Micropsi raises $30M Series B Funding to Scale Industrial Automation with Human Motion Trained Robots
Micropsi Industries secures a $30M Series B for its deep tech AI software for controlling and training industrial robots MIRAI robot control system enables hand-eye-coordinated actions for automation of tasks that improve productivity in industrial environments The Series B funding is co-led by Metaplanet, VSquared, and Ahren Innovation Capital as Micropsi is ready to scale in the US and Europe Micropsi Industries has just announced the successful closing of its $30 million Series B funding round. The company provides ready-to-use AI systems for controlling industrial robots to enable the automation of manufacturing processes that so far could not be automated. By using cameras and sensors to react in real-time to dynamic conditions in a workspace, Micropsi-powered robots can be trained by humans to perform hand-eye-coordinated actions in industrial environments. MIRAI is successfully deployed in assembly, material handling, and quality control applications in a wide range of industries. Companies like Siemens Energy; ZF Group, one of the largest automotive suppliers in the world, and BSH, the largest manufacturer of home appliances in Europe, are already using MIRAI in their production halls. New investors Metaplanet, VSquared, and Ahren Innovation Capital co-led the funding round. Existing investors Project A Ventures and M Ventures also participated. MIRAI’s “Different Approach” does what others only promise “Our technology makes it easy to transfer dynamic motion know-how from humans to robots,” said Ronnie Vuine, CEO and co-founder of Micropsi. “We have not optimized the textbook approach for specific applications but took a radically different approach inspired by how humans coordinate motions. MIRAI is a proven and independent technology that’s working 24/7 in the factories of our customers. That is what convinced our investors: Here is a company that can already verifiably do what many current startups only promise to develop.” Industrial robots can compensate for labor shortages and secure supply chains. The manufacturing skills gap in the U.S for example could result in 2.1 million unfilled jobs by 2030. Before factories can put robots into service, however, a lot of preparatory work is necessary, with specialists developing software code line by line to trigger the individual movements of the machines. This is complex, expensive, and makes robots inflexible, as variance in positions or materials throws the robots off. Micropsi’s MIRAI changes this. Using artificial intelligence (AI), workers are able to train the machines through demonstration. A human guides the robot arm through the work task, which then learns and carries out the movements autonomously. In doing so, it is able to handle variance and changes in the environment and the robot’s target at execution time. This expands the commercial potential of industrial robots, as it allows them to handle complexity and keeps them flexible even as conditions change. MIRAI augments industrial robots. Once configured with MIRAI, a robot arm can perceive its workspace through cameras and continuously adjust its movements as it performs a task. MIRAI skills are not programs, they have collected intuitions of human movement that MIRAI then intelligently transfers to robots. New funding plans: Expanding operations The new funding is going to be used to expand operations in the US, ramp up sales efforts and expand to more robot platforms. Micropsi Industries has recently hired robotics expert Prof. Dominik Bösl as managing director to be in charge of the company’s ambitious technology roadmap. Prof. Bösl previously held positions at Festo, Kuka, and Microsoft. Rauno Miljand, the managing partner at Metaplanet, says: “Intelligent robot automation could tap into a currently locked productivity pool. The end-to-end learning solution built by Micropsi is one of the most advanced systems in the market and is well-positioned to unlock potential in a wide array of industrial settings. The ease of use and the fast learning cycle make it one of the most scalable platforms in the industry.”
Where will you fit in?
Reading and watching CNBC (financial channel) on a regular basis gives you a surprisingly good idea of how you are going to get out of this economic craziness and get a handle on where you stand in your market post-pandemic. Future business activities are sure to be different calling for action on management’s part, but it is sure tough to make a decision unless you know where to start. One of the most interesting segments I saw on CNBC concerned Ford and Salesforce. They seem to be joining forces to help contractors get a better understanding of their business and identify where changes need to be made making them more efficient and more profitable. When you think about this it is a GREAT value-added program from Ford since a substantial number of the customers who buy the F-150 are in some sort of service or contracting business. Is your management thinking along these lines as a means to drive continued sales to current customers, but also be a selling point to attract new customers because you have something they need that they are not getting from their current vendor? Who could you team up with to do what Ford and Salesforce are doing? Think about this because there is a market share out there for somebody to take. Along these lines, I hope you had a chance to read “Five Lessons Learned for the Post-Pandemic Supply Chain” that appeared in an MHW email recently. The Five Lessons are as follows: Stay open to new and unconventional ways of doing business. Broadening networks; expanding connections; deepening relationships Allocating resources to equipment and partnering with asset-based providers. Increasing inventory levels. Adding more storage space in multiple markets. Seems like the author, Dale Young of Worldwide Distribution Services, is suggesting spreading the risk, renting when there is a lack of hardware, stepping away from the just-in-time approach, and adding buffer inventory to carry you over the hump. Now you made not need to follow this approach, but I bet you have customers who should be thinking about these issues and what to do about them. It seems to me that most lift truck dealers have customers with problems dealing with supply chain issues, inventory issues, labor shortages, logistic problems. payroll issues and Covid issues. They may also have issues with long-term contractors that are killing them because they are not using the equipment enough to warrant the cost. So, what help can you offer customers to ease their pain? Who could you team up with to reach this goal? Could you offer seminars or Zoom programs to cover some of these problem areas? Between you and your OEM, there have to be “solutions” available to stop the pain and at the same time strengthen relationships. It is no secret that it is going to cost EVERYONE more to run their business whether they are maintaining reasonable sales levels or not. Even if they are running at 2019 sales levels their margins will shrink due to cost increases or pushback on price increases. So, if you want to know your starting point for future planning, I think we could agree that your company along with most of your customers and potential customers are going to be dealing at some level with the problems noted earlier. NOW, THIS IS WHERE YOU FIT IN Customers are going to listen to anybody that calls on them who can reduce their pain in terms of cost reduction or improved efficiency. And they are going to expect you to deliver those solutions. So, you have two or three options to consider: Lower your prices and live with it. Find ways to lower your costs to absorb the cost of the solutions you are providing. Find ways to assist customers in ways that you do not currently offer. What would the Ford CEO do? Ford is offering a solution that helps the customer pay for the truck he bought. Ford also found a partner to work with who can communicate the results of the solutions to the customers. And let us not kid ourselves, technology is going to be a big part of these solutions, and if you are not comfortable with that statement you will have to find “partners” who do and are able to collaborate with your customers. To get you started in your own company I would like you to get a copy of your trial balance for the end of the year and examine each line item to determine if the revenue or cost is going to be impacted by Covid or supply chain issues, or payroll issues, or warehouse issues including receiving or delivering product. You will be amazed how often you will be saying “What the hell is in this account?” to your controller. Believe me, you will find costs no longer required or costs that can be reduced. When you finish this simple process costs will be reduced which in turn absorbs part of the solutions you have to offer. Next, get a full list of current as well as former customers. Examine each company on the list to find those you must keep, those you would like to keep, past customers you would like to get back and new customers you would like to get. Now go down the list and find out where each of these current and former customers “stands” and ask what you can do to help. I bet you will generate a list of meetings with these companies and between you find ways to stop the pain or produce a plan to stop the pain. After all, your expertise is on the shop floor or in the warehouse environment, which covers many of the areas causing the pain. My reading and listening are telling me that technology, AI, and VR are going to become part of the solutions customers to move ahead into the future. But knowing this and knowing where you currently “stand” I surely do
EP 241: KINETIC Insurance
