10-K 1 cr-20151231x10k.htm 10-K 10-K


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2015
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-1657
CRANE CO. 
 
 
 
State of incorporation:
Delaware
 
I.R.S. Employer identification
No. 13-1952290
 
 
Principal executive office:
100 First Stamford Place, Stamford, CT 06902
 
 
Registrant’s telephone number, including area code: (203) 363-7300
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
 
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $1.00
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act
Yes    ý        No     ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act
Yes    ¨        No    ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes    ý        No     ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes    ý        No     ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, “non-accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act). (Check one):
Large accelerated filer  x
  
Accelerated filer o
 
 
Non-accelerated filer o (Do not check if a smaller reporting company)
  
Smaller Reporting Company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes    ¨         No    ý
Based on the closing stock price of $58.73 on June 30, 2015, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting common equity held by nonaffiliates of the registrant was $3,408,779,644
The number of shares outstanding of the registrant’s common stock, par value $1.00, was 58,232,596 at January 31, 2016.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual shareholders’ meeting to be held on April 25, 2016
are incorporated by reference into Part III of this Form 10-K.




Index
 
 
 
 
 
 
 
 
 
  
Page
 
Part I
Item 1.
 
  
Item 1A.
 
  
Item 1B.
 
  
Item 2.
 
  
Item 3.
 
  
Item 4.
 
  
 
Part II
Item 5.
 
  
Item 6.
 
  
Item 7.
 
  
Item 7A.
 
  
Item 8.
 
  
Item 9.
 
  
Item 9A.
 
  
Item 9B.
 
  
 
Part III
Item 10.
 
  
Item 11.
 
  
Item 12.
 
  
Item 13.
 
  
Item 14.
 
  
 
Part IV
Item 15.
 
  
 
 
 






FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K contains information about us, some of which includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements other than historical information or statements about our current condition. You can identify forward-looking statements by the use of terms such as “believes”, “contemplates”, “expects”, “may”, “will”, “could”, “should”, “would”, or “anticipates”, other similar phrases, or the negatives of these terms.
We have based the forward-looking statements relating to our operations on our current expectations, estimates and projections about us and the markets we serve. We caution you that these statements are not guarantees of future performance and involve risks and uncertainties. These statements should be considered in conjunction with the discussion in Part I, the information set forth under Item 1A, “Risk Factors” and with the discussion of the business included in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We have based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Accordingly, our actual outcomes and results may differ materially from what we have expressed or forecast in the forward-looking statements. Any differences could result from a variety of factors, including the following:

The effect of changes in economic conditions in the markets in which we operate, including financial market conditions, end markets for our products, fluctuations in raw material prices and the financial condition of our customers and suppliers;
Economic, social and political instability, currency fluctuation and other risks of doing business outside of the United States;
Competitive pressures, including the need for technology improvement, successful new product development and introduction and any inability to pass increased costs of raw materials to customers;
Our ability to successfully integrate acquisitions and to realize synergies and opportunities for growth and innovation;
Our ability to successfully value acquisition candidates;
Our ongoing need to attract and retain highly qualified personnel and key management;
A reduction in congressional appropriations that affect defense spending;
The ability of the U.S. government to terminate our government contracts;
The outcomes of legal proceedings, claims and contract disputes;
Adverse effects on our business and results of operations, as a whole, as a result of increases in asbestos claims or the cost of defending and settling such claims;
The outcome of restructuring and other cost savings initiatives;
Adverse effects as a result of further increases in environmental remediation activities, costs and related claims;
Investment performance of our pension plan assets and fluctuations in interest rates, which may affect the amount and timing of future pension plan contributions; and
Adverse effects of changes in tax, environmental and other laws and regulations in the United States and other countries in which we operate.



1



Part I
Reference herein to “Crane”, “we”, “us”, and “our” refer to Crane Co. and its subsidiaries unless the context specifically states or implies otherwise. Amounts in the following discussion are presented in millions, except employee, share and per share data, or unless otherwise stated.

Item 1. Business
General
We are a diversified manufacturer of highly engineered industrial products comprised of four segments: Fluid Handling, Payment & Merchandising Technologies, Aerospace & Electronics and Engineered Materials. Our primary markets are chemicals, power, oil & gas, aerospace & defense, along with a wide range of general industrial and consumer related end markets.
We have been committed to the highest standards of business conduct since 1855 when our founder, R.T. Crane, resolved “to conduct my business in the strictest honesty and fairness; to avoid all deception and trickery; to deal fairly with both customers and competitors; to be liberal and just toward employees; and to put my whole mind upon the business.”
Our strategy is to grow earnings and cash flow by focusing on manufacture of highly engineered industrial products for specific markets where our scale is a relative advantage, and where we can compete based on our proprietary and differentiated technology, our deep vertical expertise, and our responsiveness to unique and diverse customer needs. We continuously evaluate our portfolio, pursue acquisitions that complement our existing businesses and that are accretive to our growth profile, selectively divest businesses where appropriate, and pursue internal mergers to improve efficiency. We strive to foster a performance-based culture focused on productivity and continuous improvement, to attract and retain a committed management team whose interests are directly aligned with those of our shareholders, and to maintain a focused, efficient corporate structure.
We use a comprehensive set of business processes and operational excellence tools that we call the Crane Business System ("CBS") to drive continuous improvement throughout our businesses. Beginning with a core value of integrity, the Crane Business System incorporates “Voice of the Customer” teachings (specific processes designed to capture our customers’ requirements) and a broad range of operational excellence tools into a disciplined strategy deployment process that drives profitable growth by focusing on continuously improving safety, quality, delivery and cost.
Revenues from outside the United States were approximately 38% and 41% in 2015 and 2014, respectively. For more information regarding our sales and assets by geographical region, see Part II, Item 8 under Note 13, “Segment Information,” to the Consolidated Financial Statements.
Reportable Segments
For additional information on recent business developments and other information about us and our business, you should refer to the information set forth under the captions, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Part II, Item 7 of this report, as well as in Part II, Item 8 under Note 13, “Segment Information,” to the Consolidated Financial Statements for sales, operating profit and assets employed by each segment.
Fluid Handling
The Fluid Handling segment is a provider of highly engineered fluid handling equipment for critical performance applications that require high reliability. The segment is comprised of Process Valves and Related Products, Commercial Valves, and Other Products.
Process Valves and Related Products includes on/off valves and related products for critical and demanding applications in the chemical, oil & gas, power, and general industrial end markets globally. Products are sold under the trade names Crane, Saunders, Jenkins, Pacific, Xomox, Krombach, DEPA, ELRO, REVO, Flowseal, Centerline, Resistoflex, Duochek, Barksdale, and WTA. Manufacturing locations, along with sales and service centers, are located across the Americas, Europe, the Middle East, Asia, and Australia.
Commercial Valves is engaged primarily in the manufacturing and distribution of valves and related products for the non-residential construction, general industrial, and to a lesser extent, municipal markets. The primary geographies served include Canada, the United Kingdom, the Middle East, and continental Europe. Brands include Stockham, Wask, Viking Johnson, IAT, Hattersley, NABIC, Sperryn, Wade, Rhodes and Brownall. Manufacturing locations are located in the United Kingdom and China, with additional sales offices in continental Europe and the Middle East; distribution facilities are located throughout Canada.

