CHAPTER 12. MANUFACTURER IMPACT ANALYSIS

12.1 INTRODUCTION

................................ ................................ ............................. 12

- 1 12.2 METHODOLOGY

................................ ................................ ............................ 12

- 1 12.2.1 Phase I: Industry Profile

................................ ................................ ..................... 12

- 2 12.2.2 Phase II: Industry Cash

- Flow Model and Interview Guide

............................... 12

- 2 12.2.2.1 Industry Cash

- Flow Analysis

................................ ............................... 12

- 2 12.2.2.2 Interview Guide

................................ ................................ ................... 12

- 3 12.2.3 Phase III: Subgroup Analysis

................................ ................................ ............. 12

- 3 12.2.3.1 Manufacturing Interviews

................................ ................................ .... 12

- 3 12.2.3.2 Revised Industry Cash

- Flow Analysis

................................ ................. 12

- 3 12.2.3.3 Manufacturer Subgroup Analysis

................................ ........................ 12

- 4 12.2.3.4 Manufacturing Capacity Impact

................................ .......................... 12

- 5 12.2.3.5 Employment Impact

................................ ................................ ............. 12

- 5 12.2.3.6 Cumulative Regulatory Burden

................................ ........................... 12

- 6 12.3 GRIM INPUTS AND ASSU MPTIONS

................................ ............................ 12

- 6 12.3.1 Overview of the GRIM

................................ ................................ ...................... 12

- 6 12.3.2 Sources for GRIM Inputs

................................ ................................ ................... 12

- 7 12.3.2.1 Corporate Annual Reports

................................ ................................ ... 12

- 7 12.3.2.2 Standard and Poor’s Credit Ratings

................................ ..................... 12

- 8 12.3.2.3 Shipment Model

................................ ................................ ................... 12

- 8 12.3.2.4 Engineering Analysis

................................ ................................ ........... 12

- 8 12.3.2.5 Manufacturer Interviews

................................ ................................ ...... 1 2

- 8 12.3.3 Financial Parameters

................................ ................................ .......................... 12

- 8 12.3.4 Corporate Discount Rate

................................ ................................ .................... 12

- 9 12.3.5 Trial Standard Level s

................................ ................................ ....................... 12

- 11 12.3.6 NIA Shipment Forecast

................................ ................................ .................... 12

- 12 12.3.6.1 Base

- Case Shipment s Forecast

................................ .......................... 12

- 12 12.3.6.2 Standards

- Case Shipments Forecast

................................ .................. 12

- 13 12. 3.7 Production Costs

................................ ................................ .............................. 12

- 13 12.3.8 Conversion Costs and Stranded Assets

................................ ............................ 12

- 14 12.3.8.1 Commercial Clothes Washer Conversion Costs

................................ 12

- 14 12.3.9 Markup Scenarios

................................ ................................ ............................ 12

- 15 12.3.9.1 Preservation of Gross Margin Percentage Markup Scenario

............. 12

- 16 12.3.9.2 Preservation of EB IT Markup Scenario

................................ ............. 12

- 16 12.4 INDUSTRY FINANCIAL I MPACTS

................................ ............................ 12

- 17 12.4. 1 Introduction

................................ ................................ ................................ ...... 12

- 17 12.4.2 Commercial Clothes Washer Industry Financial Impacts

............................... 12

- 19 12.5 IMPACTS ON THE LOW

- VOLUME COMMERCIAL CL OTHES WASHER MANUFACTURER

................................ ................................ ........................ 12

- 21 12.6 OTHER IMPACTS

................................ ................................ .......................... 12

- 23 12.6.1 Employment

................................ ................................ ................................ ..... 12

- 23 12.6.2 Production Capacity

................................ ................................ ......................... 12

- 25 12.6.3 Cumulative Regulatory Burden

................................ ................................ ....... 12

- 26

12

- i12.6.3.1 DOE Regulations for Other Products Produced by Commercial Clothes Washer Manufacturers

................................ ................................ ......... 12

- 26 12.6.3.2 Other Regulations That Could Impact Commercial Clothes Washer Manufacturers

................................ ................................ ...................... 12

- 27 12.7 CONCLUSION

................................ ................................ ................................ 12

- 28 12.7.1 Commercial Clothes Washers

................................ ................................ .......... 12

- 28

LIST OF TABLES

Table 12.2.1 SBA and NAICS Classification of Small Businesses Potentially Affected by This Rulemaking

................................ ................................ ................................ 12

- 5 Table 12.3.1 Financial Parameters based on 2006

– 2012 Weighted Company Financial Data

................................ ................................ ................................ .................... 12

- 9 Table 12.3.2 Cost of Equity Calculation

................................ ................................ ...... 12

- 10 Table 12.3.3 Cost of Debt Calculation

................................ ................................ ......... 12

- 11 Table 12.3.4 Trial Standard Levels for Commercial Clothes Washers

....................... 12

- 11 Table 12.3.5 Total Base

- Case 2018 NIA Shipment s

................................ ................... 12

- 12 Table 12.3.6 Base

- Case Distribution of Efficiencies for Front

- Loading Commercial Clothes Washers in 2018

................................ ................................ ................. 12

- 12 Table 12.3.7 Base

- Case Distribution of Efficiencies for Top

- Loading Commercial Clothes Washers in 2018

................................ ................................ ................. 12

- 12 Table 12.3.8 MPC Breakdown for Front

- Loading Commercial Clothes Washers

...... 12

- 14 Table 12.3.9 MPC Breakdown for Top

- Loading Commercial Clothes Washers

........ 12

- 14 Table 12 .3.10 Product Conversion Costs for Front

- Loaders by EL

............................ 12

- 15 Table 12.3.11 Product Conversion Costs for Top

- Loaders by EL

.............................. 12

- 15 Table 12.3.12 Capital Conversion Costs for Front

- Loaders by EL

............................. 12

- 15 Table 12.3.13 Capital Conversion Costs for Top

- Loaders by EL

............................... 12

- 15 Table 12.3.14 Preservation of EBIT Markups for Front

- Loading Commercial Clothes Washers

................................ ................................ ................................ ............ 12

- 16 Table 12.3.15 Preservation of EBIT Markups for Top

- Loading Commercial Clothes Washers

................................ ................................ ................................ ............ 12

- 17 Table 12.4.1 Manufacturer Impact Analy sis for Commercial Clothes Washers

– Preservation of Gross Margin Percentage Markup Scenario

........................... 12

- 19 Table 12.4.2 Manufacturer Impact Analysis for Commercial Clothes Washers

– Preservation of EBIT Markup Scenario

................................ ........................... 12

- 19 Table 12.6.1 Potential Changes in the Total Number of Domestic Commercial Clothes Washer Production Workers in 2018

................................ ............................... 12

- 24 Table 12.6.2 Other DOE and Federal Actions Aff ecting the Commercial Clothes Washer Industry

................................ ................................ ................................ ............ 12

- 27

LIST OF FIGURES

Figure 12.3.1 Using the GRIM to Calculate Cash Flow

................................ ................ 12

- 7 Figure 12.4.1 Annual Industry Net Cash Flows for Commercial Clothes Washers (Preservation of Gross Margi n Markup Scenario)

................................ ........... 12

- 20

12

- iiFigure 12.4.2 Annual Industry Net Cash Flows for Commercial Clothes Washers (Preservation of EBIT Markup Scenario)

................................ ........................ 12

- 20 Figure 12.6.1 Commercial Clothes Washer Domestic Production Employment by Year

................................ ................................ ................................ .......................... 12

- 25

12

- iiiCHAPTER 12. MANUFACTURER IMPACT ANALYSIS

12.1 INTRODUCTION

In determining whether a standard is economically justified, the U.S. Department of Energy (DOE) is required to consider “the economic impact of the standard on the manufacturers and on the consumers of the products subject to such a standard.” (42 U.S.C. 6295(o)(2)(B)(i) ) The statute also calls for an assessment of the impact of any lessening of competition as determined in writing by the Attorney General. Id . DOE conducted a manufacturer impact analysis (MIA) to estimate the financial impact of more strin gent energy conservation standards on manufacturers of commercial clothes washer s, and assess the impact of such standards on direct employment and manufacturing capacity.

The MIA has both quantitative and qualitative aspects. The quantitative part of the MIA primarily relies on the Government Regulatory Impact Model (GRIM), an industry cash

- flow model adapted to the equipment classes covered by this rulemaking. The GRIM inputs include information on industry cost structure, shipments, and pricing strategi es. The GRIM’s key output is the industry net present value (INPV) , which is the sum of discounted industry annual cash

flow s over the analysis period . The model estimates the financial impact of more stringent energy conservation standards by comparing ch anges in INPV between a base case and the various trial standard levels (TSLs) in the standards case. The qualitative part of the MIA addresses product characteristics, manufacturer characteristics, market and product trends, as well as the impact of stand ards on subgroups of manufacturers.

12.2 METHODOLOGY

DOE conducted the MIA in three phases. Phase I, “Industry Profile,” consisted of preliminary research directed at characterizing the commercial clothes washer manufacturing industry. This research involved c ollecting data on market share, sales volumes and trends, pricing, employment, and the industry financial structure.

