Crane Co. Form 10-Q Summary
Reporting period: Three months ended March 31, 2015. The filing is for Crane Co. and subsidiaries, although the request metadata identifies Crane NXT, Co. The financial statements are unaudited and presented in millions except per-share data.
Business Context
Crane reported four operating segments: Fluid Handling, Payment & Merchandising Technologies, Aerospace & Electronics, and Engineered Materials. Management described demand as cyclical and remained cautious about global economic conditions, foreign exchange, commodity costs, and especially Fluid Handling end markets.
Financial Performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $678.8 million | $716.8 million | Down 5.3% |
| Operating profit | $86.0 million | $81.4 million | Up 5.7% |
| Operating margin | 12.7% | 11.4% | Up 130 basis points |
| Income before taxes | $76.3 million | $71.8 million | Up 6.3% |
| Net income attributable to common shareholders | $51.1 million | $48.7 million | Up 4.9% |
| Diluted earnings per share | $0.87 | $0.82 | Up $0.05 |
| Dividends per share | $0.33 | $0.30 | Up $0.03 |
Sales declined primarily because of a $34.1 million foreign-exchange impact and a $5.1 million divestiture and transition-services impact, partly offset by $1.2 million of core sales growth. Operating profit benefited from lower restructuring and MEI integration charges, productivity improvements, and stronger results in Payment & Merchandising Technologies and Engineered Materials.
Segment Results
| Segment | Q1 2015 Sales | Sales Change | Q1 2015 Operating Profit | Margin |
|---|---|---|---|---|
| Fluid Handling | $275.5 million | Down 11.4% | $34.3 million | 12.5% |
| Payment & Merchandising Technologies | $171.9 million | Up 1.7% | $21.1 million | 12.3% |
| Aerospace & Electronics | $161.6 million | Down 4.3% | $30.1 million | 18.6% |
| Engineered Materials | $69.7 million | Up 2.6% | $14.3 million | 20.5% |
- Fluid Handling profit fell 23.0%, reflecting lower process-valve demand, particularly in oil and gas, chemical, and Chinese power markets.
- Payment & Merchandising Technologies profit rose 183.6%, primarily because of lower acquisition, integration, and restructuring charges, higher core sales, synergies, and productivity.
- Aerospace & Electronics profit decreased 7.7% because of lower volumes and unfavorable product mix; backlog increased to $446 million.
- Engineered Materials profit increased 32.2%, supported by higher RV and building-products sales, productivity, and lower raw-material costs.
Cash Flow, Liquidity, Debt, and Balance Sheet
- Operating activities used $11.6 million of cash, compared with $18.9 million used in Q1 2014. Working capital used $57.1 million.
- Investing activities used $8.8 million, including $10.2 million of capital expenditures.
- Financing activities used $9.9 million, including $19.1 million of dividends and $25.0 million of open-market share repurchases.
- Cash and cash equivalents were $296.9 million at March 31, 2015, down from $346.3 million at December 31, 2014. Foreign-exchange movements reduced cash by $19.0 million.
- Total debt was approximately $876.7 million, consisting of $749.2 million of long-term notes and $127.5 million of short-term borrowings. The company had $127 million outstanding under a new commercial-paper program with a $500 million capacity.
- Management stated that cash, expected operating cash flow, and $373 million of remaining commercial-paper capacity should fund near-term requirements, including liabilities, restructuring, integration activities, and pension contributions.
- Total assets were $3.387 billion and total equity was $1.022 billion at March 31, 2015.
Material Changes Versus the Prior Comparable Period
- Revenue decreased 5.3%, driven mainly by currency translation and divestitures, while core sales increased 0.2%.
- Operating margin expanded from 11.4% to 12.7% as restructuring and integration-related charges declined from $14.7 million to $4.3 million.
- Net income and diluted EPS increased despite lower revenue.
- Cash flow improved year over year but remained negative because of working-capital requirements.
- The company initiated commercial-paper borrowings, repaid $100 million under its revolving credit facility, and repurchased 398,095 shares for $25.0 million.
- Accumulated other comprehensive loss increased by $68.7 million, primarily due to a $70.7 million currency-translation loss.
Guidance, Outlook, Risks, and Unusual Items
- Management expected 2015 company-wide sales to decline approximately 4.5%, reflecting a 4% to 6% foreign-exchange headwind and a 0.5% divestiture impact, partly offset by 0% to 2% organic growth.
- Expected 2015 restructuring and related charges were $4 million to $6 million for repositioning actions and $6 million to $8 million for MEI integration and restructuring.
- Management expected approximately $10 million of repositioning savings in 2015, increasing to $19 million annually in 2016, and an additional $9 million of MEI synergies in 2015 with a $33 million annualized run rate by the end of 2016.
- Expected 2015 capital expenditures were approximately $50 million, asbestos-related cash payments approximately $59 million, and defined-benefit pension contributions approximately $17 million.
- Asbestos liabilities were $600 million, with $144 million of related insurance receivables at March 31, 2015. Management expects additional costs beyond 2021 but cannot reasonably estimate them.
- Environmental liabilities included approximately $75.6 million for the Goodyear Site, partly reimbursable by the U.S. government, and $6.5 million for the Roseland Site. A potential Crab Orchard Site obligation was probable but not reasonably estimable.
- The company reported 44,587 pending asbestos claims. First-quarter gross settlement and defense costs were $18.3 million, while net cash payments after insurance recoveries were $10.7 million.
- Goodwill was $1.174 billion and net intangible assets were $341.3 million. Management identified no current impairment indicators, but impairment remains sensitive to projected cash flows, margins, market conditions, and discount rates.
- The effective tax rate increased to 32.7% from 31.9%, primarily because of Japanese tax reform effects and a lower U.S. domestic-manufacturing tax benefit.
Investor Verification Items
- Verify the company identity and continuity between this Crane Co. filing and the requested Crane NXT, Co. entity.
- Assess the sustainability of margin improvement after restructuring and MEI-related charges normalize.
- Monitor Fluid Handling demand, segment backlog, foreign-exchange effects, and exposure to oil, gas, chemical, power, and construction markets.
- Reconcile negative operating cash flow with reported earnings and track working-capital conversion.
- Review commercial-paper refinancing risk and the 2018 maturity of the $250 million senior notes.
- Evaluate the assumptions, insurance recoveries, and potential future cash requirements associated with asbestos and environmental liabilities.
- Confirm the timing and realization of projected restructuring savings, MEI synergies, capital expenditures, pension contributions, and asbestos payments.