Mid-Year Report Card
Looking Back at the Year Ahead
by Michael Collins
mcollins@jordanknauff.com

It is an interesting exercise, as we approach the midpoint of the year, to recall the beginning of the year and examine the predictions made at that time. The annual Bank of America CFO Outlook contained several key points that gave cause for optimism. Three-quarters of the chief financial officers (CFO) responding to the survey indicated that their research and development (R&D) expenditures had returned to their pre-recession levels. Despite the fact that the door and window industry is becoming increasingly technical in nature, I’m not confident that 75 percent of door and window manufacturers have restored their R&D spending.

More than half of the executives surveyed expected their revenues to increase in 2012 versus the prior year. This anticipated increase in revenues undoubtedly contributed to the fact that just less than one out of ten responding companies indicated that they planned to trim the workforce this year. The remaining companies were roughly evenly split between those that intended to hire additional workers and those that expected their workforce to remain the same size. The increase in national employment throughout this year would indicate that companies have followed through on their hiring plans.

Views from the CFOS
The average company surveyed about 2012 scored the overall health of the broad U.S. and global economies somewhat lower than they did in 2011. Interestingly, the average prediction of revenue growth, tempered by concerns about the overall economy, has been the typical stance of door and window manufacturers with whom we have spoken. Many have defied the odds by selecting a niche in which they were able to grow.

At the outset of this year, CFOs cited a greater availability of credit among lenders. Indeed, this has turned out to be the case thus far in 2012. Even for building products companies which have been painted with a broad, negative brush by lenders since the end of 2007, the availability of credit is increasing. This is good news since roughly 60 percent of respondents reported their plans to seek financing for a specific purpose this year. We are approached regularly by senior lenders seeking to extend credit to building products companies that have weathered the storm and remained at least somewhat profitable. Door and window manufacturers benefit from having ample hard assets and receivables against which lenders will extend credit. The increased availability of credit and working capital will play a key role for door and window manufacturers during the unfolding recovery.

M&A—Buy or Sell?
With regard to mergers and acquisitions (M&A), one out of five companies indicated that they would take part in these activities in 2012. Eighty-nine percent of companies planning to take part in M&A activities planned to be the buyer. It is certainly possible that many of the companies desiring to make acquisitions will successfully approach a company that had not previously indicated a desire to sell. Just as likely, however, these indications are a symptom of the same M&A supply-and-demand imbalance that exists in the door and window industry. We receive far more inquiries from fenestration companies seeking to make acquisitions than companies seeking to be acquired. This means that quality door and window companies with well-positioned products and a solid management team that will continue with the company after the sale will likely find a very receptive market for their companies. With acquirers seeking ways to grow revenues and armed with improved capital availability, the outlook for M&A transactions in this industry segment remains favorable.

Purchasing Plans
60 percent of respondents say they plan to seek financing for a specific purpose this year.
89 percent of companies plan to take part in M&A activities.

Michael Collins is an investment banker with Jordan Knauff and Co. He specializes in mergers and acquisitions in the door and window industry.

DWM
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