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quarterly reports
November 17, 2000
The sale at Boeing was another example - (1986) Cincinnati 10-axis CNC gantry machine centers were bringing $2,250. No, we are not missing any zeros. New, 15 years ago, that machine probably cost $1,500,000. The (1981) K&T data mill 700 CNC mills were bringing $1,500-$2,500 and this is a machine that doesn't take up a lot of space like a gantry machine center. We recently conducted an auto. screw machine sale, but this industry seems to be doing well. Acme 1 1/4" machines in the 1940's are still bringing $12,000-$15,000, which has been a consistent price for 20 years. Here is a valid point...We are now in a transition stage of the value of used machines - where used machines increased in value because of inflation - they decrease because now we are in a period of deflation. The lender or the appraiser can no longer be saved by inflation. Instead we are at the mercy of a machine becoming older; new machinery is now cheaper; and a machine is now being outdated by a faster more sophisticated machine. But the real concern is since borrowers have been geared to lesser payments because of longer terms - how are you going to get them back to shorter terms to cover the deflation and the devaluation of equipment? - even without considering an economic downturn. SHEET METAL This industry seems to do well even if the equipment is being sold in an aerospace machine shop. Example - we had a (1947) Cincinnati 10' x 3/16" power shear that brought $16,000 at the Advanced sale. That is the same price that this machine has been brining at auction for the last 15 years. HOW COME. NO COMPUTER. Certain repetitive processes such as shears, presses, plastic injection molding, automatic screw machines are basically the same machine as they were sixty years ago. So what's the gimmick? Finance machinery that is not being outdated by technology? Not very glamorous; and you may have to start financing equipment in Mexico, but it is better than being into a deal with debt outstanding of 50 Million dollars and your only collateral is a PC computer, a desk and a chair, unless recovery of collateral is not a concern. Large presses are always a little difficult in the West because, we for the most part, are not a heavy manufacturing industry on the West Coast. The main reason is the size of the equipment equating to high per foot land costs on the West Coast and the cost to move. We may be in a new price deflation period, but the cost to transport and store has continued to go up. Computer panel shops that use CNC fabricators age like any other CNC machines. CNC laser cut & CNC water jet has gotten popular for certain finishes on a product compared to a punch PLASTICS A real concern. The oil prices have affected the prices of the raw material resins that are used by all plastic manufacturers. So if the oil prices have gone up 30% in 4 months and in turn your raw material costs have increased that much - it becomes pretty difficult to increase your prices that quickly. Compounded with the higher interest rates is the lower retail demand - well, you can see their problem. But the real effect is that plastic resins are such a large part of everything we own that if the resin prices stay high or become higher, it will, at some point, produce an inflationary spiral. Of course this is not on the government's agenda, so there will be some type of government pressure to reduce oil prices. But the problem is not going away for the plastic manufacturers and we are starting to see it. We signed up 3 plastic sales in one week and there have been some recent large auction sales of injection molding: 1995 Toshiba 500 Ton Molder w/ Robot. $80,000 - $95,000 Injection molders are not enhanced with CNC since it is a long run production press that they are the same machine as for the last 20 years. But to be productive they need to run 3 shifts a day and they tend to depreciate fairly quickly due to use not technology. Ten years seems to be the good life of a molder and if a machine is older than that, the price drops quickly - similar to CNC machines. The two recent large injection molding sales went well but I do feel there will be quite a bit more equipment dumped on the market place and in turn the prices will decline. Really watch your plastic accounts because they are usually a leader of what's to come for the entire manufacturing economy. WOODWORKING There haven't been a lot of sales, but we are hearing that the furniture industry is slowing down on the East Coast and there should be some increased auction sale activity. What does seem to be doing well are the cabinet manufacturers because of the long run of a good housing industry. PRINTING This industry also seems to be pretty stable and there haven't been a lot of sales to track. The one area that really changed is business forms presses such as Harris presses and collators. Much of this area is being done on a personal computer and has affected the market. This industry has also converted to laser business forms and there was a sale recently where the laser business form printers went through the roof. But technology is changing quickly in this area and the graphics segment. Many companies are doing their own graphics in-house with the cost of new continuing to become more affordable. FOOD INDUSTRY We had purchased a large 3-day sale in Stockton and it went very well. We bought another food deal in Michigan and don't expect it to do nearly as well. The reason? The bankruptcy filing of Tri Valley Growers which is one of the largest growers in the US. This has put the food processing industry in a "wait and see" stage. So until the future of Tri Valley is resolved, I don't think you will see buyers purchasing much used equipment. TRUCKING Large downturn due to the cost of fuel. The companies that are highly leveraged probably are going to have real difficult times due to their cost of fuel. CARDBOARD BOX Strong downturn due to alternatives to boxes. Manufacturers have tried to venture into niche products. VIDEO Due to the inception of high definition TV, you are seeing most of this industry scrambling to acquire the cutting edge hi-definition equipment to stay competitive. This is the smart move, but the equipment is very expensive and as more equipment comes on the market place, the cost of new will drop and be outdated by the new state of the art equipment. You will need to have short term debt structure so that you are not caught with high balances on outdated equipment. Nobody is going to want to go backwards in this industry once they convert.
SCRAP METAL Most all companies have adjusted to the lower scrap prices and they are not holding onto inventory purchases at $100/ton when they now buy at $25/ton. But the same problem exists. How do I cover my overhead when my gross is 1/4 of what it used to be? At auction sales of other industries, we could always count on selling everything, because the worst case scenario a scrap dealer would buy it. With rising fuel, labor and trucking costs - this is not always the case. If you cannot abandon the equipment, you may now have clean up costs. GENERAL We are in a transitional stage of a wait and see phase. With the elections, fuel prices, rising interest rates, stock market, it is hard to appraise equipment or predict what will happen the next quarter. We are coming off a long run of great prices from a great economy. Many companies that do close are purchased by a user, so there haven't been a lot of sales to get a good read on. If that bulk purchaser or the equity money dries up, we should get a better indicator where used prices are. If new equipment purchases no longer extend the "no down and no money for six months terms" then it should drive the price for used up. Same idea as Home Depot doing well during a downturn. But the US., especially California, is becoming less and less a manufacturing country. So we as liquidators are becoming more and more dependent on the out of country buyers. But to do this you must have a large sale and also provide the capability to bid online. Tauber-Arons has been doing auction sales on a live and simultaneous internet bid basis and in the right situation, we have found it to be a good promotional tool. We still find that the larger buyers still attend the sale but the activity from the internet increases prices overall. I guess this consolidation trend will continue until the companies become too massive to operate economically or until the Justice Department wakes up. Talk to you next in January. Sincerely, TAUBER-ARONS AUCTIONEERS
STEVE QUALE March 23, 2001
My position in the company has not changed and I will be reviewing all of Jerry's appraisals, for awhile, until I feel he is consistently coming up with the same numbers that John & I would. I have added Jerry because our business had expanded to a point that it was limiting the time I could spend with my personal relationships with the lenders. I will also be spending quite a bit more time on the auction side, since we see an upturn coming in that segment. GENERAL I guess from the last letter you received, our concern, as to how we saw the economy slowing in August may, at first glance, been premature; but we are now starting to see the effects of that downturn in August. It will be interesting to see if Greenspan can wave his magic wand on a downward economy and to see if it works the same as an upward spiraling economy. But I don't think that is as much of a concern as is defation is with the long term amortization rates on equipment. Not only do you have to deal with normal depreciation of equipment, but now new prices keep going down. It is making it real difficult to appraise when we don't know how much less new price will be in 1 to 2 years or even obsolete due to technological changes in 3 to 5 years. It is similar to what we had in the 1890's during the industrial revolution compared to what we had in the technological revolution in the 1990's. In the 1890's you had machine tools replacing manual labor and cars replacing horses. When those replacements came out they were expensive and only a few could afford. As the population saw that the change was here to stay, the new machine tool and automotive manufacturers streamlined the costs so that the general public could afford their new innovations. New price kept dropping and the product kept changing until we had the base model that went from the 1920's till the 1970's. When the general public all had the base model and when it became a matter of replacing because of age, the manufacturing corporations could no longer show the high multiple of earnings each year once everyone purchased the base model and in turn the drop off in earnings and the glamour in the stock market in the late 20's. We seem to be seeing the same today with computers, telecommunications and technology with reduced pricing and companies trying to find the final base model. So, until a floor is reached and new prices quit dropping, we, as appraisers, can no longer use inflation of new prices as a cushion for valuation of used prices. An example of this is, four years ago, a new CNC Turning Center was priced new at $140,000. Today, you can get the same for $100,000. And it makes sense. You add a computer monitor and (3) Servo Drives that probably cost $10,000 - so, why was the cost double of a manual machine. CNC Machines are no longer only for the elite, but now are the norm and therefore the drop in price for the masses.
MACHINE SHOPS It does seem that the new prices of machine tools is starting to stabilize. Since the summertime Haas and Fadal have stopped reducing prices. A good example is a local recent sale with the following prices: That's about 75% of new for a 3-year old machine which is very good. The Asian flu got well and the imported machine tool prices have also stabilized. So, although you are going to see a lot of liquidations and used prices dropping because nobody is expanding, I am more optimistic than I was in August. I think you are seeing a bottom because the shops have cut back to where they should be, but they are not in a buying mode yet. If the company you are financing is at a break even or a little profit, in the fourth quarter last year, then they probably will be okay this year. If you saw escalating losses in the fourth quarter and they are highly leverged, then they probably will be a casualty in the first half of the year.
The aerospace shops are really having a tough time even though Boeing is bragging about all the orders they have. The problem in the aerospace industry is during the last 5 years of boom times a few aerospace mini conglomerates have been formed by holding companies that know nothing about the aerospace industry. I think you will see a a lot of consolidation in those conglomerates. The pricing in that industry has gotten so bad that most of the old time aerospace companies have had to pass on work and wait until the winning bid screwed up the job, so that the pricing can go back up. The guys who have been through this a few times will probably reap the rewards in the 3rd or 4th quarters. But the name of the game is Boeing which government has told us is not a monopoly?
SHEET METAL Probably the only industry I've seen that is doing well and when you have a sale there is some excitement in the attendance. Watch out for large stamping presses because of the energy crunch and the cost to move. You are going to see a real cut back in the automotive industry which is of course will affect the Midwest more than the West. There were some sales of stamping presses in the fourth quarter that were down in the dealer price purchase range. (1988) Bliss 500 Ton, 96" x 54" Stamping Presses (great size) bringing $230,000 when they would normally go for $450,000 all day. The real downside is if the sale of large stamping presses continues - then the machine dealers will hit a point where they can't afford to buy anymore because of the cost of moving, storage and cash flow. Shears and brakes are not going to draw a lot of energy and are easy to move but when you get into presses that have to be dismantled or are in pits, then most of your buyers will think twice before buying at auction.
PLASTICS The energy crunch is going to affect these guys. We had some sales recently and we are being told that the hydraulic injection molders draw too much power and everyone is trying to convert to electric injection molders. The plastic industry is also having a tough time because of the constantly changing prices of its raw materials - resins. The oil price keeps on getting manipulated so the manufacturer's profit margins keep jumping all over the place because they usually don't immediately change the sales price of their products, eventhough their cost of raw materials keep changing. The plastic industry manufacturers have to almost be a commodities broker in their purchase of materials to average out their raw material costs.
The recycling industries also have not been able to really sink their feet in and expand because their buyers may flip from recycled materials to virgin resins when the price of oil drops, making virgin resins cheaper to purchase. So recyclers almost have to have a product line so they can use up their recycled resins during these times. But the recyclers' main problem is getting enough tonnage to cover overhead. Lightweight material takes up a lot of space and the name of the game in this industry is their ability to purchase large quantities at good prices. We will be conducting a few auction sales that we own in the plastic bag industry so we are hoping that industry hasn't fallen too much. Recent Prices in the fourth quarter show how tough injection molding has gotten: (1989) Toshiba 500 Ton Injection Molder $27,500 Very depressing prices, but also shows that once a molder gets past 10 years old, it really drops off.
WOODWORKING This is a tough industry to figure out. There has been a downturn in the economy, but there haven't been many sales in this industry and when there is, the sale goes well. I think the only thing you can attribute it to is that house sales are still doing well and is therefore supporting this industry. Woodworking really seems to be keyed to mortgage rates and the end product doesn't change much. So from a managerial standpoint, it is a pretty predictable industry to be in.
PRINTING A few sales but not many. The prices are down a little maybe 10% to 20% but not terrible. A recent sale brought the following: (1985) Komori 28" x 40", 5-Color Press $175,000 (1983) Heidelberg Mod. HD102V, 28" x 40", 4-Color Press $145,000 But what's interesting is to see the Komori ( if you ballpark adjust for year and amount of colors) is just about bringing the same as the Heidelberg which is the Cadillac.. I guess that easy term financing that Komori provided paid off to get the machines on the floors in the US to show that they match up with the best. But in comparison to the 2 presses above is a sale of a web press. (1984) Harris 22 3/4" Cutoff x 35" Web, 8-Color Web Press with Dryer, Sheeter & Folder - $145,000. Harris is the Cadillac and new this press would cost twice what a sheet fed press cost but brings the same price. Why? I don't know - web press buyers are not auction buyers? You cannot pick up a web press in one piece like a sheet fed press. A web press is taken apart in sections and when you put it back together it is tough to get the registrations right; so the owners would rather buy it new guaranteed to be installed by the manufacturer. Secondly - web presses run at high speeds and therefore run up their impressions much quicker. The business forms industry is still really having a tough time and getting worse. Recent auction - (1992) Sanden Mod. 851, 21", 6-Unit Business Form Press w/ Inserts - $119,000. Ridiculous - but who wants something expensive in a dying industry. It has trickeled down to the small web presses and is reflected by the problems that Didde Glase is having who was the leader in this area of printing. Stay away from graphics systems and film processors. Graphics changes too quickly and film processors you get to use for free when you buy the paper from the distributor.
FILM INDUSTRY A real gamble with the pending strike. This industry has had 30% of its income go to Canada in the last year and one half. So it would follow that the demand and value for the equipment would drop. Also, how they stage lights for films is changing. So if there is a strike and the industry shuts down for six months or longer, it could be crippling. But if you look at this industry for the
FOOD INDUSTRY It looks like the Tri Valley bankruptcy is just about resolved which will remove the uncertainty from the growers and producers. By late 3rd and early fourth quarter, they should be back into full swing.
TRUCKING Still having problems. Maybe some improvement when oil prices stabilize.
