Crane Co. Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011. The filing identifies the registrant as Crane Co.; it reports annual results and unaudited quarterly information, including fourth-quarter 2011 results. The company operated through five segments: Aerospace & Electronics, Engineered Materials, Merchandising Systems, Fluid Handling, and Controls, with approximately 11,000 employees and 42% of revenue generated outside the United States.
Financial Performance and Position
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $2.546 billion | $2.218 billion | Up 15% |
| Operating profit | $42.3 million | $235.2 million | Down 82% |
| Operating margin | 1.7% | 10.6% | Down 8.9 percentage points |
| Income before taxes | $20.5 million | $210.9 million | Down 90% |
| Net income attributable to common shareholders | $26.3 million | $154.2 million | Down 83% |
| Diluted EPS | $0.44 | $2.59 | Down 83% |
| Cash flow from operations | $149.8 million | $133.5 million | Up 12% |
| Capital expenditures | $34.7 million | $21.0 million | Up $13.7 million |
| Cash and cash equivalents | $245.1 million | $272.9 million | Down $27.9 million |
| Total debt | $400.0 million | $399.7 million | Broadly unchanged |
| Net debt | $154.9 million | $126.8 million | Up $28.2 million |
The reported 2011 operating margin and earnings were materially reduced by a $241.6 million asbestos charge and a $30.3 million environmental charge. Excluding these corporate charges, segment operating profit increased to $372.4 million from $284.5 million, and segment operating margin improved to 14.6% from 12.8%.
Segment Results
| Segment | 2011 Sales | Sales Change | 2011 Operating Profit | Operating Margin |
|---|---|---|---|---|
| Aerospace & Electronics | $677.7 million | Up 17% | $145.6 million | 21.5% |
| Engineered Materials | $220.1 million | Up 4% | $29.8 million | 13.5% |
| Merchandising Systems | $373.9 million | Up 25% | $30.3 million | 8.1% |
| Fluid Handling | $1.154 billion | Up 13% | $152.1 million | 13.2% |
| Controls | $120.1 million | Up 9% | $14.7 million | 12.2% |
Fluid Handling remained the largest segment and benefited from stronger maintenance, repair and overhaul activity and improved energy, chemical and pharmaceutical markets. Aerospace & Electronics benefited from higher commercial OEM and aftermarket demand. Merchandising Systems included $53 million of 2011 sales from the Money Controls acquisition. Fluid Handling included approximately $10 million of sales from the WTA acquisition.
Cash Flow, Liquidity, Debt, and Capital Allocation
- Operating cash flow was $149.8 million, after $79.3 million of net asbestos settlement and defense payments and $48.1 million of pension and postretirement contributions.
- Investing cash outflow was $65.5 million, including $36.6 million for acquisitions and $34.7 million of capital expenditures. The company acquired W. T. Armatur GmbH & Co. KG for $37 million in cash plus $1 million of assumed debt.
- Financing cash outflow was $108.7 million, including $57.0 million of dividends and $80.0 million of share repurchases. The annual dividend increased to $0.98 per share from $0.86.
- Total debt was approximately $400 million, consisting principally of $200 million of 5.50% notes due in 2013 and $200 million of 6.55% notes due in 2036. Net debt to net capitalization was 15.9%, compared with 11.3% in 2010.
- The company had no borrowings under its $300 million revolving credit facility at year-end. The facility was scheduled to expire on September 26, 2012, and management expected to replace it before expiration. The facility leverage covenant required total debt to total capitalization of no more than 65%; the reported ratio was 33%.
- Approximately $201 million of cash was held by non-U.S. subsidiaries and was intended to remain permanently reinvested outside the United States.
Material Changes Versus 2010
- Revenue increased $328 million, driven by $217 million of core growth, $60 million from acquisitions and dispositions, and $51 million of favorable foreign exchange.
- All five segments reported higher sales. Segment operating profit increased $87.9 million, or 31%, with particularly strong gains in Aerospace & Electronics, Fluid Handling, Merchandising Systems, and Controls.
- Reported operating profit declined $192.9 million because 2011 included the asbestos and environmental charges. The prior-year period included $6.7 million of restructuring charges and $1.3 million of Money Controls transaction costs.
- Net income declined $127.9 million despite higher sales and segment profitability. The 2011 effective tax rate was negative 29.9%, compared with 26.9% in 2010, primarily because the asbestos and environmental charges generated tax benefits.
- Pension and postretirement liabilities increased substantially, contributing to a $93 million after-tax reduction in equity through other comprehensive income. The defined benefit pension funded status deteriorated to a $108.3 million deficit from a $12.8 million deficit.
- Year-end order backlog was $411 million in Aerospace & Electronics, $314 million in Fluid Handling, $27 million in Controls, $15 million in Merchandising Systems, and $11 million in Engineered Materials.
Guidance, Outlook, Risks, and Unusual Items
Management Outlook
- Management expected 2012 core sales growth of 5% to 6%, acquisition-related growth of less than 1%, unfavorable foreign exchange of approximately 2%, and total sales growth of 3% to 5%.
- Management expected profitable growth at a reduced year-over-year rate versus 2011, with further improvement in Aerospace & Electronics and Fluid Handling, relatively stable Engineered Materials and Merchandising Systems results, and moderate growth in Controls.
- Expected 2012 cash requirements included approximately $85 million of net asbestos payments, $5 million of pension contributions, $1.3 million of postretirement contributions, and approximately $40 million of capital expenditures.
Material Contingencies and Unusual Items
- The company recorded an additional $285 million gross asbestos liability as of December 31, 2011, reflected in a $241.6 million net pre-tax charge after the related insurance receivable effect. Total asbestos liability was $894 million for pending and reasonably anticipated claims through 2021, offset by a $225 million insurance receivable.
- Approximately 58,658 asbestos claims were pending at year-end. Management stated that additional liabilities after 2021 may be significant but could not be reasonably estimated.
- The company recorded a $30.3 million environmental charge related primarily to the Goodyear, Arizona Superfund site. The gross estimated liability was $66.0 million through 2016, with a $13.7 million receivable for expected U.S. government reimbursements.
- Other litigation includes consolidated lawsuits related to a 2003 chicken-processing plant fire with claimed damages exceeding $260 million. No loss was accrued because the company did not consider a loss probable or reasonably estimable at year-end.
- Risks include cyclical demand, defense-spending reductions, foreign exchange, raw-material inflation, supply-chain disruption, government-contract compliance, acquisition integration, pension-market performance, environmental obligations, asbestos claims, product liability, and competitive pricing pressure.
Investor Verification Checklist
- Verify the registrant identity and corporate name: the supplied filing is for Crane Co., while the request metadata names Crane NXT, Co.
- Reconcile reported 2011 earnings with the underlying segment performance after separately assessing the asbestos and environmental charges.
- Review the assumptions, claim trends, insurance recoveries, and forecast period supporting the $894 million asbestos liability and $225 million insurance receivable.
- Assess the timing and funding of the $200 million notes maturing in 2013 and the planned replacement of the revolving credit facility expiring in September 2012.
- Monitor pension funded status, future contributions, discount-rate sensitivity, and investment performance.
- Evaluate whether 2012 guidance assumptions for core growth, foreign exchange, acquisitions, aerospace demand, Fluid Handling backlog, and raw-material costs were achieved.
- Review the status and potential exposure of the Goodyear, Crab Orchard, chicken-processing plant, Merrimac acquisition, and New Jersey environmental proceedings.