Financial survey dives deep into metal fabrication industry

A recent financial survey from the FMA goes deep into the books behind metal fabrication, offering an in-depth look into an industry dominated by private companies. Getty Images Plus

The past few years for fabricators have been a whirlwind. Consider the recently released results of the annual “2023 Financial Ratios and Operational Benchmarking Survey,” published by the Fabricators and Manufacturers Association (FMA). The tumultuous ride started in 2019, when sales grew 8.2% on average—clicking to the top of the first hill, all riders blind to the precipice beyond.

When COVID-19 hit in 2020, sales for survey participants sank by 13.9% on average—significant, but not cataclysmic. Sales then came roaring back in 2021, with shops reporting average growth of 34.9%. And the growth continues. In the most recent survey, released in December, fabricators reported average growth of 17.3%. It’s been quite a ride.

Note that FMA’s financial survey is a bit unusual. Every year, a small group of metal fabricators spend serious time filling out a detailed questionnaire. The 2023 report had 28 U.S.-based participants. Metal fabrication businesses vary widely, depending on the markets they serve and the metals they process, so some averages incorporate a wide range of responses.

Even so, the depth of the information fabricators provide is extremely valuable. They took the time to dig into their financials and report (anonymously, of course) everything from gross margin to EBITDA (earnings before interest, taxes, depreciation, and amortization), bid win rates to inventory turns. They revealed labor cost ratios, on-time delivery rates, average quote turnaround times, and more. The findings give significant financial insight into an industry dominated by private companies.

Much of the survey’s greatest takeaways revolve around that sales growth roller coaster—a dip followed by skyrocketing demand, complemented by rising costs. In the latest report, direct material costs reached an average of 43% of sales, the highest average seen in the survey’s history.

On the other hand, labor costs actually fell, with indirect labor dropping to just 6.5% of sales, down from 8.3% the previous year, and direct labor dropping to 13.9%, down from 14.4% the previous year. The drop in indirect labor makes sense, considering the increased volumes fabricators are seeing. The work of salespeople and administrators can be spread across more revenue. But the slight decline in direct labor costs is particularly impressive—especially when you consider the sales-per-employee metric, which jumped from $242,100 to $273,206. Growth numbers aren’t just from material price inflation. Yes, material costs take a big chunk of the revenue, but shops also are getting more out of the people they have.

Combine this with the sales-per-square-foot metric, and you get an idea of just how good some of the best-performing shops are. The average jumped from $38,152 to $104,602 in the most recent survey. Note that sales-per-square-foot numbers vary substantially, depending on which shops participate in the survey, and a low metric isn’t always bad. A fabricator might buy or build a new building with room to grow. Geography and the cost of real estate matter too.

Still, the dramatic shift upward shows just how productive fabricators are becoming. Some of this might be from dramatic upticks in equipment spending, especially in flexible automation. Some of the industry’s largest machine suppliers have reported record sales in recent years, and the financial ratios in the most recent survey reflect this.

The average debt-to-equity ratio climbed to its highest point in fiscal 2020 (reported in the 2021 survey), when the debt-to-equity average was 1.15. That dropped to 0.60 in the survey two years ago, then rose to 0.85 last year. Metal fabrication’s debt-to-equity ratios still trend conservative for capital-intensive manufacturing businesses overall, but considering just how productive modern machines can be (along with the new plants that house them), the increased debt makes business sense—even in this higher-interest-rate environment.

Trends in EBITDA margin show the benefits of such investments. The average in the latest survey was 10.7%, two percentage points higher than the number reported in the thick of the pandemic.

All this new sales volume, though, comes with its own challenges. First is inventory. Inventory turns are well within historical averages, but they’re trending downward. Average inventory turns have been on the decline for three years, from 18.5 turns reported for fiscal 2019 to just 10.3 turns reported in the latest survey. So, not only is material costing more, but fabricators are holding more of it at any one time. Everyone felt the pain of supply chain shortages, so the increased inventory might be more strategic than anything else—if, that is, it isn’t coupled with other negative trends, like rising scrap and rework.

In the latest survey, respondents reported scrap and rework comprised 1.4% of sales, on average, versus 1.0% in previous surveys. The increase could be pegged partially on material costs; every bit of scrap now costs more. So could new nesting strategies that prioritize quick response over material yield. But it also could be due to training and communication issues as fabricators struggle to process higher volumes of work.

On-time delivery trends certainly reflect this. The latest survey reports an average on-time-delivery rate of 84%. That’s a marked improvement from the previous year, when the average fell to 77% as fabricators scrambled to meet a wave of new demand. That said, the on-time-delivery average is at least heading in the right direction.

All in all, the survey paints a financial picture of some resilient industry players benefiting from positive tailwinds like reshoring and infrastructure spending. The better the industry’s best performs, the more likely those tailwinds become long-term phenomena. Along with other stateside manufacturers, good metal fabricators will help make that long-sought-after U.S. manufacturing renaissance a reality.