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Monday, June 13, 2011

Companies Spend on Equipment, Not Workers

Companies that are looking for a good deal aren’t seeing one in new workers.


 Workers are getting more expensive while equipment is getting cheaper, and the combination is encouraging companies to spend on machines rather than people.
“I want to have as few people touching our products as possible,” said Dan Mishek, managing director ofVista Technologies in Vadnais Heights, Minn. “Everything should be as automated as it can be. We just can’t afford to compete with countries like China on labor costs, especially when workers are getting even more expensive.”
Vista, which makes plastic products for equipment manufacturers, spent $450,000 on new technology last year. During the same period, it hired just two new workers, whose combined annual salary and benefits are $160,000.
Two years into the recovery, hiring is still painfully slow. The economy is producing as much as it was before the downturn, but with seven million fewer jobs. Since the recovery began, businesses’ spending on employees has grown 2 percent as equipment and software spending has swelled 26 percent, according to the Commerce Department. A capital rebound that sharp and a labor rebound that slow have been recorded only once before — after the 1982 recession.
With equipment prices dropping, and tax incentives to subsidize capital investments, these trends seem likely to continue.
“Firms are just responding to incentives,” said Dean Maki, chief United States economist at Barclays Capital. “And capital has gotten much cheaper relative to labor.”
Indeed, equipment and software prices have dipped 2.4 percent since the recovery began, thanks largely to foreign manufacturing. Labor costs, on the other hand, have risen 6.7 percent, according to the Labor Department. The rising compensation costs are driven in large part by costlier health care benefits, so those lucky workers who do have jobs do not exactly feel richer.
Corporate profits, meanwhile, are at record highs, and companies are hoarding cash. Many of the companies that are considering hiring say they are scared off by the uncertain future costs of health care and other benefits. But with the blessings of their accountants, these same companies are snatching up cheap, tax-subsidized tractors, computers and other goods.
“We had an opportunity to buy equipment at a very discounted rate,” Mr. Mishek explains of his decision to make bigger investments in equipment than in workers. “Now that the economy has turned around a little bit, it made sense to upgrade.”
Hiring has some hidden costs, as well as the expenses of salary and benefits, Mr. Mishek added.
“I dread the process we have to go through when we want to bring somebody on,” he said. “When we have a job posting these days, we get a flurry of résumés from people who aren’t qualified at all: people with misspellings on their résumés, who have never been in the industry and want a career move from real estate or something. It’s a huge distraction to sort through all those.”
Culling the résumés takes three days. Then he must make time to interview applicants, and spend $150 for each drug test.
Once a worker is hired, that person must complete a federally mandated safety program, which Vista pays an outside contractor a flat fee of $7,000 annually to handle. Finally, Vista’s best employees spend several months training the new hire, reducing their own productivity.
“You don’t have to train machines,” Mr. Mishek observes.
Usually economists cheer on capital spending, and have supported Congress’s tax breaks for capital investment, like bonus depreciation, which lets companies expense the full cost of purchases immediately instead of waiting several years. That is because capital and labor can be complementary: a business that buys a new truck often hires a new driver, too.
But with the rising costs of hiring, companies like Vista are finding ways to use capital to replace workers whose jobs are relatively routine.
“If you’re doing something that can be written down in a programmatic, algorithmic manner, you’re going to be substituted for quickly,” said Claudia Goldin, an economist at Harvard.
To add insult to injury, much of the equipment used to replace American workers is made by workers abroad, meaning that capital spending is going overseas. Of the four pieces of equipment Vista bought last year, one was made domestically. The others came from Israel, Switzerland and Germany. (“I try to avoid buying Chinese at the workplace and at home,” Mr. Mishek said.)
Of course the shift to more automated production predates the Great Recession. And in the long run, better technology lowers prices, raises living standards and helps workers move into higher-paying jobs. This was the case with the mechanization of farming, which a century ago employed 41 percent of the American work force.
“We don’t have 11 million unemployed farmers today because over time farmers and their children transitioned into different sectors,” says William C. Dunkelberg, chief economist at the National Federation of Independent Business. “We don’t usually have this kind of shock, though, that displaces a lot of workers at once.”
Better technologies may eventually offer better job opportunities, but only if people can upgrade their skills quickly enough to qualify. That is hard to do in the short run, especially when so many displaced workers need to be retrained at once.
“People don’t seem to come in with the right skill sets to work in modern manufacturing,” Mr. Mishek said, complaining that job applicants were often deficient in computer, mathematics, science and accounting skills. “It seems as if technology has evolved faster than people.”
Some economists support policies that might shift the balance away from capital spending. Andrew Sum, an economist at Northeastern University, advocates tax incentives for hiring that mirror those for capital investment. Congress passed a hiring tax credit along these lines last year, but it was not well publicized, and some said it waspoorly devised. The proposal is reportedly floating around Washington once again.

