Crane Co. Form 10-Q Summary
Reporting period: Three months ended March 31, 2016; filed May 5, 2016. The filing is for Crane Co., the predecessor company to Crane NXT, Co. Financial statements are unaudited and presented in millions except per-share data.
Business Context and Financial Performance
Crane reported four segments: Fluid Handling, Payment & Merchandising Technologies, Aerospace & Electronics, and Engineered Materials. Net sales were geographically diversified, with non-U.S. operations representing 36.1% of sales versus 39.1% in the prior-year quarter.
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $660.0 million | $678.8 million | Down 2.8% |
| Operating profit | $85.5 million | $86.0 million | Down 0.6% |
| Operating margin | 13.0% | 12.7% | Up 30 basis points |
| Income before taxes | $76.6 million | $76.3 million | Up 0.4% |
| Net income attributable to common shareholders | $55.0 million | $51.1 million | Up 7.6% |
| Diluted EPS | $0.93 | $0.87 | Up 6.9% |
| Dividends per share | $0.33 | $0.33 | Unchanged |
| Effective tax rate | 27.9% | 32.7% | Down 480 basis points |
Sales declined $18.8 million, consisting of a $5.5 million core-sales decline and a $13.3 million unfavorable foreign-currency impact. Lower sales and profit in Fluid Handling and Engineered Materials were largely offset by improved results in Payment & Merchandising Technologies and Aerospace & Electronics.
Segment Results
| Segment | Sales | Year-over-year sales | Operating profit | Year-over-year profit |
|---|---|---|---|---|
| Fluid Handling | $248.0 million | Down 10.0% | $25.4 million | Down 25.9% |
| Payment & Merchandising Technologies | $172.0 million | Flat | $28.0 million | Up 32.7% |
| Aerospace & Electronics | $171.7 million | Up 6.3% | $33.1 million | Up 10.0% |
| Engineered Materials | $68.3 million | Down 2.0% | $13.7 million | Down 4.2% |
- Fluid Handling was affected by weak oil prices, lower customer capital spending, economic weakness in Asia, and soft construction markets. Backlog was $263 million, down from $304 million at March 31, 2015.
- Payment & Merchandising Technologies benefited from MEI synergy savings of approximately $2.5 million, stronger bottler sales, and lower acquisition-related charges. Backlog was $60 million versus $68 million a year earlier.
- Aerospace & Electronics benefited from higher commercial original-equipment sales and shipments under a large military program. Backlog was $419 million versus $446 million a year earlier.
- Engineered Materials experienced lower recreational-vehicle sales and competitive pricing pressure. Backlog was $16 million versus $19 million a year earlier.
Cash Flow, Liquidity, Debt, and Balance Sheet
- Operating activities used $18.0 million, compared with $11.6 million used in Q1 2015, primarily because of higher working-capital requirements, including $82.0 million of working-capital cash use.
- Investing activities used $10.5 million, including $11.0 million of capital expenditures. Management expects 2016 capital expenditures of approximately $50 million.
- Financing activities provided $7.9 million, including $28.5 million of commercial-paper issuance and $19.2 million of dividends paid. No open-market share repurchases occurred during the quarter.
- Cash and cash equivalents were $354.0 million at March 31, 2016, compared with $363.5 million at December 31, 2015.
- Short-term borrowings were $78.1 million, including $77.5 million of commercial paper. Long-term debt was $744.8 million. There were no other significant debt maturities until 2018.
- The company stated that $422 million was available under its commercial-paper program and revolving credit facility. Total assets were $3.395 billion and total equity was $1.225 billion.
- Approximately $356 million of cash was held by non-U.S. subsidiaries and would be subject to additional taxes if repatriated.
Guidance, Outlook, and Management Commentary
- Management expected 2016 total-company 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 modestly lower operating profit.
- Payment & Merchandising Technologies sales were expected to increase in the low-single-digit range, with higher profit from sales growth, MEI synergies, and lower integration costs.
- Aerospace & Electronics sales were expected to increase in the mid-single-digit range, with slightly improved profit.
- Engineered Materials sales were expected to be approximately flat, while operating profit was expected to decline modestly because of a narrower raw-material-cost and pricing spread.
- Management cited cyclical end markets, global economic conditions, currency movements, commodity costs, oil prices, and customer capital-spending trends as significant demand variables.
Material Changes, Unusual Items, and Contingencies
- The effective tax rate fell primarily because of Japanese tax reform, reinstatement of the U.S. federal research credit, and a greater domestic manufacturing tax benefit.
- Restructuring produced a $0.4 million gain in Q1 2016, compared with $0.5 million of restructuring expense and $1.6 million of acquisition-integration charges in Q1 2015.
- Comprehensive income attributable to common shareholders was $88.6 million versus a $17.7 million loss in Q1 2015, primarily due to a $102.7 million favorable change in currency translation adjustments.
- Asbestos liabilities totaled approximately $531.8 million, including $75.0 million current, and related insurance receivables totaled approximately $126.3 million. Management made no change to the asbestos estimate for the quarter but stated that future changes could be material and that additional post-2021 liabilities cannot be reasonably estimated.
- Asbestos claims pending at March 31, 2016 totaled 40,649. Gross settlement and defense costs incurred were $21.3 million, while net cash payments were $10.8 million.
- Environmental liabilities included approximately $60.1 million for the Goodyear site, with a $12.3 million receivable for expected government reimbursements. A separate Crab Orchard remediation obligation was probable but not reasonably estimable.
- The company had ongoing asbestos appeals and other litigation. A Phoenix, Arizona jury verdict announced April 22, 2016 assigned the company a 20% share of a $9 million compensatory verdict plus $5 million of exemplary damages; the company stated it would pursue post-trial relief and appeal if necessary.
- Goodwill was $1.178 billion and net intangible assets were $314.3 million. Management reported no impairment indicators as of March 31, 2016, but impairment testing depends on assumptions regarding growth, margins, discount rates, and market conditions.
- The company adopted debt-issuance-cost presentation guidance retrospectively and adopted business-combination measurement guidance prospectively; neither adoption materially affected results. New lease, revenue-recognition, inventory, deferred-tax, and share-based-payment standards had not yet been fully adopted.
Most Important Facts for Investors to Verify
- Whether the expected 2016 sales decline and approximately flat core sales outlook were achieved, particularly in Fluid Handling.
- The sustainability of Payment & Merchandising Technologies’ margin improvement and MEI synergy realization.
- Backlog trends in Fluid Handling and Aerospace & Electronics, including conversion into revenue.
- Operating cash flow and working-capital performance, which were negative in Q1 2016 despite higher net income.
- Commercial-paper usage, debt maturities beginning in 2018, and the availability of committed liquidity.
- Changes in asbestos claim activity, insurance recoveries, litigation outcomes, and the adequacy of the $531.8 million asbestos liability.
- Potential environmental obligations, especially the currently unquantified Crab Orchard exposure.
- Tax-rate sustainability and the effect of foreign-cash repatriation taxes.