fiscal cliff series Archives - Shopfloor

Blindfolded By Uncertainty of the Fiscal Cliff

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Stellar Industries, an aptly named hydraulic truck equipment manufacturer, reflects the values of the small town it operates in. Based in Garner, Iowa, Stellar Industries has always been a family- and employee-oriented business, ensuring that its workers share in the company’s success. Click here to check out a photo essay of its operations. Stellar Industries has enjoyed a successful past two years, with business growing by 50 percent this year alone. But with the fiscal cliff approaching and no solution in sight, it’s a starkly different outlook for Stellar Industries in 2013.

The significant bounce back Stellar Industries enjoyed from the 2009 recession is at risk. The company has seen its orders rescinded, and customers are sitting on the sidelines. As suppliers to the mining industry that has come under attack from Washington recently, some of its customer base is eroding. To weather the coming economic storm, Stellar Industries plans to reduce overtime and remains very cautious about its employment situation. Future investments and acquisitions are uncertain at best.

“One of the best presents for the holidays we could receive is a commitment from Washington to implement policies that will help us grow,” said Stellar Industries CFO David Backus. “We need an agreement in the short term that can lead to resolving the bigger tax and debt issues facing America. We’ve always taken care of our employees because they are our most valuable asset, but a bad economy reduces our ability to do that and forces us to make some tough decisions.”

Mr. Backus goes on to say that, “Raising taxes won’t get the job done. It won’t solve our problems, but it will hurt manufacturers of all sizes. Washington could use a dose of the reality that businesses face every day. We’re planning today for 10 years from now. Because Washington has been unable to get out of its own way, we have to make those plans blindfolded.”

We’re just days away from going off the cliff, and manufacturers are deeply worried about where this will leave them. They want something simple—action from Washington that will allow them to keep growing, investing and taking care of the men and women who make up their workforce. It’s not too much to ask, and it would be great if policymakers could provide the gift of certainty this holiday season.

Fiscal Cliff Has Made Business Disappear

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Until this fall, Staub Manufacturing Solutions in Dayton, Ohio, was having a pretty good year. The laser-cutting manufacturer had experienced an uptick in sales and had grown its workforce to accommodate the demand for its services. Unfortunately, as the leaves changed, so did its outlook on the future of its business. The fiscal cliff and accompanying uncertainty caused a sharp slowdown—many large projects and orders were cancelled—as its customers expressed anxieties over their future.

“Our customers have postponed or cancelled orders that would have meant significant growth for our company,” said Steve Staub, president and owner of Staub Manufacturing Solutions. “In fact, several of those orders were large enough that we would have hired additional people, and now that is just impossible. Sadly, if this slowdown continues, we’re likely going to have to go in the other direction and implement layoffs. What Washington doesn’t seem to understand is that any tax increase is going to hurt our company. We’re already dealing with huge cost increases in energy and other operational obligations.”

At the beginning of this year, Mr. Staub says that he was very optimistic about growth. 2011 had been a good year, and his company was expecting to do even better in 2012. As business began to slow, he attempted to maintain his optimism, but it became evident that what happened in Washington was going to dramatically affect his business, for better or worse. He remarked, “Some customers told me that if Washington appeared to be getting its act together, they would make some major purchases. Unfortunately, that didn’t happen, and those orders vanished. I don’t blame them—the same people who have put our country in this situation have still been unable to come to an agreement that protects job creators like me.”

Mr. Staub is intensely proud of manufacturing in the United States.  He is an active business leader in his community. He has a strong commitment to telling the story of manufacturing and launched a blog last year, “Made in Dayton,” to showcase the contributions of local manufacturers. Staub Manufacturing’s efforts are inspiring and exactly what policymakers in Washington should be working to support. Unfortunately, we are 13 days away from going over the fiscal cliff, and there is no end in sight to the uncertainty.

A family-owned business, Staub Manufacturing began in 1997 with one laser and three people. Like its services, its team has grown over the years with some of the best in the business. From the original offering of flat laser cutting, the company has added 3D laser cutting, forming, welding, metal fabrication and machining solutions to support a variety of industries, including aerospace, automotive, computers and many more. When manufacturers like Staub Manufacturing struggle, it sends a ripple effect throughout the entire economy.