SCRAP METAL No change - it's bottomed out so the guys that are making money now will continue at their present levels but may be buying surplus to stockpile in anticipation of the market returning to higher levels. CLOSING If you get a chance, pull up our web site at www.tauberaronsinc.com - we are pretty proud of the way it looks. As I mentioned earlier I am much more optimistic about the economy in January than I was in August. You are gong to see quite a few liquidations but so far in January and February, the prices have been very good with large attendances at the sales and new faces. When money gets tight, quite often you will see used prices at auction sales go up when people have a little more time on their hands and are trying to save some money by buying used. Also, companies have their budgets for the new year and they are out to buy. Probably your big cap companies are not going to be spending for awhile, but some of your smaller companies look for this as a good time to increase their market share. Another interest point drop and I think by the third or fourth quarter, the economy will probably return to normal and companies will start spending again. The only exception would be an external source such as a military conflict, etc.. that would put uncertainty in peoples minds - such as our local energy crisis. Since we have been cast adrift by the Feds to resolve the energy crisis ourselves - if we don't - then we cannot be competitive with the rest of the nation in the manufacturing sector. Hard to believe our State Government Officials could let this happen but they let it happen before with workers' compensation and other issues when aerospace left the area. The same thing happened to the movie industry moving to Canada. At some point our State Government has to show business that they want them to stay in our State instead of depending on the whether to keep industry here. Sincerely, T/A APPRAISAL, INC. STEVE W. QUALE September 10, 2001
There is a level in the age of equipment that when you are in a downward spiral that equipment becomes unwanted. And this is where we are now. The problem is that scrap is so low that the cost to remove restricts the equipment from being sold as scrap. This creates a problem in the food chain. We can no longer say that everything will be sold at public auction; which in turn creates a problem in the liquidation of a company. It has to be late to be great. You can still have a good auction sale if the equipment is near new (1995 & up). Even though we are in a recession, the companies that are still strong now want to buy late equipment (trying to save money) rather than paying for the cost of new, but they will not buy equipment that would be a step backwards. The bigger it is the worse it is. Cost of removal and trucking is still escalating making the price a buyer will pay for a piece of equipment restrictive if it is a large piece of equipment. Distance is becoming a factor on what a buyer will pay for equipment in isolated areas. If he has to bring in riggers that are not local, he has per diem to deal with, plus the additional trucking. In summary - AEROSPACE - It looks like quite a few companies are starting to gear up. They are anticipating a 2002 second quarter surge and they are probably right. JOB SHOPS - Really depends if they are locked in with the right Aerospace subcontractor. They are in the toughest predicament - do I stay small, make money and take the chance of being passed up or do I become huge, burden my company with debt and take the chance of a downturn or the contractor cutting me out completely? For the Aerospace contractor & sub-subcontractors it is a very difficult decision because all the eggs are in one basket - Boeing. So when you see a large concentration with one customer - they have no choice. Usually the perfect formula is to add a little commercial and a little defense to their basket. Trouble is when they get really busy with Aerospace, they usually drop the less profitable commercial. The newly formed Aerospace conglomerates may have a tough time making it until Mid next year, but the experienced guys who have been through this before should be okay. AUTO SCREW MACHINES - Not affected by CNC, but the equipment manufactured in the 40's through the 60's is starting to fall off. Maintenance and condition are really important. GEAR SHOPS - There are so few here on the West Coast. It is tough to get a read because there aren't many auction sales. COLD HEADING - Really tough right now. A 20-30% drop in the last year at auction - and the dealers are full. This brings up a general and new problem in the machine shop industry. The machinery dealers have always been buyers and gave support to this industry, because you could always count on a minimum price. But the internet has created a crippling problem for the dealers. The manufacturers no longer need them because they can buy, sell and verify used prices on the internet. We have been hearing this problem for awhile and now we are starting to see a few dealers go out of business. This could have a large affect on auction prices without the dealer. You may have users run the price up one day and the next day the price may drop dramatically. If a user does not have a need for a piece of equipment, then it really doesn't matter how cheap it goes for. He will just shake his head saying how cheap it is and never bid. Without dealers at an auction sale it is going to make it very difficult to appraise equipment. One day you are going to look like a hero - the next day like a bum. It does look like the user will become his own machinery dealer which will change, eliminate or consolidate a 70 year old industry of machinery dealers. The only option is to 1). rebuild the equipment; 2). sell the equipment for a lower, quicker return; or 3). specialize in an industry and corner the market on that industry. SHEET METAL But a shear, brake and punch press have not changed in 70 years. The only change we see is speed. The faster the better and how fast they can go gets a little scary. It's almost like they are going to spin off the carrousel. O.B.I. Stamping Presses are a piece of cake to sell. Large Stamping Presses can either do well or fall off the table since a dealer's purchase price is so low due to removal and carrying costs. Energy costs have a large effect due to large size of the motors on the presses. PLASTICS Blown film is having a real problem and even fairly late equipment is not drawing a lot of interest. PLASTIC SCRAP RECYCLERS - We had a sale in Ohio that went about average for late style equipment, (1996) Davis Standard 6" Pelletizing Lines were going for about $125,000. New price on that Line four years ago would have been $350,000 when they bought it. But when we sold the Line in 2001, the new price had dropped to $250,000. New prices in the plastics industry have really become "make us an offer and we'll negotiate." They really need to move product to show sales. But even with equipment new in the (1996) Vintage there were only 6-10 active auction buyers. The largest recyclers in the industry did not attend (and they knew about the sale) because as long as the equipment was being liquidated a competitor had been eliminated. Therefore no necessity to protect the turf. BLOW MOLDING - Haven't seen any sales to give any results. INJECTION MOLDING - Is still having a real rough time but maybe if oil prices stabilize, it might help. But it's going to take a general upturn in the economy for them to invest money on new equipment. RUBBER - We had a 2-day sale in Dallas that went through the roof. (1998) REP Injection Rubber Presses were bringing $95,000. A buyer on the internet from Mexico bid on all of the rubber presses and therefore kept the price up all the way through. This sale contradicted the way the industry had been going. This is the point I wanted to make. Auction sales are not as predictable as they used to be. We had a Fastener Cold Heading shop in Las Vegas that set some record prices on Fastener equipment and auto. screw machines. This was old, rough looking equipment in a flat industry that went high. So go figure - everything going against these two sales and they both hit home runs. WOODWORKING FILM INDUSTRY So where this industry was closed to a small group who were allowed carte blanche budgets - they are now scrutinized by the numbers crunchers representing the syndication. Similar to Las Vegas. TRUCKING The length capacity varies from state to state and it would probably be helpful if they become national guidelines. The era of the truck tractor - 28' trailer - dolly - 28' trailer-may be coming to an end. The time is takes to load, unhook and rehook up the equipment is just taking too much time. The 48' trailer is becoming outdated by the 53' x 102" wide trailers which seems to be the trailer of the day. So the set up will be a 3-Axle Conv. Truck Tractor with a 53' x 102" wide Trailer. The NAFTA Agreement should be interesting especially if the US stands by and enforces that all equipment entering the US from Mexico must comply with US standards. This may boost the sale of used US trucking equipment in Mexico and give an outlet for our surplus trucks and trailers. GENERAL As we see our economy becoming more global, and with the consolidation of companies; I think you will see the next progression of countries working jointly for the benefit of the geographical economy. I think you will see countries forming alliances based on geographical benefits because it financially benefits all. An alliance of the Americas. We have had 10 years of economic boom times where companies have splurged on buying new manufacturing equipment, expanded their telecommunications networks, bought new houses, bought new cars - it's like you've eaten enough food for hibernation. Companies built up so much cash reserves that they have been able to withstand this last year but at some point soon those reserves will run out and the good business managers will rise to the top. So, relax- it's a natural progression - the economy will return, but not until supply is reduced to current demand. Sincerely, STEVE QUALE March 1. 2002 FOURTH QUARTER 2001
The recession bottomed out in June of 2001, but not a lot of plants were sold, since they were merged with other companies. So, there was never an oversupply of equipment auctioned and therefore prices never really fell that hard. One support segment of industry is the used machinery dealer, who has had a very tough time, not only from lack of demand, but by the ability of the user to market his equipment over the Internet. The user can now determine the market value of his equipment and sell his equipment over the Internet without the need of the machinery dealer. Around November 2001, we started to see prices improving and the economy appeared to be on the way out of the recession. But, when September 11th happened, it put uncertainty into everyone's mind and put everything on hold. The economy then tried to come out again and the Enron "Creative Accounting Demonstration" again put a big question mark in everybody's minds. So, now in February, everybody is trying "real hard" to get the economy going, but they are also looking over their shoulders. I feel, as I did in November, that we are moving out of the recession and on our way, unless some unforeseen event happens to shake our confidence. I assume that the new age of lenders understand that when you do 100% financing on new equipment, don't be surprised if the manufacturer drops his price by 30% the next year. This happened in the 1980's bout in the oil industry. So, when you are going 100% on a $1 Million piece of equipment, try to think what your piece of equipment will be worth when new price is $700,000 a year later for the same piece of equipment. No way out! The one thing in a down economy, which I will keep referring to, is the size of a piece of equipment. Look at it this way. 1. You are a company that is barely keeping its head above water in a recessionary economy. I want to sell you a press that would cost new $20,000,000 to replace. It will cost you $2 1/2 Million to remove and reinstall the equipment at your place. You presently have low cash reserves and do not have the work for the press, and do not see any work in the immediate future, but it would be a piece of equipment you would use if business returns. I will sell you that press for $0. Do you buy it? 2. I have a press for sale that would cost $1 Million to replace. It will cost $10,000 to remove and reinstall at your premises. I will sell you that press for $100,000. Same scenario. Do you buy it? This is the restrictive decision that has to be made based on removal costs, energy drain and cash flow where probably you say no to #1 and yes to #2. During an up economy, you are all over the $20,000,000 press, and this is the decision a used machinery dealer must make during good and bad times. You can see where the cost of removal could put certain pieces of equipment into a position of zero worth because the user or dealer will not gamble because of the cost of removal. The second major change is the consolidation of industries leading to less potential buyers at an auction sale. This leads to sales where the price can vary drastically on the same piece of equipment and also that larger companies tend not to be auction buyers. Almost any auctioneer in the country will tell you that the major change in sales is the attendance. This can lead to an auction sale being a real disaster or a savior, without any rhyme or reason. It can be old equipment, new equipment, an industry that's dying or a new age industry. It's all over the board. And that's one of the reasons why appraisers are having such a tough time appraising. The prices are all over the place and the last time the equipment was sold was during good times. You know it's bad but you don't have anything to compare. You can only try to achieve an average sale value. MACHINE SHOPS One important thing to check when you finance a new machine, be sure to get a copy of the final invoice and check out the serial number of the machine when it arrives at the plant. Aerospace - The one area that was on the rebound until September 11th. How many commercial aircraft companies are going to take their orders after what has happened? Which, of course, trickles down to the subcontractors who are also put on hold. They, of course, are scrambling to get defense work and general economy machining. The prices are all over the place. Aug. 2000-CA - (1990) Cincinnati 30V, 3-Axis, 3-Spindle Rail Profiler $375,000 This above Washington sale shows signs that the aerospace is returning to August of 2000 when it was at the beginning of the recession. Really shows the drop off when machines get past ten years old. I personally feel that the orders are there, but it is going to take two profitable quarters by the airlines before they will take delivery. Aerospace probably will lag the rest of the economy because of this. They originally were looking at the second quarter of 2002 before September 11th happened, so it's my guess it will be probably the first quarter of 2003 before they get into gear. But, when they do, look out, because the ones that survive (and our one of the "chosen" by Boeing) are going to do great. Screw Machines - Having a real tough time because of automotive. The CNC Swiss screw machines are selling well because they can quickly do short run projects. But, the cam operated long run screw machines such as Acme Gridley, Davenport, Wickman and Brown & Sharpe are having a tough time. The set up time for cam operated is much longer and there just isn't any long run high volume work available. SHEET METAL Between October and December, (35) CNC Fabricators were sold and mostly between 1996-2000. I have never seen that many fabricators sold in a short period of time. But, the prices were not that bad considering that many were being sold. Sale 2 Sale 3 Sale 4 As you can see Amada way outsells a Strippitt. In those sales there were also quite a few Amada CNC Press Brakes which always sell well, since press brakes can be used for more varied applications. More CNC Lasers came unto the marketplace: Now, in all the above prices - sometimes not everything is actually sold at an auction sale, or one buyer can make the whole difference. In particular, a (2000) Mazak X510, 2500 Watt Laser: One selling for $475,000 and one for $262,500, and that's why you can't always look at all these numbers as the final word. That's why it is important for an auctioneer to be the appraiser because they have the "gut" feel of what is high, what is low and what is an average price. When you get into O.B.I. Punch Presses, they hold their value because they are easy to physically move. When you get into S.S.D.C. Stamping Presses, they hold their value up to a certain physical size. Look at it this way - if a forklift can stroll up and pick a piece of equipment with one pick -then you will have a more salable piece of equipment. Coil Processing Equipment, Slitters, Cut-To-Length Lines, T-Mills, Z-Mills, Rolling Mills - "Look out." The above was some good-looking equipment that is in an industry that is having more than recession problems. That last Nash mill probably would cost new today $5 Million. The U.S. went through one industrial change in the 1980's with Steel Mills and this second time through may prove to be even tougher. A sale in September had tube mills that went very low and this industry has the same problems as the rest of the steel industries mentioned above. (17) Tube Mill Lines (2) at $80,000 each (1994 & 1999) and the rest were $5,000 to $30,000. The two (1994) and (1999) lines that sold for $80,000 each probably would cost $750,000 each new today. PLASTIC But here's a sale that really opens your eyes to size in Indiana in August: (1991) Van Dorn 1500 Ton Molder $31,000. Terrible price for a very expensive machine, but a (1988) Van Dorn 500 Ton Molder $19,000 not a bad price. 1/3 the size but about half the price and 3 years older. Same sale (1998) Van Dorn 400 Ton Molder $70,000 each which is not a bad price. Big equipment is tough to sell during downturn because of energy use, the cost to move and the space it takes up. But all in all this is a good indication that the plastic industry is firming up and the plastic industry is a lead indicator for the rest of the economy. Blown Film - We got crushed with a blown and cast film plants that we owned in June 2001 and a commission blown film sale which was also in June and was late equipment. Then in October there was a blown film plant in Georgia with older equipment that brought good prices. We then had a blown film plant in Los Angeles in December where we had a great demand and great prices, which leads us to believe that in June of 2001 we were in the bottom and moving out of the recession. The prices we saw in October and December were as good as we would have seen three years ago, and in both sales it was older equipment. This, I feel, is a good sign for the plastics industry, since it had cut back its industrial machine supply through June of 2001 and then saw an upturn in the fourth quarter creating a demand for equipment. WOODWORKING Weinig Profimat 22N Molder $22,500 Woodworking is probably following the sale path as injection molding. Also one reason that it hasn't been too bad is because the low interest rates have spurred new housing, which of course, in turn spurs cabinetry and furniture. GARMENT So prices on sewing machines are only off about 20-25%. We had an unusual sale that you hardly ever come by. Cotton Garnett Machines. Proctor Garnett Line w/ (2) Proctor Garnetts, Hunter Garnett, (1987) Dilo Loom, (1997) Circle 30' Oven, Hunter Slitter: $40,000 for the Line. Proctor Garnett Machine by itself brought $3,500 when we used to figure them for $5,000. Not really too bad of a price considering Los Angeles is not known for Cotton Garnett Machines (usually Southeast) and where most of the industry has gone to Mexico. The oven was super expensive but it will cost a lot to move and reassemble. Another unusual tough sale was a Leather Tannery in the east coast with mostly (1995) equipment. The highest price was a (1994) Koch 750 Ton Leather Press that brought $20,000 with a good part of the equipment having no bids. The continued sign of an industry leaving America. Circular knitters (such as a 1990's Monarch) will still go as high as $15,000 where they used to bring $25,000 for the same vintage. Tajima and Baruden Embroidery Machines will bring $20,000 where they used to bring $30,000. So the prices aren't too bad, but this equipment is very easy to move. On the other end is the dyeing and finishing equipment. There have been recent sales where Jet Dyeing Machines will bring $2,000 to $3,000 where they used to bring $25,000 three years ago. Tenter Frames are almost unsaleable because they cost too much to move. Three years ago a tenter frame would bring $50,000 to $150,000: today almost zero. Forget what new prices are - it really doesn't have any bearing on what a five year old piece of dyeing equipment will do at a public auction. PRINTING This is probably just exactly what they should have brought. There have been some screen printing sales. We had a sale in San Diego with the following: There have been a couple other screen printing sales recently (which is quite a lot for this industry) but the sales have been fine. Vinyl Album Equipment is having a tough time. We have sold two in the last four months and the industry seems to be consolidating and going to Mexico. FOOD Now that the Tri-Valley bankruptcy has basically been taken care of, food processing should return to normal and be the most stable industry again. Sincerely, STEVE W. QUALE September 13, 2002
This is going to sound a little crazy but the first six months of this year were as good a time to sell equipment since 2000. But not too many people took advantage of this odd situation. To be obtaining fantastic prices while in a recession is really unusual. I can only attribute this to one thing: There were very few auction sales taking place during this period and the companies that will be the survivors started buying used equipment instead of new in an effort to economize during a recession. So what’s going to happen in the second half? I am afraid it’s not going to be quite as nice. In mid-August, the floodgates opened and now we are looking at a ton of deals. And because there are just a limited amount of buyers that are doing well, the buyers may reach capacity if a large quantity of equipment is dumped on the market place in a short period of time. Consequently, prices will drop. Sales of new equipment have really dropped, but used equipment has picked up. This is normal for most recessions. But the lack of industrial auction sales is not normal. I do think that the lenders have taken haircuts, rewrote notes, transferred the paper to healthy companies or anything else they can do to avoid the possibility of a bad liquidation and taking a loss larger than they had budgeted for. Think of it as getting a large gash in your leg and you apply a tourniquet to stop the bleeding. But, instead of repairing the leg, you just let blood flow through once in a while and jeopardize the entire body. This recession never “bottomed out” and instead it has just limped along and just keeps getting shots of blood once in a while, but not the cure. I think we also see that the policy of lowering interest rates during a recession does not work. Probably what will trigger the recovery is when the government commits to some deficit spending that directly spurs the economy. I do think we are starting to see the effects of NAFTA. Countries such as Canada have all of a sudden become much more competitive because of their lower national cost basis and with NAFTA they have the ease of trading in the US. I understand the “wisdom?” in NAFTA (to turn the US into a continental economy) but the effect will be to average out the (3) economies. Our economy is going to suffer but, Canada and Mexico’s economy is going to rise to a point where they start to even out.
I do think that even though you will have the countries economically working together, that does not mean they will work together politically (i.e. Canada not supporting US in going into Iraq). There will always be the sovereignty of a country. NAFTA does seem like a big gamble and I think we will see more of its effects as time goes on. MACHINE Almost every phase of machine shops are doing better. Some of the companies that are barely hanging on will probably close down in the second half, which, as in the natural food chain, will make the survivors healthier. The one industry that will of course take longer to rebound is the aerospace job shops. But when the aerospace survivors rebound, it will be with a vengeance. The airline fleets were in a position to be replaced before 9/11 and when they do recover there are going to be huge orders. The defense segment will support the aerospace companies until the commercial aircraft work returns. One change is Horizontal and Vertical Machine Centers. An H.M.C. costs about double of a V.M.C. but when sold at auction, comparable sizes of H.M.C.’s & V.M.C.’s will bring the same price. A lot has to do with the extra set up time with H.M.C. SHEET METAL Doing fantastic!!! – Historically the most stable in the machinery industry and today still holds true. The only segment that has down turned and may never completely return is CNC Turret Fabricators. Because of the drop in computer industry, fabricators have really been hurt by the lack of the computer panel business. But the other factor is the CNC Laser and CNC Waterjet has replaced the fabricator for the other portion of work. Laser and Waterjet can go through thicker materials, faster and leave a better finish. There was a tube bending auction sale that took place that brought about double of “retail”. The reason: a major company had to have the equipment and tooling to complete a contract and was going to buy the equipment and tooling no matter what the price. Price was not a factor. Happens once in a while but you never know for sure when it is going to happen. It happens sometimes when two owners sell their business at auction and they both want to stay in business. Becomes a poker game of running his partner, when he knows his partner needs that piece of equipment.
We had a sheet metal auction sale in Oklahoma City, which brought what we told the owner, but a good portion of the equipment went to buyers in Texas. Oklahoma City had been saturated with sales and was not large enough of a town to be able to support much more. The important ingredient is that a sale must be large enough to attract buyers from outside the area. PLASTIC First one in – first one out! Blow Molding – we guaranteed a sale in Buffalo and had a great sale, where a year ago the same equipment died at an auction sale. This equipment does not come up very often and there are only 70 industrial blow molders left in the US. So your sales can be volatile. Blown Film – the plastic bag industry is slowly returning to where it was prior to 2001. Nothing dramatic but just a slow gradual return with auction prices firming. Injection Molding – the industry is getting better but there is just such an extreme surplus it will be a real slow process before auction prices return to normal levels. WOODWORKING Even though we know this industry is hurting, there have been very few sales on the West Coast. The sales that have taken place on the East Coast have been a little tough but not awful. The housing industry has probably kept this industry from falling deeper. We are also hearing that because of NAFTA that cabinet manufacturers (i.e. – Las Vegas casinos being built) are getting clobbered by Canadian companies. Canada is very supportive of its wood industry from sawmills through furniture. One change we are seeing is that woodworking is converting to CNC. Probably the last industry to do this because woodworking has always been considered as a craft – just like a tool & die maker in the machine shop industry. But unless they convert to CNC they cannot compete. GARMENT No new sales since last mentioned. Still an industry just trying to keep its head above water.