Tuesday, May 31, 2011

Made in America: Manufacturing Jobs Are Coming Home

The tale of American manufacturing has long been one of woeful decline. Just about a year ago, China replaced the U.S. as the world’s No. 1 maker of things, and that seemed a sure sign that the glory days had faded for good. But all of a sudden the talk is of a “manufacturing renaissance,” to quote a new study by the Boston Consulting Group.
The BCG study, “The Return of U.S. Manufacturing,” makes an interesting case. China’s wages are rising by 15 to 20 percent a year, while its productivity will improve at half that rate. The yuan is gaining in value, too, and Chinese-made products are destined to become more expensive. There is a shortage of skilled workers even in major manufacturing centers such as Shanghai and Tianjin.
In the U.S., wage increases have been minimal for years and will remain at 3 percent or so annually. U.S. productivity will remain higher than China’s by a wide margin, and government incentives are also a factor in attracting U.S. manufacturers back home. “Reinvesting in the U.S. will accelerate,” the study says, “as it becomes one of the cheapest locations for manufacturing in the developed world.”
The math that went into this study is impressive, and it works like this: Right now, labor costs in China are slightly less than half those of the U.S. when the difference in productivity is factored in. In five years’ time, labor costs on the mainland will be 70 percent of the U.S. figure. Counting costs such as inventory and shipping, the study says, the Chinese cost advantage will drop to single digits or disappear entirely.
It’s a convergence theory of a kind, and one forecasted result is that outsourcing jobs to China will turn out to have a beginning, middle, and end. “China will no longer be the default low-cost location for supplying the U.S. market,” the BCG study asserts. “The economics are becoming marginal for many products.”
Some interesting figures support the study’s argument. U.S. manufacturing grew at an estimated annual rate of 9.1 percent in the first quarter of this year, compared with a disappointing 1.8 percent for the economy as a whole. There are also some curious cases of prodigal industrial companies already returning home:
  • Caterpillar, which has a major presence in China, is building its next plant to make excavating equipment in Texas, tripling its capacity for such equipment in the U.S.
  • Ford is repatriating 2,000 jobs from China after reaching an agreement with the United Auto Workers that it says it can live with.
  • NCR has already brought its production of automated teller machines back from China to shrink the time from production to market, to stitch divisions closer together and lower operating costs.
  • The toy maker Wham-o (and this is my favorite) is repatriating half of its production of Hula Hoops and Frisbees, most from China, some from Mexico.
“It’s very early days, but this trend’s beginning,” says Hal Sirkin, a senior partner at Boston Consulting. “It’s all based on simple economics: wage rates, relative exchange rates, and productivity levels. Over four or five years, manufacturers will be indifferent to producing in China or the U.S. If it’s for the Chinese market, make it in China; if they’re producing for U.S. consumption, make it in the U.S.” 
A couple of myths seem about to explode. One was that manufacturing is finished in the U.S., another that we live in a post-industrial economy. The first is patently untrue—though manufacturing as a share of GDP has been declining for half a century, and steeply for the past decade. As to the second, there is no such thing, in my view, as a post-industrial economy. No one survives without making things.
President Obama is entirely on the right track in declaring a revival of industrial production as one of his economic priorities. But the Boston Consulting study starts to look more than a touch rosy (and too statistics-driven) when you consider a few of the harder facts:
  • Recent growth in manufacturing is due partly to a come-from-behind context. True, the U.S. has added 250,000 manufacturing jobs since the start of 2010. Also true: It lost almost 6 million jobs in the past decade, including a third of all employment in manufacturing. 
  • Growth in industrial production is concentrated in a few sectors such as oil and computers. “The Case for a National Manufacturing Strategy,” a new study by the Information Technology and Innovation Foundation, a Washington public-policy group, indicates that 15 of 19 sectors, accounting for almost 80 percent of U.S. industrial output—apparel, metals fabrication, machinery, printing, and so on—declined over the past decade.
  • The U.S. strategy, such as it has one, is fundamentally different from those of Europe and Japan. Their manufacturing sectors are stable or better because they have automated drastically (Japan) or gone into high-end production (much of Europe). The U.S., by contrast, has lagged in capital investment and appears set to compete primarily by way of low wages and often costly packages of tax breaks and other incentives.
The question is obvious: Do Americans want to make their country a low-cost production platform? Ford is coming (fractionally) home because it can pay auto workers $14 an hour—about 10 bucks less than it paid them when it eliminated those jobs. Henry Ford famously thought his workers should be able to afford the products they made; he believed in a vital middle class. So other questions are obvious, too: What will a manufacturing renaissance, if it arrives, do for this country’s middle-income wage-earners? What will a decade or so of intense outsourcing have cost them in net terms when the jobs come home?
Related Links:
Manufacturing Is Expected to Return to America as China’s Rising Labor Costs Erase Most Savings from Offshoring (Boston Consulting Group)
The Case for a National Manufacturing Strategy (Information Technology and Innovation Foundation)
U.S. Manufacturing Rebound Is a Myth (The Market Oracle)
China Poised to Eclipse U.S. Manufacturing (Open Salon)

