“Judge companies on their virus response,” I wrote in April. It’s as good a way as any to determine which CEOs are really committed to improving their environmental, social and governance policies and which ones are hoping a few buzzwords are sufficient to earn them a cut of the billions now earmarked for morally minded investments. So what’s the verdict? For a brief shining moment, it felt like we really were all in this together. Essential workers were celebrated both publicly and privately as heroes; many CEOs gave up their salaries in solidarity with workers who were asked to take pay cuts; and most manufacturing companies initially held off on permanent job and cost reductions. But now that we’re almost a year into this pandemic, doing the right thing has gotten more difficult and companies are showing their true nature, good and bad.
I’ve talked before about Fastenal Co. The $25 billion industrial distributor is unlikely to show up in most traditional ESG screenings, but its management team seemed to be taking certain tenets of the movement to heart, particularly when it comes to customer and employee relationships. And it has continued to do so: I listen to a lot of earnings calls and Fastenal is one of the few companies that carves out time to talk about the effects of the pandemic on its workforce. That impact has been particularly devastating of late: Through September, there were 344 cases of Covid-19 among Fastenal’s 20,000-plus employees. By the end of the year, that number jumped to 1,118 cumulatively, or about 5% of the workforce.
There’s something powerful about a company’s top executives acknowledging this human toll. You’d think this would be the bare minimum we could expect, but most CEOs are sticking with broad expressions of gratitude to employees for their service during this difficult time and some have ceased doing even that. Some companies might be reluctant to share this kind of information for fear of how it reflects on their safety protocols. But the trendline at Fastenal mirrors that of the country as a whole and the case count is actually a bit better than the national average on a per capita basis — even though more than 90% of the company’s employees serve in essential roles that require day-to-day interaction with other people.
Crane Co. is another manufacturing company that doesn’t attract much ESG attention, in part because it makes some of its money selling pumps and valves to oil refiners and chemical processors. But it’s worth a closer look. Crane gets another big chunk of its revenue from the beaten-up aerospace sector and another from payment technology used by retailers, casinos and parking meters; as you can probably imagine, the pandemic has not been particularly kind to this company. Adjusted earnings per share declined by more than a third in 2020, Crane said this week. That forced the company to cut costs, an effort that ultimately yielded $105 million in gross savings and approximately 1,000 fewer employees compared with the end of 2019. It could have been much worse, though. Crane’s management rejected many spending-reduction proposals offered by its business units because the cuts would have hampered the company’s long-term growth prospects, CEO Max Mitchell said on a call this week to discuss the company’s fourth-quarter results.
While an unfortunate number of employees still lost their jobs, Crane sought to safeguard the financial wellbeing of the workers it kept. There were no mandated unpaid furloughs in the US and 401(k) matching benefits were maintained throughout the pandemic, unlike at many other companies. No salary reductions were implemented below the level of corporate officer and board director; in fact, merit-based increases were still awarded and the company guaranteed that those eligible for an annual bonus would receive at least 50% of their targeted payout, despite the financial slump. “We followed this approach because we believed that it was a fair and appropriate way to thank and recognize our associates for their extraordinary efforts in these trying times and to build lasting goodwill and morale,” Mitchell said.
The way in which Crane and Fastenal handled the pandemic reminds me of something that Peter Stavros, KKR & Co.’s co-head of Americas private equity and Ingersoll Rand Inc.’s chairman, said last year when we were discussing the latter company’s decision to issue equity grants to rank-and-file workers. “Being a stakeholder capitalist doesn’t mean that you don’t do things that make the company more efficient. It’s about how you treat people,” he said.
There’s a benefit for companies, too, in taking care of employees and avoiding deep cuts if they can help it. Factory-equipment maker Rockwell Automation Inc. certainly wasn't immune to the pandemic; organic sales fell 9.7% in the quarter ended in December. But CEO Blake Moret took a long-term view of the crisis and elected to be fairly surgical with cost and job cuts. “We have seen in past recessions that even though the cause is very different, the recovery always seems to be faster than we predict when we're in the depths of it,” he said in an interview this week.