PRINTING No sales – Go figure. We know this industry is flat and sitting on huge loans. We have to assume the lenders are doing creative financing to keep these guys alive. Extremely expensive machines, where your standard piece of equipment that you have to have, costs new One huge change that could change this industry is digital. Right now printers are playing with it. But if digital replaces impression presses it will be a mess. The printing industry is the epitome of “give me the newest and the best so I can separate from the competition.” So if digital takes over, the printers could dump their $2 ½ Million presses. Could be a huge problem. MEXICO At some point all lenders will be doing business in Mexico. Whether it be a sister bank relation or opening an office in Mexico – it will happen. With NAFTA the transportation of product has been streamlined. For a US manufacturer it will become just a dollar and cents decision if he is able to maintain quality control in Mexico or if quality is not much of an issue. The US manufacturer will require that his bank can accommodate his operations in Mexico or he will switch to a bank that can. It’s also staring us in the face. If a US manufacturer needs to auction his plant in Mexico, he is going to want to use a US auctioneer he trusts, but who can also easily work inside Mexico with Mexican connections. For this and previous Quarterly Reports, visit our website at tauberaronsinc.com. Sincerely, T/A APPRAISAL, INC. STEVE W. QUALE April 21, 2003
In the last six months, this recession has received additional obstacles that have given this recession much more complexity. The uncertainty of a war (although on April 11th looks to be over), the responsibility of rebuilding Iraq and most of all, the long anticipated arrival of China. To end this recession there is light at the end of the tunnel, but with China, it will be a very long and difficult process that may have not end but instead a new mind set on how you do business. We went through this before in competing with overseas products such as furniture products. It’s the same old story – “I, as the manufacturer, can buy a piece of furniture overseas, delivered to my factory, cheaper than I can make it.” And the answer was to either close down or size down and produce high-end short run products. This is still the answer today, but it’s almost like we are going to a second level. You can get into a specialty area or produce a product that separates you from overseas competition, but that is only good for about 2-3 years and then it is duplicated overseas. So, the challenge is to be continually changing with state of the art equipment to produce a unique product at a cheaper price and to continually market a new product with a new sales angle. Add to that equation that since there has been “too much” consolidation of companies (monopolies), you, as a subcontractor to these monopolies, must reduce your price by 5% each year or lose the contract. So how does that affect you, the lender? You have to finance state of the art equipment that cost new: Year 1 $500,000; Year 2 $400,000; Year 3 $300,000; Year 4 $200,000 and Year 5 $100,000 and you must extend the term of the loan so that the owner can afford this state of the art equipment. Deflation is going to introduce a new mind set to financing.
You must finance a company (who if it does everything the same as it did last year) will have its revenues decrease by 5%. And with the consolidation of companies, there are less companies to provide financing to, therefore, you are putting all your eggs in less baskets, with the risk that the industry you are banking on becoming non-existent in the U.S. which is what has already happened to some industries. So, what happens if there is only one airplane manufacturing, one carpet manufacturing, and one bank? Sounds crazy, but that is the direction we are taking. The pitfall and ambivalent saving grace is that these companies become so large through consolidations, that they can have a tough time competing with a new line company that has no “baggage.” Almost all old line machine manufacturing companies such as K&T, Lucas and Cincinnati consolidated but could not compete because of the “baggage” they must carry through the consolidations of old companies in an effort to increase market share. But, then a company such as Haas (a new machinery manufacturing company in California) starts up in the 1980’s and beats out the imports. Not only did he beat out the imports, but also he did it in California with the highest cost base. And this is where I see the answer and the beauty of the U.S. economy. We may have companies that become too big and too old which leaves the door open for some entrepreneur to start up from nothing (with no baggage) and be able to undercut everyone with a better product. We may lose a lot of old line companies because they cannot compete with overseas competition, but then someone will start up from scratch and become the new Henry Ford, Bill Gates or whoever. It is our entrepreneur creativity working in a democracy that will continually make us competitive. Values – I have heard more and more lenders complain how bad auction prices are. This is my fourth recession and I’m telling you, I have never seen such strong auction prices during a recession. You will have a sale “bomb” once in a while because the market has left the U.S. or there is only a handful left in that industry, but in the overall scheme, prices have been very good. But, it can get pretty volatile. We had a deal that we bought against a lot of competition and we were anticipating making 20% on a good day, but we got lucky and doubled up. We had a sale recently that brought 50% of what we had told the owners. In either case, we were giving our honest opinions of what we thought the equipment would bring on an average day. So, what do you do when you are in the workout department and the liquidator has told you the auction will bring $500,000 and then you sell it to a user for $505,000? If you are the liquidator, then after a while you start giving the lender a figure of $650,000 instead of $500,000 and hope you get lucky. And that’s why you are probably feeling that the auction prices are low. Whether we, as a liquidator, own the deal or are selling on commission for your behalf, the sale will bring about the same. Even if we are working on commission we still have that professional pride in doing a good job. Every once in a while, you will have a bad or a good sale, but for the most part, you don’t have bad auctions – you have bad appraisals when they are continually optimistic instead of giving you an average appraisal value. In summary, (1) the competition from China is going to be a real challenge; (2) we have lived off inflation but now are faced with deflation where new prices are continually dropping; (3) some industries may leave the U.S. and may never come back; (4) prices can be volatile and sometimes you will get retail at an auction sale but don’t lend at retail even though it says it is a liquidation appraisal; (5) don’t believe everything you hear. MACHINE Aerospace – as you can guess this is going to be a real long haul. The only reason these guys are surviving is because defense is strong. Even though the war is over, the restocking of defense contracts should be good for another year. I think everyone has found out that you can’t be in the insurance business, buy a bunch of aerospace machine shops, form a conglomerate and be successful. Aerospace guys are a separate breed and they must stay with the company if the company is bought. SHEET METAL Alert 180 Degrees – this is the first time in four recessions that I have seen sheet metal drop off. But not just with CNC fabricators, but also with the standard of the industry – press brakes and shears, and not because of any change in technology such as fabricators, but probably because there are just too many on the market place. In any other recession, press brakes and shears have always retained their price, but not in this one. PLASTIC Injection Molding – Indicator alert – prices are starting to rise which is the best sign in a long time, since injection molding is a lead economy indicator. Blow Molding & Extrusion – we bought a medical blown molding shop in Santa Ana and a pipe extruder in Bakersfield in which the sales will be in May and then we will get a better indication. The medical plant is small bottles and what is interesting is that you can get real lucky on the dies. The dies (unless there are logos in the dies) usually are standard size and even though a hair care company may have all the equipment they need; they may introduce a new product that requires a standard bottle size. Haven’t sold a PVC pipe plant in a while, so we are kind of looking forward to that. Blown Film – was recovering but dropped off quickly. Chinese imports of standard plastic bags are killing this segment of the industry. Even a company like Formosa in Texas (who is also a resin material manufacturer) is also having a tough time competing with China. We are seeing a major consolidation in this industry, which will probably continue. Companies with high debt structure and high overhead are going to have a tough time making it. The remaining segment of the industry will be short run specialty bags. If oil prices drop, this will provide some relief for this industry. PRINTING Same as last letter. No auction sales from anyone. Even though you may say that companies try to advertise more during a recession but that is the case for only a period of time until a company also slashes its advertising budgets. Because printing companies are such a tight margin companies that finance expensive equipment it is really hard to figure out how they are making it. Maybe Heidelberg and Komori will at some point stop taking back equipment. FOOD Interesting – there has been a drop off in prices due to the consolidation of major corporations. We are doing a 3-day food-processing sale and most all major corporations are selling surplus equipment. But there is a change that is interesting. I assume that you have all noticed that you are now getting fresh fruits and vegetables in the wintertime because they come from Mexico and South America. U.S. companies, as you could understand, have always been very seasonal, but now we are starting to see major companies such as Con Agra opening plants in Mexico. I will assume this will continue into South America and this will in turn even out the revenues of the major food companies in the U.S. so they are not so seasonal. We are finding that the Mexican and South American food plants are opening state of the art facilities and the U.S. companies will need to budget some large expenditures if they are going to compete down there, with new equipment instead of bringing down older and slower equipment. WOODWORKING Finally starting to see some auction sales take place and some of the older equipment is dropping in price. This industry is again getting beat up by foreign imports so the trick will be again to go to high-end short run products. Most companies are converting to CNC to increase the speed in which they can turn out a product to give them a delivery time edge. MEXICO What was initially the U.S.’s reason to move to Mexico has just been replaced with China. What was going to be an option for U.S. companies to manufacture in Mexico has now had a geographical change and most U.S. companies are now making a trip to China. This should be a real financial challenge for the lender. Before, where you were concerned about U.S. equipment moving to Mexico, now instead you will be financing new equipment manufactured in China to be used by U.S. companies in China. CONCLUSION Just as the key to manufacturers is changing product lines with state of the art equipment, that keeps getting faster – faster – faster. The lender is going to have to change quicker to meet the manufacturer’s needs in new countries. Also, the trend to financing inventory looks as if it will expand even more as goods come in from overseas for U.S. distribution. For this and previous Quarterly Reports, visit our website at www.tauberaronsinc.com Sincerely, T/A APPRAISAL, INC. STEVE W. QUALE February 26, 2004 Dear Title Contact, Sorry it has taken so long to get the report out, but I did my second hip surgery in December and it kind of slowed me down.
Good news – the economy has taken off and auction prices have been thru the roof. Auction prices have been steadily improving since September 2003. But, since January 1st, 2004, they have really taken off. It seems like we are coming out of the bottom and now heading upward. Full speed ahead. We are still lagging a little behind the eastern part of the country, but that is normal when we come out of a recession. In almost all industries, the fat has been cut off and the survivors should prosper thru this year. At that point (probably fourth quarter of 2004 or first quarter of 2005), we should start to see expansion, good earnings, airplane orders, illogical I.P.O’s and funny money financing. This should continue thru 2008 with a slowdown in 2010, a recession in 2011 thru 2013 and recovery in 2014. CHINA – this should be real interesting, especially for California since we are the first point of import. I can’t tell you how many machinery movers that I have talked to saying ‘they are loading containers full of machinery being shipped to China.’ We should see the manufacturing portion of California companies shrinking but their import segment increasing. It may not affect their total sales or profit levels, but the import/domestic manufacturing blend is going to be different.
Page two And this is where it is going to get interesting for your auditors. Your verification for cost of goods is going to almost be based on a ‘leap of faith.’ It is one thing for public companies to have manufacturing operations throughout the world, but it will be a little different for privately held companies. I think U.S. finance companies are going to have a tough time verifying just what expenses and overhead is figured into the cost basis for the imported items that are shipped to the parent in the U.S. In other words ‘rob Peter to pay Paul.’ The owner may be showing small profits in the U.S., but he may be building a huge personal nest egg for himself overseas. Did I say your auditors will have a tough time or will it be an I.R.S. problem where corporations were recently attacked because offshore corporations were just a shell; but in China it will be a legitimate manufacturing operation. What does this mean to you, the lender? You may have an operation go bankrupt in the U.S. and find out that you advanced 50% on a $10 import cost basis and find out that the true cost is $1, due to inflated import costs. All of the owner’s U.S. assets are truly liquidated, but he has a palace in China you can’t touch. This happened not too long ago when Korean textile manufacturers came to the U.S. and started buying Korean manufactured textile machines. Of course this was during good times and financing was yours for the asking. So, if I am from Korea and wish to buy a Tenter Frame from Germany that cost new $3 Million, I then show my banker that I can get the same machine from Korea for $2.5 Million and of course it is every bit as good as the German machine. Makes sense. But what you are not told that he is buying the Korean machine for $1.5 Million from his brother-in-law and the other $1 Million is going from his brother-in-law to his bank account in Korea (which may be the standard course of business in Korea). Everything is okay as long as business is good in the U.S. because his cost of equipment is still approximately 20% less than the German piece. But when things turn sour and you go to liquidate that used piece of equipment that you are into for $2.3 Million, to the people who know that the machine really only costs $1.5 Million – now you are in trouble. Now as appraisers, we have previously experienced this and been able to ignore invoice prices and base our decision on what that machine has sold for on the used market. It takes a period of time to establish the actual liquidation value of new brands to the marketplace. And that’s why I have been saying for 25 years that you have to ignore new prices and base your appraisal decisions on supply and demand. And this is why it is going to be hard at first to evaluate Chinese imports based on a cost basis (inventory or equipment) because they have not yet gone through the liquidation learning curve. MACHINE SHOPS Page three for capital expenditures. The cost of new CNC has decreased to a point that it looks like it has leveled off and you probably won’t have much more deflation. I don’t know how many times I have had an owner retrofit a (1980’s) CNC piece and try to convince me that it is as good as new. It may be for him, but that is about all it is good for when you go to resell. Aerospace is still having a tough time with commercial airplanes, but it is doing fantastic on the defense airplanes and parts segment. There is light at the end of the tunnel for airplanes and the survivors are going to be the rulers in aerospace when the orders begin. There may even be a lag in deliveries in trying to gear up for demand. We co-conducted an aerospace job shop at Warner Aircraft and the prices were all over the place. (1996) Cincinnati 30V Single-Spindle 5-Axis ‘Baby’ (12’ x 90’) Gantry Profiler $150,000 – very low! (1998) SNK Mod. PC60, Single-Spindle, 5-Axis Profiler, 20” x 40” Travels, $180,000 – very high. (1996) SNK FSP120V Single-Spindle Ram Type Profiler, 10’ Travel $200,000 – good price. Shows that the larger gantries that require pits that are used for long wingspans are not in demand but the small SNK PC60 5-Axis (that makes small defense work parts) is. (1997) Haas VR11’s $90,000 - $100,000; (1997) Haas VF10 $85,000; (1997) Haas VF8 $65,000 & (1997) Haas VF7 $65,000 – Good Haas prices. But then you get a (1960’s) DeVlieg 5K-144 CNC Jig Mill (Conv. to CNC) that brings $180,000. Extremely high price for an old machine converted to CNC. This has not been the trend. The trend has been that older equipment really drops off in price unless it is really a rare piece of equipment that doesn’t come up very often. Again – very few buyers but good prices. One thing that has done well is bridge cranes. At that sale we had a 5-ton crane that brought $18,000 (great price) and this has been consistent with all bridge crane sales – they have gone high. SHEET METAL The computer panel segment of the sheet metal industry may be improving soon. I have never seen so many CNC Fabricators sold in the last 3 years. So the panel industry has shrunk to a point of survival and the survivors will flourish soon. One technology change is that CNC Fabricators have been somewhat Page four outdated by CNC Water Jet. You can cut a thicker product with a better finish on the edges. Real interesting process which should continue to expand. We recently had a press sale with 100 – 200 Ton, 3’ x 6’ Bed Straight Side Stamping Presses. Prices were within 5% of what we told the owner. The presses were in the 1960’s and went from $25,000 - $50,000 each. These presses have not been sold on the local marketplace in a while and they were standard sizes. But, it was interesting; we only had (3) bidders on the presses. This has been the sign of the future – prices are fine but very few buyers. Makes our job a little difficult in keeping the buyers from getting together. One industry that is having a tough time is the wheel industry and it looks like wheels for the near future will be made in China. PLASTICS BLOW MOLDING & EXTRUSION – The blow molding sale we had at Allergan did fantastic. (1970’s) Bekum Blow Molders were in the $25,000 - $35,000 range. But the Jomars were disappointing. We used to get $25,000 each but were getting $12,000 - $15,000 each. The pipe plant in Bakersfield at KWH made large diameter Plastic pipes for irrigation. Older equipment does not come up very often and we thought we would get lucky; but didn’t. BLOWN FILM – still becoming a short run specialty bag industry with even maybe a few more consolidations. As of February 23, 2004, oil prices were surging which will drive resin prices up and will directly affect blown film bags since they do not immediately pass on the increases to their customers. This shortage of oil will affect all plastic industries in the short term.