Mr. Staub added, “I still believe in our company and that we will have long-term opportunities to succeed. We’re set to work doubly hard to make sure that we come through the fiscal cliff well, but it would be great if we didn’t have to fight through Washington’s policies to be successful.”

Fiscal Cliff Threatens to Knock Manufacturers Down

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“I wish I could project growth for next year,” says Porta-King, Inc. CEO Steve Schulte. “Unfortunately I would be kidding myself. The uncertainty surrounding the fiscal cliff has already resulted in a decline in our core business. I was set to make a major acquisition of one of our competitors but as business slowed that growth became a risk we just couldn’t take.”

Last year Porta-King bought a building to expand their business internally and prepare for an acquisition, preparing to grow and add workers to accommodate their expected expansion in production capability. Unfortunately Porta-King is now projecting sales in 2013 to be 10% less than this year – making that investment a sunk cost for the time being. As the fiscal cliff approaches, it becomes more difficult to see light at the end of the tunnel and reports out of Washington are only increasing that pessimism among manufacturers.

Porta-King manufactures modular in-plant offices, the kind you see in manufacturing and distribution facilities across the country, along with pre-fabricated stand-alone  exterior buildings like security guard entrances, toll booths and bullet resistant structures.  Click here to check out a photo essay of their operations. In business since 1932, Porta-King split with its parent company  in 1969 to pursue a diversified market and hasn’t looked back since. Headquartered in St. Louis, MO, the company has grown significantly over the years and now employees 265 people. They took a pretty big hit during the recession but were bouncing back before the fiscal cliff has threatened to knock Porta-King down again.

Mr. Schulte, who has been with the company since 1970, says, “The fiscal cliff has got me very worried. We’re experiencing a severe decline in customer activity – and they’re telling me that they’re going to sit  tight until they have certainty. I’m also a military supplier, so the hit from defense cuts will impact me along with the tax increases I’m facing. It’s important for Washington to remember that increasing taxes on the top rates is absolutely a tax on manufacturers and other small businesses that want to re-invest back into their business.”

Mr. Schulte and manufacturers need action and they need it now. “I want our leaders to do what’s right for the country – I want them to stop campaigning, sit down at the table and get a deal done. I am absolutely petrified about the future for small business in America. I don’t blame business owners or our customers for holding back right now – investing with this uncertainty is foolish. But if they can put together a solution that protects manufacturers I know that we can get the engine of our growth moving again.”

Navigating a Rough Economy Without A Compass

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Schaefer Brush Manufacturing Company has thrived for more than a century in Waukesha, Wis., making brushes for many purposes—from painting houses to plumbing, chimney cleanings and many other industrial uses. Over the years, Schaefer Brush has been successful in separating itself from the competition. Unfortunately, the company finds itself in the same boat as other S-corporation manufacturers, trying to navigate rough economic seas without a compass or a weather forecast.

Schaefer Brush Owner and CEO Harold Schaefer says, “I’ve been in this business for 47 years, and I thought I’d seen it all—but this is the most uncertain environment I’ve ever been through. Our family has been manufacturing brushes for 107 years. I’m looking to ensure that the next generation of leadership is set to grow, but that’s impossible to do right now. What manufacturer is going to stick their neck out when we don’t know what’s going to come out of Washington?”

Schaefer Brush has taken a cautious approach in planning for its future—delaying plans for growth, purchases of new equipment (including upgrades to key machines integral to production) and hiring. Mr. Schaefer says that the best-case scenario for the next year is simply keeping pace with 2012 performance. However, his pragmatic take has business sliding backward. Mr. Schaefer doesn’t pull any punches with his feelings about the situation his company finds itself in. “It’s pathetic. We were set to grow, expand and hire new people, but the failures of Washington have forced us to slam on the brakes for all of those goals.”

He goes on to say, “I’m as patriotic as any American, but this isn’t the country I know and certainly isn’t the America we can be. I try to have a positive attitude, but that’s tough to do when there is a real threat of losing business, growth opportunities and employees. And if you walk down the streets of my town, every business is feeling the same way.”

Fiscal Cliff Would Cut Legs Out From Under Businesses

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Glier’s Meats, Inc., a third generation owned food manufacturer in Covington, Kentucky is deeply worried about the cuts that the fiscal cliff might force upon their business. They’ve already had to delay buying two new smokehouses, critical upgrades to their facilities, and the purchase of a new boiler with the hopes that the old one will hold out until the economy picks up again. These are gambles that no manufacturer should have to be making – hoping that they’ll be able to tread water long enough for Washington to sort out a self-inflicted mess.

