Risk Management

Article Dean Dorton

Here are the key risks and opportunities for 2018:

Technological Modernization

Investment in mining technology has lagged behind the technological advancements of other sectors. These advancements range from automated production and data analysis to advance digital applications, such as artificial intelligence and blockchain technology. Companies willing to invest in new technology or further apply existing technology will be positioned to maximize efficiency and to gain a deeper understanding of their operations through the data that is now available to them. Consider these potential applications:

Data analysis allows a company to examine its performance under various types of weather and then have the ability to implement subtle changes based upon weather conditions that improve productivity

Machine learning applications as equipment transmit operational and geological data in real-time, while at the same communicating with a vendor regarding the operational health of the machine and need for servicing

Production analysis paired with customer profiles to maximize sales

The use of blockchain technology to streamline contract negotiations and provide direct corroboration between inventory warehouses and suppliers

Companies who utilize the tools that technology provides will be well positioned succeed in this sector. Companies who fail to invest in technology run the risk of losing competitive advantages to their competitors.

Shareholder Returns

The mining sector has not been a “hot” area for investors in recent years. Public companies have yielded mediocre results at best and been slow to issue dividends. Private companies have struggled to obtain the pricing and production volume necessary to reward existing shareholders and to entice private investors. Recent trends, such as changes in the American geo-political environment, the increase in metallurgical coal prices, and the increased demand for cobalt (stemming from battery applications), have created an environment of interest to new investors, who may seek quick returns on their investment. This presents the sector with a philosophical paradigm, to invest in the growth of the company or the satisfaction of the shareholders. It will become increasingly important for companies in the sector to balance the growth agenda with disciplined capital expectations.

Cybersecurity

The mining sector is not immune to the digital reformation transforming all other industries. With these changes come significant threats to cybersecurity. Cyber threats have the ability to eradicate gains obtained from any strategic efforts. The influx of artificial intelligence and operational intelligence as a core strategy causes cybersecurity to be a primary risk to the sector. The risk of rogue network operators, “hackers,” puts all digital data at risk.

Cash Optimization

After several years of the mining sector being cash strapped, trends within the sector have recently resulted in positive cash flows. The question now becomes how to put this cash to use: corporate growth versus shareholder awards. The concerns of the shareholders have been discussed previously. A return to growth will drive new revenue and new cost structures, namely an investment in capital. Equipment fleets have become aged as the sector sought to minimize capital expenditures. Deferred maintenance of mature equipment is likely significant as cash resources have been limited. Revenues will continue to be highly volatile and susceptible to unexpected market fluctuations.  Companies within the mining sector must be intentional in their utilization of cash, balancing the needs of today with investment in the future.

Regulatory Changes

Regulatory and political issues are a significant consideration within the sector. Nations are seeking accountability over the extraction of their natural resources while at the same time seeking to be business friendly in order to maximize tax revenue. This creates an intense regulatory environment. States and localities are advancing tax regulations that create additional cost and administrative burden. Public policies continue to promote renewable energy sources, thus decreasing demand. Environmental agencies can block or hamper access to strategic mining areas. Certain regulations threaten the way in which extracted minerals are used, thus decreasing demand. Changes to the regulatory environment can lead to uncertainty within the sector; it is very important to stay abreast of such changes. American miners start 2018 with lower income tax rates which afford them the opportunity to invest back into their businesses. Owners may also look at stock buyback opportunities. The new tax act allows for 100% bonus depreciation for five years which encourages capital investment. Mining companies may be able to improve employee benefit packages as well to help retain key employees. Lastly, miners should look to move operations back to the U.S. from foreign locations to take advantage of the better tax landscape.

Social Awareness

The mining sector must seek to proactively engage the local and regional communities in which it operates. Miners have a unique role in the local, state, and national community. The safety of its workers should always be a priority for mining companies. Miners must consider the impact of their actions within each unique community. Illegal or unethical practices will damage a miner’s reputation and make national headlines, but legitimate closing of a project due to financial reasons may generate significant reputational damage as well. Miners should consider the impact their operations have on their communities.