Page five RUBBER PRINTING We also had a sale of a paper converter that went well. Most equipment was in the (1960’s) but all the sheeters, slitter-rewinds did well within 5% of a 6-month old appraisal. WOODWORKING FOOD We had a hair care cosmetic sale in Camarillo that was fantastic. This is one arena that should continue to do well because of the proprietary nature of their products. The processing of their products and their quality control concerns should require local manufacturing plants. We had a sale at Starbucks that went very well. It was a Seattle’s Finest plant that Starbucks no longer needed due to the purchase of Seattle’s Finest. We had concerns about doing the sale on an island but almost all of the equipment left the state and all went well. Page six We had a pharmaceutical sale at Wyeth and the sale went exceptionally well. We conducted the sale with (2) machinery dealers who were the “mavens” in pharmaceutical equipment. The sale was figured to bring in the mid-$700,000’s. We sent out to their national and international mailing list of 25,000 buyers. We conducted the sale and had only 75 people in attendance but the sale brought in the high $800,000 range. Just re-emphasizing my point that prices are excellent, but the amount of bidders has consolidated into a small quantity of larger companies. CONCLUSION Sincerely, TAUBER ARONS, INC. STEVE QUALE December 8, 2004
The last letter in February 2004 talked about how auction prices were going through the roof. It continues into April and then the economy seemed to stall and continues through the election. It now seems it is back on track but won’t skyrocket because of Chinese competition. The major change I have seen is the attendance has increased dramatically. It is about double from a year ago. Machinery dealers are finally seeing some activity. When their large inventories that they have been sitting on for the last four years start to diminish you will probably see new machinery sales start to increase. Some industries are leaving the U.S. and may never come back. We purchased a wheel plant in England and held the auction sale at the first week of December with the pre-auction and auction sales, we were happy with the results. But the one thing we noticed that all of the equipment was leaving England. Due to the extinction of manufacturers in England their cost of living is extremely high because of all the taxes that are imposed on the general public to make up for the loss of industry. It’s just a share to watch our government sit back and let the same thing happen to us. Our one saving grace is our natural resources but is being gobbled up by China driving up our manufacturing costs in the U.S. With our deficit rising and our dollar falling that should to some degree help the U.S. manufacturers compete with overseas. The industries that are leaving the U.S. to cheaper manufacturing operations in China such as the wheel industry, furniture manufacturing, plating are maintaining shell distribution warehouses that gives them a competitive edge in maintaining the quality control, delivery and service that maintains their personal relationship with the end product distributors in the U.S. But as what happened in the ‘80’s the Chinese manufacturers will finally decide to open up direct sales headquarters in the U.S. and cut out the middlemen. They will then want to invest in the U.S. and they will start buying commercial real estate and banks & golf courses. The prices will be driven up, followed by a recession and then we get to buy it back later. Probably a 15-year cycle from start to finish. One other major change is financing and the new prime lenders. The funds that used to be the mezzanine financing have now become the new prime lender who doesn’t have to be scrutinized by any bank regulations. This frenzy of ‘just get the money out’ reminds me of the early ‘80’s oil boom. Their timing seems to be good because a rising economy hides a lot of mistakes. But it could be just like a stock market bust in about 6 years if the snowball starts rolling the other way. MACHINE SHOPS The industry seems to be doing well because it crosses over to so many industries. We had a (2) wheel shop sales in the fourth quarter and the sales did great even though the wheel industry is down because of the same equipment can be used many other industries. Example: A (1997) Haas VF10 was bought by a defense contractor for $92,500. A Manual Lathe that we figured to bring max. $15,000 was bought by a steel house in Mexico for $32,000. Aerospace has not gotten any better and their problem have maybe even deepened. If Boeing continues to build its components in China and aircraft orders don’t increase, then even the defense industry may not be enough to keep them afloat. Screw Machines are having a tough time because of the automotive industry and the short run orders are not conductive to the old style auto. Screw machines. It looks like they will finally convert to CNC, which is more economical for the short run work. One thing that is kind of neat is that we are starting to see a lot of small operation ‘new machinery manufacturing companies’ pop up they have small operations and design a machine that is faster than anything out there or technologically out performs the existing products. It’s somewhat like Haas but we are starting to see more and more of them pop up. Since it takes awhile for acceptability they can make it since they are set up for low production and low overhead ventures. PLASTICS Injection Molding – there hasn’t been that many sales but the ones that have taken place have done well. They now of course are energy sensitive so that have to be machines of the last five years. The other factor is that the smaller tonnage molders tend to do better & wise because of energy costs and floor space. So you can see if it is an older large tonnage molder – it has become scrap. Blown Film – The Bag companies are in an interesting environment. They have always been dictated by the price of resin and therefore were always a commodities broker disguised as a bag maker with the prices of resin so volatile this has even magnified. They have consolidated into such large companies it gives them a 5 Cents a pound advantage on their material costs. This translates to a very profitable company or one that is losing money. So the smaller company has become a recycler to even out his costs. By recycling resins instead of purchasing virgin resins he can drop his raw material cost in half and therefore compete. Of course he must be manufacturing a product where he can use recycled resins. The high production recycler supply other bag companies and have created a tow tier company. The dealers in the bag industry are all finally starting to sell their used equipment inventory. We have a blown film plant coming up December 9th & it will give us a better indication even tough it is older equipment. PRINTING There just haven’t been any sales. The pre and postproduction equipment is very technologically sensitive. The presses really haven’t changed on the large size presses and it probably be a while before digital can even be thought of replacing the ink presses. Box Printing – We had a box plant that hardly ever comes up to auction. We had appraised the plant over the last five years and when we had the sale, we did 10% better than a year old appraisal. Bobst, which is the old line, high quality, leader of the industry die cutter has had to drop its prices of new due to sluggish new sales and new competition. Quite often they will finance the equipment and if they have to take it back they will refurbish the equipment and sell it as a factory rebuilt. That is the game plan that Heidelberg uses in its sales agenda. When you have a Standard 28” x 40”, 6-Color Press that costs new approaching $3 Million and you take it back within one year – there is just no way you are going to get $2.5 Million for it. A buyer would much rather get a brand-new press for $3 Million and have it 100% financed. So this is one industry that if you are going to finance new equipment you better get 20% in cash or in assets. Otherwise it is very risky. Anyway we had Komori Box Printing Presses, which were in the (1990) vintage. As you can image print box material on a press is much harder on the press that printing paper. Box printing presses are usually in the 50” & 60” width sizes, which the graphics paper people do not use. The Komori 50” brought $260,000 and the 40” brought $200,000. The Bobst Die Cutters that were (1987) Vintage brought $165,000 and $130,000. We were very happy with the Komoris but we thought we could have done about 20% better on the die cutters. FOOD The Birds Eye plant that we bought in Texas went well at the auction sale. On plant is somewhat isolated near San Antonio and when we bought the deal we had that nightmarish vision of tumbleweeds rolling across the property. We have sold some of the property so financially it is a matter of being patient and it has been a learning process. Food auction sales have really slowed down with most of the consolidation already taken place. To me it is a major concern that products are grown, produced and packaged outside of the U.S. and they are not under the scrutiny that we apply to our growers in the U.S. So next time you get a cantaloupe in January or buy a can of tomatoes manufactured in China will raise any concerns for you. CONCLUSION Again, the same old thing – why does our government handicap our manufacturers in America in competing with overseas industries that export to the U.S. Sincerely, TAUBER ARONS, INC. STEVE QUALE January 24, 2005
The last letter in February 2004 we talked about how auction prices were going through the roof. It continued into April and then the economy seemed to stall and continued stalled through the election. It now seems it is back on track but won’t skyrocket because of Chinese competition. The major change I have seen is the attendance at auction sales, which has increased dramatically. Attendance is about double from a year ago. Machinery dealers are finally seeing some activity. When dealers’ large used inventories that they have been sitting on for the last four years start to diminish you will probably see new machinery sales start to increase. Some industries are leaving the U.S. and may never come back. We purchased a wheel plant in England, held the auction sale at the first week of December and with the pre-auction and auction sales we were happy with the results. But, the one thing we noticed is that all of the equipment was leaving England. Due to the extinction of manufacturers in England their cost of living is extremely high because of all the taxes that are imposed on the general public to make up for the loss of industry. It’s just a shame to watch our government sit back and let the same thing happen to us. Our one saving grace and catch 22 is our natural resources. They are so extensive, but are being gobbled up by China, and in turn driving up our manufacturing costs basis in the U.S. Another hurdle for the U.S. manufacturers to deal with. With our deficit rising and our dollar falling that should to some degree help the U.S. manufacturers compete domestically with overseas. The industries that are leaving the U.S. to cheaper manufacturing operations in China such as the wheel industry, furniture manufacturing and plating are maintaining shell distribution warehouses which gives them a competitive edge in maintaining the quality control, delivery schedule and service that sustains their personal relationship with the end product distributors in the U.S. This happened before in the ‘80’s with Japan; when the Japanese manufacturers finally decided to open up direct sales headquarters in the U.S. and cut out the middlemen. They then invested in the U.S. and started buying commercial real estate, banks & golf courses. The prices were driven up, followed by a recession and then we get to buy it back later. A 15-year cycle from start to finish. This is probably the same progression that the Chinese will follow. One other major change is financing and who the new prime lenders are. The investment funds that used to be the mezzanine financing have now become the new prime lender who doesn’t have to be scrutinized by any bank regulations. This frenzy of ‘just get the money out’ reminds me of the early ‘80’s oil boom. Their timing seems to be good because a rising economy hides a lot of mistakes. But it could be just like a stock market bust in about 6 years when the snowball starts rolling the other way. The new S&L’s. MACHINE SHOPS The machinery industry seems to be doing well because it crosses over to so many products. We had (2) wheel shop sales in the fourth quarter and the sales did great even though the wheel industry is down. Example: A (1997) Haas VF10 was bought by a defense contractor for $92,500. A Manual Lathe that we figured to bring max. $15,000 was bought by a steel house in Mexico for $32,000. Aerospace has not gotten any better and their problems may have maybe even deepened. If Boeing continues to build its components in China and aircraft orders don’t increase, then even the defense industry may not be enough to keep them afloat. Screw Machines are having a tough time because of the automotive industry and the short run orders are not conducive to the old style Auto. Screw machines. It looks like they will finally convert to CNC, which is more economical for the short run work. One thing that is kind of neat is that we are starting to see a lot of small market ‘new machinery manufacturing companies’ pop up. They have small operations and design a machine that is faster than anything out there or technologically out performs the existing products. It’s somewhat like Haas, but we are starting to see more and more of them pop up. It takes awhile for acceptability of their products, but they can still make it because they are set up for low production and low overhead costs. SHEET METAL We had a sale of stamping equipment in which the O.B.I. Punch Presses (smaller) did well and the Stamping Presses (larger) did poorly. As expected we had an older Danley 150 Ton 3’ x 5’ Bed Press bring $32,500 which did poorly but we had a (1983) Komatsu 200 Ton 3’ x 6’ Press bring $95,000 which did well, and a 400 Ton 4’ x 8’ Press bring $15,000. Basically it displays that the larger, older presses used in the auto industry do not do well. The O.B.I. Presses did great: The smaller the better: less space-less energy. WOODWORKING Crazy. With all the furniture manufacturing leaving the country, you would think there would be a sharp decline in prices. In September there were (13) large woodworking auction sales take place in California. You would think it would have been a massacre. But even tough the prices dropped maybe 10% below what we expected; it could have been a lot worse. Certain areas such as coating, panel saws, tenoners, edge banders are very tough. But dust collectors are doing great and smaller table saws, etc. are doing well. We had (4) of the (13) sales and we were happy with the results considering we didn’t know when we signed the deals that there were going to be (9) other sales take place at the same time period. PLASTICS Injection Molding – there hasn’t been that many sales but the ones that have taken place have done well. They now of course are energy sensitive so the machines need to be new in the last five years. The other factor is that the smaller tonnage molders tend to do better because of energy costs and floor space. So you can see if it is an older, large tonnage molder (1000 ton) – it has become scrap. Blown Film – The Bag companies are in an interesting environment. They have always been dictated by the price of resin and therefore were always a commodities broker disguised as a bag maker. With the prices of resin so volatile this has even magnified. They have consolidated into such large companies it may give them a 5 Cents a pound advantage on their material costs. This translates to a very profitable company from one that is losing money. So even the smaller company has become a recycler to even out his material costs. By recycling resins instead of purchasing virgin resins he can drop his raw material cost in half and therefore compete. Of course he must be manufacturing a product where he can use recycled resins. The high production recycler also supplies other bag companies and have created a PRINTING There just haven’t been any sales. The pre and postproduction equipment is very technologically sensitive. The presses really haven’t changed for large size presses and it will probably be a while before digital can even be thought of replacing the large high quality ink presses. Box Printing – We had a box plant that hardly ever comes up to auction. We had appraised the plant over the last five years and when we had the sale, we did 10% better than a year old appraisal. Bobst, which is the old line, high quality, leader of the die cuter industry has had to drop its prices of new due to sluggish new sales and new competition. Quite often they will finance the equipment and if they have to take it back they will refurbish the equipment and sell it as a factory rebuilt. That is the game plan that Heidelberg uses in its sales agenda. When you have a standard Heidelberg 28” x 40”, 6-Color Press that costs new approaching $3 Million and you take it back within one year – there is just no way you are going to get $2.5 Million for it. A buyer would much rather get a brand-new press for $3 Million and have it 100% financed. So this is one industry that if you are going to finance new equipment you better get 20% in cash or in assets. Otherwise it is very risky, because you will be under water for the first (9) months. Anyway we had Komori Box Printing Presses, which were in the (1990) vintage. As you can image printing box material on a press is much harder on the press than printing paper. Box printing presses are usually in the 50” & 60” width sizes, which the paper printers do not use. The Komori 50” brought $260,000 and the 40” brought $200,000. The Bobst Die Cutters that were (1987) Vintage brought $165,000 and $130,000. We were very happy with the Komoris but we thought we could have done about 20% better on the die cutters. GARMENT We had a sale of knitting machines that did quite well. (1997) Tajima 18-Head $32,500 Sewing contractor sale in August did well showing that the garment industry is starting to come back. Pegasus W500 Cover Stitcher $1,000 - $1,500 DIE CAST Sale in October do poorly as expected. (1986) Toshiba 350 Ton $12,500 The balance of die casters brought anywhere from $1,500 - $3,000 each. This industry has left the country. PHARMACEUTICAL WE had a sale in December at a company with very late style equipment around the (2002) Vintage. The sale took only 4 hours and generated more than $3 Million in proceeds. This industry always seems to do well when it goes to auction. TRUCKING WE had a sale of a food distribution company that went through the roof. As you can imagine with the price of steel going up and California becoming a distribution warehouse for China – you can imagine that the steel pallet shelving would go high and it did. Also, all you see on the roads are trucks. The refrigerated trucks-trailers went absolutely fantastic. The warehouse, distributing and transportation industry should continue to expand. FOOD The Birds Eye plant that we bought in Texas went well at the auction sale. One plant is somewhat isolated near San Antonio and when we bought the deal we had that nightmarish vision of tumbleweeds rolling across the property. We have sold some of the real property so financially it is a matter of being patient, but it has been a learning process. Food auction sales have diminished with most of the consolidation having already taken place. We had a small cannery in Illinois that unexpectedly did extremely well. So with the consolidations over there are less sales with better prices. To me it is a concern that products are grown, produced and packaged outside of the U.S. and they are not under the scrutiny that we apply to our growers in the U.S. So next time you get a cantaloupe in January or buy a can of tomatoes manufactured in China: Will that raise any health concerns for you?
CONCLUSION Again, the same old thing – why does our government handicap our manufacturers (and now farmers) in America in competing with overseas industries that export to the U.S. Better yet, why do we sit still and watch it happen? Sincerely, TAUBER ARONS, INC. STEVE QUALE June 10, 2005
Auction sales at the beginning of the year were few and far between but the sales that did take place had great attendance and high prices. But as soon as people paid their taxes (April 15th), all of a sudden the auction activity increased. Go figure why personal taxes cripple business owners from making major business decisions (closing a plant) but there always seems to be that correlation each year. We hope that prices hold up the second half of the year so that the 1st half’s high prices were not due to budgetary spending. If you are going to sell equipment – sell it the first quarter of the year. The major changes or highlighted industries are aerospace, plastic bags, trucking and structural steel which I will address at each industry level. MACHINE SHOPS ALERT – Aerospace has done a 180-degree in a 3-month time period. The defense side is still very strong and will continue all the way through the next election. If there is philosophical change as to government spending for defense, then the defense segment will slow down. But what will bolster the aerospace is the commercial side. In 3 months the commercial side has gone from very slow plane orders to a shortage of spindle capacity for airplane work. The reason is Boeing finally beat Airbus on some airplane orders with Boeing’s 787 Dreamliner plane. Energy efficiency for planes has become the selling point due to the high cost of fuel. SHEET METAL Structural steel companies are going through a major change. Due to the cost of trucking most structural steel companies are local in nature. In other words, if you are going to build high rises in Los Angeles, then your production facility would have to be local in nature. December 31, 2005
The areas I want to cover are Mexico and Aerospace, which seems to have the most activity and also where there have been recent sales. MEXICO Probably 80% of the equipment was bought by Mexican companies and U.S. Maquilladors in Hermosillo. You always have some uncertainty when you are venturing into a country where you have never sold in before, but the sale brought 5% more than I originally quoted the owners. The equipment was owned by an American Company, but the equipment was originally owned and brought into Mexico by an Asian Company. When you bring equipment into Mexico, you must document all equipment being brought into Mexico with the “Pedimentos” documents. When you sell or export equipment out of Mexico, you must have the Pedimentos. If you are a company that is staying in Mexico, when your company is audited by the government and you don’t have the Pedimentos, the government can confiscate the equipment. If you are going to export the equipment – if you don’t have the proper Pedimentos you won’t get the equipment out of the country. So if you are going to finance equipment in Mexico you must verify they have the proper Pedimentos and you, as the lender, must have the original documents in your possession. The owner had their local representatives in control of the Pedimentos because they had to organize and prepare those documents for the buyers. The representatives ended up confiscating the documents until he was paid up front the money he demanded. December 31, 2005 Doing a sale in Mexico is totally different than in the U.S. I do not know of any judicial authority (bankruptcy court) that can oversee what is going on in a liquidation of a company. In the U.S. if you are the first perfected secured lender then you are generally not too concerned with the junior lien holders, landlord (landlord waiver), employee obligations and labor unions – but you will in Mexico. PRIORITIES Landlord – You are not going to get into the premises until he is paid in full including utilities. If utilities are not paid they transfer onto the next tenants. Social Security – If there is a dispute they can pick up the equipment, move it to a warehouse and then “we will discuss it.” Unsecured Creditors – This is probably the hardest to understand, but if a creditor can get the police to enforce a debt – the equipment is not going to leave until he is paid. We had the expeditor who brought the equipment into Mexico who was owed money and the equipment was not going to leave until he was paid. Some of the Non-Union employees that were needed to complete the Pedimentos and prepare invoices also had to be paid to complete those Mexican invoices. So you can look at this as payoffs and extortion, but it really comes down to this – If you are going to shut down a company in Mexico and remove the equipment you must pay all debts. We, in the U.S., are not used to this because everyone takes a haircut and the unsecured creditors get nothing. But as simplistic as it sounds, everyone gets paid and all proceeds are 1st going to go to the above (4) priorities. Nothing is going to happen until the Labor Union is taken care of. So if you want to loan money to a U.S. company operating in Mexico, you must set aside enough reserve to take care of the above (4) priorities and you must be in possession of the original Pedimentos with copies held by the owner. If you do not have enough proceeds to cover the (4) priorities then you can just walk away and let the Union dispute the assets.