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Other Products includes pumps and related products for water and wastewater applications in the industrial, municipal, commercial and military markets, primarily in the United States. Products are sold under the trade names Deming, Weinman, Burks, and Barnes. Facilities are located in the United States, Canada, and China.
Payment & Merchandising Technologies
The Payment & Merchandising Technologies segment is comprised of Crane Payment Innovations (“CPI”) and Merchandising Systems.
CPI provides high technology payment acceptance products that improve our customers’ productivity in numerous global markets including retail self-checkout, vending, casino gaming, government lotteries, parking, transit fare collection, payment kiosks, and banking. Products for these markets include coin acceptors and dispensers, coin hoppers, coin recyclers, bill validators, bill recyclers, and cashless systems. CPI facilities are located in the United States, Mexico, Japan, Canada, Switzerland, Germany, and the Ukraine, with additional sales offices across the world.
Merchandising Systems is primarily engaged in the design and manufacture of vending equipment and related solutions. Merchandising Systems’ innovative products and solutions create value by improving the consumer experience, and driving higher same store, or vendor machine, profitability. Products include a full line of vending equipment that dispenses food, snack, and hot and cold beverages. Other solutions include vending management software, cashless payment products, and wireless connectivity to enable our customers to operate their businesses more profitably. Primary customers include vending operators, and food and beverage companies, primarily in the United States and Europe. Facilities are located in the United States and the United Kingdom.
Aerospace & Electronics
The Aerospace & Electronics segment supplies critical components and systems, including original equipment and aftermarket parts, primarily for the commercial aerospace and military aerospace and defense markets. The commercial market and military market accounted for 70% and 30%, respectively, of total segment sales in 2015. Sales to original equipment manufacturers ("OEM") and aftermarket customers were 73% and 27%, respectively, in 2015.
Crane Aerospace & Electronics has strong brands which have been supplying products to these end markets for several decades. Brands include Hydro-Aire, ELDEC, Lear Romec, P.L. Porter, Keltec, Interpoint, Signal Technology, Merrimac Industries, and Polyflon.
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.
Our products are sold directly to aircraft manufacturers, commercial Tier 1 integrators (companies which make products specifically for an aircraft manufacturer), defense and space prime contractors, airlines, government agencies including the U.S. Department of Defense, foreign allied defense organizations, aircraft seat manufacturers, and aircraft maintenance, repair and overhaul ("MRO") organizations.
Facilities are located in the United States, Taiwan, and France.
Engineered Materials
The Engineered Materials segment manufactures fiberglass-reinforced plastic ("FRP") panels and coils, primarily for use in the manufacturing of recreational vehicles ("RV"s), truck bodies, truck trailers, with additional applications in commercial and industrial buildings. 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. Manufacturing facilities are located in the United States.
Acquisitions
We have completed two acquisitions in the past five years.
In December 2013, we completed the acquisition of MEI Conlux Holdings (U.S.), Inc. and its affiliate MEI Conlux Holdings (Japan), Inc. (together, “MEI”), a leading provider of payment solutions for unattended transaction systems, which serves customers in the transportation, gaming, retail, service payment and vending markets, for a purchase price of $804 million for all of the outstanding equity interests of MEI. MEI had sales of $399 million in 2012 and was integrated into our CPI business within our Payment & Merchandising Technologies segment. Goodwill for this acquisition amounted to $438 million. The amount allocated to goodwill reflects the benefits we expect to realize from the acquisition, specifically, that it will strengthen and broaden our product offering and allow us to improve our global position in all sectors of the market.

