Cutting Edge Newsletter™ June 2006Business BriefingRising Productivity - The Key to ProsperityBy Art Raymond, araymond@raymondnet.com
In the last 20 years, manufacturing productivity has doubled. Since 1997, manufacturing productivity has averaged a 4.6% gain annually. When productivity rises, businesses can afford to pay higher wage rates. More importantly, workers can be released to perform more value-producing tasks. The increased profits that result mean more money for investment in productive equipment. Managers' efforts to raise labor productivity also bring secondary benefits, like lower inventories and quicker throughput. Companies that increase their labor output per hour do so by eliminating wasted effort. These restructured organizations are, as a result, more competitive. For that reason, the U.S. remains the world's leading producer of manufactured goods. Our manufacturing sector alone would be the seventh largest economy in the world. Total U.S. manufacturing output has risen by 10% since 2002. These gains have come at a price. Over the past 15 years, the U.S. has shed over three million manufacturing jobs. Many blame this decline on globalization. But a study by the Federal Reserve Bank found that the real culprit is labor-saving technological progress ie, better machines, better information systems, and smarter process designs. Put simply, capital investment has simultaneously taken labor out of our factories and increased output. One wood products industry sector that has benefited from increased investment is cabinet manufacturing. From 1997 to 2004, cabinetmakers spent $2.9 billion on new plant and equipment. In 1997 annual shipments per production worker totaled just over $113,000. By 2004, that metric jumped to over $161,000, a 42% gain. At the same time, the industry reduced delivery times and improved their product offerings with more customization opportunities for the consumer. Kitchen Cabinet Industry Productivity
Cabinetmakers as whole nearly doubled sales with only 26,712 new workers. If productivity had remained at the 1997 level, the industry would have required 45,500 more workers in 2004. That's real improvement. And thus far, this industry has strongly defended its turf against foreign competitors. Remember, too, that those 45,000 people found jobs. Unemployment ran 4.6% in May vs. 5.1% in 2005. Bottom Line: Put simply, doing more with less is the driver of the miracle that is the U.S. economy. The relative share of manufacturing employment has fallen steadily in the U.S. for at least 50 years. That decline has coincided with a remarkable rise in our standard of living based primarily on new technologies. Machinery makers, keep the new gear coming... Economic Factoid The same statistical analysis by the Federal Reserve Bank that identified the role of technology in lower manufacturing employment also highlighted the impact of taxes. The recent economic performance of Ireland proves that linkage again. In the late 1980's the tax rate on Irish corporations was cut to 12.5% - the lowest in the developed world. The boom that has followed drove Ireland's unemployment rate from 18% to 4.2%. Compare that with Germany's rate of 11.7%. Per capita GDP at $41,000 is second only to Luxembourg in the European Union. Sector Report Kitchen Cabinets Cabinet sales rose 6.1% in April versus the same month in 2005, according to the KCMA's Trend of Business Survey. For the year to date, sales were up 13%. April saw custom sales rise by 4.2%; semi-custom, 7.1%; and stock, 5.5%. At the producers... Masco reported cabinet sales of $852 million in its Q12006, up 8.8% over the same period last year. Operating margin was 14.2%, down from 14.8% last year owing to higher energy and particleboard costs. The company is increasing cabinet prices to offset this margin decline. Meanwhile, two assembly lines have been installed in temporary quarters as the company's Merillat division awaits completion of its 350,000 ft. Home Furniture Imports Continue Double-Digit Growth 2005 furniture imports surpassed $20 billion, 11% above last year. Despite the imposition of anti-dumping tariffs, China led the way with shipments of nearly $11 billion, up 18% over 2004. Producers there now account for nearly 50% of all imported furniture. Last year's performance marks a significant slowdown from the 30%-plus growth rates in recent years. Canada, the number two source, has seen its competitiveness erode with a weaker U.S. dollar. Its shipments to the U.S. grew only 1% last year to $2.5 billion. Italy, another high cost source, saw its shipments to the U.S. fall by 12% to $1.15 billion. The 42% increase in Chinese upholstery shipments to the U.S. contributed to Italy's plight as their sales of this product category declined by 31%. Vietnam, the newest low-cost source, jumped to number six in the import ranks with shipments totaling $670 million, up from $362 million in 2004. No Surprise - Chinese Producer Reports Strong Sales Samson Holding, owner of Chinese casegoods producer Lacquer Craft, reported FY2005 sales of $517 million, up 13%. Profits rose to $89 million, generating a whopping profit margin of 17.2%. About 90% of Samson's products are sold in the U.S., with 88% of that volume moving through its Universal and Legacy Classic brands and 12% through private labeling. The company is expanding its Jiashan and Dongguan plants to produce an additional 1,000 containers of furniture per month. Additional investments are planned in upholstery, home office, and youth product categories. In early May Lacquer Craft acquired Craftmaster, an upholstery producer based in Taylorsville, NC. The company plans to leverage the synergies