Business
Financing needs still press chemical firms 1980 recession didn't shore up company balance sheets as much as previous recessions; cash fell, debt rose, and key ratios barely gained William F. Fallwell C&EN, New York
The traditional reaction of a chemical company in its short-term cash management in a year like 1980 would be a sudden conservative swing. After letting out the financial sails in the previous expansion—with big increases in inventories, receivables, and short-term debt—the company would tack carefully into the wind. Control would be the order of the day for inventories, receivables, and debt. And the company's cash coverage of
liabilities would begin to swing upward. Some of this did happen in 1980, but not nearly so much as in the previous recession in 1975. The result is that companies are running not much tighter financially than before the recession (C&EN, May 5,1980, page 10). "Liquidity" (cash and relative cash coverage of liabilities) hasn't changed much. A C&EN survey of 20 leading U.S. basic chemical companies' 1980 annual reports shows the extent of the industry's continuing financial pinch: • Overall, companies'cash fell 11% in 1980; it rose 12% in 1975. • "Current ratio" (current assets divided by current liabilities) eked out a slight gain, to an average 2.0 from 1.9 in 1979; in 1975, the rise was to 2.4 from 2.2 in 1974. • Coverage of current liabilities with actual cash (the "cash ratio") similarly edged up to an average of
0.20 from 0.19 in 1979; in 1975, this ratio rose to 0.33 from 0.28 in 1974. Nine companies, many of them smaller ones, did lift their store of cash, including short-term investments convertible into cash, in 1980. Along with other measures described below, this created much stronger balance sheets, notably at Allied, American Cyanamid, Celanese, Reichhold Chemicals, and Rohm & Haas. But the cash drain at the majority of companies pulled the combined total down 11% from 1979. The store of cash dropped at the largest companies—21% at W. R. Grace, 22% at Monsanto, 41% at Du Pont, 33% at Dow Chemical, and 46% at Union Carbide. Partly as a result, overall current ratios hardly budged in 1980 from a year before. Ten companies managed a gain, led by Rohm & Haas' rise from 2.3 to 2.7, the highest of the group. But at several of the industry giants,
Financial ratios barely rose in 1980, and cash declined 1980 (roc—ion) Cash and marketable* Current Caen (S mHHon») ratio ratio
1979 Cash and marketable· Current (S muttons) ratio
197$ (reosatlo«J Cash and Cash niartcotaDfOS Current Cash ratio ratio ratio (S nWllloni)
1974 Cash and marhetabiss Currant (S nwMons) ratio ratio
1.4 3.2 2.0 2.4 2.4
0.28 0.11 0.22 0.54 0.28
117JÛU 35.5 423.3 128.0 42.5
.1.7. 1.4 1.4 2.6 2,6
0.31 0.16 0.27 0.13 0.33
0.16 0.12 0.88 0.44 0.22
168.2 22.2 324.1 98.2 2.2
1.6 2.0 2.9 2.3 2.0
0.20 0.08 0.63 0.46 0.01
2.2 2.4 3.1 2.5 2.4
0.11 0.09 0.42 0.55 0.25
22.8 19.7 53.6 426.1 14.6
2.3 2.3 2.5 2.2 1.9
0.45 0.10 0.39 0.38 0.18
2.4
0.33
$2230.2 -17%
2.2
0.28
Air Products Akzona Allied American Cyanamid Cabot
$ 64.5 17.7 189.0 180.6 108.2
1.3 2.1 1.4 1.8 2.0
0.18 0.09 0.16 0.23 0.34
$ 47.0 18.5 126.0 146.2 19.3
1.4 2.2 1.2 1.6 2.0
0.15 0.10 0.09 0.18 0.08
$ 37.2 12.2 86.0 154.1 23.4
1.3 2.6 2.2 2.4 3.0
0.19 0.12 0.27 0.46 0.34
Celanese Diamond Shamrock Dow Chemical Du Pont Ethyl Corp.
