Crane Co. 2010 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2010. The source filing identifies the registrant as Crane Co.; it does not identify Crane NXT, Co. The filing is an annual report, not a standalone fourth-quarter filing, although fourth-quarter results are disclosed.
Business Context
Crane Co. is a diversified manufacturer of highly engineered industrial products operating through five segments: Aerospace & Electronics, Engineered Materials, Merchandising Systems, Fluid Handling, and Controls. The company employed approximately 10,500 people, and approximately 40% of revenue came from outside the United States.
Key Financial Metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net sales | $2.218 billion | $2.196 billion | Up 1% |
| Operating profit | $235.2 million | $208.3 million | Up 13% |
| Operating margin | 10.6% | 9.5% | Up 110 basis points |
| Income before taxes | $210.9 million | $184.9 million | Up 14% |
| Net income attributable to common shareholders | $154.2 million | $133.9 million | Up 15% |
| Diluted EPS | $2.59 | $2.28 | Up 14% |
| Operating cash flow | $133.5 million | $189.0 million | Down 29% |
| Capital expenditures | $21.0 million | $28.3 million | Down 26% |
| Cash and equivalents | $272.9 million | $372.7 million | Down $99.8 million |
| Total debt | $399.7 million | $399.6 million | Approximately flat |
| Net debt | $126.8 million | $26.9 million | Up $99.9 million |
The effective tax rate was 26.9%, compared with 27.5% in 2009. The 2010 tax provision included a $5.6 million benefit from treating all accumulated non-U.S. earnings as indefinitely reinvested outside the United States. Cash dividends increased to $0.86 per share from $0.80, and the company repurchased 1.4 million shares for approximately $50 million.
Segment Performance
| Segment | 2010 Sales | 2010 Operating Profit | 2010 Margin | Change Versus 2009 |
|---|---|---|---|---|
| Aerospace & Electronics | $577 million | $109 million | 18.9% | Sales down 2%; profit up 14% |
| Engineered Materials | $212 million | $30 million | 14.2% | Sales up 23%; profit up 53% |
| Merchandising Systems | $298 million | $17 million | 5.6% | Sales up 2%; profit down 21% |
| Fluid Handling | $1.020 billion | $123 million | 12.0% | Sales down 3%; profit down 7% |
| Controls | $110 million | $6 million | 5.3% | Sales up 20%; turned profitable from a 2009 loss |
Material Changes Versus the Prior Comparable Period
- Sales increased only modestly, but operating profit benefited from productivity programs, lower Aerospace engineering spending, and improved volume in Engineered Materials and Controls.
- Aerospace operating profit increased despite the absence of the $16.4 million operating-profit benefit from the 2009 Boeing 787 settlement; Aerospace engineering expense declined by $23 million.
- Engineered Materials benefited from stronger RV and transportation demand and customer inventory restocking, partially offset by higher raw-material costs.
- Fluid Handling declined because of weaker later-cycle power, refining, and oil-and-gas project activity, although backlog increased 9% to $272 million.
- Merchandising Systems profit declined because of restructuring and Money Controls transaction costs and the absence of favorable 2009 legal settlements.
- Cash generation weakened because of higher working-capital requirements, $42 million of pension contributions, and $66.7 million of net asbestos-related cash payments.
- The company completed two acquisitions for approximately $144 million: Merrimac in February 2010 and Money Controls in December 2010. It also sold Wireless Monitoring Systems for $3 million.
Liquidity, Debt, and Capital Resources
Management reported $272.9 million of cash and no borrowings under its $300 million revolving credit facility, which expires in September 2012. The facility was used only for letters of credit in 2010 and 2009. Total debt consisted primarily of $200 million of 5.50% notes due 2013 and $200 million of 6.55% notes due 2036. The total-debt-to-capitalization ratio was 29%, versus a maximum covenant level of 65%. Senior unsecured debt was rated BBB by Standard & Poor’s and Baa2 by Moody’s.
Management expected cash, operating cash flow, and available revolver capacity to fund operations, acquisitions, dividends, share repurchases, pension contributions, and asbestos and environmental obligations. Planned 2011 capital expenditures were approximately $40 million.
Guidance, Outlook, and Management Commentary
- Management forecast 2011 core sales growth of 4% to 5%, acquisition-related growth net of divestitures of 2% to 3%, and favorable foreign exchange of approximately 1%, implying total sales growth of 7% to 9%.
- Management expected continued recovery in commercial aerospace, Engineered Materials, shorter-cycle Fluid Handling markets, Merchandising Systems, and Controls.
- Money Controls was expected to be earnings-dilutive in the first half of 2011 and accretive later in the year, with a slightly positive full-year impact.
- Management expected moderate Fluid Handling growth but continued uncertainty in longer-cycle energy markets, particularly North American power and downstream oil and gas.
- The company expected approximately $15 million of pension contributions, $1.5 million of postretirement contributions, and approximately $65 million of net asbestos settlement and defense payments in 2011.
Risks, Contingencies, and Unusual Items
- Asbestos: The company had approximately 64,839 pending claims at December 31, 2010. The recorded liability for pending and reasonably anticipated claims through 2017 was $720 million, with an asbestos insurance receivable of $214 million. Additional liabilities after 2017 may be significant but cannot be reasonably estimated.
- Environmental: The estimated gross Goodyear, Arizona remediation liability was $40.5 million through 2014, partly offset by a $9 million expected U.S. government reimbursement. The company also reported a potentially significant but not reasonably estimable exposure at the Crab Orchard Superfund site.
- Fiberglass-panel litigation: Five consolidated lawsuits related to a 2003 chicken-processing plant fire sought damages exceeding $260 million. Trial was expected in fall 2011; no loss was accrued because an unfavorable outcome was not considered probable or reasonably estimable.
- Other litigation: A shareholder lawsuit related to the Merrimac acquisition was pending, with no loss accrued. The company reported valid defenses and intended to seek insurance coverage where applicable.
- Market risks: Results were exposed to cyclical demand, raw-material price volatility, foreign-exchange movements, interest rates, government-contract compliance, pension performance, supply-chain disruptions, and acquisition integration risk.
- Restructuring: The company recorded approximately $7 million of restructuring charges in 2010. Substantially all earlier restructuring actions were completed, and no additional significant 2011 charges were expected.
Most Important Facts for an Investor to Verify
- Confirm the issuer identity: the supplied filing is for Crane Co., while the request metadata references Crane NXT, Co.
- Reconcile the quality of earnings by separating productivity savings and lower Aerospace engineering expense from recurring operating improvement.
- Monitor cash conversion, working capital, pension funding, asbestos payments, and environmental expenditures.
- Assess the sensitivity of the $720 million asbestos liability and $214 million insurance receivable to claim trends, insurer solvency, and coverage disputes.
- Evaluate whether the 2011 sales-growth forecast of 7% to 9% was achieved and whether Money Controls integration produced the expected earnings benefits.
- Review Fluid Handling exposure to delayed energy projects and the pending fiberglass-panel litigation for potential cash-flow effects.