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MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) Part I - Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q contains information about Crane Co., some of
which includes "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are
statements other than historical information or statements about our current
condition. You can identify forward-looking statements by the use of terms such
as "believes," "contemplates," "expects," "may," "could," "should," "would," or
"anticipates," other similar phrases, or the negatives of these terms.
Reference herein to "Crane", "we", "us", and, "our" refer to Crane Co. and its
subsidiaries unless the context specifically states or implies otherwise.
References to "core business" or "core sales" in this report include sales from
acquired businesses starting from and after the first anniversary of the
acquisition, but exclude currency effects. Amounts in the following discussion
are presented in millions, except employee, share and per share data, or unless
otherwise stated.
We have based the forward-looking statements relating to our operations on our
current expectations, estimates and projections about us and the markets we
serve. We caution you that these statements are not guarantees of future
performance and involve risks and uncertainties. In addition, we have based many
of these forward-looking statements on assumptions about future events that may
prove to be inaccurate. There are a number of other factors that could cause
actual results or outcomes to differ materially from those addressed in the
forward-looking statements. The factors that we currently believe to be material
are detailed in Part II, Item 1A of this Quarterly Report on Form 10-Q and in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 filed
with the Securities and Exchange Commission and are incorporated by reference
herein.
Overview
We are a diversified manufacturer of highly engineered industrial products. Our
business consists of five segments: Aerospace & Electronics, Engineered
Materials, Merchandising Systems, Fluid Handling and Controls. Our primary
markets are aerospace, defense electronics, non-residential construction,
recreational vehicle ("RV"), transportation, automated merchandising, chemical,
pharmaceutical, oil, gas, power, nuclear, building services and utilities.
Our strategy is to grow the earnings and cash flows of niche businesses with
leading market shares, acquire businesses that fit strategically with existing
businesses, aggressively pursue operational and strategic linkages among our
businesses, build a performance culture focused on productivity and continuous
improvement, continue to attract and retain a committed management team whose
interests are directly aligned with those of our shareholders and maintain a
focused, efficient corporate structure.
Outlook
Our sales depend heavily on industries that are cyclical in nature, or are
subject to market conditions which may cause customer demand for our products to
be volatile. These industries are subject to fluctuations in domestic and
international economies as well as to currency fluctuations, inflationary
pressures, and commodity costs.
The global economic recovery remains uncertain due, in part, to persistent high
unemployment in the U.S. and Europe, a weak U.S. and European housing market,
government budget reduction plans, and concerns over the deepening European
sovereign debt crisis. Although a slower global economy is likely, we believe we
are well positioned to achieve profitable growth in 2012. We expect a
combination of limited market growth and gains in market share to drive
profitable growth in 2012, albeit at a reduced, year-over-year rate compared to
2011. We expect further improvements in our longer, late cycle businesses within
Fluid Handling and Aerospace & Electronics while our outlook is relatively
stable for our short cycle businesses (Engineered Materials and Merchandising
Systems), with the potential for slight improvement in 2012. Specifically, in
2012, we expect core sales to increase 5% to 6%, sales from our acquisitions,
net of divestures to increase less than 1% and unfavorable foreign exchange of
2%. In aggregate, we expect total year-over-year sales growth of 3% to 5%.
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Aerospace & Electronics
In 2012, we believe market conditions in the aerospace industry will remain
positive despite high fuel prices and, accordingly, we expect to achieve higher
sales and profits in our Aerospace Group as we benefit from higher build rates
for large commercial aircraft, new products and an expanded global sales force.
In addition, we expect an increase in aftermarket sales resulting from continued
commercial airline growth. We forecast reasonably stable results for our
Electronics Group despite reductions in overall defense spending, as we expect
growth in our commercial business, which comprises about 39% of Electronics
sales, to offset a slight decline in defense related sales.
Engineered Materials
In 2012, we expect a modest increase in sales volume and operating profit in our
Engineered Materials segment despite challenging end market conditions, as we
leverage market share gains and benefit from new product applications.
Merchandising Systems
In 2012, we expect relatively flat sales for our Merchandising Systems segment,
reflecting modest core growth offset by unfavorable foreign exchange
translation. Operating profit is expected to improve led by productivity
initiatives across the segment. In Payment Solutions, despite headwinds in the
first half of 2012 related to the German gaming market, we expect sales to
increase modestly due to a gradual improvement in market demand for new
products. In Vending Solutions, we expect revenue to remain close to 2011
levels, reflecting continued economic uncertainty.