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In July 2011, we completed the acquisition of W. T. Armatur GmbH & Co. KG (“WTA”), a manufacturer of bellows sealed globe valves, as well as certain types of specialty valves, for chemical, fertilizer and thermal oil applications, for a purchase price of $37 million in cash and $1 million of assumed debt. WTA’s 2010 sales were approximately $21 million; WTA has been integrated into our Fluid Handling segment. Goodwill for this acquisition amounted to $12 million.
Divestitures
We have completed four divestitures in the past five years.
In 2014, we sold Crane Water, which was formerly part of our Fluid Handling segment, for $2.1 million and recorded a $1.1 million net loss. The business had sales of approximately $15 million in 2013.
In December 2013, as part of the execution of regulatory remedies associated with the MEI acquisition, we sold a product line, which was formerly part of our Payment & Merchandising Technologies segment, to Suzo-Happ Group for $6.8 million and recorded a $2 million gain. Sales of this product line were $15.1 million in 2013.
In June 2012, we sold certain assets and operations of the Company’s valve service center in Houston, Texas, which was formerly part of the Fluid Handling segment, to Furmanite Corporation for $9.3 million. The service center had sales of $14 million in 2011 and was reported as discontinued operations on our Consolidated Statement of Operations.
In June 2012, we also sold Azonix Corporation (“Azonix”), which was part of our former Controls segment, to Cooper Industries for $44.8 million. Azonix had sales of $32 million in 2011 and was reported as discontinued operations on our Consolidated Statement of Operations.
Other Matters Relating to Our Business as a Whole
Competitive Conditions
Our businesses participate in markets that are highly competitive. Because of the diversity of products manufactured and sold, our businesses typically have a different set of competitors in each geographic area and end market in which they participate. Accordingly, it is not possible to estimate the number of competitors, or precise market share; however, we believe that we are a principal competitor in most of our markets. Our primary basis of competition is providing high quality products, with technological differentiation, at competitive prices, with superior customer service and timely delivery.
Our products are sold into markets, including chemical, power, oil & gas, aerospace & defense, along with a wide range of general industrial and consumer related end markets. As such, our revenues depend on numerous unpredictable factors, including changes in market demand, general economic conditions, customer capital spending, and credit availability. Because our products are sold in such a wide variety of markets, we do not believe that we can reliably quantify or predict the potential effects of changes in any of the aforementioned factors.
Our engineering and product development activities are focused on improving existing products, customizing existing products for particular customer requirements, as well as the development of new products. We own numerous patents, trademarks, copyrights, trade secrets and licenses to intellectual property, no one of which is of such importance that termination would materially affect our business. From time to time, however, we do engage in litigation to protect our intellectual property.
Research and Development
Research and development costs are expensed when incurred. These costs were $62.8 million, $68.0 million and $52.7 million in 2015, 2014 and 2013, respectively, and were incurred primarily by the Aerospace & Electronics and Payment & Merchandising Technologies segments.
Our Customers
No customer accounted for more than 10% of our consolidated revenues in 2015, 2014 or 2013.

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Backlog
The following sets forth the unfulfilled orders attributable to each of our segments as of the indicated dates:
(in millions)
 
December 31, 2015
 
December 31, 2014
Fluid Handling
 
$
267

 
$
311

Payment & Merchandising Technologies
 
63

 
68

Aerospace & Electronics
 
436

 
422

Engineered Materials
 
15

 
17

    Total Backlog
 
$
782

 
$
818

Our Employees
We employ approximately 11,200 people in the Americas, Europe, the Middle East, Asia and Australia. For a discussion of risks related to employee relations, please refer to “Item 1A. Risk Factors.”
Raw Materials
Our manufacturing operations employ a wide variety of raw materials, including steel, copper, cast iron, electronic components, aluminum, plastics and various petroleum-based products. We purchase raw materials from a large number of independent sources around the world. Although market forces have at times caused increases in the costs of steel, copper and petroleum-based products, there have been no raw materials shortages that have had a material adverse impact on our business, and we believe that we will generally be able to obtain adequate supplies of major raw material requirements or reasonable substitutes at acceptable costs.
Seasonal Nature of Business
Our business does not experience significant seasonality.
Government Contracts
We have agreements relating to the sale of products to government entities, primarily involving products in our Aerospace & Electronics segment and, to a lesser extent, our Fluid Handling segment. As a result, we are subject to various statutes and regulations that apply to companies doing business with the government. The laws and regulations governing government contracts differ from those governing private contracts. For example, some government contracts require disclosure of cost and pricing data and impose certain sourcing conditions that are not applicable to private contracts. Our failure to comply with these laws could result in suspension of these contracts, criminal or civil sanctions, administrative penalties and fines or suspension or debarment from government contracting or subcontracting for a period of time. For a further discussion of risks related to compliance with government contracting requirements; please refer to “Item 1A. Risk Factors.”
Available Information
We file annual, quarterly and current reports and amendments to these reports, proxy statements and other information with the United States Securities and Exchange Commission (“SEC”). You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers, like us, that file electronically with the SEC. The address of the SEC’s website is www.sec.gov.
We also make our filings available free of charge through our Internet website, as soon as reasonably practicable after filing such material electronically with, or furnishing such material, to the SEC. Also posted on our website are our Corporate Governance Guidelines, Standards for Director Independence, Crane Co. Code of Ethics and the charters and a brief description of each of the Audit Committee, the Management Organization and Compensation Committee and the Nominating and Governance Committee. These items are available in the “Investors – Corporate Governance” section of our website at www.craneco.com. The content of our website is not part of this report.


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Executive Officers of the Registrant
Name
 
Position
 
Business Experience During Past Five Years
 
Age
 
Executive
Officer Since
Max H. Mitchell
 
President and Chief Executive Officer
 
Chief Executive Officer since January 2014. President since January 2013. Chief Operating Officer from May 2011 through January 2013. Group President, Fluid Handling from 2005 to October 2012.
 
52
 
2004
Curtis A. Baron, Jr.
 
Vice President, Controller
 
Vice President, Controller since December 2011. Assistant Controller from 2007 to December 2011.
 
46
 
2011
Thomas J. Craney
 
Group President,
Engineered Materials
 
Group President, Engineered Materials since 2007.
 
