Future for Finances: Ask Again Later?

July 2017

Amid unprecedented innovation and change in the industry, many manufacturers have one critical question: How will we fund it?

Companies are looking closely at their financials, liquidity and expectations for the future to ensure they can fund innovation and growth while still meeting the demands of existing customers and orders. To be sure, there is plenty of reason for optimism. In addition to the ISM Manufacturing Index’s indication of steady growth, the Manufacturers’ Alliance for Productivity and Innovation Foundation forecasts 1.6 percent growth for U.S. manufacturing and a U.S. GDP growth of 2.2 percent over the next three years. But perhaps most notably, the National Association of Manufacturers (NAM) reports that 93.3 percent of manufacturers are positive about their own company’s outlook, up significantly from 56.6 percent last year and marking an all-time high for their survey. 

Still, manufacturers remain exposed to external factors out of their control; chiefly, the availability of capital, challenges in business planning and the potential for increased interest rates. With uncertainty around these critical factors, manufacturers may be as good at predicting outcomes as a Magic-8 Ball. 
 

“Spurred by a positive environment, many manufacturers have expanded capital spending budgets this year. Whether these funds are earmarked for acquisitions, the Internet of Things, or other investments, having sound plans for financing and cash management are important to ensure capital availability and cost minimization and ultimately to maximize the bottom line.” 

2017-Manufacturing-RFR-headshots_Shea-(1).jpgDan Shea
Managing Director, BDO Capital Advisors

 



Capital Concerns: If You Allocate it, Will it Come?

NAM’s First Quarter Outlook Survey found that manufacturers expect their own capital expenditures to increase by 2.1 percent in 2017. Most report they are encouraged to spend due to increased demand, new products and innovations, and the possibility of an improved business policy environment. 

Despite renewed opportunities to deploy capital, concerns over liquidity and access to financing held steady in our analysis. In addition, more manufacturers point to risks related to their debt exposure and financial or debt covenants that could limit their flexibility to act on opportunities like M&A, expansion and innovation. Seasonality and the cyclicality of sales are also a risk for just over half of manufacturers, many of whom point to challenges with strategic planning and liquidity linked to difficult-to-predict sales periods and results.


More Confidence in Customers 

While manufacturers may be feeling uncertain about their own financial security, they appear to have more confidence in the financial footing of their key customers. Concerns over customers’ access to capital and credit remained relatively steady in this year’s study, but fewer manufacturers point to the potential loss of a major customer, canceled orders, excess inventory and the general health of the industries they serve.  

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In addition to being themselves a bellwether of the overall economy, manufacturers also serve many industries that track closely to the health of the market, including energy and construction. There are high hopes that 2017 will be a rebound year for both sectors.

After oil slumped to less than $30 a barrel at the end of 2015 and beginning of 2016, the oil & gas market has largely stabilized. In early June, crude prices dipped 4 percent, surprising the market at the beginning of the busy summer travel season. Looking at the industry overall, however, OPEC’s decision to cap production to stabilize supply and demand has helped prices rightsize. It also provided a temporary boost to U.S. energy companies that have ramped up production. The Energy Information Administration expects U.S. oil production will reach a record 10 million barrels per day in 2018.

The Trump administration’s pro-manufacturing policies also extend to planned infrastructure spending. While there is hope that a renewed focus on infrastructure from the White House and Congress will spur growth for manufacturers, particularly those that serve the construction and building industries, whether that will materialize remains to be seen. Construction spending dropped in May despite a forecasted increase, reflecting a slowdown in homebuilding and new construction projects.


The Rate Debate: Will They, or Won’t They?

One stumbling block for manufacturers’ momentum is the potential for raised rates. In March, the Federal Reserve signaled their own confidence in the economy by raising the short-term interest rate to its highest level since 2008. In mid-June, the Fed raised the short-term interest rate by 0.25 percent, signaling confidence in an improving job and labor market. Some analysts predict it will not be the last rate increase this year.

As a result, the number of manufacturers pointing to interest rate changes as a risk jumped significantly this year, perhaps reflecting improved confidence in the economy and the realities that rate increases are more likely. In 10-K filings, manufacturers note that interest rate increases could negatively impact sales by placing more financial strain on customers and impacting their own return on investments and cash flows. More manufacturers also point to concerns related to their hedging instruments and arrangements, which may not protect them fully from exposures to both rate increases and currency exchange rates.

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