New tax law may lead to banner machinery sales

By slashing corporate tax rates and giving an immediate 100 percent depreciation for capital investments, the big federal tax reform package could boost plastics equipment in this NPE year.

But it's still too early to gauge the full impact, according to machinery officials and some processors.

President Donald Trump signed the tax reform just three days before Christmas. Plastics machinery executives interviewed in the first few weeks of January said their U.S. customers are still trying to gauge the impact, as well as making lists to prioritize their most pressing capital machinery needs.

"It's still too early, and many ​ companies are still trying to figure out the real tax saving before they will commit to new equipment investments," said Sonny Morneault, vice president of sales and marketing at Wittmann Battenfeld USA. But Morneault said customers are saying the tax reform will be a big contributing factor in equipment spending.

Machinery leaders contacted by Plastics News were bullish for 2018, but as the New Year dawned, they were sorting it all out.

"I do really think it's still kind of early, but certainly when I look at the details of it, I would think it makes common sense that this will certainly spur investment," Peter Gardner said Jan. 4. Gardner is vice president of sales and general manager of Niigata injection molding presses at DJK Global Group in Wood Dale, Ill.

Niigata and several other injection molding press suppliers are bumping up inventory in anticipation of a big year.

"We've increased our production plan for stock machines, machines we stock here in the U.S. for quick delivery to customers. We've increased that by 25 percent in anticipation of there being more demand for machinery because of the tax reform law," Gardner said. The machines are made in Japan.

Bill Duff, general manager of sales and marketing at Yizumi-HPM Corp., said the company has boosted inventory of its Chinese-made injection presses by about 30 percent at its headquarters in Iberia, Ohio.

"So we'll be hot, and we'll be carrying a much higher level of inventory for 2018 than we have in the previous two years," he said.

The tax reform lowers the corporate tax rate from 35 percent to 21 percent. It also includes a 20 percent deduction on taxable income for S corporations or LLCs — common in the plastics processing industry — known as "pass-through" companies because the income falls to the taxable income of the owners.

The 100 percent depreciation runs for five years, through 2022.

"The bonus depreciation means I get to expense 100 percent of the asset in the year it's placed into service," said Michael Devereaux, who coordinates the tax incentives program at Mueller Probst LC in St. Louis. He said it applies to new machinery and used equipment.

The write-off also applies to some other capital investments, such as physical improvements to a factory.

Combined, the tax cuts dramatically reduce the cost of capital. The 21 percent corporate tax increases the productive capacity of the economy and makes the United States a much more competitive place to manufacture, economists say.

It gives companies more money to spend on capital improvements, hiring and giving pay raises, as well as improving their profitability.

Another fuel source for growth this year: In a rare occurrence, major economics around the world are strong at the same time.

"The stock market is great. The volatility index is low, which is kind of a measure of confidence in the stock market by investors. It seems like all green lights ahead for our economy," said Gardner of Niigata.

But for machinery, the 100 percent expensing is the Big Kahuna, economists and machinery officials say.

"You get to write off capital investment immediately for things like machinery, so that puts machinery 'on sale,'" said plastics economist Bill Wood. "That means that whatever you spend on it, roughly speaking, is about 20 percent cheaper because that money you don't have to pay taxes on. … So that, too, will be favorable."

Devereux said: "It's huge. I think this is going be wonderful for manufacturing."

Already solid, the U.S. market for injection molding presses — the largest single category of primary plastics equipment — has rebounded strongly since the Great Recession. Over the last three years, U.S. injection press shipments have topped 4,000 units, considered a benchmark rate. Wood called it "kind of a steady grind upward." And although tepid in recent years, the current long economic expansion is one for the history books that is driving a bull market in stocks that is nearly nine years old.

"So the tax bill won't hurt, but it's not clear to me how much it's going to help. The environment was already pretty good for investment in new equipment anyway," said Wood, who runs Mountaintop Economics & Research Inc. in Greenfield, Mass. Wood also is economics editor for Plastics News.

A tax break alone is not going to cause a plastics processor to buy a new machine.

"I always tell people, don't let the tail wag the dog. Buy equipment if you need to buy equipment," Devereux said.

Donald Rochelo, chief operating officer of custom molder Apex Resource Technologies Inc., agreed.

"Purchases and the need to purchase is a result of things already in play. We don't wait for a tax bill and then look around and say, 'What can we spend the money on?' That's not how it works with business," he said. "The need has got to be there before you look around."

But at the same time, any manufacturing plant has some older equipment, an outdated cooling system, even leaking air hoses.

Mack Molding Inc. already has purchased some new metal fabrication machinery.

"We're lining up exactly what we're going to buy in terms of injection molding machines. Paint systems, cooling fixtures, air equipment, we're looking at it," said President Jeff Somple.

