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Table of Contents

Executive Summary

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The study deals with the revenue and cost structure of the American furniture industry. The profitability is compared to alternative investments, and we ask whether company owners earn an adequate return. The study continues to analyze the industry's financial health. Ratios concerning debt and equity, liquidity, short term capital employment (receivables, inventory) are presented in numerous tables. Finally, financing sources (banks, leasing, debentures) are discussed, indicating their advantages and disadvantages. Our findings are segregated by industry segment, company size, and region.

TABLE OF CONTENTS AND EXHIBITS

TABLE OF CONTENTS (Condensed)

1. REVENUE, COSTS AND PROFITS
   • Revenue
   • Costs
   • The Rate of Return
2. THE FINANCIAL STRUCTURE
   • Debt and Equity
   • Liquidity
3. SHORT TERM CAPITAL EMPLOYMENT
   • Accounts Receivable
   • Inventory
4. SOURCES OF FINANCE

TABLE OF EXHIBITS

• Furniture manufacturers' shipments and costs by selected cost item, 1997.
• Selected cost items as a share of total shipments for household and office furniture manufacturers, 1997.
• Furniture manufacturers' costs as a share of total shipments by industry segment by selected cost item, 1997.
• Production workers, production hours and dollar value added in the US furniture industry by segment, 1997.
• Rates of return by the manufacturing sector and the furniture and fixtures industry compared to other rates of return, 1999.
• Before tax profit as a percentage of shareholders' equity for the manufacturing sector and the furniture and fixtures industry, 1992 to 1999.
• Before tax profit as a percentage of shareholders' equity for the furniture and fixtures industry by size of firm, 1992 to 1999.
• The equity ratio -- equity as a percent share of total liabilities and equity -- for total manufacturing and the furniture and fixtures industry, 1992 to 1999.
• Equity expressed as percentage share of total fixed assets for total manufacturing and the furniture and fixtures industry, 1992 to 1999.
• The equity ratio -- equity as a percentage share of total liabilities and equity -- for the furniture and fixtures industry by size of firm, 1992 to 1999.
• The current ratio -- the ratio of current assets to current liabilities - for total manufacturing and the furniture and fixtures industry, 1992 to 1999.
• The current ratio -- the ratio of current assets to current liabilities - for the furniture and fixtures industry by size of firm, 1992 to 1999.
• The quick ratio -- the ratio of current assets excluding inventories to current liabilities -- for total manufacturing and the furniture and fixtures industry, 1992 to 1999.
• Accounts receivable turnover in days for total manufacturing and the furniture and fixtures industry, 1992 to 1999.
• Inventory to sales ratios for total manufacturing and the furniture and fixtures industry, 1992 to 1999.
• Inventory supply in days for total manufacturing and for the furniture and fixtures industry by segment, 1996.
• Sources of financing in the furniture and fixtures industry by size of firm expressed as a percentage of total liabilities, 1999

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EXECUTIVE SUMMARY

A new report by the AKTRIN Furniture Information Center on "The Financial Heath of the American Furniture Industry" comes to the basic conclusion that the profitability, equity base and liquidity of the American furniture industry is on a sound footing.

The report first looks at the industry’s revenue and cost structure. The average sales revenue of American furniture establishments is only slightly in excess of $5million. This is less than half the size of the average for all industrial manufacturing plants.

Average shipments vary significantly across furniture producer segments. The largest establishments are in the non-wood office furniture segment (averaging about $ 27.5 million) while custom architectural woodwork and millwork manufacturing establishments rank among the smallest with only $ 3 million.

Material costs average 46 percent of shipments. The second largest cost component is wages to production workers, with 16 percent. Both, material costs and production wages are slightly above the industrial average for household furniture manufacturers and slightly below the average for office furniture manufacturers. Materials exceed 51 percent of shipments in the upholstery segment.

The higher share of production wages among household furniture manufacturers reflects this segment’s labour intensive nature. On the other hand, non-production salaries tend to account for a higher share among the office and contract furniture groups. This reflects the fact that sales and marketing activities among office and contract furniture producers are frequently carried out by the manufacturer whereas the household furniture group relies more on external distribution networks to cover such expenses

Within the industry the most productive workers (value added per worker) were those in the non-wood office segment followed by mattress manufacturing. The production workers with the lowest value added were in non-upholstered wood household furniture manufacturing and in wood television, radio and sewing machine cabinet manufacturing.

The report continues to analyze the industry’s rate of return. When profits are expressed as a return on shareholder’s equity, furniture achieves a rate of 31.9 percent compared to 32.9 percent for manufacturing overall. This measure is somewhat flawed as it includes the equity, but not the debt portion of the investment producing that rate of return.

A more reliable measure expresses net profits plus interest expenses as a rate of return on total assets. This measure gauges an industry's capacity to generate both profit and interest payments on borrowed funds. This rate of return calculation, therefore, is not influenced by the method of capital finance chosen by the industry (e.g., equity or debt capital).