In Phase II, “Industry Cash Flow Model and Interview Guide ,” DOE created a framework GRIM to analyze the economic impact of amended energy conservation standards on the commercial clothes washer manufacturing industry as a whole. The DOE also developed a manufacturer interview guide to gather additional information on the potential impacts on manufacturers in Phase III

. In Phase III, “Subgroup Impact Analysis,” DOE interviewed manufacturers representing an estimated 98 percent of the commercial clothes washer market. Interviewees included manufacturers with various market shares and product focus, providing a representati ve cross

section of the industry. During interviews, DOE discussed financial topics specific to each manufacturer and obtained each manufacturer’s view of the industry. The interviews provided DOE with valuable information for evaluating the impacts of ame nded energy conservation standards on manufacturer cash flows, investments, and employment.

12

- 112.2.1 Phase I: Industry Profile

In Phase I of the MIA, DOE prepared a profile of the commercial clothes washer industry that built upon the market and technology assess ment prepared for this rulemaking. (See chapter 3 of this final rule Technical Support Document (TSD)). Before initiating the detailed impact studies, DOE collected information on the present and past market structure and characteristics of the industry, t racking trends in market share, product attributes, product shipments, manufacturer markups, and the cost structure for various manufacturers.

The profile also included a top

- down analysis of manufacturers in the industry using Security and Exchange Commi ssion (SEC) 10

– K filings

, a Standard & Poor ’s (S&P) stock reports, b and corporate annual reports released by both public and privately held companies. DOE used this and other publicly available information to derive preliminary financial inputs for the GRIM ( e.g. revenues; cost of goods sold; depreciation; selling, general and administrative expenses (SG&A); and research and development (R&D) expenses).

12.2.2 Phase II: Industry Cash

- Flow Model and Interview Guide

Phase II focused on the financial impacts of amended energy conservation standards on the commercial clothes washer manufacturing industry as a whole. Amended energy conservation standards can affect manufacturer cash flows in three distinct ways: (1) by c reating a need for increased investment, (2) by raising production costs per unit, and (3) by altering revenue due to higher per

- unit prices and/or possible changes in sales volumes. DOE created a framework GRIM to analyze the economic impact of amended en ergy conservation standards on the commercial clothes washer manufacturing industry as a whole

. In p reparing the GRIM , DOE used the financial values derived during Phase I and the shipment assumptions from the NIA. Additionally , DOE prepared a written guid e for manufacturer interviews to collect additional data critical to develop ing other inputs for the GRIM

.
12.2.2.1 Industry Cash

- Flow Analysis

The GRIM uses several factors to determine a series of annual cash flows over a period from the announcement year of the amended energy conservation standards until thirty years after the standards’ compliance date. INPV is the sum of these annual cash flows discounted by the industry weighted average cost of capital. Inputs to the GRIM include the manufacturing costs, marku ps, and shipment forecasts developed in other analyses as well as the industry weighted average financial parameters developed in Phase I

. DOE derived the manufacturing costs from the engineering analysis as presented in chapter 5 of th is final rule TSD , information provided by the industry, publicly available financial reports, and interviews with manufacturers. To examine the range of possible impacts, DOE developed alternative markup scenarios based on discussions with manufacturers. DOE’s shipments a nalysis, presented in chapter 9 of the final rule TSD, provided the basis for the shipment projections. DOE derived the financial parameters using publicly available reports and revised them using information received during confidential manufacturer inter views. DOE used the GRIM to compare INPV in the base case with INPV at

a A vailable online at www.sec.gov

. b A vailable online at www2.standardandpoors.com

.

12

- 2various TSLs (the standards cases). The difference in INPV between the base and standards cases represents the financial impact of the amended standard on manufacturers.

12.2.2.2 Interview Guid e
During Phase III of the MIA, DOE interviewed manufacturers of commercial clothes washer s to gather information on the effects of amended energy conservation on revenues and finances, direct employment, capital assets, and industry competitiveness. Before the interviews, DOE distributed an interview guide to representatives of each participating manufacturer. The interview guide provided a starting point to help identify relevant issues and understand the impacts of amended energy conservation standards on individual manufacturers or subgroups of manufacturers. The information DOE received from these meetings is protected by non

disclosure agreements and resides with DOE’s contractors. The topics covered as part of these interviews include (1) key issues re lated to this rulemaking; (2) engineering and life cycle cost; (3) manufacturer markups and profitability; (4) financial parameters; and (5) conversion costs. The interview guide is presented in a ppendix 12

- A.

12.2.3 Phase III: Subgroup Analysis

While conducting the MIA, DOE interviewed a representative cross

- section of commercial clothes washer manufacturers. The MIA interviews broadened the discussion to include business

- related topics. DOE sought to isolate key issues and concerns

, to obtain feedback from indu stry on the approaches used in the GRIM , and to identify key manufacturer subgroups for analysis.

12.2.3.1 Manufacturing Interviews

The information gathered in Phase I and the cash

- flow analysis performed in Phase II are supplemented with information gathered from manufacturer interviews in Phase III. The interview process provides an opportunity for interested parties to express their views on important issues privately, allowing confidential or sensitive information to be considered in the rulemaking process.

DOE used these interviews to tailor the GRIM to reflect the unique financial characteristics of the commercial clothes washer manufacturing industry. Companies with various market shares and product focus were interviewed to provide a representation of the industry. Interviews were scheduled well in advance to provide every opportunity for key individuals to be available for comment. Although a written response to the questionnaire was acceptable, DOE sought interactive interviews, as they help to clarify r esponses and identify additional issues. The resulting information provides valuable inputs to the GRIM.

12.2.3.2 Revised Industry Cash

- Flow Analysis

In Phase II of the MIA, DOE provided manufacturers with preliminary financial figures for review and evaluation. D uring the interviews, DOE requested comments on the values it selected for the parameters. DOE revised its industry cash

- flow model based on this feedback. Section 12.3.3 provides more information on how DOE calculated the parameters.

12

- 312.2.3.3 Manufacturer Subgroup Analysis Using average cost assumptions to develop an industry cash flow estimate is not adequate for assessing differential impacts among subgrou ps of manufacturers. Small

, low

- volume manufacturers, or manufacturers exhibiting a cost structure that differs significantly from the industry average could be more negatively affected. Ideally, DOE would consider the impact on every manufacturer individu ally; however, it typically uses the results of the industry characterization to group manufacturers exhibiting similar characteristics. During the interview process, DOE discussed the potential subgroups and subgroup members that have been identified for the analysis. DOE looked to the manufacturers and other stakeholders to suggest what subgroups or characteristics are the most appropriate for the analysis.

Small

- Business Manufacturer s
DOE used the Small Business Administration (SBA) small business size standards as amended by the Office of Management and Budget on January 1, 2012, and effective January 7, 2013 , and the North American Industry Classification System (NAICS) code, presented in Table 12.2

. 1 , to determine whether any small entities would be affected by the rulemaking. c For the equipment classes under review, the SBA bases its small business definition on the total number of employees for a business including the total employee count of a parent company and its subsidiaries. An aggregated business entity with fewer employees than the liste d limit is considered a small business.

As there is currently an energy conservation standard for commercial clothes washers, DOE used its own publically available Compliance Certification Database 1 as a starting point to identify manufacturers of commerc ial clothes washers. Additionally, DOE used public certification databases provided by the California Energy Commission (CEC) 2 and ENERGY STAR 3 to identify commercial clothes washer manufacturers. DOE then checked this list of commercial clothes washer man ufacturers against the employee limit for small businesses using reports from vendors such as Dun & Bradstreet. DOE also consulted publicly available data from the Small Business Association (SBA) to determine the presence of any additional small businesse s in the industry. Further, DOE asked interested parties and industry representatives if they were aware of other small business manufacturers and checked any companies identified against the small business criteria

.
For the Framework document , DOE consid ered businesses with primary NAICS code 333312, “ Commercial Laundry, Dry C leaning , and Pressing Machine Manufacturing

. ” A search of companies operating under this 2007 NAICS code indicated that there was potentially one small business that manufactures commercial clothes washers covered by this rulemaking. DOE has since confirmed that this small business is not a manufacturer , and thus will not be considered for the purposes of this small business analysis . In 2012, commercial laundry manufacturing was r olled into NAICS code 333318, “ Other Commercial and Service Industry Machinery Manufacturing ,” d DOE has updated its search for small business manufacturers,

c The size standards are available on the SBA’s website at www.sba.gov/content/table

- small

- business

- siz e

standards

. d NAICS code 333318 includes all manufacturing of commercial and service industry equipment, except optical instruments and lenses, and photographic and photocopying equipment , and has a size limit of 1,000 employees, as defined by the Small B usiness Administration.

12

- 4using this new NAICS classification and corresponding size limit provided by the Small Business Ad ministration. During this updated research, DOE did not identify any manufacturer of commercial clothes washer s that qualif ies as a small business as specified by the SBA employee limits

.

