Crane Co. Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2011; filed November 7, 2011. The filing identifies the registrant as Crane Co. and reports five operating segments: Aerospace & Electronics, Engineered Materials, Merchandising Systems, Fluid Handling, and Controls. Financial statements are unaudited and presented under U.S. GAAP.
Financial Highlights
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net sales | $659.5 million | $560.7 million | $1,914.2 million | $1,643.8 million |
| Operating profit | $82.1 million | $62.9 million | $234.9 million | $181.5 million |
| Operating margin | 12.5% | 11.2% | 12.3% | 11.0% |
| Net income attributable to common shareholders | $52.5 million | $41.5 million | $151.4 million | $114.8 million |
| Diluted EPS | $0.89 | $0.70 | $2.55 | $1.92 |
| Operating cash flow | Not separately provided | Not separately provided | $65.0 million | $59.3 million |
- Q3 sales increased 17.6%, including 11.2% core growth, a 3.2% favorable currency effect, and 3.1% from acquisitions net of divestitures.
- Nine-month sales increased 16.5%, including 10.8% core growth, a 3.0% currency benefit, and 2.7% from acquisitions net of divestitures.
- Effective tax rates increased to 31.0% in Q3 and 31.1% year to date, compared with 28.3% and 29.5%, respectively, primarily because 2010 included discrete tax benefits.
- Dividends were $0.26 per share in Q3 and $0.72 per share for the first nine months, compared with $0.23 and $0.63 in the prior-year periods.
Liquidity, Debt and Cash Flow
- Cash and cash equivalents were $211.2 million at September 30, 2011, down from $272.9 million at December 31, 2010.
- Operating cash flow of $65.0 million was partly offset by $57.6 million used in investing activities and $67.6 million used in financing activities.
- Investing cash uses included $27.7 million of capital expenditures and $35.6 million for the W. T. Armatur acquisition. Management expected 2011 capital expenditures of approximately $40 million.
- Financing uses included $42.0 million of dividends and $50.0 million for repurchases of 1,056,200 shares.
- Long-term debt was $398.9 million, consisting primarily of $199.7 million of 5.50% notes due 2013 and $199.2 million of 6.55% notes due 2036. Short-term borrowings were $0.8 million.
- No borrowings were outstanding under the $300 million revolving credit facility, which was scheduled to expire in September 2012. Management expected to replace or renew the facility before expiration.
- Management stated that cash, expected operating cash generation, and available revolving credit were expected to fund capital needs, acquisitions, shareholder returns, asbestos and environmental payments, and pension contributions.
Material Changes Versus Prior Comparable Period
- Aerospace & Electronics Q3 sales increased 20.3% and operating profit increased 40.5%; year-to-date sales rose 21.5% and operating profit rose 40.4%, driven by commercial aerospace, aftermarket, power solutions, and microelectronics demand.
- Fluid Handling Q3 sales increased 18.6% and operating profit increased 23.1%; year-to-date sales rose 13.0% and operating profit rose 21.3%. Backlog increased to $328.8 million from $271.8 million at December 31, 2010.
- Merchandising Systems Q3 sales increased 28.0% and operating profit increased 73.2%, aided by the Money Controls acquisition and operating efficiencies. Year-to-date sales rose 29.7%, while operating profit increased 17.0% because of purchase accounting and the absence of a prior-year patent litigation settlement benefit.
- Controls Q3 operating profit increased 137.0% and year-to-date operating profit increased 294.7%, reflecting improved end-market demand and the absence of losses from divested businesses.
- Engineered Materials was weaker: Q3 sales declined 3.3% and operating profit declined 25.7%; year-to-date operating profit declined 5.6% despite 4.6% sales growth, primarily because of higher raw material costs and softer RV demand.
- Consolidated backlog was $801.0 million at September 30, 2011, up 10.5% from September 30, 2010 and 4.3% from December 31, 2010.
Guidance, Outlook and Unusual Items
- Management expected 2011 total sales growth of 15% to 16%, reflecting higher core growth, favorable foreign exchange, and acquisitions.
- Management cited limited visibility in short-cycle Engineered Materials and Merchandising Systems markets, including weaker RV demand and expected slowing transportation demand.
- Management remained positive on commercial aerospace, defense electronics, Fluid Handling, and Controls, citing improving backlogs, MRO activity, aerospace demand, and chemical, refinery, power, and oil and gas markets.
- In July 2011, the company acquired W. T. Armatur GmbH & Co. KG for approximately $38 million on a cash- and debt-free basis. The acquisition was integrated into Fluid Handling and added approximately $10 million of goodwill based on preliminary purchase accounting.
- Asbestos liabilities totaled $637 million at September 30, 2011, including $100 million classified as current. Related insurance receivables totaled $189.8 million, and the company recorded no change to its asbestos estimate during the quarter.
- Nine-month asbestos settlement and defense costs incurred were $82.9 million, while net cash payments after insurance recoveries were $59.2 million, versus $43.7 million in the prior-year period.
- Environmental liability for the Goodyear, Arizona site was $30.4 million, with a $7.7 million receivable for expected U.S. government reimbursements. The company stated that additional remediation costs could vary as site conditions and regulatory requirements develop.
- Material litigation includes asbestos claims, a Georgia fire-related product liability matter involving claimed damages exceeding $260 million, acquisition-related litigation concerning Merrimac, and environmental claims. No loss accrual was recorded for the Merrimac or Georgia matters because loss was not considered probable or reasonably estimable.
- Goodwill was $821.7 million at September 30, 2011. Management reported no indicators requiring an interim impairment test and stated that annual testing is performed in the fourth quarter.
Investor Verification Priorities
- Verify that the filing being analyzed is Crane Co., rather than the later Crane NXT corporate identity.
- Assess sustainability of reported growth after separating core growth from foreign exchange and acquisitions.
- Review the expected 2013 maturity of approximately $200 million of senior unsecured notes and the planned replacement of the revolving credit facility.
- Monitor asbestos claim counts, settlement and defense costs, insurance recoveries, and the sensitivity of the $637 million liability estimate.
- Evaluate the potential exposure from the Georgia fire litigation, Crab Orchard and Goodyear environmental matters, and other unaccrued contingencies.
- Review whether higher raw material costs and weaker RV and short-cycle demand could pressure Engineered Materials margins.
- Confirm fourth-quarter goodwill impairment testing and the carrying values of the company’s $821.7 million of goodwill and $152.6 million of net intangible assets.