December 31, 2005 The people we met in Mexico were intelligent, hard working and friendly people, but when they see a company leaving everyone wants to get their share. The lack of confidence in their government and Unions have taught them to look out for themselves because nobody else will. The sales tax is 15%, but the buyers are OK paying it because they get it refunded from the government when they provide the proper Pedimentos. One other thing that seems to add credibility is to have everything notarized. Being a landlord could be a nightmare because if a company leaves owing the Union money, the Union will lock out the landlord until they are paid. If Mexico is able to establish a legitimate judicial system to oversee the Union and other matters, then it would add some stability and at least you could know the rules before you go into the transaction. Until then fasten your seat belts, but the good side is that the equipment is very saleable in Mexico to the local buyers. MACHINE SHEET METAL WOODWORKING PLASTICS December 31, 2005 BLOWN FILM CONSTRUCTION MISCELLANEOUS CONCLUSION Sincerely, TAUBER ARONS, INC. STEVE W. QUALE July 10, 2006
Even though economists are predicting a slowdown; most industries in general are doing well, but what does seem to be missing is the lack of auction sales. I don’t feel that is attributable to a growing economy, but instead the emergence of the venture capital groups replacing the Turnaround Management Groups. It seems that nowadays if a company is struggling the venture capital groups bring in an influx of capital to keep the company alive in exchange for a large, if not a controlling interest, in the company. They then negotiate a turnaround strategy with the creditors and if the turnaround is successful they either keep it in the portfolio or spin it off for a quick gain. The strategy is to continue to merge in weaker companies, consolidate operations (thus providing better profit margins) and redistribute assets to their other divisions. In other words, the sick ones don’t go to auctions, instead they get merged in with venture capital groups. This will continue to work until one day the management team that has put together this consortium realizes there is not further growth potential. If investors find an investment (higher interest rates), that will return 10-15% with less risk, then the influx of new capital will dry up and consequently the reason that these companies have stayed alive. The companies will be required to actually make money and that is when the manager will say ‘adios’ and the investors will be left with a huge bankruptcy case. FOOD The food industry giants are duplicating the Wal Mart model, which Boeing followed. Sub out all your production needs and then squeeze the subcontractor’s profit margins by competition from other contractors trying to score the Wal Mart contract. You as bankers have seen it time and again that you look at a balance sheet and see that the company’s sales are concentrated in the 80% range with one company. The subcontractor knows that to stay alive he must go after the big fish. But once he gets the big fish he finds out that he is the one on the hook. He must expand operations from the growth of obtaining that contract, but the only way he is competing is on the basis of price, and that is when the main has him. They go out and get quotes from overseas and local subcontractors forcing him to drive down his pricing or lose the main and go out of business. He may know that the new subcontractor can never perform at those bid price levels but he also knows if he calls their bluff he will be out of business, the new subcontractor will get his foot in the door and then re-negotiate the contract when the main has lost his other source. And so begins the new cycle for this new subcontractor. This seems to be the future for a while as long as the purchasing agents of these mains base their decisions solely on pricing. Every once in a while you will read of a company who refuses to do business with Wal Mart when he has built an excellent product, because he knows the short lived future. We bought a deal from Con Agra in Canada and had a sale that brought 40% more than we expected. Con Agra was moving one product line over to China and subbing out the balance of what that plant produced. We are doing a salad processing plant in New Orleans in June. It is a little unique that there is a lot of auction sales taking place in this industry but the prices are extremely high. I attribute this to the mains subbing out their production and the subcontractors are scurrying to increase their manufacturing capabalities due to the new supply of orders. I think you as lenders will be seeing a lot of activity and growth in this industry for a while until the work is finally placed: pricing will become the only criteria and profits start shrinking; until then enjoy the expansion demand ride. MACHINE SHOPS Not a lot of auction sales taking place since this industry is doing so well due to aerospace. When a sale takes place the prices are fantastic. But don’t think that because you have a CNC Machine Turning Center in a wheel company, that the Turning Center will do well. The wheel industry is just about done in the U.S. and those machines will not be used by the aerospace industry. Because of the automotive downturn, the machines in an automotive auction sale will not do well, except for Swiss CNC Screw Machines making small parts for other industries. So when you are looking at an industry (machine shops) don’t look at it in general, but look at whom they are providing work for and how that particular industry is doing. SHEET METAL Doing better because of the demand for computer and telecommunication panels has increased from where it was 4 years ago. Amada CNC Press Brakes are back up again, but an older Amada CNC Brake may outsell and newer Amada due do design changes. CNC Turret Fabricators & Plasma Units are back up. Structural steel companies have been fantastic for the last 3 years due to the expansion of city building planning. What airport have you gone to that is not expanding for increased air travel? What city do you go to where you don’t see new buildings going up or old ones being torn down with new ones going up in their place? We are starting to run out space in the large cities. WOODWORKING Still a segmented industry with the cabinet industry doing well and the furniture doing terrible. PLASTICS Now more than ever a ‘commodities game.’ Companies continue to devour others so that they can get the volume discounts on resins. Hasn’t been a lot of injection molding sales and when they do occur the prices are about average. One change is the pricing of Electric Injection Molders (EIM). Prices on EIM’s used to be quite a bit higher than a Hyd. Injection Molder due to the high cost of energy that spurred the development and demand for the EIM. Well now more manufacturers have gotten into building EIM’s and the new price has dropped down to about the same level as the Hyd. Injection Molder. Blow Molding is off a little bit. If you are manufacturing small bottles, they are a product that is easily shipped to the U.S. from overseas in large quantities, and therefore that portion of blow molding is not doing well. Sincerely, TAUBER ARONS, INC. STEVE W. QUALE MARCH 16, 2007
SO LET ME SEE IF I UNDERSTAND GREENSPAN’S EVALUATION OF THE FUTURE: 1. WE ARE NOT GOING TO PROTECT U.S. INDUSTRY. 2. INSTEAD – WE ARE GOING TO BE A HIGHLY INTELLECTUAL, INNOVATIVE ECONOMY WHOSE HEADQUARTERS IS THE SILICON VALLEY. BUT – HOUSTON WE HAVE A PROBLEM. 3. OUR EDUCATIONAL SYSTEM IS IN THE TOILET, AND WE ARE RAISING A BUNCH OF IDIOTS. 4. AND – ANYONE WHO HAS ANY SMARTS IS RETIRING. GREENSPAN’S OBSERVATIONS OF THE CONGRESS’ ATTITUDE IS ACCURATE BUT TO SIT BACK AND JUST WATCH IT HAPPEN IS A HUGE GAMBLE, I DON’T THINK BUSINESS HAD THIS IN MIND, WHEN BUSINESS PREACHES “LAISSEZ FAIRE.” THE CONGRESS HAS BEEN STEALING FROM US BY TAKING OUR SOCIAL SECURITY MONEY AND USING IT TO BALANCE THE BUDGET AND IF ANY OF YOU AT MY AGE (59) YOU GOT YOUR LETTER FROM THE SOCIAL SECURITY SAYING “WE’RE NOT GOING TO PAY YOU WHAT YOU HAVE COMING!” AND THAT’S WHY WHEN BUSH WANTED US TO BE ABLE TO USE OUR SOCIAL SECURITY TO INVEST PRIVATELY – IT GOT NIXED IMMEDIATELY BY CONGRESS BECAUSE THEY WOULD HAVE NO FUNDS TO PILFER TO BALANCE THE BUDGET. WHAT’S THIS GOING TO MEAN TO US? AS GREENSPAN PUT IT: “WE ARE GOING TO HAVE A FEW CASUALTIES.” SOMEHOW I DON’T THINK ANY OF THOSE CASUALTIES WILL BE PAST, PRESENT OR FUTURE CONGRESSIONAL LEADERS. OUR PREAMBLE OF “BY THE PEOPLE AND FOR THE PEOPLE” IS HYPOCRISY IF ANY OF OUR CONGRESSIONAL LEADERS THINKS IT APPLIED THROUGH THEIR LEADERSHIP. SO WHAT TO DO? 1. YOUR SOCIAL SECURITY THAT YOU PAY INTO EACH YEAR GOES TO PURCHASE A TREASURY BILL THAT GOES INTO YOUR 401K. THE NEXT YEAR YOUR SOCIAL SECURITY PLUS LAST YEAR’S ‘T’ BILL GOES TO PURCHASE ANOTHER 1 YEAR ‘T’ BILL. YOU MAY START SELLING ‘T’ BILLS AT AGE 65 AND IF YOU DIE THEY TRANSFER TO YOUR NEXT OF KIN. YOU’RE FUNDING YOUR RETIREMENT AND INVESTING IN OUR COUNTRY. BUT, WON’T THIS MAKE OTHER COUNTRIES NOT LIKE US, AND THEY MAY THREATEN NOT TO BUY OUR “T” BILLS. SO DON’T BUY THEM: THE CITIZENS OF THE U.S. HAVE ALREADY REPLACED YOUR INVESTMENT. BUT THE REASON THEY BUY OUR “T” BILLS AND THE REASON THEY INVEST IN OUR COUNTRY ARE BECAUSE IT IS THE MOST STABLE AND FINANCIALLY SECURE ECONOMY IN THE WORLD BASED UPON ITS PAST PERFORMANCES. BUT YOU HAVE SEEN A WEAKNESS LATELY IN THE VALUE OF THE DOLLAR COMPARED TO OTHER CURRENCIES AND OTHER COUNTRIES ARE TELLING US SOMETHING “BASED ON THE WAY YOU ARE HEADING YOU MAY NOT BE THE STRONGEST ECONOMY IN THE FUTURE.” ONCE YOU LOSE THAT CREDIBILITY FROM THE WORLD ECONOMIES, THEY HAVE PUT A DENT IN THE ARMOR AND YOU ARE NO LONGER INVINCIBLE AND THEREFORE YOU ARE DEFEATABLE. PERCEPTION OF STRENGTH AND MOMENTUM ARE A STRONG FORCE BUT ONCE THAT STRENGTH SHOWS SIGNS OF DECLINE THAT MOMENTUM AND PERCEPTION MAY BE HARD TO GET BACK. BUT, NONE OF THIS WILL WORK UNLESS WE HAVE TERM LIMITS ON CONGRESS. TWO (2) TERMS, THEN YOU’RE OUT FOR ONE (1) TERM AND IF YOU WANT TO RUN AGAIN – THEN GET ELECTED. THESE HALF DEAD AND SPECIAL INTEREST PROTECTING CONGRESS PERSONS ARE STIFILING ANYONE WHO COMES IN TO TRY AND DO SOME GOOD. THEY HAVE TO GO. SO WHAT DOES THIS MEAN TO ASSET BASED LENDING IF THE VENTURE CAPITAL AND HEDGE FUNDS DO NOT BUY YOUR POTENTIAL LIQUIDATION. THE AMOUNT OF BUYERS HAS NARROWED TO A SMALL HANDFUL AND AT SOME POINT THEY HAVE BECOME SO HUGE THAT THEY REALLY DON’T CARE IF A SMALL COMPETITOR COMES ON THE MARKET PLACE – THEY’RE JUST NOT A THREAT. SO YOU WILL END UP WITH ALL THESE (1) HIGH END (2) SPECIALTY – SHORT RUN OR (3) NICHE PLAYERS TO MAKE UP FOR ALL THE HIGH PRODUCTION FACILITIES THAT WILL HAVE LEFT THE U.S. THERE JUST WON’T BE ENOUGH DEMAND FOR ALL THE SUPPLY OF EQUIPMENT AND PRICES WILL EVENTUALLY DROP DUE TO THE SURPLUS MANUFACTURING CAPACITY. AUTOMOTIVE WILL HAVE A HUGE TRICKLE DOWN EFFECT HITTING FIRST THE AUTOMOTIVE ACCESSORIES. YOU ARE ALREADY STARTING TO SEE A LOT OF INJECTION MOLDING SALES (LARGE TONNAGE), AUTOMATIC SCREW MACHINE, WHEEL INDUSTRY SALES, ETC. AFTER THAT YOU WILL SEE FORD & GM PLANT CLOSURES AND THAT’S WHEN THE LARGE STAMPING PRESSES WILL COME ONTO THE MARKET PLACE. I CAN’T SEE ANY FOREIGN COMPANY RESCUING FORD & GM BECAUSE WHO WOULD WANT TO MANUFACTURE CARS IN THE U.S. WITH THE COST OF LABOR, UNIONS, ENVIRONMENTAL REQUIREMENTS & PENSIONS. WOODWORKING ABOUT TWO YEARS AGO, YOU HAD A LOT OF FURNITURE MANUFACTURING COMPANY DEPARTURES DUE TO FOREIGN LONG RUN COMPETITION. BUT A LOT OF COMPANIES REMAINED BECAUSE HOUSING WAS SO GOOD THAT IT KEPT THEM AFLOAT. THAT’S WHY WE USED TO SAY FURNITURE IS DOWN BUT CABINETMAKERS WERE STILL DOING WELL. IF THE HOUSING MARKET CONTINUES TO DOWNSIZE IN ‘NEW HOMES BUILT’ THEN WOODWORKING WILL HAVE NOWHERE TO GO. WE HAVE (1) SALE IN FEBRUARY, (3) IN MARCH AND WE ARE LOOKING AT (5) OTHER WOODWORKING SALES – AND WE ARE JUST ONE AUCTION COMPANY. FOOD VERY FEW AUCTION SALES. IF YOU ARE GOING TO PULL THE PLUG NOW IS THE TIME. THE PRICES ARE THRU THE ROOF. VENTURE CAPITAL LIKES IT FOR THE SAME REASON, WE GOT INTO IT 7 YEARS AGO – “YOU GOTTA HAVE FOOD!” THE MAINS ARE NOT SPINNING OFF DIVISIONS YET BECAUSE THEY ARE STILL MAPPING OUT THEIR GAME PLAN. MACHINE SHOP STILL DOING GREAT BUT NOT QUITE AS HOT AS IT WAS LAST FALL OR SPRING. MAYBE DOWN JUST A LITTLE FROM THAT TIME MAYBE 5%. BUT THE AEROSPACE INDUSTRY IS ON FIRE BUT NOT JUST FROM DEFENSE (WHICH WILL WEAKEN WITHIN THE NEXT COUPLE OF YEARS) OR FROM BOEING’S HUGE ORDERS OF COMMERCIAL AIRCRAFT, BUT FROM THE SMALL REGIONAL JET & BUSINESS JET MANUFACTURERS. THIS NEW SOURCE OF BUSINESS, ALONG WITH BOEING, HAS SWALLOWED UP ALL SPINDLE CAPACITY IN THE U.S. WHAT HAS THAT DONE TO THE PRICE OF A ‘NEW CINCINNATI’ OR ‘SNK PROFILER’ AND WHAT WILL HAPPEN IF A USED ONE COMES ON THE MARKET PLACE? PRICE BECOMES A NON-ISSUE. GREAT FOR ANOTHER 5 YEARS, SELL THE COMPANY OFF AND THEN BUY IT BACK 5 YEARS LATER FOR 10% OF THE PRICE YOU SOLD THE COMPANY FOR. YOU WILL SEE SOME MACHINE SHOPS COMING ON THE MARKET PLACE FROM THE AUTOMOTIVE SEGMENT BUT THERE IS ENOUGH DEMAND THAT PRICES WILL STAY CONSTANT IN CNC EQUIPMENT. SHEET METAL SEEMS TO HAVE NO SLOWDOWN IN THE FABRICATION SIDE OF LASERS, BRAKES, STRUCTURAL FABRICATION, COMPUTER FRAMES, ETC. BUT WATCH OUT FOR HEAVY STAMPING. DEALERS ARE EVEN GOING TO BE A LITTLE HESITANT TO SPEND THE MONEY TO MOVE AND STORE THESE MAMMOTHS. PLASTICS THERE ARE A LOT OF LARGE TONNAGE MACHINES THAT HAVE BEEN SOLD AND THE PRICES HAVE BEEN PRETTY GOOD. MOST OF THE SALES ARE COMING FROM AUTOMOTIVE BUT THE SAVING GRACE FOR PLASTICS IS THAT LARGE MOLDERS ARE USED IN OTHER SEGMENTS OF MANUFACTURING COMMERCIAL GOODS. YOU CAN USE A 1000-TON MOLDER TO MAKE AUTOMOTIVE SEATS OR YOU CAN MAKE PLASTICS TRASHCANS. ALSO MANUFACTURING LARGE BULKY PLASTIC PRODUCTS MAKES YOU COMPETITIVE WITH OVERSEAS BECAUSE OF THE SPACE THEY TAKE UP FOR SHIPPING. LARGE MOLDERS ARE PLANT SIZE AND ENERGY HOGS BUT THEY DO NOT REQUIRE MUCH LABOR. SMALL INJECTION MOLDERS ARE DOING WELL IN THE PHARMACEUTICAL AND MEDICAL INDUSTRY SINCE QUALITY CONTROL IS SUCH A HUGE CONCERN. GENERAL IF THE NEW HOME BUILDING CONTINUES TO SLOW IT WILL HAVE A TRICKLE DOWN EFFECT FOR WOODWORKING, AIR-CONDITIONING, AND ROOFING INDUSTRIES. THESE GUYS HAVE HAD A 10-YEAR RUN AND WERE DOING FANTASTIC IN 2001 THRU 2004 WHEN EVERY OTHER INDUSTRY WAS SUFFERING. SO THEY MAY HAVE OVER EXPANDED OR PEOPLE HAVE GOTTEN INTO THE INDUSTRY THAT HAVE NEVER HAD TO DEAL WITH A DOWNTURN. SO AS WE HAVE BEEN TOLD “THERE WILL BE SOME CASUALTIES.” AUTOMOTIVE – UNLESS FORD & GM LET IT ALL HANG OUT AND DEVELOP A NEW ENERGY, FUEL EFFICIENT, ECONOMICALLY AFFORDABLE AUTOMOBILE, I THINK THEY WILL HAVE A TOUGH TIME MAKING IT IN THEIR PRESENT FORM. SINCERELY, STEVE W. QUALE October 29, 2007 After 30 years at the same location, Tauber Arons, Inc. & T/A Appraisal has moved about 5 miles to our new corporate headquarters. We previously sent out a change of address but wanted to take this time to re-notify. Our telephone numbers are the same but our fax numbers have changed to (818) 933-0782 for Tauber Arons, Inc. and (818) 933-0787 for T/A Appraisal, Inc.. Our new address is
GENERAL
We have hesitated in opening regional offices unless we have the right person to represent Tauber Arons, Inc.. Well, that right person has joined us. Mr. Dave Mazzalupo will be representing both Tauber Arons, Inc. on the auction side and T/A Appraisal, Inc. on the appraisal side. Dave has 35 years of experience in the plastics industry and in my opinion knows blow molding equipment better than anyone in the country. Dave has set up manufacturing plants in the blow molding industry. He has liquidated through Orderly Liquidation and public auction sales plastic plants both nationally and internationally. He has appraised for lenders equipment in the plastic and various other manufacturing concerns. Dave will be located in Pittsburg, Pennsylvania and will cover the entire Eastern region. He will be the easiest to reach at Dave’s cell number (860) 997-1587. Mr. Spencer Quale has joined Tauber Arons, Inc. and will be working out of the Los Angeles office. Spencer graduated from Cal State San Luis Obispo with a B.S. in Business Administration. Spencer will be working jointly with the auction staff setting up auction sales and learning the appraisal process. Tauber Arons, Inc. will be an exhibitor at the CFA Convention in Arizona at Booth #133. Both Dave & Spencer will be at the booth, along with Tony Arons the CEO of Tauber Arons, Inc. and myself, Steve Quale. If you have time, we would like to introduce our new personnel and offer you a cigar, t-shirt and a golf towel. We are also tinkering with the idea of opening a Portland, Oregon office in the near future. Hope to see you at the CFA and look forward to any input as to how we may better serve you. GENERAL Nothing new that wasn’t already discussed before except we are starting to see the effects of China, housing and automotive. This last year before the elections should be pretty much a lame duck session, but the only thing that could create positive volatility is if the troops are brought home from Iraq. I would think that the Republican Party is trying to get Bush to do everything he can do to effect a troop withdrawal before the elections. But outside of that, it appears that everything will continue its present course that it is heading on. CHINA – just more and more companies leaving the U.S.. With the decline in the exchange rate of our dollar it may help U.S. production a little due to cheaper U.S. products, but I don’t see it as the white knight for U.S. industries. It’s going to be awhile before the creation of a Chinese middle class with wage increases has any effect on U.S. production. HOUSING – probably about 2 ½ more years of downturn. Prices haven’t dropped much yet but at some point people will have to drop prices to move their property especially when new home developers start dropping prices to move inventory. Once that inventory is evaporated then it will probably be status quo for five years because people will be afraid of getting burnt again. Just a repeat of the stock market collapse. It takes awhile for people to jump back in again, and after that the next five years should have up ticket in prices. The saving grace is that this did