Nature of Operations and Significant Accounting Policies

Nature of Operations

Crane Co. (the “Company”) is a diversified manufacturer of highly engineered industrial products comprised of four reporting segments: Fluid Handling, Payment & Merchandising Technologies, Aerospace & Electronics and Engineered Materials. Its' primary markets are chemicals, power, oil & gas, aerospace & defense, along with a wide range of general industrial and consumer related end markets.

See Note 12, “Segment Information” for the relative size of these segments in relation to the total company (both net sales and total assets).

Due to rounding, numbers presented throughout this report may not add up precisely to totals the Company provides, and percentages may not precisely reflect the absolute figures.

Significant Accounting Policies

Accounting Principles The Company’s consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated upon consolidation. Reclassifications of certain prior year amounts have been made to conform to the current year presentation.

Use of Estimates These accounting principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results may differ from those estimated. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the financial statements in the period in which they are determined to be necessary. Estimates are used when accounting for such items as asset valuations, allowance for doubtful accounts, depreciation and amortization, impairment assessments, reserve for excess and obsolete inventory, reserve for warranty provision, restructuring provisions, employee benefits, taxes, asbestos liability and related insurance receivable, environmental liability and contingencies.

Currency Translation Assets and liabilities of subsidiaries that prepare financial statements in currencies other than the U.S. dollar are translated at the rate of exchange in effect on the balance sheet date; results of operations are translated at the average rates of exchange prevailing during the year. The related translation adjustments are included in accumulated other comprehensive income (loss) in a separate component of equity.

Revenue Recognition Revenue is recorded when title (risk of loss) passes to the customer and collection of the resulting receivable is reasonably assured. Revenue on long-term, fixed-price contracts is recorded on a percentage of completion basis using units of delivery as the measurement basis for progress toward completion. Sales under cost reimbursement type contracts are recorded as costs are incurred.

Cost of Goods Sold Cost of goods sold includes the costs of inventory sold and the related purchase and distribution costs. In addition to material, labor and direct overhead and inventoried cost, cost of goods sold include allocations of other expenses that are part of the production process, such as inbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs, amortization of production related intangible assets and depreciation expense. The Company also includes costs directly associated with products sold, such as warranty provisions.

Selling, General and Administrative Expenses Selling, general and administrative expense is charged to income as incurred. Such expenses include the costs of promoting and selling products and include such items as compensation, advertising, sales commissions and travel. Also included are costs related to compensation for other operating activities such as executive office administrative and engineering functions, as well as general operating expenses such as office supplies, non-income taxes, insurance and office equipment rentals.

Income Taxes The Company accounts for income taxes in accordance with Accounting Standards Codification (“ASC”) Topic 740 “Income Taxes” (“ASC 740”) which requires an asset and liability approach for the financial accounting and reporting of income taxes. Under this method, deferred income taxes are recognized for the expected future tax consequences of differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. These balances are measured using the enacted tax rates expected to apply in the year(s) in which these temporary differences are expected to reverse. The effect of a change in tax rates on deferred income taxes is recognized in income in the period when the change is enacted.

Based on consideration of all available evidence regarding their utilization, the Company records net deferred tax assets to the extent that it is more likely than not that they will be realized. Where, based on the weight of all available evidence, it is more likely than not that some amount of a deferred tax asset will not be realized, the Company establishes a valuation allowance for the amount that, in management's judgment, is sufficient to reduce the deferred tax asset to an amount that is more likely than not to be realized. The evidence the Company considers in reaching such conclusions includes, but is not limited to, (1) future reversals of existing taxable temporary differences, (2) future taxable income exclusive of reversing taxable temporary differences, (3) taxable income in prior carryback year(s) if carryback is permitted under the tax law, (4) cumulative losses in recent years, (5) a history of tax losses or credit carryforwards expiring unused, (6) a carryback or carryforward period that is so brief it limits realization of tax benefits, and (7) a strong earnings history exclusive of the loss that created the carryforward and support showing that the loss is an aberration rather than a continuing condition.

The Company accounts for unrecognized tax benefits in accordance with ASC 740, which prescribes a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation, based solely on the technical merits of the position. The tax benefit recognized is the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.

