10-Q 1 form_10q-0302.txt CRANE CO 10Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2002 Commission File Number 1-1657 CRANE CO. (Exact name of registrant as specified in its charter) Delaware 13-1952290 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 First Stamford Place, Stamford, CT. 06902 (Address of principal executive office) (Zip Code) (203) 363-7300 (Registrants telephone number, including area code) (Not Applicable) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of the issuers classes of common stock, as of April 30, 2002: Common stock, $1.00 Par Value 59,762,046 shares Part I - Financial Information Item 1. Financial Statements Crane Co. and Subsidiaries Consolidated Statements of Income (In Thousands, Except Per Share Amounts) (Unaudited)
Three Months Ended March 31, 2002 2001 Net Sales $371,545 $379,283 Operating Costs and Expenses: Cost of sales 247,563 248,954 Selling, general and administrative 75,166 71,502 Depreciation and amortization 12,002 21,492 334,731 341,948 Operating Profit 36,814 37,335 Other Income (Expense): Interest income 450 355 Interest expense (4,491) (4,779) Miscellaneous - net (1,732) (1,713) (5,773) (6,137) Income Before Taxes 31,041 31,198 Provision for Income Taxes 10,244 10,919 Net Income $ 20,797 $ 20,279 Basic Net Income Per Share $.35 $.34 Average Basic Shares Outstanding 59,786 60,212 Diluted Net Income Per Share $.35 $.33 Average Diluted Shares Outstanding 60,188 60,774 Dividends Per Share $.10 $.10 See Notes to Consolidated Financial Statements
-2- Part I - Financial Information Item 1. Financial Statements Crane Co. and Subsidiaries Consolidated Balance Sheets (In Thousands, Except Share and Per Share Amounts)
(Unaudited) March 31, December 31, 2002 2001 2001 Assets Current Assets: Cash and cash equivalents $ 12,969 $ 2,557 $ 21,163 Accounts receivable 232,199 229,330 217,636 Inventories: Finished goods 69,565 84,511 68,421 Finished parts and subassemblies 63,728 50,889 64,965 Work in process 28,693 27,633 28,990 Raw materials 74,428 72,355 81,814 236,414 235,388 244,190 Other Current Assets 38,148 39,473 40,268 Total Current Assets 519,730 506,748 523,257 Property, Plant and Equipment: Cost 645,448 588,586 636,272 Less: accumulated depreciation 375,066 346,831 360,479 270,382 241,755 275,793 Other Assets 70,804 39,894 72,622 Intangibles 44,567 40,993 41,970 Goodwill 375,545 315,281 378,473 $1,281,028 $1,144,671 $1,292,115 See Notes to Consolidated Financial Statements
-3- Part I - Financial Information Item 1. Financial Statements Crane Co. and Subsidiaries Consolidated Balance Sheets (In Thousands, Except Share and Per Share Amounts)
(Unaudited) March 31, December 31, 2002 2001 2001 Liabilities and Shareholders Equity Current Liabilities: Current maturities of long-term debt $ 375 $ 325 $ 375 Loans payable 2,402 13,686 1,443 Accounts payable 94,702 94,272 84,707 Accrued liabilities 126,927 107,435 136,690 U.S. and foreign taxes on income 29,409 23,477 25,924 Total Current Liabilities 253,815 239,195 249,139 Long-Term Debt 279,617 220,245 302,368 Deferred Income Taxes 17,209 28,004 20,888 Other Liabilities 21,042 22,411 22,911 Accrued Postretirement Benefits 27,548 29,180 27,694 Accrued Pension Liability 18,501 10,702 17,820 Preferred Shares, par value $.01 - - - 5,000,000 shares authorized Common Shareholders Equity: Common stock, par value $1.00 72,426 72,426 72,426 200,000,000 shares authorized, 72,426,139 shares issued Capital surplus 105,517 101,144 103,754 Retained earnings 802,356 739,391 789,244 Accumulated other comprehensive loss (40,449) (38,581) (34,461) Common stock held in treasury (276,554) (279,446) (279,668) Total Common Shareholders Equity 663,296 594,934 651,295 $1,281,028 $1,144,671 $1,292,115 Common Stock Issued 72,426 72,426 72,426 Less Common Stock held in Treasury (12,587) (12,775) (12,736) Common Stock Outstanding 59,839 59,651 59,690 See Notes to Consolidated Financial Statements
-4- Part I - Financial Information (Contd.) Item 1. Financial Statements Crane Co. and Subsidiaries Consolidated Statements of Cash Flows (In Thousands) (Unaudited)
Three Months Ended March 31, 2002 2001 Operating activities: Net income $20,797 $20,279 Depreciation 10,305 9,304 Amortization 1,697 6,056 Non-cash special charges stock based retirement costs - 6,132 Deferred income taxes 1,941 714 Cash used for operating working capital (6,167) (15,264) Other (1,496) 1,938 Total provided by operating activities 27,077 29,159 Investing activities: Capital expenditures (6,479) (5,988) Payments for acquisitions (1,650) (7,738) Proceeds from disposition of capital assets 462 167 Total used for investing activities (7,667) (13,559) Financing activities: Equity: Dividends paid (5,983) (6,025) Reacquisition of shares-open market - (26,803) Reacquisition of shares-stock incentive programs (273) (1,365) Stock options exercised 1,011 3,945 Net equity (5,245) (30,248) Debt Proceeds from issuance of long-term debt 103 7,068 Repayments of long-term debt (22,954) - Net increase (decrease) in short-term debt 630 (121) Net debt (22,221) 