Crane Co. (now Crane NXT, Co.) — Q1 2011 Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited three months ended March 31, 2011, compared with the three months ended March 31, 2010. Crane was a diversified manufacturer operating through Aerospace & Electronics, Engineered Materials, Merchandising Systems, Fluid Handling and Controls. The company reported continued recovery across several end markets, including aerospace, transportation, MRO, process industries and payment solutions.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $611.0 million | $530.3 million | Up 15.2% |
| Operating profit | $72.9 million | $53.3 million | Up 36.7% |
| Operating margin | 11.9% | 10.0% | Up 190 basis points |
| Income before taxes | $70.2 million | $46.8 million | Up 50.0% |
| Net income attributable to common shareholders | $48.5 million | $33.2 million | Up 45.8% |
| Diluted earnings per share | $0.81 | $0.56 | Up $0.25 |
| Dividends per share | $0.23 | $0.20 | Up $0.03 |
| Operating cash flow | $(16.2) million | $16.8 million | Down $33.0 million |
| Capital expenditures | $8.1 million | $4.1 million | Up $4.0 million |
Sales growth comprised approximately 10.9% core growth, 3.0% from the net impact of acquisitions and divestitures, and 1.3% from currency translation. Sales outside the United States represented 41.1% of total sales. The effective tax rate was 31%, compared with 29% in the prior-year quarter.
Segment performance
- Aerospace & Electronics: Sales increased 21.2% to $161.9 million; operating profit increased 39.0% to $34.0 million; margin improved to 21.0% from 18.3%. Backlog was $454.6 million.
- Engineered Materials: Sales increased 15.0% to $61.8 million; operating profit increased 18.8% to $10.1 million; margin improved to 16.4%.
- Merchandising Systems: Sales increased 35.2% to $94.9 million, primarily due to the Money Controls acquisition and core growth. Operating profit declined 6.0% to $4.7 million, including a $1.7 million non-recurring purchase-accounting charge.
- Fluid Handling: Sales increased 6.6% to $264.1 million; operating profit increased 26.7% to $35.5 million; margin improved to 13.4%. Backlog increased to $305.3 million, 12% above December 31, 2010.
- Controls: Sales increased 13.2% to $28.2 million; operating profit increased to $3.1 million from $0.1 million, partly reflecting the absence of losses from divested businesses.
Cash flow, liquidity and debt
- Cash and cash equivalents were $233.2 million at March 31, 2011, down from $272.9 million at December 31, 2010. The decline primarily reflected working-capital investment and $30.0 million of share repurchases.
- Operating cash flow was negative because $67.3 million was used for working capital, including increased accounts receivable and inventories to support higher sales.
- Investing cash flow used $2.6 million, compared with $55.3 million in Q1 2010, when the company paid $51.2 million for the Merrimac acquisition. Management expected 2011 capital expenditures to approach $40 million, versus $21 million in 2010.
- Financing cash flow used $27.0 million, including $13.5 million of dividends and the $30.0 million share repurchase, partially offset by $12.6 million from stock-option exercises.
- Long-term debt was $398.8 million, consisting primarily of $199.6 million of 5.50% notes due 2013 and $199.1 million of 6.55% notes due 2036. Short-term borrowings were $0.9 million.
- The company had no borrowings under its $300 million committed revolving credit facility, which expires in September 2012. Management stated that cash, expected operating cash generation and available credit were sufficient for anticipated capital needs, pension contributions and asbestos and environmental payments.
Material changes versus the prior comparable period
- Revenue, operating profit and diluted EPS increased materially, while operating margin expanded by 190 basis points.
- Core sales growth accelerated across most segments, particularly Aerospace & Electronics and Engineered Materials.
- Merchandising Systems benefited from the Money Controls acquisition but experienced lower operating profit because of purchase-accounting and integration-related costs.
- Operating cash flow shifted from $16.8 million provided in Q1 2010 to $16.2 million used in Q1 2011 because of higher working-capital requirements.
- The company repurchased 634,900 shares for approximately $30.0 million and increased the quarterly dividend to $0.23 per share.
- Miscellaneous income increased by $3.6 million, primarily from a gain on the sale of an Ontario building.
Guidance, outlook, risks and unusual items
- Management increased expected 2011 total year-over-year sales growth to 10%–12%, from its prior estimate of 7%–9%, citing stronger core growth and favorable foreign exchange.
- Management expected higher 2011 sales and profits in Aerospace & Electronics, Engineered Materials, Fluid Handling and Controls. Money Controls was expected to dilute earnings in the first half of 2011 and provide a slightly positive full-year contribution.
- Key operating risks include cyclical customer demand, economic conditions, foreign-exchange movements, inflation and rising raw-material costs, airline fuel costs, potential reductions in government defense spending, and market recovery uncertainty.
- Asbestos liabilities totaled $701 million at March 31, 2011, including a $100 million current portion. Related insurance receivables totaled $207 million. Management made no change to its estimate during the quarter but stated that future charges could be material and cannot be reasonably estimated beyond the current forecast framework.
- The company incurred $27.6 million of asbestos settlement and defense costs in the quarter and made $12.7 million of net cash payments after insurance recoveries.
- The Goodyear Site environmental liability was $35.9 million, with a $9.0 million receivable for expected U.S. government reimbursements. Additional costs remain uncertain.
- The company disclosed significant unresolved litigation, including consolidated lawsuits related to a 2003 plant fire with claimed damages exceeding $260 million, as well as environmental and shareholder litigation. No loss was accrued for these matters because a loss was not considered probable or reasonably estimable.
- Goodwill was $822.5 million and intangible assets were $157.4 million at March 31, 2011. Management reported no impairment indicators, but impairment conclusions depend on forecasts, discount rates and market conditions.
Important facts for investors to verify
- Whether the projected 10%–12% 2011 sales growth and expected earnings contribution from Money Controls were achieved.
- Whether working-capital investment normalized and operating cash flow recovered after the quarter’s negative result.
- Changes in asbestos claims, settlement costs, insurance recoveries and the $701 million recorded asbestos liability.
- Progress and ultimate cost of the Goodyear Site remediation and the unresolved Crab Orchard environmental matter.
- The outcome and insurance coverage of the plant-fire litigation and other disclosed legal proceedings.
- Debt refinancing or repayment plans ahead of the $200 million notes due in the third quarter of 2013.
- Potential goodwill or intangible-asset impairment if market conditions, growth forecasts or margins weaken.