How Manufacturing CFOs See 2006 Shaping Up

Economy

• Manufacturing company CFOs continue to view the current state of the U.S. economy in a positive light, giving it an average score of “66” on a scale ranging from 0 (extremely weak) to 100 (extremely strong) for the second year in a row. This is an increase from 2003 (“58”) and 2002 (“65”).

• CFOs also have a positive view of the world economy, giving it an average score of “63,” up slightly from a score of “62” last year. CFOs gave the current state of the manufacturing sector a “59,” up from “58” in 2004 and “51” in 2003.

• Although more than half of all manufacturing company CFOs (58%) believe the national economy will expand in 2006, this is the lowest percentage in four years.

• Only 46% of CFOs surveyed believe that the U.S. economy will outperform the world economy in 2006, a significant decline from 58% in last year’s survey.

• Oil prices were cited by 57% of manufacturing company CFOs as having the greatest potential impact on the U.S. economy in 2006.

• Sixty percent of CFOs surveyed believe that the actions taken by the Federal Reserve Board have helped the economy. This is down significantly from 72% last year and 83% the year before.

• For the fourth consecutive year, CFOs’ optimism about the manufacturing sector has declined. Only one-third of CFOs forecast “expansion” in the manufacturing sector, a substantial decrease from the 44% citing expansion in last year’s survey.

• Only 15% of CFOs report that the current state of the U.S. economy has caused them to accelerate their company’s plans for growth or expansion, down dramatically from a high of 25% last year.

• In line with CFOs’ more tempered outlook for the 2006 U.S. economy, their expectations for revenue growth remains healthy (73%) but are down from 81% last year.

• Thirty-seven percent of CFOs expect their capital expenditures to increase in 2006.

Finance

• The most significant financial concern of manufacturing company CFOs (84%) is the impact that rising energy costs will have on the U.S. economy in 2006. This is up from 72% last year. Other notable financial concerns are cost of materials — excluding energy (82%) and healthcare costs (81%).

• Only 25% of CFOs expect their borrowing needs to increase in 2006, the lowest percentage in the eight-year history of the CFO Outlook.

• With interest rates on the rise for the second consecutive year, 59% of CFOs forecast an increase in the cost of capital.

• Six-in-ten manufacturing companies are considering financing in 2006. The top reasons for financing are capital expenditures (38%), working capital (23%), acquisition (21%)
• and U.S. expansion (19%).

• Sixty-eight percent of manufacturing company CFOs plan to use internal sources as a means of financing in 2006. Other types of financing cited include cash flow financing (46%), asset-based financing (39%) and leasing (34%).

• Of the various products and services offered by lenders, Letters of Credit (63%) and Cash Management (60%) continue to be used most often by manufacturing companies.

Labor Costs and Product Pricing

• Fifty-nine percent of CFOs believe their labor costs per unit will increase in 2006, up
• significantly from 53% reported last year.

• Sixty-one percent of CFOs expect to increase the price of their products in 2006, compared to 63% reporting product price increases last year.

Mergers and Acquisitions (M&A)

• Thirty percent of manufacturing company CFOs expect to participate in a merger or acquisition in 2006. This is up sharply from 23% last year and the highest percent in the history of the survey.

• Twenty-three percent of CFOs think the purchase price of companies as a multiple of earnings will increase in 2006. Twenty-one percent believe it will decrease.

• Only twenty percent of CFOs surveyed believe that there will be more businesses available at lower purchase price multiples in 2006 — a significant decrease from 27% last year.

International

• For the second year in a row, 84% of manufacturing companies surveyed conduct business internationally. Seventy-two percent buy from foreign suppliers, 67% sell to foreign markets and 45% have operations outside the United States.

• Sixty-eight percent of companies that sell to foreign markets expect sales to increase in 2006, compared to 62% last year.

• Asia and Europe continue to be the top two foreign expansion markets. Among those companies expecting foreign sales to increase in 2006, 56% are expecting that growth to occur in Asia and 43% in Europe.

• Most companies (80%) with foreign operations do not plan to repatriate foreign earnings as a result of the American Jobs Creation Act tax incentive. Ten percent plan to take advantage of this opportunity. The remaining 10% of the survey participants are uncertain as to their plans.

Source: Bank of America Business Capital Services

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