Crane NXT, Co. quarterly report, Q2 FY2011

Crane Co. Form 10-Q Summary

Reporting period: Three and six months ended June 30, 2011, compared with the corresponding 2010 periods. The filing identifies the registrant as Crane Co.; the supplied metadata refers to Crane NXT, Co.

Business Context and Reporting Period

Crane Co. is a diversified manufacturer of highly engineered industrial products operating through Aerospace & Electronics, Engineered Materials, Merchandising Systems, Fluid Handling, and Controls. Principal end markets include aerospace, defense, industrial, energy, chemical, pharmaceutical, transportation, construction, automated merchandising, and utilities.

Financial Performance and Position

Metric	Q2 2011	Q2 2010	Six months 2011	Six months 2010
Net sales	$643.8 million	$552.8 million	$1,254.8 million	$1,083.1 million
Operating profit	$79.9 million	$65.3 million	$152.8 million	$118.6 million
Operating margin	12.4%	11.8%	12.2%	10.9%
Net income attributable to common shareholders	$50.4 million	$40.0 million	$98.9 million	$73.3 million
Diluted EPS	$0.85	$0.67	$1.66	$1.23
Dividends per share	$0.23	$0.20	$0.46	$0.40

Six-month effective tax rate was 31.2%, versus 30.2% in 2010.
Cash provided by operating activities was $15.2 million, down from $63.9 million, primarily because working capital consumed $85.4 million versus $20.6 million in the prior-year period.
Capital expenditures were $18.3 million, compared with $8.4 million. Management expected approximately $40 million of capital expenditures for full-year 2011.
Cash used in financing activities was $55.0 million, including $50.0 million for share repurchases and $26.9 million of dividends paid.
Cash and cash equivalents were $231.4 million at June 30, 2011, compared with $272.9 million at December 31, 2010.
Total debt consisted of $398.8 million of long-term notes and $0.5 million of short-term borrowings. The notes included $199.7 million of 5.50% notes due 2013 and $199.1 million of 6.55% notes due 2036.
The company had no borrowings under its $300 million revolving credit facility, which expires in September 2012. Management stated that cash, expected operating cash flow, available credit, and market access were sufficient for anticipated requirements.
Total assets were $2.77 billion and total equity was $1.09 billion at June 30, 2011. Goodwill was $824.3 million and net intangible assets were $152.7 million.

Material Changes Versus the Prior Comparable Period

Q2 sales increased 16.4%, including approximately 10.3% core growth, 4.3% favorable currency translation, and 1.8% from acquisitions net of divestitures. Six-month sales increased 15.9%, with approximately 10.7% core growth.
Q2 operating profit increased 22.4%; six-month operating profit increased 28.9%. Margin expanded by 60 basis points in Q2 and 130 basis points year to date.
Aerospace & Electronics was the strongest contributor: Q2 sales increased 23.1% and operating profit increased 41.7%, with margin rising to 21.7%.
Fluid Handling Q2 sales increased 13.5% and operating profit increased 14.9%; its backlog was 19% above December 31, 2010.
Controls operating profit improved to $3.7 million from $0.8 million in Q2, partly because losses from divested businesses were absent.
Engineered Materials sales increased 2.5%, but operating profit declined 10.2% because higher raw material costs more than offset volume gains.
Merchandising Systems sales increased 26.1%, largely due to the Money Controls acquisition, but operating profit declined 12.3% because of the absence of a favorable 2010 patent litigation settlement and acquisition-related costs.
Money Controls was dilutive to first-half earnings but marginally profitable in Q2. Management expected it to be slightly accretive for full-year 2011.
Order backlog was $825.2 million at June 30, 2011, up 7.5% from December 31, 2010 and 15.6% from June 30, 2010.
Cash flow was weaker despite higher earnings because receivables and inventories increased substantially and asbestos-related net cash payments rose to $35.6 million from $27.5 million.

Guidance, Outlook, Risks, and Unusual Items

Management raised expected 2011 total sales growth to 14%–16%, from the prior estimate of 10%–12%, citing stronger Aerospace and Fluid Handling core growth, favorable foreign exchange, and the July 2011 acquisition of W. T. Armatur GmbH & Co. KG.
Management expected higher full-year 2011 earnings, continued improvement in later-cycle markets, and further growth in Fluid Handling sales and profits during the second half.
Key operating risks include cyclical customer demand, economic and currency fluctuations, inflation, higher raw material costs, airline fuel costs, defense-spending reductions, supply-chain constraints, and volatility in industrial and construction markets.
The company recorded a $4.3 million gain on divestiture in the first six months, primarily related to the sale of a building in Ontario.
W. T. Armatur was acquired in July 2011 for $38 million on a cash- and debt-free basis and is being integrated into Fluid Handling. Its 2010 sales were approximately $21 million.
Asbestos liabilities totaled $671 million at June 30, 2011, including a $100 million current portion. Related insurance receivables totaled $200 million. Management made no change to its asbestos estimate during the quarter but stated that future charges could be material and cannot presently be reasonably estimated.
The company had approximately 56,403 pending asbestos claims at June 30, 2011. Gross asbestos settlement and defense costs incurred during the first six months were $56.2 million, while net cash payments were $35.6 million.
Environmental liabilities included $33.1 million for the Goodyear, Arizona site, partly offset by a $7.7 million receivable for expected U.S. government reimbursements. A potential Crab Orchard, Illinois remediation obligation was considered probable but could not be reasonably estimated.
Other unresolved matters included shareholder litigation related to the Merrimac acquisition, consolidated lawsuits involving a Georgia plant fire with claimed damages exceeding $260 million, and New Jersey environmental-related homeowner claims. No loss was accrued for these matters because an amount was not considered probable or reasonably estimable.
Goodwill impairment testing had identified no impairment indicators as of June 30, 2011, but the company noted that changes in forecasts, market conditions, or business performance could result in future impairment charges.

Important Facts for Investors to Verify

Confirm the registrant identity and whether this historical Crane Co. filing is the intended source for Crane NXT, Co.
Assess the sustainability of reported growth after separating core growth from currency effects, acquisitions, divestitures, and nonrecurring items.
Monitor operating cash conversion, working-capital requirements, capital expenditures, share repurchases, and the timing of the 2013 debt maturity.
Review asbestos claims, liability assumptions through 2017, insurance recoverability, and potential sensitivity to litigation trends or adverse verdicts.
Evaluate the financial impact and integration progress of Money Controls and the subsequent W. T. Armatur acquisition.
Track raw material inflation, especially in Engineered Materials and Fluid Handling, and verify whether pricing offsets cost increases.
Reassess environmental and litigation contingencies because several potential obligations were probable or material but not reasonably estimable at the filing date.