A Fragile Recovery for Banks

Commercial banks are facing strong headwinds to growing their business, even as they put their underwriting missteps behind them. A lack of lending and negative effects from regulation have put banks in a "revenue drought," says Lee Kyriacou, a partner at Novantas, a financial services consulting firm.
According to the Federal Deposit Insurance Corp.'s latest quarterly banking report, released on Tuesday, net interest income (the money banks earn primarily from lending) had its first year-over-year drop in 22 years, falling 3% in the first quarter of 2011. The FDIC attributed the downtrend to narrower net interest margins and weak growth in interest-earning assets. Battered by lower revenues from deposit account service charges and reduced trading income, banks also experienced a decline in noninterest income, which fell by $2.2 billion, or 3.7%. In total, banks' first-quarter net operating revenue was off 3.2%.

http://www.cfo.com/article.cfm/14578393/c_14578920

Wednesday, May 25, 2011

Mazuma Capital Funds Multimillion Dollar Transaction for Environmentally Conscience Ground Clearing and Reclamation Services Provider

DRAPER, UT, MAY 25, 2011–Mazuma Capital, an elite national direct lender, announces it has funded a $2.5 million dollar transaction for a privately owned services company. The company is a prominent national player in the ground clearing and reclamation services industry.  Well known for administering environmentally friendly solutions in order to maintain a miniscule ecological footprint.
With major growth and expansions over the past 18 months the company sought funding for new equipment.  The equipment was engineered with superior fuel efficiency in mind; as well as being able to withstand extreme stress and tough terrain while performing its functions. The equipment was vital as it was needed to accommodate the large amount of growth and expanding service contracts in the oil and gas sector, while still providing a level of environmental responsibility. 
The company had obtained new contracts throughout the country to work with utility providers in need of reclamation and mulching services.  The challenge was finding a structure to meet the needs of the company's growth and financial requirements, while not requiring personal guarantees. Mazuma Capital Corp provided a lease structure to procure the ground clearing and mulching equipment for the company.
Mazuma Capital’s experienced underwriters brought their ability to think outside the box, using innovation and their proven track record in securing funding for growing companies to the table. Mazuma was able to structure the lease to meet the company's needs while ensuring it would foster the current growth and help to facilitate new growth.
“Working with Mazuma Capital allowed us to ride the tailwind of our newly signed service contracts with the right equipment in place.  The flexibility Mazuma offered us was refreshing and it was a great fit for our needs,” said the CEO of the Services Company. “The team at Mazuma did not feel like your typical lender/banker, their business is relationship based on every level.  The dynamic throughout Mazuma’s staff was one of professionalism with an added level of personalized service. Working with a top notch lender that provided exactly what we needed was a great experience.”
About Mazuma: Mazuma Capital is committed to our client’s success. Our unique capabilities and innovative product offerings provide solutions accelerating financial growth. Servicing both rising companies and established businesses, Mazuma continues to secure its position as the middle-market industry leader. We build long-term relationships by delivering on our commitments. Mazuma co-authored the Utah Best Practices Alliance and subscribes to the ELFA Code of Fair Business Practices.
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Media Contact: Julie Fuchs, 801-816-0800 Ext. X291, jfuchs@mazumacapital.com, http://mazumacapital.com


FASB, IASB Revert to One Model for Lease Accounting

Never mind, the Financial Accounting Standards Board has decided on its plan to allow two different accounting methods for leases. They like their original, single-model idea best after all.
In deciding how companies should account for leases, the FASB and the International Accounting Standards Board initially proposed all leases would be treated like financing transactions, with companies recognizing a liability to make lease payments and putting an asset on the balance sheet reflecting the right to use the asset for the term of the lease. Both would be measured at the present value of the lease payments. The liability would be measured in subsequent periods using the effective interest method while the asset would be amortized or written down based on the pattern of consumption and the expected future economic benefit it would produce.
Companies swallowed the treatment for long-term lease agreements that look and feel a lot like the financed purchase of an asset, but they cried foul for short-term leases that look and feel more like simple rental agreements. FASB and IASB acquiesced and agreed they would work on a two-model approach.
The boards determined “finance leases” would be treated like installment purchases, much the way today's capital leases are booked in the financial statements. “Other than finance” leases would be treated like today's operating leases, with an even amount recognized as expense each period over the life of the lease. Such a recognition pattern would more closely match the actual cash flows as companies pay down their lease obligations, companies argued and the boards conceded. FASB and IASB instructed their staff to define the criteria that would be needed to distinguish between the two types of leases.
Now, however, the boards have reversed course and decided they won't establish a two-model approach. In a joint meeting last week, FASB and IASB said they're going to stick with their original idea as described in the exposure draft for a single model for all leases. They promised to give some further thought to how to address concerns about the presentation and disclosure of information related to amortization, interest expense on the liability to make lease payments, total lease expense, and lease payment cash flows.
The lease project is one of four key accounting standards FASB and IASB are developing jointly to try to bridge major differences between U.S. and international accounting rules. The board continue to mull over how they want map out the accounting requirements for lessors as well.