Table 12.2

. 1 SBA and NAICS Classification of Small Businesses Potentially Affected by This Rulemaking Industry Description Revenue Limit Employee Limit NAICS Commercial Laundry, Dry

- cleaning , and Pressing Machine Manufacturing N/A 500 333312

Other Commercial and Service Industry Machinery Manufacturing N/A 1,000 333318

Low

- Volume Manufacturers

While no small business manufacturers of commercial clothes washers were identified during interviews , o ne manufacturer was identified as ha ving significant commercial clo thes washer market share, but much low er revenues than its diversified competitors . This manufacturer ’ s business is highly concentrated in the production of both commercial and residential laundry products. Still , it is not a small business per the SBA definition for manufacturers of commercial clothes washers . DOE subsequently assigned this manufacturer its own sub

- category, the “Low

- Volume Manufacturer” ( LVM ) , to evaluate the disproportionate impacts of a mended standards for commercial clothes washers on this manufacturer. The analysis of impacts on this subgroup is found in section 12.5

.
12.2.3.4 Manufacturing Capacity Impact

One possible outcome of amended energy cons ervation standards is the obsolescence of existing manufacturing assets, including tooling and production equipment. The manufacturer interview guide contains a series of questions to help identify impacts of amended standards on manufacturing capacity, sp ecifically capacity utilization and plant location decisions in the United States and North America, with and without amended standards; the ability of manufacturers to upgrade or remodel existing facilities to accommodate the new requirements; the nature and value of any stranded assets; and estimates for any one

- time changes to existing plant, property, and equipment (PPE). DOE’s estimates of the one

- time capital changes and stranded assets affect the annual cash flow projections in the GRIM. These estimates can be found in section 12.3.8 0 ; DOE’s discus sion of the capacity impact can be found in section 12.6.2

.
12.2.3.5 Employment Impact

The impact of amended energy conservation standards on employment is an important consideration in the rulemaking process. To assess how domestic direct employment patterns might be affected, the inter views explored current employment trends in the commercial clothes washer industry. The interviews also solicited manufactur er views on changes in employment patterns that may result from more stringent standards. The employme nt impacts section of the interview guide focused on current employment levels associated with manufacturers at each production facility, expected future employment levels with and without amended energy

12

- 5conservation standards, and differences in workforce skills and issues related to the retraining of employees. The employment impacts are reported in section 12.6.1

.
12.2.3.6 Cumulative Regulatory Burden

DOE seeks to mitigate the overlapping effects of regulation on manufacturers of commercial clothes washers. These effects may be the result of other regulatory actions affecting commercial clothes washers, or of amended energy conservation standards for other products and equipment made by the same manufacturers. DOE identified regulations relevant to commercial clothes washer manufacturers using its o wn research and discussions with manufacturers . A d iscussion of the cumulative regulatory burden of energy conservation standards and the impact on manufacturers of multiple, product

- specific regulatory actions can be found in section 12.6.3

.

12.3 GRIM INPUTS AND ASSU MPTIONS

The GRIM serves as the main tool for assessing the impacts on industry due to amended energy conservation standards. DOE relies on several sources to obtain inputs for the GRIM. Data and assumptions from these sources are then fed into an accounting model that calculates the industry cash flow both with and without amended energy conservation standards.

12.3.1 Overview of the GRIM

The basi c structure of the GRIM, illustrated in Figure 12.3

. 1 , is an annual cash flow analysis that uses manufacturer prices, manufacturing costs, shipments, and industry financial information as inputs, and accepts a set of regulatory condit ions such as changes in costs, the need for additional investments, and changes in associated margins. The GRIM spreadsheet uses a number of inputs to arrive at a series of annual cash flows, beginning with the present year, 201 4 , and continuing to 204 7 , 3 0 years after the compliance year of the rulemaking . The model calculates the INPV by summing the stream of annual discounted cash flows during this period. 4

12

- 6Figure 12.3

. 1 Using the GRIM to Calculate Cash Flow

The GRIM projects cash flows using standard accounting principles and compares INPV between the base

- case and the standard

- case scenario s

. The difference in INPV between the base case and the standard case(s) represents the estimated financial impact of the amended energy conservation standards on manufacturers. Appendix 12

- B provides more technical details and user information for the GRIM.

12.3.2 Sources for GRIM Inputs

The GRIM uses several different sources for data inputs in determining industry cash flo w. These sources include corporate annual reports, company profiles, U.S. Census data, credit ratings, the shipments model, the engineering analysis, and the manufacturer interviews.

12.3.2.1 Corporate Annual Reports

Corporate annual reports for publicly held compa nies are freely available to the general public through the SEC as filings of F orm 10

- K. Additionally, some privately held companies publish annual financial reports on their corporate websites. DOE developed initial financial inputs to the GRIM by examini ng the publicly available annual reports of companies primarily engaged in the manufacture of home appliances whose combined product range includes commercial clothes washer s. As these companies do not provide detailed information about their individual pr oduct lines, DOE used the aggregate financial information at the corporate level in developing its initial estimates of the financial parameters to be used in the GRIM. In doing so, DOE assumes that the industry

- average figures calculated for these compani es were representative of manufacturing for commercial clothes washer s. These figures were later revised using feedback from interviews to be representative of the commercial clothes washer manufacturing industry . DOE used corporate annual reports to deriv e the following initial inputs to the GRIM:

• Tax rate ;

• Working capital ;

• SG&A ;

• R&D ;

• Depreciation ;

• Capital expenditures ; and

• Net PPE

.

12

- 712.3.2.2 Standard and Poor ’s Credit Ratings

S&P provides independent credit ratings, research, and financial information. DOE relied on S&P reports to determine the industry’s average cost of debt when calculating the weighted average cost of capital.

12.3.2.3 Shipment Model

The GRIM used shipment projections derived from DOE’s shipments model in the national impact analysis (NIA). The model rel ied on historical shipments data for commercial clothes washer s. Chapter 10 of the final rule TSD describes the methodology and analytical model DOE used to forecast shipments.

12.3.2.4 Engineering Analysis

DOE conducted the engineering analys i s for this rulemakin g using the efficiency

- level approach, combined with the cost

- assessment approach, to develop a cost for each efficiency level for commercial clothes washer s. During this analysis, DOE used a manufacturing cost model to develop manufacturer production cost (MPC) estimates for commercial clothes washer s. The analysis yielded the labor, materials, overhead, and total production costs for products at each efficiency level. The engineering analysis also estimated a manufacturer markup to determine the manufactu rer selling price (MSP) for each product at every efficiency level. Chapter 5 of the final rule TSD describes the engineering analysis in detail.

12.3.2.5 Manufacturer Interviews

As part of the MIA, DOE conducted interviews with a representative cross

- section of

ma nufacturers. Through these discussions, DOE obtained information to determine and verify GRIM input assumptions. Key topics discussed during the interviews and reflected in the GRIM include:

• Capital conversion costs (one

- time investments in PPE);

• Pro duct conversion costs (one

- time investments in research, product development, testing, and marketing);

• Product cost structure, or the portion of the MPCs related to materials, labor, overhead, and depreciation costs;

• Projected total shipment and ship ment distribution mix; and

• MPCs estimated in the engineering analysis.

12.3.3 Financial Parameters

In the manufacturer interviews, DOE used the financial parameters from 200 6 to 201 2 for three manufacturers of commercial clothes washer s w hich command a combined market share of

over 95 percent as a starting point for determining the commercial clothes washer industry financial parameters. The industry financial parameters were determined by weighting each manufacturer’s individual financial parameters b y their respective market share, and correcting for the fraction of the market that was not represented. Table 12.3

. 1 below shows the data used to determine the initial financial parameter estimates.

12

- 8Table 12.3

. 1 Financial Parameters based on 200 6

– 2012 Weighted Company Financial Data

Parameter Industr y Weighted Average Manufacturer A Manufacturer B Manufacturer C

Tax Rate (% of Taxable Income) 29.2 34.8 23.5 17.6

Working Capital (% of Revenue) 9.5 15.7 3.2 2.4

SG&A (% of Revenue) 11.7 14.1 9.2 17.2

R&D (% of Revenue) 2.5 2.3 2.7 1.7

Depreciation (% of Revenue) 3.7 4.3 3.1 4.9

Capital Expenditures (% of Revenue) 2. 1 2.1 2.1 5.6

Net Property, Plant, and Equipment (% of Revenues) 16. 0 15.0 16.9 22.6

During interviews, manufacturers were asked to provide their own figures for the parameters listed in Table 12.3

. 1

. Where applicable, DOE adjusted the financial parameters according to the manufacturers’ feedback.

12.3.4 Corporate Discount Rate

A company’s ass ets are financed by a combination of debt and equity

, and the weighted average cost of capital (WACC) represents the minimum rate of return necessary to cover the debt and equity obligations manufacturers use to finance operations. The WACC is the total co st of debt and equity weighted by their respective proportions in the capital structure of the
company.