created by sourcing imported cut and sewn covers and exposed wood components in China while using the North Carolina plant for special order fulfillment. This acquisition represents a major strategic initiative by a Chinese furniture maker and evidences their recognition of mass customization and fast delivery requirements in the upholstery sector. News among U.S. furniture producers remains mixed as more plants are shuttered and imports grow... Furniture Brands International reported a 3.1% gain in its 1Q2006 sales driven by strength at its Lane and Thomasville divisions. Gross margin was flat while operating margin fell from 6% to 5.7%. Its Thomasville division announced the closure of its Plant D. The 309,000 ft Ethan Allen, perhaps the most recognized brand name in furniture, reported a 15.5% increase in its 3Q2006 revenues. Gross margin rose from 47.8% to 50.5% while operating margin remained about flat. The higher revenues resulted from higher advertising and increased store management. Management is raising prices to offset higher freight and raw material costs. The company operates 11 domestic plants and a retail network of 311 stores, 129 of which are company-owned. About 65% of its line is manufactured in the U.S. Canadian furniture maker Dorel Industries announced that its 1Q2007 furniture sales fell by 4.4% accompanied by an 11% decline in earnings. Higher particleboard prices negatively impacted gross margin. Canadian RTA producer Gusdorf has filed for bankruptcy protection blaming pricing pressure from Chinese imports. Its plans include closing a factory in Laval, Quebec, and becoming more import-based. RTA furniture maker O'Sullivan Industries, which has been operating in Chapter 11 since last October, has emerged from bankruptcy with a new financing package. Meanwhile, its auditors have reported concern with its ability to overcome sales declines and losses from operations. Cresent Fine Furniture of Gallatin, TN, has ceased production and will import its product line. Its plant will transition into a distribution center. The third generation, family-owned company had seen sales of its domestically made solid wood casegoods decline, while its five-year old import line has prospered. Chromcraft Revington said that its 1Q2006 sales increased by 2.8% over the same period last year. The company is focusing on a hybrid strategy of domestic production combined with imported components and finished goods. Initiatives are underway to improve the flow of its imports and to increase its mass customization techniques. At the recently completed High Point Market, the company exhibited its largest-ever new product introduction. Hooker Furniture of Martinsville, VA, announced a 20.7% increase in its 1Q2006 earnings on sales growth of 6%. These gains were fueled by a 26% rise in sales of their imported products. Sales of its domestically made products fell nearly 29%. Stanley Furniture reported flat sales and a 6.4% decline in net income in its 1Q2006. The decline was attributed to a softer retail climate for furniture in March. As a result, management is now forecasting a 2 to 5% decrease in 2Q sales and full year sales of $335 to $345 million, slightly below earlier projections. The company produces about two-thirds of its revenues in its U.S. plants. Mastercraft, mid-priced upholstery maker based in Council Bluffs, IA, has shut down operations. Office Furniture BIFMA reported that April orders and shipments increased by 6%. On a trailing twelve-month basis, orders grew 11% to $10.4 billion. Likewise, shipments rose by 10.2% during the same period. At $10.345 billion, annual shipments are now about 22% higher than the market bottom of $8.47 billion in November 2003. BIFMA's latest forecast for 2006 calls for shipments to grow 11.5% and orders 9.5%. While these targets are higher than earlier forecasted, BIFMA reduced their 2007 predictions for shipments to 6.3% and orders 6.6%. At the company level... Knoll, Inc. reported a 20.7% gain in its 1Q2006 sales. Its gross margin (historically among the highest in the office furniture sector) was 32%, down slightly from the same period last year. Cost of sales was impacted by higher material and transportation costs. Operating margin jumped to 10.2% from 9.5% last year. HNI, headquartered in Muscatine, IA, saw its 1Q2006 office furniture sales rise by 14.8% to $490 million. Operating profit in this category was $40.5 million or 8.2% of sales. Wood Flooring March 2006 shipments of strip flooring rose to over 49 million square feet, up 20% compared with the same month in 2005. Year to date the industry has shipped 13% more flooring than in the first three months of 2005. Public PolicyWins, Losses and TiesBy John Satagaj, email@jsatlaw.com  It is a victory, but we have talked about this so many times, that it seems like old news. Congress finally passed, and the President signed into law, $70 billion worth of tax relief. The highlights are a two-year extension of the capital gains and dividends tax rate relief into 2010 and a one-year extension of the individual Alternative Minimum Tax (AMT) relief "patch." The patch is an increase in the threshold at which the AMT kicks in. It does not provide much comfort to most S Corporation shareholders. The only thing that will really help is repeal of the AMT and too much tax revenue is at stake to do that. Our victory is that the law also includes an extension of the temporary increase to $100,000 in the direct expensing allowance. It has been extended through 2009. There were indications that the amount might be increased to $400,000 as proposed by the President in his State of the Union address, but that did not work out.