The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line of its Consolidated Statement of Operations, while accrued interest and penalties are included within the related tax liability line of its Consolidated Balance Sheets.

In determining whether the earnings of its non-U.S. subsidiaries are permanently reinvested overseas, the Company considers the following:


•	Its history of utilizing non-U.S. cash to acquire non-U.S. businesses,


•	Its current and future needs for cash outside the U.S. (e.g., to fund capital expenditures, business operations, potential acquisitions, etc.),


•	Its ability to satisfy U.S.-based cash needs (e.g., domestic pension contributions, interest payment on external debt, dividends to shareholders, etc.) with cash generated by its U.S. businesses, and


•	The effect U.S. tax reform proposals calling for reduced corporate income tax rates and/or “repatriation” tax holidays would have on the amount of the tax liability.

Earnings Per Share The Company’s basic earnings per share calculations are based on the weighted average number of common shares outstanding during the year. Shares of restricted stock are included in the computation of both basic and diluted earnings per share. Potentially dilutive securities include outstanding stock options, restricted share units, deferred stock units and performance-based restricted share units. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per common share by application of the treasury method. Diluted earnings per share gives effect to all potential dilutive common shares outstanding during the year.



(in millions, except per share data) For the year ended December 31,	2016		2015		2014

Net income attributable to common shareholders	$	122.8	$	228.9	$	192.7

Weighted average basic shares outstanding	58.5		58.1		58.7
Effect of dilutive stock options	0.8		0.7		0.9
Weighted average diluted shares outstanding	59.3		58.8		59.6

Earnings per basic share	$	2.10	$	3.94	$	3.28
Earnings per diluted share	$	2.07	$	3.89	$	3.23

Cash and Cash Equivalents Cash and cash equivalents include highly liquid investments with original maturities of three months or less that are readily convertible to cash and are not subject to significant risk from fluctuations in interest rates. As a result, the carrying amount of cash and cash equivalents approximates fair value.

Accounts Receivable Receivables are carried at net realizable value.

A summary of allowance for doubtful accounts activity follows:



(in millions) December 31,	2016			2015			2014
Balance at beginning of year	$	4.7		$	4.9		$	4.8
Provisions	6.1			3.0			3.7
Deductions	(3.5		)	(3.2		)	(3.6		)
Balance at end of year	$	7.3		$	4.7		$	4.9

Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers and relatively small account balances within the majority of the Company’s customer base and their dispersion across different businesses. The Company periodically evaluates the financial strength of its customers and believes that its credit risk exposure is limited.

Inventories Inventories consist of the following:



(in millions) December 31,	2016		2015
Finished goods	$	97.7	$	102.3
Finished parts and subassemblies	38.2		46.9
Work in process	56.0		60.7
Raw materials	150.6		167.0
Total inventories	$	342.5	$	376.9

Inventories include the costs of material, labor and overhead and are stated at the lower of cost or market. Domestic inventories are stated at either the lower of cost or market using the last-in, first-out (“LIFO”) method or the lower of cost or market using the first-in, first-out (“FIFO”) method. Inventories held in foreign locations are primarily stated at the lower of cost or market using the FIFO method. The LIFO method is not being used at the Company’s foreign locations as such a method is not allowable for tax purposes. Changes in the levels of LIFO inventories have reduced cost of sales by $1.8 million, reduced cost of sales by $1.5 million and increased cost of sales by $0.7 million for the years ended December 31, 2016, 2015 and 2014, respectively. The portion of inventories costed using the LIFO method was 34% and 29% of consolidated inventories as of December 31, 2016 and 2015, respectively. If inventories that were valued using the LIFO method had been valued under the FIFO method, they would have been higher by $13.3 million and $14.3 million as of December 31, 2016 and 2015, respectively. The reserve for excess and obsolete inventory was $54.1 million and $48.5 million as of December 31, 2016 and 2015, respectively.