DOE estimated the WACC for the commercial clothes washer manufacturing industry based on three representative companies, using the following formula:

WACC = After

- Tax Cost of Debt x (Debt Ratio) + Cost of Equity x (Equity Ratio)

The cost of equity is the rate of return that equity investors (including, potentially, the company) expect to earn on a company’s stock. These expectations are reflected in th e market price of the company’s stock. The capital asset pricing model (CAPM) provides one widely used means to estimate the cost of equity. According to the CAPM, the cost of equity (expected return) is:

Cost of Equity = Risk

- free Rate of Return + β x Ris k Premium

where:

1 2

- 9Risk

- free rate of return is the rate of return on a “safe” benchmark investment, typically considered the short

- term Treasury Bill (T

- Bill) yield. In practice, investors use a variety of different maturity T

- Bills to estimate the risk

- fre e rate. DOE used the 10

- year T

- Bill return because it captures long

- term inflation expectations and is less volatile than short

- term rates. The risk

- free rate is estimated to be approximately 5. 2 percent, which is the average 10

- year T

- Bill return between 19 28 and 201 2

. Risk premium is the difference between the expected return on stocks and the risk

- free
rate of return

. DOE used the average annual return on the S&P 500 between 1928 and 2012 as the expected return on stocks to arrive at an estimated market risk premium of 6. 1 percent.
Beta (β) is the correlation between the movement in the price of the stock and that of the broader market. In this case, Beta equals one if the stock is perfectly correlated with the S& P 500 market index. A Beta lower than one means the stock is less volatile than the market index. Values for Beta are only available for publicly traded companies.

DOE used the capital asset pricing model to calculate the cost of equity for th r e e commercia l clothes washer manufacturers whose combined market share is over 95 percent

. DOE determined that the industry

- average cost of equity for the commercial clothes washer industry is 15. 7 percent ( see Table 12.3

. 2 ).

Table 12.3

. 2 Cost of Equity Calculation

Parameter Industry Weighted Average Manufacturer A Manufacturer B Manufacturer C

(a) Average Beta 1.7 2 1.75 1.75 1.03

(b) Yield on 10 Year T

- Bill (1928

– 2012) (%) 5.16

(c) Market Risk Premium (1928

– 2012) (%) 6.10

Cost of Equity (b) + [(a)*(c)] (%) 15. 67

Equity/Total Capital (%) 59.67 45.87 69.20 75.54

Bond ratings are a tool to measure default risk and arrive at a cost of debt. Each bond rating is associated with a particular spread. One way of estimating a company’s cost of debt is to treat it as a spread (usually expressed in basis points) over the ri sk

- free rate. DOE used this method to calculate the cost of debt for three manufacturers by using S&P and other estimates of corporate credit ratings and adding the relevant spread to the risk

- free rate.

Since proceeds from debt issuance are tax deductibl e, DOE adjusted the gross cost of debt by the industry

- average tax rate to determine the net cost of debt for the industry. DOE determined that the after

- tax industry

- average cost of debt for the commercial clothes washer industry is 4.9 percent

. Table 12.3

. 3 presents the derivation of the cost of debt and the capital structure of the industry ( i.e. the debt ratio (debt/total capital)).

12

- 10Table 12.3

. 3 Cost of Debt Calculation

Parameter Industry Weighted Average Manufacturer A Manufacturer B Manufacturer C

S&P Bond Rating

-- BBB BBB BBB

(a) Yield on 10 year T

- Bill (1927

– 2011) (%) 5.16

(b) Gross Cost of Debt (%) 6.76 6.76 6.76 6.76

(c) Tax Rate (%) 28.14 34.82 23.53 20.54

Net Cost of Debt (b) x[1

- (c)] (%) 4.8 6

Debt/Total Capital (%) 40. 33 54.13 30.80 24.46

Correcting for an inflation rate of 3.1 percent over the analysis period, DOE’s calculated value for the commercial clothes washer industry’s inflation

- adjusted WACC and the initial estimate of the discount rate is 8.2 percent. During interviews, manufacturers were asked to provide their estimate of the discount rate

. Subsequently, DO E adjusted the discount rate to 8.6 percent

.
12.3.5 Trial Standard Levels

DOE developed TSLs to analyze the impact on manufacturers of amended energy efficiency standards for two equipment classes of commercial clothes washer s

. Table 12.3

. 4 present s the TSLs and the corresponding equipment class efficiency levels based on Modified Energy Factor ( 10 CFR part 430, subpart B, appendix J2)

.
TSL 3 is comprised of the max

- tech efficiency level s for both equipment classes . TSL 2 is comprised of efficiency level 2 for front

- loading commercial clothes washers and efficiency level 1 for top

- loading commercial clothes washers

. TSL 1 is comprised of effic iency level 1 for each equipment class.

Table 12.3

. 4 Trial Standard Levels for Commercial C lothes W asher s

Equipment Class Base Case TSL 1 TSL 2 TSL 3 TSL 4
Front

- Loading Commercial Clothes Washers Efficiency Level Baseline EL 1 EL 2 EL 2 EL 3 MEF (using Appendix J2) 1.65 1.8 2.0 2.0 2.2
Top

- Loading Commercial Clothes Washers Efficiency Level Baseline EL 1 EL 1 EL 2 EL 2 MEF (using Appendix J2) 1.15 1.35 1.35 1.55 1.55

12

- 1112.3.6 NIA Shipment Forecast

The GRIM estimates manufacturer revenues based on total

- unit

- shipment forecasts and the distribution of these values by efficiency level. Changes in the efficiency mix at each standard level are a key driver of manufacturer finances. For this anal ysis, the GRIM used commercial clothes washer shipment data from the NIA

. Chapter 9 of the final rule TSD explains DOE’s calculations of total shipments in detail.

Table 12.3.5 shows total shipments forecast s for both equipment classes of commercial clothes washer s in 2018 , the year new standards for commercial clothes washers would take effect

.

Table 12.3

. 5 Total Base

- Case 201 8 NIA Shipments

Equipment Class Total Industry Shipments

Front

- Loading Commercial Clothes Washers 5 8

, 300
Top

- Loading Commercial Clothes Washers 1 32

, 100

12.3.6.1 Base

- Case Shipments Forecast

As part of the shipment analysis, DOE estimated the distribution of shipment s by efficiency level for both equipment classes of commercial clothes washer s. DOE held the base

case energy efficiency distribution constant throughout the forecast period. Table 12.3

. 6 and Table 12.3

. 7 show the base

- case distributions of shipments by efficiency level estimated in the NI A for the commercial clothes washer equipment classes.

Table 12.3

. 6 Base

- Case Distribution of Efficiencies for Front

- Loading Commercial C lothes W asher s in 201 8

Efficiency Level Baseline EL 1 EL 2 EL 3

MEF 1.65 1.8 2 2.2

% of Shipments 0 % 3 1 .0 % 69.0 % 0 .0 %

Table 12.3

. 7 Base

- Case Distribution of Efficiencies for Top

- Loading Commercial C lothes W asher s in 201 8

Efficiency Level Baseline EL 1 EL 2

MEF 1.15 1.35 1.55

% of Shipments 62.0 % 26.7 % 11.3 %

12

- 1212.3.6.2 Standards

- Case Shipments Forecast

To examine the impact of amended energy conservation standards on shipments, which in turn affects the INPV, DOE used the base

- case shipments described in the previous section as a point of comparison for shipments forecast in the standards case. For each TSL described in the standards case, DOE used the shipments forecasts developed in the NIA for commercial clothes washer s. DOE assumed the presence of cross

- price elasticity in determin ing efficiency distributions for the standards case , meaning that a portion of shipments moves from one equipment class to the other as the former becomes comparatively more expensive to produce

. Th e remaining portion of shipments for products that fall below the amended energy conservation standards are assumed to “roll

- up” to the new standards efficiency level for a given equipment class on the compliance date e and thereafter.

As in the shipments analysis, DOE assumed no relative price elasticity in the commercial clothes washer market, meaning that amended energy conservation standards that increase the first cost of commercial clothes washer s would lead to no change the number of total shipments

.
12.3.7 Production Costs

Changes in the MPCs of commercial clothes washer s can affect revenues, gross margins, and cash flow of the industry, making product cost data key GRIM inputs for DOE’s analysis. In the engineering analysis, DOE created separate cost curv es for the two commercial clothes washer equipment classes using data from tear

- downs to develop both the baseline MPCs and the incremental costs that correspond to the proposed design options. Generally, manufacturing higher efficiency products is more costly than manufacturing baseline products due to the use of more complex components.

The cost model disaggregated the MPCs at each efficiency level into material, labor, overhead, and depreciation. For materials, DOE used the incremental component and r aw material costs that correspond to the proposed design options at each EL. For labor, DOE estimated the labor contribution at each EL by examining how the proposed design options may influence manufacturing and assembly practices. For depreciation, DOE u sed a depreciation value that is consistent with historical information in SEC 10

- Ks. The remainder of total overhead was allocated to factory overhead.

Later, manufacturers validated these estimates and assumptions during interviews. DOE used the result ing MPCs and cost breakdowns as described in section 12.3.2.4 above, and further detailed in chapter 5 of the final rule TSD, for each efficiency l evel analyzed in the GRIM.

The MSP is comprised of production costs (the direct manufacturing costs or MPCs), non

production costs (indirect costs including SG&A), and profit. DOE calculated the MSPs for commercial clothes washer s by multiplying the MPCs b y the appropriate manufacturer markup for that product. Table 12.3.8 and Table 12.3

. 9 show the production cost estimates used in the GRIM for the representative equipment classes for commercial clothes washer s.

e The estimated compliance date for the commercial clothes washer energy conservation standard is 2018.

