Item 1. Financial Statements
ITEM 1: FINANCIAL STATEMENTS
CRANE HOLDINGS, CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
(in millions, except per share data) 2022 2021 2022 2021
Net sales $ 864.3 $ 855.5 $ 1,735.7 $ 1,688.9
Operating costs and expenses:
Cost of sales 535.7 523.5 1,061.8 1,037.0
Selling, general and administrative 204.2 187.6 402.5 374.2
Restructuring (gains) charges, net — ( 0.2 ) — ( 13.3 )
Operating profit 124.4 144.6 271.4 291.0
Other income (expense):
Interest income 0.6 0.4 0.9 0.9
Interest expense ( 11.4 ) ( 11.4 ) ( 22.5 ) ( 25.0 )
Gain on sale of business 228.7 — 228.7 —
Miscellaneous income, net 14.8 9.7 18.3 13.6
Total other income (expense) 232.7 ( 1.3 ) 225.4 ( 10.5 )
Income before income taxes 357.1 143.3 496.8 280.5
Provision for income taxes 98.9 5.0 133.6 33.8
Net income attributable to common shareholders $ 258.2 $ 138.3 $ 363.2 $ 246.7
Earnings per share:
Basic $ 4.60 $ 2.36 $ 6.41 $ 4.22
Diluted $ 4.54 $ 2.33 $ 6.32 $ 4.17
Average shares outstanding:
Basic 56.1 58.5 56.7 58.4
Diluted 56.9 59.3 57.5 59.1
Dividends per share $ 0.47 $ 0.43 $ 0.94 $ 0.86
See Notes to Condensed Consolidated Financial Statements.
3
CRANE HOLDINGS, CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
(in millions) 2022 2021 2022 2021
Net income before allocation to noncontrolling interests $ 258.2 $ 138.3 $ 363.2 $ 246.7
Components of other comprehensive income (loss), net of tax
Currency translation adjustment ( 75.9 ) 7.6 ( 97.5 ) ( 27.3 )
Changes in pension and postretirement plan assets and benefit obligation, net of tax 3.5 5.2 6.8 10.1
Other comprehensive (loss) income, net of tax ( 72.4 ) 12.8 ( 90.7 ) ( 17.2 )
Comprehensive income before allocation to noncontrolling interests 185.8 151.1 272.5 229.5
Less: Noncontrolling interests in comprehensive income ( 0.1 ) ( 0.1 ) — 0.7
Comprehensive income attributable to common shareholders $ 185.9 $ 151.2 $ 272.5 $ 228.8
See Notes to Condensed Consolidated Financial Statements.
4
CRANE HOLDINGS, CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in millions) June 30,
2022 December 31,
2021
Assets
Current assets:
Cash and cash equivalents $ 650.6 $ 478.6
Accounts receivable, net of allowance for doubtful accounts of $ 10.0 as of June 30, 2022 and $ 10.4 as of December 31, 2021
490.4 483.0
Current insurance receivable - asbestos 13.7 13.7
Inventories, net:
Finished goods 103.6 147.3
Finished parts and subassemblies 73.6 59.5
Work in process 37.4 37.0
Raw materials 228.3 205.3
Inventories, net 442.9 449.1
Other current assets 130.8 118.7
Total current assets 1,728.4 1,543.1
Property, plant and equipment:
Cost 1,239.1 1,288.5
Less: accumulated depreciation 724.9 732.9
Property, plant and equipment, net 514.2 555.6
Long-term insurance receivable - asbestos 51.2 60.0
Long-term deferred tax assets 6.2 17.7
Other assets 239.6 259.3
Intangible assets, net 435.8 467.1
Goodwill 1,523.7 1,583.8
Total assets $ 4,499.1 $ 4,486.6
See Notes to Condensed Consolidated Financial Statements.
5
CRANE HOLDINGS, CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in millions, except per share and share data) June 30,
2022 December 31,
2021
Liabilities and equity
Current liabilities:
Short-term borrowings $ 119.4 $ —
Accounts payable 247.9 273.7
Current asbestos liability 62.3 62.3
Accrued liabilities 361.6 442.7
U.S. and foreign taxes on income 54.1 10.6
Total current liabilities 845.3 789.3
Long-term debt 842.9 842.4
Accrued pension and postretirement benefits 210.4 231.9
Long-term deferred tax liability 75.1 76.9
Long-term asbestos liability 517.5 549.8
Other liabilities 143.3 161.2
Total liabilities 2,634.5 2,651.5
Commitments and contingencies (Note 10)
Equity:
Preferred shares, par value $ 0.01 ; 5,000,000 shares authorized
— —
Common shares, par value $ 1.00 ; 200,000,000 shares authorized, 72,426,139 shares issued
72.4 72.4
Capital surplus 369.3 363.9
Retained earnings 2,837.7 2,527.3
Accumulated other comprehensive loss ( 530.9 ) ( 440.2 )
Treasury stock ( 886.7 ) ( 691.1 )
Total shareholders’ equity 1,861.8 1,832.3
Noncontrolling interests 2.8 2.8
Total equity 1,864.6 1,835.1
Total liabilities and equity $ 4,499.1 $ 4,486.6
Share data:
Common shares issued 72,426,139 72,426,139
Less: Common shares held in treasury 16,333,384 14,590,274
Common shares outstanding 56,092,755 57,835,865
See Notes to Condensed Consolidated Financial Statements.
6
CRANE HOLDINGS, CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
(in millions) 2022 2021
Operating activities:
Net income attributable to common shareholders $ 363.2 $ 246.7
Gain on sale of business ( 228.7 ) —
Gain on sale of property — ( 18.5 )
Depreciation and amortization 61.0 62.3
Stock-based compensation expense 11.9 12.4
Defined benefit plans and postretirement credit ( 6.6 ) ( 4.2 )
Deferred income taxes 19.9 ( 21.4 )
Cash used for operating working capital ( 149.0 ) ( 29.1 )
Defined benefit plans and postretirement contributions ( 8.6 ) ( 17.2 )
Environmental payments, net of reimbursements ( 5.0 ) ( 3.6 )
Asbestos related payments, net of insurance recoveries ( 23.4 ) ( 20.2 )
Other 14.3 ( 0.5 )
Total provided by operating activities 49.0 206.7
Investing activities:
Proceeds from disposition of capital assets 0.1 23.3
Capital expenditures ( 25.2 ) ( 14.6 )
Proceeds from sale of business 314.3 —
Purchase of marketable securities — ( 10.0 )
Proceeds from sale of marketable securities — 40.0
Total provided by investing activities 289.2 38.7
Financing activities:
Dividends paid ( 53.1 ) ( 50.2 )
Reacquisition of shares on open market ( 203.7 ) —
Stock options exercised, net of shares reacquired 1.8 5.2
Repayments of commercial paper with maturities greater than 90 days — ( 27.1 )
Net borrowings from issuance of commercial paper with maturities of 90 days or less 119.4 15.0
Repayment of term loan — ( 348.1 )
Total used for financing activities ( 135.6 ) ( 405.2 )
Effect of exchange rates on cash and cash equivalents ( 30.6 ) ( 4.5 )
Increase (decrease) in cash and cash equivalents 172.0 ( 164.3 )
Cash and cash equivalents at beginning of period 478.6 551.0
Cash and cash equivalents at end of period $ 650.6 $ 386.7
7
CRANE HOLDINGS, CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
(in millions) 2022 2021
Detail of cash used for operating working capital:
Accounts receivable $ ( 65.1 ) $ ( 45.1 )
Inventories ( 57.3 ) ( 29.8 )
Other current assets ( 14.1 ) ( 22.3 )
Accounts payable 13.5 49.7
Accrued liabilities ( 64.4 ) 3.3
U.S. and foreign taxes on income 38.4 15.1
Total $ ( 149.0 ) $ ( 29.1 )
Supplemental disclosure of cash flow information:
Interest paid $ 21.0 $ 23.8
Income taxes paid $ 75.3 $ 37.0
See Notes to Condensed Consolidated Financial Statements.
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The accompanying unaudited condensed 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 periods presented. All such adjustments are of a normal recurring nature. These interim condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2021.
Due to rounding, numbers presented throughout this report may not add up precisely to totals we provide, and percentages may not precisely reflect the absolute figures. Certain amounts in the prior periods’ condensed consolidated financial statements have been reclassified to conform to the current period presentation.