60
 
2007
Brendan J. Curran
 
President, Aerospace & Electronics
 
President, Aerospace & Electronics since February 2015. Group President, Aerospace from May 2013 through February 2015. Pratt Whitney: United Technologies Corporation (diversified manufacturing) Vice President, Business Development, Strategy & Partnerships, Commercial Engines from July 2012 through June 2013 and Vice President, Commercial Engines & Global Services from April 2011 through June 2012. Hamilton Sundstrand, United Technologies Corporation: VP and General Manager, Repair & Supply Chain from 2009 through March 2011.
 
53
 
2013
Augustus I. duPont
 
Vice President, General
Counsel and Secretary
 
Vice President, General Counsel and Secretary since 1996.
 
64
 
1996
Bradley L. Ellis
 
Senior Vice President
 
Senior Vice President since December 2014. Group President, Merchandising Systems from 2003 through December 2014. Vice President, Crane Business System from 2009 to December 2011.
 
47
 
1997 - 2003
2007 - present
James A. Lavish
 
Vice President, CBS, People & Performance
 
Vice President, CBS, People & Performance since January 2016. Vice President, Crane Business System from March 2013 through January 2016. President, Crane Pumps & Systems from 2008 to 2013.
 
49
 
2016
Richard A. Maue
 
Vice President - Finance and Chief Financial Officer
 
Vice President - Finance and Chief Financial Officer since January 2013. Principal Accounting Officer since 2007 and Vice President, Controller from 2007 to December 2011.
 
45
 
2007
Anthony D. Pantaleoni
 
Vice President, Environment, Health and Safety
 
Vice President, Environment, Health and Safety since 1989.
 
61
 
1989
Louis V. Pinkham
 
Senior Vice President
 
Senior Vice President since December 2014. Group President, Fluid Handling from October 2012 through December 2014. Senior Vice President, General Manager at Eaton Corp. (diversified power management company) from June 2011 to October 2012. Vice President, General Manager at Eaton Corp. from 2008 to 2011.
 
44
 
2012
Tazewell S. Rowe
 
Vice President, Treasurer
 
Vice President, Treasurer since August 2013. Assistant Treasurer, ITT Corporation (diversified manufacturing) from 2010 through August 2013. Managing Director, Corporate Strategy, Ally Financial from 2006 through 2010.
 
44
 
2013
Kristian R. Salovaara
 
Vice President of Business Development and Strategy
 
Vice President of Business Development and Strategy since March 2014. Vice President, Business Development from May 2011 to March 2014. Managing Director at FBR Capital Markets & Co. from 2009 to May 2011.
 
55
 
2011
Edward S. Switter
 
Vice President, Tax
 
Vice President, Tax since 2011. Director Global Tax from 2010 to 2011. Director of Tax from 2006 to 2010.
 
41
 
2011


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Item 1A. Risk Factors
The following is a description of what we consider the key challenges and risks confronting our business. This discussion should be considered in conjunction with the discussion under the caption “Forward-Looking Information” preceding Part I, the information set forth under Item 1, “Business” and with the discussion of the business included in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These risks comprise the material risks of which we are aware. If any of the events or developments described below or elsewhere in this Annual Report on Form 10-K, or in any documents that we subsequently file publicly were to occur, it could have a material adverse effect on our business, financial condition or results of operations.
Risks Relating to Our Business
We are subject to numerous lawsuits for asbestos-related personal injury, and costs associated with these lawsuits may adversely affect our results of operations, cash flow and financial position.
We are subject to numerous lawsuits for asbestos-related personal injury. 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. Our estimate of the future expense of these claims is derived from assumptions with respect to future claims, settlement and defense costs which are based on experience during the last few years and which may not prove reliable as predictors. 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 or on appeal. A legislative solution or a structured settlement transaction could also change the estimated liability. 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 settlements and defense costs escalates or if legislation or another alternative solution is implemented; however, we are currently unable to predict such future events. The resolution of these claims may take many years, and the effect on results of operations, cash flow and financial position in any given period from a revision to these estimates could be material.
As of December 31, 2015, we were one of a number of defendants in cases involving 41,090 pending claims filed in various state and federal courts that allege injury or death as a result of exposure to asbestos. See Note 10, “Commitments and Contingencies” of the Notes to Consolidated Financial Statements for additional information on:
Our pending claims;
Our historical settlement and defense costs for asbestos claims;
The liability we have recorded in our financial statements for pending and reasonably anticipated asbestos claims through 2021;
The asset we have recorded in our financial statements related to our estimated insurance coverage for asbestos claims; and
Uncertainties related to our net asbestos liability.
We have recorded a liability for pending and reasonably anticipated asbestos claims through 2021, and while it is probable that this amount will change and that we may incur additional liabilities for asbestos claims after 2021, which additional liabilities may be significant, we cannot reasonably estimate the amount of such additional liabilities at this time. The liability was $546 million as of December 31, 2015.
Macroeconomic fluctuations may harm our business, results of operations and stock price.
Our business, financial condition, operating results and cash flows may be adversely affected by changes in global economic conditions and geopolitical risks, including credit market conditions, levels of consumer and business confidence, commodity prices, exchange rates, levels of government spending and deficits, political conditions and other challenges that could affect the global economy. These economic conditions could affect businesses such as ours in a number of ways. Such conditions could have an adverse impact on our flexibility to react to changing economic and business conditions and on our ability to fund our operations or refinance maturing debt balances at attractive interest rates. In addition, restrictions on credit availability could adversely affect the ability of our customers to obtain financing for significant purchases and could result in decreases in or cancellation of orders for our products and services as well as impact the ability of our customers to make payments.  Similarly, credit restrictions may adversely affect our supplier base and increase the potential for one or more of our suppliers to experience financial distress or bankruptcy.  See “Specific Risks Related to Our Business Segments”.


