Reading the Tea Leaves: Sometimes the Biggest Moves Aren’t What They Seem
By Michael Collins
Even though we’re all in the same door and window industry, it sometimes appears that companies are preparing for different markets than their competitors and suppliers anticipate. The first half of this year has seen several companies make acquisitions in our segment. We would put plant expansions in the same optimistic expansion category.
There are a handful of other companies, though, that would appear to be making plans for a tougher market ahead. This includes Jeld-Wen, whose recent announcements of plant closures in Oregon, Texas and Iowa will result in the layoff of several hundred employees. Similarly, Milgard and Quanex announced plant shutdowns. Do these companies have the opposite view of the future strength of our industry segment than companies making acquisitions and undertaking plant expansions? Without any inside knowledge of their plans, we think they probably do not have an overall negative view of the market.
Bear in mind that large companies like these have a manufacturing footprint that often extends across the U.S. Large manufacturers rarely make plant shutdown decisions with an eye toward permanently reducing their manufacturing footprints and capabilities. Instead, they navigate a soft or challenging market by shutting down locations and then open new optimized locations as the market is on an upswing. These types of plant shutdowns strike us as characteristic more of companies playing the long game regarding their manufacturing decisions, rather than pessimistic messages regarding the prospects the market holds for everyone.
We endeavor to remain neutral, regardless of which political party is in office, confining our comments to predictions of whether a given policy would help or hurt the building products industry. With that in mind, we turn to the possibility that the administration will enact tax code changes that allow business owners to expense all capital purchases in the year of purchase, rather than having to depreciate the assets acquired over a longer period. During the Obama administration, and Trump’s first term, such policies were highly effective in spurring investment in more efficient and modern equipment.
A Policy Void
At present, the only policy regarding full expensing that the current administration has teased is for companies that manufacture overseas to be able to expense purchases of capital equipment that lets them reestablish or increase their manufacturing presence in the U.S. Considering that the president put through a full expensing policy in his first term, it’s not a leap to predict that he would expand this beneficial policy beyond just companies that have moved their manufacturing overseas. This will help companies which, like the vast majority of door and window manufacturers, have always maintained their manufacturing here in the U.S.
Another change being discussed by the administration stems from its proposed cuts to funding for the U.S. Environmental Protection Agency (EPA), some of which would spell the demise of the Energy Star program. This came as a surprise to us, primarily because Energy Star has consistently been one of the most recognized brand names in America. For that reason, we would predict that if the dismantling of that program moves forward, one of the large and well-capitalized testing and certification bodies would propose to buy the brand and program from the government. You heard it here first.
Michael Collins is a partner and managing principal of EquiNova Capital Partners LLC. He specializes in mergers and acquisitions in the door and window industry.
mcollins@equinovacapital.com
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