Property, Plant and Equipment, net Property, plant and equipment, net consist of the following:



(in millions) December 31,	2016		2015
Land	$	66.6	$	68.8
Buildings and improvements	193.5		174.7
Machinery and equipment	566.8		566.0
Gross property, plant and equipment	826.9		809.5
Less: accumulated depreciation	548.0		533.5
Property, plant and equipment, net	$	278.9	$	276.0

Property, plant and equipment are stated at cost and depreciation is calculated by the straight-line method over the estimated useful lives of the respective assets, which range from 10 to 25 years for buildings and improvements and three to ten years for machinery and equipment. Depreciation expense was $40.2 million, $39.1 million and $41.7 million for the years ended December 31, 2016, 2015 and 2014, respectively.

Goodwill and Intangible Assets The Company’s business acquisitions have typically resulted in the recognition of goodwill and other intangible assets. The Company follows the provisions under ASC Topic 350, “Intangibles – Goodwill and Other” (“ASC 350”) as it relates to the accounting for goodwill in the consolidated financial statements. These provisions require that the Company, on at least an annual basis, evaluate the fair value of the reporting units to which goodwill is assigned and attributed and compare that fair value to the carrying value of the reporting unit to determine if an impairment has occurred. The Company performs its annual impairment testing during the fourth quarter. Impairment testing takes place more often than annually if events or circumstances indicate a change in status that would indicate a potential impairment. The Company believes that there have been no events or circumstances which would more likely than not reduce the fair value for its reporting units below its carrying value. A reporting unit is an operating segment unless discrete financial information is prepared and reviewed by segment management for businesses one level below that operating segment (a “component”), in which case the component would be the reporting unit. As of December 31, 2016, the Company had seven reporting units.

When performing its annual impairment assessment, the Company compares the fair value of each of its reporting units to its respective carrying value. Goodwill is considered to be potentially impaired when the net book value of the reporting unit exceeds its estimated fair value. Fair values are established primarily by discounting estimated future cash flows at an estimated cost of capital which varies for each reporting unit and which, as of the Company’s most recent annual impairment assessment, ranged between 9.0% and 12.0% (a weighted average of 10.5%), reflecting the respective inherent business risk of each of the reporting units tested. This methodology for valuing the Company’s reporting units (commonly referred to as the Income Method) has not changed since the adoption of the provisions under ASC 350. The determination of discounted cash flows is based on the businesses’ strategic plans and long-range planning forecasts, which change from year to year. The revenue growth rates included in the forecasts represent best estimates based on current and forecasted market conditions. Profit margin assumptions are projected by each reporting unit based on the current cost structure and anticipated net cost increases/reductions. There are inherent uncertainties related to these assumptions, including changes in market conditions, and management’s judgment in applying them to the analysis of goodwill impairment. In addition to the foregoing, for each reporting unit, market multiples are used to corroborate its discounted cash flow results where fair value is estimated based on earnings multiples determined by available public information of comparable businesses. While the Company believes it has made reasonable estimates and assumptions to calculate the fair value of its reporting units, it is possible a material change could occur. If actual results are not consistent with management’s estimates and assumptions, goodwill and other intangible assets may then be determined to be overstated and a charge would need to be taken against net earnings. Furthermore, in order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test performed during the fourth quarter of 2016, the Company applied a hypothetical, reasonably possible 10% decrease to the fair values of each reporting unit. The effects of this hypothetical 10% decrease would still result in the fair value calculation exceeding the carrying value for each reporting unit. No impairment charges have been required during 2016, 2015 or 2014.

Changes to goodwill are as follows:



(in millions)	Fluid Handling			Payment & Merchandising Technologies			Aerospace & Electronics			Engineered Materials			Total
Balance as of December 31, 2014	$	227.3		$	589.9		$	202.7		$	171.5		$	1,191.3
Currency translation	(8.6		)	(14.7		)	(0.1		)	(0.1		)	(23.4		)
Balance at December 31, 2015	$	218.7		$	575.2		$	202.6		$	171.4		$	1,167.9
Currency translation	(6.4		)	(11.9		)	(0.3		)	(0.1		)	(18.7		)
Balance as of December 31, 2016	$	212.3		$	563.3		$	202.3		$	171.3		$	1,149.2

Changes to intangible assets are as follows:



