Published in Manufacturing
The new federal tax reform law allows manufacturers to deduct the cost of automation equipment in one year, rather than over a period of years. Experts say the changes could result in a wave of new orders for capital equipment suppliers. The new federal tax reform law allows manufacturers to deduct the cost of automation equipment in one year, rather than over a period of years. Experts say the changes could result in a wave of new orders for capital equipment suppliers. Courtesy Photo

Federal tax reform benefits manufacturers’ investments in automation equipment

BY Sunday, March 18, 2018 11:05am

For West Michigan manufacturers who are struggling both to find workers and to keep up with order volumes, the recent federal tax reform offers some welcome news. 

Changes to the tax code allow companies to immediately deduct all of their capital expenditures in equipment and building upgrades from their taxable income, rather than take the deduction over a period of years. The change has industry watchers bracing for a wave of new investments in industrial equipment and especially for automation systems that help companies get more value out of their existing workforce.

For Norton Shores-based Seabrook Plastics Inc., the new tax scheme put executives’ “wheels turning in terms of opportunities in investment scenarios,” said Bill Veldboom, the company’s general manager and COO. 

“Certainly, the tax credit opens up (options) and lowers the bar in terms of where you would want to invest,” Veldboom told MiBiz. “I think we are looking harder at things that we could automate and help us improve our operations. It isn’t that it changed our minds, but it might make it a little bit more affordable.”

Already, Seabrook Plastics, a plastic-injection molding company, has invested in more equipment, such as new presses and four robots.

“We were already on board when the tax changes came about, but it makes it more attractive to invest and get growth,” Veldboom said. “The byproduct of that is more jobs. What we’ve also found is that we’ve been a little more active in doing workforce development and training as well, which we see … being linked together.”

Investing in the automation equipment gives companies like Seabrook Plastics “broad capabilities,” Veldboom added. 

“Most of our robots are geared for material handling and secondary processing after injection molding,” he said. “We’re able to make it safer and reduce some direct labor costs by using robots.”

Whether they’re investing in automation equipment, wage increases or bonuses, West Michigan manufacturers are being directly affected by the recently-passed tax legislation, said Joel Mitchell, an accountant in Grand Rapids for Plante Moran PLLC.

Mitchell, who services clients in the manufacturing industry, said the tax reform law — which preserved the R&D credit — is benefiting the product development and research and development divisions at manufacturers. 

“When we think of automation, there’s certainly the large OEMs … but one of the interesting things about the R&D credit is for the newer, tech startup-type companies that are forming,” Mitchell told MiBiz

The Tax Cuts and Jobs Act of 2017 that President Donald Trump signed into law in December lowered the corporate tax rate from 35 percent to 21 percent and offered limited liability companies a 20-percent deduction on taxable income. 

In February, many U.S. employees received more money in their paychecks because of the reduced income tax rates, Mitchell said, adding that “even the smaller, middle market businesses … (were) doing annual bonus increases or wage increases.”

“A lot of employers are trying to reward their employees for their hard work and the increased productivity that most people have seen,” he said. 

INSIDE THE TAX CUT

In theory, the 21-percent corporate tax rate will increase the productive capacity of the economy and make manufacturing in the U.S. more competitive, industry sources said. Additionally, the tax cut sparked optimism for suppliers of capital equipment, who braced for a wave of orders given the advantages of being able to fully write off the equipment in one year. 

According to a U.S. Department of Commerce report, spending on equipment rose 11.4 percent year over year in the fourth quarter of 2017, the biggest gain in three years — even before the tax changes were signed into law. 

That’s been a boon for companies like Emerson Electric Co. (NYSE: EMR), a diversified Ferguson, Mo.-based manufacturer that includes a factory automation division. 

In a February call to discuss quarterly earnings, Chairman and CEO David Farr told analysts that sales of automation equipment to U.S. manufacturers “have bumped up since tax reform was passed,” citing “a very good pace of business for the next two years in the U.S. and North America.”

