Machinery and equipment manufacturers are benefiting from the improvement in the overall manufacturing economy, according to a new study from Grant Thornton, but the firm says the sector is being fundamentally reshaped by a "complex mix of market and regulatory factors."

Increased manufacturing activity "will spur purchases of equipment in addition to the increased export demand for machinery in developing countries, and will be fueled by an extension of certain government credits and incentives," says Wally Gruenes, Grant Thornton's national managing partner, in the study, "A Well-Oiled Machine: Maximizing Machinery and Equipment Opportunities, Minimizing Risks." In 2010, new machinery orders were estimated at $288.8 billion, an increase of 21.1% over 2009.

Machinery exports were also up more than 20% in 2010, to $137.56 billion. In 2010, the United States had a favorable trade balance, exporting $32.07 billion more in machinery than it imported.

Gruenes notes that with the recovery taking hold, there are "increasing opportunities for strategic buyers, business sellers and those looking to pull cash out of their businesses." The report notes that merger and acquisition activity is strong and private equity firms are holding $500 billion in capital.

To take advantage of the recovery, the report says, now is the time for strategic buyers to make acquisitions.The report cites five "megadeals" that occurred in the fourth quarter of 2010, including Caterpillar's purchase of Bucyrus International for $8.6 billion and ABB's acquisition of Baldor Electric for $4.2 billion. "Given the robust M&A activity in this sector, machinery and equipment businesses have a good chance of finding a strategic buyer in this market," says Ian Cookson, director, Grant Thornton Corporate Finance.

Despite the concerns of businesses about taxes, the report notes that many equipment manufacturers are not taking advantage of a variety of tax benefits. For example, the 2010 Tax Relief Act "offers 100% first-year depreciation for qualified assets (those with depreciable lives of less than 20 years) placed in service after Sept. 8, 2010, but no later than Dec. 31, 2011."

Another opportunity comes from the Small Business Jobs and Credit Act of 2010, which extends Section 179 expensing to machinery and equipment purchased and installed during the 2011 tax year. The report notes that a company can expense up to $500,000 in equipment purchases made in the current year. Moreover, when Section 179 expensing is exhausted, a company can "transfer the remainder of their investment to bonus depreciation."

Gruenes says the inability of manufacturers, particularly small-to-medium size firms, to recognize these tax benefits is cause for concern. He notes that such firms are considered the "key to the economic recovery" and failure to take advantage of tax breaks provides less money for investment. He says the complexity of the tax code needs to be addressed.

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