Filing scope and business context
This is Crane Co.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2012. The requested company name, Crane NXT, Co., does not match the registrant identified in the filing, which is Crane Co. The company operated five reportable segments: Aerospace & Electronics, Engineered Materials, Merchandising Systems, Fluid Handling, and Controls.
Key financial metrics
| Metric | Three months ended June 30, 2012 | Three months ended June 30, 2011 | Six months ended June 30, 2012 | Six months ended June 30, 2011 |
|---|---|---|---|---|
| Net sales | $657.7 million | $633.2 million | $1,303.3 million | $1,233.5 million |
| Operating profit from continuing operations | $69.4 million | $78.9 million | $147.7 million | $150.3 million |
| Operating margin | 10.5% | 12.5% | 11.3% | 12.2% |
| Income from continuing operations | $42.8 million | $49.8 million | $93.8 million | $97.3 million |
| Net income attributable to common shareholders | $62.6 million | $50.4 million | $114.2 million | $98.9 million |
| Diluted EPS | $1.07 | $0.85 | $1.95 | $1.66 |
| Dividends per share | $0.26 | $0.23 | $0.52 | $0.46 |
Reported sales increased 3.9% in the quarter and 5.7% year to date. Core sales increased approximately 5.8% and 6.7%, respectively, while foreign-exchange translation reduced sales by approximately 2.9% and 1.9%. Continuing-operations profit declined despite higher sales, principally because of restructuring charges and weaker Fluid Handling and Engineered Materials performance.
Discontinued operations contributed $19.9 million after tax in the quarter and $20.7 million year to date, including an $18.3 million after-tax gain from divestitures. Excluding these items, continuing-operations earnings were lower year over year.
Segment performance
- Aerospace & Electronics: Second-quarter sales increased 4.1% to $178.6 million and operating profit increased 4.8% to $38.9 million. First-half sales increased 6.1% and operating profit increased 8.1%.
- Engineered Materials: Second-quarter sales declined 9.3% to $54.5 million and operating profit declined 39.3% to $5.5 million. Transportation demand, competition, production delays, and European weakness were cited.
- Merchandising Systems: Second-quarter sales increased 3.8% to $97.6 million and operating profit increased 28.1% to $9.1 million, supported by productivity gains.
- Fluid Handling: Second-quarter sales increased 5.7% to $302.3 million, but operating profit declined 27.2% to $26.8 million, including an $11.4 million restructuring charge and higher European manufacturing costs.
- Controls: Second-quarter sales increased 15.5% to $24.7 million and operating profit increased 39.6% to $3.8 million, driven by transportation and oil and gas demand.
Cash flow, liquidity, debt, and balance sheet
- Operating cash flow was $16.1 million for the first six months, compared with $15.2 million in the prior-year period. Working capital used $90.6 million, including $72.3 million from higher receivables.
- Investing activities provided $40.7 million, including $52.7 million of divestiture proceeds. Capital expenditures were $13.8 million versus $18.3 million in the prior-year period.
- Financing activities used $48.4 million, including $30.1 million of dividends and $30.0 million for share repurchases.
- Cash and cash equivalents were $252.3 million at June 30, 2012, compared with $245.1 million at December 31, 2011.
- Long-term debt was $399.0 million, consisting primarily of $199.8 million of 5.50% notes due 2013 and $199.2 million of 6.55% notes due 2036. Short-term borrowings were $1.1 million.
- No borrowings were outstanding under the $300 million revolving credit facility, which was amended in May 2012 and expires in May 2017. The company stated that liquidity was sufficient for expected operating needs, capital expenditures, debt maturities, restructuring, asbestos and environmental obligations, and pension contributions.
- Order backlog was $811.6 million at June 30, 2012, compared with $778.0 million at December 31, 2011 and $825.2 million at June 30, 2011.
Material changes, outlook, and unusual items
- The company recorded $14.7 million of pretax restructuring charges in the second quarter, primarily for European Fluid Handling actions, including plant closures, facility transfers, and workforce reductions. Approximately 200 employees, or 2% of the global workforce, were expected to be affected.
- Additional restructuring charges of approximately $5 million were expected in the second half of 2012, with approximately $12 million of annualized savings expected to begin largely in 2013. Expected cash payments were approximately $5 million in 2012 and $10 million in 2013.
- Management expected 2012 continuing-operations core sales growth of 6% to 7%, acquisition-related sales growth of less than 1%, unfavorable foreign exchange of approximately 2%, and total sales growth of 4% to 5%. Management expected profitable growth but at a reduced year-over-year rate compared with 2011.
- Management cited uncertainty in the global economy, European sovereign-debt concerns, weak housing markets, government budget reductions, currency movements, inflation, commodity costs, and cyclical customer demand.
- On June 19, 2012, the company sold Azonix for $43.4 million and recognized a $13.6 million after-tax gain. On June 28, 2012, it sold a Houston valve service center for $9.3 million and recognized a $4.6 million after-tax gain.
- Asbestos liabilities were $848 million at June 30, 2012, with related insurance receivables of $218 million. The company reported 57,559 pending asbestos claims and $39.2 million of net asbestos-related cash payments during the first six months. Management stated that additional charges are probable but cannot reasonably be estimated beyond 2021.
- The Goodyear environmental liability was $57.6 million, partly offset by a $12.7 million expected government reimbursement receivable. Potential Crab Orchard environmental obligations and several other legal matters were not accrued because the amounts could not reasonably be estimated.
- Goodwill was $806.2 million and net intangible assets were $131.5 million at June 30, 2012. Management reported no indicators requiring interim goodwill impairment testing.
Most important facts to verify
- Confirm that this Crane Co. filing, rather than a Crane NXT filing, is the intended source.
- Separate continuing-operations performance from the $18.3 million after-tax divestiture gain when assessing earnings quality.
- Assess whether the $14.7 million restructuring charge and expected additional $5 million charge produce the projected savings.
- Monitor working-capital consumption, particularly the $72.3 million increase in accounts receivable and low operating cash flow relative to earnings.
- Review the 2013 maturity of approximately $200 million of senior notes and available refinancing or liquidity sources.
- Evaluate the sensitivity of asbestos reserves and insurance recoveries to claim volumes, settlement costs, litigation outcomes, insurer solvency, and developments beyond the 2021 forecast period.
- Track European weakness, Fluid Handling margins, Engineered Materials demand, currency effects, and whether the 4% to 5% full-year sales outlook remains achievable.