12

- 13Table 12.3

. 8 MPC Breakdown for Front

- Loading Commercial Clothes Washers

EL MEF WF Materials Labor Depreciation Overhead MPC Mfr. Markup MSP

EL1 1.80 4.5 $441.87 $97.76 $32.54 $272.06 $844.23 1.285 $1,084.84

EL2 2.00 4.0 $442.17 $97.71 $32.55 $272.11 $844.54 1.285 $1,085.23

EL3 2.20 3.7 $458.00 $99.43 $33.31 $273.42 $864.15 1.285 $1,110.43

Table 12.3

. 9 MPC Breakdown for Top

- Loading Commercial Clothes Washers

EL MEF WF Materials Labor Depreciation Overhead MPC Mfr. Markup MSP

EL1 1.35 8.8 $239.69 $65.27 $20.52 $206.92 $532.40 1.285 $684.13

EL2 1.55 6.9 $273.83 $75.39 $22.05 $200.76 $572.03 1.285 $735.06

12.3.8 Conversion Costs and Stranded Assets

Amended energy conservation standards typically cause manufacturers to incur one

- time conversion costs to bring their production facilities and equipmen t designs into compliance with new regulations. For the MIA, DOE classified these one

- time conversion co sts into two major
groups: product conversion costs and capital conversion costs. Product conversion costs are investments in research, development, testing, marketing, and other non

- capitalized costs focused on making equipment designs that comply with th e amended energy conservation standard. Capital conversion costs are investments in property, plant, and equipment needed to adapt or change existing production facilities so that new equipment designs can be fabricated and assembled. In the instance where changes to energy conservation standards result in the obsolescence of manufacturing capital, the un

- depreciated value of any obsolete equipment is considered a stranded asset. In addition to product and capital conversion costs, stranded assets also fact or into the GRIM’s calculation of annual cash flows. The following sections describe the inputs DOE used in the GRIM in greater detail.

12.3.8.1 Commercial C lothes W asher Conversion Costs

DOE based its estimates of the conversion cost s required to meet each TSL on confidential information received during manufacturer interviews. DOE asked manufacturers to estimate the ir investment s in product development and new manufacturing capital and their anticipated stranded capital assets at vario us efficiency levels. DOE then reviewed public information in the DOE Compliance and Certification, California Energy Commission ( CEC )

, and ENERGY STAR product databases

, as well as manufacturer websites to understand which products manufacturers would ne ed to upgrade at each efficiency level. DOE mapped manufacturers’ estimates of investments and stranded assets to a composite database of products to disaggregate their reporting and allocate the estimated costs across the various equipment classes and ef ficiency levels that each representative company manufactures . From this, DOE also developed an average cost estimate to bring non

- compliant products in each equipment class

12

- 14into compliance at each efficiency level. DOE applied these average cost estimate s to the remaining products in the database to arrive the compliance costs required by the remainder of industry. These figures were then added to the disaggregated estimates of individual manufacturer conversion costs to arrive at a total industry estimat e of product and capital conversion costs and stranded assets for each efficiency level of each equipment class

.

Table 12.3.10 Table 12.3

. 10 through Table 12.3

. 13 show DOE’s estimates of the product and capital conversion costs necessary for each commercial clothes washer equipment class at each efficiency level identified

. None of the manufacturers interviewed provided comment regarding poten tial stranded assets.

Table 12.3

. 10 Product Conversion Costs for Front

- Loaders by E L
EL ( J2 MEF) Product Conversion Costs (Millions 201 2 $) EL1 (1.80) $0.0 EL2 (2.00) $0.3 EL3 (2.20) $ 11

. 9

Table 12.3

. 11 Product Conversion Costs for Top

- Loaders by E L
EL ( J2 MEF) Product Conversion Costs (Millions 201 2 $) EL1 (1.35) $9.9 EL2 (1.55) $50. 6

Table 12.3

. 12 Capital Conversion Costs for Front

- Loaders by E L
EL (J2 MEF ) Capital Conversion Costs (Millions 201 2 $) EL1 (1.80) $0.0 EL2 (2.00) $0.0
EL3 (2.20) $24. 5

Table 12.3

. 13 Capital Conversion Costs for Top

- Loaders by E L
EL ( J2 MEF) Capital Conversion Costs (Millions 201 2 $) EL1 (1.35) $0.0 EL2 (1.55) $38. 7

12.3.9 Markup Scenarios

MSP is equal to MPC times a manufacturer markup. The MSP includes direct manufacturing production costs ( i.e.

, material, labor, depreciation, and overhead estimated in DOE’s MPCs) and all non

- production costs ( i.e.

, SG&A, R&D, and interest), along with profit.

In the base case, DOE used the same baseline markups calculated in the engineering analysis for both equipment classes. In the standards case, DOE modeled two markup scenarios to represent the uncertainty about the potential impacts on prices and profitability following the implementation of amended energy conservation standards: (1) a preservation of gross margin

12

- 15percentage markup scenario , and (2) a preservation of earnings before interest and taxes (EBIT) markup scenario . Modifying these markups from the base case to the standards cases yields different sets of impacts on manufacturers by changing industry revenu e and cash flow.

To calculate the baseline manufacturer markup, DOE evaluated publicly available financial information for manufacturers whose product offerings include commercial clothes washer s . During manufacturer interviews, DOE received feedback suppo rting the calculated 1. 2 8 5 baseline manufacturer markup. For both GRIM markup scenarios, DOE assumed a predominantly flat markup structure

, placing no premium on higher efficiency products.

12.3.9.1 Preservation of Gross Margin Percentage Markup Scenario

The preservation of gross margin percentage markup scenario assumes that the baseline markup of 1. 2 8 5 is maintained for all products in the standards case. As production costs increase with efficiency, this scenario implies that the absolute dollar markup will increase as well. This scenario represents the upper bound of industry profitability as manufacturers are able to fully mark up and pass through higher production costs to their customers.

12.3.9.2 Preservation of EBIT Markup Scenario

DOE also modeled the preservation of EBIT markup scenario to estimate a lower bound of profitability for the industry. This is similar to the preservation of gross margin percentage markup scenario with the exception that in the standards case, minimally c ompliant products lose a fraction of the baseline markup. The lower markup for minimally compliant products is derived by calibrating the markup for minimally compliant products such that industry

- wide EBIT in the
year after standards go into effect matche s EBIT of the same year in the base case. This scenario represents a more substantial impact to the commercial clothes washer industry in the form of reduced gross margin percentage as manufacturers vie to maintain the lowest possible prices for marginally compliant products while securing the same level of EBIT they saw prior to new and amended standards. While all compliant products receive the 1.2 8 5 markup in the preservation of gross margin percentage markup scenario, Table 12.3

. 14 through Table 12.3

. 15 list the calibrated markups used in the preservation of EBIT markup scenario.

Table 12.3

. 14 Preservation of EBIT Markups for Front

- Loading Comm ercial Clothes Washers

EL J2 MEF Minimally Compliant EL

EL 1 EL 2 EL 3

EL 1 1.80 1.285

EL 2 2.00 1.285 1.285

EL 3 2.20 1.285 1.285 1.282

12

- 16Table 12.3

. 15 Preservation of EBIT Markups for Top

- Loading Commercial Clothes Washers

EL J2 MEF Minimally Compliant EL

EL 1 EL 2

EL 1 1.35 1.285

EL 2 1.55 1.285 1. 277

12.4 INDUSTRY FINANCIAL I MPACTS

Using the inputs and scenarios described in the previous sections, DOE used the GRIM to estimate the financial impacts on the c ommercial clothes washer industry. The MIA uses two key financial metrics: INPV and annual cash flows. The main results of the MI A are reported in this section.

12.4.1 Introduction

The INPV measures the industry value and is used in the MIA to compare the economic impacts of different TSLs in the standards case. The INPV is different from DOE’s NPV, which is applied to the U.S. economy at large . The INPV is specific to the commercial clothes washer manufacturing industry, and is the sum of all annual net cash flows discounted at the industry’s WACC . The GRIM for the commercial clothes washer industry models cash flows from the present y ear, 201 4

, to 204 7 . This timeframe models both the short

- term impacts on the industry from the announcement of the standard until the compliance date in 2018 , and a long

- term assessment over the 30

- year analysis period immediately thereafter.

In the MIA, DOE compares the INPV at the base case (no amended energy conservation standards) to that at each TSL in the standards case. The difference between the base case and a standards case INPV is an estimate of the economic impacts that implementing that partic ular TSL would have on the industry. For the commercial clothes washer industry, DOE examined the two markup scenarios described above: the preservation of gross margin percentage markup scenario and the preservation of EBIT markup scenario. DOE ’s estimates of INPV for the full analysis period (201 5

– 2047) for the base case and at each TSL in the standards case are presented in Table 12.4

. 1 and Table 12.4

. 2 below. While INPV is useful for evaluating the long

- term effects of amended energy conservation standards, short

- term changes in cash flow are also important indicator s of the industry’s financial situation. For example, a large investment over one or two years could strain the industry’s capital reserves and cash flow

. Consequently, the sharp drop in financial performance could cause investors to flee, even if recovery is possible. Thus, a short

- term disturbance can have long

- term effects that the INPV cannot capture. To get an idea of the behavior of annual net cash flows, Figure 12.4

. 1 and Figure 12.4

. 2 below present the annual net or free cash flows from 201 4 through 20 47 for the base case and each TSL in the standards case.