not happen in a recessionary period – Yet. AUTOMOTIVE – you’re starting to see the sales in Michigan for the automotive support industries. There have been talks of closing automotive stamping plants which should happen soon. I find it interesting that Ford at this point in time (Oct. 29th) has not agreed to a new labor contract. I can’t help but think that in those boardroom meetings someone is kicking around the idea for changing the shape of Ford into an engineering/marketing company. The Sears, Wal-Mart & Boeings of the world have laid out an enticing corporate model i.e. “Let someone else deal with all that manufacturing crap and let them fight among themselves for our business.” We’re doing a sale for Alcoa Wheel Division in Canada and have looked at other wheel deals in other continents. So this is not just a U.S. problem, but an international problem in trying to compete with China. WOODWORKING FOOD MACHINE SHOP 1. Automatic Screw Machines – done and probably not coming back. SHEET METAL All these factors need metal to be cut, shaped, welded, etc and to add to that the computer panel business is doing well which bolsters the CNC Turret Fabricators. PLASTICS Where there does seem to be some concern is the blown film plants that do not have a product or process that separates them from their competitors. Resin prices are really making it tough on these guys and many play the commodities game. The problem in commodities game of becoming so large to get price discounts is if you lose a major customer or a dip in sales. Your margins are so tight that if you lose volume you may not be able to react quick enough to shrink capacity. These guys have never been able to pass on resins price increases so they have to maintain their costs by increasing their buying capacity. METALS But like the stock market, housing market, etc. – “what goes up must come down.” Closing – In appraising we all say that “you must use these figures for today’s value.” But a good appraiser knows that when you make a loan – you are not going to foreclose today. Therefore, when you are appraising you should give some consideration of where the market is compared to normal times and which way the market is heading. Example – the trucking industry is in boom time and the price of trucks has gone from $90,000 three years ago to nowadays they are $135,000. New trucks may be advertised at $135,000 but I have seen invoices of $115,000 when 20 were bought at a time. Be sure to look at their paid invoice and transfer amount instead of going by quotes or advertised prices. The point I am making is that there is a lot of wiggle room in pricing during good times and new price can drop dramatically during bad times. In the 80’s during the oil collapse, Mori Seiki dropped their prices 30% in one year. One last thought is the housing (usually called a collapse but really a normal adjustment from an over-inflated investment) and how it is going to affect the industry. Industry that serviced housing will definitely be affected. An example – trucking in most segments may not be affected, but it will be affected in dirt & concrete hauling. The value for these trailers was really over-inflated for a long period and therefore there will be an adjustment. Concrete batch plants will probably have a slowdown as will the transit mixer trucks that haul concrete. A year ago car carriers were hit by the slowdown at GM & Ford, but the trucking industry as a whole, stayed strong because of the amount of port terminal transportation and the growth of smaller cities requiring more supply of product and infrastructure. So – is there going to be a correction for segments of each industry – YES – but only for the portion of that industry that services residential housing, but not a correction for the entire industry. Sincerely, STEVE W. QUALE July 7, 2008
With $200 worth of software you can now alter a PDF document. And yes, I have heard that if you apply the “double secret whammy” no one will be able to alter the PDF document. Which is the same thing that was said when people first started using a PDF document “it is secure and can’t be altered!” Any time you start relying on electronically transmitted documents, you are running a risk. The risk is diminished if you only review documents from the original sender. I would suggest a verbal confirmation with the appraiser that the document you received is the same that was sent. With all the borrowers applying to the syndications of multi-lenders, a telephone call or insisting on seeing the original document may be in order. We have always sealed our numbers on our original document. Any suggestions as to how to secure electronically transmitted documents would be greatly appreciated on files we send. GENERAL It looks like that recession we mentioned about in the last letter in October 2007 finally arrived. But, what you are not seeing is a ton of auction sales (yet) that you normally see with an economy like this. I feel this is due to the venture capital and hedge funds are gobbling up the sick companies that would normally be sold at auction. The Fund Managers are doing the same thing that the Stock Fund Managers did in the ‘90’s. “If you buy mine – I’ll buy yours.” And this is what seems to be happening with these investment funds so that each time a piece is sold it is sold at a little higher value and the spiral continues upward. But when the chips are called in and everyone realizes that what they have is way over-valued – then the spiral goes downward and it becomes a game of musical chairs. The banks are seeing this and with the problem they have had with housing they have tightened credit. The government is concerned that if credit is tightened too much, the downward spiral could steepen and produce the one thing they don’t want – PANIC. You can feel it – everyone is starting to grab for the money and not let go. The next six months could be interesting. The Feds can’t drop rates much more and it may just have to come down to “open the curtain, let’s see what we have here and deal with it.” We had a die casting shop in May and we knew how bad the industry was and figured the die casters for $1,000 - $2,000 each. We had 22 die casters and only 4 went to users. The rest sold to scrap dealers who paid $4,000 - $7,000 each. Yes, they were worth more dead than alive. Scrap used to bottom out at $25 per ton and top out at $100 per ton with it usually around the $60 per ton range. In October 2007, we mentioned that scrap had doubled – well now it has quadrupled. Scrap was at the $400 - $460 per ton range and copper was up to the $6 per pound level. What concerns me is that in talking to the scrap dealers, they are saying it is going to continue to go up and won’t ever come down; - which means it is going to drop soon. As soon as someone says the stock market will always go up – that’s when you know it’s going to drop soon; as soon as someone says that the housing prices will continue to go up-that’s when you know it is going to drop soon----- because in everyone’s heart of hearts – we all know when something is over-valued. MACHINE SHOP Still doing well but can’t help but think this is only promoted by the aerospace industry. Boeing has had some delivery problems on its 787. These are the orders that catapulted Boeing and the U.S. aerospace industry; but if these problems are not corrected and with the change in administrations look for the aerospace industry to correct in 2009 . Yes I know that the contractors have defense orders until 2012 but orders can be put on hold (ie. the Carter admin. and the B-1 bomber). What will be the new aerospace industry are the orders from outside of Boeing for the regional and corporate jets such as Bombardier etc. We had a CNC Shop and even the older CNC equipment did well. New CNC equipment pricing has increased therefore driving up used CNC equipment prices. No real changes except milling and turning is being incorporated into one machine. SHEET METAL We had a CNC Fabrication Shop in May and the CNC Press Brakes did fantastic. Accupress is giving Amada a run for its money as far as used resale value. CNC Fabricators and CNC Lasers may be off approximately 10% from where they were. WOODWORKING Probably the most affected. Furniture, housing, overseas has all made it next to impossible to compete. Prices are down about 30-40% from six months ago. We did a large woodworking shop in Tijuana and it was difficult because of production related equipment. Most U.S. shops have an affiliate shop in China or Vietnam for large production orders and their local shop is for fill in if overseas orders get delayed. The delay in delivery is the only fault I have heard about overseas products. PLASTICS Large tonnage injection molding machines are having a real tough time. Size, cost to move, energy drain, automotive, resin prices have all attributed to a tough market place. Blown Film is strange. There haven’t been any auction sales but dealers are saying the companies are not buying any equipment with a recent plastic bag sale having mixed results. The extrusion side of the blown film business has had a tough time where the downstream equipment (bag making) has done well. Grocery store bags at markets are talking about charging for plastic bags and you are starting to see shoppers use canvas bags that are brought with them to the market. It may take awhile for market shoppers to remember to take the canvas bags with them but when they do, it makes sense cost wise and environmentally. Prices are great because there haven’t been a lot of auction sales in this industry. But what we are starting to see is that most of the majors are starting to send out to co-packers. This is a tough decision for a food company to make because it only takes one product scare to ruin a label. If 50 people die from “Mama Ragu’s” Ravioli it also kills the entire product line and the recovery period can be devastating. CLOSING The last recession April 2000 – June 2004 was the adjustment from the over-inflated stock prices. But what was unusual was the recovery. Usually a recovery has a lot of pop to it. From June 2004 to June 2007 things were better based on where they came from but not great. What seemed to spur the recovery was housing instead of the manufacturing sector. Housing is really a matter of trading up or speculating on over-inflated values. So in the last recovery period the manufacturing sector recovered but really didn’t seem to expand because most of the manufacturing left the country. It seemed like 2 steps downward (2000-2004) and one step upward (2004-2007). Going into this recession it looks like another couple steps downward. I know everyone wants to focus on gas prices and housing but housing was really just a normal adjustment from over-inflated values. The gas problem is a little different. (1) The quickness in the rise of prices haven’t given companies time to pass on those increases. (2) This rise in price is going to affect everything (food, transportation, energy bills) but it’s OK because our government has explained to us it hasn’t affected inflation??? (3) These price increases are being artificially manufactured by price fixing and controlling the supply of oil to drive up prices. Have you seen any lack of gas or lines of cars trying to get gas? These prices are not from a lack of supply but plain and simple “price fixing.” With our reserves where only 5% is being used – at what price do you really start using the U.S. reserves? Or are they trying to tell us “why use it now when it is going to be a lot higher--then I’ll use my reserves”. Or make the public suffer enough so that I can drill in areas where they’ve stopped me before. Their gamble is being governmentalized but not much of a gamble due to their Congress ties. The only good thing I can see is that we will be forced into using another source of energy (nuclear, hydrogen, etc.) which may be our reward. But until then, who will buy a motor home or a gas guzzling car; maybe we will think twice before we jump on a plane or get in our car. But the net effect is that these fuel prices are going to create a bottom swell of inflationary prices that will effect every facet of our lives. The other happy factor is if credit keeps tightening, you may see interest rates climb due to less availability of capital. When you write off $30 Billion it’s not just an accounting transaction. “Now that I have written it off everything is OK.” That $30 Billion has to be replaced with either 1.)An outside infusion of capital . 2.) A higher return of your assets (higher interest rates) or 3) An increase in the size of the loan portfolio or a combination of all of the above. But to get that infusion of capital, it may cost you ownership or you may have to pay higher rates to get the funds,-- therefore charging higher rates when you loan your money will make you noncompetitive. And when that happens, it makes it pretty hard to increase your market share. Sincerely, STEVE W. QUALE November 3, 2008
Well if you got the chance to watch our distinguished Congress at work at the finance sub-committee headed by the Honorable Barney Rubble from Massachusetts. What happened? Why weren’t we told? Which Republicans are responsible for this disaster? Then you have the other side of the fence; Paulson who says “This has to be done immediately because I had no idea this was going on” or “How am I going to save Goldman Sachs, make it a bank, so I can be the CEO when I get out of this mess I have ignored.” But somewhere along the line, the Executive Branch was informed how serious this is. Mr. President you have a group of major banks that are going to have to be taken over by the FDIC and if the general public makes a run on its deposits in those banks, the FDIC will not be able to cover the deposits. And when that occurs, panic will take over and people will make a run on deposits in banks that are in good condition. So instead of the FDIC taking over those failing banks, let’s give $700 Billion to the surviving banks that we choose to survive and we will make them buy out the failing banks so the FDIC doesn’t go broke. By the way, let’s also tell everybody that the FDIC will increase the insured amount from $100,000 to $250,000 per account. Did the FDIC just win the lottery or how do they double their insurance premiums overnight? I mentioned PANIC in the last report in June and that is all they are trying to prevent. This was not to be a cure, it was the only tourniquet they could apply to the wound to prevent disaster. But what the government doesn’t understand is that everyone realized this was all horseshit and the only reason there was not a run on the banks is because we all know what that would do. We could all run to the banks, grab our money and then what are we going to with it? – put it in your backyard and have the dollar become worth 10 cents? Housing is down, stocks would dump; there would be nowhere to go with that money and what saved us from a severe crisis is the general public’s understanding of what the consequences would be if we made a run on the banks (not the government’s bailout). We have been in a recession for about a year so we probably have another 1 ½ years to go before we see a through and then an upturn. So about a year ago in our letter, we were warning about the automotive and how it was going to downturn the sale of large injection molders. In June when scrap was at $650/ton, we were telling you to watch out for an adjustment because it was overvalued. Large injection molders dropped and scrap prices tumbled down. But it doesn’t help to send out to you a warning letter when it has already happened – it’s too late, you are already into the deal. You need to know when something has topped out and will at some point will correct. Scrap steel was historically at the $50-$60/ton range, bottom out at $25/ton and top out at $100/ton. So you can see that when it is at $450/ton, we are telling you to watch out. It’s nothing new – the stock market did it – the housing sector did it. We’ve had some food processing sales where 3 weeks ago at the first sale, stainless steel was at 71 cents a pound, 2 weeks later at a Tuesday sale, it was 17 cents a pound and at the Thursday sale, it was at 3 cents a pound. So in general, what you are seeing now is the opposite of speculation. It’s like when a building is on fire, you see everyone running out and firemen running in. That is why you see Warren Buffet running in because now everything has become undervalued. Because we had some greed, get caught with its hand in the cookie jar doesn’t mean that production has gone to zero. Where I feel the base of the problem started in the early 90’s was that industry was leaving the United States. This got disguised in the mid 1990’s because of the internet and P.C. industries took the place of our core industry. So in the mid 1990’s you really didn’t notice the loss because of the replacement industry. But in 2000 everyone had a computer, has an internet, had a software, had a gameboy which created a leveling off in the industry and the realization that these industries were overvalued, with the result of a recession from 2000-2004. But underlying this is what happened. You never hear of the term Gross National Product anymore. Caterpillar may sell a D-8 for $350,000 with a profit margin of $100,000. Now Caterpillar’s margin profit still looks good at $100,000 a unit, but what is missing is the $250,000 of production costs in the U.S. that increased our Gross National Product. Every year, the Gross National Product was an important figure but over the last 10-15 years, you never hear about it. It’s kind of like our unemployment rate being 5% when it is probably more like 10%. I really don’t feel our country will be healthy again until manufacturing returns to the U.S. Until then we will continue to live off speculation. We have become commodities investors (not commodities in the pure term sense) but in the concept of speculating of what could possibly happen in the future. What is missing is the core growth of a corporation inside the U.S. We need to protect industry in the U.S. I would like to see how Greenspan’s comments that were made at the CFA a few years ago would be accepted if made today. In general all prices at auction sales have dropped anywhere from 10% to 50% from 6 months ago.
