Crane Co. Fiscal 2015 Form 10-K Summary
Business Context and Reporting Period
The filing is Crane Co.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015. Although the request references Crane NXT, the filing identifies the registrant as Crane Co. and describes its four segments: Fluid Handling; Payment & Merchandising Technologies; Aerospace & Electronics; and Engineered Materials. The company manufactures highly engineered industrial products serving chemical, power, oil and gas, aerospace and defense, industrial, construction, transportation, vending and payment markets. Approximately 38% of 2015 revenue was generated outside the United States.
Key Financial Metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $2,740.5 million | $2,925.0 million | Down 6% |
| Operating profit | $372.9 million | $316.3 million | Up 18% |
| Operating margin | 13.6% | 10.8% | Up 2.8 points |
| Income before taxes | $336.5 million | $281.2 million | Up 20% |
| Net income attributable to common shareholders | $228.9 million | $192.7 million | Up 19% |
| Diluted EPS | $3.89 | $3.23 | Up 20% |
| Operating cash flow | $229.3 million | $264.0 million | Down 13% |
| Capital expenditures | $39.6 million | $43.7 million | Down 9% |
| Cash and cash equivalents | $363.5 million | $346.3 million | Up $17.2 million |
| Total debt | $798.9 million | $850.0 million | Down $51.1 million |
The effective tax rate was 31.7%, compared with 31.2% in 2014. Cash dividends increased to $1.32 per share from $1.26. The company repurchased 398,095 shares for approximately $25 million in 2015.
Segment Performance
| Segment | 2015 Sales | 2015 Operating Profit | 2015 Margin | Year-over-Year Change |
|---|---|---|---|---|
| Fluid Handling | $1,091 million | $125 million | 11.5% | Sales down 14%; profit down 31% |
| Payment & Merchandising Technologies | $703 million | $101 million | 14.4% | Sales down 1%; profit up 47% |
| Aerospace & Electronics | $691 million | $145 million | 21.0% | Sales down 1%; profit up 5% |
| Engineered Materials | $255 million | $48 million | 19.0% | Sales up 1%; profit up 32% |
Material Changes Versus the Prior Comparable Period
- Revenue declined $185 million, primarily from $134 million of unfavorable foreign-currency translation, a $35 million core-sales decline and $15 million from divestitures and the expiration of a transition-services agreement.
- Fluid Handling was adversely affected by lower oil prices, weaker European and Asian economic conditions, reduced chemical, power and general industrial spending, unfavorable mix and currency effects.
- Payment & Merchandising Technologies benefited from higher core sales, $14 million of MEI acquisition synergies and lower integration and restructuring costs. MEI-related costs declined substantially from 2014.
- Aerospace & Electronics profit improved through productivity, repositioning benefits and favorable mix despite modestly lower sales.
- Engineered Materials profit benefited from lower resin costs and productivity gains.
- Reported operating profit benefited from the absence of 2014 environmental charges and a lawsuit settlement. In 2014, the company recorded a $49.0 million Goodyear Site charge, a $6.8 million Roseland remediation charge and a $6.5 million Roseland lawsuit settlement.
- Comprehensive income attributable to common shareholders was $150.4 million, compared with a $57.8 million comprehensive loss in 2014, but 2015 included a $70.1 million foreign-currency translation loss and an $8.4 million pension-related loss in other comprehensive income.
Liquidity, Debt and Commitments
Management stated that cash, expected operating cash flow and approximately $451 million of available commercial-paper and revolving-credit capacity were sufficient for foreseeable requirements. The company had $49.0 million outstanding under its commercial paper program, no borrowings under its revolving credit facility, and no significant debt maturities until 2018. Debt consisted primarily of $250 million of 2.75% notes due 2018, $300 million of 4.45% notes due 2023 and approximately $199 million of 6.55% notes due 2036. Total debt-to-capitalization was 41%, below the facility covenant maximum of 65%.
Net debt was $435.4 million, and net debt-to-net capitalization was 27.4%. Non-U.S. subsidiaries held approximately $358 million of cash that could incur additional tax upon repatriation. The company expected 2016 payments of approximately $50 million for asbestos costs net of insurance recoveries, $12 million for environmental matters, $8 million for pension contributions and $50 million for capital expenditures.
Guidance, Outlook and Management Commentary
- For 2016, management expected total sales to decline approximately 2%, driven by unfavorable foreign exchange, with core sales approximately flat.
- Fluid Handling sales were expected to decline in the high-single-digit range, with operating profit modestly lower, reflecting continued oil-price weakness, lower capital spending and foreign-exchange pressure.
- Payment & Merchandising Technologies sales were expected to increase in the low-single-digit range, with higher operating profit from sales growth, integration synergies and lower integration costs.
- Aerospace & Electronics core sales were expected to increase in the mid-single-digit range, with slightly higher operating profit. Commercial conditions were expected to remain generally positive, while defense sales were expected to benefit from certain contracts and programs.
- Engineered Materials sales were expected to remain approximately flat and operating profit to decline modestly because of a narrower spread between raw-material costs and pricing.
- Management expected incremental 2016 savings of approximately $18 million from repositioning actions and $9 million of additional MEI synergies.
Risks, Contingencies and Unusual Items
- Asbestos: 41,090 pending claims were outstanding at December 31, 2015. The recorded liability for pending and reasonably anticipated claims through 2021 was $546 million, with an estimated asbestos insurance receivable of $129 million. Management stated that additional post-2021 liabilities could be significant but could not reasonably be estimated.
- Environmental: The estimated gross Goodyear Site liability was approximately $63.7 million, substantially payable through 2022, with a $14.0 million expected government reimbursement receivable. The company also reported unresolved exposure at the Crab Orchard Superfund Site for which a loss was considered probable but not reasonably estimable.
- Other principal risks include cyclical demand, oil and commodity prices, foreign-currency movements, raw-material costs, supply-chain disruptions, competition, government contracting and export regulations, product liability, acquisitions and integration, pension performance, tax matters, cybersecurity and environmental compliance.
- Goodwill was $1.168 billion and net intangible assets were $317.1 million. No goodwill or intangible impairment was recorded in 2015, and management stated that a hypothetical 10% reduction in reporting-unit fair values would not have resulted in impairment.
- Restructuring and acquisition-integration charges totaled $7.8 million in the income statement in 2015; the company also recorded approximately $11 million of restructuring and related costs and $7.2 million of MEI integration costs in its comparability discussion.
Most Important Facts for Investors to Verify
- Confirm the registrant identity: this filing is for Crane Co., not a company named Crane NXT.
- Assess whether the 2015 earnings increase is sustainable, given that operating profit benefited materially from the absence of 2014 environmental and litigation charges.
- Monitor Fluid Handling exposure to oil and gas, industrial capital spending, European and Canadian markets, and foreign exchange.
- Reconcile operating cash flow of $229.3 million with net income of $228.9 million and verify the effect of asbestos, environmental and pension payments.
- Review asbestos liability assumptions, insurance recoveries, pending litigation and the unestimated exposure after 2021.
- Verify the timing and funding capacity for the $250 million debt maturity in 2018 and the availability of revolving-credit and commercial-paper capacity.
- Test the 2016 outlook against actual currency movements, core sales trends, projected MEI synergies and restructuring savings.