You have to get ISO certified or you’re going to be out.” We’re not out, we haven’t heard anything more from them. Doesn’t mean we won’t hear anything more from them. When you start working with smaller accounts that aren’t in the corporate America world, they are not looking at those certifications. There are plenty of those companies out there. We see much, much, much larger margins working with them. At the same time, we have to be on a program of approved quality and approved processes and everything else. There is someplace in between ISO certification and where we’re at now. Not saying that ISO is not the coming thing, but the compliance level that you get into can probably kill a lot of small companies. We’re finding that there are a lot more people, small companies, out there that are not interested in ISO. • You still have to have strong systems and corrective actions and 248

all those things you have to have. • You’ve got to do the corrective actions, you have to do the quality and all that. • I think it’s no different than when you have 100 candidates for a job and you say, “Well, I can ask for an MBA and that will get me down to 20 people,” because I don’t want to have to interview 100, so I can say MBA. So I’m going to say ISO certified. • I think that goes for -- I mean, if your end product fails and somebody or masses of people die, either your industry is going to impose it or your government is going to impose it. So if you want to be in aerospace, if you want to be in defense, if you want to be in medical devices, you’re going to have it. It’s either going to be applied by your industry group or it’s going to be applied by your government group. There are other things that are “if.” If your end product fails and somebody doesn’t die, the tort courts will handle it, right? That’s the bottom line. And you’ll take a risk with your insurance. But I don’t see that going anywhere in aerospace, defense, medical. Like it’s the cost of being in the game. • At least in my industry, in machine, aerospace, the ones you just mentioned, it was that way up until just a few years ago where there were plenty of smaller players. That’s the trend, that’s what’s changing. • Food is the next big one. • I guarantee it’s different for those smaller guys. • The word in food is farm to fork, everything certified. • We are hearing more where the Europeans are under a system, they want to know exactly what’s in every piece of steel that’s made, any of them that is hazardous waste or anything like that; we’re seeing a lot more of that. But what you have is you have a piece of steel that’s plated, and it doesn’t have the same color because of something. It’s the right thickness, but it doesn’t have the same color. And it’s an internal part. And a medium-sized company wants to reject that because it doesn’t have the same color. Because the quality people probably don’t know anything about manufacturing, but they have a set of rules they are looking at. And they can’t interpret the difference, where you go with it. Then if it’s a big company or a small company, you want to go this route, or even bigger companies. You’re losing a lot of potential customers, or suppliers. • But that trend isn’t going to change. • But if you have a car and your door gets banged up, we all expect that new door to go on and be proper. We expect the bolding to be right, the steel to be right, everything else. You need that. But there 249

are places if you make them one off -- you have to make sure more than anything else that your processes are taken care of. If you can learn anything from that, from what I can see, it’s the processes, get your processes down. One last question: If five years from now we’re sitting around this same table, the same people, and you’re looking at the totality of everything we’ve talked about, will things be better, worse, or just about the same? • In spite of the government, yes. I really want to say I believe this country can rebound in manufacturing. I see it bigger in five years. • Same. • I agree. • I would agree. • I’ll say one thing on that, and that is in spite of our state government, I don’t know if we can. I’m seeing a huge number of people absolute for sure that are pulling their assets out of the state of Minnesota and going to a lesser-taxed state. • Personal income tax. They’re probably going to have the plant here, but the person will be out. I’ve got two acquaintances, it shocked me, that are now residents of Florida, and they have pulled a lot of potential investment dollars out. That comes from a statement our governor made about a year ago. The question was put to him, “But, Governor, people are going to be out of the state of Minnesota for over six months so they can pick up Florida residency.” And he said, “Then we’ll make residency 60 days here in the State of Minnesota; in 60 days, you’re a resident.” That made the decision for a lot of people, for individual income tax, to move out of the state. • The number one audit issue for the Department of Revenue is residency. The fact that you’re out of the state more than six months, to them, doesn’t mean anything because they’ll try to pull you back in under what we call a connection test. What do you have in Minnesota? • Credit cards, receipts. • It’s crazy. That’s the number one issue at the Department of Revenue. • Don’t make any charitable contributions back to Minnesota. • Right. • Because that will show a link to the community. • That’s right. • Don’t even use a credit card. • Don’t even think about giving back to Minnesota charities. • It’s where the locus of your life is, is what the court said. 250

• We just had a client auditor that’s been in Florida for 10 years, and the State of Minnesota is doing one thing now that they haven’t done in the past. If you own real estate in your name and you don’t file a Minnesota return, you automatically get audited. So think about that. That’s where it’s headed.

251

FOCUS GROUPS

Eveleth 10:30 a.m., March 20

IRRRB

How did you do last year compared to how you thought you’d do at this time last year? • Well I know, speaking for us, not as well as we thought we were going to do. Our business kind of took a downturn. We -- I can’t even remember what our sales were last year -- but we’re probably about half of what we did last year. Is it something to do with your industry or is it about the overall economy? • Yeah, I think in our business -- we manufacture heat exchangers for the mining industry, for large-haul trucks, also for oil and gas industry and both of those kind of tanked a little bit. And I think a lot of our customers had excess inventory which made their projections kind of hard to live by. They all kept moving them out, out, out and then finally ended up canceling. We’ve seen a real reduction in our sales, and like I said, probably 40 to 50 percent from where we thought we would be. And then it’s not coming back real quick. How about profitability? • Because we tried to maintain our staff in four plants in the U. S. we took a $6 million loss or so and now we’ve in turn shut down two of those plants and laid off probably about 250 people. 252

• Last year we performed as we expected and so I would say that we expected to see a small long growth and we were able to realize that growth while maintaining our profitability targets. So we continue to perform as we’d expect and based on the indications that we see in the market trend for our business. We’re fortunate. • Our company, our facility, rather small, is part of a larger organization and if you look at the Daimler Corporation, the products that they offer, they’ve picked up market share and as a result of them picking up market share, it’s allowed for us to also benefit from that growth along with the fact that we look at external markets outside of the Daimler organization and we’ve been able to attract customer base in that area. So as a result, we’re able to continue to grow. So we’re fortunate. • I think we’re down about probably ten percent, but then it’s directly related to the economy as a whole which, in turn, I guess you could look at our industry. But as a whole we’re down. We may have been able to hold our numbers as far as employees goes, but ten percent is ten percent. And when we have loss -- and we’ve had a little bit of attrition -- we haven’t replaced. So it’s kind of a -- and we were okay, just down ten percent. What about next year? • We’re hopeful. • Yeah. • I’m hoping. And you know our company’s still strong. I mean the loss didn’t hurt cash flow; it didn’t hurt our status. We still don’t have any long-term loans or anything like that, so we’re pretty strong. We’ve downsized. We’re down to two plants in the U. S. We still have three overseas facilities and we’re just going to build on them and try and get it so we’re comfortable whether we’re at $50 million or $110 million in sales that we can maintain the same staff and not be hurting. That’s what we’re working for. But all of our customers are pretty confident that eventually this will come back. Having said this, is it more difficult to forecast than it was in the past? • I think we’re seeing a lot of volatility. I don’t know about you guys, but we see a lot of movement and so I think the industry in general is very cautious or hesitant because there’re a lot of things going on. I think all of us as manufacturers work very, very hard to continue to grow and exist and maintain stability. And if you look at what’s happening with the politics both at the national and local 253

levels, they seem to be hurting us from the standpoint that they keep doing all these, I don’t want to use the term, stupid things that make it more difficult for us to thrive in the marketplace. And so you’re working your butt off to grow your business and to do the right thing and they keep putting in policies that just hinder your ability to get that stability or to get confidence in the marketplace. Let’s talk about Affordable Care Act. How does it – or will it -affect your ability to run the business? • Well, right now that’s a big-ticket item but it’s something that we’re going to continue to provide for our employees. My wife works for Blue Cross Blue Shield and I think (company)’s medical and dental is better than hers, and less costly. We are still paying over 80 percent of our portion of it -- 80/20 -- where I think it’s still probably more like 90/10 as far as what the company pays to what we have to pay as employees. I think mine, for a family, monthly is probably $160 or something like that, for my coverage, and my wife’s is $300 at Blue Cross. And we are committed to continuing to provide that even though they can probably get away cheaper paying the penalties. But something we have talked about as a management group is how other companies are doing what I’ve mentioned earlier about hiring their own staff and bringing them in and having a clinic and they do that, some of them, as cheap as $5 million a year or so you know. If we take a look at what we’re paying out, we could easily probably afford that. • We try to be ahead of the game as the years go. We’re self funded which has helped us greatly, but this year we put another level into our plans that we always follow under ObamaCare. We are there with all of our other plants, but as the costs continue to increase, I mean even as a self-funded plant our costs have gone up drastically because nobody knows what’s going to happen with ObamaCare. It’s just so unpredictable and every day something changes. So we’ve struggled with that. We’ve looked at -- you know saying, “Hey, somebody go by yourself some insurance.” But we’re a family but an organization; we want to keep it that way and we want to offer this benefit to employees. But I think it has hurt us as far as the cost. The time that has gone into learning about it is costing the company I think. I don’t see a benefit to it at all. • I’ve got to ask a question to an HR person. Being a manufacturer and employer and offering health benefits has always been a positive. It’s always been a tool to recruit; it’s a benefit of joining the company. We heard from another company that the generation coming in now doesn’t look at it as a real positive 254

because they can go under ObamaCare. Have you experienced that? • Sure. They’re all 21 and bullet proof so they don’t want insurance anyway. But we have some people that don’t have health insurance and they’re being forced to do it; I don’t think they’re looking at it as a positive either because they do think they are 21 and bullet proof. Now they have to pick up insurance somewhere. • And there’s some secondary fallout from that because for example when we, in our on-boarding process, we’re going to hire direct labor employees (we bring them on as contract employees first) and because there’s penalty now for not having ObamaCare, you now have a lot greater concern of “Hey, I either need to make more money or I need benefits because if I don’t have them, I’m going to receive a penalty.” So all of our labor force at (company) -- and we grow jobs year over year -- we do that through contract labor and now I’m going to have a harder time recruiting contract labor or it’s going to change my upfront cost to get that labor because of the penalty that’s going to be forced by ObamaCare -- which didn’t exist before. And that penalty goes into effect I believe May 1st. (It’s April 1st.) I actually had a contract employee that was going to quit because I didn’t convert her to the company and who we’ve invested several thousand dollars in training only because she doesn’t have healthcare coverage and can’t get it through the contract staffing agency. What about your ability to attract and retain qualified workers? How is it up here? • Well I know for us, when we had our last upswing a couple of years ago, we went from 450 employees to 900 in 18 months and it was tough getting them. And to get that 450 employees we actually hired over 700 and the retention was -- You have people that come in the door. They’re young, bullet proof or whatever we want to call them -- young and dumb -- come in and go “Wow, this ain’t for me.” And you’ve spent a few grand getting them in that door and then they walk. (They’re not skilled employees; they’re entry level.) Yeah. We’ve also -- I laugh and tell everybody we’re a farm team working like the Minnesota Twins. You know we bring people in; we train them; we lose them to the local mines because we can’t touch their wages. We’ve lost a lot of people lately and again, with the retention thing, once they go, we’re really not replacing some of them. But when we have welders, that’s our bread and butter; we’ve got to replace those guys. And we’ve lost a couple of them in the last week or two to the mines. Oh yeah. 255

