Captains of Capex

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

Companies also invest in IT to better interact with an expanding client base. Maximus sank money into its ERP system to meld an array of legacy systems into “a common framework that allows us to plug and play with client systems,” says Walker. The company wants to be “shovel ready” if the expansion of Medicaid and other federal-state programs under the new health-care law spawns new demand for its services.

6) They Are Focused on Returns.

One of the biggest reasons companies with hefty amounts of cash on hand put it into capex is that they feel it provides the best return on their investments. “We’re extremely focused on return on invested capital, and when we look at different ways to make investments of our cash or earnings,” says Jeff Hall, the CFO of Express Scripts, “investments in capex come at the top of the list because they have the highest return.”

Good acquisitions rank second, he says, “and if we still have cash remaining after we fill the first two buckets, then we’re left with looking at how do we want to return that cash to shareholders,” including dividends and share buybacks.

But investment in one of those categories does not necessarily conflict with investment in another. After recently buying a glass company in Argentina, Owens-Illinois will triple the size of the acquisition to serve what the company regards as an underserved market for fine wines. “So you make the acquisition. And then you go in with another $20 million or $30 million of capital to modernize and expand,” says CFO White. “Capex goes hand in hand with M&A.”

David M. Katz is New York bureau chief of CFO.

Going Without the Flow

Sustaining rising capital expenditures (capex) demands strong corporate will — and, often, steady cash flow. Sometimes, however, companies keep spending even when their free cash flow is declining.

How often is such an approach strategic, rather than obligatory? An analysis done for CFO by Charles Mulford, a Georgia Tech accounting professor and managing director of research at Cash Flow Analytics, suggests the answer may be “rarely.”

The search unearthed seven public, non-financial-services companies with rising capex and falling free cash flow over one- and three-year periods ending in March 2010. The companies (all of which have market caps greater than $1 billion, increases in reported capex to revenue of greater than 20%, and decline in reported free cash flow of up to 20%) are: Dendreon, NCR, MEMC Electronic Materials, Overseas Shipholding Group, Patterson-UTI Energy, Pride International, and Royal Caribbean Cruises.

Most seem locked into capex increases by the nature of their businesses. Dendreon, a biotechnology firm, endured steady losses as it developed a prostate-cancer drug that went on the market in May. NCR contributes to a reserve fund devoted to potential environmental liabilities.

Two oil drillers, Pride and Patterson, and Overseas, a bulk shipper, spent to keep their equipment in shape even as the economic downturn threatened sales. And, even as tourism took a dive, Royal Caribbean still was contractually obliged to pay for ships as well as to pay off maturing debt.

Sometimes, though, atypically high capex in the face of weak cash flow is a bet on the future: MEMC, a chipmaker, invested in new raw-materials production and solar energy despite uncertain demand in its industry. In a July earnings release, Ahmad Chatila, the company’s chief executive, said the outlays are “all meant to catalyze future growth.” — D.M.K.


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