2007 Outlook of What CFOs Expect

by Joyce White March/April 2007
Six hundred CFOs were asked their opinions on the economy, financing, M&A activity and their involvement in foreign markets in Bank of America Business Capital’s ninth annual CFO Outlook. Conducted by an independent research firm, respondents were surveyed from late August to early October 2006.

More than half (55%) of manufacturing chief financial officers said they believe the economy will grow in 2007, according to the survey. While a majority, this is down from the 58% last year who expected economic expansion and 77% the year before. (See Exhibit 1 — CFO Outlook for U.S. Economy) Although a majority of CFOs (54%) also believe that the actions taken by the Federal Reserve Board have helped the economy, this is down significantly from 60% last year and 72% the year before.

What’s more, only 26% of CFOs surveyed expect the U.S. manufacturing sector to expand in 2007, while 35% believe the manufacturing sector will contract next year. This is the first time in the survey’s history that more CFOs believe the manufacturing sector will contract than expand. (See Exhibit 2 — CFO Outlook for U.S. Manufacturing Sector)

Cautious Optimism
Despite the tempered economic outlook and apparent concern for the manufacturing sector, CFOs continue to see growth opportunities for their individual companies. Sixty-eight percent of CFOs anticipate revenue growth this year and 45%
expect their profit margins to increase (See Exhibit 3 — 
CFO Outlook for Company Revenue)

This continued upbeat expectation could be a function of the generally positive state of manufacturing over the past 12 months. When asked, “How would you rate the current state of the manufacturing sector on a scale of 0 (extremely weak) to 100 (extremely strong)?” the average score was “59,” the same as last year’s rating.

M&A and Global Expansion
Expectations for merger and acquisition activity were considerably lower. Twenty percent of manufacturing companies surveyed expect to participate in a merger or acquisition in 2007, down sharply from 30% last year, the highest percentage in the survey’s history. (See Exhibit 4 — 
Percent of CFOs Anticipating M&A Activity) That’s in spite of an anticipated decline in the price of acquisitions; 21% of CFOs expect acquisition targets to go for a higher multiple of earnings compared to 27% last year. Likely due to continued market liquidity, only 23% believe there are more businesses available at lower purchase prices; however, this is up from 20% last year.

With 87% of manufacturing companies saying that they are competing in world markets, manufacturing is growing as a global business. Of those, 71% sell to foreign markets while 75% buy from foreign suppliers. Also, 42% of companies have operations outside the United States.

Increases in international trade growth are expected primarily in Asia (57%) and Europe (42%). Sixty-four percent of manufacturing CFOs selling to foreign markets expect international sales to increase in 2007, down from 68% last year.

Cost Concerns
Eighty-four percent of CFOs said they consider materials and equipment to be their number one cost concern. Not surprisingly, this was followed closely by energy prices and the cost of healthcare, both at 82%. (See Exhibit 5 — 
CFOs’ Most Significant Financial Concerns)

When asked about capital expenditures over the next 12 months, nearly eight-in-ten CFOs indicated that 2007 capital expenditures will be higher (38%) or the same as current levels (40%). Only 21% of CFOs plan to spend less or refrain from making capital expenditures altogether. Among those expecting higher than average levels of capital expenditures over the next 12 months are companies with revenues between $500 million and $2 billion (52%), businesses expecting expansion in the U.S. economy (44%) and manufacturing sector (48%) and those expecting sales to foreign markets to increase (43%).

Financing Requirements
Nearly two-thirds of CFOs expect to borrow money for a variety of purposes, including capital expenditures (38%), working capital (25%), U.S. expansion (22%) and acquisitions (20%). (See Exhibit 6 — CFO Outlook for Financing Needs) They also expect to use a variety of financing sources, with internal funding (68%), cash flow financing (43%), asset-based lending (41%) and leasing (33%) mentioned most frequently. Credit is also plentiful. Thirty-nine percent say the availability of credit from their lenders increased during the past 12 months and 52% say it has remained the same.

The bank products used most frequently by CFOs include letters of credit and cash management, both at 66%. These are followed by foreign exchange (42%) as necessitated by a continued increase in international business activities also revealed in this survey. (See Exhibit 7 — Products & Services CFOs Use From Current Lender) Within these banking relationships, CFOs report that the most important factor by far in their consideration of senior financing is the lender’s willingness to work with them during good times and bad. (See Exhibit 8 — CFOs’ Most Important Considerations for Senior Financing) Effectively meeting their credit needs and offering fewer financial covenants round out the top three considerations cited by CFOs.

The results of the Bank of America Business Capital 2007 CFO Outlook illustrate manufacturers are feeling the strain of higher energy prices, interest rate hikes and increasing healthcare costs. Nevertheless, with a positive outlook for revenue and profit margin growth, manufacturers continue to be hopeful. By looking for ways to grow revenue outside of the U.S., they also remain resourceful. Indeed, many manufacturers are taking the steps necessary to succeed in an increasingly competitive and global economy.



Joyce White is president of Bank of America Business Capital. To download the unedited version of Bank of America Business Capital’s ninth annual CFO Outlook, please visit www.bofa.com/businesscapital107.

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