So there seem to be two employee-related issues. One is finding trained people and the other is what we’re calling the alarm clock issues. Which is the more challenging? • For us it’s the show-up-for-work. Everyday would be nice. I mean we’ll take you and train you because I don’t think anyone knows how to -- It’s rare if you walk in the door and you know how to manufacture a drill bit, but we can train you. But it’s also a two-year training period. We’ve been fortunate enough to have a real low turnover rate and most of our turnover is because of the soft issues of not coming to work when you’re supposed to or -• I want to be on my cell phone. • Yeah. The Internet. • Yeah. “What do you mean I can’t smoke a cigarette when I walk back and take an extra five minute break? Is there something wrong with that?” • There’s oil all over the -• “What do you mean I can’t text all day long on the production line?” Or “I want to surf Facebook while I’m on the line.” • The information age. Yeah. • Yeah. • They don’t like it when I put them down. • Would you stereotype it as a social issue, a social connection? Is it generational? Is it any different than it was ten years ago? • It’s dramatically. • Oh yeah. I think the work ethic of today’s youth is horrific compared to what the work ethic of us more mature people has been. • The point was made and I think it’s very true that if you have somebody for a week or a month and they don’t like it, it’s “See ya.” “I’ll just go somewhere else.” • I read an article on that. You know you have the baby boomers and you have the millennials. And the millennials are the younger generation now from like 1960 and on who are job hoppers. They’re content; then when they get bored they move on. And the baby boomers, we hang in there. What do you do? How do you cope with that? • Well I mean from talking with our people, we do meetings with them and try and pump them for information. We want to open a two-way line of communication rather than us jamming it down their throat. From the few that you can get to open up, it’s they want money and recognition are probably two of the big things. 256

And then you have the few that want to move up, you know, have promotional things. • It’s the immediate gratification that a lot of these younger people want. • I’m not sure about the rest of you but if you look at trying to hire a skilled position -- engineer, quality materials type person -- it’s hard to attract people in this region because if you come as a package, so if you have experience and you or a husband and wife combination, I can give one of them a job. But where’s the other person going to work because there’s not a lot of those positions available. So as the mines suffer, that reduces the requirement for a labor pool so it does hinder our ability to attract skilled resources to the area as well. That’s been an ongoing problem and I’ve been on the Iron Range for ten years and that’s been something that we’ve encountered every year I’ve been here, the ability to attract and retain top, skilled labor for these key, salaried type positions. • We haven’t but we haven’t had really any turnover in the last -- in our top level. I mean five out of our top managers are owners so they’re not going anywhere. We’re fortunate that way and then the rest, we really haven’t had turnover. And as we’ve grown -- it’s funny you say that because as we’ve grown -- My husband was hired as one of the managers of the “new place” and (name) came on through a network, but he was already from here. So I guess we’ve been lucky to find -• You have to find people that want to come back. • And there’s that, and you have to give them a reason to stay. • But (name) when you came back, was your wife looking for employment, and if she was, was she able to find something here? • Oh yes. • Okay. • All right. So we’ve been fortunate that way. • Yeah, we struggle a little bit I think because well 1) we have certain qualifications and our hiring practices, how we go about doing it, has changed with our HR Department. We do group interviews now and put them through little informal tests and check verbal skills and math and measuring and things like that. And then there’re multiple interviews that they go through before we get them in the door because what we’re trying to do is alleviate the chance of having them come in and then go out because it’s not -- telling them it’s not for them. So our processes have changed. They have to go through more before they even get to a supervisor interview, which before was just immediately in the door, do the supervisor interview, if he liked them then we would send them for 257

a physical and do a background check. And now they get to meet a lot of people in (company) before they even get to the supervisor. Someone brought up that 65 percent of the students who come into a technical school can’t do basic mathematics, writing or reading. They have to take remedial classes before they can even get into Auto Body Repair or something like that. Are you finding that, too? • Yeah, we’ve found that a lot and that’s why we’ve improved the process a little bit. Because some you can work with. I mean we can bring them in the door if they haven’t touched turning decimals into fractions or vice versa in 25-30 years, then they may be a little rusty. So part of our process picks that up and we can work with that. But you know if they just don’t have it, yeah, then we’ve found that also. • That was just astounding when I heard that. • Me too. That’s scary. • You know, maybe that’s why some of our people don’t make it because they can’t do it and you just don’t know it. We don’t do the testing like you do. I think it’s a great idea and we’ve talked about doing it, but we use temp agencies so a lot of our screening is -- They do it ahead of time. • Right, and they do that screening ahead of time. So by the time they get to us we’re kind of hoping that they’ve got what we need and then you know maybe that’s some frustration that I’m not hearing about and that’s why someone leaves. You know if you can’t read and they put you in a position where you have to do something, and you just decide. • And most adults don’t like to admit that. What about drug testing. Is this a factor for you? • Yes. I’m just having a problem implementing it, so it’s a different thing. But yes, it’s a problem. • But then they’re sort of, once they’re through the door, if you do randoms and they fail, then you have to provide a program because you can’t terminate them because they come to work stoned. • So I think it makes it very difficult for us as employers to handle that end of it. That’s what I’m struggling with. • That goes back to what you said earlier about the inhibitors of doing business. • Right, it’s hurting us more. • So you look at our workers’ comp, our personal injury risk can 258

be -- You see it in an employer that if your employees come to work stoned, your responsibility is to rehabilitate them, not release them from employment. • That’s if they admit to having a problem. • No. They refuse to tell us the nature. • If you do a random, that’s part of the agreement is that they have to go into a program. And I think it’s like 30 days for us anyway that they have to at least enter a program within 30 days or we can terminate them. • The State of Minnesota’s extremely strict on the drug and alcohol policy, how you process that whole deal, but it is definitely not in favor of the employer, that’s all. • It’s unique to Minnesota because (company’s) got organizations throughout the U. S. and we’re – (company) had to modify our drug and alcohol policy specific to Minnesota, just for our site. Yeah. • It’s not working. Somebody said in one of the other groups too that there’s a trend now of hair follicle testing which -• We do that as well. • Because that’s even deeper. • Yeah. So all of our employees on a pre screen have to go through a hair follicle sample versus just a urinalysis and then the randoms are urinalysis. What do you think about the trend toward heavy using contract and temporary employees? • My response would be it’s not just a tool to deal with the nervousness or concern over the market. It’s also a great pre screen tool, because you bring them on board and they become an employee, now you have the issue of you have a liability from the unemployment standpoint, you have the cost of benefits, you have all of these and with a contract employee, you have a minimum of 520 hours that you get to try them out. And if you don’t like them at any time, you can release them. So as an employer your liability is greatly reduced. From a legality standpoint you have the whole protected class. There’s a whole variety of rules or requirements that are met if you make them an employee and with a contract employee, those rules reside with the staffing agency not your organization. So it mitigates your risk. Are you responsible for workers’ comp with a contract 259

employee? • You don’t have workers’ comp, you don’t have to offer them benefits, you don’t have to offer them holiday pay or vacation, anything like that. You can terminate that contract with the staffing agency at any time for any reason, so you don’t have the liability or any more risk associated with on-boarding them as an employee. So we do it because it allows -- Today we talk about the young people’s work ethic. If they don’t want to come to work, that’s not my fault and if they’re a contract employee I can just tell them you don’t have to show up tomorrow. You don’t have to show up ever again. So very different than if they’re one of your own employees and then you have to work them through your attendance policy and all the guidelines that are in place to manage your employees. So your turnover rate is lower because you had a period of time to try them out. Every day is a working interview, so you have that opportunity to interview them for a long period of time before you truly convert them. • We use them for the same exact purpose and it’s worked out very well for us. So it’s here to stay. • I think so. I mean our best referrals are word of mouth and we still send them. You know I call up the staffing agency and say “This Bill Smith will start on Tuesday at ___, so make sure that they’ve signed up and gone through things.” But I give them the name. I don’t even say “Send me ten names.” And then it’s exactly what he said. It helps us to kind of know if -- In 90 days you should be able to figure out if someone’s going to make it or not. • It’s a good indication of the longevity, so your turnover’s reduced because you have a higher confidence. • And the ones that really want it you can tell because they make the effort in the first 90 days to really be a team player and jump on board. • And if you look at your costs as an employer, you’re paying that temp staffing a percentage to have that employee there. But if you convert them, you add the benefit costs on top, it’s a push, it’s a wash. So there’s no true added cost by using a temp staffing agency and you have a lot less risk that you’re having to mitigate. Are retirements something you worry about? • Oh yeah, we’re actually working hard on that now and going through Enterprise Minnesota with Training Within Industry. We’re trying to document the knowledge that we’re going to be 260

losing in our breakdowns for different positions and different jobs, trying to get the tribal knowledge out of the older guys that none of the younger guys will have. And if they walk out the door with it, we’re not going to ever have it. So yeah, succession planning is really important to nail down. And we’ve always been a company that hires and promotes within for new positions. I mean myself, I started out on the assembly floor and worked in several departments, through quality and then training coordinator and then quality manager. And a lot of our management group has also been over in the shop floor. • It helps. • Yep. So we’re working heavily on that. • Well, it’s probably a 50 year horizon. We can do things a lot quicker through TWI now because we’re actually able to get a lot of that written down where we weren’t. Most of everything that we’ve got documented has come from customer complaints or things that we found didn’t work in-house. But when you get somebody that’s in a skilled position -- (name) for example -- if he walked out the door, there’s a whole lot of our quality management system that can go with him. And there’re other positions like that, production managers, production coordinators, safety director, a lot of good positions that people are getting up there. Most of us are within eight to ten years of retirement so it’s time to start working on it. • I agree. It scares me because most of our people have done their 30 years. And in the next ten years we’re going to see -- and I’m talking like at the operator level which, they’re extremely skilled. They know the little tweaks in everything and hopefully with TWI which we can retain some of those things because it will walk out the door and then I don’t know what to do. But it’s a concern. • Not as much an issue in our industry. We’ve had a lot of growth in the employee base over the last seven years, so we’ve been able to strengthen the team and we’ve done the Training Within Industry with Enterprise Minnesota as well so a lot of our processes are documented. It’s not as much of a concern in our organization. Talk about what factors you have to consider when retaining and attracting employees? • I think younger people look for more flexibility. I do see that as one of the things, that overall -• Doesn’t it come down to the dollar -- salary/wage? • I think it does but I’m not so sure because I can offer extras for 261

all these men and still they don’t, I’m missing a little factor there. I’m not sure what’s the most important thing to them. I think as the employer, the Affordable Care Act is a really big struggle right now, but if you’re asking how to get employees, I’m not sure what the best way is. • I think you know yeah, depending on the question. I think somewhere between salary and wages and the benefit package. • Right. And for us it all comes as a whole I think. • Yeah, because it’s the entire cost of compensation so I think you have to take salary and wage and your benefit package altogether. • The flexible work schedules, there’s a benefit there. I think that if you look at flexible work schedules and benefit packages, it’s really [00:36:12 inaudible]. So for example, by and large this year we changed it so everybody who walks in the door gets four weeks of vacation. They did that because they felt they could attract and retain employees. Do I think that that was the best strategy? I don’t know. Only time will tell but there’s a huge cost associated with that. So you can have a very flexible work force because you’ve got four weeks of vacation coming in. But again, that’s a benefit package, so there’s a lot of crossover in your list is how you should look at it. • Companies I work with right now, it’s ObamaCare. That is #1 on their list. And then #2 would be on the larger employer is what in the future is going to motivate our employees? And they’re not thinking it’s money or benefits. It’s something else. • That’s what I’m saying. I don’t -- I can’t figure out what it is. I don’t know. When I figure it out, I’ll call you. • Or write an article for us. • Whoever gets the answer first, you’ve got to share. Another heartburn issue that is or isn’t a factor is increased competition from foreign sources. Is that something that affects you here? There’s a lot of talk about re-shoring, about China and India becoming more expensive, their quality is down, the transportation costs are huge, so people are wanting to bring things closer to the United States, maybe to Mexico or the U. S. Do you see that? Is it a factor at all? • I mean it’s already hurt us but I think we’ve, since then -- You know a few years ago we acquired (company) and that was our main USA brand, so we’ve kind of restructured and we actually added another division just so we could beat that and we believe that we can. It’s a factor, absolutely because China can make a drill bit for two cents where it costs us ten. And that doesn’t seem like 262

a big deal but it adds up. So we’ve had to restructure and put some investment just to survive against that; but I think we’ll win. • #1 we’re diversifying. • I think it stabilizes the company and then potential for growth is there versus just being flat. How about supply chain relationships? Improving? • Oh yeah, constantly. For us it’s trying to maintain or get rid of single source supplies and trying to have more than one supply to that product. I mean our copper tubing for our tubes, for instance, if one goes down, you’re pretty much shutting the doors because that’s our bread and butter. Other things we’re having at times, issues, at times are fasteners, finding the quality we’re looking for and you know the “Made in USA.” It’s getting tough now with nuts, bolts, washers -- simple things -- trying to find somebody in the U.S. that produces those, and quality. Yeah, we’re actually trying to go with fasteners that look good on the product and we don’t have to repaint everything. You know we used to build everything with old black mono-sealed fasteners which you had to prime paint. Now we’re trying to go with zinc or cad fasteners that we don’t have to paint; we can just put it on a product and they look good and won’t have to worry about rust. And trying to find “Made in the good old US of A” is getting really tough. Most of the washers, lock washers, nuts are made in China now so it’s tough to find -- or Canada. We’re suffering sometimes with North American made stuff. And our customers demand the same quality. And for us, we’re the highest priced heat exchangers on the market, but once they buy one they don’t have to buy it again. So we take pride in that. • For us with the economy that’s stabilized a little bit, we’ve seen the supply chain improve versus where it was two or three years ago. We don’t see as much of a supply chain issue as we had just two years back. • I think it’s the same, so I am not going to say anything. • We have issues. • It depends. • Sporadic. • Right. • A good example, I think you talk about the hard-to-get pieces that you need, it’s a ripple you have to pass. Well those pieces were probably pretty low on the radar screen of your supplier and they can use their machine time to manufacture something else with a greater margin. 263

