N95 Masks Aren't the Only Thing in Demand

(Bloomberg Opinion) -- Dissecting earnings reports is always more of an art than a science. That’s particularly true in a pandemic, when the state of play changes at an ever-faster clip. With a surge in coronavirus cases in the U.S. Sun Belt and burgeoning concerns about a second wave in Europe and parts of Asia, any glimmers of insight from companies who operate on the ground floor of the economy carry extra weight. Nearly five months into this pandemic, CEOs in the manufacturing sector appear to at least have a handle on what’s happening with their businesses, for better or for worse. Tuesday brought results from three companies that sit at key fault lines in the industrial economy: 3M Co., Rockwell Automation Inc. and Raytheon Technologies Corp. Here are my top takeaways: 

3M Co. : The maker of N95 masks has been on the front line of the pandemic, but even in normal recessions, it’s usually one of the first companies to see the early signs of a recovery, given the fast turnaround time for many of its products. So it’s particularly encouraging that 3M says it’s actually seeing July sales trending up by a low-single digit percentage compared to a year earlier. That compares with a 13.1% decline on an organic basis in the second quarter that was slightly worse that what analysts had been anticipating, one possible reason for the stock’s slide on the news. The forward trajectory is all that really matters at this point, though. Sales of N95 masks and other protective gear have undoubtedly been one big driver of the growth in July, with 3M on track to make two billion of the respirators this year. But other companies including Fastenal Co. and Cintas Corp. have predicted a moderation of the surge-style spikes seen in the earlier days of the pandemic in April and May as the market is now comparably better-supplied. More importantly, for those seeking signs of economic revival, 3M cited “broad-based sales improvements across businesses and geographies.” While this doesn’t necessarily augur a V-shaped recovery for the manufacturing sector, it does suggest things are moving in the right direction. The cloud over any rebound for 3M is its potential liabilities related to per- and polyfluoroalkyl substances, or PFAS, which have been linked to cancer and other ailments. 3M reached an agreement last week with Alabama that will see it assess contamination from the so-called forever chemicals; invest in treatment and remediation; and research the substances impact on health and the environment — at an unspecified cost to the company. Some analysts had been expecting 3M to take another significant charge on PFAS in the second quarter and the missed opportunity to “kitchen-sink” what were going to be ugly numbers anyway may also be a factor in the stock reaction. 

Rockwell Automation Inc.: Continuing with the theme of possible green shoots of recovery, Rockwell CEO Blake Moret is confident enough in the trajectory of his company’s recovery that he announced intentions to roll back temporary pay cuts for employees by December and “hopefully sooner.” Rockwell also intends to make another “recognition payment” to manufacturing workers who have continued to come in to factories and kept its operations grinding along. While some companies have had to turn furloughs into permanent job cuts as the pandemic and associated economic slump have dragged on longer than expected, this is an important counterpoint. It speaks to a broader trend across the industrial landscape of companies prioritizing labor and seeking cost cuts elsewhere first in recognition of the unique nature of this particular downturn and shifting expectations of the corporate world’s duty to the community. Railroads CSX Corp. and Union Pacific Corp. have also said they are bringing workers off of furlough as volumes rebound. In terms of numbers, Rockwell actually increased its fiscal 2020 profit guidance for the year and now anticipates adjusted earnings per share of $7.40 to $7.60 on an organic sales decline of about 8%. This is based on an expectation that a “gradual recovery continues, with no increase in pandemic-related facility closures or disruptions to the supply chain.” Coming out of this crisis, Rockwell is set to be a key beneficiary of any significant push to bring manufacturing work back to North America. 

Raytheon Technologies Corp. : Whatever recovery is happening in manufacturing, it isn’t showing up in the world of commercial aerospace, with flight travel still at a crawl. Raytheon — formed earlier this year from the merger of United Technologies Corp. and Raytheon Co. — burned through nearly $250 million of cash in the first quarter as stable results from its defense businesses failed to offset a disastrous slump in the aerospace operations. The Collins Aerospace parts division, previously the company’s most profitable, was barely in the green on an adjusted basis in the second quarter and Raytheon took a $3.2 billion goodwill writedown on the roughly $30 billion acquisition of Rockwell Collins Inc. in 2018 that helped form the unit. The charge reflects the deteriorating outlook for commercial aerospace due to the coronavirus, which no one could have predicted, but it’s worth remembering that the deal was very expensive from the start and the assumptions underpinning that price tag relied on quite a lot of things breaking the company’s way. The Pratt & Whitney engine segment saw sales tumble more than 30% excluding the impact of M&A and currency swings. Raytheon CEO Greg Hayes said the company had cut 8,000 positions in its commercial aerospace divisions and said some of that reduction would be permanent, a shift from the first quarter when he warned about cutting too deep. Arguably, things could have been uglier. The question now is whether the worst is truly behind the company. A slide in the earnings presentation termed “Current Environment” has big question marks next to projections for commercial air traffic and macroeconomic conditions. In case it wasn’t clear what those meant, they are also colored gray, as in this is a gray area.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.

©2020 Bloomberg L.P.