Crane Co. 2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013. The supplied filing is for Crane Co., not Crane NXT, Co.; investors should verify the intended issuer. Results cover four segments: Aerospace & Electronics, Engineered Materials, Merchandising Systems, and Fluid Handling.
Business Context
Crane Co. is a diversified manufacturer of engineered products serving aerospace, defense, transportation, automated payment, vending, construction, chemical, pharmaceutical, oil and gas, power, nuclear, utilities, and other industrial markets. Approximately 41% of revenue was generated outside the United States in both 2013 and 2012, and the company employed approximately 11,500 people.
On December 11, 2013, the company acquired MEI Conlux Holdings for $804 million. MEI was integrated into the Merchandising Systems segment and contributed approximately $25 million of revenue and an operating loss of approximately $2 million after acquisition closing.
Financial Performance and Key Metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $2.595 billion | $2.579 billion | Up 1% |
| Operating profit from continuing operations | $347.9 million | $310.4 million | Up 12% |
| Income from continuing operations | $221.0 million | $196.2 million | Up 13% |
| Net income attributable to common shareholders | $219.5 million | $217.0 million | Up 1% |
| Diluted EPS | $3.73 | $3.72 | Essentially flat |
| Operating margin | 13.4% | 12.0% | Up 1.4 percentage points |
| Segment operating margin | 16.3% | 14.6% | Up 1.7 percentage points |
| Cash flow from operations | $239.4 million | $234.8 million | Up 3% |
- Segment sales and operating profit: Aerospace & Electronics sales were $693.8 million and operating profit was $160.0 million; Engineered Materials sales were $232.3 million and operating profit was $34.3 million; Merchandising Systems sales were $380.6 million and operating profit was $34.8 million; Fluid Handling sales were $1.289 billion and operating profit was $194.9 million.
- Fourth quarter: Sales were $681.4 million, operating profit was $83.1 million, net income attributable to common shareholders was $49.7 million, and diluted EPS was $0.84. The quarter included $10.2 million of MEI transaction costs, $4.7 million of acquisition-related inventory and backlog amortization, and a $2.0 million gain on the sale of a product line.
- Cash deployment: Capital expenditures were $29.5 million, dividends paid were $67.3 million, and cash used in investing activities was $824.0 million, principally reflecting the $801.8 million cash payment for MEI.
- Liquidity: Cash and cash equivalents were $270.6 million, including approximately $257 million held by non-U.S. subsidiaries. The company reported $375 million of remaining availability under its committed revolving credit facility.
- Debt: Total debt was $875.0 million versus $400.2 million at year-end 2012. Net debt was $604.4 million versus net cash of $23.7 million in the prior year. Debt included $250 million of 2.75% notes due 2018, $300 million of 4.45% notes due 2023, $200 million of 6.55% notes due 2036, and $125.8 million drawn under the revolving credit facility.
- Debt covenant: Total debt to capitalization was 42%, below the facility’s maximum permitted ratio of 65%. Senior unsecured debt was rated BBB by Standard & Poor’s and Baa2 with a negative outlook by Moody’s.
- Shareholder returns: Annual dividends per share increased to $1.16 from $1.08. The company made no open-market share repurchases in 2013.
Material Changes Versus the Prior Comparable Period
- Revenue growth was modest because $25 million of acquisition-related revenue and $1 million of core growth were partly offset by $9 million of unfavorable foreign exchange.
- Operating profit improved across all four segments. Margin expansion primarily reflected productivity gains, pricing, and the absence of 2012 restructuring charges.
- Fluid Handling operating profit increased 21% to $194.9 million, aided by the absence of $12.7 million of 2012 restructuring charges and approximately $10 million of repositioning savings.
- Engineered Materials operating profit increased 40% to $34.3 million, supported by stronger RV demand, productivity gains, and the absence of prior-year repositioning charges.
- Merchandising Systems sales increased 2%, but core sales declined 4%; the MEI contribution offset weaker Vending Solutions sales. Segment operating margin remained 9.1%.
- Aerospace & Electronics sales declined 1%, while operating profit increased 3%. Lower military aftermarket and defense-related electronics demand was partly offset by stronger commercial OEM activity and cost reductions.
- Corporate expense increased to $76.1 million from $64.8 million, primarily because of $22.8 million of MEI transaction costs. This was partly offset by lower pension expense.
- Goodwill increased to $1.249 billion from $813.8 million, primarily due to $442.2 million of goodwill recognized for MEI. No goodwill impairment was recorded.
- The domestic defined benefit pension plan was frozen for future accruals effective January 1, 2013, contributing to lower pension expense. Accrued pension and postretirement benefits declined to $151.1 million from $233.6 million.
Guidance, Outlook, Risks and Unusual Items
Management expected 2014 total sales growth of 15% to 17%, consisting of 1% to 3% organic growth and approximately 14% from the full-year impact of MEI. Management expected $18 million to $21 million of MEI transaction, integration, and inventory step-up costs, plus $10 million to $13 million of repositioning actions. Expected repositioning savings were approximately $5 million in 2015 and $10 million annually beginning in 2016.
- Aerospace & Electronics was expected to benefit from commercial OEM build rates, while Electronics sales were expected to decline modestly because of defense-program delays.
- Engineered Materials was expected to improve through RV demand, building-products recovery, and productivity initiatives.
- Merchandising Systems was expected to grow substantially from MEI, partially offset by divested product-line revenue and acquisition-related costs.
- Fluid Handling was expected to achieve modest sales growth and higher operating profit, although Canadian commercial construction and mining remained weak and project delays affected fourth-quarter 2013 orders.
- Major risks include cyclical demand, defense-budget reductions and government-contract termination, foreign-exchange volatility, raw-material inflation, supply-chain disruptions, competition, acquisition integration, pension assumptions, environmental liabilities, tax examinations, cybersecurity, and product liability.
- Asbestos: The company had 51,490 pending claims at December 31, 2013 and recorded an asbestos liability of $699 million for pending and projected claims through 2021, partially offset by a $171 million insurance receivable. Management stated that additional liabilities after 2021 are probable but cannot be reasonably estimated.
- Environmental: The Goodyear, Arizona remediation liability was approximately $32.8 million, with a $9.3 million expected reimbursement receivable from the U.S. government. The company also reported a potentially material but currently unestimable exposure related to the Crab Orchard Superfund Site.
- Acquisition accounting: The MEI purchase-price allocation was preliminary, and subsequent measurement-period adjustments could be material. MEI represented 27% of consolidated assets but only 1% of 2013 revenue; management excluded MEI from its internal-control assessment, and the auditor’s internal-control examination likewise excluded MEI.
Investor Verification Checklist
- Confirm whether the intended issuer is Crane Co. or Crane NXT, Co.; the filing supplied is Crane Co.’s 2013 Form 10-K.
- Reconcile reported 2013 earnings with MEI-related transaction costs, inventory and backlog amortization, withholding taxes, and the product-line gain.
- Assess the sustainability of margin expansion after excluding the benefit from the absence of 2012 restructuring charges.
- Evaluate MEI integration, preliminary purchase-price allocations, expected synergies, and the projected 2014 revenue contribution.
- Review increased leverage, debt maturities beginning in 2018, credit ratings, covenant headroom, and cash held offshore.
- Monitor asbestos claim trends, insurance recoveries, litigation outcomes, and the unaccrued exposure after 2021.
- Review Goodyear and Crab Orchard environmental obligations, including the timing and adequacy of remediation estimates.
- Compare management’s 2014 sales and cost guidance with actual organic growth, segment margins, integration costs, and repositioning charges.