Dwelling on the bottom

Executives of top Tar Heel private companies hope things start looking up soon. But many aren’t so sure they will.
By Frank Maley

With a bedroom as the office and his garage the warehouse, Bob Luddy started what became Captive-Aire Systems Inc. 33 years ago in Raleigh. His company, which installed fire-suppression equipment in commercial kitchens, boomed, landing on Inc. magazine’s list of the nation’s fastest growing a couple of times in the ’80s.

It evolved into a manufacturer of ventilation equipment for commercial kitchens. Customers include Red Lobster, Olive Garden and Golden Corral. Captive-Aire grossed $224 million last year, up 6%, and climbed three spots to No. 35 on Grant Thornton’s annual ranking of North Carolina privately held companies. But it might have trouble hoisting itself higher. “We’ve never had a down sales year,” Luddy says, “but we will … this year, primarily because of the general economy and its impact on commercial construction.”

To battle weak demand, the company is cutting costs, rolling out more products and pushing its sales team harder. And like most executives, Luddy hopes the economy turns around soon. Last spring, Federal Reserve Chairman Ben Bernanke said that should happen by year-end and told an audience in late August it would soon start growing again — albeit slowly. More than half of the responses to a survey of this year’s companies on the list agreed, expressing some degree of optimism about the economy’s direction.

But a significant minority isn’t sure better times are at hand. Nearly a third of those surveyed proclaimed themselves neutral in their 12-month outlook, and 15% were pessimistic. Luddy, for one, is confident his company can increase business through its new products, but he’s not as sanguine about the big picture. “I think the economy has stabilized at a lower level than we were.”

Scott Davis, a partner in Grant Thornton’s Corporate Advisory and Restructuring Services practice in Charlotte, is among those who fear the economy isn’t on the brink of bouncing back. “What tipped us in here in the first place was all of the creative financing around home mortgages, and we are just getting to the point where the equivalent instruments in commercial real estate are getting ready to mature.” He expects that to happen by the end of the year. It might not worsen the recession but could delay recovery until late next year. If he’s right, it will be more bad news for Tar Heel business owners, many of whom already struggle with shrinking margins, changing customer demand and reduced access to capital.

Lenders, still smarting from last year’s financial meltdown and under tighter scrutiny from federal regulators, continue to move cautiously, putting a damper on business expansion and other construction projects. Clancy & Theys Construction Inc., a Raleigh-based general contractor, moved from No. 10 to eighth place by grossing $577 million in 2008, but it won’t beat that number in 2009, Vice President Scott Cutler says. “In our 60 years in business, we had never laid anybody off, but when there is attrition we’re not rehiring, and a couple of our divisions have had to let some people go. And that’s been very painful.”

Since 2000, Clancy & Theys has been shifting focus from commercial to publicly funded projects, more because of market forces than strategic design. While revenue has more than doubled, that coming from public projects rocketed from 10% to 70%. But in the past year, some public projects have been delayed by an unfavorable bond market, Cutler says, while money for commercial projects is still hard to come by. In the second quarter, few banks loosened standards for commercial real-estate loans or increased lines of credit for commercial construction, according to a recent Fed survey of loan officers.

Like Captive-Aire, Clancy & Theys is trying to boost business by trying something new. It has been educating itself on how to win federal contracts, a business with a long learning curve and a lengthy lead time before the money starts flowing. The company hopes to win its first federal contract later this year. It can’t stand pat because builders can’t count on the credit thawing anytime soon. Bankers in the

Fed survey say standards across all loan categories will remain tight until at least the second half of 2010. “Until that money is out there, and until there’s confidence in the financial markets, it’s going to continue to be a struggle,” Cutler says. “We are not seeing the light at the end of the tunnel.”

Companies might have to devote more energy to finding often-neglected sources of cash and minimizing outflows. Many, for example, would benefit from a hard look at their taxes to see if they’re missing out on deductions or need to change how and when they pay them, says Michael Baker, head of Grant Thornton’s Carolinas tax practice. Companies can mitigate expected losses by filing as quickly as possible for a refund of estimated taxes paid. “If you paid $100,000 of income tax in the first couple of quarters of 2009 but it looks like in the entire year of 2009 you’ll have a loss, you’ll want to get that money back as soon as possible.”

Another way companies can deal with limited access to capital is to drive down inventory and free up cash to offset interest costs, pay debt and expand, says Billy Moore, director of Grant Thornton’s CFO Services Group in the Carolinas. “Managing inventory is not something that’s a lot of fun or that a lot of people have paid a lot of attention to, other than just lip service, but it’s more important today.”

Not all companies on the list are hurting. Bojangles’ Restaurants Inc. has enjoyed a boom amid the nationwide bust. Last year was the best in its 32-year history, Executive Vice President Eric Newman says. The first half of this year was its best six months ever. Recession drove diners into cheaper restaurants, and the Charlotte-based chain took full advantage. It added 44 restaurants last year, bringing the total to 429. It had 449 in mid-August and will have 466 by January. In June, it refinanced $70 million of debt on more favorable terms, Newman says, partly because of its strong performance. Revenue last year propelled it from 40th to 36th on this year’s list.

Even so, there are signs that Bojangles’ road ahead might not be so smooth. Newman worries about stubbornly high unemployment rates — North Carolina’s has hovered around 11% most of this year. Competition in the fast-food industry is always fierce, and business slowed down during the summer. “We’re a little softer now. But we’re hanging pretty good.”


For a copy of the Grant Thornton North Carolina 100 list of the top private companies for 2009, go to www.grantthornton.com/nc100.