274.0 28.4 168.0 219.0 108.9
2.0 2.2 1.6 2.3 2.5
0.47 0.07 0.06 0.11 0.53
214.0 31.3 252.0 370.0 119.0
1.8 1.9 1.4 2.6 2.8
0.36 0.08 0.10 0.21 0.62
146.0 52.7 374.9 139.2 103.9
1,7 2.1 1.5 2.0 3.5
0.36 0.28 0.25 0.11 0.99
W. R. Grace Hercules Monsanto Olln Pennwalt
124.9 36.7 210.6 12.9 9.1
1.5 2.0 2.1 1.8 2.1
0.11 0.09 0.18 0.04 0.04
157.2 56.3 271.3 25.6 17.9
1.6 1.9 2.2 1.8 2.2
0.15 0.14 0.24 0.08 0.09
110.1 28.4 425.6 98.2 21.9
1.8 2.0 3.4 2.4 3.1
Reichhold Chemicals Rohm & Haas Stauffer Chemical Union Carbide WHco Chemical TOTAL (average for ratios) ANNUAL CHANGE
12.2 85.3 86.0 243.0 74.3
2.2 2.7 1.8 2.2 2.2
0.12 0.33 0.17 0.14 0.45
10.2 69.6 55.9 449.0 72.6
2.1 2.3 1.7 2.2 2.0
0.09 0.25 0.14 0.26 0.41
5.6 17.5 53.0 585.1 14.5
$2253.3 -11%
2.0
0.20
$2528.9 0%
1.9
0.19
$2489.5 12%
$ 45.8 9.0 72.8 179.4 25.2
Note: Current ratio is current assets divided by current liabilities. Cash ratio is cash and marketable securities divided by current liabilities.
May 4, 1981 C&EN
15
Business Debt still rose as inventories, receivables climbed 1980 FISCAL YEAR END SMIIHon·
Air Products Akzona Allied American Cyanamid Cabot Celaneee Diamond Shamrock Dow Chemical Du Pont Ethyl Corp. W. R. Grace Hercules Monsanto Olin Pennwalt Relchhoid Chemicals Rohm & Haas Stauffer Chemical Union Carbide Witco Chemical TOTAL
Inventoriée
$ 114.6 121.0 601.0 495.3 294.7
% chang· from 1980 1979
14% 2 0 -4 12
6% 28 81 3 30
Receivable*
$ 298.8 166.3 785.0 731.6 231.3
% change from 1980 1979
17% 0 4 6 19
27% 22 52 21 46
12 393.0 23 387.7 47 1,934.0 1 2,010.0 144.2 - 1 1
11 32 31 17 20
518.0 484.6 2,159.0 2,110.0 244.9
7 9 5 8 -2
21 39 25 21 22
6 5 -9 10 8
8 1 26 -1 12
743.5 417.8 1,334.1 291.0 218.4
1 2 4 0 3
16 23 15 13 22
812.5 337.2 832.3 286.8 205.7
74.7 -8 13 318.9 -4 305.2 1,887.0 6 83.5 - 2 5 7% $11,639.3
0 20 15 15 28 19%
132.9 272.1 361.8 1,598.0 191.6 $13,290.7
3 -2 17 12 23 7%
19 15 18 14 41 22%
% change from Payables" 1980 1979
25% $ 182.5 -1 109.7 673.0 - 1 2 6 282.7 16 200.6
11% 26 93 b 54
Short· term debt
% change from 1980 1979
- 1 % -13% $ 34.2 75 33 81.1 33.0 - 8 2 1942 43 89.8 - 5 5 52 36 51.2
0 14 1 7 -1
35 46 40 35 b
49.0 - 2 5 21.1 - 4 1 22 736.0 71 393.0 -1 18.9
51 -31 30 -11 2
12 501.3 -8 153.3 425.8 - 2 7 10 147.8 5 70.7
23 b b -4 28
228.1 - 1 4 72 148.3 2 238.8 70.6 13 21 73.5
12 71 b -19 38
-9 69.3 120.3 - 1 20 140.7 432.0 - 1 8 154.1 - 4 -4% $6257.2
19 41 20 22 65 b
237.0 263.6 1183.0 830.0 79.8
11 - 2 3 16.1 -14 32.6 - 1 6 34 38 275.6 -47 52 317.0 6.6 - 1 7 65 b 10% $2914.5
a Generally trade accounts; other major liabilities included for Akzona, Cabot, and Witco. b Accounting change makes comparison impossible.