On this episode, I was joined by the Co-founder and CEO at KINETIC, Haytham Elhawary. KINETIC is focused on enhancing workplace safety and ergonomics by focusing on one of the most common injury areas, the back. We discuss the origins of KINETIC, how it has evolved, and their new launch of the insurance arm of their business. Key Takeaways KINETIC was previously on the podcast discussing their wearable device but this time around Haytham joined so we could get the full story on why the company was founded. The device itself is somewhat like a pager that you wear on your waistband or belt. It is able to determine when you are making movements that are not ergonomic and could be high risk for potential strains or sprains. The idea originally stems from Haytham seeing what his mother went through as a nurse dealing with injuries and other pains related to her work. He was able to connect with his co-founder to apply technology to the solution and come up with what is now their wearable device. New to the KINETIC lineup is their insurance arm which now offers worker’s comp insurance. While Haytham is quick to admit that he never imagined selling insurance, the progression of the business makes total sense. Since the wearable device is helping to reduce the number of injuries and therefore potential claims it only made sense that they could pair it in an insurance package that would allow customers to save on their insurance by reducing the number of claims. If you sign up for insurance with them then you are provided with free devices for all your workers and because they are able to see the specific data over time you will see insurance discounts based on how effective your workers are being with the devices. I personally love the idea of the KINETIC wearable and think it is amazing that is solely focused on safety for the worker and no other purpose. This sets it apart as it can truly become a friend to the worker who is wearing it. Haytham shares some of the reactions they have gotten from companies and workers but my favorite is hearing how some workers will notice an overall difference in how they feel over time because they are gradually correcting their movements to be more ergonomic based on what the device is telling them. Listen to the episode below and leave your thoughts in the comments. The New Warehouse Podcast EP 241: KINETIC Insurance
Equipment Leasing and Finance Association’s Survey of Economic Activity: Monthly Leasing and Finance Index
November New Business Volume Up 8 Percent Year-over-year, Down 26 Percent Month-to-month, and up 10 Percent Year-to-date The Equipment Leasing and Finance Association’s (ELFA) Monthly Leasing and Finance Index (MLFI-25), which reports economic activity from 25 companies representing a cross-section of the $900 billion equipment finance sector, showed their overall new business volume for November was $7.9 billion, up 8 percent year-over-year from new business volume in November 2020. Volume was down 26 percent month-to-month from $10.7 billion in October. Year-to-date, cumulative new business volume was up 10 percent compared to 2020. Receivables over 30 days were 2.2 percent, up from 1.7 percent the previous month and down from 2.3 percent in the same period in 2020. Charge-offs were 0.20 percent, up from 0.16 percent the previous month and down from 0.61 percent in the year-earlier period. Credit approvals totaled 77.2 percent, down from 78 percent in October. Total headcount for equipment finance companies was down 9.9 percent year-over-year, a decrease due to significant downsizing at an MLFI reporting company. Separately, the Equipment Leasing & Finance Foundation’s Monthly Confidence Index (MCI-EFI) in December is 63.9, a decrease from the November index of 64.6. ELFA President and CEO Ralph Petta said, “As we get ready to close out 2021, industry volume is still holding up, with portfolio quality improved relative to the same period last year. Supply chain disruptions continue to plague an otherwise strong economy, creating inflationary pressures that are a concern for many Americans. With the Federal Reserve recently announcing an accelerated tapering of asset purchases as well as several planned interest rate hikes in 2022, the hope is that the Fed does not choke off the recovery in its efforts to control further inflation.” Kirk Phillips, President and CEO, Wintrust Commercial Finance, said, “The November MLFI-25 reflects both a monthly and cumulative year-over-year increase in business equipment investment as our economy recovers from the impact of the COVID pandemic. While there are headwinds—supply chain disruptions, increasing labor and material costs, and now the potential for rising borrowing costs to offset inflationary pressures—businesses in many capital-intensive industries remain poised to capitalize on pent-up demand as soon as the equipment is available.”
Much needed plans for 2022
There is little doubt that 2022 is going to be a handful to deal with. David Baiocchi laid it all out in last month’s issue and every bit of what he said is going to take place in some form in 2022 and even 2023. To make matter worse, from the time David’s article appeared in MHW we have a new highly contagious COVID-19 strain to deal with which could put you back six or nine months, which in turn could offset some of the changes you made to your business to get back on track to a more profitable 2022. Not only is the new Covid strain a problem but when you add in the supply chain issues that continue to plague us there seem to be more roadblocks in front of us than pathways to profitability and cash flow. And just so you know, Dean informed me I had the cover story for January and the topic should cover what dealers will face in 2022 to the best of my ability. I said that would not be a problem. The next day, however, I received a copy of David’s article. Needless to say, I am thinking David covered most of what to expect in 2022, leaving me to follow up where he left off which in my mind is a tough thing to do. So, I did my homework and am taking a shot at projecting what roadblocks you will face in 22 along with ideas on how to turn problems into opportunities. Hopefully, I will provide you with some paths to explore to improve sales, profits, and cash flow. So, let us get going. First of all, let us stop talking about 2019. I keep hearing people say they wish they could get back to their 2019 operating results. Well, FORGET IT! It is not going to happen because too much has changed in your business world that will not permit a return to the past. If you want to understand what I am talking about go back and read David’s article and then tell me how you would use your 2019 business strategy to correct your problems and put you back at 2019 operating results. Not going to happen. Equipment and parts are somewhere on a boat or on a truck (if you are lucky). A recent article written by a 35-year truck driver states that non-union drivers who get paid per load or some other metric will not go to the ports because they wind up losing money on the deal. His conclusion was that this condition will continue for years to come. So do not expect to replenish your new unit inventory any time soon. The labor problem also seems to continue even though there are plenty of jobs available. People want to work from home. People want to avoid coming in contact with the virus. People want more money for what they do. All these factors place you in a tough position. And then we have inflation to deal with, which many of you have not had the pleasure of dealing with the negative impact of inflation. Your inventory and parts cost increase. Your other expenses increase. Payroll increases because employees need to cover the inflationary cost increases. How do you plan for these scenarios and still have adequate capital to stay afloat? That is the question to which every one of you will have a different answer, depending on how much capital you have available, the markets you are in and the customer base you do business with. Quite frankly, you are starting with a clean slate when you plan out 22 because all the variables are nothing like what you faced in the past with fewer solutions and resources available to make meaningful changes. If I were sitting in your office, I would suggest using a zero-base budgeting approach to attempt to zero in on areas where the spend is too high or the returns too low. There is little doubt that technology will be part of this correction even though part of the problem is to figure out which technology to adopt. But no matter what the technology has to provide benefits and support to customers as well as your company. Otherwise, you are wasting your money. To start on a budget, I suggest you make use of the Profit Planning Model found in the annual MHEDA DiSC report. This tool provides methods to determine RETURN ON ASSETS and RETURN ON NET WORTH. The formula covers both your balance sheet and income statement activity, making it easy to spot what activity or investments are causing the ROA or RONW to move to the better or worse. To start with I would not use your 2019 operating results as a starting point for your budgets. I would use that zero-based approach where you build up costs from the bottom up using a method where you eliminate unnecessary costs or excessive costs. But no matter how you look at it the goal is to arrive at a plan that allows you to do more with less and more efficiently with the dollars you spend. If you cannot arrive at this goal, I believe you will find it hard to compete in your markets because a competitor has produced a new strategic plan that allows him/her to put forth more competitive pricing than you can. This competitor will have a good handle on customer needs and how to fill them, be able to notify customers of potential problems, use fewer people to do more work, and market in a way to attract new customers. Let us face it, the cheapest way to reduce cost is to become more productive. Know what your employees are doing, have employees accountable for the work they perform. Find ways to reduce the time to perform tasks. This goes for your employees and the employees of vendors that supply goods and services. Part of this solution may
Section 1202 Stock: How most taxpayers can exclude up to $10 Million on the Sale of their Business!
