Who Put the Brakes on Capex Spending?

The number of capital-intensive companies that halted capex spending reached 42 in 2007.
Marie LeoneFebruary 3, 2009

The amount of capital expenditures a company makes during the year often provides clues about the company’s growth plans. Indeed, increased capex spending – which includes purchases of property, industrial building, and new equipment – usually means a company is preparing to expand its operation in some way. The converse is often also true.

Across the board, companies have slammed the brakes on capital spending to minimize the outflow of cash. Capex increased 18 percent in 2006 but just 3 percent in 2007 for a sample of 300 companies, according to management consulting firm PRTM. Further, the outlook for capital spending is remarkably bleak, with finance chiefs in Europe looking to slash capex by 11 percent over the next 12 months, compared with predictions for modest growth in previous quarters, according to the latest poll of senior finance executives by CFO Europe.

A slowdown in capital spending has also affected those who do it the most – executives at companies that operate in capital-intensive industries like mining, oil and gas exploration, and electric and telecom utilities. A new study from Georgia Tech’s Financial Analysis Lab takes a look at 92 capital-intensive companies and their capex spending trend over a recent one-year period. The study’s main purpose is to focus on the link between capex spending during a recession and a company’s risk of increased tax payments as deferred tax liabilities come due. Deferred tax liabilities rise and fall as depreciation schedules of capital purchases change.

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In the study, authors Charles Mulford, Jason Blake and Sohel Surani, found that unless companies continue to maintain or increase their capex spending, they will be in danger of driving up their tax bill (see article). That’s because slowing or stopping capex spending usually leads to a hike in reported tax income. The hike is caused by a decrease in deferred liabilities to offset current liabilities. In the report, the researchers study corporate financial statements from 2007 to calculate whether capex spending for the companies in the report was on the rise or sinking.

They then calculate the dollar amount of each company’s net deferred tax liabilities. Those liabilities are what a company would owe the Internal Revenue Service in addition to a regular tax bill in the unlikely event that all the deferred liabilities came due at once. The authors also calculate the net deferred tax liabilities as a percentage of total company assets.

The figures below present a complete version of the study’s findings in table format, ranked in order of capex spending increases and decreases. The original article on, “Tax Tip: Spend Your Way Out of the Recession,” included an abridged version of the tables, ranked by gross tax liabilities, rather than capital spending.

The companies are divided into two groups , one representing capital-intensive companies that increased capex spending between 2006 and 2007, and the other which lists companies that have slowed capex spending. (DTLs in the table refer to deferred tax liabilities.)

BeefingUp chart
SlimmingDown chart