COVID-19 FAQs: MANUFACTURING

11 June 2020

The COVID-19 global pandemic is having a widespread impact on all facets of business. In the manufacturing industry, manufacturers are contending with mandatory shutdowns, supply chain disruptions, workplace safety concerns and long-term economic uncertainty. Here are some of the most frequently asked questions and resources to help manufacturers in their immediate response and planning.

How can I prevent supply chain disruptions?

For many manufacturers, supply chain disruption has already meant supply shortages, fulfilment delays, increased prices for high-demand goods and heightened transportation costs. Others are bracing themselves as supply chain disruption aftershocks can often outweigh initial impacts. Despite the uncertainty surrounding the intensity and duration of the disruption, there are steps manufacturers can take now to minimize current and future disruption:

Monitor demand shifts. Maintain a daily pulse of customer demand shifts to obtain a real-time view of finished goods and inventory needs.
Communicate with key suppliers. Share information frequently to delay, increase or cancel inbound supply orders, as needed, to align inventory investments with customer demand. Understand the contractual implications of changes to orders.
Prioritize customers and products. Invest working capital to maximize profitability, avoid loss of critical customers and minimize reputational risk.
Mitigate risk. Strengthen operational risk programs that cover crisis management and communication, business continuity and third-party risk. Operational risk programs should identify and evaluate the organization and its manufacturing segment, as well as cite critical path analyses, interdependencies, product and service priority levels, Value-at-Risk (VaR) and recovery time objectives.
Improve resiliency. Introduce a resiliency scorecard to evaluate current risk mitigation processes against associated goals and determine what corrective actions need to be taken. Supply chain resiliency strategies to consider building into a scorecard include flexible contracting, multi-sourcing, financial planning, risk pooling across parts or products, collaboration to improve forecasting and test batches.
Re-evaluate your supply chain footprint. By shifting supply sources to a variety of countries, and minimizing the dependence on a single location, companies have more flexibility when it comes to procurement and manufacturing. It’s important to assess potential exit charges, permanent establishment status and the tax liabilities associated with the movement of functions and assets.
Increase supply chain transparency and visibility. Implementing technologies such as cargo tracking, cloud-based GPS and RFID can help increase visibility into nearly every part of the supply chain. Real-time transparency can help companies more quickly react to the unexpected.
Review your insurance coverage. Make sure you understand the extent of your insurance coverage. Pay close attention to whether your policy contains a Communicable Disease Exclusion.

How do I qualify as an “essential business”?

Over 45 states have issued orders closing all “non-essential” businesses within their borders to flatten the COVID-19 infection curve. The Department of Homeland Security (DHS) issued non-binding guidance on what it considers an essential business during the COVID-19 outbreak. This guidance includes a broad category of “critical manufacturing,” which covers, among others: manufacturers of metals, industrial minerals, semiconductors and materials needed for medical supply chains, as well as for supply chains that support other essential industries. It also covers manufacturers of personal protective equipment (PPE) including face masks and protective scrubs for frontline health workers. DHS guidance is not a legal order, however, and the exact definition of “essential” varies by state.

Organizations deemed nonessential by their state’s closure order can appeal the decision through the state-run appeal process. Manufacturers may also be able to pivot their production so that they fall within the essential category and avoid mandatory shutdowns. For instance, some large manufacturers of apparel and footwear that wouldn’t normally be considered essential have pivoted to produce face masks and scrubs.

For more, access the National Association of Manufacturers’ interactive map outlining state and local declarations and their impact on manufacturing operations and facilities here.

How do forced closures impact our insurance coverage?

To determine how forced closures may impact your organization’s insurance coverage, you need to first review your business interruption coverage. Non-physical damage coverage for business interruption losses can include lack of access to facilities, government declarations of emergency and cancelation of events, among other activities and/or relevant actions during a public health crisis. Quantify the impact to your organization from such non-physical damages and identify coverage for broader civil authority and ingress/egress, supply chain interruptions, loss mitigation and extra expenses that can arise from increased logistics and redistribution costs, workforce disruption and shifting production to potentially higher-cost locations.

Once you’ve evaluated your coverage, you should establish milestones for claim recovery that are appropriate for your business. For example, resources across your organization—both in terms of supplies and talent—are likely to be stretched thin for the foreseeable future. It’s important then to create reasonable, but effective milestones and hold all members—from your adjusting team to internal stakeholders—accountable for achieving those goals.