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Demand for our products is variable and subject to factors beyond our control, which could result in unanticipated events significantly impacting our results of operations.
A substantial portion of our sales is concentrated in industries that are cyclical in nature or subject to market conditions which may cause customer demand for our products to be volatile. These industries often are subject to fluctuations in domestic and international economies as well as to currency fluctuations and inflationary pressures. Reductions in demand by these industries would reduce the sales and profitability of the affected business segments. In our Fluid Handling segment, a slower recovery of the global economy or increased uncertainty in major industrial markets and/or the continued weakness in oil prices could reduce sales and profits, particularly if projects for which our businesses are suppliers or bidders are canceled or delayed. Results at our Payment & Merchandising Technologies segment could be affected by sustained weakness in certain end markets such as China and Russia, low employment levels, office occupancy rates and factors affecting vending operator profitability such as higher fuel, food and equipment financing costs; results could also be impacted by unforeseen advances in payment processing technologies. In our Aerospace & Electronics segment, a significant decline in demand for air travel, or a decline in airline profitability generally, could result in reduced orders for aircraft and could also cause airlines to reduce their purchases of repair parts from our businesses. In addition, our Aerospace & Electronics segment could also be impacted to the extent that major aircraft manufacturers encountered production problems, or if pricing pressure from aircraft customers caused the manufacturers to press their suppliers to lower prices; in addition, demand for military and defense products is dependent upon government spending, which remains uncertain. In our Engineered Materials segment, sales and profits could be affected by declines in demand for truck trailers, RVs, or building products; results could also be impacted by unforeseen capacity constraints related to certain raw materials, in particular, resin.
Our operations expose us to the risk of environmental liabilities, costs, litigation and violations that could adversely affect our financial condition, results of operations, cash flow and reputation.
Our operations are subject to environmental laws and regulations in the jurisdictions in which they operate, which impose limitations on the discharge of pollutants into the ground, air and water and establish standards for the generation, treatment, use, storage and disposal of solid and hazardous wastes. We must also comply with various health and safety regulations in the United States and abroad in connection with our operations. Failure to comply with any of these laws could result in civil and criminal, monetary and non-monetary penalties and damage to our reputation. In addition, we cannot provide assurance that our costs related to remedial efforts or alleged environmental damage associated with past or current waste disposal practices or other hazardous materials handling practices will not exceed our estimates or adversely affect our financial condition, results of operations and cash flow. For example, in 2014, the U.S. Environmental Protection Agency issued a Record of Decision amendment requiring, among other things, additional source area remediation resulting in us recording a charge of $49.0 million pertaining to the Phoenix-Goodyear Airport North Superfund Site (the "Goodyear Site"), extending the accrued costs through 2022. In addition, also in 2014, we recorded a $6.8 million charge for expected remediation costs associated with an environmental site in Roseland, New Jersey (the "Roseland Site").

We may be unable to identify or to complete acquisitions, or to successfully integrate the businesses we acquire.
We have evaluated, and expect to continue to evaluate, a wide array of potential acquisition transactions. Our acquisition program attempts to address the potential risks inherent in assessing the value, strengths, weaknesses, contingent or other liabilities, systems of internal control and potential profitability of acquisition candidates, as well as other challenges such as retaining the employees and integrating the operations of the businesses we acquire. There can be no assurance that suitable acquisition opportunities will be available in the future, that we will continue to acquire businesses or that any business acquired will be integrated successfully or prove profitable, which could adversely impact our growth rate. Our ability to achieve our growth goals depends in part upon our ability to identify and successfully acquire and integrate companies and businesses at appropriate prices and realize anticipated cost savings.
Our businesses are subject to extensive governmental regulation; failure to comply with those regulations could adversely affect our financial condition, results of operations, cash flow and reputation.
We are required to comply with various import and export control laws, which may affect our transactions with certain customers, particularly in our Aerospace & Electronics, Fluid Handling and Payment & Merchandising Technology segments, as discussed more fully under “Specific Risks Relating to Our Business Segments”. In certain circumstances, export control and economic sanctions regulations may prohibit the export of certain products, services and technologies, and in other circumstances we may be required to obtain an export license before exporting the controlled item. A failure to comply with these requirements might result in suspension of these contracts and suspension or debarment from government contracting or subcontracting. In addition, we are subject to the Foreign Corrupt Practices Act, which generally prohibits U.S. companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or retaining business, or securing any improper advantage and the anti-bribery laws of other jurisdictions. Failure to comply with any of these

Page 8



regulations could result in civil and criminal, monetary and non-monetary penalties, fines, disruptions to our business, limitations on our ability to export products and services, and damage to our reputation.

Additional tax expense or exposures could affect our financial condition, results of operations and cash flow.
We are subject to income taxes in the United States and various international jurisdictions.  Our future results of operations could be adversely affected by changes in our effective tax rate as a result of a change in the mix of earnings in countries with differing statutory tax rates, changes in tax laws, regulations and judicial rulings, changes in generally accepted accounting principles, changes in the valuation of deferred tax assets and liabilities, changes in the amount of earnings permanently reinvested offshore and the results of audits and examinations of previously file tax returns. 
The prices of our raw materials could fluctuate dramatically, which may adversely affect our profitability.
The costs of certain raw materials that are critical to our profitability are volatile. This volatility can have a significant impact on our profitability. The costs in our Engineered Materials segment are affected by fluctuations in the price of resin. The costs in our Fluid Handling, Payment & Merchandising Technologies and Aerospace & Electronics segments are affected by fluctuations in the price of metals such as steel and copper. While we have taken actions aimed at securing an adequate supply of raw materials at prices which are favorable to us, if the prices of critical raw materials increase, our operating costs could be negatively affected.