Fluid Handling
For 2012, in our Fluid Handling segment, we expect further sales growth and
margin improvement over 2011 levels led by a continuing recovery in our Energy
and ChemPharma business units, which are positioned to benefit from exposure to
their late cycle end markets and an expanded sales force. We expect unfavorable
foreign exchange translation to partially offset core sales growth in 2012. We
also expect to see continued improvement in both our MRO and project business.
Refining quote activity is improving in both the U.S. and the Middle East, and
we expect this trend to continue in 2012. Market conditions in Europe have
stabilized since the fourth quarter of 2011, but remain somewhat depressed,
reflecting economic uncertainty. Demand from global power markets has softened,
with some customers delaying delivery dates.
Controls
In our Controls segment, we anticipate further growth in the oil and gas,
transportation and industrial end markets which should result in higher sales
and operating profit in 2012.
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Results from Operations - Three Month Periods Ended March 31
All comparisons below refer to the first quarter 2012 versus the first quarter
2011, unless otherwise specified.
First quarter of 2012 compared with first quarter of 2011
First Quarter Change
(dollars in millions) 2012 2011 $ %
Net sales $ 657.9 $ 611.0 $ 46.9 7.7
Operating profit 79.6 72.9 6.7 9.2
Operating margin 12.1 % 11.9 %
Other income (expense):
Interest income 0.4 0.3 0.1 36.2
Interest expense (6.7 ) (6.6 ) (0.1 ) (1.3 )
Miscellaneous-net (0.3 ) 3.6 (4.0 ) NM
(6.7 ) (2.7 ) (4.0 ) (146.1 )
Income before income taxes 72.9 70.2 2.7 3.9
Provision for income taxes 21.1 21.8 (0.7 ) (3.1 )
Net income before allocation to noncontrolling
interests 51.8 48.4 3.4 7.1
Less: Noncontrolling interest in subsidiaries'
earnings (losses) 0.1 (0.1 ) 0.2 250.6
Net income attributable to common shareholders 51.7 48.5
$ 3.2 6.6
First quarter 2012 sales increased $46.9 million, or 7.7% compared to the first
quarter of 2011. Core business sales for the first quarter increased
approximately $47.9 million, or 7.8%. Sales also increased $4.4 million, due to
the net impact of divestitures and acquisitions. The impact of currency
translation decreased reported sales by approximately $5.4 million as the U.S.
dollar strengthened against other major currencies in the first quarter of 2012
compared to the first quarter of 2011. Net sales related to operations outside
the U.S. were 40.9% and 41.1% of total net sales for the quarters ended
March 31, 2012 and 2011, respectively.
Operating profit was $79.6 million in the first quarter 2012 compared to $72.9
million in the same period of 2011. The increase in operating profit reflected
improved performance in our Fluid Handling, Aerospace & Electronics and Controls
segments. Operating profit margins were 12.1% in the first quarter of 2012,
compared to 11.9% in the comparable period in 2011.
Miscellaneous - net decreased by $4.0 million in the first quarter 2012 compared
to the same period of 2011. The decrease primarily reflected the absence of a
net gain primarily associated with the sale of a building in Ontario, Canada in
2011 and the divestiture of a small product line.
Our effective tax rate is affected by a number of items, both recurring and
discrete, including the amount of income we earn in different jurisdictions and
their respective statutory tax rates, changes in the valuation of our deferred
tax assets and liabilities, changes in tax laws, regulations and accounting
principles, the continued availability of statutory tax credits and deductions,
the continued reinvestment of our overseas earnings, and examinations initiated
by tax authorities around the world.
Our effective tax rate of 29% for the three months ended March 31, 2012 is lower
than our effective rate of 31% for the three months ended March 31, 2011
primarily due to a lower rate on non-U.S. earnings partially offset by the
statutory expiration of the U.S. federal research tax credit as of December 31,
2011.
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Segment Results
Aerospace & Electronics
First Quarter
(dollars in millions) 2011 2010 Change
Sales $ 175.2 $ 161.9 $ 13.2 8.2 %
Operating profit $ 38.1 $ 34.0 $ 4.0 11.8 %
Operating margin 21.7 % 21.0 %
The first quarter 2012 sales increase of $13.2 million reflected sales increases
of $10.2 million and $3.0 million in the Aerospace Group and Electronics Group,
respectively. The segment's operating profit increased $4.0 million, or 11.8%,
in the first quarter of 2012 when compared to the same period in the prior year,
driven by strong sales growth and margin improvement in the Aerospace Group
which more than offset a decrease in the Electronics Group.