The National Association of Manufacturers (NAM)/IndustryWeek Survey of Manufacturers tells us that, unfortunately, they are not alone. The prospect of higher taxes as part of the fiscal cliff caused 62.9 percent of manufacturers to reduce their business outlook for 2013. Moreover, 42.6 percent either reduced or slowed down their business investment, and 36.2 percent either reduced their employment or stopped hiring. Now is the time for manufacturers to be growing – but uncertainty due to Washington’s inaction has them cutting back.

Dan Glier, owner of Glier’s Meats, says the number one thing affecting his business is uncertainty. “We are trying to plan for next year, to invest where we need it, and it’s next to impossible. We’re basically pulling numbers out of the sky as we’re making our budget – and because of that, I can’t make the improvements we badly need. I just don’t know if the money is going to be there.”

Since its founding in 1961, Glier’s Meats has made their ‘goetta,’ a German-style sausage, into a must-have treat in the Greater Cincinnati area. This small family-owned manufacturer with 25 employees has become the preeminent supplier of ‘goetta’ in the United States. Each year the company hosts ‘Goetta-Fest,’ a multi-day festival that attracted over 175,000 people last year. Manufacturers and local communities often become entwined over the years – so much so that it’s hard to think of one without the other. Glier’s Meats is that kind of manufacturer. Of their 25 employees, two-thirds of them have been with the company over 10 years, and a few have worked there for almost 40. The Glier family is loyal – to their workers and to their community – and it is a sad thing to see them at risk.

“I hope I don’t have to make further cuts. We want to do right by the people who work for us,” said Mr. Glier. “We’ve already made many cuts and if we have to keep doing so it will cut our legs right out from under us. The political posturing and verbal swordplay does nothing for the small business owners in this country. It’s time for Washington to put all of that aside and just get down to business. Offer up a solution that works and keeps us doing what we want – working for our communities.”

Manufacturers’ Confidence in Washington Waning

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As an S-corporation that pays income taxes at the individual rate along with two-thirds of manufacturers, HUSCO International is subject to the tax increases set to take place on January 1. As with two-thirds of manufacturers, those dollars that would be used to grow the company will instead be sent to Washington. Combined with the economic catastrophe of another recession and the elimination of market opportunities, the fiscal cliff represents a major threat. HUSCO President and CEO Austin Ramirez is exploring all options to ensure his company is optimally positioned. However, at the end of the day, like countless other manufacturers, his company is in dire need of a responsible solution from Washington.

Unfortunately, Mr. Ramirez says that his confidence in Washington’s ability to find a bipartisan, workable solution to the fiscal cliff is waning. “My story is the story of manufacturers across the United States: just as we started to lift ourselves out of this economic hole, we are in danger of being dragged right back down again. If the people at the negotiating table in Washington can’t put an end to the political posturing and come to a productive answer that will keep America from going over the cliff, the impact on my company will be severe. During the ‘Great Recession,’ we had to cut nearly half of our employees. We are now back to our pre-recession employment level and poised for record growth in 2013. However, if we go over the cliff and into another recession, all bets are off, and we will be looking at a much different scenario next year.”

Mr. Ramirez continued, “Compared to the beginning of the year, my attitude about the economic future of this country has pulled a 180-degree turn. The saddest part is that I truly believe that if we can solve this fiscal cliff soon and in a productive manner, there is serious opportunity for growth. I see a lot of pent-up demand in the marketplace that, with the burden of uncertainty removed, could be a tremendous boost to the economy. But without action and with massive tax hikes looming, this opportunity for success will vanish completely.”

After becoming an independent company in 1985, HUSCO flourished as a leading manufacturer of hydraulic components for off-highway and automotive applications. It invested heavily in the development of fuel-efficiency technology. Today, vehicles all around the globe contain parts from HUSCO that enable reduced fuel consumption. Mr. Ramirez took the reins from his father in 2011 and is set to lead the company to even greater heights. With a worldwide workforce of 1,268 men and women (696 of those in the United States), HUSCO is well positioned to succeed if we can avoid going over the fiscal cliff.

