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The Machinery of Cash

An irony of the downturn: the drop in sales that many midcap machine makers have suffered has helped them maintain decent cash earnings per share.

Editor’s note: To download a Microsoft Excel file containing the full results of the CFO Midcap 1500 Machinery Industry Scorecard, click here.

Hit by a 22 percent drop in first-quarter revenue, the machinery industry provides an example of how corporations are struggling to hold the line on cash in a bad year. But a look at 41 companies out of the CFO Midcap 1500′s machinery segment with first quarters ending March 31 of this year reveals that in some cases, these manufacturers succeeded.

To be sure, the group’s cash earnings per share dove to 9 cents in the first quarter of this year from the 23 cents it generated in the same period of 2008, the figures show. Overall, that’s about $117 million less year-over-year cash generated by the companies.

On the other hand, the 9 cents cash EPS the machinery mid caps reported compares favorably to the 0 cents those companies claimed for the first quarter of 2007, indicating that the companies had more money to put into the pockets of their shareholders than they did two years ago.

How did the machine makers and suppliers manage to dole out at least some cash to their shareholders over the bumpy two-year ride? For some companies, the conditions worked in their favor — at least in terms of cash EPS, which is calculated by dividing a company’s operating cash flow by its diluted shares outstanding. From an investor’s standpoint, the metric reveals how much cash a company has for such things as dividends and buybacks.

An irony of the downturn is that the decrease in revenues that many midcap machine makers have suffered may have helped them post better cash EPS. At Ampco-Pittsburgh Corp., a maker of forged steel rolls used by metal manufacturers, revenue dropped from $98 million for the first quarter of 2008 to $86 million for the first three months of this year.  At the same time, the company’s cash EPS surged to $1.35 in the first quarter of 2009 from 50 cents in the same period of the previous year.

The reason for the company’s 171% rise in cash EPS is “less monies tied up in the working capital,” Dee Ann Johnson, Ampco-Pittsburgh’s controller and treasurer, told CFO.com. “Our working capital has improved because our receivables and inventories have declined.” The cash winnowed from working capital increases cash EPS.

Indeed, the company’s net working capital improved strongly, declining from $123 million in the first quarter of 2008 to $94 million in 2009. Trimming its receivables balance from $74 million in the year-ago first quarter to $51 million in Q1 2009, it was also able to cut the value of its inventories from $74 million to $59 million in the same two quarters.

In its first-quarter 10-Q this year, the company attributed the drop in receivables to “stronger collections” and the drop in inventory values to “the economic slowdown.” In contrast, “the first quarter of 2008 was experiencing robust growth and record-level demand from steel and aluminum producers throughout the world.”

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