Wednesday, May 21, 2003

Capital Spenders In The Downturn

WASHINGTON - If you want a grim statistic on America's economic health, look at capacity utilization. A measure of the usage of the nation's factories, mines and utilities, capacity utilization has dropped 10% since April 2000 and now sits at a 20-year low of 72%..

Despite the slack capacity numbers, some businesses have been ramping up over the past few years by increasing their capital investment and steadily adding to property, plant and equipment. It's a risky bet, to be sure, but it may well look smart when the economy improves.

Example: American Woodmark, a manufacturer of kitchen cabinets with $499 million in revenue. For the latest 12 months, American Woodmark's capital spending stands at $45 million, up from $23 million for the comparable period a year ago. On a five-year annualized basis, the company's capital expenditures have risen 54%. The money has gone to projects such expanding assembly and finishing capacity at plants in five states.

Yet even with the capital-investment drive, American Woodmark has managed to keep its free cash flow (net income less capital expenditures plus depreciation) in positive territory. As its capital expenses fall, that free cash flow will likely get a boost, giving the company the flexibility to repurchase shares or pay down its modest $19 million in long-term debt.

So far, American Woodmark's expansion has had mixed results. Profits have climbed from $4 million in fiscal 1996 to $32.2 million for the firm's fiscal year ended April 2002. But year-over-year quarterly net margins have slipped from 6.2% to 4.9%. Shares have dipped accordingly--the stock trades 30% off its 52-week high.

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