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Jack Keough: Shutdown, Sequestration Had Effect On Distribution

Fri, 11/08/2013 - 9:17am
Jack Keough, Industrial Distribution Contributing Editor

The brief shutdown of the federal government and sequestration has had an effect on the business operations of distributors and manufacturers, and could impact earnings in this quarter.

Grainger, for example, recently reported that sales performance for its federal government business had declined in the last quarter. Sequestration and the government shutdown remain significant headwinds for Grainger’s federal government business, said Laura Brown, Senior Vice President of Communications and Investor Relations.

In contrast, sales for Grainger’s state and local government businesses grew in the single digits in September.

Those numbers show, however, that Grainger’s total company sales for the quarter still increased five percent.

Peter McCausland, executive chairman of Airgas, pointed out in his company’s recent quarterly earnings report that it was difficult to gauge the shutdown’s impact.

“We have more than 1 million customers, many of which are small businesses. The degree to which the federal government shutdown may have affected our customers is difficult to gauge, but it can only have had a negative impact on business confidence and spending, particularly for our smaller customers,” McCausland said according to a transcript of the call as provided by www.seekingalpha.com.

“Growth is hard to come by in this economy. There's a lack of confidence, which is having a negative impact on business spending and on hiring,” he said.

Thomas Gallagher, chairman and CEO of Genuine Parts Co., which is the parent of Motion Industries, said the shutdown impacted the company in the second quarter. “I think, we saw some of that where we – in our Electrical business, for instance, where we deal with defense contractors and they continue to have some issues in terms of builds. Certainly, we saw it in the Office Products business indirectly where we sell to customers who sell into the governmental agencies. So we saw that demand drop off somewhat. As far as what happens now that we have at least a temporary resolution, it is too early to tell and we'll just have to wait and see how it develops over the next couple of weeks” he said.

Gallagher also said GPC expected to close on a small electrical acquisition by the end of October, which should add an additional $10 to $12 million to its revenue over the final two months of 2013. (Edited to add: GPC did close on two acquisitions, one in the industrial sector and one in the electrical. Click here for details.)

That acquisition will enable the Electrical Group to end the year with a more positive fourth quarter and position it for improved results in 2014, Donahue said.

Neal Keating, chairman, CEO, and president of Kaman Corp., parent of Kaman Industrial Technologies, said the furlough of government workers meant that submitted orders for payments couldn’t be signed off on because the workers weren’t there to pay the bills. “That turned out not to be a problem for us because it was a relatively short time frame,” he said.

Keating did say that Kaman experienced some slowdowns in the first few weeks of October, but the company says it hopes to make up that business during the quarter.

“But a lot will depend on our end customers as to whether or not they're able to receive equipment from us, because we just don't know how much their lines have been backed up,” he said according to a transcript of the call.

Manufacturers also reported a drop off in business because of the shutdown.

Stanley Black and Decker, a manufacturer of power and hand tools, cut its 2013 forecast due in part to the shutdown.

“We really believe that the U.S. government sequestration and shutdown has had a modest impact in Q3 and will have a slightly more significant impact on us in Q4,” said CFO Donald Allan in a conference call, according to www.marketwatch.com 

Daniel L. Florness, chief financial officer, executive vice president, and treasurer for the Fastenal Corp., clearly stated his opinion as to what is happening in Washington when he made the following comments on a conference call with analysts:

“I think as a nation, and I'll go out on a little limb here . . . we've grown a little bit accustomed to the fact that we have a bunch of folks in our nation's capital that a high percentage of the time, do things that are pretty damn dumb,” he said according to a transcript of the call. “And that's unfortunate, speaking as a U.S. citizen. With that said, I'm a firm believer, if there's core demand for the things that we sell, that core demand will be there. And I don't think that distraction is going to be that destructive longer term, but we don't know.”

Meanwhile, the job market has been hurt by the shutdown. The September ADP employment increase was revised recently to just 145,000 new jobs, down from the 166,000 reported a month ago.

"The government shutdown and debt limit brinksmanship hurt the already softening job market in October," the report said.

IHS Global Insight has reportedly estimated the shutdown cost American businesses about $1.6 billion each week, or $300 million per day and estimated the shutdown could take 0.12% to 0.16% off economic growth this quarter alone. And this doesn’t even include the impact of jobs and production losses in the private sector.

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