Captains of Capex

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

Another firm that has used its capex to expand globally is Maximus Inc., a health-and-human-services business-process outsourcer that specializes in the government sector. Massive public-sector budget-cutting has been good for outsourcers; Maximus, for instance, helps states administer welfare-to-work programs and public-health insurance programs such as Medicaid and the Children’s Health Insurance Program, and tracks down deadbeat dads.

“Our solutions export quite well. The states study each other and the [governments of the] world study each other, and they land on similar models,” says David Walker, the company’s finance chief. The BPO company will end the year with about 30% of its revenue coming from outside the United States, up from 8% five years ago and 15% in 2008.

2) They Used the Recession to Plan for Growth.

Although companies with a high capex/sales ratio and good cash flow were battered less by the economic crisis than were other companies, many suffered from cash constriction for a quarter or two during 2008 and 2009. Some responded by decreasing capex, but they tended to regard such cuts as a pause in their long-term spending plans rather than a departure from them.

For some, it was a pause that refreshed. Integra LifeSciences Holdings registered a dip in its normally robust capex/sales ratio from the second quarter of 2008 through the third quarter of 2009. “We certainly went through a period of being cautious, particularly during the most challenging part of the credit crisis,” John Henneman, the company’s CFO, acknowledges. “Like a lot of companies, we wanted to be very careful about the possibility that borrowing money in the future would be difficult, so we ran the company carefully and spent that time paying down a lot of debt.”

But the company, which makes surgical implants and medical instruments, was also “at a natural point of transition in a number of areas of our business,” he says. “We spent some time thinking about what we should do next, rather than just doing it.” Out of that period came a decision to boost capex to fund two new projects: the construction of an internal enterprise-resource-planning (ERP) system and the deployment of instruments that surgeons use to put in the company’s implants. Deployment of those instruments should help the company spur sales of the implants, its core business. As of first-quarter 2010, the company had increased its capex ratio to more than 4%, a high for at least four years.

3) They Spend Through Business Cycles.

Last year, Esterline’s capex hit an all-time high in the company’s 43-year history, says CFO George. That was a brief departure from what had been a very consistent pattern. For 10 straight quarters through the first quarter of 2009, Esterline’s capex ratio had hovered between 2.16% and 2.67%.

Such predictability is music to George’s ears. It represents the company’s intention to keep capex on a straight line regardless of its industry’s fortunes. “We believe that it gives us a competitive advantage as the cycle turns. Having been in aerospace and defense for a long, long time, we have great faith and confidence that those cycles will turn,” he says. “And when they begin to turn up, we’ll be able to respond to our customers.”


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