Captains of Capex

Some companies have outpaced the field in capital investments even as they've kept the cash flowing. What are their secrets?

And several dozen other companies, while showing some quarter-to-quarter fluctuations, also maintained stable capex growth at a time when most of their peers were loath to part with cash for any reason. What kinds of companies are they? What are their strategies? How have they managed to keep investing for the long term in the face of a powerful economic downturn? And what can your company learn from them as the crisis abates and strategies pivot slowly away from cost-cutting and toward growth? Based on interviews with finance executives, here are six common traits of companies that have bucked the trend.

1) They Are in the Right Place at the Right Time.

There is no denying that when it comes to spending big, or at least bigger, on capex, it certainly helps to be in an industry that is outpacing the general economy. These days that largely means health care, energy, aerospace, and business-process outsourcing. For many companies in these sectors, steady increases in capex are almost mandatory because they are the market leaders and they want to keep the competition at a distance. Esterline Technologies, for instance, is a specialized manufacturing company that derives about 80% of its sales from the aerospace and defense industries and 20% from the application of its technology elsewhere. While the
commercial-airline industry that it serves has been hit hard by the recession, the company’s defense contracts assure it a solid base of revenue for years to come.

Virtually all of Esterline’s operating units are number one or number two in their niches, according to Bob George, the company’s CFO. The finance chief freely acknowledges that Esterline’s strong market position has enabled it to boost its capex-to-sales ratio over the last three years. “I don’t think you can take any company’s investment decisions out of context from the industry it competes in,” he says.

But Esterline is also spending with an eye toward further growth. Recently, for instance, it built new facilities in Middle Wallop, England, and Everett, Washington, and expanded its existing facilities in Mexico and in Coeur d’Alene, Idaho. “The expenditures were all based on current demand and/or projections of future demand,” George says.

Similarly, Owens-Illinois, a maker of glass containers for soft drinks, spirits, and pharmaceuticals, continued to boost its capex/revenue ratio, hitting a peak for recent years of nearly 8% in the second quarter. It hasn’t been immune to the recession: last year, the company’s sales were off 10% and it cut both its inventory and its workforce (from about 25,000 to 22,000), while also decreasing its machine lines. (CFO Edward White insists, however, that head-count reductions and machine-line shutdowns are part of a three-year restructuring effort and not driven by the recession.)

Unlike many other companies, however, Owens-Illinois isn’t sitting on the cash it’s wrung from those cuts. The company’s goal has been to “have working capital as a source of cash, not a use of cash,” says White. The company plans to expand its existing operations in South America, Southeast Asia, and China; already, 70% of its revenue comes from outside the United States.


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