Cash Flow

Auto Sector Drives Discretionary Spend

“We’re seeing healthy growth and free-cash generation. We’re seeing a return to normalcy and growth,” a cash-flow guru observes. Much of it can be ...
Kathy HoffelderFebruary 7, 2013

In a positive sign for the economy, a new study suggests that consumers are buying nonessential items after the lull triggered by the recent recession. In the auto industry, for instance, companies that make such items as heated seats, thermal cup holders, and all-terrain vehicles are seeing a rise in revenue and free cash flow.

Revenues for the automobile and truck sector (which includes auto-parts makers and manufacturers of heating and cooling containers and bins) on average rose 7% to $2.4 billion for the 12 months ended September 2012, according to figures supplied to CFO. The numbers come from a study of 2,848 companies with a market capitalization of $50 million or more done by Charles Mulford, director of the Georgia Tech Financial Reporting & Analysis Lab.

The auto and truck sector contributed to a median revenue rise among all 44 industries to $776.47 million for that time period, more than 3% above the prerecession 2008 peak of $751.15 million. It’s also a 14.9% increase over the $675.82 million reached during the year-ago 12-month period.

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Mulford explains that during the recent recession years, customers were less likely to buy nonessential auto items or even essential replacement parts. While such products can have a wide variety of uses outside of their use in autos, he notes, they tend to go unsold during a tough economy. But now he expects firms that make these products to see more interest from consumers. “If you look at median revenues, we’re seeing healthy growth and free cash generation. We’re seeing a return to normalcy and growth,” he says.

Government data also reveals the auto sector as a big driver of the nation’s discretionary spending. According to the Bureau of Economic Analysis, purchases of motor vehicles and parts made up almost half of the increases in personal consumer expenditures (adjusted for inflation) at the end of 2012. Purchases of durable goods rose 1.3% in December 2012, following a rise of 2.9% in November 2012. Overall personal-consumption expenditures rose $22.6 billion, or 0.2%, in December.

Minnesota-based Arctic Cat, a maker of all-terrain vehicles and snowmobiles, is a prime example of one company in Mulford’s study that’s already benefiting from discretionary spending. Arctic Cat reported net sales for the first nine months of 2012 of $558.4 million versus net sales of $486.8 million for the same time period in 2011. Sales of all-terrain vehicles rose 28% to $69.6 million for the third quarter of 2012, and increased 40% for the first nine months of fiscal 2013 to $212.2 million from $151.1 million over the same period of fiscal 2012.

The firm credits strong demand for all-terrain vehicles from both the United States and abroad for its revenue increase. But a season of scanty snow put a damper on its snowmobile sales, which fell 2% to $122.4 million from $125.2 million.

Timothy C. Delmore, CFO of Arctic Cat, said on its earnings call in January that the firm saw an increase in parts and accessory sales in its third quarter after sales of parts, garments, and accessories fell 5% to $26 million for the same quarter last year. “We are very pleased with our third quarter and year-to-date results, that are in line with our expectations,” he said.

Citing data from Cash Flow Analytics, Mulford says other positive factors have been at play of late. In his analysis, Arctic Cat’s free cash margin, its average free cash flow taken as a percentage of revenue, surged more than 10% during the third quarter, rising from -1.10% for the 12 months ended 2011.

Free cash margin, a metric developed by Mulford, provides companies with a way to determine what percent of a firm’s revenue is available for shareholders in the form of free cash flow. Companies, of course, strive for positive free cash flow. Indeed, Arctic Cat chief executive officer and president Claude E. Jordan said on the earnings call that “going forward, we will continue to focus on our cash position and expect to generate positive cash flow this fiscal year.”

Mulford determined from his analysis that there is a “steady increasing trend” in free cash margin for the auto sector currently. These firms “can probably plateau at a level much higher” than where their free cash margin has been in the past several years, he says. Mulford’s study shows free cash margin for this group rose to 2.63% for the 12 months ended September 2012, which is up from 1.17% for the 12 months ended September 2011.

Northville, Michigan-based Gentherm, a manufacturer of heated seats and storage bins, cups, and cooling seat systems, is another firm in this category. Mulford says its free cash margin was 5.4% for the 12 months ended September 2012, up from 1.24% for the 12 months ended September 2011.

On Gentherm’s conference call in November, the firm cited new-product launches as a boost to its revenues, which rose 12% in the third quarter to $141.1 million, up from $125.6 million this time last year. For the first nine months of 2012, its revenues rose to $406.7 million from $238.6 million compared with the prior-year period.