The title of this article is NOT a typo, that’s right…up to $10 Million United States Dollars can be excluded from the sale of a business if certain parameters are met. Business owners should take note of the very important requirements that allow the exclusion of up to $10 million in federal tax. Section 1202 is an EXTREMELY beneficial portion of the Internal Revenue Code and so long as the correct rules are followed, the exclusion is easy to apply. Section 1202 is also referred to as the Small Business Stock Gains Exclusion. The Section only applies to qualified small business stock acquired after Sept. 27, 2010, that is held for more than five years. The Protecting Americans from Tax Hikes (PATH) Act of 2015 was passed by Congress and signed into law by President Obama. One tax benefit, made permanent by the Obama presidency, is the Small Business Stock Capital Gains Exclusion found in Section 1202 of the Internal Revenue Code. The intent behind Section 1202 is to provide an incentive for non-corporate taxpayers to invest in small businesses in the United States. Before 2009, this provision of Section 1202 excluded 50% of capital gains from gross income. To stimulate American small businesses, the American Recovery and Reinvestment Act increased the exclusion rate from 50% to 75% for stocks purchased between February 18, 2009, and September 27, 2010. The latest revision to Section 1202 provides for 100% exclusion of any capital gains if the acquisition of the small business stock was after September 27, 2010. Also, the treatment of no portion of the excluded gain is a preferential element for alternative minimum tax (AMT) purposes. The capital gains that are exempt from tax under this section are also exempt from the 3.8% net investment income (NII) tax applied to other investment income. The amount of gain that any shareholder can exclude under Section 1202 is limited to either $10 million or 10 times the adjusted basis of the stock. The taxable portion of a gain from selling a small business stock has an assessment at the maximum tax rate of 28%. As previously discussed, not all small business stocks are lucky enough to qualify for the tax breaks under Section 1202. There are very stringent requirements that must be followed with regard to qualified small business stock. Those requirements are as follows. It was issued by a domestic c-corporation other than a hotel, restaurant, financial institution, real estate company, farm, a mining company, or business-related to law, engineering, or architecture. Note: while Section 1202 does not speak to an LLC taxed as a c-corporation, a Private Letter ruling by the IRS allowed Section 1202 treatment for an LLC that chose to be taxed as a c-corporation. It was initially issued after August 10, 1993, in exchange for money, property, or as compensation for a service that was rendered. On the date of the stock issue and immediately thereafter, the issuing corporation had $50 million or less in assets. The use of at least 80% of the corporation’s assets is for the active conduct of one or more qualified businesses. The issuing corporation does not purchase any of the stock from the taxpayer during a four-year period beginning two years before the issue date. The issuing corporation does not significantly redeem its stock within a two-year period beginning one year before the issue date. A significant stock redemption is redeeming an aggregate value of stocks that exceed 5% of the total value of the company’s stock. If your business satisfies these requirements, then congratulations! When you sell your company, you should be able to exclude (almost all) of your federal capital gains tax. State taxes that conform to federal tax will also exclude capital gains of small business stock. Since not all states correlate with federal tax directives, taxpayers should seek guidance on how their states treat realized profits from the sale of qualified small business stocks. Let’s walk through an example whereby a business owner decides to close up shop and sell their business. The business owner is single and has $410,000 in ordinary taxable income, therefore placing them in the highest tax bracket. They sell qualified small business stock acquired on September 30, 2010, and have a realized profit of $50,000. The taxpayer may exclude 100% of their capital gains, meaning the federal tax due on the gains is $0. The exclusion could possibly be even greater if the applicable state laws recognize Section 1202! Now, let’s change the facts a little bit. Suppose the taxpayer purchased the stock on February 10, 2009, and after five years sells it for a $50,000 profit. The Federal tax due on capital gains would be 28% x (50% x 50,000) = $7,000. This example really illustrates the importance of timing with regards to when the stock was acquired. Only stock acquired on or after September 27, 2010, is eligible for exclusion of up to $10 million. Business owners should immediately check with their legal counsel, accountant, or business broker regarding the structure of their business, ESPECIALLY if they plan on selling their business within the next few years. Failure to do so could potentially leave millions on the table! About the Authors: Michael S. Hampleman focuses his practice on small business taxation and corporate structuring. He is an associate attorney at the Center for Financial, Legal, & Tax Planning, Inc. Roman A. Basi is an expert on closely held enterprises. He is an Attorney/CPA and the President of the Center for Financial, Legal & Tax Planning, Inc. If you have any questions, please contact us at (618) 997-3436.
EP 232: Peter C. Lewis and What’s Next
On this episode, I was joined by Peter C. Lewis of Wharton Equity Partners. Peter is the Chairman and President at Wharton Equity Partners and currently started the firm in 1987 where they now focus on investing in industrial real estate as well as other companies that impact that space. We discuss how Peter pivoted from fully in on residential investments to fully in on industrial investments, their recent investment in micro-fulfillment company Fabric, and also his thoughts on where the industry is going. Key Takeaways One of the craziest and most impactful parts of my conversation with Peter was how he pivoted into the industrial space. He started his firm in 1987 and was focused on residential real estate investments but then he started to notice the pace at which e-commerce was growing. In fact, he said the pivotal moment was when he saw his 90-year-old father was starting to order things online. Typically people would get dip their toe in at first but Peter C. Lewis dove right in and unloaded all of his residential investments ($500 million worth) to move everything into industrial real estate. He has built up several large warehouses over the years and has now also begun investing in technology companies that support warehousing and logistics initiatives. Their most recent investment was in Fabric which is a micro-fulfillment company that focuses on taking small spaces and using technology to help them become fulfillment powerhouses. Peter had been watching them for some time as he believes that micro-fulfillment is the future as consumers are wanting their products faster which means the product needs to be closer to them in order to meet quick delivery times. He was also blown away when he saw one of their operations underneath a mall in Israel on a trip in the area. With micro-fulfillment on the rise, we will be sure to see more of Fabric and other companies like them growing rapidly. Throughout the pandemic, I have been curious to see if the vacant retail locations would become more fulfillment spaces than true brick and mortar locations. Peter is the perfect one to ask since he deals in the real estate side of things. He believes that brick and mortar will never completely go away but what we will continue to see is the amount of inventory they hold continue to decrease. The idea is that these will become more of a showroom type of location so that consumers can still feel the product and understand it in person if they need to but it will be fulfilled to them from a different location whether it is a regional warehouse or micro-fulfillment location. Very interesting forward-looking insights from Peter in this episode. Listen to the episode below and leave a comment with your thoughts. The New Warehouse Podcast EP 232: Peter C. Lewis and What’s Next
Transitory my _ _ _!
Well, let’s start by saying that cryptocurrencies are here to stay and somewhere, somehow your company will be called upon to complete a transaction using crypto. Never thought it would happen this fast but with the continued inflation talk one way to protect your buying power is to use a product that holds its value no matter how much the value of the dollar decreases. What led me to this conclusion? Basically, the investment newsletters I receive recently all had Crypto type investments to consider. In addition, my latest issue of Forbes has a young man on the cover (29 years old) who started a company called FTX, which is a crypto exchange where traders can buy and sell digital assets such as Bitcoin and other cryptocurrencies. FTZ handles about 10% of the $3.4 T (that is Trillion) market of futures and options trades crypto traders use each month. Big numbers! Consequently, this young man is worth $26 B as of this date. If crypto can generate that kind of value for a service provider these crypto companies are surely becoming an acceptable means of transferring value. Then I saw where contractors are using Crypto to purchase materials as well as receive Crypto as payment for services rendered. A masonry contractor in fact. If a masonry contractor uses this process, I suspect many other contractors will jump on the bandwagon. And, of course, we assume the value of the Crypto will increase in value as the value of the dollar falls as a result of another trillion dollars added to our money supply. Interesting, especially for those of you doing business with offshore vendors or customers. Probably worth the time to investigate further. Next on my list for this month is the “transitory” talk regarding inflation, general price increases, and how long the inflation levels (some say 5-7%) will hold until they return to a more normal 2%. Everything I read and hear about tells me the supply chain issue will remain for another two years. And because of shortages every one of you will experience cost pressures which you can hopefully pass on to the customers. And then they speculate that once the demand/ supply issue reverses we may even experience a recession. What fun owning a company that buys offshore products, has products that use the major industrial materials that are already at high price levels, has a need for trained personnel to service customers, and has to carry substantial inventories which are financed by bank debt where interest rates are sure to increase as means to curb inflation. If these issues were something you could reasonably plan for you are in a position to control whatever they throw at you. But the issues we face today are not “normal” and require closely managed companies to stay ahead of the game. To see what may happen to your financials under these conditions I prepared a simple balance sheet and income statement to determine how inflation will impact your financial stability. To get going I calculated the inflation impact for 10 years using 2% per year and also 5% pre year. After 10 years at 2%, the $1,000 current cost would increase to $1,200. Not bad. Something you can handle. But at 5% the $1000 cost becomes $1,550 (a 55% increase) that will necessitate a much higher degree of financial management. Would be great if you could get a dealer projection model where you could use all the variables and estimate profits and the balance sheet impact. The profit planning model would do for a start as long as you gross up the figures used to calculate ratios. The model I am referring to appears in the annual MHEDA Disc Report. The problem going forward relates to your ability to pass on increased costs to customers have the service capability to maintain your normal above-average performance, turn your inventory levels and still make an adequate profit to support this new business structure. My concern is the Balance Sheet. The cost of every non-cash asset category will increase not because you are buying more, but because they cost more per unit. Consequently, the liabilities will mirror what happened on the asset side and in addition incur expected interest rate hikes that will eat up cash. In the end, I see both the cash balance and the equity account not moving much even if sales increase. Remember the old saying ….and it is true that FOR EVERY DOLLAR OF SALES THERE IS AN ADDITIONAL CAPITAL REQUIREMENT. I remember years ago when I did a presentation titled HOW TO SELL YOURSELF INTO BANKRUPTCY, demonstrating how additional sales require more cash to cover the time you have to pay for items sold versus the time you collect from the customer. In short, you could have a great sales increase and run out of money, which is close to what I see if here if a substantial inflation rate sticks. Ways to mitigate this capital shortfall is more use of technology to improve productivity which will decrease the cost of doing business. Another is to manage inventory levels, which includes refurbing used units or rental fleet units to sell, which probably would be seen as beneficial since customers are in the same boat as you are. Another is to adapt to electrical units. Another is to clean up the rental fleet and used equipment inventory and covert as much as you can into cash. All of which assists with the “gap” referred to above. Stay on top of your game and be prepared no matter what the economy throws at you. About the Columnist: Garry Bartecki is a CPA MBA with GB Financial Services LLC and a Wholesaler columnist since August 1993. E-mail editorial@mhwmag.com to contact Garry.