6,947 Total used for financing activities (27,466) (23,301) Effect of exchange rate on cash and cash equivalents (138) (668) Decrease in cash and cash equivalents (8,194) (8,369) Cash and cash equivalents at beginning of period 21,163 10,926 Cash and cash equivalents at end of period $ 12,969 $ 2, 557 Detail of Cash Provided by (Used for) Operating Activities Working capital: Accounts receivable $(15,985) $(23,385) Inventories 6,735 (969) Other current assets (630) (1,400) Accounts payable 10,486 2,787 Accrued liabilities (10,313) 4,130 U.S. and foreign taxes on income 3,540 3,573 Total $ (6,167) $(15,264) Supplemental disclosure of cash flow information: Interest paid $3,772 $5,322 Income taxes paid 6,759 7,499 See Notes to Consolidated Financial Statements
-5- Part I - Financial Information (Contd.) Notes to Consolidated Financial Statements (Unaudited) 1. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and the instructions to Form 10-Q and, therefore reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim period presented. Certain prior period amounts have been reclassified to conform to the 2002 presentation. These interim consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements in the Company s Annual Report on Form 10-K for the year ended December 31, 2001. 2. Net Sales, gross profit and operating profit by segment are as follows: Three Months Ended March 31, 2002 2001 (In Thousands) Net Sales: Aerospace $ 82,454 $ 99,375 Engineered Materials 67,147 76,721 Merchandising 42,976 57,703 Fluid Handling 163,128 116,386 Crane Controls 15,857 29,775 Intersegment Elimination (17) (677) Total $371,545 $379,283 Gross Profit: Aerospace $ 33,187 $ 45,080 Engineered Materials 18,316 18,495 Merchandising 13,788 20,412 Fluid Handling 43,962 29,016 Crane Controls 6,363 9,830 Goodwill Amortization - (4,320) Intersegment Elimination (12) 46 Total $115,604 $118,559 Operating Profit (Loss): Aerospace $15,370 $25,166 Engineered Materials 11,016 10,029 Merchandising 4,377 9,514 Fluid Handling 12,217 7,898 Crane Controls 795 433 Corporate (6,917) (11,411) Goodwill Amortization - (4,320) Intersegment Elimination (44) 26 Total $ 36,814 $ 37,335 -6- Part I - Financial Information (Contd.) Notes to Consolidated Financial Statements (Unaudited) 3. Inventories Inventories are stated at the lower of cost or market, principally on the last-in, first-out (LIFO) method of inventory valuation. Replacement cost would be higher by $18.0 million at March 31, 2002, $22.1 million at March 31, 2001, and $18.9 million at December 31, 2001. 4. Goodwill and Intangible Assets Goodwill is the excess of purchase price over fair value of net assets acquired in business combinations accounted for under the purchase method. Goodwill is not being amortized in 2002 in accordance with the provisions of Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible Assets. Intangible assets, primarily relating to tradenames, patents and drawings, are amortized on a straight-line basis over their estimated useful lives which range from five to twenty years. Accumulated amortization was $25.1 million at March 31, 2002, $23.6 million at March 31, 2001 and $24.2 million at December 31, 2001. 5. SFAS 142 Transitional Reporting Requirements In accordance with SFAS 142, prior period earnings were not restated, reconciliation of the previously reported net income and earnings per share for the three months ended March 31, 2001 to the amounts adjusted for the reduction of amortization expense, net of related income tax effect, is as follows: Three months ended March 31, --------------------- 2002 2001 ---------- --------- Net income, as reported $ 20,797 $ 20,279 Add back: goodwill amortization, net of income taxes - 4,106 ---------- --------- Net income, adjusted $ 20,797 $ 24,385 ========== ========= Basic earnings per share: Net income, as reported $ 0.35 $ 0.34 Add back: goodwill amortization, net of income taxes - 0.07 ---------- --------- Net income, adjusted $ 0.35 $ 0.41 ========== ========= Diluted earnings per share: Net income, as reported $ 0.35 $ 0.33 Add back: goodwill amortization - 0.07 ---------- --------- Net income, adjusted $ 0.35 $ 0.40 ========== ======== The Company has adopted SFAS 142 effective January 1, 2002. SFAS 142 requires the discontinuance of amortization of goodwill and intangible assets with indefinite useful lives, but requires instead that they be tested for impairment at least annually in accordance with the provisions of SFAS 142. In addition, SFAS 142 includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for -7- Part I - Financial Information (Contd.) purposes of assessing potential future impairments of goodwill. SFAS 142 also requires the Company to complete a transitional goodwill impairment test as of January 1, 2002 no later than June 30, 2002. Any transitional impairment loss would be recognized as the cumulative effect of a change in accounting principle in the Company s statement of income. As of March 31, 2002, the Company has unamortized goodwill of $376 million and intangible