• We’ve got a steel supplier that we’re having some issues with. Let’s put it that way. We’ve done our due diligence as far as our homework, checking our house first to see if there’s anything in the process where we might be falling short. It’s like this with that supplier. The problem is there aren’t many suppliers in the States that will provide you with what you need. And people want domestic, we’re going to get you domestic, but it’s becoming -How about government policies and regulations? • Let’s look at the last legislative session. Let’s look at 2013 and the fact that they came out and they imposed -- You’ve got the Business to Business Tax as just one example. And now this year we come into the session with a $1.2 billion surplus and they’re going to give a portion of that back to the middle class or whatever. And they all feel good about it now they’re getting their backs patted and all of that. But at the end of the day, why did they increase -- And the taxes they imposed last year are on all of our businesses. So they went in and raised taxes on our businesses only to come back and have a surplus. It’s like how do they expect businesses to try to grow and thrive in Minnesota when they do things like this and then try to feel good about it the next day? I don’t know; it just doesn’t seem to make a whole lot of sense to me. And doing business in Minnesota seems to be more difficult. Now I think we’re fortunate on the Iron Range from the standpoint of being able to get assistance for business growth. If we were outside the Iron Range, there is great access and they’re very cooperative when it comes to being able to lend or you know provide grants or funding to corporations. If we weren’t on the Iron Range and you were trying to do something in your business, I think the most you can get is about $2 million from the State of Minnesota whether it’s through abatement or other programs. And so we’re fortunate to be up here from the standpoint that we have this resource group. But then you look at what the legislation is doing and some of these taxes and all that. I don’t know. Has anybody heard of HF2395 which is a new tax on gas? It’s a gross receipts tax which could potentially add 14.2 cents per gallon. So the current tax on fuel is 28 and a half cents. The gross receipts tax that’s being proposed to the legislature right now would add another 14.2 cents, so the new total of the gas tax -- fuel tax, not just on gasoline, it’s on fuel as well -- would be 42.7 cents and make it the sixth highest in the nation. Now you could say, well, how does that impact all of us? It would cost us more to commute. You know that the fuel surcharges that we’re going to pay to our 264

carriers, our shipping expenses are going to go up. Has anybody heard of that tax, it looks like it’s going to take place, what I’m reading, on October 1st of 2014. So has anybody even heard about this? • It’s already passed. • It’s going through legislation right now. So it’s HF2395 and I need to go do more research on that, but it’s a gross receipts tax that adds 14.2 cents to the cost of fuel. So I don’t know. Like I said I’m just getting to the early stages of this. So our employees are going to be frustrated because it’s going to cost them more to commute to work. You know on average you may have to drive a ways to get to work. So gas is already high. Our fuel surcharges, the cost of heating -- everything will go up. What do you do about that? • Well you have to sit back and look at your margin and say your customer is looking for the best price, so what are you able to do? You have to figure out do I lower the profitability? Can I afford to eat it? Do you try to pass some of it along? If we pass it along you know it’s just a trickle down effect. If you pass along a price increase to your end customer, they’ve got to make that up as well. • Do you have any success contacting your legislators to talk about it, to get them to listen? • That’d just be like -• You could start laughing now. • I could open the window and yell and have better luck. • Well that’s too bad. • That must have fallen under the radar. I’ve never heard of that. • No, I’m going to look that up. • This is just what I’m hearing. This is something that I’ve seen in the last just couple days. • But are they offering any specifics, that this is going toward specifically road improvements? • Is it going into the general fund? Where is this going? • And then my understanding of what I’ve heard so far, it’s not dedicated to roads or bridges. So I don’t -- and again I haven’t done -- so that’s why I’m asking. I didn’t know if anybody here -• Up their retirement? • I don’t know. I just -- I have not Googled HF2395. I have a colleague that works in the fuel industry that has made some recent posts on Facebook regarding the sanity of this whole situation. So it’s just something I thought maybe some of you had heard about, especially with some focus groups. Again it’s HF2395 and 265

I’m planning to spend some more time on that because we have to know this is coming. Because it will impact our cost. As you look into your crystal balls, will things be better or worse for manufacturers on the Range in five years? • That’s a hard one to answer because in our business we have so many ups and downs in what we manufacture that every two to three years we see the same thing we’re seeing now. • Not always. With our customer base it just depends on how well they’re doing. And right now, we do a lot like I said for oil and gas industry. We’ve built heat exchangers for the fracking industry and we all know what’s happening with that. I mean people don’t like it; they’re trying to get rid of it. We do off-shore oil rigs. We’re really big in Oklahoma and Texas and off-shore, but nobody’s buying anything right now, nobody’s updating servicing any of their rigs. So we’re not getting orders and with what’s going on in North Dakota, you know our sales guy’s over there trying to drum up some business too. Mining around the world, coal doing what it’s doing and every other thing their mining out there is not helping us. Again, I go back to you know maybe a lot of people we’ve sold to over the last three years or so have been stockpiling radiators, but we don’t know for sure, but they’re not restocking the orders and so on. Everybody’s afraid to bolt in on something. • Well I’m a total optimist so I’m going to say yes, but I really don’t know. I’d like to believe it. You know we’re not really doing a lot of business with mines, so I don’t see that; but I think the economy as a whole, if we can get these other things to open up and bring more people back, all of a sudden there’s more building going on and people need drill bits to build and so. But overall I think the economy as a whole is where we’re affected. Like you could see the mines tank up here and we hold steady; so it’s a hard indicator of what -- I mean, I don’t wish to argue but I just think we’re all the same. Yes. • I have one party that’s working in the mine but you have other parties in the family that are looking for jobs elsewhere. Also a lot of the younger people that would have some talents or trades, they’re going to follow the big industry too in going. I think that hurts us, too, a lot. Where some of these other mines, if they did get up and going, it’s going to hurt to start, but it also brings more population to pick from. • I think it depends which way they go with some of these big you know plants that they have. That’s our steel, PolyMet. I think that’s really going to turn some tables. 266

â&#x20AC;˘ Like the rest, our business isnâ&#x20AC;&#x2122;t impacted by the mining as well, but it does impact the services in other regions, so I would expect that our business, again, will continue to do okay irrelevant to what happens in mining the region but it will have an impact on a lot of different things in the environment that we work and live in.

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FOCUS GROUPS

Fergus Falls 9:30 a.m., March 24

Minnesota State Community and Technical College and West Central Initiative

I am going to start with a question that our pollster generally starts with and it’s typical poll lingo but they call it the right track/ wrong track question. From your perspective, is manufacturing and automation’s economy on the right track? Is it going in the right direction or do you think it’s going in the wrong direction? How’s your business? • It feels like it’s starting to get going in the right direction. We’re in the construction industry so it is moving in the right direction. And I will tell you, hopefully it continues that way because I’m not real thrilled right now with what the government is doing. It feels like they’re more putting a damper on it versus allowing it to actually grow and that’s from everything from healthcare to the wage, and everything else that they want to go out and control instead of allowing the market itself to get healthy and literally start coming back. We’ll get to some of those issues. But just generally speaking, how about you? • It feels like it’s going in the right direction. We’ve seen and read increases in sales and generally going in the right direction. It feels like it’s turned from definitely a negative direction. For us directly, we’re seeing an upturn in sales.

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What do you attribute that to? • I don’t know for sure. That’s a bigger question. I think a part of it is the global market myself. • We sell to the processing industry. I would say things have been fairly strong for us. We’re seeing a lot of projects taking off. We’re seeing the big projects as far as process industries in the South America, in the China, some of those regions. We’re seeing a huge uptick as far as process industry creating new lines, new areas being developed. There are a huge number of opportunities just waiting to go; we’re trying to figure out when are they going to bust open. • I don’t know if your question is more towards the market or right track/wrong track for manufacturers and employees, but it’s always a struggle to get employees. We do a lot of aluminum welding and we’re now getting into more CNC machines, so we’re getting more machines in and we’re starting to feel it. We will be working with technical colleges and other areas to help us find employees. Well, we’re jumping ahead to the workforce question, but I’m certainly hearing a theme. Are you having trouble finding workers? • Yes. And keeping them. Finding production and passing drug tests, passing randoms. Showing up for work. So how do you get around that? • Your costs go up. You have to carry more people. You know and we’re not seasonal anymore like we used to be either, so we have yearround jobs, careers for people. We promote from within. So we do a lot of work that way, but it’s probably beating a dead horse. It’s just a struggle to find new people. How many employees are you looking for at the moment? • I’d say going into the season we’re in and the growth we’ve had on the production side we’d add about ten, and professionally including one we’ve already hired it’s three office or management jobs. • Pretty consistent theme. But yeah, and even once they’re there and we do the randoms, you still get others who have figured how to pass the pre-employment test but then when a random comes up and you end up losing them at that point, too. • And how much overtime do you get for this to run? • We run a ton of overtime, which of course then draws extra turnover and stuff as well, too. But last year we worked probably 60- to 65-hour workweeks just to try to get the product out. And we ended up having to extend lead times and turn away orders. We actually told our sales staff to stop selling to new customers. We limited our growth last year 269

because of our workforce. What is the prevailing wage may I ask? • You know it’s typically around -- for us -- it’s probably at $10 or $10.50 where we start for unskilled labor. And are you looking for employees across the board or at that entry level? • We work mostly on skill labels. We’re rarely looking at the 40 we had last year and then on account of the other three. Would you pay more if you add skilled workers? • I don’t have a huge need for more skilled workers, so for us it probably wouldn’t be a tremendous amount. We’re literally looking for people who can show up to work and be trained and that stuff internally, and then once they’re in of course, then they get up to that $12, $13, $14 an hour. But for us the training -- I don’t know if it’d be something that a school could train them for what we’re looking for. It’s more industryspecific I guess or manufacturing-specific. • My answer to that question would be yes. I mean very definite yes. A lot of our workers will start at $12 an hour, skilled or unskilled. So we feel like we need to offer them a little better wage in order to get someone qualified in there. Getting someone qualified is really the tough nut to crack. We’re looking for machinists, CNC, either just CNC users and/or programmers and anybody with electronics background of any sort. And engineers, good luck with that. We have a fair number of engineers at our business and you just have to do a lot of selling. I mean we spend just a lot of time and effort out there selling the town, selling the area, selling our business. It’s tough for young people to want to come to Fergus Falls to get their initial experience. They really feel like they need to go to that big place, get that on their resume. That’s a big one; they don’t feel like putting Fergus Falls on their resume is really what they need. • And we just hired an engineer, honestly, about a month or two ago and we use a recruiting firm through the private equity company that owns us. And we literally look -- the biggest thing, you’ve got to find an engineering degree and everything else, but look for people that were originally from this area that had already been to the cities and already been to other areas and now they’re starting to have a family. And this young man has a brand new baby and wants to be a bit closer to home. And that’s where we found the best luck recruiting for new people is ones that have grown up in this area and want to come back to the Lakes Country. 270