Year-End Tax Planning Tips for small businesses
You still have time to significantly reduce this year’s business federal income tax bill even with all the uncertainty about proposed tax law changes. Here are five possible moves to consider — but stay tuned for developments. Congress is currently considering some major tax changes. If approved, it’s unclear when they will all take effect. Claim 100% First-Year Bonus Depreciation for Last-Minute Asset Additions Thanks to the Tax Cuts and Jobs Act (TCJA), 100% first-year bonus depreciation is available for qualified new and used property that’s acquired and placed in service in the calendar year 2021. That means your business might be able to write off the entire cost of some or all of your 2021 asset additions on this year’s federal income tax return and maybe on your state return, too. Consider making additional acquisitions between now and December 31. Contact your tax pro for details on the 100% bonus depreciation break and exactly what types of assets qualify. However, if significant tax-rate increases are enacted for 2022 and beyond, you could be better off forgoing 100% first-year bonus depreciation and, instead, depreciating newly acquired assets over a number of years. If tax rates go up, those future depreciation write-offs could be worth more than a current-year 100% write-off. Fortunately, you have until the deadline for filing your current-year federal income tax return — including any extension — to decide which course to take. If your business uses the calendar year for tax purposes, the extended filing deadline will be October 17, 2022, for sole proprietorships and C corporations. The extended deadline will be September 15, 2022, for partnerships, limited liability companies (LLCs), and S corporations. Extending your return may give you more flexibility to react to future tax developments. Write Off New or Used Heavy SUV, Pickup, or Van The 100% bonus depreciation deal can have a major tax-saving impact on first-year depreciation deductions for new or used heavy vehicles used over 50% for business. That’s because heavy SUVs, pickups, and vans are treated for federal income tax purposes as transportation equipment. In turn, that means they qualify for 100% bonus depreciation. Specifically, 100% bonus depreciation is available when the SUV, pickup, or van has a manufacturer’s gross vehicle weight rating (GVWR) above 6,000 pounds. You can verify a vehicle’s GVWR by looking at the manufacturer’s label, which is usually found on the inside edge of the driver’s side door where the door hinges meet the frame. If you’re considering buying an eligible vehicle, placing one in service before year-end could deliver a significant write-off on this year’s return. However, if significant tax-rate increases are enacted for 2022 and beyond, you could be better off forgoing 100% first-year bonus depreciation and, instead, depreciating newly acquired assets over a number of years. You have until the deadline for filing your current-year federal income tax return, including any extension, to decide whether claiming 100% first-year bonus depreciation is a good idea. Manage Current-Year Business Income and Deductions If your business operates as a pass-through entity — such as a sole proprietorship, S corporation, partnership, or LLC taxed as a partnership — your shares of various tax items are accounted for on your personal return and net income is taxed at your personal federal income tax rates. As the year-end approaches, if you expect to be in the same or lower federal income tax bracket in 2022 than you are in 2021, the traditional strategy of deferring taxable income into next year while accelerating deductible expenditures into this year makes sense. Deferring income and accelerating deductions will, at a minimum, postpone part of your tax bill from 2021 until 2022. On the other hand, if you expect to be in a higher tax bracket in 2022 than you are in 2021, accelerate income into this year (if possible) and postpone deductible expenditures until 2022. That way, more income will be taxed at this year’s lower rate instead of next year’s higher rate. Maximize the Deduction for Pass-Through Business Income The deduction based on an individual’s qualified business income (QBI) from pass-through entities is a key element of the TCJA. The deduction can be up to 20% of a pass-through entity owner’s QBI, subject to restrictions that can apply at higher income levels and another restriction based on the owner’s taxable income. For QBI deduction purposes, pass-through entities include: Sole proprietorships, Single-member LLCs that are treated as sole proprietorships for tax purposes, Partnerships, LLCs that are treated as partnerships for tax purposes, and S corporations. You can also claim the QBI deduction for up to 20% of qualified REIT dividends and up to 20% of qualified income from publicly traded partnerships. Because of the limitations on the QBI deduction, year-end tax planning moves (or lack thereof) can increase or decrease your allowable QBI deduction. For instance, year-end moves that reduce this year’s taxable income can have the unanticipated negative side effect of reducing this year’s QBI deduction. Work with your tax pro to optimize your results. Establish a Tax-Favored Retirement Plan If your business doesn’t already have a retirement plan, now might be the time to take the plunge. Current retirement plan rules allow for significant deductible contributions. For example, if you’re self-employed and set up a SEP-IRA, you can contribute up to 20% of your self-employment earnings, with a maximum contribution of $58,000 for 2021. If you’re employed by your own corporation, up to 25% of your salary can be contributed to your account, with a maximum contribution of $58,000. If you’re in the 32% federal income tax bracket, making a maximum contribution could cut what you owe Uncle Sam for 2021 by a whopping $18,560 (32% times $58,000). Other small business retirement plan options include: 401(k) plans, which can even be set up for just one person (also called solo 401(k)s), Defined benefit pension plans, and SIMPLE-IRAs. Depending on your circumstances, these other types of plans may allow bigger deductible contributions. Thanks to a change made by the 2019 SECURE Act, tax-favored qualified
Taxes that can hurt you
I had the privilege to make a presentation with my Dealer, Rental, and Equipment team for IEDA (Independent Equipment Dealers Assoc.) in September. It was similar to what we did for MHW One-Day Dealer Conference two years ago. With the new proposed tax law and the remaining ways to get government funding, we had plenty to cover in 60 minutes. I made my presentation regarding the state of the never-ending moving target of the economy, the COVID-19 impact, interest rates, the inflation/deflation possibility, supply chain issues, and let us not forget China because when China sneezes the rest of us catch a cold. And I am sure you can add to the list if you stop to think about it. There was one sobering fact I heard from the former head of the Dallas Fed who stated that his review of the supply chain issue and the inability of U.S. ports of entry to manage the flow, along with conversations with port authorities and union leaders leads him to surmise that it will take another two years before things get back to normal. Not good news if a major portion of your inventories come in by boat from another country. So, my presentation suggested dealers manage cash, clean up the Balance Sheet, prepare for the new lease accounting rules (in effect for 2022 financial statement), take the time to understand the new proposed tax changes, and find ways to continue to service customers including ways to reduce cost. Steve Pierson reviewed the proposed tax changes. He spent most of his time explaining potential risks associated with the phase-out of Bonus Depreciation since dealers currently using bonus sell assets with zero tax basis and then offset any tax by purchasing another unit that will then be deducted using Bonus. But once the phase-out occurs there could be tax exposure each year during the phase-out. The “new” tax liability could still be offset to a great extent using Sec. 179, as long as you qualify to keep in mind that Sec 179 has a $ 1 million cap, which may be less if your 179 purchases exceed $2.5 million. But, no matter what, we can count on both personal and corporate tax hikes. Paul Rozek, Steve’s Partner, then discussed ERC (Employee Retention Credit), which is still available for both 2020 and 2021. Surprisingly, a good number of attendees were not really familiar with this tax credit that provides substantial bucks depending on how the total sales for each quarter in 2019 compares against the quarterly numbers for the same quarter in 2020 and 2021. If any of your 2020 quarters had sales 50% less than the 2019 quarterly results you qualify for that quarter. They made it easier for 2021 where the 2021 quarterly results qualify if they are 20% less than the 2019 results. The max credit for 2020 is $5000 per employee for the year. For 2021 the max credit is $7000 PER QUARTER per employee. Like I said, big numbers if you qualify. This area is a bit complicated, and you really need a REAL EXPECT like Paul to max your benefit from this credit, with does not have to be repaid but is taxable in the year received. And last but not least Jim Margner, my SALT guy (State and Local Tax), reviewed the most complicated area of your company tax situation. This is a high-risk and potentially expensive issue if you mishandle reporting state and local taxes post-Wayfair. To get the discussion going Jim handed out a Questionnaire with nineteen questions on it. I think having a clean bill of health regarding SALT is important for every equipment dealer. Who needs to be harassed by the State for tax, penalties, and interest? The last time I received one of these notices there was a perceived $2000 tax missed that wound up with interest and penalties of over $10000, both of which increased daily. Luckily, Jim saved the day and proved the tax was paid and, in the end, it cost me $20. I am going to make Jim’s questionnaire available on the MHW website, along with Steve Pierson’s summary of the proposed tax changes and Paul Rozek’s presentation to help you understand the ERC. The points here are: YOU DO NOT WANT TO MISS OUT ON THE ERC YOU DO NOT WANT TO WIND UP WITH A TAX SURPRISE BECAUSE OF THE BONUS CHANGES YOU DO NOT WANT TO GET INVOLVED WITH A TIME-CONSUMING, EXPENSIVE STATE TAX ISSUE IF IT WAS SOMETHING YOU COULD HAVE AVOIDED If you have any questions, feel free to reach out to: Steve Pierson Pierson@seldenfox.com Paul Rozak Rozakl@seldenfox.com Jim Marger Jmargner@comcast.net Take care! Garry Bartecki is a CPA MBA with GB Financial Services LLC and a Wholesaler columnist since August 1993. E-mail editorial@mhwmag.com to contact Garry.
