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Strength in Numbers: Talking About the Next Upswing

Oct. 4, 2022
With another earnings season around the corner, we dive into a cross-section of our IW US 500 list for a check on the state of industrial balance sheets.

Which data point to believe?

On the one hand, a recent Grant Thornton survey of CFOs showed the executives increasingly pessimistic about the economy, with only 39% of the nearly 250 respondents positive about the U.S. economy over the next six months.

On the other hand are comments from Ingersoll Rand Inc. Chairman, President and CEO Vicente Reynal at a Morgan Stanley investor conference in the middle of last month. Asked about the conditions for a capital expenditures supercycle, Reynal wouldn’t commit to using that phrase. But, viewing the world through demand for Ingersoll Rand’s pumps, compressors and other machinery parts, he said a growing number of customers are committing to longer-cycle projects, work that will Ingersoll Rand 12 months or more to deliver.

“We’re hearing that customers are […] talking about the next upswing,” Reynal said. “And they just want to be ready.”

With many industrial companies preparing to report their third-quarter results, we set out to get a gut check on that statement via financial filings. To get a decent cross-section of Manufacturing America, we peeked at the balance sheets of 10% of our IndustryWeek U.S. 500 list of publicly traded companies. We pulled the five largest companies in 10 sectors of the IW500: aerospace, apparel, chemicals, fabricated metal products, industrial equipment, machinery, motor vehicle parts, plastics, stone/clay/glass and wood products.

We compiled three metrics from their filings: the cash ratio (measuring cash and equivalents as a share of current liabilities), the debt-to-equity ratio and the capex ratio (comparing cash flow from operations to capital expenditures). For our timeframe, we chose the recently reported mid-2022 quarter as well as the periods ending on or near the end of 2021 and 2020. For most companies, the latter reports were for their full fiscal years; for a handful, this summer’s filings were their annual reports.

We weren’t as interested in individual companies’ stats and stories but instead wanted to see what broader short-term trends might emerge from our sample. A few clear takeaways did show themselves—and they suggest that Ingersoll Rand’s insight into spending patterns holds up. Many large players in the industrial sector are acting pretty sanguine about what’s ahead even if the journey of the next few quarters might feature the bumpy ride that Grant Thornton’s survey suggests. For instance:

  • 34 of the 50 companies entered the second half of this year with better debt-to-equity ratios than they had at the end of 2020. Of those 34, 14 had lowered their debt loads by at least 20% over those 18 months. To sum it up simply: Every CFO worthy of the title took advantage of a historic run of low interest rates.
  • More than 40 of the 50 companies had lower cash ratios on June 30 than 18 months prior. That was very often due both to lower holdings—hello, inflation as well as paying down some of those debts—as well as higher current liabilities. An interesting exception to this trend among our subgroups were companies in the stone, clay, glass and concrete industries: Four of the five had more cash on hand at the end of June than 18 months prior. All 15 companies in our apparel, motor vehicle parts and plastics samples, however, were working with less cash.
  • An almost equally large share of our selected companies’ capex ratio trends also were down from the end of 2020. Excluding outliers with negative cash flows, the average ratio of operating cash flows to capital expenditures slipped to 4.0 in June from 5.2 at the end of 2020. But here, the underlying numbers are a little more nuanced: For about half of our 50 companies, the cash flows in their numerator fell but their capital spending denominators also grew.

The rise in capex illustrates inflation’s effects to some extent; the costs of materials and equipment have been rising and recent investor conferences featured plenty of optimism about more price increases. But it also speaks to the relative strength with which many companies are looking at—or past—the near future. It’s a strength that Manolis Saridakis, East Region division head of Global Industrials and Services at U.S. Bank, sees at many of his team’s customers today. A lot of them, he said, were surprised in 2007 and 2008 by how quickly and seriously the economic environment deteriorated and have since set out to be more prepared to ride out such scenarios in the future.

“No one is an expert on when a recession starts or ends but CFOs are focused on the tasks at hand: How to grow, how to position themselves,” said Saridakis, who is based in New York. “They don’t want to wait; they want to be ready for the right opportunity. They’re being selective, and I like that.”

Another change from the Great Recession, Saridakis said, is that many finance chiefs have a good sense of where they can cut costs should a changing situation push them to. But they’re also generally confident in demand from customers, comfortable with the investments they are making and less reticent than in 2008 to commit to making financing moves. Then, it was often a case of, “We’re fine with where we are. We’ll hide here for a while.” Today, more executives are willing to put money to work to improve their products and margins and not as focused on waiting until interest rates come down again.

“They’re more focused on planning out their futures,” Saridakis said. “And most companies I’ve seen that plan ahead haven’t had to worry about their strategic goals.”

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