That view is already playing out: An end-of-the-year surge in orders pushed demand above pre-pandemic levels, leading Rockwell to add capacity and workers. With high rates of absenteeism during Covid compounding a pre-pandemic shortage of skilled labor, manufacturing wages are rising, according to an analysis by Scott Davis of Melius Research this month. In that kind of environment, it’s particularly helpful that Rockwell isn’t already starting from behind, Moret said. Separately, the company announced it will use a portion of a $70 million pre-tax legal settlement related to an intellectual property dispute to accelerate new software product launches and invest in sustainability initiatives.
Now for the other end of the spectrum. Raytheon Technologies Corp. said this week it's cutting an additional 2,000 jobs between its contractor workforce and commercial aerospace units. That brings the total pandemic cuts to 21,000 — not including 1,000 positions that were already expected to be eliminated because of overlap following the merger between Raytheon and United Technologies. There’s a logic to this. Things remain fairly dire in the aerospace industry right now. Adjusted operating profit at Raytheon’s Collins aerospace-parts division fell 92% in the fourth quarter and the Pratt & Whitney engine business didn’t fare much better with a 78% decline. But the company this week committed to repurchasing at least $1.5 billion of stock in 2021. So how dire are things really?
While General Electric Co. last year said it would stop supplying new coal power plants and set a goal to become carbon neutral by 2030, it seems to have forgotten about the S and G components of ESG. Questioned by the Financial Times this week over his rejiggered bonus structure, CEO Larry Culp defended the plan as “long-term” and “performance-based” and cited his own pandemic sacrifices, including foregoing a salary in 2020. He seems to be under the impression that people are displeased about the equity bonus because they mistakenly believe it’s being paid out in 2020; no, people are upset because GE dramatically lowered the bar on what was supposed to be an aspirational grant for the CEO while simultaneously firing 13,000-plus people in its aerospace division. And while the bonus itself won’t be paid out in 2020, the easier terms allowed Culp to lock in the first $47 million tier of the payout in December, mere months after the agreement was revised — and thanks in part to cost savings from those job cuts.
No one is suggesting Culp doesn’t deserve to be compensated for what he’s accomplished at GE; his ability to keep the turnaround narrative alive amidst the pandemic is impressive. But GE’s continued inability to offer any kind of reasonable explanation for why the bonus needed to be made more easily attainable means this issue isn’t going away.
It’s easy to forget in this week of Reddit rallies, but there is a real economy at work in the US, one that doesn’t have the luxury of detaching from fundamentals. Thankfully in manufacturing, those fundamentals are looking better by the day and helping to support elevated stock prices. After a busy week of earnings, it’s clear the industrial recovery is intact and continuing apace. The “worst is behind us,” Honeywell International Inc. Chief Financial Officer Greg Lewis said Friday after the company reported better-than-expected fourth-quarter sales across its business. The unit that houses its Intelligrated warehouse-automation operations and personal protective equipment business had a particularly strong showing in the final three months of the year. Caterpillar Inc. held off on official 2021 guidance, citing lingering uncertainty from the pandemic. But CFO Andrew Bonfield expressed optimism around an overall sales recovery this year and flagged the housing boom as a key source of growth.
Weak spots remain. Aerospace is the obvious one, with Boeing Co. this week reporting a stunning $11.9 billion net loss in 2020 as the pandemic collided with idiosyncratic delivery issues on the 737 Max and 787 Dreamliner and a $6.5 billion charge on the delayed 777X widebody jet.
The commercial real estate sector is another troubled area. While US housing starts rose last month to the fastest pace since 2006, cash-strapped state and local governments are delaying road projects. Companies — including many industrial ones — are more likely to be shuttering offices these days than opening new ones. Just this week, Lockheed Martin Corp. said it would allow some of its office leases to expire over the next few years as more employees work from home, leaving it with “at least a couple of million” fewer square feet of real estate. United Airlines Holdings Inc., meanwhile, is giving up 150,000 square feet of office space in its Willis Tower headquarters as the airline tries to downsize. Bonfield of Caterpillar characterized the non-residential construction market as “sluggish” in an interview with Bloomberg News’s Joe Deaux. Honeywell expects there to be demand for its “healthy buildings” offerings as landlords try to convince employees it’s safe to breath the air. There will also be broader spending on building products by data centers, warehouses and health-care facilities — corners of the economy that have benefited during the pandemic. Offices and hospitality venues on the other hand will remain challenged.
Bloomberg
