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U.S. companies still cutting capex to boost cash Print E-mail
Saturday, 19 December 2009

By Ronald Fink

U.S. companies continue to maintain their profitability in the face of declining revenues by cutting their capital expenditures, according to a study released on Friday.

The study of 3,704 companies with revenues of over $50 million by the Financial Analysis Lab of the Georgia Institute of Technology found that their free cash flow margin, the percentage of free cash flow divided by revenues, improved to 5.4 percent during the third quarter of 2009. That is the highest level observed by the lab since it began tracking the metric in 2000.

While the authors of the study described that finding as "remarkable," they noted that it appears to have been achieved primarily as a result of reduced capital spending.

Capex as a percentage of revenue was 3.0 percent, the lowest the lab has ever observed and down sharply from 4.2 percent a year earlier. The ratio is now even lower than it was before the 2001 recession.

"What is particularly remarkable about the feat is that firms have continued to improve on free cash margin even as median revenue has declined," wrote Charles Mulford, an accounting professor at Georgia Tech and an advisor to CFOZone, and Brandon Miller, a graduate research assistant.

The study found that median revenue for the sample peaked a year ago, in the twelve months ending September 2008, at $751.1 million, and has been falling ever since. For the twelve months ended September 2009, median revenue was $528.4 million, a 29.7 percent decline.

Only one of twenty industries—pharmaceuticals, biotechnology and life sciences—experienced a decline in free cash flow margin. Another eight—energy, transportation, media, health care equipment and services, software and services, technology hardware and equipment, semiconductors and semiconductor equipment, and utilities—showed stable margins.

Of the 11 other industries showing increases in free cash margin, the biggest gainers were automobiles and components; food, beverage and tobacco; and household and personal products.

In the auto segment, where the margin more than doubled to 2.9 percent from 1.2 percent a year earlier, Ford Motor stood out with an increase to 5.6 percent from 0.3 percent. The standouts in the two other segments were Kraft, whose cash flow margin rose to 9.1 percent from 6.0 percent, and Kimberly-Clark, whose margin rose to 12.7 percent from 8.6 percent.

Unlike most other companies, Ford increased its capital expenditures as a percentage of revenue, to 4.6 percent from 4.2 percent. The automaker improved its cash flow margin by reducing its days of inventory, to 21.2 days from 27.4.

Yet an increase in inventories may be the brightest finding for the overall sample. The study found that inventory for the 3,704 companies increased to an average of 24.5 days at September 2009 from 20.8 days at June 2009.

"Companies appear to be 'stocking up' in anticipation of higher company sales," Mulford and Miller wrote.

They noted this was the first meaningful increase in inventory they've seen since the twelve months ended June 2008, and that it brought inventory days to levels that existed before the latest recession began.

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