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Tax and Accounting

Supply Chain Disruptions and the Employee Retention Credit

BY MICHAEL GALDIERI

The world of packaging has come out of the COVID-19 pandemic strong and is helping America get back on its feet. In an effort to accelerate businesses out of recovery mode and back into growth mode, Congress made legislative changes to significantly cut taxes for businesses who kept employees throughout the pandemic through federal incentives.

The Employee Retention Credit (ERC) is particularly applicable to the packaging industry, as it can completely eliminate a business’s payroll tax and generate a cash refund, if the company had business disruptions, including supply chain issues.

These disruptions oftentimes stem from government orders that have either forced packaging companies to halt operations or had an effect on suppliers and their ability to fulfill necessary orders.

Employee Retention Credit Background

The ERC, which was put in place as a part of the Coronavirus Aid, Relief, Economic Security (CARES) Act, offers U.S. businesses a refundable credit that they can claim on qualified wages, which include health insurance costs paid to employees.

Packaging businesses can claim the credit for all of 2020 even if the business claimed PPP. The American Rescue Plan took the credit a step further, allowing taxpayers to claim the incentive for all of 2021 as well.

In order to qualify for the credit, businesses must be able to establish that they were either fully or partially suspended due to orders from an appropriate government authority in any calendar quarter or that they experienced a significant decline in gross receipts. It’s important to note that businesses that were not suspended can still qualify if their suppliers and vendors were fully or partially suspended and if that is having a material effect.

How AICC Members Qualify

While most businesses across the country were closed in 2020 and thus can qualify for that year, boxmakers have continued to face supply chain issues, and those disruptions could qualify AICC members for significant tax savings in 2021. We are seeing businesses regularly claim six to seven figures in cash and credits for the first quarter alone.

As an example, if a boxmaker’s paper supplier is able to supply only 80% of what is ordered due to governmental orders, reducing the output of the company, that would be deemed a qualifying disruption. Even if the company itself is deemed essential, is profitable, and is operating at full capacity, it may still be considered a partial suspension due to supplier issues.

Ideally, the IRS would want to have seen that the taxpayer company made a reasonable attempt to find an alternative option when their primary supplier was unable to fulfill their orders. Even further, the impact from suppliers being unavailable—or any other work disruptions—needs to have more than a nominal effect on the company’s business operations.

While the IRS has attempted to put forward guidance clarifying the incentive, there is still a significant amount of ambiguity surrounding the ERC. Many businesses are trying to claim the credit themselves or by using a financial advisor who is simply asking them to earmark which employees they want to claim the credit on. That may be ill-advised as proper documentation, and substantiation of disruptions, supply chain issues, government orders—at an employee-by-employee level—would be prudent.

Michael Galdieri is associate director at alliantgroup’s New York office. He has more than 15 years of experience working with startups to Fortune 500s. He has also partnered closely with CPA firms to uncover significant tax savings for their clients. He can be reached at 844-898-3280 or michael.galdieri@alliantgroup.com.

Package Crafters: ‘It’s All About the Hustle!’

BY STEVE YOUNG

Photo courtesy of Package Crafters.

Team Package Crafters, from left: Michael Spohn, chief financial officer; Gary Brewer, founder and CEO; Shawn Bragan, plant manager; Kimberly Potter, customer service manager; Mike Roach, designer/estimator; Hugo Hernandez, production supervisor; and Alan Deal, director of sales and marketing. COMPANY: Package Crafters

ESTABLISHED: 2002

JOINED AICC: 2008

PHONE: 336-431-9700

WEBSITE:

www.packagecrafters.com

LOCATIONS: High Point, North Carolina

CEO: Gary Brewer

Gary Brewer, CEO of Package Crafters in High Point, North Carolina, remembers his initial reaction once he looked out into the 70,000-square-foot building he had purchased for the sheet plant he founded in 2002: “There were only six of us when we started. You could see all the walls in the building. I was, like, ‘What have I gotten myself into?’”

Now, 18 years later, Package Crafters and its sister company, Creative Packaging in Savannah, Georgia, employ 39 people in 129,000 feet of manufacturing space and produce 160 million square feet per year. Of the company’s fast success, Brewer says simply, “It’s all about the hustle. My machinery looks like everyone else’s machinery. And now, when we’re all buying from the same suppliers, the materials are pretty much the same. I say in theory, my box is no better than my competitor’s. It comes down to the hustle: Do I give you what you want when you want it? That’s really what’s put us on the map.”

Rich Market, Golden Opportunity

The point on that map occupied by Package Crafter’s main plant is the Piedmont Triad region of north central North Carolina. Anchored by the cities of High Point, Winston-Salem, and Greensboro, the region’s economy has historically been tied to textiles, furniture, and tobacco. But according to the Piedmont Triad Regional Council, new growth industries are emerging rapidly, including distribution, consumer products, biotech, and aerospace. The city of High Point itself, so named because it was the highest point on the North Carolina Railroad, has long been known as the “Furniture Capital of North America,” and the corrugated box market in the area has historically reflected that.