Maintaining contemporaneous documentation is also critical to ensuring your claims hold up. It’s a trying time for businesses and their people as they work to navigate public safety concerns while preserving their operations. However, keeping careful records even during this crisis is critical. Email records around non-physical damages and suppliers/customers being impacted may be the difference between receiving relief from a business interruption claim and not.

Keep in mind that most insurers and analysts are asserting that COVID-19 does not trigger property/business interruption policy coverage. However, there is active litigation and potential changes to regulations that could impact this view broadly.

How can I educate my employees on how to prevent cyber vulnerabilities while working from home?

While many manufacturing jobs require an in-person presence, back-office functions can be done from home. As shelter-in-place orders and mandated remote working become more common during this crisis, your organization needs to equip its employees with the knowledge and tools necessary to maintain proper security protocols. Some employees, for example, may not be as comfortable in their technology skills and struggle to adjust to new processes in place to maintain security. It’s important that you take the time to make sure your workforce has the resources and training needed to stay safe and secure.

Steps like training each employee on best practices for secure remote work, sharing additional guidance on tactics that hackers are exploiting more during this time, reviewing data regulations and making relevant information available to employees and maintaining clear and consistent communication to employees about security and private best practices, changing regulations, evolving vulnerabilities and any other concerns as they arise are important steps.

How do I educate my front-line managers to appropriately lead in a virtual environment?

The two most important factors for success are care and communication. The crisis has a significant human toll and managers must prioritize the physical and mental health of their workforce above all else. With workers losing the boundaries and the natural touchpoints of the office, staying connected is also critical. A VitalSmarts survey of more than 1,000 remote workers pre-crisis found that nearly half (46%) said the most successful managers checked in regularly with remote employees.

Manufacturers who are still operating in-person need to institute policies to protect their employees’ health, including mandating wearing personal protective equipment (PPE) such as gloves and masks, frequent employee temperature checks and regular facility cleanings. Some manufacturers are assigning a senior executive as the Chief Sanitation or Cleaning Officer, focused on enforcing new workplace guidelines and safety processes to ensure the health of onsite employees.

Frontline managers can’t control the effects of COVID-19, but they can leverage common collaboration tools to allow for streamlined communication and conferencing, as well as take steps to protect employee health.

How is COVID-19 impacting deal flow?

The decision most management teams and investors are making is: pause. For the manufacturing industry, in particular, COVID-19 has introduced significant risk from issues with suppliers and customers to uncertainty around revenue and cashflow. The associated disruption to revenue and earnings and, perhaps most importantly, the uncertainty about projected performance, has brought valuations into question. Reliable expectations are difficult to come by, let alone the appropriate risk factor or discount rate to apply to projected results.

Buyers, sellers and lenders are currently assessing the situation and will be making decisions to proceed, adjust or discontinue processes based on critical factors including crisis management, performance outlook, valuation changes and COVID-19’s lasting impact on the economy. Ultimately, and hopefully soon, paths will become clear and many sellers will resume sale processes with customary haste. To be sure, some will have to modify their approach or even take longer pauses. Every situation is and will be different.

If the recovery is characteristic of the last recession, deal flow will skew towards distressed opportunities as well as the most attractive targets. Post-crisis, the industries in favor are likely to be those providing essential services and/or products—which may very well include manufacturing as the effort to on-shore supply chains accelerates.

Should we be thinking about re-tooling our business strategy to capture new business opportunities?

Manufacturers may see a decline in demand for their products, especially if they produce non-essential goods. Whether you sell to other businesses, consumers or both, you’ll need to take a hard look at your customer base and identify at-risk customers along with your level of exposure to them. If your ability to safely drive revenue in the next two to four months is in question, you should take preemptive measures to mitigate potential losses. You must take actions to right-size your cost structure, ensuring you can remain liquid with the decline in revenues.

In taking these actions, keep the core components of your business in mind: which customers, products and/or service combinations are providing comparably high profit? How do you ensure they are protected during a downturn? This determination will be critically important for navigating a downturn and eventually transitioning into recovery mode.

