Ohio Makes The Grade In Manufacturing Report Card

Castings sit on shelves while awaiting cleaning and sanding at a foundry in Ohio. Photographer: Ty Wright/Bloomberg

Ohio's manufacturing industry is in pretty good shape, a new report found, though the state trails some of its nearby competitors.

In the report from Ball State University, the state received a solid "B," the same grade it earned in the 2018 analysis of the data. The Ball State research measures each state's manufacturing industry in the following areas: logistics industry health; human capital; worker benefit costs; tax climate; expected fiscal liability; global reach; sector diversification; and productivity and innovation.

Only five states received a grade of "A," but four of them are in the Midwest or border Ohio: Indiana, Iowa, Kentucky and Michigan. The fifth state receiving an "A" was South Carolina.

Ohio's best grade within the categories came in logistics, where it earned an "A" for 2019, just as it did in 2018. Its lowest grade was in the worker benefit costs category, though Ohio rose to a "C-" this year from "D" a year ago.

The only category in which Ohio declined was sector diversification, which fell to a "B-" from a "B."
Here are the 2019 grades for Ohio:

• Logistics health: A
• Human capital: C
• Worker benefit costs: C-
• Tax Climate: C
• Expected fiscal liability: C
• Global reach: B
• Sector diversification: B-
• Productivity and innovation: C

AMONG THE GIANTS

Two big Northeast Ohio manufacturing companies, Eaton and Parker Hannifin, are part of this Bloomberg Opinion roundup of prominent developments in the industrial sector.

Bloomberg Opinion's Brook Sutherland writes that Eaton's recently released second-quarter results "did little to endear analysts and investors to its current structure. While the company's aerospace and electrical divisions put up strong numbers despite currency pressures and a more challenging economic environment, the hydraulics and vehicle units were disappointments, yet again. Eaton now estimates organic growth in the hydraulics business will be flat to up 1% for the full year, down from a previous guide of 3% to 4%. Margin expectations for that unit were also slashed. In the vehicle division, Eaton sees as much as an 8% decline in organic sales this year."

Asked by Goldman Sachs Group Inc. analyst Joe Ritchie about the hydraulics unit's long-term fit within Eaton's portfolio, CEO Craig Arnold pointed out that the company's overall performance was solid "despite the fact that we have one of our businesses that's not today firing on all cylinders."

Sutherland concludes, "That's true, and yet while I'm wary of industrial companies' passion for breakups going too far, 'despite' is really the key word in Arnold's comments. This isn't a momentary slip-up for either the hydraulics or the vehicle business, and they're increasingly perceived as more cyclical roadblocks holding up even greater margin improvement and sales growth for the overall company. Arnold has signaled in the past that if the company can't get struggling businesses to targeted profitability levels, that could be a catalyst for divestiture.

The piece also examines Parker's deal to buy Exotic Metals Forming Co. for $1.73 billion.
Via Sutherland:

The name might lead you to believe this company crafts metalworks on some sort of tropical island, but it's based in Washington and makes complex high-temperature engine components and exhaust-management systems for aircraft including the Boeing 737 Max and Lockheed Martin Corp.'s F-35 fighter jet. On the one hand, the addition of Exotic Metals will boost the share of Parker Hannifin's revenue tied to faster-growing, more profitable aerospace products to more than 20% by Bloomberg Intelligence's estimate, which will help to offset the sales slowdown in its industrial-products divisions. At about 13 times 2019 estimated adjusted Ebitda, the Exotic Metals deal is cheaper on that basis than the $3.7 billion acquisition of adhesives and coatings company Lord Corp. that Parker Hannifin announced earlier this year. But this is another debt-fueled bet on the aerospace industry at a time when skepticism is growing about how much longer the multiyear boom in that sector will last.

The conclusion: "Exotic Metals' already-high Ebitda margin of nearly 30% and compound annual sales growth of more than 16% over the last three years leave little room for improvement. A goal of a high single-digit return on invested capital in year five for the Exotic Metals deal isn't terribly impressive to begin with; the risk is, even that is optimistic."