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Capital offense

In revealing their capital spending plans for the coming year, companies provide mixed signals for the U.S. economy.

With the economy slowing down and fears of a recession looming, corporate America's plans for capital spending in the coming year have become the focus of much attention. Many on Wall Street worry that shrinking profits and a potential credit crunch may cause a capital spending pullback, which would in turn damage the economy further.

According to respondents to this month's CFO Forum, the outlook is mixed. A razor-thin majority of U.S. companies (50.6 percent) plan to increase capital spending in 2001 over last year's levels. But the factors underlying their decisions to spend either more or less may be cause for concern.

The biggest reason companies cite for increasing spending is to replace outdated technology or equipment (40.9 percent), compared with only 11.4 percent who say that demand has outstripped capacity. This could be an indication that companies are simply treading water rather than expanding rapidly. Moreover, of the companies that are not upping spending this year, 65.8 percent cite either excess production capacity or capacity at equilibrium as the reason.

The shaky state of the capital markets may also be keeping spending plans in check. Of the companies that plan to increase capital spending this year, 88.6 percent plan to finance it from internal operations. Far fewer see bank loans or bond issues in the cards, despite a recent pickup in activity for some credit markets, including investment-grade and high-yield bonds. And after the worst year in a generation for stocks, only 4.5 percent of companies report plans to finance increased capital spending by issuing common shares. Of this group, 40 percent will issue private shares rather than tap the public market.

Does your company plan to increase capital spending this year over last?

Yes 50.6%

No 49.4

If so, why?

To replace outdatedtechnology/equipment 40.9%

To increase productivity 25.0

To remain competitive in our industry 18.2

Demand has outstripped capacity 11.4

Other 4.5

If not, why not?

Currency turmoil has reduced sales and profits 4.9%

Excess production capacity 31.7

Capacity at equilibrium 34.1

Other 29.3

If you do plan to increase capital spending, how will you finance it?

From internal operations 88.6%

Bank borrowing 22.7

Private placement of debt 4.5

Public long-term debt 15.9

Common stock issue 4.5

Preferred stock issue 0.0

Venture capital 0.0

Other 2.3

If you anticipate doing a debt financing, what form will it take?

Public debt 42.3%

Private placement 42.3%

Both 15.4

Will you undertake a global debt offering?

Yes 16.4%

No 83.6

Will it be dollar-denominated or foreign currency-denominated?

Dollar 83.3%

Foreign currency 16.7

If you plan to issue stock, will it be public or privately placed?

Public 60.0%

Private 40.0

Will it be a global equity offering?

Yes 15.4%

No 84.6

When was the last time your company issued new equity?

Within the past 12 months 9.5%

Between one and two years ago 10.8

Two to five yearsago 17.6

More than five years ago 62.2

When was the last time your company issued debt?

Within the past 12 months 43.2%

Between one and two years ago 11.1

Two to five yearsago 30.9

More than five years ago 14.8

Did your company borrow long term in late 1999 or early 2000?

Yes 47.0%

No 53.0

If not, do you plan to borrow in the credit markets?

Yes 50.0%

No 50.0

Is your company planning to borrow in the credit markets, even though it may not need the funds immediately, to take advantage of low long-term rates?

Yes 11.1%

No 88.9

If you have borrowed recently, how much did you raise?

Less than $100 million 12.5%

$100 million to $249 million 25.0

$250 million to $499 million 22.9

$500 million to $749 million 20.8

$750 million to $1 billion 0.0

$1 billion-plus 18.8

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