• And that’s exactly true. Yeah. • You’ve got to almost look for people that have been here before. Are there other elements of this particular area of Minnesota that attract people in addition to that? • That’s a big part of it. You want -- I mean in our territory if they’re a hunter or a fisherman, they fit in well. If they’re not, it’s a tough area to live in. • And keeping them is the key. I mean we did have an engineer, a young man that came because of he wanted the experience. But he was from India. We brought him in but he just never felt comfortable in Fergus Falls. • Just the demand in staffing has been tremendous in the last few years. And obviously it’s one of the biggest challenges to growth. All of a sudden you need people and they’re not there. It puts things to a screeching halt. You’re giving up business because you don’t have the bodies to do the work. You have customers now that know that they can go somewhere else and get it if they’re not getting it on time. And after the recession, you saw production schedules go from much further out to a much shorter lead time. When your clients want it, they want it now. If they can’t get it now, they’re willing to go somewhere else. So it’s business lost, in that respect. Are you seeing the need for temp workers, too? • We see a little bit of both. You have some businesses that are seasonal, but the bulk of the people that we place are looking to get into long-term positions and the openings are what we call preview placement. The goal is to hire them. We’re seeing more companies outsource, too, because of lack of reliability of people. You want to test them out; you want to make sure they’re going to work before you add them to your benefits because of the Affordable Care Act and how expensive that is. It’s an interesting time for that. • I feel that it’s kind of a mind shift. It’s kind of like selling your house, but when there’re more buyers than sellers, you have to do things differently. In this case the employees have the upper hand. So if you’re trying to do the same old things to attract people, you’re probably not going to be very successful. So it’s about what else you’re going to give people. And young people today are going to act differently. If you’ve got 50-ish or 40-ish supervisors who are trying to supervise people that are in their 20s the same way they supervised people 20 years ago, you’re not going to be very successful. So it’s a complete mind shift and a cultural shift within your organizations. And I work with a lot of different companies throughout the area, and those that are tackling 271

those with the most vigor and effort and doing things are probably those that are least looking for additional help. • Including drug tests? • Yeah, but I mean I can’t say that you understand. But generally speaking, the good people go -- I mean word of mouth is what’s out there. Everybody talks, so you know good companies rise to the top and they know what those are. I’m not saying like anybody in here is or isn’t. That’s not my point. I’m just saying in general those are the issues. Are you worried about what retirements might do to your workforce needs? • Our workforce is fairly young. We have not yet had the problem with retirements. • You’re on the other end of it. • Yeah. • I think if we were to look at (name of company), they are going to be facing a lot of retirements over the next ten years. They’re going to lose a significant part of their workforce to retirements. They’re going to be losing a lot of people so it’s going to be a shift. • I’m seeing that people are looking at the healthcare act and saying “Why not retire?” A lot of people work for the benefits and we’re going to see those going away. We have a lot of temps who would help out. We had some farmers that worked in the winter; we had college people who worked in the summer. I think we’re tending to move away from that and really needing to look for full-time people who are always going to be there and utilize those hours. So all this being said, how is the future looking for profitability for manufacturers in the area? • I think a larger percentage of people are going to be retiring. The challenge will be how successfully we pass on the knowledge of someone who’s been there for 35 years with the same company to a person who’s coming in fresh out of school or from another business. • It takes time and effort and expense to get people up to speed along with companies aren’t finding people with experience. You take a welder or a CNC machinist for example. You’re not going to go out and find a person with ten or fifteen years of experience with that. You essentially have to take a more entry-level person and we’re seeing companies kind of home- grow that person within their company, and that certainly takes expense and time and effort. • I would say profitability is going to be pinched from all angles. • We’re kind of unique in that -- or not unique -- but we’re a small enough company that we don’t fall into the category, but from Day 1 272

we’ve offered health insurance -- up till now. The coverage itself went down to a point where it was pretty much gutted. And so we went out and we’re looking for comparable to what we had and couldn’t get it. I mean it just wasn’t there. So for us, we just ended up opting to drop the coverage. So as we grow, if we hit that point where we have to, that’s when it’s going to be another issue again although we’ll have to look at it. But also then if you’re a small company trying to grow but can’t offer the health insurance, now you’re losing the opportunity to offer benefits. • We didn’t lose employees. There’s a morale thing that goes on and it’s come back around but we didn’t lose any. But we also shifted to more part-time help because there it’s not offered in the first place. • You lose efficiency though. • You really do and the interim between college and the farmers, you run into this gap where there’s nobody. • Yeah because the farmers are going to start leaving now. You don’t see the college student coming back. And then it takes like that month for the college student to come back. They’re there two months, boom, they’re gone. You still have harvest, and then they have sugar beets. • I mean that’s been a real issue to try to work through. • Is the key difference between your age and theirs an obvious issue? You should be telling them who you used to hire. • Perhaps we have some of theirs. • That’s nothing new with healthcare either. For the last ten or twelve years it’s been double-digit increases in employee premiums so we did the same thing. We dropped the coverage to try to keep the premiums reasonable and now it’s just a catastrophic policy. We run an HSA so they’ve got some money in there that they can contribute to for appointments and what not, but for the most part it’s for that big event. Let’s talk about some heartburn issues I’m going to read the question and then you just rank these. What gives you greatest heartburn? Is it increased competition from foreign sources, managing your supply chain relationships, government policies and regulations -- we’ve heard some of that -- the cost of healthcare, cost of salaries and benefits, or the ability to attract and retain qualified workers? • I think so, since the conversation in the last 40 minutes has been pretty much about finding and retaining qualified workers. • Yeah. I would have to agree. • And I’m in a unique situation right now. For the first time in about three years we’re fully staffed. • Congratulations. • Everybody knows where to go for their employees. 273

• Have you checked the mail yet this morning? • Sounds like you have a sales issue. • (A local technical school instructor) makes a point to let his students know that anybody can teach them how to run a machine; he’s there to teach them how to be a good employee and he does a good job of it. And he holds them accountable and if they’re late, they have to call their partner. He doesn’t care. “You know, this is your education if you’re going to be late, but you’re leaving this guy hanging, so you need to --” So he does a good job of that. • And that’s not a class to teach you how to be an employee. And that’s a class to teach you how to be an employee, it’s a class to teach you how to run machines, so maybe that curriculum is taught to the current instructors. • It’s funny you’ve been talking about the skills gap for a while, but I saw something on LinkedIn here just the other day and I don’t remember who the quote was from but it was skills are teachable, character is not and we’re running into those issues now. • A lot of the work force or lack of workforce. • The four percent unemployment. I mean to be honest about that four percent, I mean we’re probably not at eight percent or nine percent unemployment, there’s a different level of person that’s out there at four percent, with all due respect. There’s always been, that bottom’s always churned forever. That’s why you get back to how it’s just an employees’ market. So the good employees have always got options. So are you seeing programs at the high school level? Are they still teaching classes that are going to feed your future workforce? • That’s a good question. I mean the students that are in the vocational section of the high school here in Fergus Falls, where do those students -- Are you hiring those students? • There’s not very many of them, but yeah. I mean we want kids to be interested in the trades, but electives are tough in the school at all because of grad standards pretty much. They’re tough to get kids into electives and there’re a lot of electives. So it’s tough to get the kids -• They’re mostly grad standards. There are requirements for graduation. • Graduation requirements have gotten increasingly higher and higher and higher and higher, which ultimately pushes out the elective courses. • And the high schools have lost their funding for vocational education gradually over the years, so they’ve given up most of their vocational classes. • I’ve got a senior in high school. He’s in the Welding Three, the third year welding class. There’re seven of them in that class. That’s barely 274

enough to have the doors open. • I’m surprised they could even hold it. • Those programs are traditionally the most expensive to run as well, and some of it’s hard for schools to allocate money there when you have low attendance. • I do think it’s a community shift though because we do have high school partners who are making this happen, who’ve met the grad standards and have a really robust and career technical education program. It starts early at sixth and seventh grade and you identify that that might be your path. I just heard this morning that Alexandria High School is going to an academy focus for the high school. There’s a lot of math and there are all kinds of things that would be taught in a career technical field that could still allow a school to meet the grad standards and not get rid of the classes. But it’s an entire community shift to make career and technical education a priority and to have parents understand the value. • My former boss used to say that the parents want their kids to be doctors and lawyers; the kids all want to be athletes and rock stars; and some place in between there is there is work. • That’s true. • I agree. I know I think there’s a big shift going on out there, but I mean it really has to start with the manufacturers and the business community working with these high schools. I know there’s one high school in the area where 70 percent of the kids who graduate from the high school will have work experience as part of their high school. And I’m not saying they’re perfect and I’m not saying everybody’s doing something different, but I think there’s things that are going on out there. You know, if I can just switch subjects a little bit here, for the manufacturers in the room, how many of you have a formal, strategic planning process? And how does that work? Is that an annual? Is that five years? Is it two years? Is it quarterly? • We do an annual strategic plan that of course involves budget and everything else, too, but it’s a three-year strategic plan that changes every year. So basically every year we get back together, look at the strategy, the mission, values, all of it combined and then basically look at where we’re going for the next three years. But it’s a yearly process. And is that process driven by something in particular? • Private equity. And I had come from a larger business where we did that annually as a process anyway, so it’s driven by the calendar. Every quarter we’ve got certain tasks that we need to complete to make sure that that continues on cycle. We want to make sure we’re attracting the 275

right customers, growing the right customers as well as going out and making sure our business fits for that target customer as well. • We also do our yearly strategic planning, but we also do maintain a five-year plan. As a management group we meet yearly and determine, based on, of course, directives from corporate. Also we take that into consideration. But really, as far as our company is concerned, we maintain our own company’s strategic planning. That works in concert with our corporate office, but we set out our goals and we push it out to the departments. The departments make their own goals based on the planning process, what came out of the planning process, and then quarterly we let all the employees know where we are versus what we set out to do. • We’re also owned by private equity. So we have quarterly board meetings. So it’s cumulatively updated but once a year is the big push if you will for the next 12-month plans, how are you going to get there, and the goals for the earnings and the growth that you have to have, and EBITDA, and what you’re going to do to achieve it, acquisition, organic growth, whatever it is. Talk about the value of that. • I think it’s huge in the direction of the company and it helps with turnover, it helps with a lot of things that when people understand there’s more of a purpose than coming in and punching the clock and just doing whatever they do as a manufacturer. When they understand what the vision is, where we’re going, what the opportunity will be in the future, I mean we’ve seen reduction in turnover by making sure it gets shared all the way down to the shop floor. The team understands what’s critical and what -- It’s as important to know what to say no to as it is to say yes to, and that’s where we’re seeing the biggest benefit is when people have to make that decision about should I do this to save a little money or should I spend a little money and do this. And they understand very clearly what the strategy is and what the company’s core values are. They can make that decision without having to run it up the flagpole so they become quicker reacting. You become better for your customer and again the employee feels more a part of something than just punching the clock and working and going home sort of thing. • It allowed us to do a lot more communicating to the floor. There are monitors in the shop with sales orders on it or work production orders on it. We’ve got the value stream information because we’re dealing with aluminum, steel, plastic -- you know plastics plant, wood plant -- so it’s kind of your four commodities that are broken down into four value streams. • I agree. I think it gives the feeling of employee ownership. They’re 276

part of the process, they’re part of the communication, they’re totally in the know as far as what we’re setting out to do and they’re part of setting their own goals and being part of it. Yeah. It’s really a good feeling for the employees as far as ownership. • Well, we’re a little different than that in that my wife and I are the management team so our planning is ongoing. We’ve got an annual plan but it’s kind of we-can-adjust-it as needed. But then we do just like you’re saying, right down on the floor. We’ve only got four fulltime employees and the rest are part time, but they see our production schedule and they’re actually allowed to adjust it to get the product out the door, but they also see what the impact of making those adjustments. And we try, again because we’re small. We know that as we grow we have to grow out of that, but right now we try to -- The feedback is really easy to do so we try to give them as much feedback as we can so they see the direct impact. And a lot of times I’m on the floor with them, so we’d be able to talk it through there and we’ve adjusted plans sometimes weekly. Like, “Wait a minute. That’s not the direction we want to go. Let’s just make the adjustment.” But we still do have a oneyear and a three-year plan that are there. But it really, for us, becomes more of a tighter focused plan with the small plant. I do see where we’ll grow out of that as we grow into more employees so you’re trying to handle more information. It’s true. We have one company in Anoka that surprised us all when he said they have a 20-year strategic plan. And we asked how? Why? And he said ten years ago they were very concerned about employees retiring and they wanted to have a plan to grow into that. So it’s never too early to plan. How about a formal marketing plan? • Well, it would be based on, I guess, us. Kind of part of the strategic planning process. Really it’s almost like a marketing plan, the first step, because depending on what marketing is going is going to tell you, that determines what the rest of the company is going to do, really. So that’s probably one of the first steps, the marketing plan, to put in place and then from there we grow into it. You know you look at your percentage of -- what percentage of growth do you want and where do you want that growth to happen or where can it happen based on the research on what’s out there -- and where a partner tells you to go. • Ours is kind of two pronged because we always say we have two customers. We have the dealer network that we exchange goods for money with, the docks and lifts that are also through a dealer network, but we also have to participate heavily in the retail market through our dealers and advertising and promotions and coops and different things. So there’s a pretty defined strategy in our marketing department. 277

