Crane Co. Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2010. The filing identifies the registrant as Crane Co.; the requested company name is Crane NXT, Co. The financial statements are unaudited and presented in accordance with U.S. GAAP.
Business Context and Reporting Period
Crane Co. is a diversified manufacturer of highly engineered industrial products serving aerospace, defense electronics, recreational vehicle, transportation, automated merchandising, chemical, pharmaceutical, energy, power, nuclear, building services and utility markets. Its five reporting segments are Aerospace & Electronics, Engineered Materials, Merchandising Systems, Fluid Handling and Controls.
The company continued recovering from the global downturn, supported by restructuring and cost reductions of approximately $175 million implemented during 2009. Core revenue grew in the third quarter, although demand remained uneven, particularly in later-cycle project markets.
Financial Performance and Key Metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Net sales | $560.7 million | $550.7 million | $1,643.8 million | $1,651.3 million |
| Operating profit | $62.9 million | $55.5 million | $181.5 million | $138.8 million |
| Operating margin | 11.2% | 10.1% | 11.0% | 8.4% |
| Net income attributable to common shareholders | $41.5 million | $35.1 million | $114.8 million | $86.2 million |
| Diluted EPS | $0.70 | $0.60 | $1.92 | $1.47 |
| Dividends per share | $0.23 | $0.20 | $0.63 | $0.60 |
- Third-quarter sales increased 1.8%, while core sales increased approximately 3.6%; currency translation reduced reported sales by approximately $8.2 million.
- Nine-month sales declined 0.5%, reflecting a 1.2% core sales decline partially offset by favorable currency translation of approximately $12.6 million.
- Third-quarter operating profit increased 13.4%, and nine-month operating profit increased 30.7%. The nine-month comparison benefited from the absence of a $7.3 million legal-settlement charge recorded in 2009.
- The effective tax rate was 28.3% for the quarter and 29.5% for the nine months, unchanged from the comparable 2009 periods.
- Backlog was $725.1 million at September 30, 2010, up 9.1% from December 31, 2009 and 6.4% from September 30, 2009.
Liquidity, Cash Flow and Capital Structure
| Metric | 9M 2010 | 9M 2009 |
|---|---|---|
| Cash provided by operating activities | $59.3 million | $125.7 million |
| Cash used in investing activities | $60.0 million | $17.9 million |
| Cash used in financing activities | $51.1 million | $51.6 million |
| Capital expenditures | $13.6 million | $21.3 million |
| Cash and cash equivalents at September 30 | $315.6 million | $304.9 million |
- Cash decreased $57.2 million from December 31, 2009, primarily due to the Merrimac acquisition, pension contributions, asbestos-related payments and working-capital requirements.
- Operating cash flow declined primarily because of a $25 million discretionary pension contribution, increased working capital, and $43.7 million of net asbestos-related cash payments versus $34.8 million in the prior-year period.
- The company had $398.7 million of long-term debt, consisting principally of $199.6 million of 5.50% notes due 2013 and $199.1 million of 6.55% notes due 2036, plus $1.4 million of short-term borrowings.
- No borrowings were outstanding under the $300 million revolving credit facility, which expires in September 2012. The company reported no significant debt maturities before the third quarter of 2013.
- The company expects 2010 capital expenditures of approximately $25 million to $30 million and stated that available cash, expected operating cash flow and revolving-credit capacity should fund operating needs, acquisitions, pension contributions and asbestos and environmental obligations.
Material Changes Versus Prior Comparable Period
- Aerospace & Electronics: Q3 sales increased 4.6% and operating profit increased 27.3%. Lower engineering expense and higher Aerospace sales drove improvement. Nine-month sales declined 4.5%, but operating profit rose 35.2% as Aerospace engineering expense fell by $21.8 million.
- Engineered Materials: Q3 sales increased 14.2% and nine-month sales increased 30.7%, led by recreational vehicle and transportation demand. Margin declined in the quarter because higher volumes were substantially offset by raw-material costs.
- Merchandising Systems: Q3 sales rose 1.7%, while operating profit fell 9.4%, partly because 2009 benefited from a legal settlement and a restructuring-liability reduction. Management expected full-year sales to be consistent with 2009.
- Fluid Handling: Q3 sales declined 4.1% and operating profit declined 4.8%; nine-month sales declined 4.8% and operating profit declined 5.4%. Weakness remained in energy, chemical and other project-based markets, although MRO activity improved.
- Controls: Q3 sales increased 28.4% and the segment returned to operating profit of $1.9 million from a $1.7 million loss. The improvement reflected stronger transportation, oil and gas demand and the divestiture of loss-making businesses.
- On February 3, 2010, the company acquired Merrimac Industries for approximately $51 million in cash. Merrimac was integrated into Aerospace & Electronics and contributed approximately $16 million of goodwill and $20 million of identified intangible assets in the preliminary purchase-price allocation.
- The company repurchased 881,258 shares for approximately $30 million during the first nine months and paid $37.0 million of dividends.
Guidance, Outlook, Risks and Unusual Items
- Management expected foreign-exchange effects to be minimal for full-year 2010 and expected continued strong Aerospace performance as that market recovered.
- Engineering expense was expected to decline approximately $20 million in 2010 as key programs were completed. Boeing directed the company to stop work on a modified 787 brake-control system; management did not expect a material financial impact.
- Management expected Fluid Handling operating margins of approximately 12% to 13% for 2010 and anticipated productivity savings in Merchandising Systems to offset unfavorable product mix.
- Industries served are cyclical and exposed to economic conditions, customer demand volatility, currency fluctuations, inflation and further industrial-market weakness.
- Asbestos remained the most significant contingency. At September 30, 2010, the company had approximately 65,441 pending claims, a recorded asbestos liability of $752 million and asbestos insurance receivables of $222.7 million. The liability covers estimated claims through 2017; management stated that additional charges are probable but cannot be reasonably estimated beyond recorded amounts.
- Gross asbestos settlement and defense costs incurred during the first nine months were $75.7 million, with net cash payments of $43.7 million after insurance recoveries.
- The Goodyear environmental remediation liability was approximately $42.1 million, including a current portion of approximately $12.8 million, with a $10.5 million receivable for expected U.S. Government reimbursements. Additional EPA-requested actions were under discussion.
- The company was named in litigation related to the Merrimac acquisition and in consolidated lawsuits alleging that company-manufactured material contributed to a 2003 plant fire. No loss was accrued for either matter because losses were not considered probable or reasonably estimable; the plant-fire claims exceeded $260 million in demanded damages and could materially affect results if plaintiffs prevail and insurance is unavailable.
- The company stated that its disclosure controls were effective and that there were no material changes in internal control over financial reporting.
Most Important Facts for Investors to Verify
- Confirm the requested issuer identity: the filing is for Crane Co., not an entity named Crane NXT, Co.
- Assess whether improved operating profit is sustainable or substantially dependent on restructuring savings, reduced Aerospace engineering expense and the absence of 2009 legal charges.
- Reconcile lower operating cash flow with reported earnings, focusing on working capital, pension contributions and asbestos payments.
- Monitor asbestos claims, liability estimates, insurance recoveries and the potential for material future charges or cash requirements.
- Review the Merrimac acquisition’s final purchase-price allocation, integration costs, amortization and contribution to Aerospace & Electronics.
- Evaluate Fluid Handling recovery trends, backlog quality and exposure to cyclical energy, chemical and project markets.
- Verify debt maturity and refinancing risk, particularly the $200 million of notes due in 2013 and the September 2012 revolving-credit expiration.
- Track the Goodyear and Crab Orchard environmental matters and the unresolved plant-fire and Merrimac-related litigation.