Holding Company Reorganization
On May 16, 2022, Crane Co., a Delaware corporation (“Crane Co.”), completed its previously announced reorganization merger pursuant to the Agreement and Plan of Merger, dated as of February 28, 2022 (the “Reorganization Agreement”), by and among Crane Co., Crane Holdings, Co., a Delaware corporation (“Crane Holdings”), and Crane Transaction Company, LLC, a Delaware limited liability company and, as of immediately prior to the consummation of such merger, a wholly-owned subsidiary of Crane Holdings (“Merger Sub”). The Reorganization Agreement provided for the merger of Crane Co. and Merger Sub, with Crane Co. surviving the merger as a wholly-owned subsidiary of Crane Holdings (the “Reorganization Merger”).
Following the Reorganization Merger, on May 16, 2022, Crane Co. (which, as a result of the Reorganization Merger, became a wholly-owned subsidiary of Crane Holdings) converted from a Delaware corporation into a Delaware limited liability company named “Crane LLC” (such conversion, together with the Reorganization Merger, the “Reorganization”). Following the Reorganization, substantially all of the assets of Crane LLC were distributed, assigned, transferred, conveyed and delivered to, and related liabilities of Crane LLC were assumed by, Crane Holdings. On May 17, 2022, Crane LLC converted from a Delaware limited liability company to a Delaware corporation named “Crane Co.” Subsequently, on May 26, 2022, Crane Co. filed a Certificate of Amendment to its Certificate of Incorporation (the “Certificate of Amendment”) with the Secretary of State of the State of Delaware, which became effective upon filing, pursuant to which the Company officially changed its name from “Crane Co.” to “Redco Corporation”. The “Crane Co.” name has been reserved for future use by Crane Holdings.
Sale of business
On April 8, 2022, the Company entered into an agreement to sell Crane Supply for CAD 380 million on a cash-free and debt-free basis. The sale closed on May 31, 2022.
Pending Separation
On March 30, 2022, Crane Co. announced that its Board of Directors unanimously approved a plan to pursue a separation into two independent, publicly-traded companies (the “Separation”). The Separation is expected to occur through a tax-free distribution and is expected to be completed within approximately 12 months, subject to the satisfaction of customary conditions and final approval by Crane Co.’s Board of Directors.
Discontinued Operations
On May 16, 2021, we entered into an agreement to sell the Engineered Materials segment to Grupo Verzatec S.A. de C.V. for $ 360 million on a cash-free and debt-free basis. In the second quarter of 2021, the assets and liabilities of the segment were classified as held for sale, and the segment’s results were presented as discontinued operations. This change was applied on a retrospective basis. On May 26, 2022, Verzatec terminated the sale agreement and paid $ 7.5 million to the Company in termination fees. As such, the results of the Engineered Materials segment are presented as continuing operations as of June 30, 2022.
Recent Accounting Pronouncements - Adopted
Simplifying the Accounting for Income Taxes
In December 2019, the Financial Accounting Standards Board (“FASB”) issued amended guidance to simplify the accounting for income taxes. The guidance is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Certain amendments are to be applied prospectively, while other amendments are to be applied retrospectively to all periods presented. We have adopted this standard effective January 1, 2021. The adoption of this new standard did not impact our consolidated financial statements.
9
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Segment Results
Our segments are reported on the same basis used internally for evaluating performance and for allocating resources. We have four reportable segments: Aerospace & Electronics, Process Flow Technologies, Payment & Merchandising Technologies and Engineered Materials. Assets of the reportable segments exclude general corporate assets, which principally consist of cash, deferred tax assets, insurance receivables, certain property, plant and equipment, and certain other assets. Corporate consists of corporate office expenses including compensation and benefits for corporate employees, occupancy, depreciation, and other administrative costs.
A brief description of each of our segments are as follows:
Aerospace & Electronics
The Aerospace & Electronics segment supplies critical components and systems, including original equipment and aftermarket parts, primarily for the commercial aerospace, and the military aerospace, defense and space markets. Products include a wide range of custom designed, highly engineered products used in landing systems, sensing and utility systems, fluid management, seat actuation, power and microelectronic applications, and microwave systems.
Process Flow Technologies
The Process Flow Technologies segment is a provider of highly engineered fluid handling equipment for mission critical applications that require high reliability. The segment is comprised of Process Valves and Related Products, Commercial Valves, and Pumps and Systems. Process Valves and Related Products manufactures on/off isolation valves, instrumentation and controls, and related products for critical and demanding applications primarily in the chemical and petrochemical, general industrial, energy-related and pharmaceutical end markets globally. Commercial Valves is engaged primarily in the manufacturing of valves and related products for the non-residential construction, general industrial, and municipal markets, and the distribution of pipe, valves and fittings (PVF) for the non-residential construction market. Pumps and Systems manufactures pumps and related products for water and wastewater applications in the industrial, municipal, commercial and military markets.
Payment & Merchandising Technologies
The Payment & Merchandising Technologies segment consists of Crane Payment Innovations (“CPI”) and Crane Currency. CPI provides high technology payment acceptance and dispensing products to original equipment manufacturers, and for certain vertical markets, it also provides currency handling and processing systems, complete cash and cashless payment and merchandising solutions, equipment service solutions, and fully connected managed service solutions. Crane Currency is a supplier of banknotes and highly engineered banknote security features as well as a provider of security features for product authentication. A pioneer in advanced micro-optics technology, Crane Currency provides a wide range of engaging visual effects in features that increase the level of security and public trust in banknotes and for the product brand authentication market. Crane Currency offers uniquely designed banknotes, substrate (paper) and printing capabilities for over 50 central banks around the world.
Engineered Materials
The Engineered Materials segment manufactures fiberglass-reinforced plastic panels and coils, primarily for use in the manufacturing of recreational vehicles ("RVs"), and in commercial and industrial buildings applications, with some additional applications including trailers and other transportation-related products. Engineered Materials sells the majority of its products directly to RV, trailer, and truck manufacturers, and it uses distributors and retailers to serve the commercial and industrial construction markets.
10
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Financial information by reportable segment is set forth below.
Three Months Ended Six Months Ended
June 30, June 30,
(in millions) 2022 2021 2022 2021
Net sales:
Aerospace & Electronics $ 161.5 $ 157.5 $ 318.6 $ 311.5
Process Flow Technologies 296.0 310.7 607.4 598.8
Payment & Merchandising Technologies 334.0 328.2 666.6 665.6
Engineered Materials 72.8 59.1 143.1 113.0
Total $ 864.3 $ 855.5 $ 1,735.7 $ 1,688.9
Operating profit:
Aerospace & Electronics $ 28.2 $ 30.8 $ 56.2 $ 56.8
Process Flow Technologies 40.6 46.5 89.6 96.6
Payment & Merchandising Technologies 80.7 77.9 164.9 163.7
Engineered Materials 7.3 7.7 20.2 14.1
Corporate ( 32.4 ) ( 18.3 ) ( 59.5 ) ( 40.2 )
Total $ 124.4 $ 144.6 $ 271.4 $ 291.0
Interest income 0.6 0.4 0.9 0.9
Interest expense ( 11.4 ) ( 11.4 ) ( 22.5 ) ( 25.0 )
Gain on sale of business 228.7 — 228.7 —
Miscellaneous income, net 14.8 9.7 18.3 13.6
Income before income taxes $ 357.1 $ 143.3 $ 496.8 $ 280.5
(in millions) June 30, 2022 December 31, 2021
Assets:
Aerospace & Electronics $ 633.9 $ 604.7
Process Flow Technologies 1,135.6 1,240.4
Payment & Merchandising Technologies 2,032.2 2,096.5
Engineered Materials 233.7 220.5
Corporate 463.7 324.5
Total $ 4,499.1 $ 4,486.6
(in millions) June 30, 2022 December 31, 2021
Goodwill:
Aerospace & Electronics $ 202.3 $ 202.5
Process Flow Technologies 315.1 349.4
Payment & Merchandising Technologies 835.0 860.6
Engineered Materials 171.3 171.3
Total $ 1,523.7 $ 1,583.8
11
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Revenue
Disaggregation of Revenues
The following table presents net sales disaggregated by product line for each segment:
Three Months Ended Six Months Ended
June 30, June 30,
(in millions) 2022 2021 2022 2021
Aerospace & Electronics
Commercial Original Equipment $ 60.6 $ 53.7 $ 119.2 $ 108.3
Military and Other Original Equipment 57.1 62.8 114.4 125.6
Commercial Aftermarket Products 29.0 25.3 57.7 44.8
Military Aftermarket Products 14.8 15.7 27.3 32.8
Total Aerospace & Electronics $ 161.5 $ 157.5 $ 318.6 $ 311.5
Process Flow Technologies
Process Valves and Related Products $ 186.7 $ 184.3 $ 369.6 $ 358.6
Commercial Valves 77.2 98.2 175.4 187.7
Pumps and Systems 32.1 28.2 62.4 52.5
Total Process Flow Technologies $ 296.0 $ 310.7 $ 607.4 $ 598.8
Payment & Merchandising Technologies
Payment Acceptance and Dispensing Products $ 211.4 $ 197.3 $ 422.4 $ 382.3
Banknotes and Security Products 122.6 130.9 244.2 283.3
Total Payment & Merchandising Technologies $ 334.0 $ 328.2 $ 666.6 $ 665.6
Engineered Materials
FRP - Recreational Vehicles $ 32.2 $ 24.8 $ 67.9 $ 49.1
FRP - Building Products 31.8 26.5 59.2 48.3
FRP - Transportation 8.8 7.8 16.0 15.6
Total Engineered Materials 72.8 59.1 143.1 113.0
Net sales $ 864.3 $ 855.5 $ 1,735.7 $ 1,688.9
Remaining Performance Obligations
The transaction price allocated to remaining performance obligations represents the transaction price of firm orders which have not yet been fulfilled, which we also refer to as total backlog. As of June 30, 2022, total backlog was $ 1,387.0 million. We expect to recognize approximately 69 % of our remaining performance obligations as revenue in 2022, an additional 29 % in 2023 and the balance thereafter.