Are you seeing a resurgence in that issue that they call re-shoring or home sourcing? Are you seeing business come back from overseas? Did it ever go away? • We used to purchase more things from China and every one of them, sooner or later, you got burned by it; so we totally purchase at home. Because of …? • Missed lead times, quality problems. They will very often substitute and not tell you and you have to have everything. You know you can’t use this, you can’t use that, can’t use that; and if something is on that can’t use list we’ll still throw it in there and ship it over to you and you have big problems. It’s been a few years, but it was always trouble. So where do you get your parts now? • It’s all domestic. What we’re seeing international now is the lack of rail cars and getting the product. If we’re bringing something over from China via ship, it could sit for weeks because the rail car system is totally full, mostly from western North Dakota. So currently we’ve got a shipment. Well #1, if the ship breaks down, you’re part of paying for that ship repair if it breaks down in the middle of the ocean -- we just found that out. And #2, once it finally got to the U. S. it sat in California forever because there are just not enough rail cars to put it on to get it going. So what does future growth look like? What do you say about government regulations at this point? You mentioned at the beginning a little bit but what are the issues that you’re seeing within that? • It makes a huge impact, at least for us, depending on what industry is hit with what type of regulations. Just as an example, when they had the moratorium on oil building out in the ocean, out in the Gulf. Remember when Obama put that moratorium on? Well one of our industries is ship building and that hit us really hard. It was a large percentage of our industry at that time. We’re in a lot of different industries, so usually when one is up another is down. But then what they did is they actually released the moratorium but didn’t allow any new licensing so it really didn’t matter. So you know when the government is playing and making up these different rules it does affect you. • And in ways, like in the construction industry, from the front end too there are a lot of regulations that are on the forefront or they’re looking at it. They want to put sprinklers in every residential home which, of course, is going to add five to $10,000 to the cost of every new home 278

construction that goes up, which of course -- we build windows for new home construction -- so they want – There are a lot of problems that they seem to want to solve that don’t seem like they’re big enough problems that they should be worried about that type thing. So I know now they’ve scaled it back a little to say well if it’s over a 2400 square foot home it has to have sprinklers inside of it. If it’s under that they don’t need them. And so they’re continually looking for ways, I guess, to add more in and every time they add to those regulations it adds time to the permitting process and it adds cost to the building and then a lot of people make the decision to say it’s not worth it anymore, which then of course takes the demand away from our industry on that piece. And then like I talked about earlier, there’s a whole lot of stuff going on, the other piece that is adding a lot of cost to the business. So as demand goes down and as cost comes up, again being part of a private equity firm or as an individual business owner, there are many places people can invest their dollars and if there’s not a return on those dollars, those businesses won’t be around. And I think that’s the piece that the government forgets about. They think that all that’s going to happen is that business owners are just going to take less profit. Well that’s not what happens. The business owners decide to take their money and put it somewhere else where they can still make their profit. They’ve got a choice. What happens? The individual employees get hurt because now they don’t even have a job that they had before. And somehow I’d love to be able to give an Economics 101 book to most of our politicians to understand that things aren’t free. There is a cost and people have choices and they will make choices and the ones who don’t have the choices are the employees that need a job. One final question: Look ahead five years and put yourself in that fifth year. When you’re looking back, will these have been good years, tough years, bad years? What are your thoughts around prognostication here? • I think the next few years will be very good years. I think. Then you’re going to see, when we’re looking back in five years, at that point I think there’s going to be a storm. I think we’re going to see the economy come to a head and I think we’re going to have another economy bump in five years. • Yep. I do. I think we can only go so long in this and it’s going to adjust again. Maybe not what we saw back a few years ago, but I really think we’re going to see. • I have to tell you that in higher ed these are very difficult times, very difficult times. Our tuition has been frozen, looks like it may be frozen for even more years and probably 50-60 percent of our revenue 279

comes from tuition. At the same time our labor contracts keep going up and so you will find and I’m sure you’ll be reading it in the paper soon, we have to cut back, cut back, cut back on programs, cut back on employees. And there are a lot of presidents that are retiring right now because they don’t want to make the difficult decisions that we have to make. So for us, I don’t see it getting better for a long time. • I think a lot will depend on what happens in the next administration, too, you know because here in half an hour or so it could change. I think right now we’re still reeling from some of the policy changes that happened when we were at our last lull such as unemployment and that’s directly affecting where things are right now with the shortage of skilled employees. And you’ve got people out there that are taking advantage of everything that’s out there for them making roughly the equivalent of $14 an hour in Minnesota. Yeah, I mean I’m guilty of looking at groups and saying, boy, how could they be so lazy? When really, mathematically speaking, the system makes it viable for them. And also worse still, manufacturers and I think a lot of us are still impacted from where we were before because of the policies that were set forth and it’s not just a competition for employees from your brick and mortar neighbor, it’s the system as well. So I’m hoping we see some changes with that that will incent people to get back to work. • I’ve heard that from a number of employers too that they’re not just competing against other employers. They’re competing against people staying home. • I have literally heard that from one person. He’s been out of work for a year and he was a welder and he was going to get offered a ridiculous $13 or $14 an hour to start at a place. He said, “No, I won’t do it for below $15.” • How is he living? • He said it’s better for me to stay at home. • That doesn’t last forever. • Yeah they’re thinking of extending it. • That’s another 59 weeks or whatever it is but yeah. That’s another couple of years. • Yeah, there’s no reason for them to go to work. That’s bad. • That’s why the four percent unemployment rate isn’t a real number either. There’s a lot more than that that aren’t counted that are using the unemployment. Yeah. • I know my dad farms and he had a guy that said, “I’ll work for you but you’ve got to give me cash because -- of the unemployment.” Dad said, “Well, I’m not going to do that and you know I can pay $14 an hour.”

280

SELECTED CROSS TABULATIONS

QUESTION 1: Generally speaking, in regard to being a competitive business location, would you say that things in Minnesota are going in the right direction, or have they pretty seriously gotten off on the wrong track? REGION

REVENUES

EMPLOYEES

REST LESS 10 TWIN OF THAN $1M OR CITIES STATE $1M $5M $5M+ LESS

YEARS IN OPERATION

PRIMARY BUSINESS

1150

51+

PREC- MET- PRO- 1-15 OEM ISION AL CESS YRS

16+ YRS

BASE=TOTAL SAMPLE RIGHT DIRECTION WRONG TRACK

227 42% 50%

173 39% 52%

153 46% 46%

106 37% 56%

116 38% 54%

187 43% 49%

132 39% 52%

76 40% 52%

119 45% 46%

99 38% 56%

69 42% 51%

50 46% 44%

74 41% 49%

325 41% 51%

DON'T KNOW/UNSURE REFUSED

7% 1%

7% 2%

6% 1%

6% 2%

7% 1%

6% 2%

7% 1%

8% 2%

5% 1%

6% 1%

10% -

9% 1%

6% 2%

QUESTION 2: Thinking about the upcoming year... in 2014, do you anticipate… REGION

REVENUES

EMPLOYEES

REST LESS 10 TWIN OF THAN $1M OR CITIES STATE $1M $5M $5M+ LESS

YEARS IN OPERATION

PRIMARY BUSINESS

1150

51+

PREC- MET- PRO- 1-15 OEM ISION AL CESS YRS

16+ YRS

BASE=TOTAL SAMPLE ECONOMIC EXPANSION A FLAT ECONOMY A RECESSION

227 39% 51% 7%

173 33% 58% 6%

153 33% 56% 6%

106 39% 53% 8%

116 40% 53% 6%

187 33% 55% 8%

132 41% 53% 5%

76 39% 54% 5%

119 38% 51% 6%

99 39% 54% 6%

69 39% 54% 3%

50 33% 51% 16%

74 38% 52% 10%

325 37% 55% 6%

DON'T KNOW/UNSURE

QUESTION 3: From a financial perspective, how do you feel right now about the future for your company... REGION

REVENUES

EMPLOYEES

REST LESS 10 TWIN OF THAN $1M OR CITIES STATE $1M $5M $5M+ LESS

YEARS IN OPERATION

PRIMARY BUSINESS

1150

51+

PREC- MET- PRO- 1-15 OEM ISION AL CESS YRS

16+ YRS

BASE=TOTAL SAMPLE TOTAL CONFIDENT TOTAL NOT CONFIDENT

227 83% 16%

173 86% 13%

153 79% 19%

106 79% 21%

116 96% 4%

187 81% 19%

132 83% 16%

76 96% 4%

119 86% 14%

99 84% 14%

69 81% 17%

50 88% 12%

74 81% 16%

325 85% 15%

VERY CONFIDENT SOMEWHAT CONFIDENT NOT VERY CONFIDENT NOT AT ALL CONFIDENT

37% 46% 15% 2%

34% 52% 11% 2%

27% 52% 17% 2%

34% 45% 17% 4%

46% 50% 4% -

29% 52% 17% 2%

39% 45% 14% 2%

49% 47% 4% -

35% 51% 13% 2%

37% 47% 10% 4%

38% 43% 17% -

35% 53% 10% 2%

28% 53% 15% 1%

38% 47% 13% 2%

DON'T KNOW/UNSURE

281

QUESTION 4: As you look to 2014, do you project your company’s gross revenues to increase or decrease compared to 2013, or will they probably stay the same? REGION

REVENUES

EMPLOYEES

REST LESS 10 TWIN OF THAN $1M OR CITIES STATE $1M $5M $5M+ LESS

YEARS IN OPERATION

PRIMARY BUSINESS

1150

51+

PREC- MET- PRO- 1-15 OEM ISION AL CESS YRS

16+ YRS

BASE=TOTAL SAMPLE TOTAL INCREASE TOTAL DECREASE

227 50% 8%

173 37% 5%

153 37% 5%

106 47% 13%

116 55% 3%

187 38% 6%

132 45% 8%

76 62% 3%

119 50% 6%

99 43% 10%

69 45% 3%

50 39% 2%

74 47% 10%

325 44% 6%

INCREASE BY MORE THAN 10% INCREASE BY LESS THAN 10% DECREASE BY LESS THAN 10% DECREASE BY MORE THAN 10%

27% 23% 2% 6%

18% 19% 2% 3%

22% 15% 1% 4%

27% 20% 4% 10%

22% 33% 2% 1%

24% 14% 1% 5%

23% 23% 4% 5%

24% 38% 1% 1%

28% 23% 1% 5%

24% 19% 4% 6%

17% 28% 3%

19% 20% 2%

24% 23% 3% 7%

23% 21% 2% 4%

STAY THE SAME

40%

55%

56%

38%

40%

54%

45%

32%

43%

45%

52%

53%

43%

47%

1% -

2% 1%

1% -

1% 1%

2% -

1% 1%

2% -

3% -

1% -

4% 2%

2% 1%

TOO SOON TO SAY/DK REFUSED

QUESTION 5: And, as you look to 2014, do you project your firm’s profitability to increase or decrease compared to 2013, or will it probably stay the same? REGION

