Crane Co. Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2014, compared with the respective 2013 periods. The filing is for Crane Co., the predecessor registrant associated with the provided Crane NXT metadata. Financial statements are unaudited.
Business Context
Crane reported four segments: Fluid Handling; Payment & Merchandising Technologies; Aerospace & Electronics; and Engineered Materials. The December 2013 acquisition of MEI materially increased Payment & Merchandising Technologies revenue and debt. Operations outside the United States represented 41.4% of third-quarter sales and 41.7% of nine-month sales.
Key Financial Metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Net sales | $727.4 million | $637.5 million | $2,194.3 million | $1,913.8 million |
| Operating profit | $47.7 million | $89.0 million | $226.7 million | $264.8 million |
| Operating margin | 6.6% | 14.0% | 10.3% | 13.8% |
| Net income attributable to common shareholders | $28.1 million | $57.1 million | $136.5 million | $169.8 million |
| Diluted EPS | $0.47 | $0.97 | $2.28 | $2.89 |
| Cash flow from operations | Not separately provided | Not separately provided | $113.4 million | $91.0 million |
- Q3 sales increased 14.1%; nine-month sales increased 14.7%. MEI contributed $86.2 million of Q3 sales and $264.1 million of nine-month sales. Core sales growth was approximately 0.3% and 0.5%, respectively.
- Operating profit declined primarily because of a $55.8 million environmental provision, including $49.0 million for the Goodyear, Arizona Superfund site and $6.8 million for the Roseland, New Jersey site.
- Nine-month operating results also included $17.3 million of restructuring and related charges, $7.7 million of MEI integration charges, and a $6.5 million Roseland environmental lawsuit settlement charge.
- Interest expense rose to $9.6 million in Q3 and $29.1 million for nine months, reflecting debt issued to finance the MEI acquisition. Effective tax rates were 27.5% for Q3 and 30.6% for nine months.
- Cash and cash equivalents were $301.7 million at September 30, 2014, compared with $270.6 million at December 31, 2013. Current assets were $1.226 billion versus current liabilities of $657.9 million.
- Debt comprised $749.2 million of long-term notes and $114.8 million of short-term borrowings. The company had $386 million available under its $500 million revolving credit facility, which expires in May 2017; no other significant debt maturities were due until 2018.
- Nine-month capital expenditures were $32.2 million, dividends paid were $54.8 million, and the quarterly dividend was $0.33 per share.
Material Changes Versus Prior Comparable Period
- Payment & Merchandising Technologies sales increased 116.5% in Q3 and 107.3% for nine months, primarily from MEI. Segment operating profit increased 219.4% in Q3 and 90.4% for nine months, although acquisition, integration, and restructuring costs reduced reported margins.
- Fluid Handling sales declined 2.4% in Q3 and 2.0% for nine months, while Q3 operating profit increased 3.3% due to productivity gains and lower pension expense.
- Aerospace & Electronics sales declined 1.5% in Q3 but increased 1.3% for nine months. Operating profit declined 21.6% in Q3 and 14.7% for nine months, reflecting defense-related weakness, higher engineering and launch costs, and restructuring charges.
- Engineered Materials sales increased 4.5% in Q3 and 9.0% for nine months, but Q3 operating profit declined 16.3% because of unfavorable product mix and higher resin costs.
- Currency translation produced a $69.3 million after-tax other comprehensive loss in Q3 and a $57.6 million loss for nine months, largely reducing comprehensive income despite positive net income.
- The company recorded $9.6 million of 2014 repositioning charges and expects workforce reductions of approximately 180 employees from those actions, with estimated savings of $5 million in 2015 and $10 million annually beginning in 2016.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2014 sales of approximately $2.95 billion, including 0% to 1% core sales growth and the full-year impact of MEI.
- Management expected $18 million to $21 million of MEI transaction, integration, and inventory step-up costs, and $10 million to $13 million of repositioning costs.
- Management expected approximately $45 million of 2014 capital expenditures, $65 million to $70 million of net asbestos-related payments, and approximately $24 million of defined benefit plan contributions.
- Asbestos liabilities were $637 million at September 30, 2014, including $88 million classified as current. Related insurance receivables were $155 million. The estimate covers claims projected through 2021; potential costs after 2021 cannot reasonably be estimated and could be material.
- The company had approximately 47,922 pending asbestos claims at September 30, 2014. Future claim levels, settlement costs, litigation outcomes, insurance recoveries, legislation, and case law could materially affect earnings, cash flow, and financial condition.
- The Goodyear environmental liability was $82.6 million, with a $49.0 million third-quarter charge and an $18.7 million receivable for expected U.S. government reimbursements. Management noted that remediation estimates may change as site investigations and regulatory approvals progress.
- The company settled Roseland homeowner claims for $6.5 million and recorded a further $6.8 million remediation charge. A potential Crab Orchard environmental obligation was considered probable but could not yet be reasonably estimated.
- Other principal risks include cyclical and volatile end markets, foreign currency and commodity-cost exposure, defense-program delays, acquisition integration, goodwill and intangible-asset impairment, tax examinations, and litigation contingencies.
- The company stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether reported growth and future guidance remain primarily acquisition-driven or develop into sustained core organic growth.
- The recurring operating earnings profile excluding environmental, restructuring, acquisition-integration, and other unusual charges.
- Cash conversion after asbestos payments, environmental remediation, pension contributions, capital expenditures, and dividends.
- Actual MEI integration progress, achieved cost synergies, restructuring savings, and leverage reduction.
- Updates to asbestos claim activity, liability assumptions through 2021, insurance recoveries, and potential post-2021 exposure.
- Further developments and cost changes at the Goodyear, Roseland, and Crab Orchard environmental sites.
- Defense-market demand, Aerospace & Electronics margins, Fluid Handling end-market recovery, and exposure to currency and raw-material costs.