Crane Co. 2017 Second-Quarter Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2017; filed August 2, 2017. The filing covers Crane Co. and its subsidiaries and presents unaudited interim results. Reportable segments were Fluid Handling, Payment & Merchandising Technologies, Aerospace & Electronics, and Engineered Materials.
Key Financial Metrics
| Metric | Three Months 2017 | Three Months 2016 | Six Months 2017 | Six Months 2016 |
|---|---|---|---|---|
| Net sales | $702.5 million | $712.2 million | $1,375.9 million | $1,372.2 million |
| Operating profit | $109.0 million | $102.6 million | $205.6 million | $188.1 million |
| Operating margin | 15.5% | 14.4% | 14.9% | 13.7% |
| Net income attributable to common shareholders | $69.2 million | $68.2 million | $132.3 million | $123.3 million |
| Diluted EPS | $1.14 | $1.15 | $2.19 | $2.09 |
| Dividends per share | $0.33 | $0.33 | $0.66 | $0.66 |
Six-month net cash provided by operating activities was $70.4 million, compared with $51.8 million in the prior-year period. Capital expenditures were $20.8 million, and cash paid for acquisitions was $54.1 million. Dividends paid were $39.3 million. Cash and cash equivalents were $509.3 million at June 30, 2017, essentially unchanged from $509.7 million at December 31, 2016.
Long-term debt was $745.7 million, consisting of notes due in 2018, 2023, and 2036. There were no outstanding borrowings under the $500 million commercial paper program or $500 million revolving credit facility. Management stated that available cash, operating cash flow, borrowing capacity, and access to debt markets were expected to fund operating needs, acquisitions, dividends, capital requirements, asbestos and environmental obligations, and pension contributions.
Material Changes Versus Prior Comparable Period
- Second-quarter sales declined 1.4%, primarily because of $13.8 million of unfavorable currency translation, partly offset by $3.4 million of net acquisition-related sales and $0.7 million of core growth.
- Six-month sales increased 0.3%, reflecting 2.1% core growth and a 0.1% net acquisition/divestiture contribution, partly offset by 1.9% unfavorable currency translation.
- Operating profit increased 6.2% in the quarter and 9.3% for the six months. The six-month improvement included higher Payment & Merchandising Technologies and Engineered Materials profit and lower corporate costs, partly offset by declines in Fluid Handling and Aerospace & Electronics.
- Payment & Merchandising Technologies delivered the strongest segment performance: second-quarter sales increased 2.9% and operating profit increased 23.2%; six-month sales increased 8.0% and operating profit increased 30.6%.
- Aerospace & Electronics sales declined 9.6% in the quarter and 7.3% year to date, primarily due to the non-repeat of a large military program and weaker commercial and aftermarket activity.
- Fluid Handling sales declined 0.8% in the quarter and 2.0% year to date. Engineered Materials sales increased 7.6% in the quarter and 8.7% year to date, driven largely by recreational-vehicle demand.
- Second-quarter 2017 included $2.6 million of transaction-related charges for the Westlock and Microtronic acquisitions. Second-quarter 2016 included a $5.0 million legal settlement charge. The 2016 six-month period also included a $0.4 million restructuring gain.
- The effective tax rate increased to 30.5% from 27.0% in the quarter and to 29.4% from 27.4% for the six months, mainly due to geographic earnings mix and favorable tax items in 2016, partly offset by share-based compensation benefits.
Acquisitions, Outlook, and Management Commentary
In April 2017, the Company acquired Westlock Controls for $40 million, adding process-valve networking, monitoring, and control products to Fluid Handling. In June 2017, it acquired Microtronic AG for approximately $18 million, expanding cashless-payment solutions in the European vending market. The acquisitions added $29.2 million of goodwill and were not material to pro forma results.
Management expected 2017 total sales to be approximately flat with 2016, with approximately 1% core sales growth, approximately 1% unfavorable foreign exchange, and slightly positive net acquisition-related revenue. It expected substantial improvement in operating profit and margins, supported by productivity, volume, product mix, lower Aerospace & Electronics engineering expense, and the absence of an asbestos provision.
Management expected approximately $50 million of 2017 capital expenditures, approximately $55 million of net asbestos-related payments, approximately $13 million of environmental payments, and approximately $12 million of defined-benefit pension contributions.
Risks, Contingencies, and Unusual Items
- Asbestos liabilities totaled $653 million at June 30, 2017, including $71 million classified as current. The estimate covers pending and projected claims through 2059 and remains subject to substantial uncertainty regarding claim volumes, settlement costs, litigation outcomes, legal developments, and insurance recoveries.
- Related asbestos insurance receivables totaled $129 million. Six-month net asbestos cash payments were $28.2 million, compared with $25.7 million in the prior-year period. A June 30, 2017 jury verdict in the Geoffrey Anisansel claim was $20 million; the Company intended to pursue post-trial motions and appeals, and the verdict was not included in incurred costs pending resolution.
- Environmental remediation liabilities were $45.4 million for the Goodyear, Arizona site, with a $9.3 million receivable for expected U.S. government reimbursements. The Company could not reasonably estimate any potential additional Crab Orchard site obligation.
- The Company accrued $5.8 million related to a residual-value guarantee on an aircraft operating lease.
- Goodwill was $1,196.6 million and net intangible assets were $293.1 million. Management identified no impairment indicators at June 30, 2017, but impairment assessments depend on forecasts, discount rates, market conditions, and other judgments.
- Foreign exchange remains a material exposure; the Company uses foreign exchange contracts primarily for hedging and reported no material earnings or cash-flow impact from designated hedges during the six months.
- Management stated that there were no material changes to previously disclosed risk factors and that disclosure controls were effective as of June 30, 2017.
Important Facts for Investors to Verify
- Whether the expected 2017 margin improvement materialized after considering acquisition costs, currency movements, product mix, and segment-level demand.
- Trends in Aerospace & Electronics backlog, which was $328 million at June 30, 2017 versus $436 million a year earlier.
- Payment & Merchandising Technologies demand, particularly strong payment products versus weaker merchandising equipment sales.
- Actual asbestos claims, cash payments, insurance recoveries, litigation outcomes, and any revisions to the $653 million liability estimate.
- Integration results and earnings contribution from Westlock and Microtronic.
- Liquidity and refinancing plans for the $250 million of notes due December 2018, despite substantial cash and unused credit capacity.
- Potential effects of pending accounting standards, particularly revenue recognition, leases, credit losses, and cash-flow presentation.