Our ability to source parts and raw materials from our suppliers is uncertain, and any disruptions or delays in our supply chain could negatively affect our results of operations.
Our operations require significant amounts of important parts and raw materials. We are engaged in a continuous, company-wide effort to source our parts and raw materials from fewer suppliers, and to obtain parts from suppliers in low-cost countries where possible. If we are unable to source these parts or raw materials, our operations may be disrupted, or we could experience a delay or halt in certain of our manufacturing operations. We believe that our supply management and production practices are based on an appropriate balancing of the foreseeable risks and the costs of alternative practices. Nonetheless, supplier capacity constraints, supplier production disruptions, supplier financial condition, price volatility or the unavailability of some raw materials could have an adverse effect on our operating results and financial condition.

We could face potential product liability or warranty claims, we may not accurately estimate costs related to such claims, and we may not have sufficient insurance coverage available to cover such claims.
Our products are used in a wide variety of commercial applications and certain residential applications. We face an inherent business risk of exposure to product liability or other claims in the event our products are alleged to be defective or that the use of our products is alleged to have resulted in harm to others or to property. We may in the future incur liability if product liability lawsuits against us are successful. Moreover, any such lawsuits, whether or not successful, could result in adverse publicity to us, which could cause our sales to decline.
In addition, consistent with industry practice, we provide warranties on many of our products and we may experience costs of warranty or breach of contract claims if our products have defects in manufacture or design or they do not meet contractual specifications. We estimate our future warranty costs based on historical trends and product sales, but we may fail to accurately estimate those costs and thereby fail to establish adequate warranty reserves for them.
We maintain insurance coverage to protect us against product liability claims, but that coverage may not be adequate to cover all claims that may arise or we may not be able to maintain adequate insurance coverage in the future at an acceptable cost. Any liability not covered by insurance or that exceeds our established reserves could materially and adversely impact our financial condition and results of operations.
 
We may be unable to improve productivity, reduce costs and align manufacturing capacity with customer demand.
We are committed to continuous productivity improvement and continue to evaluate opportunities to reduce costs, simplify or improve global processes, and increase the reliability of order fulfillment and satisfaction of customer needs. In order to operate more efficiently and control costs, from time to time we execute restructuring activities, which include workforce reductions and facility consolidations. For example, we recorded pre-tax restructuring and related charges of $11.6 million in 2015 and $22.7 million in 2014 associated with repositioning actions intended to improve profitability in our Fluid Handling and Aerospace & Electronics segments. In addition, the Company recorded restructuring and acquisition integration charges of $6.6 million in 2015 and $20.1 million in 2014 associated with the restructuring and integration of MEI in our Payment & Merchandising Technologies segment. However, our failure to respond to potential declines in global demand for our products

Page 9



and services and properly align our cost base would have an adverse effect on our financial condition, results of operations and cash flow.

We may be unable to successfully develop and introduce new products, which would limit our ability to grow and maintain our competitive position and adversely affect our financial condition, results of operations and cash flow.
Our growth depends, in part, on continued sales of existing products, as well as the successful development and introduction of new products, which face the uncertainty of customer acceptance and reaction from competitors. Any delay in the development or launch of a new product could result in our not being the first to market, which could compromise our competitive position. Further, the development and introduction of new products may require us to make investments in specialized personnel and capital equipment, increase marketing efforts and reallocate resources away from other uses. We also may need to modify our systems and strategy in light of new products that we develop. If we are unable to develop and introduce new products in a cost-effective manner or otherwise manage effectively the operations related to new products, our results of operations and financial condition could be adversely impacted.

Pension expense and pension contributions associated with the Company’s retirement benefit plans may fluctuate significantly depending upon changes in actuarial assumptions and future market performance of plan assets.
A significant portion of our current and retired employee population is covered by pension plans, the costs of which are dependent upon various assumptions, including estimates of rates of return on benefit related assets, discount rates for future payment obligations, rates of future cost growth and trends for future costs. In addition, funding requirements for benefit obligations of our pension plans are subject to legislative and other government regulatory actions. Variances from these estimates could have an impact on our consolidated financial position, results of operations and cash flow.

We face significant competition which may adversely impact our results of operations and financial position in the future.
While we are a principal competitor in most of our markets, all of our markets are highly competitive. The competitors in many of our business segments can be expected in the future to improve technologies, reduce costs and develop and introduce new products, and the ability of our business segments to achieve similar advances will be important to our competitive positions. Competitive pressures, including those discussed above, could cause one or more of our business segments to lose market share or could result in significant price erosion, either of which could have an adverse effect on our results of operations.

We conduct a substantial portion of our business outside the United States and face risks inherent in non-domestic operations.
Net sales and assets related to our operations outside the United States were 38% and 49% of our consolidated amounts, respectively. These operations and transactions are subject to the risks associated with conducting business internationally, including the risks of currency fluctuations, slower payment of invoices, adverse trade regulations and possible social, economic and political instability in the countries and regions in which we operate. In addition, we expect that non-U.S. sales will continue to account for a significant portion of our revenues for the foreseeable future. Accordingly, fluctuations in foreign currency exchange rates, primarily the euro, the British pound, the Canadian dollar and the Japanese yen, could adversely affect our reported results, primarily in our Fluid Handling and Payment & Merchandising Technologies segments, as amounts earned in other countries are translated into U.S. dollars for reporting purposes.

We are dependent on key personnel, and we may not be able to retain our key personnel or hire and retain additional personnel needed for us to sustain and grow our business as planned.
Certain of our business segments and corporate offices are dependent upon highly qualified personnel, and we generally are dependent upon the continued efforts of key management employees. We may have difficulty retaining such personnel or locating and hiring additional qualified personnel. The loss of the services of any of our key personnel or our failure to attract and retain other qualified and experienced personnel on acceptable terms could impair our ability to successfully sustain and grow our business, which could impact our results of operations in a materially adverse manner.