Contract Assets and Contract Liabilities
Contract assets represent unbilled amounts that typically arise from contracts for customized products or contracts for products sold directly to the U.S. government or indirectly to the U.S. government through subcontracts, where revenue recognized using the cost-to-cost method exceeds the amount billed to the customer. Contract assets are assessed for impairment and recorded at their net realizable value. Contract liabilities represent advance payments from customers. Revenue related to contract liabilities is recognized when control is transferred to the customer. We report contract assets, which are included within “Other current assets” in our Condensed Consolidated Balance Sheets, and contract liabilities, which are included within “Accrued liabilities” on our Condensed Consolidated Balance Sheets, on a contract-by-contract net basis at the end of each reporting period. Net contract assets and contract liabilities consisted of the following:
(in millions) June 30, 2022 December 31, 2021
Contract assets $ 87.8 $ 73.0
Contract liabilities $ 99.3 $ 101.1
12
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
We recognized revenue of $ 30.3 million and $ 62.4 million during the three-and six-month periods ended June 30, 2022, respectively, related to contract liabilities as of December 31, 2021.
Note 4 - Earnings Per Share
Our basic earnings per share calculations are based on the weighted average number of common shares outstanding during the period. Potentially dilutive securities include outstanding stock options, restricted share units, deferred stock units and performance-based restricted share units. The 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 potentially dilutive common shares outstanding during the period.
Three Months Ended Six Months Ended
June 30, June 30,
(in millions, except per share data) 2022 2021 2022 2021
Net income attributable to common shareholders $ 258.2 $ 138.3 $ 363.2 $ 246.7
Average basic shares outstanding 56.1 58.5 56.7 58.4
Effect of dilutive share-based awards 0.8 0.8 0.8 0.7
Average diluted shares outstanding 56.9 59.3 57.5 59.1
Earnings per basic share $ 4.60 $ 2.36 $ 6.41 $ 4.22
Earnings per diluted share $ 4.54 $ 2.33 $ 6.32 $ 4.17
The computation of diluted earnings per share excludes the effect of the potentially anti-dilutive securities which was 0.4 million and 1.3 million for the three months ended June 30, 2022, and 2021, respectively and 0.3 million and 1.5 million for the six months ending June 30, 2022 and 2021 , respectively.
13
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Changes in Equity and Accumulated Other Comprehensive Loss
A summary of changes in equity for the year-to-date interim periods ended June 30, 2022 and 2021 is provided below:
(in millions, except share data) Common
Shares
Issued at
Par Value Capital
Surplus Retained
Earnings Accumulated
Other
Comprehensive
Loss Treasury
Stock Total
Share- holders’
Equity Non-controlling
Interest Total
Equity
BALANCE DECEMBER 31, 2021 72.4 $ 363.9 $ 2,527.3 $ ( 440.2 ) $ ( 691.1 ) $ 1,832.3 $ 2.8 $ 1,835.1
Net income — — 105.0 — — 105.0 — 105.0
Cash dividends ($ 0.47 per share)
— — ( 26.4 ) — — ( 26.4 ) — ( 26.4 )
Reacquisition on open market of 1,699,949 shares
— — — — ( 175.8 ) ( 175.8 ) — ( 175.8 )
Exercise of stock options, net of shares reacquired of 79,214 shares
— — — — 6.1 6.1 — 6.1
Impact from settlement of share-based awards, net of shares acquired — ( 5.1 ) — — ( 0.3 ) ( 5.4 ) — ( 5.4 )
Stock-based compensation expense — 5.9 — — — 5.9 — 5.9
Changes in pension and postretirement plan assets and benefit obligation, net of tax — — — 3.3 — 3.3 — 3.3
Currency translation adjustment — — — ( 21.7 ) — ( 21.7 ) 0.1 ( 21.6 )
BALANCE MARCH 31, 2022 72.4 $ 364.7 $ 2,605.9 $ ( 458.6 ) $ ( 861.1 ) $ 1,723.3 $ 2.9 $ 1,726.2
Net income — — 258.2 — — 258.2 — 258.2
Cash dividends ($ 0.47 per share)
— — ( 26.4 ) — — ( 26.4 ) — ( 26.4 )
Reacquisition on open market of 1,959,069 shares
— — — — ( 27.9 ) ( 27.9 ) — ( 27.9 )
Exercise of stock options, net of shares reacquired of 94,774 shares
— — — — 1.1 1.1 — 1.1
Impact from settlement of share-based awards, net of shares acquired — ( 1.3 ) — — 1.2 ( 0.1 ) — ( 0.1 )
Stock-based compensation expense — 5.9 — — — 5.9 — 5.9
Changes in pension and postretirement plan assets and benefit obligation, net of tax — — — 3.5 — 3.5 — 3.5
Currency translation adjustment — — — ( 75.8 ) — ( 75.8 ) ( 0.1 ) ( 75.9 )
BALANCE June 30, 2022 72.4 $ 369.3 $ 2,837.7 $ ( 530.9 ) $ ( 886.7 ) $ 1,861.8 $ 2.8 $ 1,864.6
(in millions, except share data) Common
Shares
Issued at
Par Value Capital
Surplus Retained
Earnings Accumulated
Other
Comprehensive
Loss Treasury
Stock Total
Share- holders’
Equity Non-controlling
Interest Total
Equity
BALANCE DECEMBER 31, 2020 72.4 $ 330.7 $ 2,192.8 $ ( 466.4 ) $ ( 600.6 ) $ 1,528.9 $ 2.2 $ 1,531.1
Net income — — 108.4 — — 108.4 — 108.4
Cash dividends ($ 0.43 per share)
— — ( 25.0 ) — — ( 25.0 ) — ( 25.0 )
Impact from settlement of share-based awards, net of shares acquired — ( 2.3 ) — — 9.5 7.2 — 7.2
Stock-based compensation expense — 6.3 — — — 6.3 — 6.3
Changes in pension and postretirement plan assets and benefit obligation, net of tax — — — 4.9 — 4.9 — 4.9
Currency translation adjustment — — — ( 35.7 ) — ( 35.7 ) 0.8 ( 34.9 )
BALANCE MARCH 31, 2021 72.4 $ 334.7 $ 2,276.2 $ ( 497.2 ) $ ( 591.1 ) $ 1,595.0 $ 3.0 $ 1,598.0
Net income — — 138.3 — — 138.3 — $ 138.3
Cash dividends ($ 0.43 per share)
— — ( 25.2 ) — — ( 25.2 ) — ( 25.2 )
Impact from settlement of share-based awards, net of shares acquired — 7.6 — — ( 9.5 ) ( 1.9 ) — ( 1.9 )
Stock-based compensation expense — 6.1 — — — 6.1 — 6.1
Changes in pension and postretirement plan assets and benefit obligation, net of tax — — — 5.2 — 5.2 — 5.2
Currency translation adjustment — — — 7.7 — 7.7 ( 0.1 ) 7.6
BALANCE JUNE 30, 2021 72.4 $ 348.4 $ 2,389.3 $ ( 484.3 ) $ ( 600.6 ) $ 1,725.2 $ 2.9 $ 1,728.1
14
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The table below provides the accumulated balances for each classification of accumulated other comprehensive income (loss), as reflected on our Condensed Consolidated Balance Sheets.
