Crane Co. Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2014; filed August 5, 2014. The filing identifies the registrant as Crane Co., not Crane NXT, Co. Financial statements are unaudited and presented in thousands except per-share data.
Business Context
Crane Co. reported four segments: Fluid Handling; Payment & Merchandising Technologies; Aerospace & Electronics; and Engineered Materials. The December 2013 acquisition of MEI materially increased Payment & Merchandising Technologies revenue and debt.
Financial Performance and Liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $750.1 million | $648.7 million | $1,466.9 million | $1,276.3 million |
| Operating profit | $97.6 million | $88.8 million | $179.0 million | $175.7 million |
| Operating margin | 13.0% | 13.7% | 12.2% | 13.8% |
| Net income attributable to common shareholders | $59.7 million | $54.9 million | $108.4 million | $112.7 million |
| Diluted EPS | $1.00 | $0.93 | $1.82 | $1.92 |
| Operating cash flow | Not separately provided | Not separately provided | $45.3 million | $10.5 million |
- Q2 sales increased 15.6%; core sales increased 0.1%, acquisitions net of divestitures contributed 14.5%, and currency translation contributed 1.1%.
- Six-month sales increased 14.9%, primarily from MEI, which contributed approximately $177.9 million; core sales increased 0.5%.
- Interest expense rose to $19.6 million for the first half from $14.0 million, reflecting debt incurred for the MEI acquisition.
- Cash and cash equivalents were $314.2 million at June 30, 2014, versus $270.6 million at December 31, 2013.
- Total debt was approximately $903.0 million, consisting of $749.2 million of long-term notes and $153.8 million of short-term borrowings. Management reported $347 million of remaining availability under its $500 million revolving credit facility.
- Capital expenditures were $20.7 million in the first half; full-year 2014 capital expenditures were expected to approximate $45 million.
- Dividends paid in the first half were $35.3 million; quarterly dividends increased to $0.30 per share from $0.28.
Material Changes Versus Prior Comparable Period
- Payment & Merchandising Technologies sales increased 117.6% in Q2 and 102.9% year to date, primarily from MEI. Segment operating profit increased 110.2% in Q2 but its margin declined to 10.1% from 10.5% because of integration and restructuring costs.
- Fluid Handling sales declined 2.8% in Q2 and 1.8% year to date, primarily because of lower valve-services activity. Aerospace & Electronics sales increased, but operating profit declined due to engineering spending, defense-program delays, and restructuring. Engineered Materials delivered higher sales and operating profit.
- Operating margin declined because of $3.3 million of Q2 restructuring charges, $2.0 million of acquisition-integration charges, and a $6.5 million environmental litigation settlement charge. First-half results included $13.3 million of restructuring charges and $6.8 million of acquisition-integration charges.
- Six-month net income attributable to common shareholders declined 3.8% and diluted EPS declined from $1.92 to $1.82 despite higher sales and operating profit, primarily because of higher interest expense, unusual charges, and a less favorable comparison of tax benefits.
- Operating cash flow improved by $34.7 million, largely because working-capital use declined to $54.4 million from $114.1 million.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2014 sales of approximately $3 billion, including 1% to 3% organic growth and the full-year impact of MEI.
- MEI-related transaction, integration, and inventory step-up amortization costs were expected to total $18 million to $21 million in 2014. Repositioning costs were expected to be $10 million to $13 million, with estimated savings of $5 million in 2015 and $10 million annually beginning in 2016.
- Management expected 2014 net asbestos settlement and defense payments of approximately $60 million to $70 million and defined-benefit pension contributions of approximately $24 million.
- Asbestos liabilities were $659 million at June 30, 2014, with related insurance receivables of $162 million. The estimate covers claims through 2021; additional post-2021 exposure is probable but not reasonably estimable. The company had 49,770 pending claims and incurred $45.0 million of gross asbestos settlement and defense costs in the first half.
- The Goodyear, Arizona environmental liability was $24.8 million, with a $6.0 million government reimbursement receivable. A separate New Jersey environmental settlement of $6.5 million was approved after quarter-end and was expected to be paid in August 2014.
- Other material contingencies included asbestos verdicts and appeals, environmental proceedings, tax examinations, warranty obligations, and a potential $7.8 million residual-value guarantee under a five-year aircraft lease.
- Management stated that liquidity, operating cash generation, and committed credit availability were expected to fund capital needs, debt service, dividends, pension contributions, restructuring, acquisition integration, and asbestos and environmental payments.
- The filing reported no significant change in previously disclosed risk factors and no material changes in market-risk disclosures. Management concluded disclosure controls were effective.
Most Important Facts to Verify
- Confirm the requested issuer identity: this filing is for Crane Co. in 2014, not an entity named Crane NXT, Co.
- Assess the sustainability of reported growth after separating MEI acquisition effects, currency, divestitures, and core organic performance.
- Reconcile the decline in operating margins and first-half EPS with acquisition, restructuring, environmental, tax, and interest-related items.
- Evaluate asbestos liability assumptions, insurance recoveries, pending litigation outcomes, and potential exposure beyond 2021.
- Monitor debt reduction, interest costs, cash conversion, working capital, pension funding, and the availability of the revolving credit facility.
- Verify the execution and timing of projected restructuring savings and the remaining MEI integration costs.