assets of $45 million including $7.5 million of tradenames with indefinite useful lives. Goodwill amortization was $4.3 million for the three months ended March 31, 2001. Amortization expense related to intangible assets was $.9 million for the three months ended March 31, 2002 and 2001 and is expected to range from approximately $3.0 million to $3.5 million each year between 2003 and 2007. The initial transitional goodwill impairment test will be completed, as required, by the end of the second quarter and any impairment loss reflected as a change in accounting in 2002. Changes to goodwill and intangible assets during the quarter ended March 31, 2002, including the effects of adopting the new accounting standard, follow. Goodwill Intangible assets Balance at December 31, 2001, net of accumulated amortization $378,473 $41,970 Intangible assets reclassified out of goodwill (3,180) 3,180 Additions during the period 1,157 500 Translation and other adjustments (905) (160) Amortization expense - (923) -------- ------- Balance at March 31, 2002, net of accumulated amortization $375,545 $44,567 ======== ======= Effective January 1, 2002, Crane Co. adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement amends previous accounting and disclosure requirements for impairments and disposals of long-lived assets. The adoption of SFAS 144 has not had a significant impact on the company s financial position and results of operations. In June 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement establishes standards for accounting for obligations associated with the retirement of tangible long-lived assets. Crane Co. must adopt this standard on January 1, 2003. Management is currently assessing the details of the standard and is preparing a plan of implementation. -8- Part I - Financial Information (Contd.) 6. Total comprehensive income for the three-month period ended March 31, 2002 and 2001 was as follows: (In thousands) Three Months Ended March 31, 2002 2001 Net Income $20,797 $20,279 Foreign currency translation adjustments (5,988) (7,485) Comprehensive Income $14,809 $12,794 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended March 31, 2002 This 10Q may contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements present management s expectations, beliefs, plans and objectives regarding future financial performance, and assumptions or judgments concerning such performance. Any discussions contained in this 10-Q, except to the extent that they contain historical facts, are forward-looking and accordingly involve estimates, assumptions, judgments and uncertainties. There are a number of factors that could cause actual results or outcomes to differ materially from those addressed in the forward-looking statements. Such factors are detailed in the Company s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 filed with the Securities and Exchange Commission. Results from Operations First Quarter of 2002 Compared to First Quarter of 2001 Net income for the first quarter of 2002 was $20.8 million, or $.35 per diluted share, compared with $20.3 million, or $.33 per diluted share for the first quarter of 2001. The 2001 results included a special non-cash charge of $6.1 million pre-tax ($4.0 million after-tax or $.07 per diluted share outstanding) resulting from the retirement of R. S. Evans as the Company s Chief Executive Officer and represents stock-based retirement costs that previously were being amortized to an anticipated retirement at age 65. Operating profit for the first quarter of 2002 was $36.8 million on sales of $371.5 million compared with $37.3 million on sales of $379.3 million for the first quarter of 2001. Operating profit for 2001 included the $6.1 million non-cash special charge ($.07 per share after tax) representing nonrecurring stock-based retirement costs of the Company s former Chief Executive Officer and $4.3 million of goodwill amortization ($.07 per share after tax). Operating profit discussions throughout this release (except where indicated) compare the current year, which eliminates goodwill amortization as of January 1, 2002 upon adoption of mandatory new accounting requirements, to the prior year as reported which includes goodwill amortization. The initial transitional goodwill impairment test will be completed, as required, by the end of the second quarter and any impairment loss reflected as a change in accounting in 2002. Order backlog at March 31, 2002 totaled $425.3 million declining $108.0 million, or 20.3%, from March 31, 2001 and declining 8.1% from December 31, 2001, reflective of the sharp decline in the commercial and general aviation markets and fulfillment of orders in 2001 for coin-changing and coin-validation equipment for the Euro conversion. Net sales from domestic businesses were 71% of the quarter s total net sales in 2002 and the same for the three-month period of 2001. Operating profit from domestic businesses was 71% and 68% (73% before the special charge) of total operating profit for 2002 and 2001, respectively. Operating