After getting his degree in chemical engineering and pulp and paper science at North Carolina State University in 1992, Brewer went to work at St. Joe Paper Co. in Port St. Joe, Florida. After five years, he left St. Joe and joined Carolina Container, where his father, Wayne, was chief financial officer. As Brewer explains it, Carolina Container’s owner, Paul Ingle, wanted someone with mill experience to take over the company’s containerboard purchasing. Brewer recalled that Ingle’s direction was simple: “’I want you to be a paper salesman’s worst nightmare.’”

During his five-year stint at Carolina Container, Brewer completed an MBA at Wake Forest University in Winston-Salem. His last class was “Entrepreneurship,” and his last assignment in that class was writing a business plan—in his case it was for the sheet plant that he would eventually start with his father, Wayne. “When we decided to start our own company, what I saw at the time was lead times, on average, were a week, a week, a week,” he explains. “And I went to market with third business day after receipt of order, and that caught a lot of people’s attention.”

Fulfilling that third-day promise meant equipping the plant properly, and Brewer credits Ben Liskey at The Haire Group for doing the heavy lifting. “I dealt with Ben at Carolina Container; he’s the guy who helped me get started,” said Brewer. “I started with a 35" flexo folder gluer, a 66" rotary die cutter, and a 74" rotary slotter, because I was at Carolina Container, and they had a lot of Ward (Machinery Co., now BW PaperSystems), and that’s what I knew.”

And the market responded. The box market in the Piedmont Triad is a typical industrial mix and mostly brown box, says Brewer. “I try not to fool anybody about us being a graphics house; the brown box market is where I cut my teeth at Carolina Container. It was industrial packaging, and that’s how we’ve grown.”

Brewer outlines the principal industries served by Package Crafters in North Carolina, those where his faster lead-time advantage has paid off: consumer goods, automotive, plastics, food and beverage, specialty chemicals, and firearms. He says the biggest growth within this industrial packaging segment has been in the large-box, or jumbo, format. “When you look at my equipment out there, you see some really big stuff,” Brewer says.

He explains that for his business model, large-format packaging fits a distinct niche, and one whose margins are, as it were, audible. “The industry is moving to all these high-speed flexos running 350 boxes a minute. and it’s going ‘10 cents, 10 cents, 10 cents, 10 cents.’ I’m out here, and I hear ‘12 dollars … 14 dollars.’ Everybody likes to hear that machine going tick, tick, tick, tick, tick, but how much revenue is being produced?”

Equipped for Success

Brewer has an instinct for opportunity in his market and a knack for equipping his plant to respond to it. Understanding the needs of his large-format box customers, he has, over the years, added a 66" x 125" Ward two-color flexo folder gluer with die-cut and a 75" x 185" Ward two-color flexo folder gluer. Rounding out the mix are a 115" Post specialty folder gluer and two Pioneer flatbed die cutters, a 110" and an 80", respectively. He says he “scours” the used-equipment market to find deals and, in these two instances, credits industry consolidation for providing him exactly what he needed. The 66" x 125" came from a plant closure; the 75" x 185" from the closure of a WestRock plant in Texas. Looking further around his market, he saw that no one else offered stitched boxes, so he added a stitcher to his mix as well. Now, when companies he calls on report glue-joint failures—for whatever reason—they become fertile ground for planting new business.

The only piece of new equipment purchased recently was a die cutter stacker from AG Stacker in Weyers Cave, Virginia. “My die cutter was just slammed, to the point that I thought I was going to have to add a second shift,” Brewer says. “What I came to realize is, the stacker is the tail that wags the dog. When I put the AG Stacker in, it sucked everything up—more production but no overtime, no second shift.”

Growth, Acquisition

Being an owner, Brewer is a member of an AICC-sponsored CEO Advisory Group. He joined the group in 2013, and at its first meeting in Southern California in the spring of 2014, he met John MacIntosh, president and owner of Creative Packaging in Savannah. MacIntosh founded Creative in 1997, a year after his stint as the executive director of the 1996 Summer Olympics sailing venue had ended.

“At the meeting, John made a comment that made my ears perk up about being interested in selling,” Brewer says. He explains that Creative’s calling card was its high service levels and being the only independent in a market dominated by integrated companies. “If I thought I was high-service, he was even higher-service. I saw a diamond in the rough and a great opportunity for the market.”

Creative Packaging’s Savannah market calls for more graphic work, due to the mix of customers in southeast Georgia— firearms, outdoor power equipment, and consumer products firms. “Compared to me, they did a lot more color work,” Brewer says. “They have a consumer products multicultural hair care company, so a lot of countertop display for bottled product. That was all the graphic side of it—the label part of it—and maybe a four-color direct print.”