MACHINE SHOP Prices off about 10% and of all industries except for food is probably doing the best. In the last (2) newsletters I have said to watch out for Aerospace. I will repeat – “watch out for Aerospace” – it has topped out. I don’t care how many defense contracts you have; with the new administration, defense is going to be chopped. Also watch out for Boeing if they don’t clean up production delivery schedules on the 787. The great thing about machine shops is that it crosses over into so many industries. The Aerospace guys have always juggled commercial and defense work depending on what’s hot. Kind of like farmers – they produce the product on their land that gives them the best return. PLASTICS Probably down 20% from 9 months ago. Mainly on the large injection molding and extrusion side. Sounds like a lot but when you think of a (2000) 900 Ton Molder selling for $200,000 nine months ago – it doesn’t sound all that horrible at $160,000 now based on what has happened in automotive and financial sector. With resin prices starting to ease it may bring some relief. WOODWORKING Down 50% from a year ago. And now the lumber industry is getting hit. The lumber guys were still doing well when furniture left, but now with housing down and overseas not gobbling up our natural resources – they are starting to feel it. TRUCKING Down 20-30% from 6 months ago. Watch for the price of new tractors and trailers to drop. METALS Down 90% from 5 months ago. Doesn’t mean that I-Beams, Sheet Stock, Coil Stock , etc are not going to be used or new price is going to drop that much. But their cost of recycled products is going to drop dramatically. So as long as they didn’t play the commodity’s game and bought a bunch of high priced inventory – they will be fine. But after awhile, competition will grind on each other and slowly prices will drop. Not a bad thing. Metals are a core of industry which should reduce the costs of core goods and reduce inflation. FOOD Up 20% from 6 months ago. Why? – They didn’t leave the U.S. Some of it was the crazy high costs of stainless but every sector of this industry is going great. In 50 years, watch out if we concrete over all our good agricultural land. Prices finally started to come down over extremely inflated used prices. Why it will take a little while to really be impacted is because of long term infrastructure and building projects that take a while to be completed. Small housing contractors may have to provide service to their clients, do housing redo’s or go back into the movie set decoration business. CLOSING This is going to sound crazy but I am more optimistic that I was 9 months ago and we were in a recession then (not the technical definition of a recession but a downturn heading into a recession). We are slowly starting to see some manufacturing come back to the U.S. Some of it happened because of our dollar devaluing but other reasons I feel are more long term. It is really a hassle doing business outside this country. You never have a deal so that you can go forward and concentrate on your own business. You spend most the time renegotiating written contracts. You can’t go full speed ahead because the rug may be pulled out from under you. The main difference between our country and others is a criminal and judicial system that is enforced. Governments of other countries are unstable and you may end up riding the wrong horse. Increased labor and shipping costs are starting to equal the costs that were originally saved. All our federal and state governments have to do is make an effort to get industry back, rather than taking the pompous attitude that we don’t need you anymore. All our arrogant politicians have to do is make an effort to understand the business problem instead of “my way or the highway.” Sincerely, STEVE W. QUALE sEptember 9, 2009
GENERAL Sorry to take so long to get this report out, since our last report of November 2008; but I wanted to see the results of the auction sales that we had and others had during the first 6 months of 2009. Since the last quarter of 2008, myself and all other appraisers knew we had to reduce values; but how much? I was estimating that if I appraised a shop in September of 2008; then in the first quarter of 2009 I would be dropping values by 20%. But, to be quite honest, all of us were somewhat guessing because the bank meltdown presented a new problem; in that the companies who do survive during this time may not be able to get money to buy equipment. I would say that from January thru June prices probably dropped anywhere from 20-50% depending on the industry. I really feel a recession is the wrong defining term for an economic downturn. I feel an economic downturn should be measured when the slowdown begins, when it levels off and then when it rises. These economic downturns used to be in 15-year cycles, but now are more in a 10-12 year cycle. They are in varying shape of a “U” instead of a “V” where all of a sudden the recession is over. Back in 1971, Barry Goldwater, a great businessman, who spoke to our business class in Arizona, explained the 15-year economic cycle. You saw these cycles in the 60’s, 70’s, 80’s & 90’s, but then a gradual change took place which I feel is noteworthy and why I am going thru this Econ 101. This recession started in April of 2007, with the normal downturn when something is overvalued and the speculators bail from that commodity. Please refer to our October 29, 2007 Newsletter as follows: “HOUSING – probably about 2 ½ more years of downturn. Prices haven’t dropped much yet but at some point people will have to drop prices to move their property especially when new home developers start dropping prices to move inventory. Once that inventory is evaporated then it will probably be status quo for five years because people will be afraid of getting burnt again. Just a repeat of the stock market collapse. It takes awhile for people to jump back in again, and after that the next five years should have up tick in prices. The saving grace is that this did not happen in a recessionary period – Yet.” This downturn would have continued thru the 1st quarter of 2010; but with mortgages being rewritten with a large balloon payment at the end; the homeowner can stay in his house and this policy reduced the housing inventory that would have come on the marketplace. The owner may not triple his money at the end of the mortgage, but at least he won’t lose his house. Real good move by the lenders, otherwise the supply side of housing would have expanded and it would taken forever to reduce the supply which would have deepened the recession. So based on these creative mortgages, I feel the economy will stop declining in the fourth quarter of 2009. The recovery will mean a couple of years of bouncing around on the bottom until something spurs it with a 3-year rise. That 2-year bottom leveling out period will seem like a rise after this immense downturn, but is really only a leveling off period – which is a good thing. And this is where I am trying to go with all this. Please refer to the July 2008 Newsletter as follows: “The last recession April 2000 – June 2004 was the adjustment from the over-inflated stock prices. But what was unusual was the recovery. Usually a recovery has a lot of pop to it. From June 2004 to June 2007 things were better based on where they came from but not great. What seemed to spur the recovery was housing instead of the manufacturing sector. Housing is really a matter of trading up or speculating on over-inflated values. So in the last recovery period the manufacturing sector recovered but really didn’t seem to expand because most of the manufacturing left the country. It seemed like 2 steps downward (2000-2004) and one step upward (2004-2007). Going into this recession it looks like another couple steps downward.” An economic cycle used to be 10-15 years. The last decline was in April of 2000 and the start of the next decline was April 2007. Only 7-year cycle. These economic cycles are getting too close together and I attribute it to not just speculation and manipulation but to the manipulation of speculation. Remember Carnegie, Rockefeller, etc. who were creating monopolies in their respective industries. The government stepped in and passed bills such as the Sherman Anti Trust Act. It is a businessman’s goal to put everyone out of business except himself (monopoly), so that he can control supply. If he can control supply, you can control price and of course make more money. So the government stepped in and said by doing this you are altering the natural flow of supply and demand which is the basis of our free enterprise system. Enters Boeing – “You have to let us buy McDonnell Douglas since the aerospace industry is now an international marketplace and we need this acquisition to be able to compete with Airbus; who doesn’t need to make a profit. If you do not let us do this – then it will mean that we will close up and will be the end of the aerospace industry in the U.S.” So Boeing is now in the position that – we are so big that the U.S. Government will not let us close down. Sound familiar. Once you control the supply – you control the price. This is only one example. OPEC is at least upfront about price fixing “we are going to cut supply so that we can increase the price.” The U.S. companies respond “we cannot control OPEC, but it is so expensive to do explorative drilling that we will just have to go along with OPEC, even though we highly denounce their practices.” RIGHT. Now that all this consolidation of companies has been allowed they control the marketplace. So when you are going to speculate in a commodity, a stock or whatever – you are subject to your speculation in that commodity being controlled by the manipulation of that commodity by a few. What Problems This Create For Appraising. I would like to refer you to the November 2008 Newsletter as follows: “We have been in a recession for about a year so we probably have another 1 ½ years to go before we see a through and then an upturn. So about a year ago in our letter, we were warning about the automotive and how it was going to downturn the sale of large injection molders. In June when scrap was at $650/ton, we were telling you to watch out for an adjustment because it was overvalued. Large injection molders dropped and scrap prices tumbled down. But it doesn’t help to send out to you a warning letter when it has already happened – it’s too late, you are already into the deal. You need to know when something has topped out and will at some point will correct. Scrap steel was historically at the $50-$60/ton range, bottom out at $25/ton and top out at $100/ton. So you can see that when it is at $450/ton, we are telling you to watch out. It’s nothing new – the stock market did it – the housing sector did it. We’ve had some food processing sales where at the first sale, stainless steel was at 71 cents a pound, 2 weeks later at a Tuesday sale, it was 17 cents a pound and at the Thursday sale, it was at 3 cents a pound.” This volatility, especially now, supports what I have been saying for the last 20 years. “When you are appraising, you cannot appraise for today’s market, but instead appraise on an average marketplace. Your adjustments are made on long term changes of marketplaces.” If a machine normally sells for $10,000 and will vary from $15,000 to the absolute high when you cannot get the machine; to $7,000 as a low when a dealer buys – then we have always approached the appraisal process as follows for appraising equipment as a new loan. If we are in a very high market and the machine is selling for $15,000 – we are appraising at $12,500. If in a low market at $7,000 – we are appraising at $8,000. If the appraisal is for the work out department, then we are appraising at the exact level it is selling for at that immediate point in time. I understand the argument that it is not my responsibility to perform that function – which I disagree with. If you know in your heart that something is overvalued and the price is too high; then I feel it is my absolute responsibility to make that call. Another example is the oil industry. When the oil industry mutually decided to raise prices; of course what followed was a rush to pump as much oil out of the ground as they could. There was a boom in the sales prices of Vertical Boring Mills & Long Bed Engine Lathes. 1940’s 8’ Vert. Boring Mills were bringing $150,000 at auction when normally they would be in the $25,000 - $50,000 range. So how do we tell an owner when we are doing a loan appraisal that “Yes, I know your machine is selling at $150,000, but I can only figure it for $65,000.” Well, the oil boom lasted for about 6 months and then dropped off as well as the prices for these oil machine tools. But something interesting has happened: since almost all American made machine tools have gone out of business (Bullard, King, Axelson, etc.), the buyer is only left with rebuilding used 1940’s machine tools which has also exaggerated the prices. Change in Auctioneers. This is not a new change since it really started about 10 years ago. Used machinery dealers needed to expand their ability to move equipment quickly since a CNC Machine depreciated quickly and the onset of an owner being able to sell their equipment online by offering their equipment to a worldwide marketplace and circumvent the dealer. So many used equipment dealers became auctioneers to combat this problem. It wasn’t anything noticeable during the good times but it is now. Many auctioneers, who are also machinery dealers, set a price that “if it doesn’t bring this price, I will just put it into inventory” which is not divulged to the buyers. So you have the auditor writing down prices that are later put in publications announcing auction prices, when a stamping press gets run up to $250,000 when the last legitimate bid was $25,000. As first viewed “wow, he got a lot of money for that equipment.” But, the problem that we are seeing is that the buyers are getting to the point of ‘why even go – I will just wait till the sale is over and I will call and find out what’s left over!” It’s starting to affect the buyers in the original concept that “everything will be sold to the highest bidder” and in turn is changing the industry. You want the buyer to come to the sale with the idea that “I’m going to try to get this thing real cheap!”; which plays into getting good auction prices. But once they assume that it will be protected, then the buyers just stop bidding and expect that it won’t be sold and will just wait till after the sale. In general, all industries have dropped to varying degrees, and the first 6 months of the year have (for the most part) presented some disappointing numbers. It takes awhile for equipment to come on the marketplace once a recession occurs. We still have a lot more equipment to sell, but there are signs in the horizon that we will probably bottom out by the end of the 4th quarter 2009 and may even see some active purchasing. This is also basically what the stock market is telling us. MACHINE SHOP Please refer to our July 2008 Newsletter as follows: “Still doing well but can’t help but think this is only promoted by the aerospace industry. Boeing has had some delivery problems on its 787. These are the orders that catapulted Boeing and the U.S. aerospace industry; but if these problems are not corrected and with the change in administrations look for the aerospace industry to correct in 2009 . Yes I know that the contractors have defense orders until 2012 but orders can be put on hold (ie. the Carter admin. and the B-1 bomber).” Machine shop maybe only dropped off 10% but look for aerospace to really drop off. The following factors have created that conclusion. 1. The change of administration means less defense spending. 2. The Corporate & Regional jet boom fell off because of the financial crisis (except for Nancy). 3. The delay of Boeing 787 could be a huge problem. If Boeing realizes that this thing may have structural problems, or people will be just too afraid to fly it, or the airplane orders are just being cancelled – then Boeing will have some major problems. We had purchased a CNC Machine Shop in November 2008 with a lot of Haas CNC Machine Tools in it. We had to put the sale off until March of 2009 because some orders needed to be completed. In February of 2009, Haas had a surplus of inventory and dropped its prices 20-30%. Most of the other machine tool manufacturing (Mori Seiki) did the same. So you can imagine our concerns about the sale in March. We lost about 4% on a $1 Million purchase. Not going to kill you, but just leaves a bad taste in your mouth. Most auctioneers during those first 3-4 months of 2009 went thru the same pitfall. The good thing is now Haas sold the surplus and has raised his prices back up to ’08 levels, but just making the point – “when you see a new price quote, there is about 20-30% to play with.” The same thing happened in the 80’s recession because of the oil boom/bust. PLASTICS Rotten – especially in the high tonnage molders due to the automotive industry. We had a sale in June with (2000) Cincinnati 250 Ton Electric (not hydraulic) molders were bringing $20,000 - $25,000 which we were very happy with. We have had (3) Plastic Injection Molder sales - and the old moulders are interesting. A 500 Ton Molder is bringing $2500, which we used to figure as $0 when scrap was $50/Ton. But now at $150/Ton it is worth someone to scrap it out. This is why lately when we appraise obsolete equipment we try to let you know what the scrap price was that day. Buyers are very selective now and the molder really needs to be within the 7-year old range to attract interest. Also the bigger it is – the worse it is, due to power, moving & storage costs. WOODWORKING I guess there are a few left, but not many. We are starting to see a trickle of work coming back because of long term quality of the goods & delivery times for Asian products. Woodworking will survive, but on a much smaller scale than before. The high end, low production, low overhead guy will make it and lumber mills will return when housing returns. PRINTING I don’t want to talk about it. OK I will. This industry is being hit by the double whammy. 1. Recession has been deep enough that people are not looking at advertising as a way to attract buyers. 2. Transformation of how media is presented to the consumer. Media has left the ground level and has moved up into the airwaves. Another industry falls to the computer age. People just don’t use printed material as their source of information. We have seen publications that we used to advertise auction sales, close down. People read books on a handheld. The size of a newspaper is about 1/3 of what it used to be, because who is going to advertise in a newspaper. Interesting to see how much of a newspaper is news. The newspapers are going to have to double their charges for a daily paper. We were always worried about the digital press taking over, but it was the change in media presentation that changed the printing industry. Digital presses are about 1/3 of the price and size of a paper press and will continue to have its place. I don’t know how much of a marketplace there will be for a $3 Million sheet fed press & a $12 Million web press. Printers have always been high equipment cost/low profit margin guys anyways; and these numbers just don’t seem to add up. FOOD Maybe only, if any, down 10% from its high point of a year ago. But, there haven’t been a ton of sales, so when we do a food sale; it is almost an automatic success. Having a real tough time on the high production side. CNC Fabricators are tough right now and so are all presses, S.S.D.C. & O.B.I. are all tough to sell because of automotive. If automotive had started closing all the plants that they would have had to if they hadn’t been bailed out by the government: it would have been a blood bath, so I guess mothballing a plant is a better alternative than scrapping it. Stamping & O.B.I. presses are probably down 50% from a year ago, where press brakes and shears are only down about 20% from a year ago. CONSTRUCTION & HOUSING - Empty - GENERAL Hopefully a new Congress will do what needs to be done to bring industry back to the U.S. Hopefully money will loosen up a little for the companies that deserve it. Hopefully the investment funds will have to make money to attract investors. Hopefully corporations will only be allowed to present one set of books to the public – the same ones they present to the IRS. Hopefully Congress will start enforcing the Anti Trust/Price Fixing Acts. And hopefully we will have term limits on Congress and start paying a new group of Congressmen a decent pay so that we can attract some people to Congress that will work for us instead of themselves. Or we can sit back and hope it all fixes itself. Sincerely, STEVE W. QUALE February 24, 2010
GENERAL FROZEN. This is the best description of what we see going on in the economy and is exactly what you don't want if you are trying to recover from a recession. It's a catch 22. The banks are not loaning money; so companies are not buying assets to expand, because they can’t get money from the banks, and the banks are not liquidating assets because the prices are too low, because nobody can borrow money to purchase the distressed assets. Sounds stupid - sounds simplistic, but that is what is happening and that is why you see Obama stressing that banks have to start loaning money. I keep hearing from everyone that the banks have plenty of money, there is plenty of money available. I hope, I hope this is true and not that they just have plenty of assets on their balance sheets (which I feel is the case) and they cannot afford (accounting wise) to turn those over-inflated assets into loanable cash, because it will create financial reports from the banks that the powers to be do not want us to see because it potentially could be the catalyst that creates more distrust in our economy and could deepen the recession. Now take a breath. We keep getting fed these reports that in the fourth quarter we had the largest growth period in 10 years, banks having record earnings - everything is getting better; but we the people keep saying bullshit. I understand the banks' posture of sitting on assets because sooner or later the economy will turn around. It has worked in the past but it may lengthen the recovery period. We are waiting for something to spur the economy. The war got us out of the 30's; the computer got us out of the 80's, so maybe something else will get us out of this one, which may be energy (nuclear). In the meantime, there are a few in Congress who are trying to reintroduce acts that will safeguard our economy from going into this mess again. In the 30's, the government passed an act restricting banks from going into certain types of investments. It did not get repealed, but a new act in the 90's allowed banks to go into high yield risky investments. Certain safeguards are put into a system to protect it from destroying itself. When you are seeing huge growth spurts, people forget and think a depression will never happen again. They remove those safeguards, greed takes over and the same consequences happen over again each time. It is inevitable. I am a businessman and I too feel that greed is good. Praise be to Geko. We are all playing monopoly and the goal is to put your competitors out of business so that you can control the supply side and therefore control pricing which results in higher profits. The free enterprise system is based on competition and the free flow of supply and demand and as long as they are not monopolized they will always work. But, that is why we had certain acts such as the Sherman Anti-Trust Act passed so that the free enterprise system (greed) would not destroy itself. The basic instinct of the entrepreneur (greed) that makes the free enterprise system the best system in the world can also be the virus that destroys the system if left unchecked. Our Congress has ignored those safeguards in the financial industry and the industrial sector and now we are mired in a catch 22. So what does the above have to do with the appraising and auctioning of equipment? The auction marketplace for the selling of equipment is still a viable option, but there have been some alterations. We need to get the word out much earlier than we used to. Where it used to be a minimum of 30 days, it is now more like a 45-60 day process. Since money is so hard to get from lenders; the buyers need more time to set up financing and just to get the word out and give it time to circulate. Also the marketplace for equipment in Europe and the U.S. is very depressed, whereas the marketplace in India and South America shows activity. Forget China - they can make it new cheaper that we can sell it to them used. But we are starting to see more activity from certain areas of overseas buyers; so it takes longer for them to logistically make arrangements. They are not going to travel for small sales but they will travel for large sales or a situation where an industry has left the U.S. and is now being done completely overseas. We are seeing more volatility in the pricing of equipment at auction sales. This is going to sound hard to believe, but attendance is actually up from 3rd quarter of 2009. This partially from people appraising their own shops and also from "the survivors" wanting to take advantage of depressed prices. Remember - for every business that closes; someone picks up a little more work. It seems like we have bottomed out 4th quarter 2009, as we suggested a year ago. The guys left are really good businessmen, but are only buying what they need now; or will project what they will need in the near future. And here's the rub. Twenty years ago, we had a massive used machinery network that provided a base price for machinery. We didn't feel real good when we sold to them because we knew the machine went cheap; but we always considered them brothers in the same type of business - "buying & selling equipment." They are gone. The internet, the economy and industry leaving the U.S. has just about eliminated the "stocking" used machinery dealers. So when you have an auction, there is no base price. If you have that one user who makes the sale; then you have a good sale. If not, you have a bunch of users going "boy that's cheap - but I didn't need it no matter what the price is." This has led auctioneers to buying back equipment at the sale and then reselling later thru other means. So, when we review auction results, we really have to look at what makes sense and what doesn't. Just because you hear "sold", doesn't actually mean it sold. In turn; when we appraise I will repeat what I have said for 20 years "You have to appraise at an average auction value." You have to look at a general trend in a price change before you alter your evaluations. One sale does not justify a price change in appraisal values. MACHINE SHOP Prices are a little down from 6 months ago but not depressed. Since machine shops cross over into so many different industries; it hasn't taken any sharp declines. Aerospace declined but there is talk that there may be an upswing on the commercial side since the 787 got off the group and didn't come apart. I'm still having a tough time with the idea of joining metal with a composite material. But it flew and there is a little glimmer on the commercial large jet aerospace side. It will be interesting to see if there is going to be financing available for the purchase of these jets. Maybe Boeing will start a Boeing Financial just like the car companies did. Prices on CNC equipment are down about 10% from 6 months ago which is a small expected dip but nothing like some other industries. One segment that has dropped is CNC Horiz. Machine Centers. They cost twice as much as a Vertical but bring about the same price at auction as a comparable size Vertical SHEET METAL Stamping Presses (unless really new) are in the scrap metal mode and we still haven't seen the sale of automotive stamping plants from the Big 3. Here is an important point. Most of us are appraising old stamping presses at scrap value which is around $250/ton; which still makes the presses saleable for scrap. But you really have to take into consideration the scrap market and where the proximity of the scrap market is compared to where your auction sale is. If you are holding the sale in Torrance, California, you can figure the price to be much higher than if you holding the sale in Albuquerque, New Mexico. And this goes for many other industries - auto. screw machines - foundry equipment - die casting, etc. And if you throw into the mix, hazardous waste (oil, etc), it can even magnify the problem. My point is that since the metals market (stainless steel - steel - copper - brass) is being manipulated and now treated like an agricultural commodity it is open to huge swings but not from weather, but from manipulation and speculation. So if someone (China) turns off the demand, the prices can drop drastically in a short amount of time which happened with steel, stainless steel and copper. The consequence is that you may not be able to remove equipment from an old plant and whomever owns the real estate may be stuck with a huge cost to return the commercial real estate to a rentable/saleable condition. Even the old standbys - small O.B.I. punch presses, press brakes and shears have dropped dramatically. PLASTICS Injection Molding - there have been a few sales with some upturn in sale prices, but we don't know if that is a couple sales or a turnaround from a dead industry. Extrusion - really down and getting worse. Doesn't matter if it is pipe extrusion or resin recycling, they are all down. Blown Film - really odd. It seems like all the fat has been cut off and the survivors are not expanding or consolidating - but just holding their own. Very few auctions. WOODWORKING These guys just can't hang on any longer. When furniture left the U.S. some went into cabinet making. When housing fell off they just didn't have anywhere else to go. With the 10-year housing boom that we had everyone became a cabinet maker or a contractor regardless of their business ability. They have tried to hang on but - . FOOD Still great auction sales but there have been very few. PRINTING Just going to be a whole different industry. Visual banners and digital creation of non-paper advertising and media. If Google has its way then say goodbye to book publishing and the equipment used to produce books. OBSERVATION Looking backward, I don't know which term I dislike the most "Mover & A Shaker", "An Event", or "Transparency". All you have to do is say those words and it gives credibility to what you are saying. Also, I found it odd how a speaker was described at a conference "The Honorable Henry M. Paulson, Jr." Sincerely, TAUBER ARONS, INC. In Memoriam - Jerry Hayes, who worked with us for 12 years, recently passed away at age 62. Jerry was one of the most conscientious people I have known and took his work personally. Jerry will be sorely missed on a personal level as well as on a business level. R.I.P. Jerry! August 12, 2010
