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The likeliest scenario in a recovery, says Mulford, features a drain on cash.
AT&T, Verizon and Sirius/XM Radio top Mulford's list of big companies that maintained a rigorous focus on free cash flow. All three companies continued to show improvement in free cash generation.
In an April 2010 earnings conference call, Verizon CFO John Killian touted a contrast between earnings dampened by non-cash, non-operational charges related to deferred tax and pension expense recognition, and Verizon's robust cash flow. But he also noted that Verizon restrained capital spending. "Our cash summary presents a much different growth picture," he told analysts. 'Cash flow from operations in the quarter was strong, up 7.5 percent over last year. Our capital spending was down $251 million or 6.8 percent. Free cash flow at the end of the quarter was $3.7 billion, up almost $750 million or 25.6 percent."
In contrast, BadgerMeter, did not depend on cuts in capex to boost cash, according to the Lab's data. Instead, the company focused on working capital improvements. Despite slipping from a recent 11.52 percent peak in the trailing 12 months ended fourth quarter of 2009, cash flow margin was 7 percent in the second quarter of 2010. "If we were worried about cash flow we might not spend on R&D the way we are," says Johnson. "Municipalities pay us on time, we're good about capex. When you've got them under control, you can count on cash flow."
Johnson has stuck to a cash policy he proudly admits might sound naïve. Even in the toughest stretch, when companies routinely held back, BadgerMeter kept right on mailing checks due in 30 days on day 25. "It translates into sales sooner, shorter supply chain lead times and increased customer satisfaction," he finds.
Conversely, Johnson has no qualms about insisting his customers, including large municipalities and distributors who sell to small towns, treat Badger the same way. He buttonholed a chronic late payer at a conference with an option to take longer to pay -but pay a higher price. The distributor elected to pay on time.
Nxstage has also found a way to boost cash without crimping its ability to grow. In late 2007, Nxstage Medical bought Medisystems, a supplier to NxStage of disposable renal products such as blood tubing and needles. Both companies build home solution for kidney dialysis, but with the only machine approved for home use, Nxstage enjoyed a healthier market capitalization than a company with half again its $40 million in revenues. The acquisition did not interrupt steady improvement in cash flow to nearly breakeven from a 330 percent deficit in 2006, meaning the shortfall in free cash flow margin was 3.3 times revenue, the Lab calculated. In the fourth quarter of 2006, NxStage burned through $17 million in cash that came from sources other than revenue. "The latest quarter burned about $2 million," says Brown. "And we have plans by the beginning of this next year to go cash positive."
A pat on the back is in order, says Mulford. CFOs worked thorough tough times in an admirable way. The question today is how deft conservation of free cash flow will play out when it comes time to spend. "CFOs have learned what levers to pull to maximize cash flow and that's what they've been doing," says Mulford. "Now they're sitting on it and taking their time before spending." If waiting too long to pull the trigger sacrifices a competitive edge, successful cash policy may come ultimately at a stiff price.
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