(in millions) December 31,	2016			2015			2014
Balance at beginning of period, net of accumulated amortization	$	317.1		$	353.5		$	408.9
Amortization expense	(30.7		)	(31.5		)	(37.9		)
Currency translation and other	(4.2		)	(4.9		)	(17.5		)
Balance at end of period, net of accumulated amortization	$	282.2		$	317.1		$	353.5

As of December 31, 2016, the Company had $282.2 million of net intangible assets, of which $27.0 million were intangibles with indefinite useful lives, consisting of trade names. Intangibles with indefinite useful lives are tested annually for impairment, or when events or changes in circumstances indicate the potential for impairment. If the carrying amount of an indefinite lived intangible asset exceeds its fair value, the intangible asset is written down to its fair value. Fair value is calculated using relief from royalty method. The Company amortizes the cost of definite-lived intangibles over their estimated useful lives.

In addition to annual testing for impairment of indefinite-lived intangible assets, the Company reviews all of its definite-lived intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Examples of events or changes in circumstances could include, but are not limited to, a prolonged economic downturn, current period operating or cash flow losses combined with a history of losses or a forecast of continuing losses associated with the use of an asset or asset group, or a current expectation that an asset or asset group will be sold or disposed of before the end of its previously estimated useful life. Recoverability is based upon projections of anticipated future undiscounted cash flows associated with the use and eventual disposal of the definite-lived intangible asset (or asset group), as well as specific appraisal in certain instances. Reviews occur at the lowest level for which identifiable cash flows are largely independent of cash flows associated with other long-lived assets or asset groups and include estimated future revenues, gross profit margins, operating profit margins and capital expenditures which are based on the businesses’ strategic plans and long-range planning forecasts, which change from year to year. The revenue growth rates included in the forecasts represent the Company's best estimates based on current and forecasted market conditions, and the profit margin assumptions are based on the current cost structure and anticipated net cost increases/reductions. There are inherent uncertainties related to these assumptions, including changes in market conditions, and management’s judgment in applying them to the analysis. If the future undiscounted cash flows are less than the carrying value, then the definite-lived intangible asset is considered impaired and a charge would be taken against net earnings based on the amount by which the carrying amount exceeds the estimated recoverable amount. Judgments that the Company makes which impact these assessments relate to the expected useful lives of definite-lived assets and its ability to realize any undiscounted cash flows in excess of the carrying amounts of such assets, and are affected primarily by changes in the expected use of the assets, changes in technology or development of alternative assets, changes in economic conditions, changes in operating performance and changes in expected future cash flows. Since judgment is involved in determining the recoverable amount of definite-lived intangible assets, there is risk that the carrying value of the Company's definite-lived intangible assets may require adjustment in future periods. Historical results to date have generally approximated expected cash flows for the identifiable cash flow generating level. The Company believes there have been no events or circumstances which would more likely than not reduce the fair value of its indefinite-lived or definite-lived intangible assets below their carrying value.

A summary of intangible assets follows:



(in millions)	Weighted Average Amortization Period of Finite Lived Assets (in years)	December 31, 2016						December 31, 2015
(in millions)		Gross Asset		Accumulated Amortization		Net		Gross Asset		Accumulated Amortization		Net
Intellectual property rights	16.4	$	86.4	$	52.1	$	34.3	$	88.3	$	51.4	$	36.9
Customer relationships and backlog	15.7	388.9		153.4		235.5		395.7		132.9		262.8
Drawings	37.9	11.1		10.3		0.8		11.1		10.1		1.1
Other	13.0	60.3		48.7		11.6		61.8		45.4		16.4
Total	16.0	$	546.7	$	264.5	$	282.2	$	556.9	$	239.8	$	317.1

Future amortization expense associated with intangibles is expected to be:



Year (in millions)
2017	$	28.7
2018	26.1
2019	23.4
2020	20.3
2021 and after	156.7