Swimming Against the Current

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Windham Millwork, Inc., has been a leading furniture and millwork manufacturer in Windham, Maine, for three generations. Unfortunately, the company is already a victim of the uncertainty caused by the fiscal cliff. Windham Millwork CEO Bruce Pulkkinen noted that the difficulties are especially frustrating coming on the heels of the past recession. “We’re finally starting to come out of a bad situation, but the threat of tax increases and the uncertainty in the United States could put us right back in the hole. I’m worried about how bad it could get if policymakers don’t come to an agreement—but I’m equally as worried that they might arrive at an agreement that will hurt manufacturers like me. Tax increases would undermine the little growth that we have had and keep me from making badly needed investments in my company.”

Windham Millwork has already had to put off replacing three machines critical to its operation. The company simply cannot take on the risk of those purchases when it doesn’t know what its fiscal future might hold. The uncertainty has forced Windham Millwork to institute a hiring freeze and delay important training. According to Mr. Pulkkinen, the ripple effect of the policies coming out of Washington will be felt through every sector of the U.S. economy. Windham Millwork has taken aggressive steps to limit the fallout from the fiscal cliff—increasing sales efforts and improving operating procedures to do more with less—but given the unknown of what lies ahead, it is hard to tell if it will be enough.

Following the 2009 recession, the economic recovery has been slow across the nation. Manufacturers that were hit hard by the economic fallout have been steadily working to rebuild what they lost.  However, those that have made modest gains now face yet another backslide. Windham Millwork is one of these companies at risk.

Since its founding in 1957, Windham Millwork grew from a small, one-shop plant to a sleek, technology-driven complex that employs 70 people and services New England and surrounding states. Despite its past success and the sweat equity that the Pulkkinen family and their employees have put into the company, Mr. Pulkkinen is not overly optimistic about the future.

“In many ways, the uncertainty and negative policies coming out of Washington have been an absolute nightmare,” said Mr. Pulkkinen. “We’re trying to keep swimming forward, but it’s tough when the current is against you. After several years of going in the wrong direction, it would be great if Washington could get behind manufacturers. If policymakers fail to avert the fiscal cliff and prevent these huge tax increases, it’s going to send our economy into a tailspin. Many people have called for taxing the wealthy. I wish they would understand that the job creators in this country are going to be swallowed up instead.”

Fiscal Cliff Has Manufacturers ‘Hanging On and Holding Back’

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For 90 years, Pine Hall Brick has manufactured the building blocks of our society. Yet, this strong and innovative manufacturer finds itself at risk today. It has weathered difficult economic times in its history, including the 2009 recession. The collapse of the housing market eliminated a significant portion of its customer base, causing a 70 percent decrease in its business. Even in the face of a tough market, business had started to increase, but the uncertainty caused by the fiscal cliff has stalled its recovery.

Pine Hall Brick President W. Fletcher Steele explained the difficulties, saying, “The uncertainty in the economy, caused by the fiscal cliff, and overall negative business climate has our customers hanging on and holding back on orders. We’re looking to regain our footing, but like our customers, we have no idea what to plan for.”

Founded in 1922 by Flake Steele, Sr., the company has been family owned and operated for three generations. Since its inception, Pine Hall Brick has been a leader, not only in manufacturing bricks for homes and offices, but for paving bricks as well. Over the decades, the company has prospered, becoming the largest supplier of clay pavers in the United States. It has constructed new, technology-driven plants and employed hundreds of workers. Headquartered since the beginning in Winston-Salem, N.C., Pine Hall Brick is a model example of how manufacturing in the United States builds communities and provides strong career opportunities. For generations, Pine Hall Brick has taken care of its employees, who have returned the favor with some of the best products on the market.

Pine Hall Brick, by all measures, has done business the right way—investing in its company and searching out new markets, all while leading its industry. The fiscal cliff is punishing manufacturers across the United States who have done the same. If there is no action, these companies will be hung out to dry. Massive tax increases, significantly decreased consumer spending, a further weakened housing market and another recession all threaten to derail our economic recovery and devastate businesses.

Manufacturers put everything they have into their businesses; they take pride in their work and have pride in their country. They have thrived in a positive business climate before and can do so again if Washington can put pro-growth policies in place. Fletcher Steele echoes this sentiment. “I hope Washington can put an agreement together that would put an end to this game of chicken.  I know that if they do that, Pine Hall Brick can thrive again. If we plunge back into a recession, I really don’t know what the future will hold.”