162 new Industrial Manufacturing Planned Industrial Project Reports – September 2021 Recap
SalesLeads just released the September 2021 results for the newly planned capital project spending report for the Industrial Manufacturing industry. The Firm tracks North American planned industrial capital project activity; including facility expansions, new plant construction, and significant equipment modernization projects. Research confirms 162 new projects in the Industrial Manufacturing sector. The following are selected highlights on new Industrial Manufacturing industry construction news. Industrial Manufacturing – By Project Type Manufacturing/Production Facilities – 147 New Projects Distribution and Industrial Warehouse – 54 New Projects Industrial Manufacturing – By Project Scope/Activity New Construction – 57 New Projects Expansion – 48 New Projects Renovations/Equipment Upgrades – 66 New Projects Plant Closings – 12 New Projects Industrial Manufacturing – By Project Location (Top 10 States) Indiana – 14 Texas – 12 North Carolina – 9 Ohio – 8 Pennsylvania – 8 Michigan – 8 Tennessee – 7 Ontario – 7 Illinois – 7 California – 6 Largest Planned Project During the month of September, our research team identified 15 new Industrial Manufacturing facility construction projects with an estimated value of $100 million or more. The largest project is owned by Ford Motor Company, which is planning to invest $5.6 billion for the construction of an EV automotive and battery manufacturing campus in MEMPHIS, TN. They are currently seeking approval for the project. Completion is slated for 2025. Top 10 Tracked Industrial Manufacturing Projects NEVADA: Lithium-ion battery recycling company is considering investing $1 billion for the construction of a 1 million SF manufacturing facility and currently seeking a site in the EASTERN NEVADA area. Watch SalesLeads for updates. ALABAMA: Automotive manufacturer is planning to invest $288 million for the renovation and equipment upgrades on their manufacturing facility in HUNTSVILLE, AL. They have recently received approval for the project. MICHIGAN: Automotive mfr. is planning to invest $250 million for the renovation and equipment upgrades at their manufacturing plants in DEARBORN, STERLING HEIGHTS, and YPSILANTI, MI. They have recently received approval for the project. SOUTH DAKOTA: Battery mfr. is planning to invest $250 million for the construction of a manufacturing and distribution complex in RAPID CITY, SD. Construction will occur in phases. They will relocate operations upon completion. NORTH CAROLINA: Fiber optic cable mfr. is planning to invest $150 million for the construction of a manufacturing facility in HICKORY, NC. They have recently received approval for the project. TEXAS: Paper products mfr. is planning to invest $120 million for the expansion, renovation, and equipment upgrades at their manufacturing facility in PINELAND, TX. Renovations are expected to start in early 2022, with completion slated for late 2022. MAINE: Paper products mfr. is planning to invest $111 million for the expansion and equipment upgrades of their manufacturing facility in RUMFORD, ME. They are currently seeking approval for the project. VIRGINIA: Aluminum extrusion mfr. is planning to invest $100 million for the expansion and equipment upgrades at their manufacturing facility in PRINCE GEORGE, VA. They have recently received approval for the project. OHIO: Recycled paper products mfr. is considering the construction of a paper mill and currently seeking a site in the SOUTHWESTERN, OH area. Watch SalesLeads for updates. TEXAS: Diversified industrial equipment mfr. is planning to invest $77 million for a 75,000 SF expansion and the renovation of their weather-damaged manufacturing and office facility in TYLER, TX. They have recently received approval for the project. Completion is slated for Spring 2022. About the Report Since 1959, SalesLeads, based out of Jacksonville, FL has been providing Industrial Project Reports on companies that are planning significant capital investments in their industrial facilities throughout North America. Our professional research team identifies new construction, expansion, relocation, major renovation, equipment upgrades, and plant closing project opportunities so that our clients can focus sales and marketing resources on the target accounts that have an impending need for their products, services, and indirect materials.
Been here before
Most people reading this probably have been, and again, the younger members of your team may not, and could probably use some education to help them be more effective in this current work environment. What I am planning to discuss this month is how the lift truck industry fared during the last financial fiasco (2008-2009) compared to what you are experiencing this time around (2020-2021 and maybe 2022). Neither event was pleasant, and most dealers found ways to manipulate their internal and external responsibilities to make it to 2020 for the start of the COVID-19 pandemic and related shutdowns and work from home scenarios. I guess if you are reading this that you were probably one of those that survived the former but still fighting through the latter. I went through both and believed (2008-2009) was easier to deal with even though it took five years in some cases to turn the corner. This time around there is more “change” associated with just about every industry, more technology developed to assist coming out of this situation in better shape than expected, much deeper declines in business and cash flows which could have caused more bankruptcies had it not been for PPP1 and PPP2, significant supply chain disruption and the related price increases caused by supply chain disruption. Many very serious economic roadblocks to deal with. But you would never think there were any by looking at the stock market. Crazy, crazy times. And to finish off our current situation you have to manage for either deflation or inflation, where making an error with either scenario could generate major cash flow problems. In a previous month, I mentioned either or both deflation or inflation would surface and probably both because deflation could be caused by the supply chain issue or if and when the Fed increases interest rates which could cause a recession, while on the other hand inflation is being caused by the supply chain issues but also because of the number of dollars being printed cause a demand/supply problem with more dollars chasing fewer goods. I little nuts but issues demanding planning for each scenario. One way to plan where you are and where you are going is to go back to your 2008-2009 financial statements to see how they compare to where you are now. You could also get into your 2010-2011 financials as a way to see how to plan for 2022 -2023. It will also be informative to see how your business has changed in the interim. Sales mix. Absorption rates. Payroll costs. Insurance costs. Benefit costs. I mention the income statement items but maybe more importantly are any differences associated with your Balance Sheet. Let us spend some time with the Balance Sheet. I am going to suggest what changes you will see without even looking at the two different statements (2021 vs 2010). I expect less cash on a normalized basis (before you take out discretionary $) because the pandemic provided much tougher economic problems to work through AR collection periods extended compared to 2009. Also, the AR per customer could be lower because your ability to deliver products and services was hampered by the supply chain issue. The cost of inventory, both new and parts, are higher and hopefully, you can sell them at what you paid for them. This will be a major issue for the auditors this year. If you had a lot of used inventory going into the pandemic it probably declined in value and has now starting to recover from a value standpoint. Again, this will be an audit issue as well as a collateral issue with your bank. This was a major issue in 2008-2009 mostly resolved by selling off fleet to pay down the banks, only to have to repurchase those units 24 months later. Be best to spend some time on your parts and used equipment inventories to support the valuations they are sitting at. How you cost them. How do you account for sales (first-in or last-in or some combination thereof? Annual equipment appraisals performed by a party that knows your business helps if the bank recognizes the appraisal as an expert. I will guess that equipment rental is providing a higher % as part Total Sales. This is a good place to find underutilized capital. Make sure you need what you have in the fleet. If not, move it before the auditors tell you to write it down. And the appraisal of rental units is as important as it is for used equipment. If your rental fleet has increased in size and you are using term loans to finance them, be aware that the increase in rental assets can lower your working capital number and raise a red flag to the bank. Pure rental companies do not calculate current assets and current liabilities because the current liabilities for fleet notes have a negative impact on your working capital calculation caused by having 100% of the fleet as a long-term asset while the related notes (current portion) sit in a current asset category. We can go on and on, but you must realize that NOW is the time to have a Clean Balance Sheet where you are aware of your shortcomings that will reduce the amount of cash they generate, as they move from inventory to the cash account. So lay both Balance Sheets side by side and see where you stand, and then compare to the MHEDA cost study, especially the top 25% category. Some good news. The new lease accounting mandate is being deferred until your 2022 statement (if you are on a Dec 31 year-end). But, as long as you are reviewing the Balance Sheet you should take a shot to see how it will look once the leasing mandate is adopted and see what it does to your bank covenant ratios. About the Columnist: Garry Bartecki is a CPA MBA with GB Financial Services LLC and a Wholesaler columnist since August
166 new Distribution and Supply Chain planned Industrial Project Reports – August 2021 recap
