Cash Flow

Revenue Dip Signals Post-Recession Weakness

A new study shows that revenue from non-financial companies fell more than 5 percent through March, which could mean the start of a slowdown in the...
Kathy HoffelderJuly 12, 2013

A new report studying the revenue trends of more than 2,900 publicly traded non-financial companies with median market capitalizations of $50 million or more suggests that this could be the beginning of a slow-down in the U.S. economy.

Median revenues decreased 5.23 percent, from $788.5 million  for the twelve months ended December 2012 to $747.23 million for the first quarter of 2013. During that period, capital spending also fell after eleven consecutive quarters of rising.

The glum news comes from a study by Charles Mulford, director of the Georgia Tech Financial Reporting & Analysis Lab. Mulford notes that if a decline in capex continues, the Fed will likely “continue its accommodative policy.” Federal Reserve Chairman Ben Bernanke earlier this week suggested that the Fed will keep up efforts to maintain low interest rates.   

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Mulford’s report, however, bucks recent announcements by the U.S. Federal Open Market Committee made in June that economic activity was expanding at a moderate pace and that labor-market conditions showed further improvement.  

While it is still to be determined whether the current slippage in revenues for companies in the study is just a “hiccup” or the start of a new decline in business activity, Mulford says “recent weakness seen in the U.S. is starting to show up in our numbers.”

Free cash flow (how much cash a company has beyond what it currently needs to grow) particularly took a hit in these companies during the period studied. “With declining revenues and free cash margin [an average of free cash flow], median free cash flow also decreased during the March 2013 reporting period. For the twelve months ended March 2013, median free cash flow decreased to $23.58 million, down from $27.55 million for the twelve months ended December 2012, but slightly up from $23.12 million for the twelve months ended March 2012,”according to the report.

In terms of industry, some companies in the study escaped the drop in free cash margin, however. Entertainment, food product, candy and soda, consumer goods, apparel and pharmaceutical firms, for example, fared better than most. Collectively, companies in those industries enjoyed “improving free cash margin,” according to the report, which notes a 27 percent rise to 9 percent for the first quarter of 2013 from 6 percent during the fourth quarter of 2012.

Theaters and amusement parks, for one, tend to have high percentages of fixed costs like rent or depreciation of rides, which can actually help boost their cash flow, says Mulford. “When revenues increase, costs don’t increase as quickly, boosting operating margins. The fortunes of this industry are very much tied to domestic discretionary spending.”

If the economy strengthens, this group should experience an even further increase in free cash margin, he notes. The companies also should be fairly well protected against a weak global economy, since the firms are mostly domestic in scope.

Improving fortunes in this group, he adds, are being driven by growing revenues, which are up almost 9 percent, to a median of $539 million for the 12 months ended Q1 2013 from $496 million for the 12 months ended Q1 2012. Sales were also up 16.4 percent from the low of $463 million reached in the 12 months ended Q1 2011.   

But other industries aren’t so well positioned when it comes to revenue and free cash margin. The precious-metals industry, which consists primarily of gold and silver mining companies, saw a significant decline in median revenues, says Mulford, noting that a precipitous decline in precious-metals prices hurt operating margins. Median revenues are off 25 percent for this sector, from a peak of $208 million reached in the 12 months ending June 2011, down to $208 million in the March 2013 reporting period. 

“When revenues fall as fast as they have for this group, companies are unable to cut operating expenses as quickly, hurting operating margins (operating cushion) and, accordingly, free cash margin,” he explains. For this group, he says, a declining revenue base will likely continue to put pressure on free cash margin, which has declined 94 percent year over year for the 12 months ending March 2013.    

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