REVENUES

EMPLOYEES

REST LESS 10 TWIN OF THAN $1M OR CITIES STATE $1M $5M $5M+ LESS

YEARS IN OPERATION

PRIMARY BUSINESS

1150

51+

PREC- MET- PRO- 1-15 OEM ISION AL CESS YRS

16+ YRS

BASE=TOTAL SAMPLE TOTAL INCREASE TOTAL DECREASE

227 41% 15%

173 28% 18%

153 31% 18%

106 33% 21%

116 44% 14%

187 33% 19%

132 32% 16%

76 46% 13%

119 40% 13%

99 30% 19%

69 33% 15%

50 37% 20%

74 34% 23%

325 36% 15%

INCREASE BY MORE THAN 10% INCREASE BY LESS THAN 10% DECREASE BY LESS THAN 10% DECREASE BY MORE THAN 10%

23% 17% 9% 7%

11% 17% 12% 6%

17% 14% 10% 7%

20% 13% 9% 11%

18% 26% 12% 2%

19% 14% 9% 10%

14% 18% 11% 5%

21% 25% 12% 1%

20% 19% 7% 6%

15% 15% 12% 7%

17% 16% 7% 7%

15% 22% 14% 6%

13% 20% 15% 8%

19% 17% 9% 6%

STAY THE SAME

43%

52%

51%

46%

41%

48%

52%

37%

47%

51%

50%

43%

44%

48%

1% -

3% 1%

1% -

TOO SOON TO SAY/DK REFUSED

QUESTION 6: And, as you look to 2014, do you project your firm’s capital expenditures to increase or decrease compared to 2013, or will they probably stay the same? REGION

REVENUES

EMPLOYEES

REST LESS 10 TWIN OF THAN $1M OR CITIES STATE $1M $5M $5M+ LESS

YEARS IN OPERATION

PRIMARY BUSINESS

1150

51+

PREC- MET- PRO- 1-15 OEM ISION AL CESS YRS

16+ YRS

BASE=TOTAL SAMPLE TOTAL INCREASE TOTAL DECREASE

227 26% 18%

173 29% 20%

153 25% 17%

106 24% 19%

116 32% 20%

187 24% 17%

132 30% 21%

76 29% 17%

119 26% 18%

99 24% 16%

69 30% 20%

50 35% 20%

74 26% 20%

325 27% 18%

INCREASE BY MORE THAN 10% INCREASE BY LESS THAN 10% DECREASE BY LESS THAN 10% DECREASE BY MORE THAN 10%

16% 10% 4% 13%

19% 9% 4% 16%

16% 9% 5% 12%

16% 8% 5% 14%

19% 13% 3% 17%

17% 8% 4% 13%

18% 12% 7% 14%

17% 12% 1% 16%

14% 12% 5% 13%

15% 9% 1% 15%

20% 10% 7% 13%

21% 14% 4% 16%

16% 10% 4% 16%

18% 10% 4% 14%

STAY THE SAME

55%

50%

57%

55%

48%

59%

47%

51%

56%

58%

48%

45%

53%

1% -

1% 1%

1% -

TOO SOON TO SAY/DK REFUSED

282

QUESTION 7: Thinking ahead, what would you say are the two or three most important drivers of your firm’s future growth? (Combined Choice) REGION

REVENUES

EMPLOYEES

REST LESS 10 TWIN OF THAN $1M OR CITIES STATE $1M $5M $5M+ LESS BASE=TOTAL SAMPLE NEW CUSTOMERS NEW PRODUCTS DEVELOPING COMPANY MANAGERS AND LEADERS ENHANCING SUPPLY CHAIN RELATIONSHIPS ACHIEVING ISO CERTIFICATION OTHER DON'T KNOW/NOT SURE REFUSED

PRIMARY BUSINESS

YEARS IN OPERATION

1150

51+

PREC- MET- PRO- 1-15 OEM ISION AL CESS YRS

16+ YRS

227 77% 42%

173 75% 39%

153 80% 41%

106 76% 41%

116 70% 41%

187 80% 45%

132 72% 37%

76 72% 38%

119 76% 40%

99 72% 38%

69 79% 39%

50 68% 37%

74 78% 42%

325 75% 41%

22%

24%

12%

18%

41%

13%

28%

40%

22%

25%

16%

38%

22%

23%

20% 2%

14% 4%

18% 1%

20% 5%

18% 4%

19% 2%

18% 2%

14% 7%

20% 1%

21% 2%

20% 4%

18% 4%

16% -

18% 3%

2% 1% 1%

2% 4% -

1% 3% 1%

3% 2% -

1% 1% -

2% 2% 2%

2% 2% -

1% -

3% 2% 1%

3% 1%

6% 4% -

3% 1% -

2% 2% 1%

QUESTIONS 8-14: Now, I would like to read you a list of factors that some companies are concerned about. For each one, please rate how concerned your firm is about that particular factor using a scale from 1 to 10, where one means that your firm is NOT AT ALL CONCERNED about it and where ten means your firm is VERY CONCERNED about it. You can choose any number between one and ten depending on how strongly you feel about it. REGION

REVENUES

EMPLOYEES

REST LESS 10 TWIN OF THAN $1M OR CITIES STATE $1M $5M $5M+ LESS Summary of Concerns: % 10 BASE=TOTAL SAMPLE THE COSTS OF HEALTH CARE COVERAGE GOVERNMENT POLICIES AND REGULATIONS ECONOMIC AND GLOBAL UNCERTAINTY THE ABILITY TO ATTRACT AND RETAIN QUALIFIED WORKERS INCREASED COMPETITION FROM FOREIGN SOURCES COSTS OF EMPLOYEE SALARIES AND BENEFITS, NOT INCLUDING HEALTH INSURANCE MANAGING SUPPLY CHAIN RELATIONSHIPS

1150

51+

PRIMARY BUSINESS

YEARS IN OPERATION

PREC- MET- PRO- 1-15 OEM ISION AL CESS YRS

16+ YRS

227

173

153

106

116

187

132

119

325

32%

41%

33%

48%

28%

34%

42%

30%

34%

38%

42%

34%

36%

27%

34%

33%

18%

35%

30%

15%

32%

28%

34%

32%

33%

29%

15%

12%

11%

14%

18%

10%

14%

10%

15%

12%

16%

13%

18%

11%

283

REGION

REVENUES

EMPLOYEES

REST LESS 10 TWIN OF THAN $1M OR CITIES STATE $1M $5M $5M+ LESS Summary of Concerns: % 8-10 BASE=TOTAL SAMPLE THE COSTS OF HEALTH CARE COVERAGE GOVERNMENT POLICIES AND REGULATIONS THE ABILITY TO ATTRACT AND RETAIN QUALIFIED WORKERS ECONOMIC AND GLOBAL UNCERTAINTY COSTS OF EMPLOYEE SALARIES AND BENEFITS, NOT INCLUDING HEALTH INSURANCE INCREASED COMPETITION FROM FOREIGN SOURCES MANAGING SUPPLY CHAIN RELATIONSHIPS

51+

PREC- MET- PRO- 1-15 OEM ISION AL CESS YRS

16+ YRS

227

173

153

106

116

187

132

119

325

56%

64%

52%

66%

51%

69%

65%

53%

66%

71%

59%

60%

59%

50%

62%

52%

60%

50%

54%

58%

50%

47%

53%

66%

54%

55%

28%

43%

22%

36%

47%

24%

42%

46%

30%

37%

35%

43%

31%

35%

33%

28%

30%

32%

33%

31%

30%

33%

32%

26%

30%

26%

32%

18%

17%

14%

17%

19%

15%

20%

21%

15%

19%

25%

21%

19%

17%

20%

11%

16%

19%

15%

17%

11%

17%

18%

23%

16%

11%

12%

13%

10%

14%

10%

19%

13%

11%

REGION

REVENUES

EMPLOYEES

REST LESS 10 TWIN OF THAN $1M OR CITIES STATE $1M $5M $5M+ LESS Summary of Concerns: Mean BASE=TOTAL SAMPLE THE COSTS OF HEALTH CARE COVERAGE GOVERNMENT POLICIES AND REGULATIONS ECONOMIC AND GLOBAL UNCERTAINTY THE ABILITY TO ATTRACT AND RETAIN QUALIFIED WORKERS COSTS OF EMPLOYEE SALARIES AND BENEFITS, NOT INCLUDING HEALTH INSURANCE MANAGING SUPPLY CHAIN RELATIONSHIPS INCREASED COMPETITION FROM FOREIGN SOURCES

1150

YEARS IN OPERATION

PRIMARY BUSINESS

1150

51+

YEARS IN OPERATION

PREC- MET- PRO- 1-15 OEM ISION AL CESS YRS

16+ YRS

227

173

153

106

116

187

132

119

325

7.6

6.3

7.9

7.8

6.4

8.1

6.7

7.5

7.6

6.8

7.3

6.9

7.5

6.9

7.4

6.8

7.1

7.5

7.9

7.1

6.1

5.9

5.6

6.1

6.5

5.7

6.3

5.9

6.2

5.5

6.1

5.3

6.3

4.7

6.1

6.7

4.9

6.3

6.8

5.2

6.1

6.4

5.4

5.8

4.4

5.2

5.5

4.5

5.4

5.7

4.8

5.2

5.5

5.7

4.9

5.1

4.4

4.2

4.3

4.2

4.7

4.4

4.2

4.6

4.5

4.8

4.7

4.4

4.1

3.8

3.5

4.4

4.3

3.5

4.4

4.2

3.8

4.2

4.1

3.7

QUESTION 15: What would you say are the one or two biggest challenges your firm is facing that might negatively impact future growth? REGION

REVENUES

EMPLOYEES

REST LESS 10 TWIN OF THAN $1M OR CITIES STATE $1M $5M $5M+ LESS BASE=TOTAL SAMPLE UNFAVORABLE BUSINESS CLIMATE, SUCH AS TAXES, REGULATIONS AND POLICY UNCERTAINTIES RISING HEALTH CARE AND INSURANCE COSTS WEAK ECONOMY AND LOWER SALES FOR YOUR PRODUCTS RISING COSTS OF ENERGY AND MATERIALS FOR YOUR PRODUCTS ATTRACTING AND RETAINING A QUALIFIED WORKFORCE OTHER DON'T KNOW/NOT SURE REFUSED

1150

51+

PRIMARY BUSINESS

YEARS IN OPERATION

PREC- MET- PRO- 1-15 OEM ISION AL CESS YRS

16+ YRS

227

173

153

106

116

187

132

119

325

45%

52%

44%

53%

51%

41%

54%

51%

46%

49%

41%

57%

46%

29%

34%

26%

36%

32%

24%

42%

31%

26%

29%

42%

28%

32%

34%

27%

37%

24%

26%

36%

27%

24%

39%

26%

25%

20%

37%

30%

34%

24%

37%

25%

23%

37%

22%

25%

32%

26%

23%

53%

20%

31%

16%

28%

10%

26%

33%

14%

24%

34%

14%

32%

19%

26%

18%

22%

2% -

3% -

3% 1% -

3% -

3% 1% 1%

2% -

4% -

3% -

1% 1% -

3% -

4% -

1% -

3% -

284

QUESTIONS 16-20: Changing the focus somewhat to attracting and recruiting new employees to your firm...I am going to read a series of factors and, after I read each one, please tell me how important that particular factor is to your firm in attracting workers, using a one to ten scale where one means that factor is NOT IMPORTANT AT ALL and where ten means that factor is VERY IMPORTANT. You can choose any number between one and ten depending on how strongly you feel about it. REGION

REVENUES

EMPLOYEES

REST LESS 10 TWIN OF THAN $1M OR CITIES STATE $1M $5M $5M+ LESS Summary of Employee Recruitment Factors: % 10 227 173 153 BASE=TOTAL SAMPLE AFFORDABLE HEALTH CARE 21% 25% 20% COMPETITIVE BENEFITS 8% 5% 3% PACKAGE SALARY AND WAGE 7% 4% 4% EXPECTATIONS FLEXIBLE WORK SCHEDULES 4% 5% 8% THE NEED TO ACCOMMODATE 3% 1% 3% PART-TIME WORKERS