profit margins for domestic businesses were 9.5% in 2002 compared with 9.4% in 2001 (11.7% before the special charge). Operating profit margins for non-US businesses were 10.9% in 2002 and 2001. -9- Part I - Financial Information (Contd) Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended March 31, 2002 Aerospace sales of $82.5 million were $16.9 million, or 17%, lower for the first quarter of 2002 compared with the first quarter of 2001. Operating profit of $15.4 million decreased $9.1 million, or 37%, in the first quarter of 2002 while margins declined to 18.6% from 24.6% for the comparable period last year. These results were principally due to a 27% decline in high-margin aftermarket spares shipments coupled with reduced shipments to OEM customers in the commercial and general aviation markets. Shipments exceeded new orders by $24.0 million as the backlog declined to $226.3 million from $250.3 million at December 31, 2001. Aerospace orders remain weak. Although Aerospace orders improved 8% from the weak fourth quarter 2001 levels, they were 45% below the first quarter of 2001. While evidence of a recovery in the airline industry has been reported, we have yet to see the improvement in our order book. This business continues to invest in new product development focused on safety and reduced cost of ownership for airlines, while continuing to exercise strict cost control and to size its workforce to current business conditions. Management continues to expect an operating profit decline of approximately 30% for 2002 (excluding goodwill amortization from both periods). Engineered Materials sales of $67.1 million decreased $9.6 million, or 12%, for the first quarter of 2002 compared with the first quarter of 2001 primarily due to the absence of $9 million of sales from the Canadian plumbing business, which was sold in the third quarter of 2001. Segment operating profit increased $2.6 million, or 31%, to $11.0 million in the first quarter of 2002 versus $8.4 million in the first quarter of 2001, and margins improved to 16.4% compared to 11.0% for last year s first quarter. This improvement was driven by Kemlite s increased shipments to the RV market, cost reduction initiatives and the absence of losses from the plumbing business. Partly offsetting these favorable impacts were reduced profits at Resistoflex reflecting continued weakness in the chemical process industry. The favorable comparison also reflects $1.6 million of goodwill amortization in the first quarter of 2001. Order backlog at March 31, 2002 was $19.8 million, an increase of $1.2 million, or 6%, from March 31, 2001 and an increase of $4.7 million from December 31, 2001 reflecting strong performance of the Company s products in the RV marketplace. Management continues to expect operating results for 2002 to remain flat (excluding goodwill amortization from both periods) as improvements from the RV market are expected to offset the impacts from depressed transportation and chemical process markets. Merchandising Systems sales of $43.0 million were $14.7 million, or 26%, lower for the first quarter of 2002 compared with the first quarter of 2001. Segment operating profit was $4.4 million, a 50% decline from prior year, because of sharply lower sales at NRI reflecting the completion of the Euro conversion. Operating profit margins were 10.2% in the first quarter of 2002 compared with 15.3% in the first quarter of 2001 as a result of lower volume. National Vendors returned to profitability in the first quarter on sales which were 17% below the prior year level, as a result of strong cost containment efforts. This business continued to strengthen its management team and invest in new products during the quarter. NRI was solidly profitable as it continued to resize its business in line with the anticipated lower sales. Order backlog at March 31, 2002 was $22.3 million which decreased $55.4 million from March 31, 2001 a result of the completion of the Euro conversion. Management continues to expect operating results to be 50% to 60% lower for 2002 (excluding goodwill amortization from both periods). This decline reflects the completion of the Euro conversion in 2001 somewhat offset by slight improvement in the domestic automated merchandising market in 2002. -10- Part I - Financial Information (Contd) Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended March 31, 2002 Fluid Handling sales of $163.1 million increased $46.7 million, or 40%, for the first quarter of 2002 compared with the first quarter of 2001. Operating profit increased $5.2 million ($4.3 million excluding goodwill amortization in 2001) to $12.2 million in the first quarter of 2002 versus $7.0 million in the first quarter of 2001. Excluding acquisitions, sales were down 6% but operating profits increased. Operating profit margins were favorable at 7.5% in the first quarter of 2002 compared with 6.8% (excluding goodwill amortization) in the comparable prior year period. Crane s valve business sales totaled $114.5 million, an increase of $51.7 million, due to