Aerospace Group sales of $108.9 million increased $10.2 million, or 10.4%, from
$98.6 million in the prior year period. The increase was due to higher original
equipment manufacturers ("OEM") product sales of 13.7% and higher aftermarket
product sales of 5.7%. The OEM sales increase reflects higher commercial product
sales associated with business jets and large aircraft while sales associated
with regional aircraft grew only slightly. The aftermarket sales increase
reflects higher commercial repair and overhaul product sales. During the first
quarter of 2012, sales to OEMs and sales to aftermarket customers were 60.8% and
39.2%, respectively, of total sales, compared to 59.1% and 40.9%, respectively,
in the same period last year. Aerospace operating profit increased by $5.0
million in the first quarter of 2012, compared to the first quarter of 2011,
primarily due to leverage on the higher sales volume.
Electronics Group sales of $66.3 million increased $3.0 million, or 4.7%, from
$63.3 million in the prior year period reflecting higher sales of our Custom
Power Solutions products. Operating profit decreased $1.0 million compared to
the first quarter of 2011, primarily reflecting a change in the product mix.
The Aerospace & Electronics segment backlog was $437.8 million at March 31,
2012, compared with $410.8 million at December 31, 2011 and $454.6 million at
March 31, 2011.
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Engineered Materials
First Quarter
(dollars in millions) 2012 2011 Change
Sales $ 58.2 $ 61.8 $ (3.7 ) (5.9 %)
Operating profit 8.4 10.1 $ (1.7 ) (17.1 %)
Operating margin 14.5 % 16.4 %
First quarter 2012 sales of $58.2 million decreased $3.7 million, or 5.9%,
reflecting lower sales to our transportation-related customers and RV
manufacturers, slightly offset by an increase in sales to our building products
customers. We experienced an 18.9% sales decrease to our transportation-related
customers, reflecting slower acceptance of new products and a reduction in
market share due to competitive conditions. Sales to our traditional RV
manufacturers decreased by 3.3% reflecting lower OEM shipments to RV dealers as
RV OEMs are cautious about retail customer demand, particularly in light of high
gasoline prices. Sales to our building products customers increased by 2.5%
aided by market share increases and new product sales. Operating profit in the
first quarter of 2012 decreased $1.7 million, or 17.1%, primarily as a result of
lower sales.
The Engineered Materials segment backlog was $11.1 million at March 31, 2012,
compared with $11.1 million at December 31, 2011 and $13.8 million at March 31,
2011.
Merchandising Systems
First Quarter
(dollars in millions) 2012 2011 Change
Sales $ 87.7 $ 94.9 $ (7.2 ) (7.6 %)
Operating profit $ 4.7 $ 4.7 $ 0.0 0.9 %
Operating margin 5.4 % 4.9 %
First quarter 2012 sales decreased $7.2 million, or 7.6%, reflecting a core
sales decrease of $6.2 million, or 6.6%, and unfavorable foreign currency
translation of $1.0 million, or 1.0%. We experienced lower sales in our Payment
Solutions business, and to a lesser extent in our Vending Solutions business,
particularly in Europe. The decline in Payment Solutions is primarily related to
German legislation which began to negatively impact a portion of our
gaming-related sales in the second half of 2011. Operating profit was generally
flat, in the first quarter of 2012, reflecting solid productivity gains and the
absence of a non-recurring purchase accounting charge of $1.7 million associated
with our Money Controls acquisition in 2011 which offset the impact of lower
sales and the costs to settle a lawsuit in 2012.
The Merchandising Systems segment backlog was $30.0 million at March 31, 2012,
compared with $15.2 million at December 31, 2011 and $25.0 million at March 31,
2011.
Fluid Handling
First Quarter
(dollars in millions) 2012 2011 Change
Sales $ 301.9 $ 264.1 $ 37.7 14.3 %
Operating profit $ 39.6 $ 35.5 $ 4.2 11.8 %
Operating margin 13.1 % 13.4 %
First quarter 2012 sales increased $37.7 million, or 14.3%, including an
increase in core sales of $37.4 million, or 14.2%, and a sales increase
resulting from the acquisition of WTA of $4.4 million, or 1.7%, slightly offset
by unfavorable foreign currency exchange of $4.1 million, or 1.6%. The core
sales performance reflected sales growth in our later, long cycle Energy and
ChemPharma businesses due to strong demand in the North America chemical
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industry as well as generally higher sales in the remaining businesses across
the segment. Operating profit in the first quarter of 2012 increased $4.2
million reflecting the higher sales which more than offset throughput
inefficiencies and higher manufacturing costs in certain European manufacturing
operations.
