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Continued: Manufacturers keep the cash

  • Article by: SUSAN FEYDER , Star Tribune
  • Last update: August 17, 2011 - 2:23 PM

Consumers aren't the only ones unsure which way the economy is headed.

Many manufacturing companies that slashed expenses during the recession continue to sit on large piles of cash, taking it slow on rehiring workers, buying new equipment or making long-term commitments on research and development.

Cash reserves for nonfinancial companies in the Standard & Poor's 500 index are now about 47 percent bigger than in the second quarter of 2008, according to Capital IQ, a New York-based business research firm. Cash holdings have grown even more for some Minnesota-based manufacturers. Since midyear 2008, 3M Co.'s cash balance has more than doubled to $3.4 billion, Toro Co.'s more than tripled to $107 million, while Polaris Industries' has ballooned from $22 million to $262 million.

"Call it being burned," said Mariann Montagne, an analyst and portfolio manager at Marks Group Wealth Management in Minnetonka, of manufacturers' thrifty ways during the recession. An example is Maplewood-based 3M, which eliminated more than 4,000 jobs, suspended merit pay, stopped buying back stock and cut spending on acquisitions, capital investments and research and development.

Amassing a rainy-day fund makes sense, Montagne and others say, especially since last week's stock market turmoil may have borne out fears the economy will turn down again.

Even before last week's market jitters, there were signs the manufacturing rebound was losing steam. The July index compiled by the Institute for Supply Management, a widely read benchmark of manufacturing activity, showed the lowest rate of growth in several months, with a reading that came very close to showing no growth at all. The government reported that nationwide factory orders fell in June, and growth in the gross domestic product for the first half of the year was lower than expected. The weak economic reports have driven down consumer confidence, prompting people to scale back on purchases of manufactured goods.

In Minnesota, manufacturers added 800 jobs in June, according to preliminary figures from the Department of Employment and Economic Development. But that gain was less than the state's overall increase in non-farm employment. Only 2,800 jobs have been added so far this year to the manufacturing sector, which lost a total of more than 45,000 jobs from 2008 to 2010.

"I think we're in the soup," said Fred Zimmerman, a retired business professor from the University of St. Thomas. He said companies are likely to stay conservative on spending for the foreseeable future.

While this sounds like a safe route, it involves some risks. A study by consulting firm McKinsey & Co. found that companies with the highest stock valuations after the 1991 recession had less cash than competitors and had spent more on acquisitions and research and development. Zimmerman said companies also risk becoming takeover targets if their cash balances become too large.

Zimmerman said it's likely manufacturers will continue to use cash to invest in equipment. Hiring permanent workers will be far less likely, he said.

3M finished 2010 with a worldwide workforce of more than 80,000, up about 5,000 from the previous year. Some new employees came via $2 billion-plus in acquisitions, a sharp increase from just $69 million 3M spent buying businesses in 2009.

Montagne said she doesn't believe 3M will make any drastic changes in its spending plans for this year. The company has said it expects to spend $2 billion to $3 billion on acquisitions. Analysts have forecast research and development spending at $1.65 billion this year, up about $200 million, but about the same 5.4 percent of sales as 2010 and lower as a percentage of sales than the previous three years.

Permanent cuts

Montagne said it's important to remember that many of manufacturers' cost-cutting measures during the recession were permanent. "There are plants that shut down that never will reopen," she said. The nationwide vacancy rate for industrial buildings was 12.3 percent as of the second quarter, only slightly lower than the peak of 12.6 percent in 2009 and much higher than the 9.2 percent in 2007, according to Marcus & Millichap Reserach Services. Aside from their cash balances, many manufacturers are leaner now, better-positioned to weather an economic storm, Montagne said.

Polaris is planning $70 million to $80 million in capital expenditures this year, the most since 2008. But much of that spending is aimed at a permanent realignment of its manufacturing operations that reduces its costs. More than a year ago, the Medina-based maker of recreational vehicles said it would close a plant in Osceola, Wis., while building a new facility in Monterrey, Mexico. The company has said the Mexican workers make about one-third of its U.S. workers' pay.

Polaris also has used an undisclosed amount of its cash this year to acquire two small but high-profile businesses -- Indian Motorcycle and Global Electric Motorcars (GEM), a Chrysler subsidiary that makes small low-speed electric vehicles.

Polaris executives declined to comment for this story. However, Mark Smith, an analyst at Feltl and Co. in Minneapolis, said he believes the company has its sights set on making a bigger deal this year, possibly something that would expand its presence in international markets. "I think they would like to make a splash," he said.

Alliant Techsystems Inc. used some of its cash earlier this year to pay down debt, repurchase shares and pay the first dividend in its 20-year history. Even so, the Eden Prairie-based defense and aerospace company had a cash balance at the end of June of almost $406 million, significantly more than the $20 million it had three years ago.

In a recent conference call, CEO Mark DeYoung said the company was looking at possible acquisitions but was "aware of the needs to maintain flexibility and liquidity on our balance sheet."

Rama Bondada, an analyst at RBC Capital Markets in New York, said Alliant is dealing with unknowns different from many other manufacturers. The U.S. government is Alliant's biggest customer, accounting for 68 percent of its $4.8 billion in sales last year. Alliant's reasons for being cautious on spending now have more to do with the prospect of lower U.S. military spending and lower sales to NASA, which recently ended the space shuttle program.

Troy Duncan, manufacturing industry leader at the Minneapolis office of Grant Thornton, said many of his clients nationwide are embarking on cost-cutting initiatives. "They're not hiring or doing discretionary expenditures. Even advertising is down," he said. He's also seen clients put acquisitions on the back burner.

"It's just like personal finance," Duncan said. "You don't go out and buy a bunch of stuff if you think things might get tough."

Star Tribune staff writer Patrick Kennedy contributed to this report.

Susan Feyder • 612-673-1723

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