the ratio fell—to 2.3 from 2.6 at Du Pont, to 2.1 from 2.2 at Monsanto, and to 1.5 from 1.6 at Grace. Cash ratios continue to show a sharp drop from levels of a few years ago. With the scant gain in 1980 to 0.20 from 0.19 in 1979, the 20 companies' average is way below where it wound up in the previous recession. Here, there is a much greater difference among companies than in the current ratio. Nine pushed the cash ratio up in 1980, some of them to much higher levels than the industry average—to 0.34 from 0.08 at Cabot, to 0.47 from 0.36 at Celanese, to 0.33 from 0.25 at Rohm & Haas, and to 0.45 from 0.41 at Witco Chemical. The industry's other outstanding cash-rich company is Ethyl, although the company's ratio fell to 0.53 in 1980 from 0.62 in 1979. At the opposite end of the scale, the cash ratio fell to 0.11 from 0.21 at Du Pont, to 0.09 from 0.14 at Hercules, to 0.07 from 0.08 at Diamond Shamrock, to 0.06 from 0.10 at Dow Chemical, to 0.04 from 0.08 at Olin, and to 0.04 from 0.09 at Pennwalt. Hence, if a business recovery is under way, the chemical industry is starting it with less financial leeway than at the start of the previous expansion in 1976. Companies may be learning to live with less coverage of their liabilities in times of high infla16
C&ENMay4, 1981
tion, but the stern measures some companies took in 1980 show that such acquiescence is not universally accepted. Behind the overall financial ratios, a look at the biggest day-to-day financing needs of these companies shows how widespread the pressure remained in 1980. Despite the recessionary drop in business volume, inventories (in dollars) still rose 7% in 1980 from 1979. A consolation is that this rate was down from 19% in 1979, in fact to below the inflation rate in chemical prices. Six companies actually cut inventories. A similar picture emerges for the industry's receivables (uncollected bills to customers). After a 22% rise in 1979, receivables' pace slowed to a 7% gain in 1980. Two companies, Ethyl and Rohm & Haas, each pruned receivables 2%. Even with the slower rates, receivables and inventories created an additional $1.7 billion financing load for the 20 firms after $4.1 billion in 1979. Companies only added to this load by tightening up in paying their own bills. After stretching out payables about a third in 1979 (on a different accounting basis at some companies), companies pulled down their outstanding bills 4% in 1980. Of course, doing so ate up more money, $255 million for the group.
With about $2 billion in extra financing created by inventories, receivables, and payables in 1980, it isn't surprising that companies increased their short-term debt 10% for the 20 firms, or $266 million. In 1979, the debt increased about 16% (with a few differences in accounting). Despite the overall standoff in companies' short-term financial management in 1980, some firms carried on the cinching-up tradition in a business downtrend. For example, under its new management, Allied turned decidedly conservative. The company increased its cash 50% to $189 million, raised its current ratio to 1.4 from 1.2 in 1979, picked up its cash ratio to 0.16 from 0.09, held inventories to no gain and receivables to just a 4% gain, trimmed payables 12%, and chopped its short-term debt (incurred largely for an acquisition a year ago) 82%. Among smaller companies, 1980 was notably conservative at Witco Chemical. The company raised its relatively large cash position 2% from 1979 to $74.3 million, its current ratio to 2.2 from 2.0, and its cash ratio to a very high 0.45 from 0.41. At the same time, Witco knocked down inventories 25%, cut payables 4%, and reduced short-term debt 17%. Only in receivables did Witco allow much of an increase, 23%. D