(in millions) Defined Benefit Pension and Postretirement Items Currency Translation Adjustment Total a
Balance as of December 31, 2021 $ ( 301.9 ) $ ( 138.3 ) $ ( 440.2 )
Other comprehensive income (loss) before reclassifications — ( 97.5 ) ( 97.5 )
Amounts reclassified from accumulated other comprehensive loss 6.8 — 6.8
Net period other comprehensive income (loss) 6.8 ( 97.5 ) ( 90.7 )
Balance as of June 30, 2022 $ ( 295.1 ) $ ( 235.8 ) $ ( 530.9 )
a
Net of tax benefit of $ 120.1 million and $ 117.9 million as of June 30, 2022 and December 31, 2021, respectively.
The table below illustrates the amounts reclassified out of each component of accumulated other comprehensive loss for the three- and six-month periods ended June 30, 2022, and 2021. Amortization of pension and postretirement components has been recorded within “Miscellaneous income, net” on our Condensed Consolidated Statements of Operations.
Three Months Ended June 30, Six Months Ended June 30,
(in millions) 2022 2021 2022 2021
Amortization of pension items:
Prior service costs $ — $ ( 0.1 ) $ — $ ( 0.1 )
Net loss 4.8 6.5 9.5 13.1
Amortization of postretirement items:
Prior service costs ( 0.3 ) ( 0.3 ) ( 0.5 ) ( 0.5 )
Total before tax $ 4.5 $ 6.1 $ 9.0 $ 12.5
Tax impact 1.0 1.1 2.2 2.4
Total reclassifications for the period $ 3.5 $ 5.0 $ 6.8 $ 10.1
15
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Defined Benefit and Postretirement Benefits
For all plans, the components of net periodic benefit for the three months ended June 30, 2022 and 2021 are as follows:
Pension Postretirement
(in millions) 2022 2021 2022 2021
Service cost $ 1.3 $ 1.7 $ 0.1 $ 0.1
Interest cost 5.2 5.2 0.2 0.2
Expected return on plan assets ( 13.9 ) ( 15.7 ) — —
Recognized curtailment gain — — — —
Amortization of prior service cost — ( 0.1 ) ( 0.3 ) ( 0.3 )
Amortization of net loss 4.8 6.5 — —
Net periodic benefit $ ( 2.6 ) $ ( 2.4 ) $ — $ —
For all plans, the components of net periodic benefit for the six months ended June 30, 2022, and 2021 are as follows:
Pension Postretirement
(in millions) 2022 2021 2022 2021
Service cost $ 2.6 $ 3.2 $ 0.1 $ 0.2
Interest cost 10.4 10.4 0.4 0.3
Expected return on plan assets ( 27.9 ) ( 29.8 ) — —
Recognized curtailment gain — ( 0.7 ) — —
Amortization of prior service cost — ( 0.1 ) ( 0.5 ) ( 0.5 )
Amortization of net loss 9.5 13.1 — —
Net periodic benefit $ ( 5.4 ) $ ( 3.9 ) $ — $ —
The components of net periodic benefit, other than the service cost component, are included in “Miscellaneous income, net” in our Condensed Consolidated Statements of Operations. Service cost is recorded within “Cost of sales” and “Selling, general and administrative” in our Condensed Consolidated Statements of Operations.
We expect to contribute the following to our pension and postretirement plans:
(in millions) Pension Postretirement
Expected contributions in 2022 $ 20.1 $ 2.6
Amounts contributed during the six months ended June 30, 2022 $ 8.6 $ —
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Income Taxes
Effective Tax Rates
Our quarterly provision for income taxes is measured using an annual effective tax rate, adjusted for discrete items within the period presented.
Our effective tax rates are as follows:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Effective Tax Rate 27.7 % 3.5 % 26.9 % 12.0 %
Our effective tax rates for the three and six months ended June 30, 2022, are higher than the prior year’s comparable periods primarily due to the reversal of a deferred tax asset established in a prior period that relates to the sale of a subsidiary, partially offset by earnings in jurisdictions with statutory tax rates lower than the United States.
Our effective tax rate for the three and six months ended June 30, 2022 is higher than the statutory U.S. federal tax rate of 21% primarily due to earnings in jurisdictions with statutory tax rates higher than the United States., expenses that are statutorily non-deductible for income tax purposes and U.S. state taxes, partially offset by excess share-based compensation benefits, tax credit utilization, and the statutory U.S. deduction related to our non-U.S. subsidiaries’ income.
Unrecognized Tax Benefits
During the three months ended June 30, 2022, our gross unrecognized tax benefits, excluding interest and penalties, decreased by $ 0.3 million, primarily as a result of decreases due to expiration of statutes of limitations in the current year and tax positions taken in the current period, partially offset by increases in tax positions taken in the current year. During the six months ended June 30, 2022, our gross unrecognized tax benefits, excluding interest and penalties, increased by $ 0.2 million primarily as a result of tax positions taken in the current year, partially offset by reductions from expirations of statutes of limitations and tax positions taken during the prior period. During the three and six months ended June 30, 2022, the total amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate (decreased)/increased by $( 0.3 ) million and $ 0.3 million respectively. The difference between these amounts relates to (1) offsetting tax effects from other tax jurisdictions, and (2) interest expense, net of deferred taxes.
During the three and six months ended June 30, 2022, we recognized $( 0.1 ) million and $ 0.2 million, respectively, of interest and penalty (income) / expense related to unrecognized tax benefits in our Condensed Consolidated Statement of Operations. As of June 30, 2022, and December 31, 2021, the total amount of accrued interest and penalty expense related to unrecognized tax benefits recorded in our Condensed Consolidated Balance Sheets was $ 5.1 million and $ 4.9 million, respectively.
During the next twelve months, it is reasonably possible that our unrecognized tax benefits may decrease by $ 6.1 million due to expiration of statutes of limitations and settlements with tax authorities. However, if the ultimate resolution of income tax examinations results in amounts that differ from this estimate, we will record additional income tax expense or benefit in the period in which such matters are effectively settled.
17
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Goodwill and Intangible Assets
Our business acquisitions have typically resulted in the recognition of goodwill and other intangible assets. We follow the provisions under ASC Topic 350, “Intangibles – Goodwill and Other” as it relates to the accounting for goodwill in our condensed consolidated financial statements. These provisions require that we, 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. We perform our 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. We believe that there have been no events or circumstances which would more likely than not reduce the fair value for our 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 June 30, 2022, we had seven reporting units.
Intangibles with indefinite useful lives, consisting of trade names, 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. We amortize the cost of definite-lived intangibles over their estimated useful lives. We also review all of our definite-lived intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.
Changes to goodwill are as follows:
(in millions) Aerospace & Electronics Process Flow Technologies Payment & Merchandising Technologies Engineered Materials Total
Balance as of December 31, 2021 $ 202.5 $ 349.4 $ 860.6 $ 171.3 $ 1,583.8
Currency translation ( 0.2 ) ( 12.0 ) ( 25.6 ) — ( 37.8 )
Disposal on sale of business — ( 22.3 ) — — ( 22.3 )
Balance at June 30, 2022 $ 202.3 $ 315.1 $ 835.0 $ 171.3 $ 1,523.7
As of June 30, 2022, we had $ 435.8 million of net intangible assets, of which $ 69.5 million were intangibles with indefinite useful lives. As of December 31, 2021, we had $ 467.1 million of net intangible assets, of which $ 70.6 million were intangibles with indefinite useful lives.
Changes to intangible assets are as follows:
(in millions) Six Months Ended
June 30, 2022 Year Ended December 31, 2021
Balance at beginning of period, net of accumulated amortization $ 467.1 $ 520.3
Amortization expense ( 20.9 ) ( 44.5 )
Currency translation and other ( 10.4 ) ( 8.7 )
Balance at end of period, net of accumulated amortization $ 435.8 $ 467.1
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A summary of intangible assets follows:
June 30, 2022 December 31, 2021
(in millions) Weighted Average
Amortization Period of Finite Lived Assets (in years) Gross
Asset Accumulated
Amortization Net Gross
Asset Accumulated
Amortization Net
Intellectual property rights 15.1 $ 134.4 $ 58.6 $ 75.8 $ 136.8 $ 59.2 $ 77.6
Customer relationships and backlog 18.1 633.1 313.6 319.5 651.7 308.8 342.9
Drawings 40 11.1 10.7 0.4 11.1 10.6 0.5
Other 11.8 138.7 98.6 40.1 142.1 96.0 46.1
Total 18.6 $ 917.3 $ 481.5 $ 435.8 $ 941.7 $ 474.6 $ 467.1
Future amortization expense associated with intangible assets is expected to be:
(in millions)
Remainder of 2022 $ 20.9
2023 41.4
2024 40.6
2025 35.3
2026 and after 228.1
Note 9 - Accrued Liabilities
Accrued liabilities consist of:
(in millions) June 30,
2022 December 31,
2021
Employee related expenses $ 111.7 $ 181.9
Warranty 8.5 8.6
Current lease liabilities 19.3 22.7
Contract liabilities 99.3 101.1
Other 122.8 128.4
Total $ 361.6 $ 442.7
We accrue warranty liabilities when it is probable that an asset has been impaired, or a liability has been incurred and the amount of the loss can be reasonably estimated. Warranty provision is included within “Cost of sales” in our Condensed Consolidated Statements of Operations.