“From the U.S. manufacturing base, we were given a very, very generous tax reform package,” Farr said. “It’s very much focused on investments in this country from a technology standpoint, capacity standpoint, something that we have not seen in this country for over 30-some-odd years since the mid 1980s. 

“From the perspective of the companies that we communicate with and we obviously serve, they see this as an opportunity to be encouraged to make those investments, and they’re going to make those investments.” 

Mike Wall, an automotive analyst based in Grand Rapids for IHS Markit, said “it’s a little too soon” to tell how local companies in the automotive supply chain will invest their tax savings, but he acknowledged the changes will make capital expenditures “more palatable” for automation equipment.

“I think there will be an additional tailwind — I don’t know to what magnitude — but for a lot of suppliers I talk to and work with, they have been moving down that path and they realize the need to invest, to stay competitive, to take advantage of those opportunities,” Wall said. 

Likewise, Mitchell at Plante Moran cautions that his clients have not immediately changed their investment strategies as a direct result of the federal tax reform. Still, he said companies are continuing to invest, “whether it’s in automation or lean manufacturing and getting more efficient.”

He also said the net result of the tax bill is that companies “should be better off.”

“The question will be how much will that after-tax income help with efficiency, autonomy, and how companies turn that into a competitive, better position to be successful over the long term,” Mitchell said. 

Moreover, while some companies are investing in new equipment and in their employees, others will “pocket the money in case they fall behind.”

“For large corporations, the tax change is permanent,” he said. “They will carry on indefinitely until there is (another) tax change. Most of the middle market-type companies that are unmanaged, there is a limited time on the tax benefit, and then they automatically revert back to the level that it was in 2017.”

That may or may not change, Mitchell said, but there will have to be legislation to retain the tax benefit for the longer term for the smaller companies. 

INVESTING IN THE COMPANY

In West Michigan, manufacturers like Viking Group, a Hastings-based manufacturer of fire suppression equipment, have seen customer orders accelerate as a result of the federal tax reform.

“We have seen some projects released to us that were being held for various reasons, but with the new tax (savings) we’ve already seen a number of projects released for construction,” said Viking Group President James Golinveaux. 

From a business standpoint, the company is still evaluating if the tax changes will affect the company’s investments in equipment, but Golinveaux said that “the tax (savings) available are just going to help.” 

Elsewhere, the Zeeland-based Gentex Corp. (Nasdaq: GNTX) is securing a line of credit of up to an additional $150 million to help fund any future business needs, including automation equipment, according to filings with federal securities regulators. 

“In order to support future growth and program launches, capacity expansion and production automation, the company estimates the capital expenditures for 2018 will be between $115 million and $130 million and depreciation and amortization expense is estimated to be between $105 million and $115 million for calendar year 2018,” Steve Downing, Gentex’s president and CEO, told analysts during the company’s latest quarterly earnings call.

“The tax change is really just an amplification of that and we intend to continue to do the same things we’ve been doing the last few years, just at a faster pace,” he added. 

SUSTAINING MOMENTUM

Despite an initial surge in automation equipment, the Commerce Department reported earlier this month that sales dipped 1.4 percent in January, ending five straight monthly increases.

According to industry sources, the slowdown was more or less expected. 

However, Grand Valley State University’s Brian G. Long, director of supply management research at the Seidman College of Business, reported orders among West Michigan businesses rose in January and February. 

“The positive result of the recent tax reform legislation has been a boom to the capital equipment manufacturers,” Long said in a statement. “Although there are a few exceptions, most of these firms report being recently swamped with new orders.”

In Long’s Institute of Supply Management survey of purchasing managers in Grand Rapids and Kalamazoo, the index for new orders rose to 32, up from 23, while the index of purchases rose modestly to 22 from 18.

“Generally, in the middle of the winter, we have a little bit of a droop, (and) we just go sideways because it’s the winter,” Long said. “This year, probably because of the recently passed tax law, we saw a significant bounce in February, particularly in the case of those firms having anything to do with capital equipment or having to do with export.”

“Lowering the corporate tax rate to the level that it is now has definitely been a boost,” he added. “We just don’t know how big of a boost yet.” 

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