TrendTracker_DWM_Seotenber 2010

Volume 11, Issue 7 - September 2010

Trend Tracker

Results are in for 2009 Benchmark Survey
Yields Interesting Industry Insights
by Michael Collins

The results of our recently completed Window & Door Industry Benchmark Survey for year-end 2009 highlighted some interesting characteristics of an industry in recovery. (Participation climbed this year to 31 companies representing $1.85 billion in revenues.)

As an example, a higher days sales outstanding (DSO) number means companies are extending more generous payment terms to their customers. The average survey respondent had roughly 40 days of sales outstanding as accounts receivable. By contrast, the average company in the survey had only 18 days’ worth of accounts payable outstanding. This means that our average respondent is paying its bills more quickly than it is being paid by customers. Any manufacturer can relate to the strain this places on working capital needs. Companies not receiving a discount in exchange for paying early may wish to consider paying somewhat more slowly to ease their capital needs.

Foreign competition seemed to be of greater concern in 2009 than in the past. Roughly one-third of responding companies indicated that they had taken steps to be more prepared for foreign competition, that they had lost business to an overseas competitor and that they had learned in 2009 that a customer or distributor would begin sourcing products directly from overseas. By contrast, only 15 percent of respondents to our 2008 survey indicated they had lost business to a foreign competitor. It is possible that, as other markets have slowed, foreign competitors have begun to explore selling into the very large U.S. door and window market.

Many companies faced profitability challenges throughout 2009, which were reflected in the margin of earnings before interest, taxes, depreciation and amortization (EBITDA) as a percentage of revenues. Revenue size was not a good predictor of EBITDA margins in this survey. The EBITDA margins among companies of various sizes ranged from 1.4 percent of revenue to 7.2 percent. Lean manufacturing continues to be widely practiced. Ninety percent of respondents had already implemented lean techniques and almost one-third Many companies faced profitability challenges throughout 2009, which were reflected in the margin of earnings before interest, taxes, depreciation and amortization (EBITDA) as a percentage of revenues. Revenue size was not a good predictor of EBITDA margins in this survey. The EBITDA margins among companies of various sizes ranged from 1.4 percent of revenue to 7.2 percent. Lean manufacturing continues to be widely practiced. Ninety percent of respondents had already implemented lean techniques and almost one-third planned to implement additional lean techniques in the future. Larger companies continue to take advantage of superior automation and scale to produce greater daily volumes of doors and windows, as may be seen in Figure 1A.

Another interesting measure of profitability is the value added by each employee. This is calculated using the following formula: (sales – [cost of goods sold – direct labor]) /number of full-time employees. The value added by each employee at responding companies of various sizes may be found in Figure 2B. This chart shows that the value added by employees at third- quartile companies was nearly as high as employees at first-quartile companies. Employees at these larger companies would presumably have greater access to lead generation programs, technology systems and updated manufacturing equipment. Clearly, smaller companies are capable of driving significant added value from their workforce, even with fewer financial resources.

Our survey also measured key manufacturing inputs. With respect to glass purchases, 83.2 percent of the glass purchased by our responding companies was purchased in the form of insulating glass units.

Among the certifications sought by the responding companies, the Energy Star® rating was the most common by number of companies, followed closely by the NFRC rating. In this year’s survey, achieving more certifications continued to have a moderately positive ability to predict that a given company would have low warranty expenses. It appears that implementing the standards required to achieve a certified manufacturing process results in fewer errors. Average warranty expenses among the larger companies in our survey were 1.4 percent of sales, while the smaller companies averaged warranty expenses of 1.0 percent of sales.

Looking to the future, nearly all of the respondents to our survey anticipated hiring additional employees in the 12 months following April 2010. Roughly 70 percent of respondents indicated they would hire production workers. Meanwhile, 35 percent and 40 percent indicated they would hire salaried employees and sales professionals, respectively. Very few participants responded that they would shutter additional plants during the same period, indicating that the wave of plant closures has likely subsided. This view of a stabilizing market is further supported by the average respondent predicting, as of June 2010, that they would see an 8.1 percent increase in 2010 sales over 2009 levels.

Michael Collins is vice president of the building products group at Jordan, Knauff & Company, an investment banking firm that specializes in the door and window industry. He may be reached at mcollins@jordanknauff.com. His opinions are solely his own and not necessarily those of this magazine.