Owens-Illinois’s White agrees that companies should stay the course on long-range capital spending. “Can you really afford not to innovate for years?” he asks. “If you have a three-to-five-year strategic plan, you can’t put that plan on the shelf.”
Adhering to long-range plans, however, requires a hefty stash of cash, confidence in a decent return — and a strong stomach. The Shaw Group, a custom-engineering and pipe-fabrication firm serving nuclear-power plants and other energy projects, for instance, absorbed a stiff descent in its free cash flow, to $338 million in the third quarter of 2010 from $646 million in the year-ago quarter.
Brian Ferraioli, Shaw’s CFO, attributes the drop to the company’s involvement in an intrinsically “lumpy business” involving large projects with milestone payments. That lumpiness means that cash flow will vary strongly from one quarter to the next. But he insists “that cash is still strong at this company,” noting that Shaw’s operating cash flow was at $249 million through May, on the heels of a record $717 million in 2009.
The company’s confidence in the long-term global demand for cheaper energy allows it to plan for steady capex growth in the face of fluctuations in cash flow, according to Ferraioli. Indeed, the company’s capex ratio has continued to rise for more than three years.
4) They Are Ready to Move — Literally.
To maintain efficient use of capital and a flexible approach to markets, companies investing in capital equipment are attempting to make sure that equipment is as light and portable as possible. The idea is to be able to quickly shift manufacturing to adapt to new markets. “If you walked into any of our production facilities on day one and you went back there in a year, it would be different,” says George of Esterline. “We’re continually looking at ways to improve how we move our product through.”
Similarly, Shaw Group has just built a facility in Lake Charles, Louisiana, that will use modular techniques in constructing nuclear-power plants. Rather than building a plant entirely on site, the company will assemble large sections in the factory and ship them to the construction site to be put together. “It’s cheaper, more efficient, and safer doing these things in the plant,” said Ferraioli, noting that the company has spent $100 million on the plant.
5) They Believe That Information Technology Matters.
Increasingly, companies are learning that gaining a foothold in new markets requires a more tightly integrated IT architecture. So they are investing in ERP and other back-end systems that can provide a foundation for a truly global business by better managing all corporate data.
In the next three years, Integra LifeSciences will lay out “significant capex” to implement an ERP system, says CFO Henneman. “This company runs off more different systems than it should because we’ve done a fair number of acquisitions over the years. The time has come for us to develop a global system to operate more efficiently.”