THANK YOU TO OUR EVENT SPONSORS

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2 THANK YOU TO OUR EVENT SPONSORS

3 Q&A Go to Slido.com Event code: #tsmaq4 Submit your questions!

4 SAVE THE DATE! UPCOMING EVENTS: WorkOne Southwest Quarterly Business Seminar November 8 8 9:30 am IVY Tech Community College TSMA Q4 Best Practice Plant Tour - PGP International December 5 8:45 10 am PGP International TSMA CFO Peer Group December 11 7:30 am Southwest Indiana Chamber TSMA Q1 Event: Workforce Development Details to come

5 Check out the SHARED LEARNING PROGRAM Sign Up Today at:

6 Welcome CHRIS BRACK CHAIR Tri-State Manufacturers Alliance

7 PURPOSE STATEMENT To work collaboratively to create a vibrant and attractive manufacturing environment in Southwest Indiana that results in improved revenue and profitability and an increase in manufacturing sector jobs.

8 STEERING COMMITTEE Chris Brack Chair President George Koch Sons, LLC Shannon Brewer, CPA Vice President Harding, Shymanski & Co., P.S.C. John Burant Vice President, Innovation Flanders Stephani Catt Vice President, Operations Uniseal, Inc. Joe Castrale GM, Mt. Vernon Site SABIC Dave Conner CFO Anchor Industries, Inc. Tim Dolletzki Central Services Manager Alcoa Warrick Operations Thad Goings GM, Assembly & Conveyance Toyota Motor Manufacturing Indiana, Inc. Jim Heck Executive Director Grow Southwest Indiana Workforce Constance Hermann HR Manager, ESC & NA Quality RB Matthew Nix Vice Chair President Nix Companies Dorothy Pergola TSMA Coordinator Southwest Indiana Chamber Jake Ward Director of Business Development Evansville Tool & Die Matt Weinzapfel Vice President, Engine Manufacturing Jasper Engines & Transmissions

9 STEVE MENAKER CPA and Audit Partner at RSM US LLP

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11 TRADE, TARIFFS AND TRENDS Tri-State Manufacturers Alliance Q4 Event October 29, 2018

12 RSM s manufacturing focus Steve Menaker Assurance Partner National Manufacturing Industry Leader steve.menaker@rsmus.com RSM US LLP serves over 3,000 clients in the manufacturing industry We have companies across the country from industrial manufacturers to chemical companies and everywhere in between. We have specialty practices focused on industrial manufacturing, automotive, and energy. Clients include local, national and internationally recognized companies with diverse organizational structures

13 What s happening? 13

14 BREAKING THROUGH THE NOISE

15 US Economic Outlook Base Case: Growth 3.1 percent in 2018 Tax cut boosts growth prospects in 2018 & 2019 Current account and trade deficits explode Tax effect fades in 2020, growth back to long-term sub-2 percent trend Key economic driver: Strong Household consumption Upper quintile of income earners driving spending Rising incomes finally showing up for low-wage earners Stronger business outlays on capital expenditures Software, equipment and intellectual property Tech and energy

16 How are companies feeling? NAM Manufacturers Outlook Survey by Quarter (First Quarter 2016 Third Quarter 2018) 93.3% 89.5% 89.8% 94.6% 93.5% 95.1% 92.5% 77.8% 61.7% 61.0% 56.6% 2016:1 2016:2 2016:3 2016:4 2017:1 2017:2 2017:3 2017:4 2018:1 2018:2 2018:3 Source: NAM Manufacturers Outlook Survey Note: Percentage of respondents who characterized the current business outlook as somewhat or very positive.

17 Production and Manufacturing Industrial Production and Manufacturing Noticeable improvement due to resilient domestic demand and global demand Auto production to be strong through end of year Industrial production advanced 4.88 percent on a year-ago basis through August and overall output is at all time high Some pulling forward of activity to avoid tariffs so a risk of payback in near term Global and domestic demand easing

18 Manufacturing Solid In ISM Manufacturing ISM New Orders Contraction=Less Than 50 Recession= Less Than Index Source: RSM US, Bloomberg

19 Global manufacturing snapshot Index US ISM Manufacturing JP Morgan Global Pmi German Markit PMI Source: RSM US, Bloomberg

20 Production is up 5.0% Year-Over-Year Industrial Production Growth (August 2017 August 2018) 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% Aug-17 Sep Oct Nov Dec Jan-18 Feb Mar Apr May Jun Jul Aug Industrial Production Manufacturing Durable Goods Nondurable Goods Source: Federal Reserve Board