SalesLeads has announced the August 2021 results for the newly planned capital project spending report for the Distribution and Supply Chain industry. The Firm tracks North American planned industrial capital project activity; including facility expansions, new plant construction, and significant equipment modernization projects. Research confirms 166 new projects in the Distribution and Supply Chain sector. The following are selected highlights on new Distribution Center and Warehouse construction news. Distribution and Supply Chain – By Project Type Distribution/Fulfillment Centers – 55 New Projects Industrial Warehouse – 136 New Projects Distribution and Supply Chain- By Project Scope/Activity New Construction – 60 New Projects Expansion – 42 New Projects Renovations/Equipment Upgrades – 68 New Projects Closing – 2 New Projects Distribution and Supply Chain – By Project Location (Top 5 States) Florida – 15 New York – 11 Texas – 10 California – 9 Georgia – 8 Largest Planned Project During the month of August, our research team identified 5 new Distribution and Supply Chain facility construction projects with an estimated value of $100 million or more. The largest project is owned by Frito-Lay North America, Inc., which is planning to invest $180 million for the construction of a 355,000 sf. warehouse and distribution center at 1496 S. Poinciana Blvd. in KISSIMMEE, FL. Construction will start in early 2022, with completion slated for 2024. Top 10 Tracked Distribution and Supply Chain Project Opportunities New Jersey: A global online retailer is planning to invest $125 million for the renovation and equipment upgrades on a 250,000 SF distribution facility in NEWARK, NJ. They have recently received approval for the project. Oklahoma: Economic development agency is planning to invest $124 million for the construction of a multimodal logistics distribution facility in ARDMORE, OK. They are currently seeking approval for the project. Georgia: Online fashion and beauty retailer is planning to invest $100 million for the expansion and equipment upgrades at their warehouse and distribution center in UNION CITY, GA. They have recently received approval for the project. Completion is slated for 2023. Alberta: A brewery is planning to invest $69 million for a 60,000 SF expansion, renovation, and equipment upgrades on their warehouse and production facility in EDMONTON, AB. They are currently seeking approval for the project. British Columbia: A global online retailer is planning to invest $65 million for the construction of a 115,000 SF distribution center at Victoria International Airport in SIDNEY, BC. They have recently received approval for the project. Completion is slated for Fall 2022. South Carolina: Bedding products mfr. is planning to invest $47 million for the renovation and equipment upgrades on the recently leased warehouse and distribution space at 101 Michelin Dr. in LAURENS, SC. Completion is slated for late 2021. Louisiana: A beverage company is planning to invest $42 million for a 120,000 SF expansion, renovation, and equipment upgrades on their warehouse and processing facility in BATON ROUGE, LA. They have recently received approval for the project. Florida: A global online retailer is planning for the construction of a 1.1 million SF warehouse and distribution center at West Midway Rd. in PORT ST. LUCIE, FL. They have recently received approval for the project. Completion is slated for Fall 2022. Tennessee: A global online retailer is planning for the construction of a 1 million SF distribution center in CLARKSVILLE, TN. Completion is slated for 2022. Kentucky: An apparel mfr. is planning for an expansion of their distribution center in BOWLING GREEN, KY by 203,000 SF They have recently received approval for the project. Completion is slated for Summer 2022. About this report: Since 1959, SalesLeads, based out of Jacksonville, FL has been providing Industrial Project Reports on companies that are planning significant capital investments in their industrial facilities throughout North America. Our professional research team identifies new construction, expansion, relocation, major renovation, equipment upgrades, and plant closing project opportunities so that our clients can focus sales and marketing resources on the target accounts that have an impending need for their products, services, and indirect materials.
Equipment Leasing and Finance Association’s Survey of Economic Activity: Monthly Leasing and Finance Index
July New Business Volume up nine percent year-over-year, Down five percent month-to-month, and Up nearly nine percent year-to-date The Equipment Leasing and Finance Association’s (ELFA) Monthly Leasing and Finance Index (MLFI-25), which reports economic activity from 25 companies representing a cross-section of the $900 billion equipment finance sector, showed their overall new business volume for July was $9.9 billion, up 9 percent year-over-year from new business volume in July 2020. Volume was down 5 percent month-to-month from $10.4 billion in June. Year-to-date, cumulative new business volume was up nearly 9 percent compared to 2020. Receivables over 30 days were 1.9 percent, up from 1.8 percent the previous month and down from 2.4 percent in the same period in 2020. Charge-offs were 0.18 percent, down from 0.22 percent the previous month and down from 0.73 percent in the year-earlier period. Credit approvals totaled 76.5 percent, down from 76.7 percent in June. Total headcount for equipment finance companies was down 13.9 percent year-over-year, a decrease due to significant downsizing at an MLFI reporting company. Separately, the Equipment Leasing & Finance Foundation’s Monthly Confidence Index (MCI-EFI) in August is 66.6, a decrease from the July index of 72.9. ELFA President and CEO Ralph Petta said, “Despite supply chain disruptions in some sectors of the economy, signs of inflation, and the emergence of the Delta coronavirus, July’s new business volume in the equipment finance industry is strong. Consumer spending is picking up, equity markets continue to advance, and unemployment is slowing—reasons to be optimistic about equipment investment and industry performance for the second half of the year.” Jill McKean-Bilby, President, BOK Financial Equipment Finance, Inc., said, “2021 continues to be interesting. Demand for equipment remains high, which is resulting in higher equipment costs. Customers are ordering equipment from OEMs with very long lead times, with the delivery times of some orders unknown. The interest rate environment still remains low. Cash has been one of our main competitors this year, due to companies still having additional resources due to PPP loans. However, we have been able to continue to grow and remain steady with organic growth.”
Financial markets and how it will affect you
This is our annual review of the Banking, Rental, and Leasing markets. Where they are and where they are going. All in all, things look pretty good with a qualifier regarding inflation, interest rates, and a potentially dangerous upswing in the new COVID-19 variant. Boy, that is quite a swing in expectations which basically suggests you plan conservatively, take advantage of short-term opportunities and keep looking over your shoulder to see what is creeping up on you. Let’s start with the BANKS. A fair percentage of banks are loosening up their credit standards for commercial loans, real estate loans, and consumer loans. But, on the other hand, many are reluctant to work with problem loans as they may have in the past. In short, trusting your bank right now may not be a smart thing to do, and maybe you should be shopping around to see which bank may have more interest in your company, is familiar with the industry and understands the industry cycles we all go through, cycle after cycle after cycle and still make it to the other side. You would be amazed how many bankers lack the knowledge of how your cycles work and what you do to manage them. Today, at the first sign of trouble their first thought is to send the loan to the “work-out” section who will suggest you sell everything and send the proceeds to them. Sounds like 2008-09 to me. With interest rates what they are I would suggest you look at refinancing any loan with more than a 3-4% rate attached to it. You don’t get it unless you ask. That would go for vehicles, real estate, inventory loans, and rental equipment. There is a lot of money out there looking for a home. I would also ask what they could do with customer equipment financing if they are offering up attractive rates. And if you have the ability to “buy down” the rate to make your major proposals more attractive that could be a good thing. A recent experience I had kind of indicates what is happening out there. My SUV 36-month lease was ending with a $17,000 residual if I wanted to buy it out. Not being able to find anything I liked with the current vendor. I searched around other vendors and found another 36-month lease where the car had a 67% residual. Not bad! And then I took my current vehicle to CARMAX for an appraisal and they said the trade was worth $22,000. I could not believe it. So, then I marched into the dealer and said I need another $4,000 on the trade and got it. In the end, I wound up with a 36-month lease car payment of $315 with a sticker price of $31000. The high residual and 2.3% interest rate in the lease did the trick. As I said, don’t ask…. don’t get. No matter how your finance your inventory and rental fleets you will doing yourself a favor keeping track of the FMV and OLV of the units you own. Needless to say, the banks got really scared when equipment values tanked and are still not to where they were pre-pandemic. You know it and I know they will come back to where they belong, especially with a shortage of new units which forces up values of both units owned as well as rental rates. I suggest an annual valuation of all owned units which support your bank loans as well as provide any “built-in” equity you have in the fleet. Having these values handy not only helps you out but also your customers who need to supply a value for units they are purchasing from you. On to Leasing Companies Leasing companies seem ready to rock and roll, believe that both construction equipment and material handling equipment are ready to entertain a healthy period of growth. Nice of them to believe that but it really comes down to each dealer’s customer mix to see if the growth potential falls into their individual market. It may or may not. The point here is not to assume and make financial decisions thinking the industry will grow over the next 12-18 months without doing your homework within your market that will support that belief. Leasing still has a benefit over purchasing because there are numerous ways to structure a lease that you could probably not do through bank financing, not to mention the cash savings available with a lease over a bank loan. Some of those benefits, however, will be diminished when lessees need to be capitalized on your financial statements (supposed to start this year I believe). As indicated by my auto deal the current interest rates available kind of makes the buy-lease question a non-starter. And once the leases are reflected on your balance sheet it is time to trust your bank because they told you not to worry about it because this accounting change will not impact your covenants. Somehow, I do not believe that. As I have mentioned in the past you may want to review this question now before the new format hits your statement and their underwriting desks. Rentals took a hit in 2020 and are finally recovering in 2021 with an expected catch-up carrying over into 2022. I am expecting an increase in overall rental activity because with the new technology being added to equipment every year it makes more sense for users without sophisticated maintenance facilities to rent versus buy the units, also supported by a lack of skilled employees to maintain the equipment. In addition, many users are more balance sheet conscious and wish to avoid debt service and invest instead in more technology to make operations more efficient and more profitable. Cannot say I disagree with this approach which should support your lease with maintenance programs going forward. Out of the three segments of the financing world we are discussing rental took the biggest hit from the bankers. When the
Forks in the road