acquisitions. Excluding acquisitions, valve sales were down 2% as higher shipments to the power and marine markets were more than offset by lower sales in Crane s short-cycle distribution businesses. Valve operating profit showed strong improvement (excluding acquisitions and goodwill amortization in 2001) on the lower revenues as a result of improved operating efficiencies. Sales in our short-cycle pump business were down 18%, generating margins in the 7% range. Crane Supply sales were up slightly from the prior year level with improved margins reflecting management s continued focus on optimizing product profitability. Order backlog at March 31, 2002 was $138.5 million, an increase of $36.6 million, or 36%, from March 31, 2001 reflecting the addition of Xomox and Crane Process Flow Technologies. Operating results for 2002 are expected to improve significantly from 2001 due to margin improvement initiatives, the full year impact of 2001 acquisitions and strong order backlog in power generation and marine markets (excluding goodwill amortization from both periods). Controls sales of $15.9 million decreased $13.9 million, or 47%, for the first quarter of 2002 compared with the first quarter of 2001. The decrease was largely due to the absence of Ferguson, which now as a joint venture is recorded under the equity method of accounting by which Crane s share of profits is included in the miscellaneous-net line of the income statement, and the absence of Powers Process Controls which was sold in September 2001. Operating profit increased $.8 million in the first quarter of 2002 compared to the first quarter of 2001 primarily due to the exclusion of Ferguson in segment results, as noted above, which operated at a loss in the first quarter of last year. Operating results for 2002 are expected to increase over 2001 (excluding goodwill amortization from both periods) reflecting the elimination of $2.1 million of losses in 2002 incurred under the prior Ferguson business model in 2001 and stable 2002 results at the remaining businesses. Liquidity and Capital Resources For the three period ended March 31, 2002, the Company generated $27.1 million of cash from operating activities, versus $29.2 million in 2001. Net debt totaled 28.9% of capital at March 31, 2002 compared with 28.0% at March 31, 2001. The current ratio at March 31, 2002 was 2.0 with working capital totaling $265.9 million compared with 2.1 and $267.6 at March 31, 2001. The Company had unused credit lines of $390.7 million available at March 31, 2002. During the first three months of 2002, the Company paid $6.0 million in dividends and decreased debt by $22.2 million. The Company s cash flows and earnings are subject to fluctuations from changes in interest rates and foreign currency exchange rates. The Company manages its exposures to these market risks through internally established policies and procedures and, when deemed appropriate, through the use of interest rate swap agreements and forward exchange contracts. Of the $279.6 million in long-term debt outstanding at March 31, 2002, $200 million was at a fixed rate of interest ranging from 6.75% to 8.50%. The remaining $79.6 million is at a floating rate of interest presently 2.23% at March 31, 2002. In February 2002, the Company entered into a two year interest rate swap agreement with JPMorganChase Bank which converts $100 million of 8.5% fixed rate debt to LIBOR plus 4.985%. The swap agreement terminates on March 15, 2004. At March 31, 2002 the amounts outstanding for forward exchange contracts were not material. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. -11- Part II - Other Information Item 1. Legal Proceedings There have been no material developments in any of the legal proceedings described in the Company s Annual Report on Form 10-K for the year ended December 31, 2001. Item 4. Submission of Matters to a vote of Security Holders A) The Annual Meeting of shareholders was held on April 22, 2002. B) The following three Directors were re-elected to serve for three years until the Annual Meeting of 2005. Mr. E.Thayer Bigelow, Jr. Vote for - 53,219,972 Vote withheld - 743,127 Mr. Jean Gaulin Vote for - 53,210,808 Vote withheld - 752,291 Mr. Charles J. Queenan, Jr. Vote for - 52,484,759 Vote withheld - 1,478,537 C) The shareholders approved the selection of Deloitte & Touche LLP as independent auditors for the Company for 2002. Vote for - 52,253,603 Vote against - 1,357,250 Abstained - 352,443 D) The shareholders rejected the adoption of the MacBride Principles in reference to the Company s operations in Northern Ireland. Vote for - 5,933,922 Vote against - 39,987,451 Abstained - 8,041,923 Item 6. Exhibits and Reports on Form 8-K There were no reports filed on Form 8-K during the quarter ended March 31, 2002. -12- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CRANE CO. REGISTRANT Date May 14,2002 By /s/ M. L. Raithel M. L. Raithel Vice President and Chief Financial Officer Date May 14,2002 By /s/ J.Atkinson Nano J.Atkinson Nano Vice President, Controller -13-