REGION

1150

51+

PREC- MET- PRO- 1-15 OEM ISION AL CESS YRS

16+ YRS

325 23%

116 17%

187 19%

132 32%

76 16%

119 25%

10%

7% 3%

4% 2%

5% 7%

6% 2%

4% 1%

8% 4%

3% 5%

6% 6%

2% 4%

7% 4%

5% 5%

REVENUES

EMPLOYEES

99 24%

69 31%

50 16%

PRIMARY BUSINESS

74 23%

YEARS IN OPERATION

1150

51+

PREC- MET- PRO- 1-15 OEM ISION AL CESS YRS

16+ YRS

106 59%

116 57%

187 43%

132 62%

76 53%

119 46%

99 51%

69 65%

50 49%

74 55%

325 50%

30%

36%

29%

34%

33%

31%

44%

27%

35%

31%

24% 11%

41% 8%

14% 16%

30% 11%

41% 9%

25% 13%

25% 11%

29% 16%

25% 19%

20% 19%

26% 12%

10%

18%

11%

REVENUES

EMPLOYEES

REST LESS 10 TWIN OF THAN $1M OR CITIES STATE $1M $5M $5M+ LESS Summary of Employee Recruitment Factors: Mean 227 173 153 BASE=TOTAL SAMPLE AFFORDABLE HEALTH CARE 6.6 6.9 5.7 SALARY AND WAGE 6.1 5.7 5.3 EXPECTATIONS COMPETITIVE BENEFITS 5.5 5.5 4.4 PACKAGE FLEXIBLE WORK SCHEDULES 4.4 4.3 4.4 THE NEED TO ACCOMMODATE 3.5 3.4 3.7 PART-TIME WORKERS

YEARS IN OPERATION

106 30%

REST LESS 10 TWIN OF THAN $1M OR CITIES STATE $1M $5M $5M+ LESS Summary of Employee Recruitment Factors: % 8-10 227 173 153 BASE=TOTAL SAMPLE AFFORDABLE HEALTH CARE 49% 53% 40% SALARY AND WAGE 35% 26% 27% EXPECTATIONS COMPETITIVE BENEFITS 25% 25% 12% PACKAGE FLEXIBLE WORK SCHEDULES 15% 12% 18% THE NEED TO ACCOMMODATE 9% 6% 10% PART-TIME WORKERS

PRIMARY BUSINESS

YEARS IN OPERATION

1150

51+

PREC- MET- PRO- 1-15 OEM ISION AL CESS YRS

16+ YRS

106 7.3

116 7.4

187 5.8

132 7.7

76 7.3

119 6.3

99 6.8

69 7.5

50 6.8

74 6.6

325 6.7

6.1

6.5

5.5

6.4

5.8

6.3

6.1

5.8

5.8 4.1

6.6 4.4

4.5 4.3

6.2 4.2

6.7 4.6

5.3 4.2

5.4 4

6 4.7

5.4 5.1

4.9 4.6

5.6 4.3

3.3

3.5

3.2

3.5

3.6

3.1

4.4

3.7

3.4

285

QUESTION 21: On average, over the last two years, have your firm’s wages, INCLUDING benefits increased decreased or stayed about the same? REGION

REVENUES

EMPLOYEES

REST LESS 10 TWIN OF THAN $1M OR CITIES STATE $1M $5M $5M+ LESS

PRIMARY BUSINESS

YEARS IN OPERATION

1150

51+

PREC- MET- PRO- 1-15 OEM ISION AL CESS YRS

16+ YRS

BASE=SAMPLE A TOTAL INCREASED TOTAL DECREASED

115 49% 10%

85 62% 1%

80 30% 9%

45 58% 7%

66 83% 3%

95 32% 10%

63 67% 2%

39 89% 3%

64 42% 9%

51 55% 2%

31 64% 3%

24 62% 8%

32 40% 3%

168 57% 7%

INCREASED CONSIDERABLY INCREASED A LITTLE DECREASED A LITTLE DECREASED CONSIDERABLY

10% 38% 2% 8%

20% 42% 1% -

5% 25% 3% 6%

18% 40% 7%

23% 60% 1% 2%

6% 26% 2% 7%

21% 46% 2%

24% 66% 3% -

6% 36% 3% 6%

18% 37% 2%

23% 41% 3%

21% 41% 4% 4%

6% 34% 3%

16% 41% 2% 5%

STAYED THE SAME

40%

33%

58%

36%

14%

55%

32%

43%

41%

33%

25%

56%

33%

DON'T KNOW

QUESTION 22: Do you expect the average wages, INCLUDING benefits to increase or decrease during the next two years, or will they stay about the same? REGION

REVENUES

EMPLOYEES

REST LESS 10 TWIN OF THAN $1M OR CITIES STATE $1M $5M $5M+ LESS BASE=SAMPLE A INCREASE DECREASE STAY ABOUT THE SAME DON'T KNOW

YEARS IN OPERATION

PRIMARY BUSINESS

1150

51+

PREC- MET- PRO- 1-15 OEM ISION AL CESS YRS

16+ YRS

115 62% 4% 34%

85 65% 1% 32%

80 41% 4% 55%

45 71% 4% 25%

66 88% 2% 10%

95 44% 3% 53%

63 79% 3% 18%

39 84% 3% 10%

64 56% 5% 37%

51 59% 4% 37%

31 67% 33%

24 62% 4% 33%

32 56% 3% 41%

168 65% 3% 32%

QUESTION 23: On average, over the last two years, have your firm’s wages, EXCLUDING benefits increased decreased or stayed about the same? REGION

REVENUES

EMPLOYEES

REST LESS 10 TWIN OF THAN $1M OR CITIES STATE $1M $5M $5M+ LESS

YEARS IN OPERATION

PRIMARY BUSINESS

1150

51+

PREC- MET- PRO- 1-15 OEM ISION AL CESS YRS

16+ YRS

BASE=SAMPLE B TOTAL INCREASED TOTAL DECREASED

111 50% 5%

88 61% 2%

73 29% 10%

61 59% 2%

50 82% -

92 36% 5%

69 65% 4%

37 81% -

55 49% 5%

48 52% 2%

38 69% 3%

27 49% -

42 38% 10%

157 59% 3%

INCREASED CONSIDERABLY INCREASED A LITTLE DECREASED A LITTLE DECREASED CONSIDERABLY

14% 36% 2% 4%

14% 47% 2%

5% 23% 1% 8%

15% 44% 2% -

22% 60% -

8% 28% 1% 4%

18% 48% 1% 3%

22% 59% -

9% 40% 5%

19% 33% 2%

16% 53% 3%

19% 30% -

12% 26% 10%

14% 45% 1% 1%

STAYED THE SAME

45%

37%

62%

39%

18%

59%

30%

19%

46%

29%

51%

52%

38%

QUESTION 24: Do you expect the average wages, EXCLUDING benefits to increase or decrease during the next two years, or will they stay about the same? REGION

REVENUES

EMPLOYEES

REST LESS 10 TWIN OF THAN $1M OR CITIES STATE $1M $5M $5M+ LESS BASE=SAMPLE B INCREASE DECREASE STAY ABOUT THE SAME DON'T KNOW REFUSED

YEARS IN OPERATION

PRIMARY BUSINESS

1150

51+

PREC- MET- PRO- 1-15 OEM ISION AL CESS YRS

16+ YRS

111 57% 2% 41%

88 66% 1% 31%

73 45% 4% 50%

61 68% 32%

50 82% 18%

92 42% 3% 52%

69 74% 26%

37 81% 19%

55 53% 46%

48 67% 2% 31%

38 63% 37%

27 70% 30%

42 47% 2% 48%

157 65% 1% 33%

1% -

1% 1%

1% -

286

QUESTION 21/23: On average, over the last two years, have your firm’s wages, (INCLUDING/ EXCLUDING) benefits increased decreased or stayed about the same? REGION

REVENUES

EMPLOYEES

REST LESS 10 TWIN OF THAN $1M OR CITIES STATE $1M $5M $5M+ LESS

YEARS IN OPERATION

PRIMARY BUSINESS

1150

51+

PREC- MET- PRO- 1-15 OEM ISION AL CESS YRS

16+ YRS

BASE=TOTAL SAMPLE TOTAL INCREASED TOTAL DECREASED

227 49% 8%

173 61% 2%

153 29% 9%

106 59% 4%

116 83% 2%

187 34% 8%

132 66% 3%

76 85% 1%

119 45% 8%

99 54% 2%

69 66% 3%

50 55% 4%

74 39% 7%

325 58% 5%

INCREASED CONSIDERABLY INCREASED A LITTLE DECREASED A LITTLE DECREASED CONSIDERABLY

12% 37% 2% 6%

17% 45% 1% 1%

5% 24% 2% 7%

16% 42% 1% 3%

23% 60% 1% 1%

7% 27% 2% 6%

19% 47% 1% 2%

23% 63% 1% -

8% 38% 2% 6%

18% 35% 2%

19% 47% 3%

20% 35% 2% 2%

10% 30% 7%

15% 43% 2% 3%

STAYED THE SAME DON'T KNOW

42% 1%

35% 2%

60% 2%

38% -

15% -

57% 2%

31% -

12% 1%

44% 3%

43% 1%

31% -

39% 2%

54% -

36% 2%

QUESTION 22/24: Do you expect the average wages, (INCLUDING/EXCLUDING) benefits to increase or decrease during the next two years, or will they stay about the same? REGION

REVENUES

EMPLOYEES

REST LESS 10 TWIN OF THAN $1M OR CITIES STATE $1M $5M $5M+ LESS BASE=TOTAL SAMPLE INCREASE DECREASE STAY ABOUT THE SAME DON'T KNOW REFUSED

YEARS IN OPERATION

PRIMARY BUSINESS

1150

51+

PREC- MET- PRO- 1-15 OEM ISION AL CESS YRS

16+ YRS

227 59% 3% 37%

173 66% 1% 32%

153 43% 4% 53%

106 69% 2% 29%

116 85% 1% 14%

187 43% 3% 53%

132 77% 2% 22%

76 83% 1% 15%

119 54% 3% 41%

99 63% 3% 34%

69 65% 35%

50 66% 2% 32%

74 51% 3% 45%

325 65% 2% 32%

1% 1%

1% -

1% 1%

1% -

QUESTION 25: Generally speaking, would you say that as a percentage of payroll your company will invest MORE in employee development or LESS next year compared to 2013, or will it say about the same? REGION

REVENUES

EMPLOYEES

REST LESS 10 TWIN OF THAN $1M OR CITIES STATE $1M $5M $5M+ LESS BASE=TOTAL SAMPLE WILL INVEST MORE WILL INVEST LESS STAY THE SAME DON'T KNOW REFUSED

YEARS IN OPERATION

PRIMARY BUSINESS

1150

51+

PREC- MET- PRO- 1-15 OEM ISION AL CESS YRS

16+ YRS

227 24% 8% 67%

173 26% 6% 67%

153 14% 11% 74%

106 21% 10% 68%

116 42% 1% 57%

187 15% 10% 73%

132 29% 6% 64%

76 42% 58%

119 23% 6% 69%

99 27% 10% 62%

69 22% 10% 68%

50 28% 2% 70%

74 20% 8% 69%

325 26% 7% 66%

1% 1%

1% -

1% 1%

1% -

1% 2%

1% 1%

QUESTION 26: Does your company have an employee development and retention program for your less experienced employees? REGION

REVENUES

EMPLOYEES

REST LESS 10 TWIN OF THAN $1M OR CITIES STATE $1M $5M $5M+ LESS

YEARS IN OPERATION

PRIMARY BUSINESS

1150

51+

PREC- MET- PRO- 1-15 OEM ISION AL CESS YRS

16+ YRS

BASE=TOTAL SAMPLE YES NO

227 34% 65%

173 27% 71%

153 8% 90%

106 36% 63%

116 55% 44%

187 13% 86%

132 39% 61%

76 62% 34%

119 27% 72%

99 36% 63%

69 32% 65%

50 29% 71%

74 23% 76%

325 33% 66%

DON'T KNOW/UNSURE REFUSED

1% -

2% 1%

2% -

1% -

3% 1%

2% -

3% -

1% -

287

QUESTION 27: Looking back on the last 12 months, did your company’s workforce grow, shrink or stay about the same? REGION