21 Private Fixed Investment: Policy Key to Reversing Slide 21% 20% 19% Pecentage of GDP (Nominal) 18% 17% 16% 15% 14% 13% 12% Source: RSM US, BEA

22 Production growth should continue Actual and Predicted Manufacturing Production Growth (NAICS, 2012=100) Manufacturing Production Forecast: 0.2% (2016) 1.5% (2017) 2.5% (2018) 2.0% (2019) Actual Manufacturing Production Predicted Manufacturing Production Source: Federal Reserve Board, NAM calculations using Moody s Analytics simulation model

23 Tight labor market Number of Unemployed Persons Per Job Opening=.90 Job Openings Per Person Source: RSM US, BLS

24 Manufacturers were already feeling the effects Manufacturing Job Openings, Hires and Separations (July 2017 July 2018, in thousands of workers) Jul-17 Aug Sep Oct Nov Dec Jan-18 Feb Mar Apr May Jun Jul Job Openings Hires Separations Source: Bureau of Labor Statistics

25 And throw in an opioid crisis.. 25 Source: MAPI Foundation

26 Many sectors showing strong results Year-Over-Year Growth in Manufacturing Production by Sector (August 2017 to August 2018) -1.9% Miscellaneous durable goods -1.8% -1.2% -0.9% -0.3% Printing and support Paper Aerospace and other transportation equipment Plastics and rubber products Motor vehicles and parts Nonmetallic mineral products Machinery Computer and electronic products Fabricated metal products Chemicals Primary metals Electrical equipment and appliances Wood products Food, beverage and tobacco products Petroleum and coal products Textile and product mills Apparel and leather Furniture and related products 7.5% 7.3% 7.1% 6.2% 5.6% 4.5% 4.4% 4.2% 2.6% 2.2% 2.2% 1.8% 0.6% 0.2% Source: Federal Reserve Board YEAR-OVER-YEAR GROWTH Manufacturing (NAICS): 3.4% Durable Goods: 4.5% Nondurable Goods: 2.3%

27 US Economic Policy Outlook Policy Outlook: Fiscal Deficits: Annual operating deficit of $1 trillion in FY 2019 Toward 5.5 percent of GDP in months Spending Large increase in defense and social outlays Massive increase in fiscal spending of $320 billion in 2018 & 2019 Infrastructure: Major initiatives unlikely Big I: Energy grid, telecom networks Little i: roads, bridges, ports, tunnels, etc. Regulation Regulatory relief for banks with under $250 billion AUM: Passed into law in May Significant win for the middle market

28 The 3 T s Taxes Trade & Tariffs Technology 28

29 TAXES

30 Tax Cuts and Jobs Act Key business provisions Reduces C corporation tax rate from 35 percent to 21 percent Repeals alternative minimum tax Pass through non-professional businesses receive a 20 percent deduction on pass through income Immediate capital expensing Research and development credit retained Limitations on business interest expense Repeals domestic production activities deduction New net operating loss (NOL) limitations

31 Wayfair overruled Quill: Modernity finally wins Physical presence is no longer a good rule in 2018 Access to the internet: 2% (1992), 89% today Modern technology and the administrative costs of compliance are unrelated to physical presence (one salesperson in many locations versus net retailer) Revenue losses of between $8 and $33 billion collectively Mail order sales: $180b (1992); e-commerce: $450b (2017) The once bright-line rule had becoming increasing shadowy Was cookie nexus physical presence? (Massachusetts and Ohio) Was click-through nexus physical presence? (20-odd states)

32 Wayfair is not just about retail Manufacturers should consider: Reversed the impact of Quill - no longer mandates a physical presence to require collection of sales taxes. Sales tax filing requirements Sales Tax Exemption Certificate Management Accounts Payable 32

33 Income taxes got more complex what we re seeing. Deduction for passthrough entities Limitations on interest expense Use of carryforward credits International tax Transaction impact prior planning decisions may require updating GILTI, FIDI Transfer pricing State taxes could get more possessive 33

34 TRADE AND TARIFFS

35 Uncertainty 35

36 Bi-lateral, tri-lateral or geographic agreements USMCA United States, Mexico and Canada US and Canada are each others largest trading partners Key changes More auto parts from member nations 75% up from 62% Higher wages for auto workers Canada loosens dairy restriction Tariffs in place pending final resolution Japan In process South Korea In process, awaiting approval Europe Representative has visited US China 36