Operational Runway

Years of focusing on survival led many companies to minimize costs, resulting in exploratory efforts being drastically reduced. As such, many companies in the sector may have limited operational runway, meaning limited access to ongoing or future mining areas. Extending this runway becomes a key risk. Key factors include expanding the exploration budget, utilizing contract miners, studying existing areas under control, and forming strategic alliances with competitors or others within the industry.

Changing Fundamentals

This risk will only rise in severity. The mining sector is a mature component of the global economy. As social preferences change and new technologies become available the status quo of the mining sector becomes irrelevant. The future of coal becomes increasingly uncertain as natural gas took a significant portion of coal’s use in energy production. Now, technological advancements are increasing the ability of renewable energy sources to compete with coal and natural gas, depleting coal’s position even further. The current and expected future demand for electric automotives and the potential for the American commuter system to be replaced by a fleet model in the relative near future draw into question the long-term demand of petroleum and the potential demand for minerals used in battery manufacturing such as cobalt. Understanding current and future trends within the sector will be a key to success.

Production Management

Maximizing the economic efficiency of production is a competitive advantage for miners who do it well. Production is impacted by financial, geological, and even social factors. Miners who effectively manage these factors and maximize production in areas that return the most value to their company will experience success. Additionally, miners who invest in maximizing the efficiency of their production abilities will be most prepared to take advantage of market improvements in their industry.

Capital Sources

Certain segments of the mining industry have lost favor with public investors and consequentially, many financial institutions. Traditional financing arrangements are difficult to obtain, and when obtained may come with high fees and interest. Companies should consider alternative capital sources such as international institutions, brokers, and even customers. These alternative capital sources may offer a form of strategic alliance, such as in marketing existing products, or helping to develop additional assets.

Compare to 2017 risks

Article Dean Dorton

Here are the key risks and opportunities for 2018:

Attracting and Retaining a Quality Workforce

Productivity challenges exist when a manufacturer can’t retain a consistent workforce. Manufacturing companies today have a hard time finding employees who will be on time for work and stick with their jobs. When it’s hard to find reliable personnel, employers have to spend more time hiring and training new employees, then rehiring and training new employees. While manufacturing firms are doing what they can to inspire a new generation of manufacturing employees and experts, there is still a considerable void when it comes to skills and experience.

Work with schools and universities in your community to ensure that schools are teaching and promoting manufacturing-focused subjects. In addition, you can bridge the generation gap by encouraging your older employees to gradually slow down to retirement, passing on valuable skills to younger employees during a transition phase. You should prepare for a wave of retirements in the next 10 years.

Cybersecurity

Manufacturers should be proactive in cybersecurity by implementing effective controls to prevent and detect cyber-crime. A successful cybersecurity campaign includes educating employees of potential phishing schemes. Potential effects of a network infiltration include shut down of operations, theft of sensitive customer information, or theft of sensitive banking information.

Big Data Management and IT Infrastructure

Manufacturing involves a great deal of data and reliance on IT systems. Many companies are unsure of how to access and use that data to leverage positioning within a competitive market. In order for manufacturers to leverage their data properly, they must study data management opportunities and challenges, identify data management abilities, and prioritize data analysis plans. Additionally, manufacturers may consider completing an IT assessment to determine if investments need to be made to advance the company through more effective systems that facilitate data analysis.

Product Development and Innovation

The global marketplace puts an emphasis on product development and innovation, so make sure you don’t miss out on well supported R&D opportunities. Focus is needed to manage the innovation process and allow for a good flow of new product ideas and innovations to enhance future success.

Regulation Compliance and Traceability

The manufacturing sector faces increasing regulation and compliance measures. Inconsistent regulations from state to state and country to country present competitive challenges. You must have complete visibility throughout your supply chain for your own compliance and that of your suppliers. Compliance can include everything from product safety to IT security to fair competition. Revenue and lease accounting standards are changing and impacting manufactures’ financial statements in 2018-2020 as well. Identifying a complete population of all leases under the new standard presents significant challenges to all businesses.

Safety, Including Overtime Management

Safety is a major concern for manufacturers, as their employees routinely work around heavy equipment. Poor equipment maintenance can cause health and safety issues, as well as unplanned or excessive downtime. You should perform preventive maintenance on recommended schedules to keep operating costs low and throughput high, while helping to ensure worker safety. Additionally, monitoring overtime hours to help protect the safety of employees represents an important oversight role and a vital way to control costs.