We scored a second victory in the bill when Congress took action to avoid re-imposition of retaliatory tariffs on some of our products by the European Union (EU). The EU won a World Trade Organization (WTO) ruling that our Foreign Sales Corporation/-Extraterritorial Income (FSC/ETI) tax benefits program was an illegal subsidy. The EU imposed retaliatory tariffs that rose to 14 percent before Congress repealed the FSC/ETI program. However, the benefits were phased out and set to expire at the end of this year. In addition, certain long-term contracts were grandfathered. Some of the contracts were estimated to have 10- to 15- year terms. The EU went back to the WTO and secured permission to re-impose the tariffs. The WTO agreed and the tariffs were to go into effect in May. Congress needed revenue to offset some of the tax relief in the tax reconciliation bill as the relief exceeds the permissible amount under the reconciliation instructions. Congress repealed the remaining benefits of the FSC/ETI program at the end of the year. Within days, the EU said it would not re-impose the tariffs. The loss is in the health care reform arena. The Senate failed to overcome a filibuster of medical malpractice reform legislation. Needing 60 votes, the medical malpractice failed to win even a majority. The medical malpractice reform initiative, S. 22, the Medical Care Access Protection Act of 2006 (MCAP), was a new version of Senator John Ensign's (R-NV) medical malpractice reform bill. It would have allowed awards of up to $750,000 for non-economic damages. Patients still would have been allowed unlimited economic damages. Under Ensign's bill, a patient could recover up to $250,000 each from a healthcare provider and up to two healthcare institutions for a total of $750,000. The bill also guaranteed timely resolution of claims by mandating that healthcare lawsuits are filed within three years of the date of injury. Basically, healthcare providers are physicians, registered nurses, dentists, podiatrists, pharmacists, chiropractors or optometrists. A healthcare institution is any entity licensed under Federal or State law to provide health care services (including but not limited to ambulatory surgical centers, assisted living facilities, emergency medical services providers, hospices, hospitals and hospital systems and nursing homes). Under S. 22, when an attorney for a party claimed a financial stake in the outcome by virtue of a contingent fee, the court would have had the power to restrict the payment of a claimant's damage recovery to such attorney, and to redirect such damages to the claimant based upon the interests of justice and principles of equity. The total for representing all claimants in a health care lawsuit would not have exceeded the following limits: (i) 40 percent of the first $50,000 recovered by the claimant(s); (ii) 33-1/3 percent of the next $50,000 recovered by the claimant(s); (iii) 25 percent of the next $500,000 recovered by the claimant(s); and (iv) 15 percent of any amount of the recovery by the claimant(s) in excess of $600,000. The Senate also failed to secure cloture on Senator Mike Enzi's version (S. 1955) of the association health plan bill. It garnered a few more votes, but fell well short of the 60 votes needed to end a filibuster. It is unlikely any of these bills will be revived in this Congress. Our tie relates to inventories. Senator Bill Frist (R-TN) put forth, and later withdrew, a proposal to repeal the Last In-First Out (LIFO) method of inventory accounting. He proposed a package of gas tax relief items, including a $100 gas price rebate for consumers (also now withdrawn) and authorization for drilling in the Arctic National Wildlife Reserve (ANWR). To pay for the lost tax revenues from the rebate, the proposal includes a repeal of the LIFO method of inventory accounting. The LIFO method assumes the items of inventory you purchased or produced last are the first items you sold, consumed, or otherwise disposed of. Items included in closing inventory are considered to be from the opening inventory in the order