Creative’s equipment inventory serves this customer base well. The company has a 37" x 96" McKinley two-color flexo folder gluer, a 50" x 110" S&S two-color flexo folder gluer with a die-cut section, a 66" x 80" Langston Titan two-color rotary die cutter, a 74" x 184" S&S onecolor rotary printer slotter, and a 49" x 65" Stock laminator.

Brewer and MacIntosh penned the deal in 2015. For Brewer and Package Crafters, the acquisition has meant an extended geographic reach, to be sure, but also what Brewer calls the “soft benefit of recognition in the marketplace.”

“People will say, ‘Oh, you have two locations. Oh, you have redundancy. Oh, you have additional capabilities.’” Operationally, the two locations function as one and are now linked via the Harry Rhodes ERP system. And in this past year, during the middle of the COVID-19 pandemic, Brewer relocated Creative Packaging into a larger brand-new 40,000-square-foot building.

Key People

Brewer has assembled a talented and motivated crew behind him. His longest-serving colleague on the management team is Alan Deal, sales manager. Deal was part of the original group of six managers, along with Gary Brewer, Wayne Brewer, Steven Vaughn, Billy McCall, and Tom Slate, who formed the nucleus of the company in 2002. “Alan was one of my original employees,” says Brewer. “He looked at me and said, ‘Let me get this straight: You want to start a sheet plant with no customers against some of the biggest competitors around?’ And I was, like, ‘Yeah.’ And it attracted him.”

Kimberly Potter is customer service manager, and when she joined the Package Crafters team four years ago, she brought her experience in running a printing plate and cutting die shop with her father. “I used to buy print plates from her,” says Brewer. “She and her father had a print plate shop, Target Graphics.”

Potter’s familiarity with tooling and its specifications are invaluable in ensuring the accuracy of customers’ orders and delivery schedules. Potter says that the most rewarding part of her job is interaction with customers. “Most rewarding is definitely being able to work one on one with the customers to meet and exceed their expectations,” she says. “It’s always nice to have that interaction and that relationship that you have over time.”

Shawn Bragan, plant manager, came to Package Crafters three years ago from a Packaging Corp. of America (PCA) plant in the Atlanta suburb of East Point. Before working at PCA, he worked at another independent, Container Service in Ringgold, Georgia. Bragan says he appreciates the opportunities afforded in an independently owned box plant. “Working for Gary has been one of the best jobs I’ve ever had,” he says. “He gives me the freedom to do what I want to do.”

Bragan works hard to ensure that workers under his charge are motivated to do their best. “Keep the morale up,” he says. “Pat them on the back, tell them they’re doing a good job. They get a good

A ‘FRACTIONAL’ CFO? MIKE SPOHN AT PACKAGE CRAFTERS EXPLAINS

Controller, accountant, finance director—these titles, found among those companies responding to AICC’s 2020 Salary, Hourly Wage & Benefit Survey, bespeak the responsibility for the financial health of a company, and often more. But what is a “fractional” chief financial officer (CFO)? Michael Spohn, CFO at Package Crafters, explains that a fractional CFO is one whose time is split among several client companies. The concept, he says, is gaining traction in the United States and elsewhere as firms seek CFO-level expertise but do not wish to have that person in their full-time employ. Spohn, having finance and accounting degrees from University of North Carolina Greensboro and High Point University, respectively, is a principal at NextGen CFO in High Point. Founded in 2010, NextGen CFO has grown to be the largest provider of fractional CFO services in the Piedmont Triad region of North Carolina. According to Spohn, the principal advantage of fractional CFOs is to leverage CFO-level expertise to enhance the value of the business for owners and shareholders. “The business owner usually wants a full-time person in that role because it’s a safety net,” he says. “A fractional CFO is the same concept. I’m only putting in a couple days a week, but you’re getting CFO-level expertise.” Spohn currently serves seven other client companies in addition to Package Crafters. Thus, he brings with him an outside perspective from diverse manufacturing, distribution, financial services, and retail firms. His service to Gary Brewer, CEO of Package Crafters, has included advice on real estate transactions, banking negotiations, and due diligence in the acquisition of other companies. In the real estate case, it was a nearby 60,000-square-foot building, a third of which Package Crafters uses for warehousing. “Gary was looking for some additional space and was considering leasing 20,000 feet of it,” Spohn explains. “I said, ‘Gary, you might as well buy the whole thing.’” Brewer did; he’s now receiving lease income from the building.

In another instance, in his first year at Package Crafters, Spohn noticed unusually high cash balances, and he urged Brewer to use this cushion to begin taking discounts on his principal expenditures for sheets and other raw materials. Says Spohn, “In the first year, we saved $140,000, which is three times what he pays me.”

Spohn brought no expertise in the corrugated industry with him to Package Crafters when he began five years ago. In fact, he admits he first looked at the industry with a jaundiced eye. “My first impression was there is no way that a company selling corrugated boxes could make money,” he recalls. “It’s pennies, and if you’re multiplying pennies you usually don’t get to large numbers. I was proven wrong quickly.” For more information about the fractional CFO concept, visit www.nextgencfo.com.