Embracing the Tax Cuts and Jobs Act

Manufactures in the U.S. start 2018 with lower income tax rates, which affords you with the opportunity to invest back into your business. Owners may also look at stock buyback opportunities. The new tax act allows for 100% bonus depreciation for five years, which encourages capital investment. You may be able to improve employee benefit packages as well, which can help retain key employees. Lastly, you should look to move business back to the U.S. from foreign locations to take advantage of the better tax landscape.

Robotics and Automation

Advancements in technology have afforded manufactures new tools that will alleviate some of the labor challenges. Manufactures have begun to use autonomous vehicles in warehouses to move materials and product. The nation is facing a shortage of truck drivers so the opportunity to use autonomous trucks could be accelerated as well. Robot orders indicate high interest in the automobile, electrical/electronics, and metals industries. Experts proclaim that robots will change the economics of manufacturing with less time focused on low-cost labor positions. Robots are becoming lighter and less expansive, and they offer the opportunity to be repurposed for multiple tasks.

The average global robot density was about 74 industrial robots installed per 10,000 employees in the manufacturing industry in 2016. The most automated countries are Republic of Korea, Singapore, Germany, and Japan. Smarter robots with a “brain” in the cloud as a basis will benefit from big data and collective learning. Robots improve the quality of work by taking on dangerous, tedious, and dirty jobs that are not possible or safe for humans to perform.

Global robot installations in 2018-2020 are estimated to increase by at least 15% on average per year (a total of 1.3 million new robots installed). During 2018 alone, the industry expects 400,000 new robots to be installed around the globe, with 38,000 new robots installed in the United States. It is estimated that approximately 3 million robots will be operational on a global basis by 2020, as compared to only 1 million operational robots in 2010.

Sources: International Federation of Robotics, Robotic Industries Association, National Association of Manufacturers Outlook Survey

Article Dean Dorton

Results from Leading Edge Alliance’s annual manufacturing outlook survey are in, and they indicate that manufacturers have increased optimism, are planning for potential, and seizing opportunity in 2018.

More than 450 manufacturing executives participated in the survey, which includes the opinions of respondents who produce industrial/machining, transportation/automotive, construction, food and beverage, and other products.

Survey results for 2018 include:

  • 81% of manufacturers believe their revenue will increase in 2018, with 72% eyeing organic growth in the U.S. as their primary opportunity to increase sales.
  • Manufacturers are more optimistic about the regional and national economy than the global economy, yet notably the optimism rating for all three has increased by more than 10 points since the 2017 outlook.
  • 62% of manufacturers expect their sectors to grow, more than doubling the 2017 outlook; food and beverage and construction materials cite the highest optimism for sector growth.
  • Manufacturers’ top three priorities are growing sales, cutting costs, and addressing the talent gap.
  • As in past years, labor remains a significant challenge. More than half of survey participants cited the labor shortage as the greatest risk or barrier to growth, and more than half of manufacturers expect to increase hiring.
  • Respondents plan to utilize technology to reduce risks and build a competitive advantage; 75% said that they will investigate/prioritize cybersecurity in 2018, and 50% will investigate/prioritize Big Data/ERP/IoT.

Article Dean Dorton

Last night, the annual Best Places to Work in Kentucky awards ceremony was held at the Lexington Convention Center, where the Kentucky Chamber of Commerce and the Kentucky Society for Human Resource Management announced this year’s winners. Nearly 1,300 attendees joined in celebrating the 100 Kentucky companies who were recognized for their commitment to focus, measure, and move their workplace environments toward excellence. For the 13th consecutive year, Dean Dorton was a part of this prestigious list.

This year, Dean Dorton ranked #4 overall in the Medium Companies category (150 to 499 employees; determined as of November each year), having previously ranked #10 in the Small Companies category. This was Dean Dorton’s first year in the Medium Company category. Dean Dorton was also recognized as one of only six companies who has been a Best Place to Work for 13 years and is a member of the Best Places to Work Hall of Fame!

