Machine Tool Industry: Review and Outlook

Abstract

FOLLOWING a three-year capital expenditures boom (from 1964 to 1966) which saw plant and equipment outlays grow at better than 15% per annum and which saw the annual order rate for machine tools double to record peace-time levels, the machine tool industry once again demonstrated its inherently cyclical nature. Although capital expenditures were at record levels in 1967, the rate of gain slowed to 1.7% from 16.7% in 1966 and machine tool orders dropped dramatically. Machine tool orders began showing lower year to year comparisons during the last two months of 1966. These poor monthly comparisons continued throughout 1967 and, for the full year, new orders of $1.13 billion were more than 30% below 1966 levels. Despite the severe slump in new orders, 1967 shipments of metalcutting machine tools increased for the seventh consecutive year. Aided by the substantial backlogs on hand at year end, total metalcutting shipments of $1.35 billion represented a $131 million, or 11%, increase over 1966. As a result of the industry's effort to reduce lead times, and in spite of the poor order pattern, shipments almost consistently exceeded net new bookings. Consequently, the backlog for metalcutting machine tools dropped from $1.31 billion to $1.09 billion at year end 1967. First quarter 1968 results showed a continuation of this pattern as shipments of $358 million exceeded orders by about 40%. In fact, the $140 million of metalcutting machine tool shipments for March 1968 represented the highest monthly total in 25 years. The industry's backlog has now declined to $970 million. In terms of overall production, this backlog represents less than nine months production, as compared to slightly over twelve months in late 1966. After showing rapid gains in earnings since the early sixties, industry profits advanced more moderately during 1967. A sample of seven of the larger, listed machine tool builders, which account for between 40 and 50 percent of industry shipments, showed a 7.8% increase in net income in 1967. (Table I) During the previous six-year period, 1961-1966, net income of these firms had increased at a compound annual rate in excess of 30%. Reflecting both a slowdown in the rate of growth in sales, and an acceleration in the rate of increase in costs, profit margin improvement began to slip after the first quarter. Pretax margins were relatively flat in 1967 after having shown steady improvement between 1961 and 1966. With a higher tax rate in 1967, 47.5 % versus 46.5%, after tax margins declined from 7.12% in 1966 to 7.05%.