State of the National Manufacturing Industry: December 2020

Marcum began reporting on the state of the U.S. manufacturing industry this year to keep manufacturers informed of legislative measures passed to alleviate the economic burden caused by the COVID-19 pandemic. We also have provided manufacturers with recommendations to ease cash flow and brace for further disruption.

As we enter the final weeks of the year, vaccines are just around the corner, but we still have a long way to go before things are back to normal. As COVID-19 cases surge across the country – and the world – another round of business shutdowns is still a real threat in some regions. With these disruptions in mind, what steps should you be taking now to prepare for 2021? How can you continue to meet your customers’ needs while managing your suppliers? How will Paycheck Protection Program (PPP) loans affect your tax liabilities? Let’s begin with some positive news.

Industry Overview: Signs of Optimism

Year-over-year revenue is down for most manufacturers, but that doesn’t mean profitability has taken a big hit. In fact, by being nimble, many of our clients have been able to cut costs to maintain profitability, albeit at a lower percentage than in prior years. In most instances, employers have reduced headcount for cause rather than as a cost-cutting measure. Manufacturing businesses are generally holding the line without needing to pivot as much as initially expected. PPP loans, and other government loan assistance programs, have played a critical role in keeping businesses afloat, retaining their workforce, and meeting other critical expenses.

According to the third-quarter survey from the National Association of Manufacturers (NAM), roughly 72% of respondents who indicated that COVID-19 had or will have a negative impact on their cash flow have obtained funds through the PPP, Main Street Lending Program or other liquidity programs. The NAM survey results reveal a rebound in manufacturing optimism, from 22.9% in the second quarter to 66% in the third quarter. Over the next 12 months, respondents also predict the following increases:

• Sales growth: 1.9%
• Growth rate of production: 2.2%
• Full-time employment: .7%
• Prices of company’s products: 1.3%

Larger manufacturers – those with at least 500 employees – feel more positive in their outlook than they have in the previous five quarters, with 70% of respondents feeling positive. That compares with 62% of manufacturers with fewer than 50 employees and 65.5% of midsize business owners who feel positive.

Tax Planning for PPP Loans

More than five million businesses received funding under the PPP loan program. As a reminder, PPP loan recipients can have their loans forgiven in full if the funds were used for eligible expenses and other criteria are met. The SBA opened its forgiveness portal the second week of August, and a host of questions regarding the timing and amount of forgiveness has required several rounds of guidance from the IRS.

One of the most frequently asked questions is whether a PPP borrower must exclude eligible PPP expenses as deductions when determining 2020 taxable income. On November 18, the IRS issued Revenue Ruling 2020-27, which states that the expenses are non-deductible for year-end 2020 if there is a reasonable expectation of forgiveness, whether a borrower files the forgiveness application in 2020 or 2021. The ruling did not address fiscal year taxpayers. Learn more about the IRS ruling.

Manufacturers who received PPP loans should plan for a higher taxable income when filing their 2020 taxes in March or April 2021. The best rule for business owners is to set aside 30-40% of their PPP loans to meet their increased tax obligations. Borrowers should work with their tax advisors on strategic tax planning.

Banking on Backlog

What can manufacturers expect in the next 12 months? There are uncertainties about whether Congress can agree on a new round of federal stimulus dollars and how the incoming Biden administration will prioritize economic relief. Some manufacturing sectors will bounce back faster than others. For example, aviation is expected to have a second-quarter 2021 comeback, and should be able to weather the storm in the interim, whereas fluid power companies have experienced general softness, which signifies pent-up demand. Some of our manufacturing clients had a profitable summer but have been experiencing a more difficult fall as orders slow and COVID cases are spiking. Impacts will vary by subsector.

Marcum expects sales backlog will come through in the second half of 2021 for the majority of our manufacturing clients, which is much better than previously anticipated. As manufacturers approach the end of the year, they should look at investment strategies, including machinery and equipment, R&D projects, trials, and new product development. If manufacturers expect to supply this backlog in the coming months, it will be critical that they maintain their workforces.

Manufacturers should consider the following questions:

• Can we meet backlog?
• What orders do I have?
• Do I have materials on hand to meet these orders?
• When do I need to meet orders?
• Can we meet delivery dates?
• Do I have the labor force to make it all happen?

If you have not yet had conversations with your suppliers, this is a good time to have them, and you should look at “safety stock” levels. On the buy side, you want to ensure you can access supplies when you need them. On the sell side, take steps to ensure you can get products out. Also, consider whether any of these steps will increase your prices.

Marcum National Manufacturing Survey: Seeking Your Input

Marcum’s Manufacturing & Distribution advisors will continue to update you on the state of the nation’s manufacturing industry. Contact your Marcum professional for assistance.

Coronavirus Resource Center

Have more questions about the impact of the coronavirus on your business? Visit Marcum’s Coronavirus Resource Center for up-to-date information.