Somple said the tax help is encouraging "kind of a spring cleaning" at the custom molder based in Arlington, Vt. Mack officials compiled a full list of the custom injection molder's infrastructure, listing what needs to be replaced or upgraded. Mack's fiscal year runs July 1 through June 30 — well before any specifics of the tax reform came out. But it was all over the news. So, Somple said, the company created two capital budgets in its planning process back last May — one for no tax reform, and a "what if" one with reform that included additional investments.

John Felinski, president and CEO of film converter Filmquest Group Inc. in Bolingbrook, Ill., announced Jan. 4 that the company paid a tax-reform driven $1,111.11 bonus to all 60 employees. (The unusual bonus amount reflects all the employees as No. 1, he explained.)

That special bonus was in addition to a normal performance bonus paid in December, not realizing tax reform would pass as fast as it did. Then Felinski saw the headlines about bonuses from big companies like AT&T giving $1,000 to more than 200,000 U.S. employees.

Filmquest also plans to buy a new coater, an investment of around $3 million, as well as upgraded slitters and metalizing equipment. The coating line would require hiring six new employees, Felinski said. And he said money freed from tax reform could help the company make acquisitions.

"The new tax is a tremendous boost to go in that direction," he said.

Some money freed up by lower federal taxes will go toward new molds.

Mike Zacharias, president and owner of mold maker and molder Extreme Tooling & Engineering Inc., said he agrees with President Trump that the tax changes are a once-in-a-generation opportunity.

"Like many other manufacturers, I am very excited and appreciative of the recent tax change," he said.

He is putting the money to work. Extreme Tool will invest more than a $1 million in facilities and five-axis CNC equipment. The company has increased its starting wage to $15 an hour and gave a 3 percent raise to its 80-employee plant in Wakefield, in Michigan's Upper Peninsula. The new minimum wage goes to everybody, including part-time and school-to-work people, Zacharias said.

"I felt like it was a good time to show all of our employees how government and business can work together to make all of our lives better," Zacharias said. He called it a "teachable moment."

"You've got to embrace the opportunities to do the right thing when it comes around," he said.

Tax reform was not part of the motivation in November when Apex Resource Technologies took delivery of a Niigata vertical all-electric press for its clean room molding operations, Rochelo said. But in a Jan. 10 telephone interview, he said the company's accountant was looking into it.

Industry officials said the spending on machinery will include new capacity and replacement machines.

Gary Carr, vice president of sales at Bekum America Corp. in Williamston, Mich., said, "there is still a very large critical mass of existing old machines" 20-plus years old in the field. "We will hopefully see an emphasis to do phased-in replacement programs — technology updates, new controls, the latest machine technologies and phasing out some of these older machines," he said.

But Carr said winning that business is challenging: "The hardest sale would be always to replace an old asset that's still running."

That's true for injection molding machines, too. Mark Sankovitch, president of Engel Machinery Inc., said it's tough to sell a new injection press to replace an older one that is already paid off.

"A lot of companies that are turning on squeezed margins, that weren't putting money away to buy that new piece of equipment, that's where they struggle," he said.

Sankovitch said replacement sales did begin to pick up in late 2016 and 2017. The tax reform should keep that momentum going, he said.

Sankovitch said he is "quite optimistic" for the U.S. plastics manufacturing sector.

"We better invest. We better take this newfound ways of improving our factories, improve training of our people," he said. But he said manufacturers won't know the full picture until they see how much more consumers are going to spend after they begin seeing more money in their paychecks starting in February. Consumer spending accounts for two-thirds of U.S. gross domestic product.

"At the end of the day, you're not going to invest in equipment unless you get more sales," Sankovitch said. And that should become clear by the middle of the year.

That puts NPE2018 in the sweet spot, since the biggest U.S. trade show comes May 7-11 in Orlando, Fla.

Held every three years, NPE is sponsored by the Plastics Industry Association.

"What's remarkable about the tax reform bill is how immediately we can expect it to have a positive impact on American manufacturers and the people and communities that depend on them," said Bill Carteaux, president and CEO in a Dec. 20 statement by the Washington trade group. The immediate capital expensing "will allow companies to begin expanding their operations and their employment rolls right away," he said.

Machinery sales executives think NPE visitors will bring their checkbooks.

"I believe that there is going to be increased buying, for sure," said Bob Columbus, sales manager at JSW Machinery Inc. JSW, of Lake Zurich, Ill., will display an injection press with 850 tons of clamping force, aimed mainly at automotive.

Carr, of Bekum, said NPE2018 could be a banner show.

"It's an important one. Timing is good. The economy's still rolling. Regardless of your politics, you can't deny that the stock market is booming, companies are doing well and now the new tax code. The indicators are right," he said.

Morneault said Wittmann Battenfeld employees "are all excited going into NPE with such a positive spending vibe." He said the Torrington, Conn., supplier maker of injection presses, auxiliary equipment and robots could add employees to meet

Columbus said the tax reform will help the current good machinery market get better.

"Absolutely. The new tax bill is directly affecting a good amount of our customers' decisions on buying additional equipment. There's no question about it," he said.