The following table summarizes warranty activity recorded during the three and six months ended June 30, 2022, and 2021.
Three Months Ended June 30, Six Months Ended June 30,
(in millions) 2022 2021 2022 2021
Balance at beginning of period $ 8.7 $ 11.5 $ 8.6 $ 9.4
Expense 2.3 2.9 3.5 6.0
Payments / deductions ( 2.3 ) ( 2.4 ) ( 3.4 ) ( 3.4 )
Currency translation ( 0.2 ) ( 0.2 ) ( 0.2 ) ( 0.2 )
Balance at end of period $ 8.5 $ 11.8 $ 8.5 $ 11.8
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Commitments and Contingencies
Asbestos Liability
Information Regarding Claims and Costs in the Tort System
As of June 30, 2022, we were a defendant in cases filed in numerous state and federal courts alleging injury or death as a result of exposure to asbestos. Activity related to asbestos claims during the periods indicated was as follows:
Three Months Ended Six Months Ended Year Ended
June 30, June 30, December 31,
2022 2021 2022 2021 2021
Beginning claims 30,312 29,407 29,958 29,138 29,138
New claims 646 772 1,303 1,505 2,975
Settlements ( 347 ) ( 176 ) ( 548 ) ( 336 ) ( 980 )
Dismissals ( 512 ) ( 215 ) ( 614 ) ( 519 ) ( 1,175 )
Ending claims 30,099 29,788 30,099 29,788 29,958
Of the 30,099 pending claims as of June 30, 2022, approximately 18,000 claims were pending in New York of which approximately 16,000 are non-malignancy claims that were filed over 15 years ago and have been inactive under New York court orders.
We have tried several cases resulting in defense verdicts by the jury or directed verdicts for the defense by the court. We further have pursued appeals of certain adverse jury verdicts that have resulted in reversals in favor of the defense. We have also tried several other cases resulting in plaintiff verdicts which we paid or settled after unsuccessful appeals.
The gross settlement and defense costs incurred (before insurance recoveries and tax effects) by us for the six months ended June 30, 2022 and 2021 totaled $ 28.5 million and $ 21.3 million, respectively. In contrast to the recognition of settlement and defense costs, which reflect the current level of activity in the tort system, cash payments and receipts generally lag the tort system activity by several months or more and may show some fluctuation from period to period. Cash payments of settlement amounts are not made until all releases and other required documentation are received by us, and reimbursements of both settlement amounts and defense costs by insurers may be uneven due to insurer payment practices, transitions from one insurance layer to the next excess layer and the payment terms of certain reimbursement agreements. Our total pre-tax payments for settlement and defense costs, net of funds received from insurers, for the six months ended June 30, 2022 and 2021 totaled $ 23.5 million and $ 20.2 million, respectively. Detailed below are the comparable amounts for the periods indicated.
Three Months Ended Six Months Ended Year Ended
June 30, June 30, December 31,
(in millions) 2022 2021 2022 2021 2021
Settlement / indemnity costs incurred (1)
$ 12.6 $ 8.4 $ 23.1 $ 13.9 $ 40.6
Defense costs incurred (1)
2.8 3.8 5.4 7.4 14.6
Total costs incurred $ 15.4 $ 12.2 $ 28.5 $ 21.3 $ 55.2
Settlement / indemnity payments $ 17.6 $ 9.4 $ 27.3 $ 19.5 $ 42.6
Defense payments 2.9 4.2 5.0 7.4 15.4
Insurance receipts ( 4.6 ) ( 4.2 ) ( 8.8 ) ( 6.7 ) ( 13.1 )
Pre-tax cash payments, net $ 15.9 $ 9.4 $ 23.5 $ 20.2 $ 44.9
(1) Before insurance recoveries and tax effects.
The amounts shown for settlement and defense costs incurred, and cash payments, are not necessarily indicative of future period amounts, which may be higher or lower than those reported.
Cumulatively through June 30, 2022, we have resolved (by settlement or dismissal) approximately 145,000 claims. The related settlement cost incurred by us and our insurance carriers is approximately $ 742 million, for an average settlement cost per resolved claim of approximately $ 5,100 . The average settlement cost per claim resolved during the years ended December 31, 2021, 2020 and 2019 was $ 18,800 , $ 13,900 , and $ 15,800 , respectively. Because claims are sometimes dismissed in large
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
groups, the average cost per resolved claim, as well as the number of open claims, can fluctuate significantly from period to period. In addition to large group dismissals, the nature of the disease and corresponding settlement amounts for each claim resolved will also drive changes from period to period in the average settlement cost per claim. Accordingly, the average cost per resolved claim is not considered in our periodic review of our estimated asbestos liability. For a discussion regarding the four most significant factors affecting the liability estimate, see “Effects on the Consolidated Financial Statements.”
Effects on the Consolidated Financial Statements
We have retained an independent actuarial firm to assist management in estimating our asbestos liability in the tort system. The actuarial consultants review information provided by us concerning claims filed, settled and dismissed, amounts paid in settlements and relevant claim information such as the nature of the asbestos-related disease asserted by the claimant, the jurisdiction where filed and the time lag from filing to disposition of the claim. The methodology used by the actuarial consultants to project future asbestos costs is based on our recent historical experience for claims filed, settled and dismissed during a base reference period. Our experience is then compared to estimates of the number of individuals likely to develop asbestos-related diseases determined based on widely used previously conducted epidemiological studies augmented with current data inputs. Those studies were undertaken in connection with national analyses of the population of workers believed to have been exposed to asbestos. Using that information, the actuarial consultants estimate the number of future claims that would be filed against us and estimates the aggregate settlement or indemnity costs that would be incurred to resolve both pending and future claims based upon the average settlement costs by disease during the reference period. This methodology has been accepted by numerous courts. After discussions with us, the actuarial consultants augment our liability estimate for the costs of defending asbestos claims in the tort system using a forecast from us which is based upon discussions with our defense counsel. Based on this information, the actuarial consultants compile an estimate of our asbestos liability for pending and future claims using a range of reference periods based on claim experience and claims expected to be filed through the indicated forecast period. The most significant factors affecting the liability estimate are (1) the number of new mesothelioma claims filed against us, (2) the average settlement costs for mesothelioma claims, (3) the percentage of mesothelioma claims dismissed against us and (4) the aggregate defense costs incurred by us. These factors are interdependent, and no one factor predominates in determining the liability estimate.
In our view, the forecast period used to provide the best estimate for asbestos claims and related liabilities and costs is a judgment based upon a number of trend factors, including the number and type of claims being filed each year; the jurisdictions where such claims are filed, and the effect of any legislation or judicial orders in such jurisdictions restricting the types of claims that can proceed to trial on the merits; and the likelihood of any comprehensive asbestos legislation at the federal level. In addition, the dynamics of asbestos litigation in the tort system have been significantly affected by the substantial number of companies that have filed for bankruptcy protection, thereby staying any asbestos claims against them until the conclusion of such proceedings, and the establishment of a number of post-bankruptcy trusts for asbestos claimants, which have been estimated to provide $ 36 billion for payments to current and future claimants. These trend factors have both positive and negative effects on the dynamics of asbestos litigation in the tort system and the related best estimate of our asbestos liability, and these effects do not move in a linear fashion but rather change over multi-year periods. Accordingly, management continues to monitor these trend factors over time and periodically assesses whether an alternative forecast period is appropriate.
Each quarter, the actuarial consultants compile an update based upon our experience in claims filed, settled and dismissed as well as average settlement costs by disease category (mesothelioma, lung cancer, other cancer, and non-malignant conditions including asbestosis). In addition to this claims experience, we also consider additional quantitative and qualitative factors such as the nature of the aging of pending claims, significant appellate rulings and legislative developments, and their respective effects on expected future settlement values. As part of this process, we also consider trends in the tort system such as those enumerated above. Management considers all these factors in conjunction with the liability estimate of the actuarial consultants and determines whether a change in the estimate is warranted.