12

- 17Annual cash flows are discounted to the year of the final rule publication

, 201 5 . Between 201 5 and the 201 8 compliance date, cash flows are driven by the level of conversion costs and the portion of these investments made e ach year. After the standard announcement dat e ( i.e. , the publication date of the final rule), industry cash flows begin to decline as companies use their financial resources to prepare for the amended energy conservation standard. The more stringent the amended energy conservation standard, the grea ter the impact on industry cash flows in the years leading up to the compliance date, as product conversion costs lower cash flows from operations and capital conversion costs increase outlays of cash for capital expenditures.

Free cash flow in the year t he amended energy conservation standards take effect is driven by two competing factors. In addition to capital and product conversion costs, amended energy conservation standards could create stranded assets, i.e.
, the residual un

- depreciated value of too ling and equipment that would have enjoyed longer use if the energy conservation standard had not made them obsolete. In this year, manufacturers write down the remaining book value of existing tooling and equipment , the value of which is affected by the a mended energy conservation standard s . This one time write down acts as a tax shield that mitigates decreases in cash flow from operations in the year of the write

- down. In this year, there is also an increase in working capital that reduces cash flow from operations. A large increase in working capital can be attributed to more costly production components and materials, higher inventory carrying to sell more expensive products, and higher accounts receivable for more expensive products. Depending on these two competing factors, cash flow can either be positively or negatively affected in the year the standard takes effect.

In the years following the compliance date of the standard, the impact on cash flow depends on the operating revenue. U nder the preserv ation of gross margin percentage markup scenario

, m ore stringent TSLs typically have a positive impact on cash flows relative to the base case because in marking up more costly equipment, manufacturers are able to earner higher operating profit, which increases cash flow from operations. There is very little impact on cash flow from operations under the preservation of EBIT scenario because this scenario is calibrated to have the same earni ngs before interest and taxes in the standards case at each TSL as the base case as in the year after the standard takes effect. In this scenario production costs increase, but EBIT remains approximately equal to the base case, effectively decreasing profi t margins as a percentage of revenue.

12

- 1812.4.2 Commercial C lothes W asher Industry Financial Impacts

Table 12.4

. 1 and Table 12.4

. 2 provide the INPV estimates for the commercial clothes washer manufacturing industry

. Figure 12.4

. 1 and Figure 12.4

. 2 present the annual net cash flows for the commercial clothes washer manufacturing industry for each of the markup scenarios.

Table 12.4

. 1 Manufacturer Impact Analysis for Commercial C lothes W asher s

– Preservation of Gross Margin Percentage M arkup S cenario

Base Case Trial Standard Level

1 2 3 4

INPV (2013$ millions) 123.5 117.1 116.9 56 23.9

Change in INPV (2013$ millions)

- (6.4) (6.6) (67.5) (99.6) (%)

- ( 5.20% ) ( 5.30% ) ( 54.60% ) ( 80.70% )
*For tables in section 12.5 , values in parenthesis indicate negative numbers

.

Table 12.4

. 2 Manufacturer Impact Analysis for Commercial C lothes W asher s

– Preservation of EBIT Markup Scenario

Base Case Trial Standard Level

1 2 3 4

INPV (2013$ millions) 123.5 117.1 116.9 53 19.7

Change in INPV (2013$ millions)

- (6.4) (6.6) (70.5) (103.8) (%)

- (5.2%) ( 5.3% ) ( 57.1% ) ( 84.1% )
*For tables in section 12.5 , values in parenthesis indicate negative numbers

.

12

- 19Figure 12.4

. 1 Annual Industry Net Cash Flows for Commercial C lothes W asher s ( Preservation of Gross Margin Markup Scenario)

Figure 12.4

. 2 Annual Industry Net Cash Flows for Commercial Clothes W asher s (Preservation of EBIT Markup Scenario)

12

- 2012.5 IMPACTS ON THE LOW

- VOLUME COMMERCIAL CL OTHES WASHER MANUFACTURER

One LVM of commercial clothes washers believes it will be disproportionately affected by any energy efficiency regulation in the c ommercial clothes washer industry. This business is concentrated in one specific market segment (commercial laundry) and is at least one order of magnitude smaller than its diversified competitors. Due to this combination of market concentration and size

, th e viability of this LVM could be at risk depending on the TSL chosen.

S mall and low

- volume manufacturers typically pay higher prices for components because of smaller purchasing volumes while their large competitors receive volume discounts. Despite the fact that the commercial clothes washer industry as a whole is a low

- volume industry, larger manufacturers, with a significantly larger proportion of washer revenues derived from the sale of residential clothes washer s , are able to purchase components in high quantities due to the similarities in commercial and residential clothes washer component parts.

DOE used the annual reports from both the LVM and its larger diversified competitors to analyze the extent to which impacts on the LVM may be disproportionate. In its 2009 10

- K, the LVM’s major competitor, whose products offerings are “primarily for home use,” reported laundry segment revenues of approximately one

- third its total annual revenues. Component parts that a re typically used across both residential and commercial clothes washers include outer sheet metal, doors and lid hardware, wash basket clothes container, outer plastic wash tub, suspension hardware, drain pump, motor and transmission assembly. DOE estimat ed LVM segment revenues and shipments from publically available sources (see Table 12.6.1). In contrast to the larger commercial clothes washer manufacturers

, the LVM’s washer revenues are mainly generated from commercial washers; residential clothes washe rs only account for an estimated 12 percent o f the LVM ’s washer revenues and an estimated 2 percent of total annual

...

Because design options associated with TSL1 and TSL2 for both equipment classes relate to control chan ges and different cycle options rather than material changes to the equipment itself

, DOE assumes that lack of bulk purchasing power would only disadvantage the LVM relative to its major competitor if the max

- tech level is chosen.

Table 12.6.1 DOE Estimates of LVM Segment Revenues and Shipments

2012 Revenues

($MM) % of Washer Revenues % of Total Revenues Shipment Volume by Sales Channel % of Washer Shipments

Commercial Top

- Loader $59 62% 12% 60,762 68% Front

- Loader $25 26% 5% 13,662 15%

Residential Top

- Loader $10 11% 2% 14,267 16% Front

- Loader $1 1% 0% 633 1% All Washers $95 100% 19% 89,324 100%

In addition to component costs, conversion costs associated with product development and new manufacturing capital are likely to be disproportionately burdensome for the

12

- 21commercial clothes washer LVM

. DOE assumes for all manufacturers that the same line would be used to build both residential and commercial clothes washers for a given washer type

. Hence, the upfront capital and product conversion costs associated with standards compliance, as well as depreciation costs are spread over the entire production volume, not just production volumes of commercial equipment

. Although commercial clothes washer shipment volumes are comparable between the LVM and its larger compet itor

, the LVM ’s overall clothes washer production volume is at least two order s of magnitude smaller than its major competitor

. Accordingly, the opportunity for the LVM to recoup upfront investments in product development is substantially smaller than its competitor . Similarly, depreciated manufacturing capital can only be spread across a disproportionately lower volume of shipments, contributing to higher per

- unit production costs.

During an interview, t he LVM indicated that it could not manufactur e top

- loading or front

- loading washers at the proposed max

- tech level with its existing manufacturing capital and platform constraints. If DOE were to set the standard at the max

- tech level, the LVM believes that a “green field” design for front

- loaders w ould likely be required. Similarly, f or top

- loaders, the LVM asserts that it does not have the technology to reach the max

- tech level, and it would be forced to adapt its business model, possibly ceasing production of commercial clothes washer s altogether, sourcing from abroad, shifting production abroad, or some combination thereof . All of these changes c ould have nontrivial impacts on manufacturing capacity and employment in the commercial clothes washer industry. Due to its relative concentration in th e top

- loading

co mmercial washer segment, i f the LVM no longer offers top

- loading washers, it would likely cease commercial clothes washer production altogether. DOE estimates that, currently, the LVM’s top

- loading washers account for more than half of the company’s commercial clothes washer revenues and more than two

- thirds of its commercial clothes washer shipments. To shift all top

- loading commercial clothes washers to front

- loading washers at current production volumes would require substantial investm ents that the company may not be able to justify. In addition, within its residential and commercial washer segments, the LVM derives an estimated 8 8 percent of its clothes washer revenue from commercial clothes washers, so its sales in the residential clothes washer market would be too low to justify continuing any top

- loading clothes washer manufacturing.

In terms of access to the capital required to cover the conversion costs associated with reaching the max

- tech levels, the LVM would likely be for ced to take on additional debt

, whereas its larger competitor s would be better equipped to fund purchases with existing cash flow from operations

. Additionally, since the recession of 2007 and 2008 , small business lending has dropped substantially due to a combination of tightened lending standards, increasing collateral requirements and reduced focus on small business credit markets. Thus, the LVM generally has access to disproportionately lesser capital than its larger competitors.