If our internal controls are found to be ineffective, our financial results or our stock price may be adversely affected.
We believe that we currently have adequate internal control procedures in place for future periods, including processes related to newly acquired businesses; however, increased risk of internal control breakdowns generally exists in a business environment that is decentralized. In addition, if our internal control over financial reporting is found to be ineffective, investors may lose confidence in the reliability of our financial statements, which may adversely affect our stock price.


Page 10



Failure to maintain the security of our information systems and technology networks, including personally identifiable and other information, non-compliance with our contractual or other legal obligations regarding such information, or a violation of the Company’s privacy and security policies with respect to such information, could adversely affect us.
We are dependent on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and, in the normal course of our business, we collect and retain certain types of personally identifiable and other information pertaining to our customers, stockholders and employees. The legal, regulatory and contractual environment surrounding information security and privacy is constantly evolving and companies that collect and retain such information are under increasing attack by cyber-criminals around the world. A theft, loss, fraudulent use or misuse of customer, stockholder, employee or our proprietary data by cybercrime or otherwise, non-compliance with our contractual or other legal obligations regarding such data or a violation of our privacy and security policies with respect to such data could adversely impact our reputation and could result in costs, fines, litigation or regulatory action against us. Security breaches can create system disruptions and shutdowns that could result in disruptions to our operations. We cannot be certain that advances in criminal capabilities, new vulnerabilities or other developments will not compromise or breach the security solutions protecting the systems that access our products and services.
Specific Risks Relating to Our Reportable Segments
Fluid Handling
Our Fluid Handling segment competes in markets that are fragmented and highly competitive. The business competes against large, well established global companies, as well as smaller regional and local companies. We compete based on our products’ quality, reliability and safety, our brand reputation, value-added technical expertise and customer support, and consistent on-time delivery. However, pricing can be highly competitive, particularly in regions and end markets with weakening levels of demand, or in markets where our value proposition - quality, reliability, and safety - is not valued as highly.
Demand for our Fluid Handling products is heavily dependent on our customers’ level of new capital investment and planned maintenance expenditures. Customer spending typically depends on general economic conditions, availability of credit, and expectations of future demand. Slowing global economic growth, volatility in commodity prices, including continued weakness in oil prices could all contribute to lower levels of customer spending, and project delays or cancellations.
A portion of this segment’s business is subject to government rules and regulations. Failure to comply with these requirements could result in suspension or debarment from government contracting or subcontracting. Failure to comply with any of these regulations could result in civil and criminal, monetary and non-monetary penalties, disruptions to our business, limitations on our ability to export products and services, and damage to our reputation. At our foreign operations, results could also be adversely impacted by a weakening of local currencies against the U.S. dollar; our Fluid Handling business has the greatest exposure to the euro, British pound, and Canadian dollar, although there is lesser exposure to several other currencies.

Payment & Merchandising Technologies
Our Payment & Merchandising Technologies segment sales are dependent on capital spending in a variety of vertical end markets, across numerous geographies. The level of capital expenditures by our customers depends on general economic conditions, availability of credit, and expectations of future demand.

This business regularly develops and markets new products. Delays in the product development process, or the inability of new products to meet targeted performance measures, could hurt future sales. The business is also directly and indirectly exposed to changes in government regulations; for example, changes in gaming regulations could influence the spending patterns of our casino operator customers, or changes in anti-money laundering regulations could result in additional technical requirements for our products.

At our foreign operations, results could also be adversely impacted by a weakening of local currencies against the U.S. dollar; the business has the greatest exposure to the euro, British pound, the Japanese yen, the Mexican peso, and the Canadian dollar, although there is lesser exposure to several other currencies. In addition, our facility in Mexico operates under the Mexican Maquiladora program. This program provides for reduced tariffs and eased import regulations; we could be adversely affected by changes in such program, or by our failure to comply with its requirements.
     
We also may not be able to successfully realize the expected synergy benefits of our 2013 acquisition of MEI.


Page 11



Aerospace & Electronics
Our Aerospace & Electronics segment sales are primarily affected by conditions in the commercial aerospace industry which is cyclical in nature, and by defense spending by the U.S. government.

Commercial aircraft are procured primarily by airlines, and airline capital spending can be affected by a number of factors including credit availability, current and expected fuel prices, and current and forecast air traffic demand levels. Air traffic levels are affected by a different array of factors including general economic conditions and global corporate travel spending, although other non-economic events can also adversely impact airline traffic, including terrorism or pandemic health concerns. Our commercial business is also affected by the market for business jets where demand is typically tied to corporate profitability levels, and the freight markets which are most heavily influenced by general economic conditions. Demand for our commercial aftermarket business is closely tied to total aircraft flight hours. Any decrease in demand for new aircraft or equipment, or use of existing aircraft and equipment, would likely result in decreased sales of our products and services.

The defense portion of the segment’s business is dependent primarily on U.S. government spending, and to a lesser extent, foreign government spending, on the specific military platforms and programs where our business participates. Any reduction in appropriations for these platforms or programs could impact the performance of our business. Our sales to defense customers are also affected by the level of activity in military flight operations.

We are required to comply with various export control laws, which may affect our transactions with certain customers. In certain circumstances, export control and economic sanctions regulations may prohibit the export of certain products, services and technologies, and in other circumstances we may be required to obtain an export license before exporting the controlled item. We are also subject to investigation and audit for compliance with the requirements governing government contracts, including requirements related to procurement integrity, manufacturing practices and quality procedures, export control, employment practices, the accuracy of records and the recording of costs. A failure to comply with these requirements could result in suspension of these contracts, and suspension or debarment from government contracting or subcontracting. Failure to comply with any of these regulations could result in civil and criminal, monetary and non-monetary penalties, fines, disruptions to our business, limitations on our ability to export products and services, and damage to our reputation.