Liability Estimate. In June 2016, the New York State Court of Appeals issued its opinion in Dummitt v. Crane Co ., affirming a 2012 verdict for $ 4.9 million against us. In that opinion, the court ruled that in certain circumstances we are legally responsible for asbestos-containing materials made and sold by third parties that others attached post-sale to our equipment. This decision provided clarity regarding the nature of claims that may proceed to trial in New York and greater predictability regarding future claim activity. We also reflected the impact of the Dummitt decision on our expected settlement values. Accordingly, on December 31, 2016, we updated and extended our asbestos liability estimate through 2059, the generally accepted end point.
Following our experience in the tort system post the Dummitt decision, we entered into several, increasingly similar, group settlements with various plaintiff firms and we expect this new trend of these types of group settlements to continue.
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Accordingly, effective as of December 31, 2019, we updated our estimate of the asbestos liability, including revised costs of settlement or indemnity payments and defense costs relating to currently pending claims and future claims projected to be filed against us through the same expected end point of 2059. Our estimate of the asbestos liability for pending and future claims through 2059 is based on the projected future asbestos costs resulting from our experience using a range of reference periods for claims filed, settled and dismissed. Based on this estimate, we recorded an additional liability of $ 255 million as of December 31, 2019.
An aggregate liability of $ 712 million was recorded as of December 31, 2019 to cover the estimated cost of asbestos claims now pending or subsequently asserted through 2059, of which approximately 85 % is attributable to settlement and defense costs for future claims projected to be filed through 2059. The liability is reduced when cash payments are made in respect of settled claims and defense costs. The liability was $ 580 million and $ 612 million as of June 30, 2022 and December 31, 2021, respectively. It is not possible to forecast when cash payments related to the asbestos liability will be fully expended; however, it is expected such cash payments will continue for a number of years past 2059, due to the significant proportion of future claims included in the estimated asbestos liability and the lag time between the date a claim is filed and when it is resolved. None of these estimated costs have been discounted to present value due to the inability to reliably forecast the timing of payments. The current portion of the total estimated liability at June 30, 2022 and December 31, 2021 is $ 62.3 million and represents our best estimate of total asbestos costs expected to be paid during the twelve-month period. Such amount is based upon the actuarial model together with our prior year payment experience for both settlement and defense costs.
We have made our best estimate of the costs through 2059. Through June 30, 2022, our actual experience during the updated reference period for mesothelioma claims filed and dismissed generally approximated the assumptions in our liability estimate. In addition to this claims experience, we considered additional quantitative and qualitative factors such as the nature of the aging of pending claims, significant appellate rulings and legislative developments, and their respective effects on expected future settlement values. Based on this evaluation, we determined that no change in the estimate was warranted for the period ended June 30, 2022.
Insurance Coverage and Receivables. Prior to 2005, a significant portion of our settlement and defense costs were paid by our primary insurers. With the exhaustion of that primary coverage, we began negotiations with our excess insurers to reimburse us for a portion of our settlement and/or defense costs as incurred. To date, we have entered into agreements providing for such reimbursements, known as “coverage-in-place,” with eleven of our excess insurer groups. Under such coverage-in-place agreements, an insurer’s policies remain in force and the insurer undertakes to provide coverage for our present and future asbestos claims on specified terms and conditions that address, among other things, the share of asbestos claims costs to be paid by the insurer, payment terms, claims handling procedures and the expiration of the insurer’s obligations. Similarly, under a variant of coverage-in-place, we have entered into an agreement with a group of insurers confirming the aggregate amount of available coverage under the subject policies and setting forth a schedule for future reimbursement payments to us based on aggregate indemnity and defense payments made. In addition, with ten of our excess insurer groups, we entered into agreements settling all asbestos and other coverage obligations for an agreed sum and received a total of $ 82.5 million in aggregate as a result of those settlements. Reimbursements from insurers for past and ongoing settlement and defense costs allocable to their policies have been made in accordance with these coverage-in-place and other agreements. All these agreements include provisions for mutual releases, indemnification of the insurer and, for coverage-in-place, claims handling procedures. With the agreements referenced above, we have concluded settlements with all but two of our solvent excess insurers with policies expected to respond to the aggregate costs included in the liability estimate. The first such insurer, which issued a single applicable policy, has been paying for many years the shares of defense and indemnity costs we have allocated to it, subject to a reservation of rights. The second insurer issued a single applicable policy in a layer of coverage that we do not anticipate reaching until many years from now, and, prior to the policy being reached, we anticipate opening a dialogue with that insurer about the execution of a suitable agreement. There are no pending legal proceedings between us and any insurer contesting our asbestos claims under our insurance policies.
In conjunction with developing the aggregate updated liability estimate referenced above, we also developed an updated estimate of probable insurance recoveries for our asbestos liabilities. In developing this estimate, we considered our coverage-in-place and other settlement agreements described above, as well as several additional factors. These additional factors include the financial viability of the insurance companies, the method by which losses will be allocated to the various insurance policies and the years covered by those policies, how settlement and defense costs will be covered by the insurance policies and interpretation of the effect on coverage of various policy terms and limits. In addition, the timing and amount of reimbursements will vary because our insurance coverage for asbestos claims involves multiple insurers, with different policy terms and certain gaps in coverage. In addition to consulting with legal counsel on these insurance matters, we retained insurance consultants to assist management in the estimation of probable insurance recoveries based upon the aggregate liability estimate described above and assuming the continued viability of all solvent insurance carriers. Based upon the analysis of policy terms and other factors noted above by our legal counsel, and incorporating risk mitigation judgments by us
22
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
where policy terms or other factors were not certain, our insurance consultants compiled a model indicating how our historical insurance policies would respond to varying levels of asbestos settlement and defense costs and the allocation of such costs between such insurers and us. Using the estimated liability as of December 31, 2019 (for claims filed or expected to be filed through 2059), the insurance consultant’s model forecasted that approximately 14 % of the liability would be reimbursed by our insurers. While there are overall limits on the aggregate amount of insurance available to us with respect to asbestos claims, certain limits were not reached by the total estimated liability currently recorded by us, and such overall limits did not influence our determination of the asset amount to record. We allocate to ourselves the amount of the asbestos liability (for claims filed or expected to be filed through 2059) that is in excess of available insurance coverage allocated to such years. An asset of $ 98 million was recorded as of December 31, 2019 representing the probable insurance reimbursement for claims expected through 2059. The asset is reduced as reimbursements and other payments from insurers are received. The asset was $ 65 million and $ 74 million as of June 30, 2022 and December 31, 2021, respectively.
We review the estimated reimbursement rate with our insurance consultants on a periodic basis in order to confirm overall consistency with our established reserves. The reviews encompass consideration of the performance of the insurers under coverage-in-place agreements and the effect of any additional lump-sum payments under other insurer agreements. Actual insurance reimbursements vary from period to period, and will decline over time, for the reasons cited above.
Uncertainties. Estimation of our ultimate exposure for asbestos-related claims is subject to significant uncertainties, as there are multiple variables that can affect the timing, severity and quantity of claims and the manner of their resolution. We caution that our estimated liability is based on assumptions with respect to future claims, settlement and defense costs based on past experience that may not prove reliable as predictors; the assumptions are interdependent and no single factor predominates in determining the liability estimate. A significant upward or downward trend in the number of claims filed, depending on the nature of the alleged injury, the jurisdiction where filed and the quality of the product identification, or a significant upward or downward trend in the costs of defending claims, could change the estimated liability, as would substantial adverse verdicts at trial that withstand appeal. A legislative solution, structured settlement transaction, or significant change in relevant case law could also change the estimated liability.
The same factors that affect developing estimates of probable settlement and defense costs for asbestos-related liabilities also affect estimates of the probable insurance reimbursements, as do a number of additional factors. These additional factors include the financial viability of the insurance companies, the method by which losses will be allocated to the various insurance policies and the years covered by those policies, how settlement and defense costs will be covered by the insurance policies and interpretation of the effect on coverage of various policy terms and limits and their interrelationships. In addition, due to the uncertainties inherent in litigation matters, no assurances can be given regarding the outcome of any litigation, if necessary, to enforce our rights under our insurance policies or settlement agreements.