In summary, DOE recog nizes that depending on the TSL selected, amended energy conservation standards ma y have disproportionate impact s on the LVM relative to its larger diversified competitors

. In this industry, l arger manufacturers may have a competitive advantage compared to the LVM due to t heir production volumes , focus on the residential market, and ability to access capital and to purchase component parts at a discount

.

12

- 2212.6 OTHER IMPACTS

12.6.1 Employment

For commercial clothes washer s, DOE used the GRIM to estimate the domestic labor expenditures and number of domestic production workers in the base case and at each TSL from 201 4 to 204 7 . DOE used statistical data from the most recent U.S Census Bureau’s 20 12 Economic Census ( EC ) , the results of the engineering analysis, and interviews with manufacturers to determine the inputs necessary to calculate industry

- wide labor expenditures and domestic employment levels. Labor expenditures for the manufacture of a product are a function of th e labor intensity of the product, the sales volume, and an assumption that wages in real terms remain constant.

In the GRIM, DOE used the labor content of each product and the manufacturing production costs from the engineering analysis to estimate the a nnual labor expenditures in the commercial clothes washer industry. DOE used c ensus data and interviews with manufacturers to estimate the portion of the total labor expenditures that is attributable to domestic labor.

The production worker estimates in t his section only cover workers up to the line

supervisor level who are directly involved in fabricating and assembling a product within an Original Equipment Manufacturer (OEM) facility. Workers performing services that are closely associated with producti on operations, such as material handling with a forklift, are also included as production labor. DOE’s estimates account only for production workers who manufacture the specific products covered by this rulemaking.

The employment impacts shown in Table 12.6.1 represent the potential production employment that could result following amended energy conservation standards. The upper end of the results in this table estimates the total potential increase in the number of production workers after amended energy con servation standards. To calculate the total potential increase, DOE assumed that manufacturers continue to produce the same scope of covered products in domestic production facilities and domestic production is not shifted to lower

- labor

- cost countries. Be cause there is a risk of manufacturers evaluating sourcing decisions in response to amended energy conservation standards, the lower end of the range of employment results in Table 12.6.1 includes the estimated total number of U.S. production workers in the industry who could lose their jobs if all existing production were moved outside of the United States.

While the results present a range of employment impacts following the compliance date of amended energy conservation standards, the discussion below also includes a qualitative evaluation of the likelihood of negative domestic production employment impacts at the various TSLs

. Using the GRIM , DOE forecasts the domestic labor expendit ure for commercial clothes washer production labor in 201 8 will fall approximately within the range of $ 12

. 0 to $13. 1 million , depending on the TSL chosen

. Using the $ 20.08 hour ly wage rate including fringe benefits and 1, 988 production hours per yea r per employee found in the 20 12 EC

, DOE estimates there will be 301 to 328 domestic production workers involved in the manufacturing of commercial clothes washer s in 201 8 , the year in which amended standards would go into effect

12

- 23for TSL 1, TSL 2 , TSL 3 , and TSL 4 . In addition, DOE estimates that 217 to 236 non

- production employees in the United States will support commercial clothes washer production. f Approximately 8 3 pe rcent of commercial clothes washer s sold in the United States are manufactured domestically. The employment tab of the commercial clothes washer GRIM contains more detailed information on the annual domestic employment impacts.

Table 12.6.1 illustrates the range of potential impact s of amended energy conservation standards on domestic production employment levels at each TSL for the commercial clothes washer market.

Table 12.6

. 1 Potential Changes i n the Total Number of Domestic Commercial C lothes W asher Production Workers in 201 8 Baseline TSL 1 TSL 2 TSL 3 TSL 4

Total Number of Domestic Production Workers in 2018 (without changes in production locations) 301 301 301 327 328

Potential Changes in Domestic Production Workers in 2018* - 0

- ( 301 ) 0

- ( 301 ) 26

- ( 301 ) 27

- ( 301 )

* DOE presents a range of potential employment impacts. Numbers in parentheses indicate negative numbers.

Figure 12.6

. 1 below shows total annual domestic employment levels for each TSL calculated by the GRIM.

f As defined in the 2012 EC , production workers number include “workers (up through the line

- supervisor level) engaged in fabri cating, processing, assembling, inspecting, receiving, storing, handling, packing, warehousing, shipping (but not delivering), maintenance, repair, janitorial and guard services, product development, auxiliary production for plant's own use ( e.g. , power pl ant), recordkeeping, and other services closely associated with these production operations at the establishment covered by the report. Employees above the working

- supervisor level are excluded from this item.” Non

- production workers are defined as “employ ees of the manufacturing establishment including those engaged in factory supervision above the line

supervisor level. It includes sales (including driver

- salespersons), sales delivery (highway truck drivers and their helpers), advertising, credit, collect ion, installation and servicing of own products, clerical and routine office functions, executive, purchasing, financing, legal, personnel (including cafeteria, medical, etc.), professional, and technical employees. Also included are employees on the payro ll of the manufacturing establishment engaged in the construction of major additions or alterations utilized as a separate work force.”

12

- 24Figure 12.6

. 1 Commercial C lothes W asher Domestic Production Employment by Year

Due to the fact that production employment expenditures are assumed to be a fixed percentage of COGS and the MPCs typically increase with more efficient products, labor tracks the increased prices in the GRIM. As efficiency of washers increases, so does the complexity of the machines, generally requiring more labor to produce. As previously discussed, for TSL 1, there is no change in MPCs from the base case, and, for TSL 2, there is a small increase in MPCs for front

- loaders offset by a shift in shipments from front

- loaders to top

- loaders. As a result, DOE expects that there would be no employment impacts among domestic commercial clothes washer manufacturers for TSL 1 and TSL 2. For TSL 3 and TSL 4 , the GRIM predicts an inc rease in domestic employment following amended standards based on the increase in complexity and relative price of the equipment.

Approximately 83 percent of commercial clothes washers are currently produced domestically. In the commercial clothes washe r industry, 100 percent of top

- loaders are manufactured domestically, while a much larger share of front

- loaders are produced abroad. The actual impacts on domestic employment after standards would be different than estimated if any U.S. manufacturer deci ded to shift remaining U.S. production to lower cost countries. The proposed standard could result in losing all 3 01 production workers if all U.S. manufacturers source standards

- compliant washers or shift U.S. production abroad. However, feedback from

ma nufacturers during final rule interviews supports the notion that top

- loading commercial clothes washers will continue to be produced domestically following amended energy conservation standards, unless the max

- tech level is chosen.

12.6.2 Production Capacity

According to the majority of commercial clothes washer manufacturers, new energy conservation standards could potentially impact manufacturers’ production capacity depending on the efficiency level required. For TSL 1 and TSL 2, the most significant conve rsion costs are the research and development, testing, and certification of products with more

- efficient

12

- 25components, which does not affect production line capacity. Thus, DOE believes manufacturers will be able to maintain manufacturing capacity levels and continue to meet market demand under new energy conservation standards as long as manufacturers continue to offer top

- loading and front

- loading washers.

However, a very high efficiency standard for top

- loading clothes washers (associated with TSLs 3 and 4) could cause certain manufacturers to abandon further domestic production of top

- loading clothes washers after the effective date, and choose instead to cease production of commercial clothes washers altogether , which could possibly lead to a permane ntly lower production capacity within the commercial clothes washer industry.

12.6.3 Cumulative Regulatory Burden

While any one regulation may not impose a significant burden on manufacturers, the combined effects of several impending regulations may have seriou s consequences for some manufacturers, groups of manufacturers, or an entire industry. Regulatory burdens can prompt companies to exit the market or reduce their equipment offerings, potentially reducing competition. Smaller companies in particular can be affected by regulatory costs since these companies have lower sales volumes over which they can amortize the costs of meeting new regulations. Assessing the impact of a single regulation may overlook this cumulative regulatory burden. A proposed standard i s not economically justified if it contributes to an unacceptable level of cumulative regulatory burden.

For the cumulative regulatory burden analysis

, DOE looks at other significant product

specific regulations that will take effect 3 years before or aft er the 2018 compliance date of the amended energy conservation standards for commercial clothes washer s . In addition to amended energy conservation regulations, several other Federal regulations apply to commercial clothes washer s . While this analysis focu ses on the impacts on manufacturers born of other Federal requirements, DOE also has described a number of other non

- Federal regulations in section 12.6.3.2 because it recognizes that these regulations also impact the equipment covered by this rulemaking.

12.6.3.1 DOE Regulations for Other Products Produced by Commercial C lothes W asher Manufacturers

Companies that produce a wide range of regulated products and equipment may face more capital and product development expenditures than competitors with a narrower scope of products and equipment

. The majority of commercial clothes washer manufacturers also produce other appliances and commercial refrigeration eq uipment

. In addition to the amended energy conservation standards for commercial clothes washer s , these manufacturers contend with several other Federal regulations and pending regulations that apply to other products and equipment

. DOE recognizes that eac h regulation can significantly affect a manufacturer’s financial operations. Multiple regulations affecting the same manufacturer can quickly strain manufacturers’ profits and possibly cause an exit from the market. Ta ble 12.6.2 lists the other DOE energy conservation standards that could also affect manufacturers of commercial clothes washer s in the 3 years leading up to and after the compliance date of amended energy conservation standards for th is equipment

.

