The good news from the 600 CFOs who were asked their opinions on the economy, financing, M&A activity and their involvement in foreign markets is that half expect their company’s revenues to increase in the coming year — and nearly four in ten (37%) predict increased profit margins. Also, despite tough times, nearly two-thirds (65%) of CFOs surveyed report that their company has an environmental management plan, and nine in ten say the level of funding for their plan will either stay the same or increase in 2009.

But the news doesn’t get better from there. While CFOs appear to be determined that their own companies will weather this storm, they seem to be less sure about the prospects for economic expansion and growth opportunities in the manufacturing sector in 2009.

The Economy
Not surprisingly, manufacturing company CFOs view the current state of the U.S. economy negatively, giving it an average score of “46,” a significant drop from last year’s score of “64” on a scale ranging from 0 (extremely weak) to 100 (extremely strong).

When asked their economic outlook for 2009, less than one third (31%) of manufacturing company CFOs believe the U.S. economy will expand. This is the lowest average score in the 11-year history of the survey and a significant decline from the 44% who expected the economy to expand in last year’s survey. What’s more, nearly the same percentage (32%) of CFOs believe the economy will contract next year, compared to only 20% from last year’s survey (see Exhibit #1 — CFO Outlook for U.S. Economy).

Ninety-two percent of CFOs believe the credit crisis will have the greatest impact on the economy in 2009. This is followed closely by the impact of the housing market, oil prices and the strength of the U.S. dollar, all at 85% (see Exhibit #2 — CFOs’ U.S. Economic Concerns).

Thirty percent of CFOs do expect the U.S. economy to outperform the world economy this year, a significant increase from 22% in last year’s survey, but a decline from 39% in 2007, 46% in 2006 and 58% in 2005. CFOs began to see the U.S. in a slightly better light as the economies around the world weakened during the course of the survey.

Another small bright spot is an increased belief (64%) that the actions taken by the Federal Reserve Board in 2008 have helped the economy. This is up from 58% last year.

Manufacturing Sector
CFOs are not much more positive about the 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 “50,” a nine-point drop from the level it had remained for the past three years.

Consistent with the CFOs’ negative outlook for the economy, only 25% of CFOs forecast expansion in the manufacturing sector in 2009, down from 30% last year. The remaining CFOs are nearly evenly split between no change (38%) and contraction (36%) (see Exhibit #3 — CFO Outlook for U.S. Manufacturing Sector).

Approximately half (52%) of CFOs say that the current state of the economy will not cause them to change their growth plans. While this is a significant drop from 67% last year, it nonetheless, shows the determination of these CFOs to remain competitive in a challenging economy.

M&A and Global Expansion
Expectations for merger and acquisition activity were identical to last year at 23%, but still considerably less than 30% three years ago. That’s in spite of an anticipated decline in the price of acquisitions with only 17% of CFOs expecting acquisition targets to go for a higher multiple of earnings in 2009. Due to a severe tightening in the credit markets, the percentage of CFOs who believe there are more businesses available at lower purchase prices has jumped to 49% from 29% last year and 23% the year before (see Exhibit #4 — Percentage of CFOs Anticipating M&A Activity).

Companies conducting business internationally remain robust at 83%, consistent with last year. Of those, 66% of CFOs said they buy from foreign suppliers, up from 62% last year. Also, 36% of companies have operations outside the United States compared to 39% last year and 42% the year before. For the first time in five years, international sales are expected to slow. Fifty-six percent of all companies selling to foreign markets expect international sales to increase this year, down significantly from 71% reported last year. Perhaps this decline is, in part, due to the strengthening U.S. dollar.

Growth in international trade is again expected primarily in Asia (57%), while Europe saw a significant decline in growth expectations to 45% from 54% last year. The Middle East saw the biggest increase: to 16% from just 2% in 2008.

Cost Concerns
Eighty-one percent of CFOs surveyed consider materials and equipment to be their number one cost concern. This was up from 74% last year, and still holds the top spot. It was followed closely by energy prices at 73% and the cost of healthcare at 67% (see Exhibit #5 — CFOs’ Most Significant Financial Concerns).

With the considerable tightening in the credit markets, it is not surprising that 42% of CFOs forecast an increase in the cost of capital, up significantly from 26% last year.

Slower Spending
The outlook for capital expenditures continues to weaken with only 20% of CFOs indicating that their capital expenditures for this year will be higher compared to 32% last year and 38% the year before. Forty percent of CFOs expect to spend less or refrain from making capital expenditures altogether in 2009 compared to 27% last year. This correlates with the continued weakening of the U.S. economy (see Exhibit #6 — CFO Outlook for Capital Expenditures).

Among those predicting higher than average levels of capital expenditures over the next 12 months are businesses expecting expansion in the manufacturing sector (27%), and public companies (26%).

Thirty-two percent of CFOs report that their lender has restricted credit availability over the past 12 months, up dramatically from 10% in last year’s survey. Only 15% say their lender has increased credit availability compared to 35% last year.

Consistent with last year, 59% of CFOs expect to borrow money for a variety of purposes, including capital expenditures (31%), working capital (30%), U.S. expansion (17%) and acquisitions (15%). They also expect to use a variety of financing sources, with internal funding (54%), cash-flow financing (45%), asset-based lending (42%) and leasing (31%) mentioned most frequently (see Exhibit #7 — 
CFO Outlook for Financing Needs).

Lender Products
The bank products used most frequently by CFOs include cash management (63%) and letters of credit (59%). These are followed by foreign exchange (36%), retirement plan services (36%) and investment banking (28%). Within these banking relationships, CFOs report that the most important factor by far in their consideration of senior financing is again the lender’s willingness to work with them during good times and bad. Effectively meeting their credit needs is second (see Exhibit #8 — Products and Services CFOs Use From Current Lender and Exhibit #9 — CFOs’ Most Important Considerations for Senior Financing).

The results of the Bank of America Business Capital 2009 CFO Outlook illustrate that manufacturers are increasingly concerned about the future of the U.S. economy and the manufacturing sector due to tightening credit markets, a deteriorating housing market, higher energy prices, and a host of other factors. 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.