Crane Co. Form 10-Q Summary
Reporting period: Quarterly and year-to-date periods ended June 30, 2016, compared with the corresponding 2015 periods. The filing identifies the registrant as Crane Co.; the provided metadata refers to Crane NXT, Co. The financial statements are unaudited.
Business Context
Crane reported four segments: Fluid Handling; Payment & Merchandising Technologies; Aerospace & Electronics; and Engineered Materials. Management described demand as cautious, particularly in Fluid Handling, because of weak oil prices, cyclical end markets, foreign-exchange volatility and broader global economic uncertainty.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2016 | Three Months Ended June 30, 2015 | Six Months Ended June 30, 2016 | Six Months Ended June 30, 2015 |
|---|---|---|---|---|
| Net sales | $712.2 million | $711.2 million | $1,372.2 million | $1,390.0 million |
| Operating profit | $102.6 million | $90.2 million | $188.1 million | $176.2 million |
| Operating margin | 14.4% | 12.7% | 13.7% | 12.7% |
| Net income attributable to common shareholders | $68.2 million | $55.8 million | $123.3 million | $106.8 million |
| Diluted earnings per share | $1.15 | $0.95 | $2.09 | $1.82 |
| Dividends per share | $0.33 | $0.33 | $0.66 | $0.66 |
- Cash flow: Operating activities provided $51.8 million in the first six months, versus $46.0 million in 2015. Capital expenditures were $26.6 million, dividends paid were $38.5 million, and net asbestos-related payments were $25.7 million.
- Liquidity: Cash and cash equivalents were $408.9 million at June 30, 2016, up from $363.5 million at December 31, 2015. Management indicated that cash, operating cash flow and $399 million of available capacity under the commercial paper program and revolving credit facility should fund expected requirements.
- Debt: Long-term debt was $745.0 million and short-term borrowings, principally commercial paper, were $100.9 million. There were no other significant debt maturities until 2018.
- Balance sheet: Total assets were $3.432 billion and total equity was $1.270 billion. Goodwill was $1.177 billion and net intangible assets were $309.2 million.
- Tax rate: The effective tax rate was 27.0% for the quarter and 27.4% for the first six months, compared with 31.5% and 32.1%, respectively, in 2015.
Material Changes Versus Prior Comparable Period
- Second-quarter sales increased 0.1%, while first-half sales declined 1.3%. Core sales increased 1.0% in the quarter and 0.1% year to date, but foreign-exchange translation reduced sales by $6.0 million and $19.3 million, respectively.
- Operating profit increased 13.7% in the quarter and 6.8% year to date. Results benefited from productivity, restructuring benefits, MEI integration synergies and the absence of prior-year acquisition and restructuring charges.
- Net income attributable to common shareholders increased 22.2% in the quarter and 15.4% year to date. Lower effective tax rates also contributed to the improvement.
- Fluid Handling was the principal weakness: first-half sales declined 9.4% and operating profit declined 9.0%, primarily because of lower oil-related and industrial capital spending and unfavorable currency translation.
- Payment & Merchandising Technologies first-half operating profit increased 32.1%, supported by productivity, higher core sales, $5.9 million of MEI-related synergy savings and lower acquisition-related charges.
- Aerospace & Electronics first-half sales increased 9.8% and operating profit increased 16.2%, driven partly by a large military program and higher retrofit and spares sales.
- Comprehensive income attributable to common shareholders was $143.9 million year to date, versus $66.6 million in 2015, primarily because currency translation shifted from a loss to a gain.
- Corporate costs included a $5.0 million legal settlement charge in the second quarter and first six months of 2016.
Guidance, Outlook and Management Commentary
- Management expected 2016 total-company sales to decline approximately 2% year over year, driven by unfavorable foreign exchange, with core sales approximately flat.
- Fluid Handling sales were expected to decline in the high-single-digit range, with a modest decline in operating profit. Weak oil prices, lower customer capital spending and project delays were identified as key pressures.
- Payment & Merchandising Technologies sales were expected to increase in the low-single-digit range, with operating profit improving because of higher sales, MEI synergies and lower integration costs.
- Aerospace & Electronics sales were expected to increase in the mid-single-digit range, with slight operating-profit improvement; defense sales were expected to benefit from a large microwave-products contract and a major military aerospace program.
- Engineered Materials sales and operating profit were expected to be approximately flat, with building-products growth offset by weaker transportation and recreational-vehicle markets.
- 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 uses included approximately $55 million for asbestos settlement and defense costs, $13 million for environmental payments, $8 million for pension contributions and $50 million of capital expenditures.
Risks, Contingencies and Unusual Items
- Asbestos: The company had 38,664 pending claims at June 30, 2016. The recorded asbestos liability was approximately $511.7 million, with $121 million of related insurance receivables. Management expects additional liabilities beyond 2021 but stated that they cannot reasonably be estimated.
- Net asbestos-related cash payments were $25.7 million in the first six months. The company stated that future amounts may vary materially with claim volumes, settlement costs, defense costs, litigation outcomes, legislation, court decisions and insurer recoveries.
- Environmental matters: The estimated Goodyear Site liability was $55.7 million, with a $12.3 million receivable for expected U.S. government reimbursements. A probable but not reasonably estimable obligation also remained associated with the Crab Orchard Site.
- The company recorded a $5.0 million net pre-tax charge in the second quarter to settle its dispute with Huttig concerning the White Pine Site.
- Management identified the United Kingdom’s referendum favoring exit from the European Union as a new risk because of possible effects on currency rates, customer demand, supplier relationships and financial results.
- Goodwill and intangible assets were material relative to equity. Management reported no impairment indicators at June 30, 2016, but impairment testing depends on forecasts, discount rates, market conditions and other assumptions.
- The company was evaluating new accounting standards covering expected credit losses, share-based compensation, leases, deferred tax presentation, inventory and revenue recognition. The filing did not provide a quantified expected impact for the standards still under evaluation.
Investor Verification Checklist
- Confirm the registrant identity and whether the intended issuer is Crane Co. or Crane NXT, Co.
- Verify the sustainability of 2016 guidance, particularly the assumed flat core sales and foreign-exchange impact.
- Monitor Fluid Handling backlog, oil and gas exposure, industrial capital spending and related margin trends.
- Assess whether Aerospace & Electronics growth is recurring or concentrated in large military and retrofit programs.
- Reconcile reported earnings growth with productivity savings, MEI synergies, lower restructuring charges and the lower tax rate.
- Track asbestos claims, cash payments, insurance recoveries and changes to the forecast through 2021.
- Evaluate liquidity after commercial paper borrowings, dividends, capital expenditures, pension contributions and environmental payments.
- Review pending environmental mediation and litigation matters for potential obligations not currently estimable.