Crane NXT, Co. quarterly report, Q2 FY2010

Crane Co. Form 10-Q Summary

Reporting period: Quarter and six months ended June 30, 2010. The filing was signed August 5, 2010. The registrant was Crane Co., a diversified manufacturer serving aerospace, defense electronics, recreational vehicle, transportation, automated merchandising, chemical, pharmaceutical, energy, power, building services and utility markets. Reported segments were Aerospace & Electronics, Engineered Materials, Merchandising Systems, Fluid Handling and Controls.

Key Financial Metrics

Metric	Q2 2010	Q2 2009	Six months 2010	Six months 2009
Net sales	$552.8 million	$545.5 million	$1,083.1 million	$1,100.6 million
Operating profit	$65.3 million	$45.5 million	$118.6 million	$83.4 million
Operating margin	11.8%	8.3%	10.9%	7.6%
Net income attributable to common shareholders	$40.0 million	$27.8 million	$73.3 million	$51.1 million
Diluted EPS	$0.67	$0.47	$1.23	$0.87
Operating cash flow	Not separately provided	Not separately provided	$63.9 million	$45.7 million

Q2 sales increased 1.3%, while operating profit rose 43.6% and net income attributable to common shareholders rose 44.2%.
Six-month sales declined 1.6%, but operating profit increased 42.2% and net income increased 43.5%.
Cash and cash equivalents were $335.5 million at June 30, 2010, compared with $372.7 million at December 31, 2009.
Total debt was approximately $399.7 million, consisting primarily of $199.5 million of 5.50% notes due 2013 and $199.1 million of 6.55% notes due 2036, plus $1.0 million of short-term borrowings.
The company had no borrowings under its $300 million committed revolving credit facility, which expires in September 2012.
Dividends were $0.20 per share in the quarter and $0.40 per share for the first six months. The company repurchased 313,500 shares for $10.0 million during the quarter.

Material Changes Versus the Prior Comparable Period

Profitability improved primarily from the substantially reduced cost base, lower engineering spending, productivity actions and the absence of prior-year restructuring and legal settlement charges.
Aerospace & Electronics Q2 sales declined 5.2%, but operating profit increased 37.3% to $26.2 million; Aerospace engineering expense declined $8.0 million.
Engineered Materials Q2 sales increased 40.4% and operating profit increased 122.1%, reflecting stronger recreational vehicle, transportation and building-products demand.
Merchandising Systems sales increased 1.6% and operating profit increased 21.5%, helped by the final payment of a previously disclosed patent litigation settlement and the absence of prior-year restructuring charges. Payment Solutions remained weak.
Fluid Handling Q2 sales declined 3.2%, but operating profit increased 18.8% to $32.2 million due to cost reductions and favorable mix. Six-month sales and operating profit declined 5.1% and 5.8%, respectively.
Controls returned to profitability, reporting Q2 operating profit of $0.8 million versus a $1.7 million loss in the prior year.
The company acquired Merrimac Industries on February 3, 2010, for approximately $51 million in cash. Merrimac was integrated into Aerospace & Electronics and generated preliminary goodwill of $15.7 million and identified intangible assets of $20.1 million.
Order backlog was $713.9 million at June 30, 2010, up 7.4% from December 31, 2009 and 2.4% from June 30, 2009.

Cash Flow, Liquidity and Outlook

Six-month operating cash flow increased $18.2 million year over year, primarily from higher earnings. This benefit was partly offset by $27.5 million of net asbestos-related payments versus $12.5 million in the prior-year period.
Investing cash use was $59.5 million, including the $51.2 million Merrimac acquisition payment and $8.4 million of capital expenditures. Full-year 2010 capital expenditures were expected to be $30 million to $35 million.
Management stated that cash on hand, expected operating cash flow and the available revolving facility should fund near- and long-term requirements, asbestos and environmental payments, pension contributions and planned investments.
Management expected the economic downturn to continue affecting 2010 results and anticipated unfavorable foreign-exchange effects in the second half. No consolidated earnings guidance was provided.
Management expected Fluid Handling margins of approximately 12% to 13% for 2010 and expected Merchandising Systems sales to be generally consistent with 2009.
Engineering spending was expected to decline approximately $20 million in 2010 as major programs neared completion. Boeing directed the company to stop work on a modified 787 brake control system; management did not expect a material financial impact.

Risks, Contingencies and Unusual Items

Asbestos liability was $773 million at June 30, 2010, including a current portion of $100 million. The related insurance receivable was $228 million. Management determined that no change to the estimate was warranted for the quarter, but stated that future charges could be material and cannot currently be reasonably estimated.
There were 65,352 pending asbestos claims at June 30, 2010. Claim activity, settlement costs, defense costs, insurer recoveries and adverse litigation outcomes could materially affect earnings, cash flow and liquidity.
The Goodyear, Arizona environmental remediation liability was $46.7 million, including approximately $12.8 million current, with a $10.5 million receivable for expected U.S. government reimbursements. The EPA had requested additional remediation actions after higher contaminant levels were identified.
The company identified a probable but not reasonably estimable potential obligation related to the Crab Orchard Superfund site.
A Merrimac acquisition-related shareholder lawsuit was pending; no loss was accrued because a loss was not considered probable and could not be reasonably estimated.
Separate product-liability lawsuits related to a chicken-processing plant fire demanded more than $260 million in aggregate. No loss was accrued because an adverse outcome was not considered probable and the amount could not be reasonably estimated; insurance coverage was being pursued.
The company expected approximately $40 million of 2010 defined-benefit pension contributions, including a $25 million discretionary contribution made in July 2010, and $2 million of other postretirement contributions.
Goodwill was $766.5 million at June 30, 2010. Management reported that a hypothetical 10% reduction in reporting-unit fair values in the prior impairment analysis would not have resulted in impairment, but noted sensitivity to forecasts, discount rates and market conditions.

Important Facts for Investors to Verify

Whether the improvement in operating margins is sustainable after restructuring benefits, lower engineering spending and other favorable comparisons normalize.
The timing and magnitude of Aerospace & Electronics shipments expected in the second half of 2010 and the financial resolution of the 787 brake-control work stoppage.
Actual asbestos claims, settlement and defense costs, insurance recoveries and any revisions to the $773 million liability and $228 million insurance receivable.
Progress and potential cost changes at the Goodyear and Crab Orchard environmental sites.
Liquidity after the Merrimac acquisition, pension contributions, asbestos payments, capital expenditures, dividends and share repurchases.
Exposure to cyclical industrial markets, foreign-exchange movements, project delays, raw-material costs and weakness in Payment Solutions and later-cycle Fluid Handling markets.