The Fluid Handling segment backlog was $337.5 million at March 31, 2012,
compared with $313.8 million at December 31, 2011 and $305.3 million at
March 31, 2011.
Controls
First Quarter
(dollars in millions) 2012 2011 Change
Sales $ 35.0 $ 28.2 $ 6.8 23.9 %
Operating profit $ 4.7 $ 3.1 $ 1.6 51.1 %
Operating margin 13.4 % 11.0 %
The first quarter 2012 sales increase of $6.8 million, or 23.9%, reflected
improvement in industrial, transportation and upstream oil and gas related
demand. Operating profit increased $1.6 million, or 51.1%, reflecting the
leverage on the higher sales.
The Controls segment backlog was $29.8 million at March 31, 2012, compared with
$27.1 million at December 31, 2011 and $24.1 million at March 31, 2011.
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Liquidity and Capital Resources
Our operating philosophy is to deploy cash provided from operating activities,
when appropriate, to provide value to shareholders by reinvesting in existing
businesses, by making acquisitions that will complement our portfolio of
businesses, by paying dividends and/or repurchasing shares.
Cash and cash equivalents decreased by $49 million to $196 million at March 31,
2012 compared with $245 million at December 31, 2011. Our current cash balance,
together with cash we expect to generate from future operations and the $300
million available under our existing committed revolving credit facility, are
expected to be sufficient to finance our short- and long-term capital
requirements, as well as fund payments associated with our asbestos and
environmental liabilities and expected pension contributions. In addition, we
believe our credit ratings afford us adequate access to public and private
markets for debt. We have no borrowings outstanding, as of March 31, 2012, under
our five-year $300 million Amended and Restated Credit Agreement, which expires
in September 2012. We expect to enter into an updated credit agreement in the
second quarter of this year. Also, there are no significant debt maturities
coming due until the third quarter of 2013, when senior unsecured notes having
an aggregate principal amount of $200 million mature.
We have approximately $196 million of cash held by our non-U.S. subsidiaries as
of March 31, 2012, which is subject to additional tax upon repatriation to the
U.S. Our intent is to permanently reinvest the earnings of our non-U.S.
operations, and current plans do not anticipate that we will need funds
generated from our non-U.S. operations to fund our U.S. operations. In the
event we were to repatriate the cash balances of our non-U.S. subsidiaries, we
would provide for and pay additional U.S. and non-U.S. taxes in connection with
such repatriation.
Operating Activities
Cash used for operating activities was $42.8 million in the first three months
of 2012, an increase of $26.6 million compared to the first three months of
2011. The increase resulted primarily from higher working capital requirements
to support improving sales trends, partially offset by higher earnings. Net
asbestos-related payments in the first three months of 2012 and 2011 were $18.2
million and $12.7 million, respectively.
Investing Activities
Cash flows relating to investing activities consist primarily of cash used for
acquisitions and capital expenditures and cash provided by divestitures of
businesses or assets. Cash used for investing activities was $7.0 million in the
first three months of 2012, compared to $2.6 million used in the comparable
period of 2011. The increase of cash used for investing activities was primarily
due to the absence of proceeds received from the sale of a building in Ontario,
Canada, in 2011. This was partially offset by a decline in capital spending of
$0.9 million to $7.2 million in the first quarter of 2012 compared to $8.1
million in the first quarter of 2011. Capital expenditures are made primarily
for increasing capacity, replacing equipment, supporting new product development
and improving information systems. We expect our capital expenditures to
approach $40 million in 2012.
Financing Activities
Financing cash flows consist primarily of payments of dividends to shareholders,
share repurchases, repayments of indebtedness and proceeds from the issuance of
common stock. Cash used for financing activities was $4.0 million during the
first three months of 2012 compared to $27.0 million used during the first three
months of 2011. The decrease of cash used for financing activities during the
first three months of 2012 was driven by dividends paid of $15.1 million,
partially offset by net proceeds received from employee stock option exercises
of $8.4 million. The first three months of 2011 included a repurchase of 634,900
shares of our common stock at a cost of $30 million.
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Recent Accounting Pronouncements
Information regarding new accounting pronouncements is included in Note 2 to the
Condensed Consolidated Financial Statements.
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