of acquisition and from those acquired during the tax year. To the surprise of many, the proposal is a simple, but complete, repeal of the LIFO method for all. Many expected a reprise of a version in a different bill last year, which would have repealed it just for the oil companies. The LIFO inventory accounting method has been a common method for many years and it is particularly useful in inflationary times. There are other methods of inventory accounting such as First In-First Out. Each method produces different income results, depending on the trend of price levels at the time. In times of inflation, when prices are rising, LIFO will produce a larger cost of goods sold and a lower closing inventory. Under FIFO, the cost of goods sold will be lower and the closing inventory will be higher. In times of falling prices, the opposite will hold true. Over the course of just a weekend, the Majority Leader reversed himself, saying, "I've spoken with Chairman Grassley, and we have agreed to withdraw the LIFO repeal proposal from the rebate package. He will hold hearings on the LIFO proposal later this year, so the pluses and minuses of the provision can become well-known." Note the last sentence. We may still have a long-term concern on our hands. While the immediate fire is under control, we look for this to re-ignite unless we douse it with cold water. LIFO Repeal Could Increase Taxes For Many Manufacturers EDITOR'S NOTE: Last month, Senate Majority Leader Bill Frist made a misguided attempt to placate American consumers by proposing a hundred dollar bill be distributed to all taxpayers to cover the cost of rising gas expenses. This "largeness" was to be funded by eliminating the LIFO inventory provision, since all programs must be revenue neutral. The one hundred dollar giveaway quickly died, but the demise of LIFO remains a distinct possibility and is under scrutiny by the Senate Finance Committee. WMMA has joined other manufacturing and distribution associations, such as NAM, in a coalition to prevent this occurrence. Below is some background information, which might be helpful when your elected officials take their summer recess and are back home among their constituents.
Several key legislators currently are discussing the possibility of repealing the LIFO (Last-In, First-Out) method of accounting for inventory, which has been used by companies for almost 70 years. While the NAM was successful in derailing recent attempts in the Senate to restrict or eliminate LIFO, there still is strong interest in the issue. One of the driving forces behind this effort is the fact that LIFO repeal would generate billions of dollars of revenue to the federal Treasury. MANUFACTURERS CANNOT AFFORD THIS TAX INCREASE! The LIFO method, which is used to determine financial statement earnings and tax liability, allows manufacturers to match their current sales revenues with current inventory replacements costs. By taking into account the greater cost of replacing inventory, LIFO results in both a more conservative measure of the financial condition of the business and the economic income to which tax should apply. The LIFO method is the predominant method of accounting in industries that carry inventories of goods, including manufacturing, mining and energy production. Repealing LIFO would increase tax bills for the hundreds of thousands of U.S. manufacturers, in all sizes and all industry sectors currently using this accounting method. These companies would be subject to a one-time tax on their LIFO reserves and would face higher future tax bills on the appreciation in value of their inventory. Are you a member of WMMA and NAM? During the on-going debate, there is little information about the use of LIFO, particularly among smaller companies. The NAM currently is surveying our small and medium-size members about their use of LIFO. WMMA is sending each member company a quick, online survey about LIFO; watch your email for it and please help document this issue by completing the survey.
 MARK YOUR CALENDAR - THE NEXT SBLC TELECONFERENCE IS JULY 5, 2006!