REVENUES

EMPLOYEES

REST LESS 10 TWIN OF THAN $1M OR CITIES STATE $1M $5M $5M+ LESS

YEARS IN OPERATION

PRIMARY BUSINESS

1150

51+

PREC- MET- PRO- 1-15 OEM ISION AL CESS YRS

16+ YRS

BASE=TOTAL SAMPLE TOTAL GREW TOTAL SHRUNK

227 23% 12%

173 23% 16%

153 8% 10%

106 23% 21%

116 42% 12%

187 10% 11%

132 27% 18%

76 50% 13%

119 23% 12%

99 21% 12%

69 28% 15%

50 19% 20%

74 22% 18%

325 24% 12%

GREW A LOT GREW A LITTE SHRUNK A LITTLE SHRUNK A LOT

6% 17% 7% 5%

8% 15% 12% 4%

3% 6% 5% 5%

3% 20% 15% 6%

17% 25% 9% 3%

2% 8% 6% 4%

8% 19% 15% 3%

16% 34% 5% 8%

6% 17% 8% 4%

7% 14% 8% 4%

12% 16% 10% 4%

6% 13% 12% 8%

3% 19% 12% 5%

8% 16% 8% 4%

STAYED ABOUT THE SAME

64%

60%

81%

54%

46%

79%

52%

37%

64%

65%

58%

59%

63%

DON'T KNOW/UNSURE

QUESTION 28: In the next 12 months, does your company expect to grow or shrink the size of its workforce, or will it stay about the same? REGION

REVENUES

EMPLOYEES

REST LESS 10 TWIN OF THAN $1M OR CITIES STATE $1M $5M $5M+ LESS

YEARS IN OPERATION

PRIMARY BUSINESS

1150

51+

PREC- MET- PRO- 1-15 OEM ISION AL CESS YRS

16+ YRS

BASE=TOTAL SAMPLE TOTAL GROW TOTAL SHRINK

227 30% 2%

173 30% 2%

153 21% 2%

106 33% 4%

116 41% 1%

187 23% 2%

132 33% 2%

76 42% 1%

119 28% 1%

99 38% 4%

69 26% 3%

50 27% -

74 27% 1%

325 31% 2%

GROW A LOT GROW A LITTE SHRINK A LITTLE SHRINK A LOT

5% 25% 2% -

4% 26% 2% -

3% 18% 2% -

4% 29% 3% 1%

9% 33% 1% -

3% 20% 2% -

4% 29% 2% 1%

9% 33% 1% -

3% 24% 1% -

5% 33% 3% 1%

3% 23% 3% -

4% 23% -

3% 24% 1% -

5% 25% 2% -

STAY ABOUT THE SAME

67%

77%

60%

57%

74%

62%

57%

70%

57%

71%

72%

66%

DON'T KNOW/UNSURE

QUESTION 29: What percentage of your workforce do you expect to lose to retirement over the next two years? REGION

REVENUES

EMPLOYEES

REST LESS 10 TWIN OF THAN $1M OR CITIES STATE $1M $5M $5M+ LESS BASE=TOTAL SAMPLE LESS THAN 5 PERCENT BETWEEN 5 AND 10 PERCENT GREATER THAN 10 PERCENT DON'T KNOW REFUSED

YEARS IN OPERATION

PRIMARY BUSINESS

1150

51+

PREC- MET- PRO- 1-15 OEM ISION AL CESS YRS

16+ YRS

227 84% 7% 8%

173 92% 7% 1%

153 86% 3% 9%

106 88% 8% 4%

116 87% 10% 1%

187 87% 4% 8%

132 87% 10% 2%

76 90% 8% 1%

119 84% 8% 7%

99 89% 6% 4%

69 85% 7% 7%

50 91% 7% 2%

74 93% 4% 1%

325 86% 8% 6%

2% -

1% -

1% 1%

1% -

2% -

1% -

288

QUESTION 30: How difficult is it to attract qualified candidates for your firm’s vacancies? REGION

REVENUES

EMPLOYEES

REST LESS 10 TWIN OF THAN $1M OR CITIES STATE $1M $5M $5M+ LESS

YEARS IN OPERATION

PRIMARY BUSINESS

1150

51+

PREC- MET- PRO- 1-15 OEM ISION AL CESS YRS

16+ YRS

BASE=TOTAL SAMPLE TOTAL DIFFICULT TOTAL NOT DIFFICULT

227 61% 37%

173 75% 25%

153 57% 41%

106 74% 26%

116 82% 18%

187 58% 41%

132 72% 28%

76 83% 17%

119 59% 39%

99 78% 21%

69 81% 19%

50 65% 35%

74 53% 47%

325 70% 28%

VERY DIFFICULT SOMEWHAT DIFFICULT NOT TOO DIFFICULT NOT DIFFICULT AT ALL

26% 36% 22% 15%

34% 41% 16% 10%

23% 34% 24% 17%

34% 39% 18% 9%

37% 45% 9% 9%

24% 34% 25% 15%

34% 38% 17% 11%

33% 50% 11% 7%

20% 38% 21% 19%

41% 36% 14% 7%

36% 45% 13% 6%

25% 39% 27% 8%

26% 27% 30% 18%

30% 41% 17% 11%

1% -

2% 1%

1% 1%

2% -

1% -

DON'T KNOW REFUSED

QUESTION 31: When looking to hire new employees, where is your need greatest? REGION

REVENUES

EMPLOYEES

REST LESS 10 TWIN OF THAN $1M OR CITIES STATE $1M $5M $5M+ LESS BASE=TOTAL SAMPLE ENTRY LEVEL EMPLOYEES EMPLOYEES WITH TECHNICAL TRAINING EMPLOYEES WITH TECHNICAL TRAINING AND EXPERIENCE EMPLOYEES WITH FOUR YEAR COLLEGE DEGREES ALL OF THE ABOVE OTHER DON'T KNOW REFUSED

YEARS IN OPERATION

PRIMARY BUSINESS

1150

51+

PREC- MET- PRO- 1-15 OEM ISION AL CESS YRS

16+ YRS

227 18%

173 28%

153 22%

106 26%

116 19%

187 22%

132 21%

76 25%

119 22%

99 14%

69 25%

50 41%

74 20%

325 23%

20%

22%

23%

20%

19%

22%

24%

13%

27%

23%

14%

18%

26%

20%

51%

43%

46%

52%

48%

46%

48%

50%

41%

57%

33%

45%

48%

11%

1% 1% 2% -

2% 1% 1%

2% 2% 1%

1% -

3% 1% -

1% 2% 1%

1% 1% -

4% -

1% 2% 1% -

1% 1% -

4% -

2% 1% 1% -

QUESTION 32: Does your firm have a recruiting relationship with one or more vocational, technical or community colleges or universities? REGION

REVENUES

EMPLOYEES

REST LESS 10 TWIN OF THAN $1M OR CITIES STATE $1M $5M $5M+ LESS

YEARS IN OPERATION

PRIMARY BUSINESS

1150

51+

PREC- MET- PRO- 1-15 OEM ISION AL CESS YRS

16+ YRS

BASE=TOTAL SAMPLE YES NO

227 27% 72%

173 32% 68%

153 11% 89%

106 26% 74%

116 57% 41%

187 10% 90%

132 35% 64%

76 66% 33%

119 23% 76%

99 38% 62%

69 25% 75%

50 29% 71%

74 18% 82%

325 32% 68%

DON'T KNOW/UNSURE

289

QUESTION 33: Will the shortage of qualified workers affect your company’s bottom line and ability to meet your growth plan in the coming year? REGION

REVENUES

EMPLOYEES

REST LESS 10 TWIN OF THAN $1M OR CITIES STATE $1M $5M $5M+ LESS

PRIMARY BUSINESS

YEARS IN OPERATION

1150

51+

PREC- MET- PRO- 1-15 OEM ISION AL CESS YRS

16+ YRS

BASE=SAMPLE A TOTAL YES A LOT A LITTLE

115 29% 7% 22%

85 40% 14% 26%

80 22% 5% 17%

45 38% 13% 25%

66 45% 14% 32%

95 22% 5% 17%

63 40% 14% 26%

39 54% 16% 38%

64 25% 8% 17%

51 39% 12% 28%

31 48% 6% 42%

24 20% 8% 11%

32 16% 6% 10%

168 37% 11% 26%

65%

55%

76%

56%

44%

76%

49%

39%

70%

55%

45%

76%

81%

57%

4% 1% 1%

4% 1% -

1% -

4% 2% -

9% 2%

1% 1% -

8% 2% 2%

7% -

3% 2%

4% 2% -

7% -

4% -

3% -

5% 1% 1%

MAYBE/TOO SOON TO TELL DON'T KNOW REFUSED

QUESTION 34: Will the shortage of qualified workers affect your company’s ability to meet your growth plan in the coming year? REGION

REVENUES

EMPLOYEES

REST LESS 10 TWIN OF THAN $1M OR CITIES STATE $1M $5M $5M+ LESS

PRIMARY BUSINESS

YEARS IN OPERATION

1150

51+

PREC- MET- PRO- 1-15 OEM ISION AL CESS YRS

16+ YRS

BASE=SAMPLE B TOTAL YES A LOT A LITTLE

111 23% 7% 16%

88 26% 13% 13%

73 14% 7% 7%

61 30% 6% 23%

50 36% 20% 16%

92 15% 9% 7%

69 28% 4% 23%

37 38% 21% 16%

55 13% 5% 7%

48 44% 19% 25%

38 27% 11% 16%

27 26% 10% 15%

42 19% 9% 10%

157 26% 10% 16%

70%

69%

82%

62%

58%

80%

66%

54%

80%

50%

68%

71%

76%

68%

5% 1%

3% 1%

4% -

5% 4%

6% -

4% -

3% 3%

8% -

5% 2%

4% 2%

5% -

4% -

2% 2%

5% 1%

MAYBE/TOO SOON TO TELL DON'T KNOW

QUESTION 33/34: Will the shortage of qualified workers affect your company’s (bottom line and ability/ability) to meet your growth plan in the coming year? REGION

REVENUES

EMPLOYEES

REST LESS 10 TWIN OF THAN $1M OR CITIES STATE $1M $5M $5M+ LESS

PRIMARY BUSINESS

YEARS IN OPERATION

1150

51+

PREC- MET- PRO- 1-15 OEM ISION AL CESS YRS

16+ YRS

BASE=TOTAL SAMPLE TOTAL YES A LOT A LITTLE

227 26% 7% 19%

173 33% 14% 19%

153 18% 6% 12%

106 33% 9% 24%

116 41% 16% 25%

187 19% 7% 12%

132 33% 9% 24%

76 46% 18% 27%

119 19% 7% 13%

99 41% 15% 26%

69 36% 9% 28%

50 23% 9% 13%

74 18% 8% 10%

325 32% 10% 21%

68%

62%

79%

59%

50%

78%

58%

46%

75%

52%

58%

73%

78%

62%

5% 1% -

4% 1% -

3% -

5% 3% -

8% 1%

3% 1% -

5% 2% 1%

8% -

4% 1% 1%

4% 2% -

6% -

2% 2% -

1% 3% -

5% 1% -

MAYBE/TOO SOON TO TELL DON'T KNOW REFUSED

290

$15.95

"The State of Minnesota’s manufacturing

executives describe their attitudes about the

economy, their sales prospects, their workforce needs, the impacts of international trade, and a variety of other topics. That information

should have value to media, elected officials,

educators, regulators, economic development professionals, and fellow manufacturers."

Bob Kill President & CEO Enterprise MInnesota

Inside, you’ll find:

• Topline results from a survey of 400 Minnesota manufacturing executives • Detailed analysis from pollster Rob Autry, managing partner, Public Opinion Strategies • Related analyses from six top executives • Full transcripts from 14 manufacturing focus groups conducted across the state • Selected cross tabulations