Crane Co. 2014 First-Quarter Form 10-Q Summary
Business context and reporting period
Crane Co. reported unaudited results for the three months ended March 31, 2014. The company operated through four reportable segments: Fluid Handling, Payment & Merchandising Technologies, Aerospace & Electronics, and Engineered Materials. The December 2013 acquisition of MEI was included in results for the post-acquisition period and materially affected year-over-year comparisons.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $716.8 million | $627.6 million | 14.2% increase |
| Operating profit | $81.4 million | $86.9 million | 6.3% decrease |
| Operating margin | 11.4% | 13.8% | Down 240 basis points |
| Income before taxes | $71.8 million | $80.7 million | 11.2% decrease |
| Net income attributable to common shareholders | $48.7 million | $57.8 million | 15.4% decrease |
| Diluted earnings per share | $0.82 | $0.99 | Decrease |
| Dividends per share | $0.30 | $0.28 | Increase |
Sales growth consisted of approximately 1.0% core growth, a 13.4% contribution from MEI, and a 0.2% unfavorable currency effect. Interest expense rose to $9.8 million from $6.7 million due primarily to debt issued to finance the MEI acquisition. The effective tax rate was 31.9%, compared with 28.3% in the prior-year quarter, partly because the prior period benefited from a retroactive federal research tax credit.
- Segment sales: Fluid Handling $310.8 million, Payment & Merchandising Technologies $169.1 million, Aerospace & Electronics $169.0 million, and Engineered Materials $67.9 million.
- Segment operating profit: Fluid Handling $44.5 million, Payment & Merchandising Technologies $7.4 million, Aerospace & Electronics $32.6 million, and Engineered Materials $10.8 million.
- Cash flow: Operating activities used $18.9 million, investing activities used $9.2 million, and financing activities provided $9.3 million. Capital expenditures were $9.4 million, and dividends paid were $17.6 million.
- Liquidity: Cash and cash equivalents were $250.3 million at March 31, 2014, versus $270.6 million at December 31, 2013. The company reported $357 million of availability under its committed revolving credit facility.
- Debt: Long-term debt was $749.2 million and short-term borrowings were $143.8 million. The company borrowed $18 million under its revolving credit facility during the quarter.
- Balance sheet: Total assets were $3.55 billion and total equity was $1.26 billion at March 31, 2014. Goodwill was $1.25 billion and net intangible assets were $398.3 million.
Material changes versus the prior comparable period
- Revenue increased $89.3 million, driven mainly by the MEI acquisition, while operating profit and net income declined because of acquisition-related costs, restructuring charges, higher amortization, and increased interest expense.
- Q1 2014 included $10.0 million of restructuring charges and $4.7 million of acquisition integration-related charges. It also included approximately $4.8 million of MEI inventory step-up and backlog amortization.
- Payment & Merchandising Technologies sales increased 89.0% because of MEI, but segment operating profit declined 26.7% because of acquisition, integration, and restructuring costs.
- Engineered Materials delivered the strongest operating improvement, with sales up 12.8% and operating profit up 25.9%. Aerospace & Electronics operating profit declined 18.8%, while Fluid Handling sales and profit were modestly lower.
- Cash used in operations improved from $20.4 million to $18.9 million, but working capital still consumed $69.3 million. Net asbestos-related cash payments increased to $12.9 million from $10.5 million.
- Other comprehensive loss improved substantially, primarily because currency translation losses were $2.5 million compared with $19.9 million in the prior-year quarter.
Guidance, outlook, risks, and unusual items
- Management expected 2014 sales growth of 15% to 17%, consisting of 1% to 3% organic growth and approximately 14% from the full-year MEI contribution.
- Management expected $18 million to $21 million of MEI transaction, integration, and inventory step-up-related costs in 2014. Additional repositioning costs were expected to be $10 million to $13 million, with anticipated savings of $5 million in 2015 and $10 million annually beginning in 2016.
- Expected 2014 capital expenditures were approximately $45 million. Management expected net asbestos-related payments of approximately $60 million to $70 million and defined benefit plan contributions of approximately $24 million.
- The company estimated asbestos liabilities of $680 million for pending and reasonably anticipated claims through 2021, partly offset by a $166 million insurance receivable. Management stated that additional liabilities after 2021 could be material but could not reasonably be estimated.
- Environmental remediation liabilities related to the Goodyear, Arizona site were estimated at $28.6 million through 2016, with a $7.8 million government reimbursement receivable. Potential liabilities related to the Crab Orchard site and New Jersey environmental litigation could not be reasonably estimated.
- Management identified cyclical demand, economic conditions in North America and Europe, currency fluctuations, commodity costs, defense-program delays, acquisition integration, goodwill and intangible-asset valuation, asbestos litigation, environmental obligations, and insurance recoveries as significant risks.
- The company reported no significant change in previously disclosed risk factors, and management concluded that disclosure controls and procedures were effective as of March 31, 2014.
Important facts for investors to verify
- Whether MEI integration produces the expected revenue, margin, and cost synergies after the one-time charges subside.
- Progress toward the stated 2014 sales-growth outlook and the anticipated organic growth range.
- Operating-margin recovery following restructuring, acquisition integration, and inventory step-up charges.
- Liquidity and leverage trends, including revolving-credit borrowings, interest expense, and debt maturities beginning in 2018.
- Changes in asbestos claims, settlement and defense costs, insurance reimbursements, and the adequacy of the $680 million liability estimate.
- Potential changes to environmental liabilities, particularly the Goodyear and Crab Orchard matters and the New Jersey class action.
- Goodwill and intangible-asset impairment sensitivity, given approximately $1.65 billion of combined goodwill and net intangible assets.