To navigate demand decline, consider simplifying and focusing operations on your products in highest demand and/or pivoting production to manufacture “essential” products, such as those that can help fight COVID-19. Evaluate your business’ core competencies – how can these capabilities be leveraged in markets with demand (hand sanitizer, for example)?

What tax strategies should I consider changing in light of the current environment?

In the short term, manufacturers should consider leveraging any tax strategies that can help lower their total tax liability and increase cash flow. This includes provisions in the various stimulus bills, like payroll tax credits and delays, AMT credits, Net Operating Loss carryovers/carrybacks and tax-deductible charitable contributions.

Outside of the existing stimulus bills and other response measures, organizations should also consider measures to reduce their total tax liability that were already available prior to the start of the pandemic, such as state and federal Research and Development (R&D) tax credits. Companies that operate internationally should be sure to also assess the tax relief options in the places they operate.

While there are many tax savings opportunities available, eligibility for some provisions is dependent on company size and other factors, and many benefits are mutually exclusive or have other tax implications that could affect an organization’s total tax liability. Given the level of complexity in tax planning during this time, it is critical organizations consult with tax professionals in order to maximize their savings and understand the long-term impacts of their tax strategies.

Will I be able to take advantage of the federal government’s economic stimulus package?

Manufacturers of all types and sizes are likely able to leverage some aspect of the economic stimulus packages passed by the federal government.

For smaller manufacturers, two disaster loan programs—the Paycheck Protection Program (PPP) and the Emergency Economic Injury Disaster Loans (EIDL) program—are available to them via the Small Business Administration (SBA). The federal government also released a second round of funding aimed at assisting small businesses in April. For smaller manufacturers facing financial strain as a result of COVID-19, these forgivable loans can help offset a variety of costs. The PPP provides funds to pay up to eight weeks of payroll costs, including benefits. EIDL loans can be used to cover any necessary financial obligations. Manufacturers can apply for loans under both SBA programs as long as they aren’t used to cover the same expenses.

To qualify for a loan under either program, your company must employ 500 workers or fewer (both full-time and part-time), or you must meet the industry size standard set forth by the SBA.

Midsize and larger manufacturers may also be eligible for low-interest loans under the $500 billion economic stabilization plan included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This includes $46 billion specifically allocated for air carriers and businesses deemed critical to national security—which is likely to include “critical manufacturers” as defined by the DHS. Unlike the SBA programs, these loans must be paid back and come with public disclosure requirements.

Additionally, the Employee Retention Credit (a 50% credit on qualifying wages paid to employees on March 13 through December 31, 2020) is available for employers who do not take advantage of the PPP and either:

Fully or partially suspend operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel or group meetings (for commercial, social, religious or other purposes) due to COVID-19; or
Experience a significant decline in gross receipts during the calendar quarter.

All employers are eligible to defer their social security tax liability due March 27 through the earlier of PPP loan forgiveness, if applicable, or December 31, 2020.

As previously mentioned, the CARES Act also includes a number of tax savings opportunities, including AMT credits, Net Operating Loss carryovers/carrybacks and tax-deductible charitable contributions.
Most recently, the Fed unveiled a new $600 billion Main Street Lending program available to small and midsized businesses with up to 15,000 employees or up to $5 billion in 2019 annual revenues. Principal and interest payments on these four-year loans can be deferred for the first year.

Multinational manufacturers should also look at what additional opportunities may be available in the countries in which they operate.

Will we still need to meet our financial reporting deadline?

Fully or partially suspend operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel or group meetings (for commercial, social, religious or other purposes) due to COVID-19; or
Experience a significant decline in gross receipts during the calendar quarter.

All employers are eligible to defer their social security tax liability due March 27 through the earlier of PPP loan forgiveness, if applicable, or December 31, 2020.

As previously mentioned, the CARES Act also includes a number of tax savings opportunities, including AMT credits, Net Operating Loss carryovers/carrybacks and tax-deductible charitable contributions.
Most recently, the Fed unveiled a new $600 billion Main Street Lending program available to small and midsized businesses with up to 15,000 employees or up to $5 billion in 2019 annual revenues. Principal and interest payments on these four-year loans can be deferred for the first year.

Multinational manufacturers should also look at what additional opportunities may be available in the countries in which they operate.

For more information, please contact a member of our team.

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