David Bundy, President & CEO,

“We are beyond proud and honored to be recognized in the Top 5 of Medium Companies in Kentucky this year. Our team members are the cornerstone of our success and their passion for each other, our clients, and their communities plays a large role in the overall culture of the firm. We strive to maintain a workplace that is both satisfying personally and professionally and through the information from the Best Places to Work in Kentucky survey, we are able to create and execute initiatives important to our team.”

The selection process, managed by Best Companies Group, is based on an assessment of the company’s employee policies and procedures and the results of an internal employee survey.

More about Best Places to Work in Kentucky and the full list of winners can be found at bestplacestoworkky.com.

Article Dean Dorton

Third party relationships have become more important as companies look to leverage outside expertise. As relationships evolve, management needs to keep a close eye to determine if the third party contractor has become an employee through the eyes of the IRS. The IRS provides guidance through Topic 762 (see below).

As discussed below, criteria exists to evaluate the contractor relationships; this area has drawn a lot of attention from the IRS. Companies should use caution in drafting service agreements — how much control a company has will go a long way in supporting the conclusion. The more autonomy a contractor can demonstrate in how he/she works will help support the contractor conclusion.

Please let us know if you want to discuss this situation with one of our subject matter experts.

Topic 762: Independent Contractor vs. Employee

For federal employment tax purposes, the usual common law rules are applicable to determine if a worker is an independent contractor or an employee. Under the common law, you must examine the relationship between the worker and the business. You should consider all evidence of the degree of control and independence in this relationship. The facts that provide this evidence fall into three categories: behavioral control, financial control, and the relationship of the parties.

Behavioral control covers facts that show if the business has a right to direct and control what work is accomplished and how the work is done, through instructions, training, or other means.

Financial control covers facts that show if the business has a right to direct or control the financial and business aspects of the worker’s job. This includes:

  • The extent to which the worker has unreimbursed business expenses
  • The extent of the worker’s investment in the facilities or tools used in performing services
  • The extent to which the worker makes his or her services available to the relevant market
  • How the business pays the worker
  • The extent to which the worker can realize a profit or incur a loss

Relationship of the parties covers facts that show the type of relationship the parties had. This includes:

  • Written contracts describing the relationship the parties intended to create
  • Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay
  • The permanency of the relationship
  • The extent to which services performed by the worker are a key aspect of the regular business of the company

Source: https://www.irs.gov/taxtopics/tc762.html

Contact your Dean Dorton advisor or Gina Whitis at gwhitis@deandorton.com to learn more.

Article Dean Dorton

In November, the IRS extended the deadline for employers to furnish Forms 1095-C and/or 1095-B to employees and covered individuals. The forms, which are required under the Affordable Care Act’s employer reporting mandate, are now due March 2, 2017 ― giving employers an additional 30 days to prepare and distribute 2016 forms. The extension is for 2016 tax year only, and no extension was provided to the due date for employers to submit data to the IRS.

1095-C
Applicable large employers (ALEs – generally employers with 50 or more full-time and full-time equivalent employees, measured in calendar year 2015) are required to report 2016 information about health coverage offered, or not offered, to certain employees. The ALE completes this requirement by furnishing Form 1095-C to the employee or former employee.

Access Form 1095-C

1095-B
Employers, regardless of size, who sponsor a self-insured health plan providing minimum essential coverage, are required to report information about enrollees’ coverage. To meet this requirement, Form 1095-B is generated and distributed to the primary enrollee, which also includes information on other participants enrolled in the primary enrollee’s health plan. Form 1095-B may also be generated directly from health plan providers (health insurance companies) for fully-insured plans.

Access Form 1095-B

Previous IRS Due Date New IRS Due Date
Deadline to distribute ACA reporting forms to employees and covered individuals (Forms 1095-C and 1095-B) January 31, 2017 March 2, 2017
Deadline to file ACA reporting forms with the IRS February 28, 2017 (paper)
March 31, 2017 (electronic)		 No change

Even with the extension, the IRS still recommends that employers distribute and file appropriate documents as soon as possible.

Read IRS Notice 2016-70

For additional questions on this ruling, please contact your Dean Dorton advisor or Jeff Ricketts at jricketts@deandorton.com.