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.
David KatzJune 9, 2009

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.

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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 “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.”

Similarly, K-Tron International, a Pitman, N.J.-based material-handling equipment manufacturer, saw bright operating results in the midst of decreased revenue. Even as its sales were declining by 13% in the first quarter when compared to the first quarter of ’08, K-Tron saw a stellar rise in cash EPS, from a deficit of 46 cents to a gain of $1.19.

Underlying the increase was a huge jump in net cash provided by operating activities, to $3.3 million provided in the first three months of 2009 from net cash used in operating activities of $1.3 million for the same period in 2008. The increase stemmed mainly “from reductions in accounts receivable and inventory and a smaller decrease in accrued expenses and other current liabilities, partially offset by a decrease in accounts payable and lower net income,” according to K-Tron’s 10-Q.

But working capital wasn’t the only source of cash improvements. Altra Holdings saw a tripling of its cash EPS, to 45 cents from 15 cents, which seems largely to have been based on a cut in selling, general, and administrative expense. The Braintree, Mass. manufacturer of products used in mechanical-power transmission cut its SG&A costs from $24.7 million in the first quarter of ’08 to $21.7 million in ’09.

The company attributed its SG&A decrease “to our strong cost reduction actions which began in the fourth quarter of 2008,” and which “focused on headcount reductions and the elimination of non-critical expenses,” according to company’s first-quarter 10-Q this year.

As with many other companies, however, Altra’s huge drop in revenue — 24% in Q1 of this year as compared to the first quarter of last year — had something to do with the decreased expense. In its filing, the company stated, “as a result of the decreased sales volume we have seen a reduction in outside sales representative commission costs.” The CFOs of Altra Holdings and K-Tron Holdings had not returned calls as of presstime.


2009 Q1 CFO Benchmark_Machinery


What Is the CFO Midcap 1500?

The CFO Midcap 1500 is an index created by CFO. Based on publicly reported data provided by Capital IQ, it consists of publicly traded companies headquartered in the United States that have annual revenues ranging from $100 million to $1 billion.


What Is Cash Earnings per Share?

Cash EPS is calculated by dividing a company’s operating cash flow by its diluted shares outstanding.


Why Is Cash Earnings per Share Important?

Cash EPS is a metric that measures how much money a company produces, over a given period, that is immediately available to be returned to shareholders or reinvested in the company’s operations. The metric can be used to benchmark a company’s cash-generation performance relative to others within its industry, to those in other industries, or to the midcap index as a whole.

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