GENERAL HUGE CHANGE - (In June it became downgraded to "an upswing." From the 4th quarter of 2009 to the 1st quarter of 2010, there has been extreme upswing. The attendance has doubled, but more importantly, people have come to buy because they need the equipment. Almost every industry (except for a few because of technological obsolence) are showing signs of activity. There is also a marked slowdown in auction sales. We can attribute this to the following factors individually or mixture of each: 1. Attrition - It seems that industry has finally completed the survival of the fittest contest. All these industries have sized down or consolidated to the point that their overhead and supply match the demand for their product. But now with the increase in business activities, these companies are looking to expand, but they have trained themselves to be cost conscious so they are looking to buy on the used market place. The result: larger attendance, increased activity & higher prices. 2. Higher Demand For Product - there seems to be an increase in the demand level of products. Small - but a definite heart beat. It may take another 3-6 months before you see unemployment make a real drop, but it should start dropping the 4th quarter of 2010. 3. China - China might have finally matured enough to grow up and join the rest of the world on their currency standard; or has the Congress finally woke up in August 11, 2010 (10 years too late) saying "it just isn't 'fair' that their exports keep on expanding at a rapid rate." Maybe we will create a container import tax (07-6-07 report). But in viewing the economy in the state of anxiety that it is, I can only use an analogy of a linebacker in football before a play. As the opposition breaks from the huddle, he is analyzing the formation, where they are going and what types of things could happen. And just when the ball is getting ready to be snapped, he is on the balls of his feet in an athletic position. Once the ball is snapped, he is immediately reacting to what is happening in front of him. Sometimes linebackers overreact. This is the way the economy reacts. The economy reacts so quickly to everything that is told each day: so that they won't be caught in a disastrous condition. It is really hard to tell what is a long term indicator as compared to an overreaction of what they see for the moment. MACHINE SHOP Definitely on the upswing. Whether you are building airplanes, oil rigs or nuclear energy plants, you need big - big - big expensive machinery to do this. So how do I go about buying a Bullard or Cincinnati Hydro 10' Vert. Boring Mill or how about an Axelson 36" x 20' Engine Lathes? You don't - all the U.S. machine tool companies have evaporated. But I can still buy a used one that has been sitting in a warehouse for 20 years. Instead of spending $1.5 Million for a new Japanese tool - I will buy a 1940's Vert. Boring Mill for $100,000, rebuild with new ball screws and up-to-date CNC controls for another $150,000 and be into an up-to-date competitive U.S. tool for $250,000 instead of $1.5 Million. It can really distort the auction value of WW II war vintage machinery. AEROSPACE - Huge demand for CNC Profilers - If the airplane companies ask for the delivery of the planes they have on order with Boeing - this industry will be busting at the seams. But it comes down to orders as to taking delivery. The demand is there, but I still question that the financing is going to be available to the airlines. Again, may be a future Boeing financial. In other industries, such as oil tool etc. where they use large capacity equipment - the prices can swing sharply for even CNC equipment in the 80's because new prices are so high. Example: (1979) Mori Seiki SL7 CNC Turning Center sold for $32,500 in 2010. That is the same price we were getting if it had been sold in 1989 when it was 10 years old instead of 22 years old. SHEET METAL The old standbys of Press Brakes, Shears & Saws seem to be coming back. But, Stamping & O.B.I. Punch Presses are still on the bottom and don't seem to be showing any near signs of recovery. Steel Processing Equipment such as Slitters and Cut-To-Length Lines are doing well, but can be volatile depending on overseas demands. PLASTICS Injection Molding - doing much better and it seems that most of the automotive suppliers auctions have taken place and there is a definite upswing on prices. But again the machine needs to be no older than 7-10 years (2000-2003) otherwise the price really drops off. Extrusion - the base form of the Extruder itself is not doing well but when you attach it to Pelletizing or Regrind Lines - the complete system brings the value up. Most plastic companies have become recyclers for their own use to level out their cost of resins. Blown Film - we know the industry is just doing "so-so" but there have been no auction sales. The companies that are going under are being bought by competitors. "You have the option of going out of business or you can give me 55% of your company and I will provide the huge volume discounts that I get; which will make you profitable." Step aside ego and play ball. It is like the Blown Film companies are out in the middle of a calm lake waiting to come onshore when everything settles down. WOODWORKING We have had approximately 15 woodworking sales in the last year and there is a definite upturn in prices since February. January there were no sales but from February on the prices are definitely improving. It's not just that we have doubled the attendance, but the buyers are buying out of need, not waiting to steal something. FOOD We have had (2) food processing sales in the last 3 months and the prices were about 30% higher than we anticipated. There is just a real shortage of food auction sales which in turn elevates the price. Also the food industry never went into the recession. PRINTING Probably will never recover from technological changes, but it is morphing into large vinyl banner products. Since nobody can read or spell anymore, the media is relying on the visual aspect of advertising. So all printers are moving into the large laser jet vinyl products. It will be a salvation for awhile and then the price cutting will hit. Until then the laser Jet printer equipment manufacturers are going to do fantastic. Video post production We just had a large post production house that we sold at the end of July. This industry has always been a popularity contest of what is hot at the time and also what product model becomes the industry work house and retains its value over the years. The Routers & Switchers become tough to sell because they need to fit a customer's specific requirements. I would be concerned on your UCC Filings and your Debtor's Covenants in this industry. OBSERVATION There seems to be a slight undertow of movement upwards for equipment that is being manufactured here in the U.S. It is not just sentimentality to buy a U.S. manufactured product but rather that we are starting to build a better product and the user can justify the additional costs. Now all we need is for Congress to open the doors rather than putting up road blocks. Sincerely, TAUBER ARONS, INC. July 6, 2011
I don't know of an industry that isn't doing better than it was 2 years ago. The reason I say 2 years is because in 2110, January thru May there was a huge change in the purchasing appetite for machinery and equipment. But from June thru December, things leveled off. So for a normal growth cycle there is always a surge of purchases for the first half of the year by using up their capital budgets for the year. But this year it is even stronger than last year and it seems much more sustained. The manufacturing sector has been in such a state of contraction from 2006 thru 2009 and add to that all of the companies that have either gone under or been purchased, it doesn't take much of an upturn to make it appear like an economic boom time. I hear people say that we are in the same economic boom time as 2006 but that isn't the case; (compare first half 2006 GNP, excuse me GDP, to first half 2011 GDP) it's a start but not an economic boom economy like 2006; because 2006 was the culmination of an economy with no base below it. It is really understandable to all people in industry why they are experiencing such a euphoric windfall, but it is because of where they have come from. China has really screwed up their chance to dominate all industry and has left the door open for us to get back in the game, reduce our trade deficit, increase the strength of our dollar, reduce our cost of US debt and restore the world's faith in our country. That way we can go ahead and sell them some more junk paper and leverage ourselves out of control. Or we can learn from this mess and get back to basics. We may get another chance but we have to do the things (not words) that give us a trade surplus which will in turn reduce our budget deficits and will draw in investor dollars into our country, if they can be assured that they won't get screwed again. But so far it has just been rhetoric about putting restrictions on the capital markets on how they invest the investor’s money. We used to have those restrictions in place after the 1930's but they were removed in the 1990's. Our whole problem is not a last ten year problem but actually a 30 year problem of looking the other way while our country transformed. With this upturn, you as lenders, will be seeing an enormous need for cap ex lines in the manufacturing sector and all companies are going to have cash flow problems. It is now the lender's turn to jump in with this surge to continue the expansion in manufacturing. That doesn't mean 0 down at 2% interest on an $800,000 house to a kid that is making $40,000 a year. Bush had a "NICE" idea but it doesn't make business sense. MACHINE / SHEET METAL SHOPS These guys are going as fast as they can go. Aerospace is still strong but a lot of it is based on future production of the F35 fighter. I think at some point the defense department is going to realize that we are really fighting different types of war and they may rethink the need for so many air fighters. But the defense guys will come up with something new to facilitate that need. It may be the expansion of the drone surveillance plane or probably some type of drone foot soldier. Sheetmetal Fabricators, even as old as the early 1990’s, are selling well. CNC Press Brakes, like Amada, are selling well in the 1980's if they are the right model. Punch presses are still soft, but look for an upswing next year. PLASTICS Plastics have been on the upswing for the last two years and even more so now. With the automotive turnaround all the plastics providers for the automotive marketplace are filling all the capacity they have plus they are expanding to cover all the competitors that have gone under. Large capacity molders (500 ton and up) are back in vogue, the small tonnage for the medical industry never declined, but the only negative is the increase of resin prices and their inability to pass on those increases to their customers. But again almost all plastic resin users are also commodity brokers. Blown film has some interesting changes. You've seen where some grocery markets are going to remove plastic bags from their store which will affect some blown film companies. But what is interesting OUR GOVERNMENT, believe it or not, has blackballed some countries (China-India) from exporting plastic bags into our country because they were DUMPING products into our country. This is the best news that I have heard where our country is actually making an effort to protect our industry. This is exactly what is needed to turn around our country, bring us out of the recession and restore confidence in our country and how we our viewed. The extrusion side of plastics is a little soft but the downstream portion of extrusion is strong enough to pull up that portion of plastics. What will really give this industry a lift is if resin prices drop because that is base of all plastic products. Probably they only way this will be accomplished is if a new source of energy is developed or other methods are utilized for the mainstay of our energy demand. CONSTRUCTION Although the marketplace has not returned the prices have. Construction is used in arenas other than building houses. Used machine prices may be down 20% from 2005-2006, which means they are back to what a normal person would pay. It will be awhile for housing to return but the housing inventory seems to be slowly working down. Housing prices are still down -- but all that means is that the lender will not be so quick to drop the hammer. WOODWORKING Still improving but as compared to the other industries it is a little slower. We probably won't ever see the huge furniture manufacturers like we used to have in the 70's but there will always be the demand for some quality furniture and cabinets. What is surprising is that the sawmill industry is starting to come back. Auction prices are on the upswing. PRINTING The only industry that is not going to come back anywhere in the form that it used to be is the printing industry. What have become popular is the large format digital printers that go on vinyl. We now are really a visually stimulated society and reading material just doesn't seem to attract our senses. There will always be a small demand for high end printing and if you can be creative on the design portion of printing, then you will have a marketplace for your equipment. FOOD Prices are still fantastic, but I do want to emphasize a point. These buyers stay in their particular area of production. We had (3) meat sales this year and prices are great on the meat side (grinders, blenders, totes, etc.), but stainless steel tanks do not do all that well. A dairy buyer will not buy stainless steel tanks at a meat sale. A meat buyer will not buy dicers at a produce sale. So when you are appraising this equipment, you are appraising what industry it is in. The only thing that will drop prices is if stainless steel price drops. You have stainless steel commodity brokers who are always buying stainless steel to fill contracts.
Sincerely, TAUBER-ARONS AUCTIONEERS
STEVE QUALE January 23, 2012 I can’t say much more than “WOW.” Prices are fantastic. You saw a drop from August thru September, then it took off in November & December. This is different from what has happened for the last two years. It reminds me of the 70’s & 80’s. A company would have a lot of profit at the end of the year; so he would buy equipment to reduce his tax base. This seems to be re-occurring today but the problem is that the manufacturing sector is such a small component of the U.S. economy as compared to what it used to be, that it just doesn’t stimulate the economy. Our economy is not based on how much product we make, but on how much product we will consume, even if it is manufactured overseas. Our country has shown some signs of manufacturers returning to the U.S. On 60 Minutes, you saw John Chamber of Cisco say “it wouldn’t take much to bring American companies back to America. If Congress would lower the tax rate to 25%, you would see a Trillion Dollars come back into the country.” You’ve seen Warren Buffet say “I can fix this country in 2 weeks. If you don’t balance the budget then Congressmen don’t get paid.” Every businessman in the U.S. knows what needs to be done but it’s just not getting done. The scary part is that with what just financially happened in 2008: IT IS GOING TO HAPPEN AGAIN. Nothing was done to fix the problem only an injection to keep the patient alive. There has been a significant change in the method in which asset based lenders evaluate their client. The asset based lenders are returning to evaluating the companies on a balance sheet basis like they used to do in the 70’s. Money has to go somewhere. It is a risk/reward thing and when something gets hot; risk goes out the window and we end up with an over-valued something. Oil, stock market, housing, junk bonds, what’s next? I don’t know what will be the next catalyst (I personally think it will be energy), but I do know how to recognize it. When you see something jumping so high that you say “I can’t believe how high it is, this is nuts, it’s got to correct.” Listen to your gut, don’t get greedy, take your profit; because it will correct. MACHINE / SHEET METAL SHOPS The only sector that I would be cautious is in Aerospace. In our July 2008 Quarterly Report we said “These are the orders that catapulted Boeing and the U.S. aerospace industry; but if these problems are not corrected and with the change in administrations look for the aerospace industry to correct in 2009 . Yes I know that the contractors have defense orders until 2012 but orders can be put on hold (ie. the Carter admin. and the B-1 bomber). “ In our November 2008 Quarterly Report we said “In the last (2) newsletters I have said to watch out for Aerospace. I will repeat – “watch out for Aerospace” – it has topped out. I don’t care how many defense contracts you have; with the new administration, defense is going to be chopped. Also watch out for Boeing if they don’t clean up production delivery schedules on the 787. The great thing about machine shops is that it crosses over into so many industries. The Aerospace guys have always juggled commercial and defense work depending on what’s hot. Kind of like farmers – they produce the product on their land that gives them the best return.” In our September 2009 Quarterly Report we said “Machine shops maybe only dropped off 10% but look for aerospace to really drop off. The change in Administration means less Defense spending.” In our July 2011 Quarterly Report, we said “Aerospace is still strong but a lot of it is based on future production of the F35 fighter. I think at some point the defense department is going to realize that we are really fighting different types of war and they may rethink the need for so many air fighters.” WELL, IT’S FINALLY HERE. But when I say cautious, I say this because: will the company you are financing be able to switch over from Defense to Commercial? Defense work has to gear down because they just flat don’t have the money and no politician is going to endorse increasing Defense spending. The 787 just isn’t stirring the pot, BUT the 737 is going to multiply like rabbits. The airline industry has to update their planes and the 737 is the choice. The problem is all aerospace companies are going to rush into this marketplace and then you are in Boeing’s sweet zone. They are going to have the subcontractors expand like crazy with orders, increase their overhead with equipment and then tell them they are going to have to reduce prices by 5% each year. And to play ball with the only game in town, you will drop prices to meet the competitive bids on each new contract. Your problem will be covering all the new overhead you have incurred and even saying yes to breaking-even or losing money to keep the competition out. The nice thing for aerospace is that whether it is Defense or Commercial, you use the same machines. The aerospace industry has to have the latest and greatest to compete; and each ‘toy’ costs about $3 Million. But on the other side is the sheet metal and fabrication. They have no problem buying equipment that was new in the 40’s because the process is still done the same way. We had a sale in November 2011 in Bakersfield, CA that we anticipated a couple million dollars and it ended up bringing over $3 Million; and for the most part of it was old equipment. We had a set of Plate Rolls (to make steel tanks) that was manufactured in the 40’s bring $35,000, when scrap value was $8,000. We had a (1981) Press Brake bring $125,000. There are companies who audit auction sales and publish the results. The owner has temporary help audit these sales and sometimes auctioneers will go thru the motions on selling a Leased piece of equipment that has a high payoff figure. So let’s say the payoff figure is $500,000. The auctioneer starts it off at $50,000 and has activity up till $100,000. So in the auctioneer’s mind, the value is $100,000. But what the heck, we might as well run it up all the way to $475,000 and say sold to a dead number. So the temporary help writes down $475,000. The Book’s owner will call to see if this is a real number to find out if he should publish the price. So The Book called on the sale in Bakersfield to find out if these were real numbers. They were real numbers and that is when you know you have had a great sale. That is also why auctioneers are the best source to use in appraising equipment. For a while most auctioneers were saying “prices are good for late style equipment but there is no demand for older equipment.” That is not the case now. And I attribute that to (3) reasons: 1. the price of new is so high and banks are still pretty tight on loaning money for new purchases, 2. the machine is not even produced anymore since most all of the large tool manufacturers are gone, 3. The older machines were made out of better steel. The same thing happens in the oil tool industry when they hit a blip in the radar and the prices of old Vert. Boring Mills triples for about 3-6 months and then return to normalidity. But you can’t appraise at these spikes. You don’t just all of a sudden, triple your appraised values. You may raise them 20% and wait a year to see if it sustains. If it does, then pump up the values another 20%. PLASTICS Very improved at all levels. We recently had an injection molding auction in November 2011 and had some interesting results. We had a (1998) Cincinnati 300 Ton Molder bring $23,000; past the molder’s 10-year life span but was about what we figured. But what followed was unusual: We were figuring these for scrap around the $1,000 - $1,500 range. The point is that users are buying older equipment and that is a good sign. On the Blown Film Bag Industry, we bought the real estate and equipment of a plant in the South East. We have an auctioneer and dealer partner and we all placed high retail prices on the equipment with the idea if that someone will pay this stupid price – then we just have to sell it before the auction sale. The equipment has been selling so quickly at such high prices that we may not even have an auction sale. This equipment is mainly in the 80’s & 90’s with a little of early 2000’s. Same illustration – the market is hot CONSTRUCTION STIll gradually getting better with auction prices bringing what they should with a normal economy. WOODWORKING A complete slowdown in the amount of auction sales with prices doing well when the equipment does come on the marketplace. Almost similar to construction in that they are doing much better; acting like a normal economy but not crazy like 2006. California is still making it tougher in all aspects for manufacturers; so these guys still have a tough time getting traction. FOOD The industry never seems to go down, but we have heard that the Feds are starting to ease their standards on imports and that would not be a good thing business wise or health wise. You have a scare like the cantaloupes in Colorado and it doesn’t matter where the cantaloupe comes from – it puts a damper on the entire crop. We did see a small negative blip on the radar when China took a slowdown/correction. Since they are such a massive consumer of raw materials and metals when they slow down their purchases, it is immediately felt here. We had some food sales where if it didn’t sell to a user; the scrap price dropped dramatically. No one is going to try to catch a falling sword. This would hold true in copper, stainless, aluminum and other metals. Until the scrap guy sees a bottom with a slight uptick, they just won’t take the chance of buying a metal that is falling unless they are filling a contract. Sincerely, STEVE W. QUALE
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