Crane Co. (now identified in the request as Crane NXT, Co.) — Q3 2016 Form 10-Q Summary
Reporting period: Quarterly and nine-month periods ended September 30, 2016, compared with September 30, 2015. The filing registrant is Crane Co., not Crane NXT, Co. The statements are unaudited. Reportable segments were Fluid Handling, Payment & Merchandising Technologies, Aerospace & Electronics, and Engineered Materials.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net sales | $694.2 million | $669.9 million | $2,066.5 million | $2,060.0 million |
| Operating profit | $103.8 million | $93.2 million | $291.9 million | $269.4 million |
| Operating margin | 15.0% | 13.9% | 14.1% | 13.1% |
| Net income attributable to common shareholders | $63.5 million | $56.9 million | $186.8 million | $163.7 million |
| Diluted EPS | $1.07 | $0.97 | $3.16 | $2.78 |
| Dividends per share | $0.33 | $0.33 | $0.99 | $0.99 |
- Q3 sales increased 3.6%; core sales rose 5.5%, partly offset by a $12.4 million unfavorable foreign-currency impact.
- Nine-month sales increased only 0.3%; core sales rose 1.9%, while currency translation reduced sales by 1.6%.
- Nine-month operating cash flow was $168.4 million versus $115.7 million in 2015. Capital expenditures were $38.5 million, and cash used for investing activities was $37.7 million.
- Cash and cash equivalents were $436.3 million at September 30, 2016, up from $363.5 million at December 31, 2015.
- Total debt comprised $745.2 million of long-term debt and $34.0 million of commercial paper. The company reported $466 million of availability under its commercial paper program and revolving credit facility, with no significant debt maturities until December 2018.
- Total assets were $3.409 billion and total equity was $1.324 billion at September 30, 2016.
Segment trends and material changes
- Fluid Handling: Q3 sales declined 7.4% to $245.1 million, primarily from weaker oil, gas, chemical, industrial and Canadian construction demand. Operating profit increased 4.4% to $30.7 million because of productivity, mix and lower restructuring costs. Nine-month sales declined 8.8% and operating profit declined 4.9%. Backlog was $242 million, down from $279 million a year earlier.
- Payment & Merchandising Technologies: Q3 sales increased 9.4% to $186.7 million and operating profit increased 37.7% to $34.7 million. Growth reflected retail, transportation and large bottler customers, productivity and MEI synergies. Nine-month operating profit increased 33.9% to $97.1 million.
- Aerospace & Electronics: Q3 sales increased 15.4% to $198.2 million, led by a large military program. Operating profit increased 6.6% to $38.9 million, despite lower-margin military mix and higher engineering spending. Backlog was $377 million, below $460 million a year earlier.
- Engineered Materials: Q3 sales increased 2.1% to $64.2 million, while operating profit decreased 8.8% to $11.4 million because of competitive pricing. Nine-month sales declined 0.7% and operating profit declined 1.0%.
- Restructuring and acquisition-integration costs were substantially lower than in 2015. The company recorded a $0.4 million restructuring gain in the first nine months of 2016 compared with $8.7 million of restructuring charges in 2015, and no acquisition-integration charges compared with $5.6 million in 2015.
- Nine-month corporate costs increased and included a $5.0 million legal settlement charge.
Guidance, outlook and management commentary
- Management expected 2016 company-wide sales to decline approximately 1% year over year because of unfavorable foreign exchange, with core sales increasing approximately 1%.
- Expected 2016 segment trends were high-single-digit sales declines in Fluid Handling, low- to mid-single-digit growth in Payment & Merchandising Technologies, high-single-digit growth in Aerospace & Electronics, and approximately flat sales in Engineered Materials.
- Management expected approximately $18 million of incremental savings from repositioning actions and approximately $9 million of incremental MEI-related savings in 2016.
- Expected 2016 cash requirements included approximately $55 million of net asbestos payments, $13 million of environmental payments, $8 million of pension contributions and approximately $50 million of capital expenditures.
- Management stated that existing cash, operating cash generation and available borrowing capacity should fund capital requirements, dividends, pension contributions and asbestos and environmental obligations.
Risks, contingencies and unusual items
- Asbestos liabilities were approximately $486.6 million at September 30, 2016, including $75 million classified as current. Related insurance receivables were $111.8 million. The estimate covers pending and projected claims through 2021; additional liabilities after 2021 are probable but cannot reasonably be estimated.
- The company had 36,450 pending asbestos claims at September 30, 2016, compared with 41,712 a year earlier. Net asbestos-related cash payments were $41.5 million in the first nine months, versus $36.2 million in 2015.
- Environmental liabilities included approximately $52.3 million for the Goodyear, Arizona site, with approximately $10.6 million of expected government reimbursement. The company also reported an unresolved potential obligation related to the Crab Orchard Superfund site that it could not reasonably estimate.
- The company paid $6.6 million in the third quarter to resolve the Dummitt asbestos judgment and $0.2 million to resolve the Suttner judgment. Several other asbestos-related appeals and verdicts remained pending.
- Goodwill was $1.176 billion and net intangible assets were $302.1 million. Management reported no impairment indicators, but impairment testing depends on forecasts, discount rates and market conditions.
- Foreign exchange, cyclical industrial demand, customer capital spending, defense-program timing, competitive pricing, litigation outcomes, insurance recoveries and environmental remediation costs remain significant risks.
- Non-U.S. subsidiaries held approximately $436 million of cash that could incur additional taxes if repatriated to the United States.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Investor verification points
- Confirm the registrant identity and corporate-name history because the filing is for Crane Co., while the request identifies Crane NXT, Co.
- Reconcile reported sales and earnings growth with the significant foreign-exchange effects and nonrecurring items, including the $5.0 million legal settlement and reduced restructuring charges.
- Assess sustainability of Payment & Merchandising Technologies growth and Aerospace & Electronics military-program volumes, including their margin and backlog implications.
- Review Fluid Handling backlog deterioration and exposure to oil, gas, chemical, industrial and construction markets.
- Evaluate asbestos reserve adequacy, projected post-2021 exposure, insurance recoveries and the sensitivity of cash payments to litigation trends.
- Monitor environmental contingencies, particularly the unquantified Crab Orchard obligation and the Goodyear remediation program.
- Verify debt maturities, available borrowing capacity, cash held overseas and the effect of potential tax costs on liquidity.