Crane Co. 10-Q Summary
Reporting period: Three and nine months ended September 30, 2013, compared with the respective 2012 periods. The filing identifies the registrant as Crane Co.; the request references Crane NXT, Co. Prior-period segment information was restated to reflect the revised segment structure, including Controls within Fluid Handling.
Business Context
Crane was a diversified manufacturer serving aerospace, defense electronics, non-residential construction, recreational vehicle, transportation, automated merchandising, chemical, pharmaceutical, energy, power, nuclear, building services and utility markets. Reportable segments were Aerospace & Electronics, Engineered Materials, Merchandising Systems and Fluid Handling.
Financial Performance and Liquidity
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net sales | $637.5 million | $646.0 million | $1,913.8 million | $1,949.3 million |
| Operating profit | $89.0 million | $86.6 million | $264.8 million | $234.3 million |
| Operating margin | 14.0% | 13.4% | 13.8% | 12.0% |
| Income from continuing operations | $57.5 million | $56.4 million | $170.8 million | $150.2 million |
| Net income attributable to common shareholders | $57.1 million | $57.1 million | $169.8 million | $171.3 million |
| Diluted EPS from continuing operations | $0.97 | $0.97 | $2.89 | $2.56 |
| Diluted EPS | $0.97 | $0.99 | $2.89 | $2.93 |
Sales declined 1.3% in the quarter and 1.8% year to date, including unfavorable currency effects. Operating profit increased 2.8% in the quarter and 13.0% year to date, with margin expansion driven primarily by restructuring savings, productivity and cost management. The 2012 comparison included $14.9 million of year-to-date restructuring charges, while 2013 included $12.6 million of transaction costs related to the pending MEI acquisition.
Cash provided by operating activities was $91.0 million for the first nine months, compared with $79.3 million in 2012. Working capital used $88.8 million of cash. Capital expenditures were $19.0 million, and cash used for investing activities was $18.6 million versus $35.9 million provided in 2012, principally because 2012 included divestiture proceeds. Dividends paid were $49.8 million; no open-market share repurchases occurred in 2013.
Cash and cash equivalents were $403.4 million at September 30, 2013, compared with $423.9 million at December 31, 2012. Short-term borrowings increased to $124.7 million from $1.1 million, while long-term debt declined to $199.2 million from $399.1 million. The $200 million of 5.5% notes maturing in the third quarter was funded with $90 million of cash and $110 million drawn under the multi-year credit facility. Approximately $377 million of cash was held by non-U.S. subsidiaries.
Segment and Period-over-Period Changes
- Aerospace & Electronics: Q3 sales decreased 0.9% to $169.8 million and operating profit decreased 4.3% to $38.1 million. Year-to-date sales declined 3.4% to $507.0 million, primarily from weaker aftermarket and delayed defense programs. Backlog was $382 million at September 30, 2013.
- Engineered Materials: Q3 sales increased 8.8% to $62.0 million and operating profit increased 49.3% to $10.8 million, supported by recreational vehicle demand, productivity and the absence of prior-year restructuring charges. Year-to-date sales increased 6.1% and operating profit increased 34.8%.
- Merchandising Systems: Q3 sales decreased 9.6% to $83.6 million and operating profit decreased 17.1% to $7.9 million, primarily due to lower Vending Solutions volumes from reduced bottler spending and weak European markets. Year-to-date sales declined 7.1%, although operating profit increased 15.3% due to productivity and restructuring savings.
- Fluid Handling: Q3 sales decreased 0.9% to $322.2 million, while operating profit increased 1.9% to $46.6 million. Year-to-date sales decreased 0.8%, but operating profit increased 22.8% to $146.7 million, reflecting restructuring savings and productivity. Backlog was $355 million.
Guidance, Outlook and Management Commentary
Management expected increased profitability and continued strong cash flow in 2013 despite a cautious view of the global economy. Expected earnings drivers included approximately $12 million of 2013 repositioning savings, cost management and market-share gains.
- Aerospace & Electronics: modestly lower full-year sales than 2012, with positive OEM trends offset by slower aftermarket recovery and defense-program delays.
- Engineered Materials: solid revenue and operating-profit growth, led by recreational vehicle demand.
- Merchandising Systems: lower full-year sales and operating profit, primarily from Vending Solutions, with margins expected to remain around prior-year levels.
- Fluid Handling: modest core sales growth and improved operating profit and margins, despite market uncertainty and project delays.
Management expected 2013 capital expenditures of approximately $25 million to $30 million. It believed cash, operating cash flow and committed revolving credit facilities would fund capital requirements, the MEI transaction, asbestos and environmental obligations, restructuring and pension contributions.
Material Transactions and Unusual Items
The company expected to acquire MEI Conlux for approximately $804 million on a cash-free, debt-free basis, subject to regulatory remedy agreements and closing expected in the fourth quarter of 2013. The transaction included required divestiture of a bill recycler product line and licensing of a coin recycler product line in Europe. The company expected to use approximately $210 million of cash for the acquisition and had incurred $12.6 million of related transaction costs through September 30.
Discontinued operations contributed nothing in 2013, compared with $21.6 million in the first nine months of 2012, including gains from the 2012 divestitures of Azonix and a Houston valve service center. This reduced reported net income and EPS comparisons despite higher continuing-operations earnings.
Risks, Contingencies and Other Matters
- Asbestos: The company had approximately 53,822 pending claims at September 30, 2013. The recorded asbestos liability was $724 million, including $92 million current, and the related insurance receivable was $182 million. Nine-month net cash payments were $48.3 million. The estimate covers projected claims through 2021 and is subject to significant uncertainty; additional charges are probable but cannot be reasonably estimated beyond 2021.
- Environmental matters: The Goodyear Site liability was approximately $37.0 million, with a $9.3 million expected government reimbursement receivable. The company also faced potential obligations at the Crab Orchard Site, for which a loss was probable but not reasonably estimable. A separate Site 36 settlement was agreed in principle, supported by $166,667 placed in escrow, subject to consent-decree approval.
- Litigation: Several asbestos verdicts and appeals remained pending, including the Peraica, Holdsworth, Garvin and DeLisle matters. Judgment amounts were not accrued until appeals were exhausted and final payment amounts determined.
- Market and operating risks: Cyclical demand, uncertain construction and European markets, defense-program delays, commodity costs, currency movements and customer capital spending could affect results.
- Debt and acquisition funding: The MEI acquisition would require substantial cash and credit capacity. The company had $110 million drawn under its multi-year facility and $13 million outstanding under foreign short-term facilities at September 30.
- Controls and accounting: Management concluded disclosure controls were effective, and reported no material changes in internal control over financial reporting. The company was evaluating the impact of new guidance on unrecognized tax benefits.
Important Facts for Investors to Verify
- Whether the MEI acquisition closed on the expected terms and how its results, purchase accounting and financing affected subsequent periods.
- Actual 2013 results against management’s stated expectations for sales, margins, cash flow, capital expenditures and repositioning savings.
- Changes in asbestos claims, cash payments, insurance recoveries and the liability forecast beyond 2021.
- Resolution and ultimate costs of pending asbestos verdicts, environmental matters and other litigation.
- The effect of increased short-term borrowings, cash held overseas and any subsequent refinancing or debt repayment.
- Whether weakness in Aerospace aftermarket, defense electronics, European markets, construction and Vending Solutions persisted or improved.