Crane Co. Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2015. The filing is for Crane Co., the predecessor issuer associated with the requested company metadata, and was filed August 4, 2015. Results are unaudited and presented in millions except per-share data.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $711.2 | $750.1 | $1,390.0 | $1,466.9 |
| Operating profit | $90.2 | $97.6 | $176.2 | $179.0 |
| Operating margin | 12.7% | 13.0% | 12.7% | 12.2% |
| Net income attributable to common shareholders | $55.8 | $59.7 | $106.8 | $108.4 |
| Diluted EPS | $0.95 | $1.00 | $1.82 | $1.82 |
| Dividends per share | $0.33 | $0.30 | $0.66 | $0.60 |
- Q2 sales declined 5.2% and net income attributable to common shareholders declined 6.5%. First-half sales declined 5.2%, while operating profit declined 1.6% and net income declined 1.5%.
- Sales reductions primarily reflected unfavorable foreign-exchange translation of $39.2 million in Q2 and $73.4 million for the first half, plus divestitures and the completion of a transition-services agreement. Core sales increased 0.6% in Q2 and 0.4% year to date.
- Cash provided by operating activities was $46.0 million for the first half of 2015 versus $45.3 million in the prior-year period. Capital expenditures were $20.1 million, dividends paid were $38.3 million, and share repurchases were $25.0 million.
- Cash and cash equivalents were $326.3 million at June 30, 2015, compared with $346.3 million at December 31, 2014. Total current assets were $1,224.4 million and current liabilities were $655.8 million.
- Debt consisted of $749.2 million of long-term notes and $122.7 million of short-term borrowings, including $121.9 million of commercial paper. The $500 million revolving credit facility was undrawn and was extended to May 2020; management reported $378 million of remaining commercial-paper capacity.
Material changes versus the prior comparable period
- Fluid Handling: Q2 sales fell 10.1% to $291.8 million and operating profit fell 37.7% to $32.5 million. First-half sales fell 10.7% and operating profit fell 30.9%, driven by weak process-valve demand, pricing and mix pressure, foreign exchange, and restructuring costs. Backlog declined to $287 million from $370 million at June 30, 2014.
- Payment & Merchandising Technologies: Q2 sales increased 1.0% to $186.5 million and operating profit increased 40.3% to $26.1 million. First-half operating profit increased 81.2% to $47.3 million, aided by higher core sales, synergies, productivity, and lower acquisition-related charges.
- Aerospace & Electronics: Q2 sales declined 5.9% and operating profit declined 11.7%; first-half sales declined 5.1% and operating profit declined 9.8%. Backlog increased to $448 million from $397 million at June 30, 2014.
- Engineered Materials: Q2 sales increased 3.8% and operating profit increased 24.5%; first-half sales increased 3.1% and operating profit increased 28.2%, reflecting productivity, higher volume, and lower material costs.
- Q2 2015 included $7.1 million of restructuring and related charges and $1.8 million of MEI integration charges. Q2 2014 included $3.3 million of restructuring and related charges, $2.0 million of MEI integration charges, and a $6.5 million Roseland environmental-litigation settlement charge.
- The effective tax rate increased to 31.5% from 30.9% in Q2 and to 32.1% from 31.3% for the first half, primarily because a greater proportion of income was earned in higher-tax jurisdictions.
Guidance, outlook, commentary, and risks
- Management expected 2015 company-wide sales to decline approximately 5.5%, consisting of a 4% to 6% foreign-exchange headwind, a 0.5% divestiture impact, and organic sales growth of negative 1% to positive 1%.
- Management expected 2015 repositioning costs of $4 million to $6 million, savings of approximately $10 million in 2015, and annualized savings of $19 million in 2016. MEI integration and restructuring costs were expected to be $6 million to $8 million in 2015, with at least $9 million of incremental synergies and a $33 million annualized run rate by the end of 2016.
- Expected 2015 capital expenditures were approximately $45 million. Management expected approximately $59 million of net asbestos settlement and defense payments and approximately $17 million of defined-benefit-plan contributions.
- Asbestos liabilities were $582 million at June 30, 2015, with $79 million classified as current; related insurance receivables were $140 million. The estimate covers claims projected through 2021, and management stated that additional post-2021 liabilities may be material but cannot reasonably be estimated.
- Goodyear environmental remediation liabilities were estimated at $72 million through 2022, with a $15.5 million expected government reimbursement receivable. Roseland remediation liabilities were approximately $3 million. The potential Crab Orchard environmental obligation was considered probable but was not reasonably estimable at the filing date.
- Key risks include cyclical and volatile demand, foreign exchange, commodity and inflationary pressures, continued weakness in Fluid Handling end markets, pension obligations, tax examinations, asbestos litigation and insurance recoveries, environmental remediation, and impairment risk related to $1.18 billion of goodwill and $336.0 million of intangible assets.
Investor verification priorities
- Reconcile the requested Crane NXT identification with the filing’s registrant name, Crane Co., and confirm the relevant corporate successor and reporting history.
- Assess whether Fluid Handling weakness and its backlog decline are temporary or indicate sustained end-market deterioration.
- Verify the conversion of earnings to cash, including working-capital use of $54.7 million and net operating cash flow of only $46.0 million in the first half.
- Review leverage and refinancing exposure, particularly $121.9 million of commercial paper and the $250 million of notes due in 2018.
- Monitor asbestos claim activity, insurance recoveries, appellate litigation, and the sensitivity of the $582 million liability estimate.
- Evaluate the assumptions supporting the $72 million Goodyear remediation reserve and the currently unquantified Crab Orchard exposure.
- Test management’s foreign-exchange, restructuring, MEI synergy, and 2015 sales assumptions against subsequent results.