Crane Co. 2016 Form 10-K Summary
Business context and reporting period
Crane Co. reported results for the fiscal year ended December 31, 2016, with fourth-quarter information included. The company was a diversified manufacturer with four segments: Fluid Handling; Payment & Merchandising Technologies; Aerospace & Electronics; and Engineered Materials. Approximately 36% of 2016 sales were generated outside the United States. The company employed approximately 11,000 people.
Key financial metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $2,748.0 million | $2,740.5 million | Approximately flat; core growth of 2% offset by $48 million of foreign-exchange headwind |
| Operating profit | $200.3 million | $372.9 million | Down 46% |
| Operating margin | 7.3% | 13.6% | Down 6.3 percentage points |
| Income from continuing operations | $123.8 million | $230.0 million | Down 46% |
| Net income attributable to common shareholders | $122.8 million | $228.9 million | Down 46% |
| Diluted EPS | $2.07 | $3.89 | Down 47% |
| Operating cash flow | $318.1 million | $229.3 million | Up $88.8 million |
| Capital expenditures | $51.5 million | $39.6 million | Up $11.9 million |
| Cash and cash equivalents | $509.7 million | $363.5 million | Up $146.2 million |
| Total debt | $745.3 million | $798.9 million | Down $53.6 million |
| Net debt | $235.6 million | $435.4 million | Down $199.8 million |
The effective tax rate was 24.6%, compared with 31.7% in 2015. Cash dividends were $1.32 per share. Total debt to capitalization was 40%, and the company had no borrowings under its $500 million commercial paper program or $500 million revolving credit facility at year-end.
Segment performance
| Segment | 2016 sales | 2016 operating profit | 2016 margin | Change versus 2015 |
|---|---|---|---|---|
| Fluid Handling | $999.5 million | $119.5 million | 12.0% | Sales down 8%; profit down 5%, reflecting weakness in oil and gas, chemical, power and industrial markets |
| Payment & Merchandising Technologies | $745.8 million | $135.5 million | 18.2% | Sales up 6%; profit up 34%, supported by higher core sales, productivity and MEI synergies |
| Aerospace & Electronics | $745.7 million | $149.8 million | 20.1% | Sales up 8%; profit up 3%, driven largely by a large military program |
| Engineered Materials | $257.0 million | $49.0 million | 19.1% | Sales up 1%; profit up 1% |
Material changes versus the prior comparable period
- Reported profitability fell sharply because the company recorded a $192.4 million pretax asbestos provision in the fourth quarter and a $5.0 million legal settlement charge related to Huttig.
- The asbestos estimate was extended from 2021 through 2059. Total asbestos liability increased to $696 million, including $71 million classified as current, while estimated insurance recoveries totaled $143 million.
- Excluding the asbestos charge and other unusual corporate items, segment operating profit increased overall, led by Payment & Merchandising Technologies, Aerospace & Electronics and Engineered Materials.
- Fluid Handling remained under pressure from weak end-market demand, foreign exchange and competitive pricing. Its backlog declined to $228 million from $267 million.
- Total backlog declined to $691 million from $782 million, primarily due to lower Aerospace & Electronics and Fluid Handling backlog. Payment & Merchandising Technologies backlog increased to $94 million from $63 million.
- Operating cash flow improved materially, aided by lower working-capital requirements and lower pension and environmental payments. Net asbestos-related cash payments increased to $56 million from $49.9 million.
- Goodwill and net intangible assets totaled approximately $1.43 billion, or approximately 42% of total assets. No goodwill or intangible impairment was recorded.
Guidance, outlook, risks and contingencies
For 2017, management expected total sales to decline approximately 2%, reflecting approximately 3% unfavorable foreign exchange and a 0.5% impact from completion of a transition-services agreement, partly offset by approximately 1% core growth. Management expected substantial improvement in operating profit and margins because the asbestos provision would not recur, productivity would improve, core volume would increase and Aerospace & Electronics engineering expense would decline.
- Fluid Handling sales were expected to decline in the mid-single-digit range, with lower profit but approximately stable margins.
- Payment & Merchandising Technologies sales were expected to increase in the mid-single-digit range, with substantially higher operating profit.
- Aerospace & Electronics core sales were expected to decline in the mid-single-digit range because the large 2016 military program would not repeat, but operating profit was expected to increase due to mix, productivity and lower engineering expense.
- Engineered Materials sales were expected to increase slightly and profit to remain approximately flat.
- Material risks include asbestos claims and estimation uncertainty, environmental remediation, cyclical demand, oil and gas weakness, defense appropriations, foreign-exchange volatility, raw-material prices, supply-chain disruptions, product liability, government-contract compliance, cybersecurity, tax matters, pension funding and potential goodwill impairment.
- As of December 31, 2016, the company faced 36,052 pending asbestos claims. Management stated that future changes in claims, litigation outcomes, defense costs, insurance recoveries or applicable law could materially affect results, cash flow and financial position.
- The company reported a $49 million environmental liability for the Goodyear Site, with estimated costs extending through 2022. A separate Crab Orchard Site obligation was considered probable but could not yet be reasonably estimated.
Most important facts for investors to verify
- Whether the $696 million asbestos liability and $143 million insurance receivable remain adequate as claims, settlement costs and insurer recoveries develop.
- The sustainability of 2017 margin improvement after excluding the nonrecurring asbestos provision.
- Fluid Handling demand, pricing and backlog trends, particularly in oil and gas, chemical, power and industrial markets.
- Whether Payment & Merchandising Technologies growth and MEI synergies continue at the expected pace.
- The effect of the completed large military program on Aerospace & Electronics revenue, backlog and mix.
- Cash generation after asbestos, environmental and pension payments, including approximately $50 million of expected 2017 capital expenditures.
- Refinancing or repayment plans for the $250 million of notes due in December 2018.
- Foreign-exchange exposure, including management’s estimate that a 10% broad currency movement would affect net earnings by approximately $6.2 million.