Hope you noticed I used a plural for the word “Forks”. Did it on purpose because every company out there will have many decision points to consider regarding post-pandemic activity, many of them uncomfortable to discuss but in some shape or form necessary to deal with. And when you add the “forks” into the mix it seems managements time will be increasing preparing plans for ’22 and beyond using gameplans that are drastically opposed to one another. Almost every line item on your balance sheet and income statement will be in play, with your goal to ensure adequate cash flow to cover debt service as well as operating expenses. Easier said than done under current circumstances because of all of the variables (forks) that need to be considered. And not only do you need to dive deep into your financial needs but also have to take into consideration your customer needs for the periods under consideration, because it does not make much sense to devise a game plan for 2022 and 2023 only to find that customer needs are materially different from what you plan to offer. You are probably wondering what forks we are talking about. The inflation/deflation possibilities are the choices because you will need to decide which horse you decide to ride but also plan for both. Read on to see why. If you guess right good for you. If you guess wrong, you have trouble. But why guess when you can be proactive getting in front of customers to see how you can help going forward. Being that most of your customers deal with large inventory investments they may need to become more efficient or cut costs to assist with debt service issues. If I had to guess a good number of customers are worried about customers coming back online and their ability to service those customers. Then they need to think about getting paid, interest rates, and wages along with cost inflation or potential deflation if they need to liquidate inventory. You have been hearing mostly about inflation fears for the balance of the year and probably into next year. Probably true and probably short-term except for the “sticky” inflation that is tough to reverse, such as wages. But after much reading and research, it is just as likely that deflation could precede inflation by about 15 quarters or more because of debt levels causing above-average debt service demands. The technology could also produce new products for a lower cost. In short, there is a possibility customers may have to liquidate excess inventory to generate cash to pay vendors and bankers and at the same time find lower-cost products coming online to replace what they sell. History tells us that debt bubbles (as we are in now) produce inflation increases as a lagging indicator because debt issues slow growth and cause prices to decrease because companies have to reduce prices to meet debt service needs. The lag is about 15 quarters or four years. So here is one of the forks you need to deal with. Are you planning for an extensive high inflationary period starting in 2022 and what that would mean in terms of employee needs, inventory needs, marketing, and sales upgrades as well as any related costs to execute such a program? Or will you plan based on the other side of the coin with deflation more prevalent because of businesses dealing with debt issues producing a need to unload inventory and assets as well as costs to produce positive cash flow? If a majority of your customers find themselves in this debt bubble scenario dealers could wind up facing lower revenues, excess inventories to finance, and bank covenants that are going to be hard to meet. Had you picked the low inflation plan and assume customers will be in a similar situation most of your offerings to major customers would be to make them more efficient, help them sell off used material handling equipment, and assist on cost reduction where you can. When you stop to think about it there are so many financial scenarios to consider regarding 22 and 23 that you should probably consider quarterly plans for both situations; higher than normal inflation levels for some time to come; and another pushing out the higher inflation out four years taking into account cash flow and debt service issues, customer bankruptcies, excess inventory levels, AR collection problems, and lower rental activity to name a few concerns. Some folks are suggesting we head back to a ZERO-BASED budgeting approach as a middle-of-the-road approach to start with. Not a bad idea and with the gig society out there the ability to cut payroll costs and at the same time pick up some expertise to assist with the budget process is there for the taking. In the end for every fork, you decide to go down there will be other forks to consider before we get back to normal, whatever that may be. A conservative approach seems to be more risk-averse. But if you have another plan on your shelf to apply to a more robust inflation cycle you can operate with lower risk until the time comes to change the game direction. All things considered, talking to your customers should be #1 on your list before making any final decisions. About the Columnist: Garry Bartecki is a CPA MBA with GB Financial Services LLC. E-mail editorial@mhwmag.com to contact Garry.
What is next on the list and how to get it done
Every time I attend a Board Meeting or Management Meeting the participants always wind up asking “what is next on the list” and how the heck we can get it done, who is going to be responsible, how to measure progress and when to call it quits if the results are NOT what we are looking for. I expect you to go through the same process. After thinking about this I noticed that the way to manage a “Get it Done” process could parallel or maybe should parallel the process followed by professional traders, especially the process used by the most successful traders, who in many cases start with minimum funds and wind-up being millionaires. There are, of course, many unsuccessful traders who lose their shirt along with their trading equity. There is no one trading format to use. You have to pick one and stick with it until you justify changing to another method. Most successful traders keep a journal to track the good ones and the bad ones. They all figure out a process that gives them an “edge” to produce a higher win rate. Risk and equity management is a must. Stops and other “downside protection” methods need to be understood and executed to lose no more than a minimum of your core investment dollars. In terms of risk, if you are approaching your hard-line risk number what you are doing is not working. And every one of these folks has a set of GET OUT rules that are followed religiously. They may get in a trade at 1:00 pm and close it out and 1:05 pm if any of their trading expectations are not met. They will not ride a loss to see if it will turn around. In short, the entire process and trigger points are set before the trade is made. And most realize that making 2-3% (a day, a week, a month) adds up to a lot of money if proper investment is made. You will be amazed how much can be made starting with truly little. I find trading fascinating, and Jack Schwager has written a book titled ” UNKNOWN MARKET WIZARDS, ” which happens to be highly successful traders who all found the method that gives them the edge they need to be successful. The bulk of the reading material is interviews conducted by Mr. Schwager where he tries to get an understanding of what these individual traders do and how they manage the process. But the remarkably interesting thing is EACH PERSON HAS THEIR OWN INDIVIDUAL PROCESS THEY FOLLOW. An amazing read worth your time because their process should be similar to your management process to “Get it Done” because your company and personnel overall produce an “edge” you should work with to solve problems or produce game plans for company growth. In my practice what I preach episode you are all aware of how I have been preaching about the benefits of hiring folks right out of college. And I have an example to share with you. A young lady I know recently graduated with three majors and not knowing what she wanted to do took on a part-time position filling in for company service personnel when they were needed. And as it turns out, the company also needed an AP clerk to properly account for payables, which are somewhat complicated to record properly. To make a long story short, the former AP clerk took most of a week to record the data, whereas the young lady looked over the materials and had it completed in one day. Enough said. And they can assist with computer and ZOOM systems. Part IV of Job Shock is this month’s feature story in this issue as well as on the MHW website with the previous parts of the series. More disturbing news, but also, in my mind, profit opportunities that could foster a stronger relationship with your customers. Give it a read and share with high-school and college students. On the tax front, the American Rescue Plan Act contains additional tax benefits for both employees and your company. The Employee Retention Credit is worth reviewing because even if you received both PPP1 and PPP2 funding you can still receive the Retention Credit if you qualify. The ACT also provided another $1,400 check or $2,800 for married taxpayers. You should have received two previous checks plus this $1,400 check. If you did not receive them, you can take them as a credit on your 1040. As long as we are in accounting mode let me tell you about an article in the Journal of Accountancy titled “8 WAYS TO CALCULATE DEPRECIATION IN EXCEL”. Believe it or not, there are eight ways to calculate deprecation. If you want a copy of the article let me know. Who knows, one of the methods may be a better fit for the way you do business. There is a lot of talk about Inflation and Deflation, both of which could require some of that planning as discussed above. But no matter what happens every business will need to take steps to mitigate their impact and still retain their customers. We will cover this topic next month. About the Columnist: Garry Bartecki is a CPA MBA with GB Financial Services LLC. E-mail editorial@mhwmag.com to contact Garry
ELFA Monthly Leasing and Finance Index: April 2021
The Equipment Leasing and Finance Association’s (ELFA) Monthly Leasing and Finance Index (MLFI-25), which reports economic activity from 25 companies representing a cross-section of the $900 billion equipment finance sector, showed their overall new business volume for April was $9.8 billion, up 19 percent year-over-year from new business volume in April 2020. Volume was up 5 percent month-to-month from $9.3 billion in March. Year-to-date, cumulative new business volume was up 4 percent compared to 2020. Receivables over 30 days were 1.8 percent, down from 1.9 percent the previous month and down from 3.0 percent in the same period in 2020. Charge-offs were 0.30 percent, down from 0.43 percent the previous month and down from 0.80 percent in the year-earlier period. Credit approvals totaled 76.3 percent, down from 77.0 percent in March. Total headcount for equipment finance companies was down 15.4 percent year-over-year, a decrease due to significant downsizing at an MLFI reporting company. Separately, the Equipment Leasing & Finance Foundation’s Monthly Confidence Index (MCI-EFI) in May is 72.1, easing from April’s all-time high of 76.1, but still at historic high levels. ELFA President and CEO Ralph Petta said, “Respondents showed robust April business activity, attesting to a strengthening economy. Despite soft labor market data for the month, an increasing number of businesses are opening up, as more Americans are receiving a vaccination, traveling, and otherwise trying to return to some semblance of normalcy. Portfolio quality also shows resilience as lease and loan contract modifications requested by many customers appear to be in the rear-view mirror. The economy and business activity still have a ways to go to return to pre-pandemic levels, but what we see so far in terms of capital equipment investment is indeed encouraging as we head into the summer months.” Ricardo Rios, president and CEO, Commercial Equipment Finance, Inc., said, “2021 is trending to be a banner year for CEFI. The April MLFI results and those at CEFI demonstrate major similarities; the only outlier being YOY headcount (where CEFI is 20 percent above). While we are actively seeking to hire additional team resources, the recruiting market is proving to be challenging.”