37 US-Global Economic Relations: A Difficult Period Ahead Global trade friction: Major 2018 policy issue This is the major risk to the domestic economic outlook in 2018 China trade war China growth slowed in Q3 to 6.2% - a significant slowing If tariffs fully implemented will shave percent off growth Pricing to be impacted with upside risk to inflation Reduces boost to economy via tax cut Reduction of purchasing power, competiveness, rising prices NAFTA Modernization: Largest impact to auto and dairy industries, few major changes, measures from TPP Rules of origin Settling trade disputes Small and medium enterprise accommodation

38 U.S.-China economic relationship

39 U.S.-China economic relationship

40 Biggest import trading partner for US Source: US Census Bureau

41 Biggest export trading partner for US Source: US Census Bureau

42 How are Manufacturers companies responding Price increases, whether or not impacted by tariffs (US manufacturing with Chinese competitors) Expand manufacturing in US or countries with lower tariffs Started with the most recent recession Global supply chains have taken years to establish Logistics pricing up Acquisitions of alternative sourcing entities Alternative routing of products via Europe, Canada can create VAT issues Substitution of materials not subject to tariffs or from other sources 42

43 Real life responses US flooring company used recession to move manufacturing back to US US manufacturer is absorbing costs in hopes of short term impact Metal fastener increased prices immediately Farm storage manufacturer evaluating price increases getting pressure from customer to hold costs Auto parts company must comply with contractual terms thereby deferring price increases 43

44 Real life responses Retailer passes costs on to customers immediately Distributor only passing along partial price increases Retailer working with suppliers and customers to have equal sharing of increase Chemical manufacturer increasing prices as certain of their raw materials only available from China Distributor working with sourcing company to move to other countries with capacity (China no longer low cost) International company evaluating global supply chain and structure (ITAX, VAT, logistics) Companies disassembling and assembling products to avoid tariffs on finished goods 44

45 TECHNOLOGY

46 Digital transformation in manufacturing ERP Systems Cloud computing (could be ERP) Process improvements, automating closing and reporting process Low-cost microprocessors to control machinery Data collection and analytics 3D Printing makes experimentation and customization inexpensive Robotics Workforce Drastically changing the skills and types of employees needed. The Number 1 issue impacting manufacturers (and all employers) 46

47 Digital transformation in manufacturing Manufacturers see a lot of barriers to digital transformation.. 47

48 Too far behind to catch up 48 Source: RSM Digital Transformation Survey

49 Bias towards what s familiar 49 Source: RSM Digital Transformation Survey

50 Don t know how to define success 50 Source: RSM Digital Transformation Survey

51 Future manufacturing facility 51

52 Digital risk - cybersecurity 52 Source: RSM Middle Market Business Index Q1 2018

53 Cybersecurity risks to middle market manufacturers are real!! Access to your systems May be a connected device or a computer node Large exposure from people connecting to or sending information to your system Contingency plans Insurance coverage Ransom Policy Intrusion Testing 53

54 The Speed of Change in Intense Taxes Opportunities lie in the details Internationally active companies live in a complex world Wayfair can rear an ugly head Trade and Tariffs Understand the impact on your entire supply chain Develop a long-range plan to address trade in light of global geopolitical issues. Technology Invest, all companies are becoming technology companies Determine where digital adds value, keep evaluating the ROI Moving ahead is critical, don t get left behind 54

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56 RSM US LLP Address City Phone rsmus.com This document contains general information, may be based on authorities that are subject to change, and is not a substitute for professional advice or services. This document does not constitute audit, tax, consulting, business, financial, investment, legal or other professional advice, and you should consult a qualified professional advisor before taking any action based on the information herein. RSM US LLP, its affiliates and related entities are not responsible for any loss resulting from or relating to reliance on this document by any person. Internal Revenue Service rules require us to inform you that this communication may be deemed a solicitation to provide tax services. This communication is being sent to individuals who have subscribed to receive it or who we believe would have an interest in the topics discussed. RSM US LLP is a limited liability partnership and the U.S. member firm of RSM International, a global network of independent audit, tax and consulting firms. The member firms of RSM International collaborate to provide services to global clients, but are separate and distinct legal entities that cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. RSM, the RSM logo and the power of being understood are registered trademarks of RSM International Association.

57 Q&A Go to Slido.com Event code: #tsmaq4 Submit your questions!

58 CHRIS BRACK CHAIR Tri-State Manufacturers Alliance

59 THANK YOU TO OUR EVENT SPONSORS

60 THANK YOU