Many uncertainties exist surrounding asbestos litigation, and we will continue to evaluate our estimated asbestos-related liability and corresponding estimated insurance reimbursement as well as the underlying assumptions and process used to derive these amounts. These uncertainties may result in our incurring future charges or increases to income to adjust the carrying value of recorded liabilities and assets, particularly if the number of claims and settlement and defense costs change significantly, or if there are significant developments in the trend of case law or court procedures, or if legislation or another alternative solution is implemented. Although the resolution of these claims will likely take many years, the effect on the results of operations, financial position, and cash flow in any given period from a revision to these estimates could be material.
Other Contingencies
Environmental Matters
For environmental matters, we record a liability for estimated remediation costs when it is probable that we will be responsible for such costs and they can be reasonably estimated. Generally, third party specialists assist in the estimation of remediation costs. The environmental remediation liability as of June 30, 2022 is substantially related to the former manufacturing site in Goodyear, Arizona (the “Goodyear Site”) discussed below. On June 21, 2021, we completed the sale of substantially all of the property associated with what we have historically called the Goodyear Site for $ 8.7 million, retaining only a small parcel on which our remediation and treatment systems are located. We will continue to be responsible for all remediation costs associated with the Goodyear Site.
Goodyear Site
The Goodyear Site was operated by Unidynamics/Phoenix, Inc. (“UPI”), which became an indirect subsidiary in 1985 when we acquired UPI’s parent company, UniDynamics Corporation. UPI manufactured explosive and pyrotechnic compounds, including components for critical military programs, for the U.S. government at the Goodyear Site from 1962 to 1993, under
23
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
contracts with the Department of Defense and other government agencies and certain of their prime contractors. In 1990, the U.S. Environmental Protection Agency (“EPA”) issued administrative orders requiring UPI to design and carry out certain remedial actions, which UPI has done. Groundwater extraction and treatment systems have been in operation at the Goodyear Site since 1994. On July 26, 2006, we entered a consent decree with the EPA with respect to the Goodyear Site providing for, among other things, a work plan for further investigation and remediation activities (inclusive of a supplemental remediation investigation and feasibility study). During the third quarter of 2014, the EPA issued a Record of Decision (“ROD”) amendment permitting, among other things, additional source area remediation resulting in us recording a charge of $ 49.0 million, extending the accrued costs through 2022. Following the 2014 ROD amendment, we continued our remediation activities and explored an alternative strategy to accelerate remediation of the site. During the fourth quarter of 2019, we received conceptual agreement from the EPA on our alternative remediation strategy which is expected to further reduce the contaminant plume. Accordingly, in 2019, we recorded a pre-tax charge of $ 18.9 million, net of reimbursements, to extend our forecast period through 2027 and reflect our revised workplan. The total estimated gross liability was $ 27.1 million and $ 32.3 million as of June 30, 2022 and December 31, 2021, respectively and as described below, a portion is reimbursable by the U.S. Government. The current portion of the total estimated liability was $ 7.8 million and $ 7.1 million as of June 30, 2022 and December 31, 2021, respectively, and represents our best estimate, in consultation with our technical advisors, of total remediation costs expected to be paid during the twelve-month period. It is not possible at this point to reasonably estimate the amount of any obligation in excess of our current accruals through the 2027 forecast period because of the aforementioned uncertainties, in particular, the continued significant changes in the Goodyear Site conditions and additional expectations of remediation activities experienced in recent years.
On July 31, 2006, we entered into a consent decree with the U.S. Department of Justice on behalf of the Department of Defense and the Department of Energy pursuant to which, among other things, the U.S. Government reimburses us for 21 % of qualifying costs of investigation and remediation activities at the Goodyear Site. As of June 30, 2022 and December 31, 2021, we recorded a receivable of $ 6.6 million and $ 7.3 million, respectively, for the expected reimbursements from the U.S. Government in respect of the aggregate liability as at that date. The receivable is reduced as reimbursements and other payments from the U.S. Government are received.
Other Environmental Matters
Marion, IL Site
We have been identified as a potentially responsible party (“PRP”) with respect to environmental contamination at the Crab Orchard National Wildlife Refuge Superfund Site (the “Crab Orchard Site”). The Crab Orchard Site is located near Marion, Illinois, and consists of approximately 55,000 acres. Beginning in 1941, the United States used the Crab Orchard Site for the production of ordnance and other related products for use in World War II. In 1947, about half of the Crab Orchard Site was leased to a variety of industrial tenants whose activities (which continue to this day) included manufacturing ordnance and explosives. A predecessor of us formerly leased portions of the Crab Orchard Site and conducted manufacturing operations at the Crab Orchard Site from 1952 until 1964. General Dynamics Ordnance and Tactical Systems, Inc. (“GD-OTS”) is in the process of conducting a remedial investigation and feasibility study for a portion of the Crab Orchard Site (the “AUS-OU”), which includes an area where we maintained operations, pursuant to an Administrative Order on Consent. A remedial investigation report was approved in February 2015, and work on the feasibility study is underway. It is unclear when the final feasibility study will be completed, or when a final Record of Decision may be issued.
GD-OTS has asked us to participate in a voluntary, multi-party mediation exercise with respect to response costs it has incurred or will incur with respect to the AUS-OU. We and other PRPs executed a non-binding mediation agreement on March 16, 2015, and the U.S. government executed the mediation agreement on August 6, 2015. The first phase of the mediation, involving certain former munitions or ordnance storage areas, began in November 2017, but did not result in a multi-party settlement agreement. Subsequently, we entered discussions directly with GD-OTS and reached an agreement, as of July 13, 2021, to contribute toward GD-OTS’s past RI-FS costs associated with the first-phase areas for an immaterial amount. We have also agreed to pay a modest percentage of future RI-FS costs and the United States’ claimed past response costs relative to the first-phase areas, a sum that we expect in the aggregate to be immaterial. We understand that GD-OTS has also reached agreements-in-principle with the U.S. Government and the other participating PRPs related to the first-phase areas of concern. Negotiations between GD-OTS and the U.S. Government are underway with respect to resolution of the remaining areas of the site, including those portions of the Crab Orchard Site where our predecessor conducted manufacturing and research activities. We at present cannot predict whether these further negotiations will result in an agreement, or when any determination of the ultimate allocable shares of the various PRPs, including the U.S. Government, is likely to be completed. It is not possible at this time to reasonably estimate the total amount of any obligation for remediation of the Crab Orchard Site as a whole because the allocation among PRPs, selection of remediation alternatives, and concurrence of regulatory authorities have not yet advanced to the stage where a reasonable estimate can be made. We
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
notified our insurers of this potential liability and have obtained defense and indemnity coverage, subject to reservations of rights, under certain of our insurance policies.
Roseland, NJ Site
The Roseland Site was operated by Resistoflex Corporation (“Resistoflex”), which became an indirect subsidiary of ours in 1985 when we acquired Resistoflex’s parent company, UniDynamics Corporation. Resistoflex manufactured specialty lined pipe and fittings at the site from the 1950s until it was closed in the mid-1980s. We undertook an extensive soil remediation effort at the Roseland Site following our closure and had been monitoring the Site’s condition in the years that followed. In response to changes in remediation standards, in 2014 we began to conduct further site characterization and delineation studies at the Site. We are in the late stages of our remediation activities at the Site, which include a comprehensive delineation of contaminants of concern in soil, groundwater, surface water, sediment, and indoor air testing, all in accordance with the New Jersey Department of Environmental Protection guidelines and directives.
Other Proceedings
We regularly review the status of lawsuits, claims and proceedings that have been or may be asserted against us relating to the conduct of our business, including those pertaining to product liability, patent infringement, commercial, employment, employee benefits, environmental and stockholder matters. We record a provision for a liability for such matters when it is considered probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions, if any, are reviewed quarterly and adjusted as additional information becomes available. If either or both of the criteria are not met, we assess whether there is at least a reasonable possibility that a loss, or additional losses, may have been incurred. If there is a reasonable possibility that a loss or additional loss may have been incurred for such matters, we disclose the estimate of the amount of loss or range of loss, disclose that the amount is immaterial, or disclose that an estimate of loss cannot be made, as applicable. We believe that as of June 30, 2022, there was no reasonable possibility that a material loss, or any additional material losses, may have been incurred for such matters, and that adequate provision has been made in our financial statements for the potential impact of all such matters.
