Business Context and Reporting Period
This unaudited Form 10-Q covers Crane Co. and its subsidiaries for the quarter and six months ended June 30, 2013, filed August 1, 2013. The filing identifies the registrant as Crane Co., not Crane NXT, Co. The company operated through four reportable segments: Aerospace & Electronics, Engineered Materials, Merchandising Systems, and Fluid Handling.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2013 | Year-over-Year Change | Six Months Ended June 30, 2013 | Year-over-Year Change |
|---|---|---|---|---|
| Net sales | $648.7 million | (1.4%) | $1,276.3 million | (2.1%) |
| Operating profit | $88.8 million | 28.1% | $175.7 million | 19.0% |
| Operating margin | 13.7% | 10.5% prior year | 13.8% | 11.3% prior year |
| Income from continuing operations | $55.4 million | 29.7% | $113.4 million | 20.8% |
| Diluted EPS from continuing operations | $0.93 | $0.73 prior year | $1.92 | $1.59 prior year |
| Net income attributable to common shareholders | $54.9 million | Down from $62.6 million | $112.7 million | Down from $114.2 million |
Net income comparisons were affected by the absence of 2012 discontinued-operation income and after-tax divestiture gains totaling $19.9 million in the quarter and $20.7 million year to date. The 2013 results included MEI acquisition transaction costs of $6.9 million in the quarter and $9.7 million year to date.
- Segment performance: Second-quarter sales and operating profit were $172.4 million and $37.0 million for Aerospace & Electronics, $57.7 million and $9.2 million for Engineered Materials, $84.8 million and $8.9 million for Merchandising Systems, and $333.8 million and $54.2 million for Fluid Handling.
- Cash flow: Operating activities provided $10.5 million in the first half, versus $16.1 million in the prior-year period. Working capital used $114.1 million, while net asbestos-related cash payments were $28.9 million.
- Investing and financing: Investing activities used $11.8 million, including $12.0 million of capital expenditures. Financing activities provided $5.5 million; dividends paid were $32.3 million, and no open-market share repurchases occurred.
- Liquidity: Cash and equivalents were $420.9 million at June 30, 2013, compared with $423.9 million at December 31, 2012. The company reported $399.2 million of long-term debt and $14.4 million of short-term borrowings.
- Debt facilities: The company had no borrowings under its $500 million revolving credit facility or its $400 million 364-day facility supporting the pending MEI acquisition. Approximately $13 million was outstanding under short-term foreign operating facilities.
- Equity and dividends: Dividends were $0.28 per share in the quarter and $0.56 per share year to date, compared with $0.26 and $0.52, respectively, in 2012.
Material Changes Versus the Prior Comparable Period
- Sales declined, primarily from weaker Aerospace & Electronics aftermarket and defense-related electronics demand and lower Merchandising Systems vending sales. Currency translation reduced second-quarter sales by approximately $3.0 million and first-half sales by approximately $5.5 million.
- Operating profit increased substantially because of productivity, cost management, repositioning savings, and the absence of $14.7 million of restructuring charges recorded in the second quarter and first half of 2012.
- Fluid Handling generated the largest operating-profit improvement, with second-quarter profit up 77.0% and first-half profit up 35.8%.
- Merchandising Systems sales declined 13.1% in the quarter and 5.9% year to date, although operating profit improved year to date due to productivity, Payment Solutions growth, and the absence of prior-year charges.
- Cash generation weakened because of higher working-capital requirements and the absence of 2012 divestiture proceeds. Cash used for accounts receivable, inventory, payables, accrued liabilities, and taxes totaled $114.1 million in the first half.
- Goodwill declined to $802.4 million from $813.8 million at year-end 2012, primarily due to currency translation. No impairment indicators were identified.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected profitable growth in 2013 despite a cautious view of the global economy, supported by approximately $12 million of repositioning savings, cost management, and market-share gains.
- Management expected modestly lower Aerospace & Electronics sales, modest Engineered Materials growth, lower Merchandising Systems sales but improved operating profit, and modest Fluid Handling sales growth with improved margins.
- The pending acquisition of MEI was revised from approximately $820 million to approximately $804 million on a cash-free, debt-free basis. European Commission clearance was conditioned on divestiture of one product line and licensing of another. Closing was expected in the fourth quarter of 2013, subject to implementation of remedies.
- The company expected to use approximately $250 million of cash to fund the remaining MEI purchase price and expected capital expenditures of approximately $25 million to $30 million for full-year 2013.
- The $200 million principal amount of 5.50% notes was due September 15, 2013. Management classified the notes as long-term debt based on its intent and ability to refinance them.
- Asbestos liabilities totaled $749 million at June 30, 2013, with $92 million classified as current; related insurance receivables totaled $187.7 million. The company estimated that insurers would reimburse approximately 25% of projected asbestos liabilities through 2021. Actual future claims, costs, litigation outcomes, and insurance recoveries remain uncertain.
- There were 54,969 pending asbestos claims at June 30, 2013. Gross settlement and defense costs incurred in the first half were $43.1 million, before insurance recoveries and tax effects.
- The Goodyear, Arizona environmental remediation liability was $42.7 million, with a $9.3 million government reimbursement receivable. The company stated that remediation estimates could change as site conditions and regulatory requirements develop.
- The company identified a probable but not reasonably estimable potential liability related to the Crab Orchard Superfund Site. It also had environmental litigation concerning a former New Jersey manufacturing facility for which no loss was accrued because the amount could not be reasonably estimated.
- The filing states that no significant changes occurred in previously disclosed risk factors and that disclosure controls were effective as of June 30, 2013.
Most Important Facts to Verify
- Confirm the issuer identity: the supplied filing is for Crane Co. in 2013, not Crane NXT, Co.
- Verify whether the MEI acquisition closed in the expected fourth quarter of 2013, the final purchase price, financing, and any required divestitures or licensing remedies.
- Verify refinancing or repayment of the $200 million notes that matured in September 2013.
- Monitor operating cash flow and working-capital trends, particularly receivables and accrued liabilities.
- Reassess asbestos claim activity, liability estimates, insurance recoveries, and appellate outcomes, including the pending Peraica and Holdsworth matters.
- Review subsequent developments in the Goodyear and Crab Orchard environmental matters and the New Jersey property litigation.
- Compare actual 2013 segment sales, margins, acquisition costs, capital expenditures, and restructuring savings with management’s stated outlook.