We estimate furniture and fixtures’ rate of return based on this definition at 13.8 percent in 1999 compared to 20.4 percent for manufacturing as a whole.

The rates of return prevailing in furniture and throughout the manufacturing sector as a whole also compare favorably with the rates of return prevailing on typical financial instruments (Commercial papers, Government bonds), a sign that furniture manufacturing, and manufacturing in general, are both on a sound economic footing in the U.S.

It is interesting to note that the rate of return within the furniture industry differs little across firms by size.

Higher employment numbers and higher average earnings resulted in significantly increased payroll costs in recent years. Nevertheless, as material and labour costs did not increase as quickly as selling prices, corporate earnings increased even faster.

A high debt level is a risk factor while a high equity level is a stabilizing one. The equity ratio -- which calculates the ratio of shareholders' equity to total liabilities plus equity -- provides a gauge of the degree to which a company or an industry is at risk.

For manufacturing as a whole as well as for the furniture industry the equity ratio held steady at around 45 percent between 1992 and 1999. However, in 1998 and 1999 the ratio in the furniture industry declined a bit but it remains comfortably above 40 percent.

Another measure of a firm's equity base is determined by calculating its shareholders' equity position as a percentage of the firm's fixed asset base. This ratio indicates the degree to which the firm's fixed asset base is financed with equity capital. A ratio of 100 percent indicates prudent financial management as it means the fixed asset base is fully financed by equity.

Between 1992 to 1999 the equity to fixed asset ratio for manufacturing as a whole has hovered between 128 percent and 143 percent. The ratio in the furniture and fixtures industry ranged between 68 and 100 percent.

The equity ratio of smaller firms tends to exceed that of the larger firms, indicating that the financial base of smaller firms as a group is as good as, if not better than, that of the larger firms in the industry.

A common way of measuring a company's degree of liquidity is the ratio of current assets to current liabilities, better known as the current ratio.

Over the last eight years the current ratio for all of manufacturing averaged about 2 to 1, as did the ratio for furniture and fixtures, though some slippage occurred in the furniture ratio in 1998 and 1999.

Over most of this period the larger furniture and fixture firms faced a lower current ratio than the smaller ones. On balance, the furniture sector appears to be in an adequately liquid financial position at this time.

In the furniture industry -- where relatively slow moving inventories account for a significant share of current assets -- it is advisable to use the quick ratio instead of the current ratio as a gauge of liquidity. This ratio removes inventories from consideration, comparing only the most liquid assets to current liabilities.

On this basis the furniture and fixtures industry also appears to be well positioned. As of early 1999, this ratio for the furniture industry stands at a healthy 1.12, however this is slightly below the ratio for manufacturing overall.

The generally healthy equity ratios should not hide the fact that some companies are highly leveraged. When demand sags, an inadequate capital foundation is one of the most frequent causes of business failure. Even under favorable business conditions a thin capital base and a high debt load can jeopardize otherwise lucrative investment opportunities.

Standard credit terms in industry and business are "net 30 days". However, because of the competitive nature of the furniture industry, any collection period under 60 days is likely being tolerated.

Over the last eight years the collection period among manufacturers averaged 42 days and for the furniture industry 48 days. Generally, smaller firms collect their accounts receivables faster than larger firm.

Over the last eight years furniture manufacturers have found many ways of reducing the levels of inventory. Since 1995 the inventory to sales ratios in furniture has declined from a level well above that of the average for manufacturers overall to one equal to the overall manufacturing level. For both manufacturers as a whole and for furniture manufacturers the ratio in 1999 averaged around 9 percent, indicating a typical inventory supply of about 33 days.

The inventories carried by each of the individual segments within the furniture industry vary significantly. For household furniture companies inventories amounted to about a 51 day supply while it is only about 27 days for the office and institutional furniture segment.

Apart from the funds provided by shareholders and affiliates -- equity and/or debt -- suppliers are in most instances the cheapest source of finance. That is why accounts payable accounted for 18.8 percent of all liabilities among furniture manufacturers in the United States. While overdue accounts typically bear a penalty interest between 15 percent and 25 percent per year, these penalties are rarely enforced.

Following supplier credits, the banks and near-banks provide the next most advantageous form of short-term credit. Short-term bank loans accounted for 2.9 percent of the industry’s liabilities.

Long term loans should be secured by long term assets. Manufacturers are well suited to long term financing since they are typically in a position to provide security for a mortgage or to assign capital assets as collateral. Larger firms are more able to secure longer-term financing through the issuing of bonds, debentures and long-term bank loans. Smaller firms are more heavily financed by means of short-term bank loans and accounts receivable.

AKTRIN is a report writing and international consulting firm fully dedicated to the furniture industry. The company has been in existence since 1985 and maintains offices in the United States and Canada. Representatives and affiliates are located throughout the world.

Text © 2000 AKTRIN

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Last updated by Mendoza Spinelli 8th September 2000