Cash Flow

We’re Back: Revenues Beat Recession Levels

Median sales for 2,900 big companies jumped 18.9% in the second quarter.
Kathy HoffelderOctober 26, 2012

Revenues of nonfinancial companies surpassed recession levels for the first time in the second quarter, according to a study of almost 2,900 nonfinancial publicly traded firms with market caps of $50 million, according to Cash Flow Analytics data.

Median revenues rose 18.9%, from $633.57 million in Q2 2011 to $753.35 million in Q2 2012, according to an ongoing study conducted by Charles Mulford, an accounting professor at Georgia Tech University and director of the Georgia Tech Financial Reporting & Analysis Lab. That’s more than the precrisis peak of $751.5 million reached in the reporting period ending in September 2008.

In fact, the median revenues the study recorded for the four quarters through Q2 are higher than they have been in any period Mulford has surveyed dating back to 2000. On a quarterly basis, those revenues rose 4.71% from Q1 2012 to Q2 2012.

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The report shows that the U.S. economy has found its footing, says Mulford. “The U.S. has had an extended period of weakness, and we’re continuing to see a snap-back in revenues, which hopefully will continue,” he adds.

Rising revenues doesn’t necessarily signal a clear-cut economic revival, though, according to the professor. Mulford maintains that corporate financial success is dependent on not only a company’s ability to generate revenue and earnings but also cash flow, especially free cash flow. Still, the report is positive in that respect as well: Median free cash flow rose 16.71%, to $25.21 million for Q2 2012 from $21.69 million in Q2 2011.

Signs of a recovery are also reflected in Mulford’s own “free cash margin” metric (free cash flow divided by revenue), which has now stabilized at prerecession levels. During the recession, free cash margin rose only because of significant corporate cuts in sales general and administrative (SG&A) spending and inventories, according to the report. “But now those trends are reversing and spending is returning to more normal levels. As median revenues continue to grow, these factors point to strength in the U.S. economy,” according to the report.

During the year ended June 2012, median free cash margin rose in 7 industries, was relatively stable in 25, and dropped in 12 industries with declining free cash margin. Among the gainers, the ability to curb spending was a key factor.

That certainly was the case for the electrical-equipment business. Electrical-equipment companies saw their median free cash margin rise to 5.78% for the 12 months ending June 2012, up from 3.7% for the 12 months ending March 2012. The reason for the rise? An increase in gross margin and a decline in the outlays for SG&A.

To be sure, sales are booming in the industry. Not every CFO can say this is turning out to be the best year ever in terms of revenue, however. But that’s exactly what Don R. Madison, finance chief of Powell Industries, a Houston-based company that makes equipment to control the flow of electricity, did on his company’s earnings call.

At that time, Madison said Powell Industries’s revenue for the year was projected to be in excess of $700 million, which basically represents “the strongest performance the company has ever had.” He further noted that “even if you discount the growth that we’ve experienced in Canada due to the acquisition in Canada, we’re looking at probably delivering 95% plus or minus of the revenues and the strongest year in the history of the company.” (Powell entered into an agreement to acquire PowerComm, a Canadian manufacturer, earlier this month.)

Another company, AZZ Inc., a maker of electrical bus systems and a metal-coatings provider based in Fort Worth, Texas, has enjoyed double-digit improvement in revenues during fiscal year 2012. Dana Perry, the company’s CFO, said last month on the company’s earnings call that revenues for the quarter ending August 31 were $153.4 million versus $114.7 million the previous year, according to a transcript contained on S&P Capital IQ.

Just how did they do that? The company’s electrical and industrial-product segment generated 40% of its revenues for the quarter, with its galvanizing services for coating metals making up the rest of the revenues.

Both Powell and AZZ credit strong demand for their electrical products coming from key customer areas such as oil and gas, transportation, transmission lines, and solar-power-generation projects.

While that’s a lot of good news, there is a downside to all of that revenue growth. Companies in Mulford’s report, in general, are not actually putting that money raised from the sale of their goods back into their firm — at least not yet.

“There’s still evidence with slow capex growth and increasing cash balances that companies are still not spending freely,” Mulford says. In particular, he notes “companies are still showing some spending restraint,” which he attributes to a “continuation of lessons learned during the recession.”

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