The Industry Improves: Still Faces Performance Headwinds
This is article is part of a series of monthly articles produced by Harbour Results for PMA’s MetalForming Business Edge e-newsletter. Click here to view the full collection of articles.
The first quarter PMA Metalforming Insights Financial study conducted by Harbour Results revealed successes and challenges for metalformers in 2021. The study that collected data from more than 75 metalforming facilities was recently distributed to participants. And, as many would predict, the industry continues to face headwinds. Nearly a quarter of study participants remain in a risky position of high debt relative to earnings. Employee Retention Credits arriving this year may provide short-term help to those who qualified, but these businesses must find ways to drive cash to the bottom line – and that is far easier said than done. EBITDA won’t be coming from high depreciation and amortization since capital expenditures remained low in 2021 compared to historical averages and optimistic spending forecasts for 2022. This all boils down to one thing - earnings must come from improving your EBIT.
The good news is that EBIT did improve in 2021 for the overall metalforming industry. For some, it came from productivity improvements as they found ways to do more with less. For others, it didn’t come from operational improvements but rather the lucky side of scrap price increases. That is a risky – not to mention difficult to predict – way to make a buck in this business.
Efficiency – measured as value-add dollars per full-time equivalent head – increased for the overall industry. Those with money used it to invest in equipment and automation to reduce reliance on scarce labor. Those without money to invest in labor reduction still couldn’t overcome labor challenges. And despite having a higher efficiency, these shops didn’t realize the same profit growth because of increased overtime and expediting costs.
What we saw in the data was larger companies being aggressive in the marketplace to return to the revenue levels they had in 2019. This was likely at the expense of the smaller companies who did not. But that aggressiveness came at a cost of continuing the squeeze on value-add as a percent of sales and without any noticeable increase in returns.
In fact, the entire industry saw an expected squeeze on value-add as a percent of sales as raw material costs remained at elevated levels. Ideally the material prices will at least stabilize so the material surcharges can catch up with purchased costs. The squeeze on value-add percent may be okay, provided metalformers are not seeing a degradation in contribution margin dollars per shop-hour.
In 2022, there is no indication that material prices will fall or that material availability and labor availability will get substantially better. The challenges will continue at least for now, so manufacturers cannot sit back to wait it out. They must adapt to push forward to improve cash generation. Some activities that leadership should consider, include:
Be disciplined to ensure every penny is recovered from material costs. A delay in calculations and invoicing surcharges or price adjustments is a lost opportunity and a hit to profit.
Change the mindset on what “factory” and “onboarding” means. Making a good first impression with potential employees by cleaning up your facility and improving new hire onboarding can provide later returns in the form of retention.
Update standards for operations and quoting. Establish expectations on quoting models for new opportunities by using data to evaluate each existing job. Think real dollars, not percentages, when making decisions on what jobs stays, what needs to go and what is accepted as new business.
Use the people you have for their valuable and best skills. Do you really need a person at each press watching parts fall into a basket? Are they making the part more valuable by doing so? Evaluate the tasks of jobs on and off the shop floor for opportunities to drive efficiency.
The full PMA Metalforming Insights Q1 2022 Report provides more data and insight on the financial environment of this industry. Shops are encouraged to participate to gain access to this valuable benchmarking information.
The Q2 Metalforming Insights Study focused on operations launched on April 26. If you would like to complete the survey, please contact Cindy Minn at cminn@pma.org.
About the author:
Jason C. Brewer, a Director at Harbour Results, helps clients drive profitable growth through strategic direction and matching their operations to the strategy. He has extensive experience consulting and working within metals manufacturing companies in roles from engineering to sales to executive team management.
