Manufacturers have scaled back spending on large projects during the coronavirus pandemic, but many say they’re continuing with software upgrades and technology initiatives to keep up with changing customer needs and remain competitive.
Public companies such as water-technology provider Xylem Inc., industrial-equipment manufacturer SPX Flow Inc. and automation provider Rockwell Automation Inc. said they’re using already allocated capital to maintain or accelerate investments in technology and research.
Industrial manufacturers‘ capital expenditure typically goes toward improvements in business processes or new equipment. As the pandemic disrupted companies’ usual operations, many have cut planned expenses to preserve cash. But spending on many long-term digital and technology projects has been spared.
A three-month moving average index of planned capital spending among U.S. manufacturers dropped in May to its lowest level since May 2009, according to Morgan Stanley, which maintains the data. But the index, compiled from Federal Reserve surveys of manufacturers, rebounded strongly in June, suggesting that companies are more likely to make business investments over the second half.
Large manufacturers, which typically spend around 3% to 5% of annual revenue on capital expenditures, don’t want to weaken their ability to meet customer demand even during the pandemic and lose market share coming out of the economic downturn, said David Berge, a senior vice president at Moody’s, the ratings company.
Xylem, a Rye Brook, N.Y.-based provider of technology ranging from irrigation systems to pumps for water parks, is pausing spending on equipment but accelerating investments in software that supports its digital tools, according to Chief Financial Officer Mark Rajkowski.
“You have to be ambidextrous,” he said.
Xylem expects to cut its annual capex spending by $40 million to roughly $200 million this year, he added. The company generated $5.2 billion of revenue last year and spent $226 million on capex.
Rockwell Automation will continue to invest in using Workday, the cloud-based software system for managing employees, and other technology projects to support its software offerings.
The automation provider reduced its capex forecast for the year to $130 million from $160 million, but “projects that we’re not cutting are projects that generally drive productivity,” Chief Financial Officer Patrick Goris said. Instead, Rockwell is delaying noncritical maintenance projects, in part because lower volumes is reducing the strain on manufacturing equipment.
Some companies made spending decisions based on customer demands and needs, especially as they watched how clients responded to the pandemic.
Xylem, for instance, saw demand from its industrial and commercial customers drop as mining and construction projects shut down. The water-technology company halted investments in new pumps and other equipment that it would have rented out to those customers, Mr. Rajkowski said. But utility customers that provide drinking water and wastewater services wanted to operate their systems remotely, and so Xylem ramped up investment in software for tools that identify technical issues, he said.
SPX Flow has also been tracking changing customer needs to determine its investment plans. The Charlotte, N.C.-based company is developing a digital portal where customers can view prices and inventory and customize the products they want to buy, its finance chief Jaime Easley said. The pandemic has led the company to prioritize this investment as SPX Flow’s employees aren’t able to go on customer sites now to do demonstrations and give cost estimates, he said.
Mr. Easley said the decision to continue investing was made easier by the company’s recent sale of its power and energy business, a deal that closed in March and generated $400 million of net proceeds. He added that SPX Flow’s capital spending for the year could potentially dip below the planned $40 million because some projects might be put back to next year.
Ernst & Young in May found that industrial companies with the highest capex from 2008 to 2012—a median 11.5% of sales—generated a median 130% return to shareholders from 2009 to 2018. Companies that spent the least—a median 1.3% of sales—delivered a median 60% gain to shareholders.
“If you’re building out your technologies, building out your capabilities, you’re doubling down on innovation and [research and development], you’re going to emerge from this in a very strong position,” said Mitch Berlin, Americas Operational Transaction Services Leader at EY.
SPX Flow, which historically spent 1% of revenue on research and development, is staying on track with its plan to increase that to 2% over the next three years, its CFO said.
“We invest through cycles, so when businesses go up and go down, some of the best investments that you’ll make will be in periods such as this,” Mr. Easley said.
Write to Elaine Chen at [email protected]
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