Are we on “AUTO” matic?
Back in the old days when OEMs, Dealers, Customers, and Banks sought to seek guidance in their crystal balls related to the near and long-term future of the lift truck industry, there would be studies and discussions, and meetings arriving at potential various outcomes. But eventually, at some point during these discussions, before notes and white papers were prepared, someone would always ask “Let us see what the auto industry is doing because whatever they do, we (the lift truck industry) will wind up doing much of the same, maybe not at the present time but within 3-5 years or so. Remember those conversations? I do. And I remember how true that statement was as equipment dealers eventually mirrored the auto business. Let us face it, a lot of what the auto industry did was beneficial when applied to the lift truck industry, even though some of what they offer up did not fit in well because of the difference between the retail and industrial customer base. In the end, I believe the lift truck industry (and other equipment OEMs and dealers) owe a lot to the auto industry for leading the way in terms of manufacturing efficiency, the just-in-time building process, financing, and leasing programs. Lift truck OEMs and dealers who followed “autos” lead benefited with better profits, cash flow, and company valuations. But reviewing the current status of the auto industry leads me to believe that if our industry follows their current outlook (not of their making) there are a lot of negative issues you will need to deal with a lot sooner than the historical “normal” 2–5-year catch-up period. Auto dealers are having trouble selling cars. Not that they do not want to sell them and not because the demand is not there, because it is. The problem is a shortage of inventory because of those microchips we have been hearing about. Auto OEMs have actually been building vehicles and parking them before they are finished because they need chips to complete the build. A lot of “inventory” to finance! And once auto OEMs closed down manufacturing locations due to the pandemic and canceled their chip contracts the just-in-time process hurt them because they had no inventory to draw from. To make matters worse the chip manufacturers went out and found new business to replace the auto business and are not in a position to supply auto production at the levels needed. In short, when they eventually get chips, they will be upgraded chips at a much higher cost. Imagine that. So, the shortage status remains status quo. Along with the chip availability and cost, there are other cost increases to consider. Steel up 180% Aluminum up 60% Copper 80% Etc. Most auto components are increasing in price with an assurance that prices will wind up higher than they currently are even after the pandemic impact subsides. In other words, HIGHER STICKER PRICES. These cost issues will make it tougher to sell cars because of price increases, even though up to this time you could “hide” price increases somewhat because interest rates and the cost of borrowing so low, which made payments more manageable. Maybe that is about to change as well. I know it is hard to believe but interest rates will increase, and it appears that may be sooner rather than later. Couple that with the price increases of vehicles (because of cost increases) and those manageable payments will become a lot harder to stomach, which could lead to fewer sales. For an industry with tight margins, this is not good news. So back to our “let’s see what the auto industry is up to” question. I have to think that your OEMs have to be in the same boat. Right? And if that is correct you are also in the same boat. Right? This is how see it: New equipment costs increase Higher parts cost Higher interest rates applied to floor plans and future rental unit purchases Some good news …used equipment values should increase Monthly lease payments will increase Lease maintenance will increase because of higher parts costs Overall financing contracts will contain rate increases Taxes will increase in some way, shape, or form Customers will have more reasons to “shop” What did I miss? What should I delete? I would like to know. In the end, it will be interesting to see how the Auto Industry handles this using a magic solution found in their crystal ball. What do you think is going to happen? Last month I was kind of kidding when I mentioned receiving payments in Bitcoin. But one month later maybe I was not kidding. About the Author: Garry Bartecki is a CPA MBA with GB Financial Services LLC. E-mail editorial@mhwmag.com to contact Garry
Bonnie Michael named 2021 Recipient of the Edward A. Groobert Award for Legal Excellence from ELFA
The Equipment Leasing and Finance Association (ELFA) has awarded Bonnie Michael, Vice President Legal and Compliance USA for Volvo Financial Services, the Edward A. Groobert Award for Legal Excellence. ELFA Legal Committee Chair Lisa Moore, Senior Counsel at PNC Equipment Finance, LLC, presented the award to Bonnie on May 4 at ELFA Legal Forum LIVE! in recognition of her significant contributions to the association and the equipment finance industry. Bonnie has over two decades of experience representing equipment finance companies and the financial services industry. She joined Volvo Financial Services as General Counsel in 2010 and has led the USA legal team since then. In her current role, she monitors the broad spectrum of legal and regulatory areas impacting the company, providing day-to-day advice and guidance, and implementing changes as developments occur. A leader in her field who is conversant in a wide range of topics concerning equipment finance, Bonnie has contributed to ELFA and the equipment finance industry in a number of ways. She has served as an information resource for ELFA members regarding legal issues impacting the equipment finance industry. She has been a frequent speaker and participant in the ELFA Legal Forum and other industry events. In addition, she has contributed to ELFA’s Equipment Leasing & Finance magazine and the Equipment Leasing & Finance Foundation’s Journal of Equipment Lease Financing and led a team of ELFA volunteers in updating the Motor Vehicle State Survey on Financial Responsibility. Bonnie has served in a number of leadership roles within the association. She is a past member of the ELFA Legal Committee (2010–2012) and past Chair/Co-Chair of the ELFA Motor Vehicle Subcommittee (2010–2016). She also gives back to the industry by serving on the Board of Trustees for the Equipment Leasing & Financing Foundation (2015–present). In 2020, she was the Vice-Chair of the Foundation Board. She has served on the Foundation’s National Development Committee, Nominating Committee, and Editorial Review Board for the Journal of Equipment Lease Financing. As a respected industry thought leader, Bonnie has mentored many members of the industry legal community. She has invested time and leadership in serving as a resource to colleagues seeking guidance from her on a range of legal issues. Outside of ELFA, Bonnie has actively participated as an “observer” in the submissions to and meetings with the Uniform Commercial Code and Emerging Technologies Committee of the American Law Institute/Uniform Law Commission currently undertaking a review of the UCC to determine whether the Code or official comments should be revised or supplemented to reflect emerged and emerging technology. In addition to her legal responsibilities at Volvo Financial Services, Bonnie created and served as the initial Chair of the Community Involvement program in the U.S., which furthered her passion for giving back, and also created and served as the first Chair of the Engagement Committee in the U.S., helping to foster an even better workplace for all employees to enjoy. Bonnie holds a J.D. from Chicago-Kent College of Law and a Bachelor of Arts degree in journalism from the University of Wisconsin. About the Award The Edward A. Groobert Award for Legal Excellence is named for ELFA’s long-time Secretary and General Counsel Edward A. Groobert, who was active in the legal affairs of the association from the mid-1960s until his retirement in 2010.