Valuation of Long-Lived Assets The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Examples of events or changes in circumstances could include, but are not limited to, a prolonged economic downturn, current period operating or cash flow losses combined with a history of losses or a forecast of continuing losses associated with the use of an asset or asset group, or a current expectation that an asset or asset group will be sold or disposed of before the end of its previously estimated useful life. Recoverability is based upon projections of anticipated future undiscounted cash flows associated with the use and eventual disposal of the long-lived asset (or asset group), as well as specific appraisal in certain instances. Reviews occur at the lowest level for which identifiable cash flows are largely independent of cash flows associated with other long-lived assets or asset groups. If the future undiscounted cash flows are less than the carrying value, then the long-lived asset is considered impaired and a loss is recognized based on the amount by which the carrying amount exceeds the estimated recoverable amount. Judgments that the Company makes which impact these assessments relate to the expected useful lives of long-lived assets and its ability to realize any undiscounted cash flows in excess of the carrying amounts of such assets, and are affected primarily by changes in the expected use of the assets, changes in technology or development of alternative assets, changes in economic conditions, changes in operating performance and changes in expected future cash flows. Since judgment is involved in determining the recoverable amount of long-lived assets, there is risk that the carrying value of the Company's long-lived assets may require adjustment in future periods.

Financial Instruments The Company does not hold or issue derivative financial instruments for trading or speculative purposes. The Company periodically uses forward foreign exchange contracts as economic hedges of anticipated transactions and firm purchase and sale commitments. These contracts are marked to fair value on a current basis and the respective gains and losses are recognized in other income (expense). The Company also periodically enters into interest-rate swap agreements to moderate its exposure to interest rate changes. Interest-rate swaps are agreements to exchange fixed and variable rate payments based on the notional principal amounts. The changes in the fair value of these derivatives are recognized in other comprehensive income (loss) for qualifying cash flow hedges.

Accumulated Other Comprehensive Income (Loss)

The tables below provide the accumulated balances for each classification of accumulated other comprehensive loss, as reflected on the Consolidated Balance Sheets.



	(in millions)	Defined Benefit Pension and Other Postretirement Items*			Currency Translation Adjustment			Total

Balance as of December 31, 2015		$	(266.2	)	$	(110.6	)	$	(376.7	)
	Other comprehensive loss before reclassifications	(42.3		)	(64.2		)	(106.5		)
	Amounts reclassified from accumulated other comprehensive income (loss)	7.1			$	—		7.1
Net period other comprehensive income (loss)		(35.2		)	(64.2		)	(99.4		)
Balance as of December 31, 2016		$	(301.3	)	$	(174.8	)	$	(476.1	)



	(in millions)	Defined Benefit Pension and Other Postretirement Items*			Currency Translation Adjustment			Total

Balance as of December 31, 2014		$	(257.8	)	$	(41.0	)	$	(298.8	)
	Other comprehensive loss before reclassifications	(16.3		)	(69.6		)	(85.9		)
	Amounts reclassified from accumulated other comprehensive income (loss)	7.9			—			7.9
Net period other comprehensive loss		(8.4		)	(69.6		)	(78.0		)
Balance as of December 31, 2015		$	(266.2	)	$	(110.6	)	$	(376.7	)

* Net of tax benefit of $119.8, $109.8 and $114.4 for 2016, 2015, and 2014, respectively.

The table below illustrates the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the years ended December 31, 2016 and 2015.



Details of Accumulated Other Comprehensive Loss Components (in millions)	Amount Reclassified from Accumulated Other Comprehensive Loss						Affected Line Item in the Statements of Operations
December 31,	2016			2015
Amortization of defined benefit pension items:
Prior-service costs	$	(0.6	)	$	(0.4	)	($0.8) and ($0.5) have been recorded within Cost of Sales for the years ended December 31, 2016 and 2015, respectively, and $0.2 and $.01 have been recorded within Selling, General & Administrative for the years ended December 31, 2016 and 2015, respectively
Net loss	11.3			12.3			$15.3 and $16.7 have been recorded within Cost of Sales for the years ended December 31, 2016 and 2015, respectively and ($4.0) and ($4.4) have been recorded within Selling, General & Administrative for the years ended December 31, 2016 and 2015, respectively
Amortization of other postretirement items:
Prior-service costs	(0.2		)	(0.2		)	Recorded within Selling, General & Administrative
Net gain	(0.3		)	(0.4		)	Recorded within Selling, General & Administrative

	$	10.2		$	11.3		Total before tax
	3.1			3.4			Tax benefit
Total reclassifications for the period	$	7.1		$	7.9		Net of tax