Crane Co. Historical 2012 Q1 10-Q Summary
Reporting period: Three months ended March 31, 2012, compared with the three months ended March 31, 2011. The filing is for Crane Co.; the supplied metadata identifies Crane NXT, Co., so the historical registrant/name should be verified.
Business Context
Crane was a diversified manufacturer with five reportable segments: Aerospace & Electronics, Engineered Materials, Merchandising Systems, Fluid Handling, and Controls. Approximately 40.9% of first-quarter 2012 sales were generated outside the United States. The company served aerospace, defense electronics, industrial, chemical, pharmaceutical, energy, transportation, vending, and other markets.
Financial Performance and Liquidity
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $657.9 million | $611.0 million | 7.7% increase |
| Operating profit | $79.6 million | $72.9 million | 9.2% increase |
| Operating margin | 12.1% | 11.9% | 20 basis-point increase |
| Net income attributable to common shareholders | $51.7 million | $48.5 million | 6.6% increase |
| Diluted earnings per share | $0.88 | $0.81 | Increase |
| Dividends per share | $0.26 | $0.23 | Increase |
| Effective tax rate | 29% | 31% | Decrease |
- Core sales increased approximately 7.8%; acquisitions and divestitures added $4.4 million, while foreign exchange reduced sales by approximately $5.4 million.
- Operating profit growth was driven primarily by Fluid Handling, Aerospace & Electronics, and Controls.
- Cash used in operating activities was $42.8 million, compared with $16.2 million used in Q1 2011. Working capital used $103.5 million, principally because of higher accounts receivable and accrued liabilities.
- Capital expenditures were $7.2 million, compared with $8.1 million in the prior-year quarter. Management expected approximately $40 million of capital expenditures for 2012.
- Cash and cash equivalents declined to $195.9 million from $245.1 million at December 31, 2011.
- Long-term debt was $399.0 million, consisting principally of $200 million of 5.50% notes due in 2013 and $200 million of 6.55% notes due in 2036. Short-term borrowings were $0.8 million.
- No borrowings were outstanding under the $300 million revolving credit facility, which was scheduled to expire in September 2012. Management expected to enter into an updated agreement in the second quarter.
- Management stated that cash, expected operating cash flow, and available revolving credit were sufficient for anticipated operating needs, capital requirements, asbestos and environmental payments, and pension contributions.
Segment Results
| Segment | Q1 2012 Sales | Sales Change | Operating Profit | Operating Margin |
|---|---|---|---|---|
| Aerospace & Electronics | $175.2 million | 8.2% increase | $38.1 million | 21.7% |
| Engineered Materials | $58.2 million | 5.9% decrease | $8.4 million | 14.5% |
| Merchandising Systems | $87.7 million | 7.6% decrease | $4.7 million | 5.4% |
| Fluid Handling | $301.9 million | 14.3% increase | $39.6 million | 13.1% |
| Controls | $35.0 million | 23.9% increase | $4.7 million | 13.4% |
- Fluid Handling benefited from strength in Energy and ChemPharma and the July 2011 W.T. Armatur acquisition, but margin declined from 13.4% to 13.1% because of European manufacturing inefficiencies and higher costs.
- Engineered Materials declined because of weaker transportation and recreational vehicle demand and competitive pressure.
- Merchandising Systems was affected by German gaming-market legislation and lower European demand; productivity gains and the absence of a prior-year acquisition charge kept operating profit approximately flat.
- Backlog increased year over year in Aerospace & Electronics, Merchandising Systems, Fluid Handling, and Controls, but declined in Engineered Materials.
Material Changes and Unusual Items
- Miscellaneous income declined from $3.6 million to a $0.3 million expense, primarily because Q1 2011 included a gain from the sale of a building and a divestiture-related item.
- The company completed the acquisition of W.T. Armatur in July 2011 for $37 million in cash and $1 million of assumed debt. The business was integrated into Fluid Handling, and its first-quarter pro forma impact was not material.
- Goodwill increased to $826.7 million from $820.8 million, primarily from currency translation. Management reported no impairment indicators at March 31, 2012.
- Cash dividends paid increased to $15.1 million from $13.5 million. Unlike Q1 2011, the company made no open-market share repurchases during Q1 2012.
Guidance, Outlook, and Risks
- Management expected profitable growth in 2012, but at a reduced year-over-year rate versus 2011. It forecast core sales growth of 5% to 6%, acquisition and divestiture-related sales growth of less than 1%, unfavorable foreign exchange of approximately 2%, and total sales growth of 3% to 5%.
- Management expected continued improvement in Fluid Handling and Aerospace & Electronics, stable short-cycle markets, modest improvement in Engineered Materials, relatively flat Merchandising Systems sales, and growth in Controls.
- Key macroeconomic risks included cyclical demand, uncertain global recovery, weak U.S. and European housing markets, government budget reductions, European sovereign debt concerns, currency movements, inflation, and commodity costs.
- Asbestos liabilities were $871 million at March 31, 2012, with $101 million classified as current. The liability covered estimated claims and defense costs through 2021; management stated that additional charges were probable but could not reasonably be estimated beyond 2021.
- Related asbestos insurance receivables were $221 million, based on an estimated reimbursement rate of approximately 25%. Changes in claim frequency, settlement costs, litigation outcomes, insurer viability, or policy interpretation could materially affect earnings, cash flow, and financial position.
- Net asbestos-related cash payments were $18.2 million in Q1 2012, versus $12.7 million in Q1 2011.
- The Goodyear, Arizona environmental liability was $62.4 million, including approximately $16.0 million current, partly offset by a $12.7 million receivable for expected U.S. government reimbursements.
- Potentially material litigation included a consolidated fire-related product liability matter with claimed damages exceeding $260 million, asbestos litigation, environmental proceedings, and a Merrimac acquisition-related shareholder lawsuit. No accrual was recorded for the fire-related, Merrimac, or certain environmental matters because losses were not considered probable or reasonably estimable.
- The company’s disclosure controls were evaluated as effective, and no material change in internal control over financial reporting was reported.
Most Important Facts to Verify
- Confirm the relationship between the historical Crane Co. registrant in this filing and Crane NXT, Co. in the request metadata.
- Review the $871 million asbestos liability, $221 million insurance receivable, forecast period through 2021, and sensitivity to litigation and insurance developments.
- Assess liquidity after the $42.8 million first-quarter operating cash outflow and verify replacement of the $300 million revolving credit facility before its September 2012 expiration.
- Monitor the $200 million senior note maturity in the third quarter of 2013 and the company’s refinancing plans.
- Evaluate whether Fluid Handling growth and Aerospace & Electronics performance offset weakness in Engineered Materials and Merchandising Systems.
- Track the fire-related litigation, with claimed damages exceeding $260 million, and the expected trial outcome disclosed for early May 2012.
- Verify execution against 2012 guidance of 3% to 5% total sales growth and approximately $40 million of capital expenditures.