See entire article:  http://www.complianceweek.com/fasb-iasb-revert-to-one-model-for-lease-accounting/article/203665/


Tuesday, May 24, 2011

Revolvers Return, with Some Twists- Good news for credit-seekers as banks relax, a little.

If anything bodes well for the economy, this does: companies are opening up new revolving lines of credit and refinancing older instruments at reduced rates.

In 2010, lenders doubled their issuance of syndicated, revolving lines of credit, a staple of corporate finance, according to data from Thomson Reuters Loan Pricing Corp., with borrowings accelerating the second half of the year, to $381 billion.

During the financial crisis, banks cut their exposure to revolvers, downsizing instruments or flatly refusing to renew them. Now, individual banks are slowly raising the amount of untapped commercial-credit commitments they're willing to keep on their books, according to federal call reports.

As in the larger corporate-loan market, new issues are predominantly refinancings of debt set to mature in the next 12 months. In late February, for example, Avista Corp. replaced existing debt set to mature last April with a new $400 million facility that expires in 2015. Near the same time, FelCor Lodging Trust, an owner of 82 upscale hotels, closed on a $225 million instrument secured by 11 of its properties.

FelCor had terminated a line of credit in 2009 because covenants were getting tight, says Steve Schafer, FelCor's vice president of strategic planning. But once earnings rebounded, FelCor pursued a new revolver with a three-year maturity, a lower interest rate, and an option for a one-year extension to 2015.

"It's always good to push out maturities," says Schafer. "The lower interest rate [LIBOR plus 4.5%] improves our earnings, and a new [line] will help us manage liquidity better — we've been carrying excess cash because we didn't have a line of credit."

"With not as many strong credits, banks are eager to lend, and they are kind of bending some of the standards," says Richard M. Pollak, a practice group leader in lending and structured finance at Troutman Sanders LLP.

Companies with steady earnings can lengthen terms to five and, at the outside, seven years. "It's fairly typical of what we see entering a growth cycle," says Walter Owens, head of U.S. commercial banking at TD Bank. "But we're a bit surprised by some of the deals going out [five and seven years]. We've let some of these deals go because we didn't think the company deserved that type of facility."


Borrowers like being locked in. "They don't have to worry about waking up one morning and discovering that their lender is not so enamored of their business anymore," Pollak says.

So, could banks be under pricing risk again? While easing up on some loan conditions, banks are more disciplined at valuing the receivables, inventory, and real estate that secure lines of credit, says TD Bank's Owens. "Since loss and default rates were not as high as most banks anticipated, in the last six months banks have been more aggressive. But, from a historical perspective, they're still fairly conservative."

And companies are having to put up a lot of assets. For example, Delta Air Lines's new revolver is secured by accounts receivable, airport slots, ground-service equipment, spare parts, engines, and flight simulators, among other property. "Out of an abundance of caution, banks are taking a lot more collateral," says Pollak. So, while banks and institutional investors may be going long, they're definitely hedging their bets.


Monday, May 23, 2011

Accounting update from ELFA

  • May 23, 2011: At a joint meeting on May 19, the FASB and IASB reversed recent tentative decisions in the lease accounting project as follows:
    • Lessee P&L - No leases will be allowed straight line rent expense treatment but rather all leases will have be front ended lease costs equal to interest expense and depreciation of the right of use lease asset
    • Lease Term - Will not be current GAAP but rather will be a lower threshold including consideration of strategic importance of asset, lessee intent and behavior in renewing in the past and will be adjusted when there are changes in judgment or circumstances
    • Incremental Borrowing Rate - Lessee will use its new incremental borrowing rate to calculate adjustments when lease payment assumptions change
    • Short-Term Leases - Will not be exempt from capitalization
    • Lessor Accounting - Still undecided between only using a derecognition method or having both an operating lease method and a derecognition method. They are considering accreting residuals in the derecognition method.