12

- 26Table 12.6

. 2 Other DOE and Federal Actions Affecting the Commercial C lothes W asher Industry

Reg ulation Approximate Compliance Date* Number of Impacted Companies Estimated Total Industry Conversion Costs

Residential Clothes Washers 2015 & 2018 4 $418.5 M Residential Clothes Dryers 201 5 4 $ 95.4 M

Microwave Oven s 2016 4 $43.1 M

Misc ellaneous Refrigeration 2018 3 N/A †

Dehumidifiers 2019 4 $81.3 M *The dates listed are an approximation. The exact dates are pending final DOE action. † For energy conservation standards for rulemakings awaiting DOE final action, DOE does not have a finalized estimated total industry conversion cost.

12.6.3.2 Other Regulations That Could Impact Commercial C lothes W asher Manufacturers

While the cumulative regulatory burden focuses on the impacts on manufacturers of other Federal requirements, in this section DOE has described a number of other regulations below that could also impact the commercial clothes washer s covered by this rulema king

.
Other Federal Standards

One manufacturer expressed concerns about the c onflict minerals directive included in the Dodd

- Frank Act of 2010 ( H.R. 4173, section 1502) g . When promulgated, this rule will require that U.S. companies report and make public a vailable their use of certain minerals from the Democratic Republic of the C ongo and adjoining countries. This may require manufacturers to make investments in new tracking systems to ensure visibility throughout the ir supply chain

. State Energy Conservat ion and Environmental Standards

Manufacturers indicated that state

- level regulations, especially in California

, contribute to overall cumulative regulatory burden. These regulations include state energy efficiency standards, for example, proposed standards for commercial clothes dryers in California. Other
state

- level regulations that may impact commercial clothes washer manufacturers include product and packaging, a nd extended producer responsibility regulations. Additionally, manufacturers expressed concerns over fut u re compliance costs associated with green chemistry laws and chem ical bans , such as those initiated and proposed as part of the California Green Chemi stry Initiative

. h

International Energy Conservation Standards

g http://www.sec.gov/rules/proposed/2010/34

- 63547fr.pdf

. h http://www.mofo.com/green

- chemistry/

12

- 27During the interview process, one manufacturer cited international electromagnetic compatibility ( EMC ) standards as a contributor to cumulative regulatory burden. Such standards serve to standa rdize the EMC performance in terms of emissions and radio interference of various electrical products, including household appliances. i

12.7 CONCLUSION

The following section summarize s the scenarios DOE believes are most likely to capture the range of impacts on commercial clothes washer manufacturers at each TSL in the standards case. While these scenarios bound the range of the most plausible impacts on manufacturers, some circumstances could cause manufacturers to experience impacts outside this range.

12.7.1 Comm ercial Clothes Washer s
At TSL 1, DOE estimates the impact on INPV for manufacturers of CCWs to be $6.4 million, or a decrease in INPV of 5.2 percent under either markup scenario. At this TSL, industry free cash flow is estimated to decrease by approximatel y 30.7 percent to $6.2 million, compared to the base

- case value of $8.9 million in the year before the compliance date (2017).

TSL 1 represents an improvement in MEFJ2 (as determined using appendix J2) from the baseline level of 1.65 to 1.80 (ft3/kWh/cy cle) for front

- loading equipment and an improvement in MEFJ2 from the baseline level of 1.15 to 1.35 (ft3/kWh/cycle) for top

- loading equipment. The identical results for the two markup scenarios at TSL 1 occur because for both equipment classes, the baseli ne MPCs and the MPCs at TSL 1 are the same. For front

- loading equipment, this is because the 1.8 MEFJ2 (as determined using appendix J2) products (on which the EL 1 standard is based) are the lowest efficiency front

- loading equipment available on the marke t. As such, TSL 1 would have no impact on the front

- loading market. Similarly, the design options associated with EL 1 for top

- loading equipment relate to control changes and different cycle options, rather than material changes to the equipment itself. While there are product conversion costs associated with the research and development needed to make these changes, there are no changes in the per unit production costs. Given these conditions, the impacts on INPV at TSL 1 can be attributed solely to the $9.9 million in product conversion costs for top

- loading equipment.

At TSL 2, DOE estimates the impact on INPV for manufacturers of CCWs to be $6.6 million, or a decrease in INPV of 5.3 percent under either markup scenario. At this TSL, industry free cash flow is estimated to decrease by approximately 31.7 percent to $6.1 million, compared to the base

- case value of $8.9 million in the year before the compliance date (2017).

TSL 2 represents an improvement in MEFJ2 from the baseline level of 1.65 to 2.00 (ft3/kWh/cycle) for front

- loading equipment and an improvement in MEFJ2 from the baseline level of 1.15 to 1.35 (ft3/kWh/cycle) for top

- loading equipment. Much like TSL 1, the identical results for the two markup scenarios at TSL 2 occur because the b aseline MPCs and the MPCs at

i http://en.wikipedia.org/wiki/List_of_EM C_directives

12

- 28TSL 2 are very close for front

- loading equipment, and the same for top

- loading equipment. For front

- loading equipment, this is because the 2.0 MEFJ2 EL (as determined using appendix J2) requires only minor changes to baseline equipment needed to enable slightly faster spin speeds. The standard level for top

- loading equipment at TSL 2 is the same at TSL 1, and again relates to control changes and different cycle options, rather than material changes to the equipment. Because t here are no substantive changes to MPCs for either equipment class, much as in TSL 1, nearly all of the impacts on INPV at TSL 2 can be attributed to the $10.2 million in product conversion costs.

At TSL 3, DOE estimates impacts on INPV for manufacturers of CCWs to range from

- $67.5 million to

- $70.5 million, or a decrease in INPV of 54.6 percent to 57.1 percent. At this TSL, industry free cash flow is estimated to decrease by over 356 percent to

- $ 22.8 million, compared to the base

- case value of $8.9 million in the year before the compliance date (2017).

TSL 3 represents an improvement in MEFJ2 from the baseline level of 1.65 to 2.00 (ft3/kWh/cycle) for equipment class 1 and an improvement in MEFJ2 from the baseline level of 1.15 to 1.55 (ft3/kWh/cycle) for equipment class 2. Unlike TSL 1 and TSL 2, the efficiency level specified at TSL 3 would require substantial redesigns of products in equipment class 2. The design options proposed at efficiency level 2 for top

- loading units include increased tub capacity, hung suspension, low

- profile (non

- traditional) agitator design, and improved motor and transmission efficiency

– all of which require major platform overhauls and significant changes to manufact uring capital. These design options do not contribute to substantially different MPCs, but the conversion costs associated with product development and testing, as well as the investments in manufacturing capital including retooling of tubs and agitators significantly impact the INPV. Additionally, the significant increase in industry aggregate product and capital conversion costs due to the shift to max tech efficiency level for top

- loaders is explained by that fact that a larger proportion of top

- loading units would require upgrades. As estimated in the shipments analysis, approximately 90% of top

- loading units currently on the market are below EL 2 (by contrast, approximately 70% of current top

- loading units are below EL 1).

At TSL 4, DOE estimates impa cts on INPV for manufacturers of CCWs to range from

- $99.6 million to

- $103.8 million, or a decrease in INPV of 80.7 percent to 84.1 percent. At this TSL, industry free cash flow is estimated to decrease by over 516 percent to

- $37.2 million, compared to t he base

- case value of $8.9 million in the year before the compliance date (2017).

TSL 4 represents an improvement in MEFJ2 from the baseline level of 1.65 to 2.20 (ft3/kWh/cycle) for equipment class 1 and an improvement in MEFJ2 from the baseline leve l of 1.15 to 1.55 (ft3/kWh/cycle) for equipment class 2. The efficiency level specified at TSL 4 would require substantial redesigns of products in both equipment classes. For front

- loading units, the design options associated with efficiency level 3 inclu de increased capacity and switching to direct drive motors. For top

- loading units, the design options proposed at efficiency level 2 include increased tub capacity, hung suspension, low

- profile (non

- traditional) agitator design, and improved motor and tran smission efficiency. All of these upgrades require major platform overhauls and significant changes to manufacturing capital. These design options do not contribute to substantially different MPCs, but the conversion costs associated with product developm ent and testing, as well as the investments in manufacturing capital including retooling

12

- 29of tubs and agitators significantly impact the INPV.

12

- 30REFERENCES

1 U.S. Department of Energy. Compliance Certification Database . Last accessed September 3, 2013. Available online at: http://www.regulations.doe.gov/certific ation

- data/

.

2 California Energy Commission. Appliance Efficiency Database . Last accessed September 3, 2013. Available online at: http://www.appliances.energy.ca.gov/

. 3 ENERGY STAR. Commercial Clothes Washers . Last accessed September 11, 2013

. Available online at : http://www.energystar.gov/index.cfm?fuseaction=find_a_product.showProductGroup&pgw_ code=CCW

.
4 McKinsey & Company, Inc. Valuation: Measuring and Managing the Value of Com panies , 3rd Edition, Copeland, Koller, Murrin. New York: John Wiley & Sons, 2000.

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