Note 11 - Financing
Our debt consisted of the following:
(in millions) June 30,
2022 December 31,
2021
Commercial paper $ 119.4 $ —
Total short-term borrowings $ 119.4 $ —
4.45 % notes due December 2023
$ 299.6 $ 299.4
6.55 % notes due November 2036
198.5 198.5
4.20 % notes due March 2048
346.4 346.3
Other deferred financing costs associated with credit facilities ( 1.6 ) ( 1.8 )
Total long-term debt $ 842.9 $ 842.4
Debt discounts and debt issuance costs totaled $ 5.5 million and $ 5.7 million as of each of June 30, 2022 and December 31, 2021, respectively, and have been netted against the aggregate principal amounts of the related debt in the components of the debt table above.
Commercial paper program - On July 28, 2021, we increased the size of the commercial paper program (“CP Program”) to permit the issuance of short-term, unsecured commercial paper notes in an aggregate principal amount not to exceed $ 650 million at any time outstanding. Prior to this increase, the CP Program permitted us to issue commercial paper notes in an aggregate principal amount not to exceed $ 550 million at any time outstanding. The other terms and conditions of the CP program remain the same. Amounts available under the CP Program may be borrowed, repaid and re-borrowed from time to time. The notes will have maturities of up to 397 days from date of issue. The notes rank at least pari passu with all of our other unsecured and unsubordinated indebtedness. As of June 30, 2022 and December 31, 2021, there was $ 119.4 million and $ 0.0 million , respectively, of outstanding borrowings under the commercial paper program.
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - Fair Value Measurements
Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are to be considered from the perspective of a market participant that holds the asset or owes the liability. The standards also establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The standards describe three levels of inputs that may be used to measure fair value:
Level 1 : Quoted prices in active markets for identical or similar assets and liabilities.
Level 2 : Quoted prices for identical or similar assets and liabilities in markets that are not active or observable inputs other than quoted prices in active markets for identical or similar assets and liabilities. Level 2 assets and liabilities include over-the-counter derivatives, principally forward foreign exchange contracts, whose value is determined using pricing models with inputs that are generally based on published foreign exchange rates and exchange traded prices, adjusted for other specific inputs that are primarily observable in the market or can be derived principally from or corroborated by observable market data.
Level 3 : Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Valuation Technique
The carrying value of our financial assets and liabilities, including cash and cash equivalents, accounts receivable and accounts payable approximate fair value, without being discounted, due to the short periods during which these amounts are outstanding.
We are exposed to certain risks related to our ongoing business operations, including market risks related to fluctuation in currency exchange. We use foreign exchange contracts to manage the risk of certain cross-currency business relationships to minimize the impact of currency exchange fluctuations on our earnings and cash flows. We do not hold or issue derivative financial instruments for trading or speculative purposes. Foreign exchange contracts not designated as hedging instruments had a notional value of $ 87.5 million and $ 3.0 million as of June 30, 2022 and December 31, 2021, respectively. Our derivative assets and liabilities include foreign exchange contract derivatives that are measured at fair value using internal models based on observable market inputs such as forward rates and interest rates. Based on these inputs, the derivatives are classified within Level 2 of the valuation hierarchy. Such derivative receivable amounts are recorded within “Other current assets” on our Condensed Consolidated Balance Sheets and were $ 7.9 million and $ 0.0 million as of June 30, 2022 and December 31, 2021, respectively. Such derivative liability amounts are recorded within “Accrued liabilities” on our Condensed Consolidated Balance Sheets and were $ 0.0 million and less than $ 0.1 million as of June 30, 2022 and December 31, 2021, respectively.
Available-for-sale securities consist of rabbi trust investments that hold marketable securities for the benefit of participants in our Supplemental Executive Retirement Plan. These investments are measured at fair value using quoted market prices in an active market and are therefore classified within Level 1 of the valuation hierarchy. The fair value of available-for-sale securities was $ 0.5 million and $ 1.6 million as of June 30, 2022 and December 31, 2021, respectively. These investments are included in “Other assets” on our Condensed Consolidated Balance Sheets.
Long-term debt rates currently available to us for debt with similar terms and remaining maturities are used to estimate the fair value for debt issues that are not quoted on an exchange. The estimated fair value of total debt, measured using Level 2 inputs, was $ 825.5 million and $ 984.9 million as of June 30, 2022 and December 31, 2021, respectively.
26
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 13 - Restructuring
Overview
2020 Repositioning - In the second quarter of 2020, we initiated actions in response to the adverse economic impact of COVID-19 and integration actions related to the Cummins-Allison acquisition. These actions include workforce reductions of approximately 1,200 employees, or about 11 % of our global workforce, and the exiting of two leased office facilities and one leased warehouse facility. We have completed this program and do not expect to incur additional restructuring charges.
2019 Repositioning - In the fourth quarter of 2019, we initiated actions to consolidate two manufacturing operations in Europe within our Process Flow Technologies segment. In 2020, we recorded additional severance costs related to the final negotiation with the works council/union at both locations. These actions, taken together, included workforce reductions of approximately 180 employees, or less than 1 % of our global workforce. We expect to complete the program in the fourth quarter of 2023. There were no charges recorded in the three month periods ended June 30, 2022 or 2021 related to these actions.
2017 Repositioning - In the fourth quarter of 2017, we initiated broad-based repositioning actions designed to improve profitability. These actions included headcount reductions of approximately 300 employees, or about 3 % of our global workforce, and select facility consolidations in North America and Europe. In 2020, we adjusted the estimate downward to reflect the impact of employees that chose to voluntarily terminate prior to receiving severance at the conclusion of the actions in North America. In 2021, we recorded a gain on sale of real estate related to these actions. We expect to complete the program in the first quarter of 2023. We recorded $ 0.0 and $( 0.2 ) in the three month periods ended June 30, 2022 and 2021 related to these actions.
Restructuring (gains) charges, net
We recorded restructuring (gains) charges, net which are reflected in the Condensed Consolidated Statements of Operations, as follows:
Three Months Ended June 30, Six Months Ended June 30,
(in millions) 2022 2021 2022 2021
Process Flow Technologies $ — $ — — ( 12.6 )
Payment & Merchandising Technologies — ( 0.2 ) — ( 0.7 )
Total restructuring (gains) charges, net $ — $ ( 0.2 ) $ — $ ( 13.3 )
The following table summarizes our restructuring gains, net by program, cost type and segment for the six months ended June 30, 2022 and 2021:
Six Months Ended June 30,2022 Six Months Ended June 30,2021
(in millions) Severance Other Total Severance Other Total
Payment & Merchandising Technologies $ — $ — $ — $ ( 0.5 ) $ — $ ( 0.5 )
2020 Repositioning $ — $ — $ — $ ( 0.5 ) $ — $ ( 0.5 )
Process Flow Technologies $ — $ — $ — $ 0.1 $ — $ 0.1
2019 Repositioning $ — $ — $ — $ 0.1 $ — $ 0.1
Process Flow Technologies 1
$ — $ — $ — $ — $ ( 12.7 ) $ ( 12.7 )
Payment & Merchandising Technologies — — — ( 0.2 ) — ( 0.2 )
2017 Repositioning $ — $ — $ — $ ( 0.2 ) $ ( 12.7 ) $ ( 12.9 )
Total $ — $ — $ — $ ( 0.6 ) $ ( 12.7 ) $ ( 13.3 )
1 Reflects a pre-tax gain related to the sale of real estate in 2021
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the cumulative restructuring costs, net incurred through June 30, 2022. We do not expect to incur additional facility consolidation costs to complete these actions as of June 30, 2022.
Cumulative Restructuring Costs, Net
(in millions) Severance Other Total
Aerospace & Electronics $ 6.5 $ — $ 6.5
Process Flow Technologies 3.7 — 3.7
Payment & Merchandising Technologies 15.8 1.8 17.6
2020 Repositioning $ 26.0 $ 1.8 $ 27.8
Process Flow Technologies $ 16.1 $ — $ 16.1
2019 Repositioning $ 16.1 $ — $ 16.1
Aerospace & Electronics $ 1.3 $ ( 1.4 ) $ ( 0.1 )
Process Flow Technologies 13.1 ( 12.7 ) 0.4
Payment & Merchandising Technologies 11.5 0.7 12.2
2017 Repositioning $ 25.9 $ ( 13.4 ) $ 12.5
Restructuring Liability
The following table summarizes the accrual balances related to each restructuring program:
(in millions) 2019 Repositioning 2017 Repositioning Total
Severance:
Balance at December 31, 2021 (a)
$ 11.5 $ 0.7 $ 12.2
Utilization ( 6.1 ) ( 0.6 ) ( 6.7 )
Balance at June 30, 2022 (a)
$ 5.4 $ 0.1 $ 5.5
(a) Included within Accrued Liabilities in the Condensed Consolidated Balance Sheets
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.