Small Business Legislative Council (SBLC) has brought back its' public policy briefing telephone conference. It is an improved product and it is free! This is an opportunity for SBLC member association staff and member association members (e.g. board, public policy committee) to participate in a briefing by SBLC President John Satagaj on the hot small business topics of the day. Upcoming teleconferences are scheduled for: Wednesday, July 5, 2006 All teleconferences are scheduled for 11:00 - 11:45 am ET. Call toll-free 1-888-577-0004, Pass code 7252#. You have the option of deciding who participates. No need to RSVP. All we ask is that you bear in mind that we want to be as candid as we can so the information is useful. By participating in the teleconference, you agree not to record the presentation, nor to quote or attribute comments to speakers. International Business DevelopmentThe following article is written by Robert E. McLean, Executive Director of the Association of Language Companies. For more information on the ALCUS, please visit their website, www.alcus.org, or contact Bob at bmclean@alcus.org.For more translation tips as well as tips on exporting visit the WMMA's Export Manual. If you need your id and password, please contact Karen Boyle at WMMA headquarters. Need a Brochure or Manual in Another Language? Here's How to Hire a Professional Language FirmBy Robert E. McLean, CAE, bmclean@alcus.org  What would you do if tomorrow you company needed to translate a product manual, safety instructions or your own website into one or more languages other than English?
The answer is to use many of the same processes used when hiring a consultant or contracting for printing, graphic design or legal services. Write a detailed request for proposal (RFP), look for professional firms with good reputations and references, negotiate the best possible rates and sign a contract that calls for a specific product by a specific date within a narrow price range. Developing an RFP
As with buying any services, a good first step is to ask for recommendations from other WMMA members. Also, ask friends and colleagues that have purchased translation services and were satisfied with the results. It's even more important to find firms that have industry specific experience and in the languages you require --and have translated similar types of documents. Once you identify several prospects, compare more than their prices. First, ask them to explain how they ensure delivery of an accurate translation. What are the minimum requirements of their translators and interpreters regarding their education, credentials and experience? What quality control steps will they take to ensure the end product is accurate? Second, ask for details about how they handle administrative issues. For example, do they use standardized contracts with their customers? How do they handle estimates? How are requests for reviews and complaints handled? One question that always offers misleading information is this: How many employees do you have? Most language firms employ independent translators, not employees, who may live across town, across the country or on another continent. This hiring practice helps ensure you get the people with the background and quality you need, when you need them and at the best possible price. How language companies charge for their work Whatever the language, you will need more A translation project, if it's your first, will most likely just take more time than you expected. Why does it take so long? Because translation projects typically involve the work of more than one translator. Every translation is edited by a second person. They may also involve typesetters and proofreaders, graphic designers, website managers and database programmers (if, for example, you're translating a directory of association members' names that's posted on a website). Such work takes time to coordinate with multiple quality checks among the project team members under the supervision of the Project Manager. So for a quality product, give yourself the time needed to prepare a complete RFP and give your professional language company the time it needs to produce an accurate, professional translation. Association BenefitsWMMA Press Tours at IWF 2006 - Sign Up Today! IWF 2006 is just around the corner - plan ahead and sign up for the WMMA Press Tours!
Get free ink on the new products you will be displaying at the IWF Fair. The WMMA® Membership Services Committee is sponsoring a "traveling tour" for the industry trade press on Tuesday, August 22nd - the day before the official show opening. This unique tour will bring editorial staff from the industry trade journals directly to WMMA® member booths, where you can introduce all of your new products. The tour will run from approximately 1:00 - 3:00 PM. If you want the press and the industry to learn more about your new products, you can not afford to miss this great marketing opportunity! This tour format gives the press an up close and personal look at your booth and your innovative display. As an added benefit, it will be done the day before the show officially opens, so you can spend the rest of the show hours concentrating on customers. Prepare materials for each member of the trade press to "take away." For more information on how to participate, click here. WIC 2006 Special Edition of the Cutting Edge Now Online! Click here to see the highlights of WIC 2006 in Maui, Hawaii.
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| ©2006 by Wood Machinery Manufacturers of America, Philadelphia, PA. All rights reserved.
This publication or any parts of it may not be reproduced in any form without written permission from the publisher. For permission to reprint articles or to send correspondence, write to: WMMA, 100 North 20th Street, 4th Floor, Philadelphia, PA 19103-1443, Phone: (215) 564-3484. Fax: (215) 963-9785. E-mail: wmma@fernley.com. The opinion expressed in any articles by outside consultants are their own views and not necessarily those of the WMMA. |
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In the first quarter of 2006, the manufacturing sector turned in another great productivity performance. Output per hour, the standard measure of labor productivity, rose by 3.8%, as the result of a 6% gain in output with only 2.1% more labor hours expended. Unit labor costs dropped 1.9% in spite of a relatively tight labor market.