Click here to check out the Pine Hall Brick operation at work.

Fiscal Cliff Has Manufacturers on Their Heels

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A family-owned business founded in 1963, Al-jon Manufacturing began as a scrap processing equipment manufacturer that diversified into building landfill compactors in the late 1970s. For three decades, the company thrived, supplying compactors throughout the country and, eventually, the world. The company has contributed millions to the local economy over the years—first under Jon Kneen and then with the leadership of his son, current CEO Kendig Kneen. This all changed as the 2008 recession hit, significantly undercutting the core of its business as consumers stopped consuming, resulting in landfill flows dropping by as much as 45 percent.

Al-jon went from a successful manufacturer employing 185 workers to a workforce of 65 employees in 2008. However, displaying the resiliency of so many manufacturers in the United States, Al-jon fought its way back. Yet, the uncertainty of the fiscal cliff has the company back on its heels. After adding to its workforce in recent years, Al-jon recently had to shed 20 jobs due to the drop in consumer spending and the looming tax increases that have hit the company from both sides.

Mr. Kneen says that Al-jon would like to hire more engineers, but the company is scared to move forward in such an uncertain climate. “Our customers and other consumers have said they are not making any purchasing decisions until this uncertainty is resolved,” said Mr. Kneen. “It’s critical that Congress and the President act quickly on the issues related to the fiscal cliff—and do so in a way that returns confidence for consumers, both large and small.”

Manufacturers like Al-jon must constantly reinvent themselves to compete with their larger competitors, and research and development (R&D) is the lifeblood of that reinvention. Tax hikes will eliminate the money Al-jon needs to invest in itself and grow competitively.  With tax increases, implementation of the Affordable Care Act and the loss of the R&D tax credit, Al-jon and its many third-generation employees are at risk.

Mr. Kneen sums up the situation quite well. “The fiscal cliff has placed the entire country in limbo. Businesses and consumers have to tighten their belts because they have no idea what the future will bring. It has made us all victims of the ripple effects caused by uncertainty. Until some semblance of order is restored, it’s hard to imagine things getting any better.”

A CPA’s View on the Tax Hikes Facing Manufacturers

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The U.S. tax code can be startlingly confusing for many people – it’s a complex labyrinth that can be difficult to navigate even when there are no expected changes. With the fiscal cliff looming and with manufacturers uncertain what their tax rates will be in 2013 it can have a paralyzing effect. Moss Adams LLP, a public accounting firm has taken the time to explain where we stand and what will happen in 2013 if policymakers are unable to take action to avoid the fiscal cliff. Their analysis paints a stark picture of the significant increases that manufacturers face and adds to the mountain of evidence that we need action to prevent going over the fiscal cliff right now.

“Starting January 1, the federal estate tax rate is set to increase from 35 to 55 percent and the amount of wealth you can transfer without incurring federal transfer taxes drops significantly. When you include estate taxes that exist in many states, your combined effective rate could exceed 63 percent.

But that’s not all. The tax rates on ordinary income, capital gains, and qualifying dividends are also scheduled to increase in 2013, with the top marginal rate on qualified dividends set to increase from 15 to 43.4 percent. And finally, the Medicare tax on net investment income (3.8 percent for higher income individuals) is also scheduled to go into effect on January 1.

Income Considerations

As it currently stands, dividend income that will be realized in January 2013 will carry up to a 28.4 percent higher federal tax burden than dividend income realized in December 2012. This can have a significant impact on domestic manufacturers who export products using an IC DISC.

For pass-through entities such as S corporations, fully understanding the benefits and costs of electing bonus depreciation should be carefully evaluated given the potential increase in tax rates as future deductions may generate larger tax savings with higher tax rates.

The Bottom Line

With all of these tax rate and transfer tax exemption changes looming around the corner, now is the right time to review your estate plan and the individual tax items you may be able to control. And it’s important to understand potential legislative changes that may extend or change the current tax rates in order to avoid unnecessarily accelerating income into the current year.”

Mark Reis is a partner at Moss Adams LLP. He is based in San Francisco and has been in public accounting since 1986. He is a tax advisor to numerous manufacturing, distribution, and service companies.