Due to the lengthy research and development cycle involved in bringing commercial and military products to market, we cannot accurately predict the demand levels that will exist once a given new product is ready for market. In addition, if we are unable to develop and introduce new products in a cost-effective manner or otherwise effectively manage the introduction of new products and/or programs, our results of operations and financial condition could be adversely impacted.

Engineered Materials
Our Engineered Materials segment manufactures and sells fiberglass-reinforced plastic panels and coils, primarily for use in the manufacturing of RVs, trucks, and trailers, with additional applications in commercial and industrial building construction. Demand in these end markets is dependent on general economic conditions, credit availability, and consumer and corporate spending levels. A decline in demand in any of these end markets, a loss of market share, or customer pricing pressure, would result in lower sales and profits for this business. Profitability could also be adversely affected by an increase in the price of resin or fiberglass if we are unable to pass the incremental costs on to our customers. Additional risks include the loss of a principal supplier, and potential loss of market share to competing materials, such as wood or aluminum.

Item 1B. Unresolved Staff Comments
None


Page 12



Item 2. Properties
 
 
Number of Facilities - Owned
Location
 
Aerospace &
Electronics
 
Engineered Materials
 
Payment & Merchandising Technologies
 
Fluid Handling
 
Corporate
 
Total
  
 
Number
 
Area
(sq. ft.)
 
Number
 
Area
(sq. ft.)
 
Number
 
Area
(sq. ft.)
 
Number
 
Area
(sq. ft.)

 
Number

 
Area
(sq. ft.)

 
Number

 
Area
(sq. ft.)

Manufacturing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States
 
7

 
789,000

 
4

 
644,000

 
2

 
568,000

 
6

 
784,000

 

 

 
19

 
2,785,000

Canada
 

 

 

 

 

 

 

 
 
 

 

 

 

Europe
 

 

 

 

 
3

 
338,000

 
8

 
1,435,000

 

 

 
11

 
1,773,000

Other international
 

 

 

 

 
2

 
295,000

 
6

 
850,000

 

 

 
8

 
1,145,000

 
 
7

 
789,000

 
4

 
644,000

 
7

 
1,201,000

 
20

 
3,069,000

 

 

 
38

 
5,703,000

Non-Manufacturing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States
 

 

 

 

 
1

 
15,000

 
3

 
138,000

 

 

 
4

 
153,000

Canada
 

 

 

 

 

 

 
7

 
155,000

 

 

 
7

 
155,000

Europe
 

 

 

 

 

 

 
2

 
74,000

 

 

 
2

 
74,000

Other international
 

 

 

 

 

 

 

 

 

 

 

 

 
 

 

 

 

 
1

 
15,000

 
12

 
367,000

 

 

 
13

 
382,000

 
 
 
Number of Facilities - Leased
Location
 
Aerospace &
Electronics
 
Engineered Materials
 
Payment & Merchandising Technologies
 
Fluid Handling
 
Corporate
 
Total
  
 
Number

 
Area
(sq. ft.)

 
Number

 
Area
(sq. ft.)

 
Number

 
Area
(sq. ft.)

 
Number

 
Area
(sq. ft.)

 
Number

 
Area
(sq. ft.)

 
Number

 
Area
(sq. ft.)

Manufacturing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States
 
1

 
16,000

 
1

 
19,000

 
1

 
15,000

 
2

 
97,000

 

 

 
5

 
147,000

Canada
 

 

 

 

 
1

 
61,000

 
1

 
21,000

 

 

 
2

 
82,000

Europe
 
1

 
12,000

 

 

 
1

 
10,000

 
3

 
686,000

 

 

 
5

 
708,000

Other international
 
1

 
53,000

 

 

 

 

 
2

 
112,000

 

 

 
3

 
165,000

 
 
3

 
81,000

 
1

 
19,000

 
3

 
86,000

 
8

 
916,000

 

 

 
15

 
1,102,000

Non-Manufacturing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States
 
1

 
6,000

 
3

 
77,000

 
9

 
200,000

 
3

 
48,000

 
2

 
40,000

 
18

 
371,000

Canada
 

 

 

 

 

 

 
24

 
520,000

 

 

 
24

 
520,000

Europe
 
4

 
7,000

 

 

 
6

 
50,000

 
6

 
50,000

 

 

 
16

 
107,000

Other international
 

 

 

 

 
6

 
31,000

 
22

 
190,000

 

 

 
28

 
221,000

 
 
5

 
13,000

 
3

 
77,000

 
21

 
281,000

 
55

 
808,000

 
2

 
40,000

 
86

 
1,219,000

In our opinion, these properties have been well maintained, are in good operating condition and contain all necessary equipment and facilities for their intended purposes.
Item 3. Legal Proceedings.
Discussion of legal matters is incorporated by reference to Part II, Item 8, Note 10, “Commitments and Contingencies,” in the Notes to the Consolidated Financial Statements.

Item 4. Mine Safety Disclosures.
Not applicable.


Page 13



Part II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Crane Co. common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol CR. The following are the high and low sale prices as reported on the NYSE Composite Tape and the quarterly dividends declared per share for each quarter of 2015 and 2014.
MARKET AND DIVIDEND INFORMATION — CRANE CO. COMMON SHARES
  
 
New York Stock Exchange Composite Price per Share
 
Dividends per Share
Quarter
 
2015
High

 
2015
Low

 
2014
High

 
2014
Low

 
2015

 
2014

First
 
$
70.47

 
$
53.12

 
$
73.08

 
$
60.14

 
$
0.33

 
$
0.30

Second
 
$
64.71

 
$
58.24

 
$
76.33

 
$
68.43

 
0.33

 
0.30

Third
 
$
59.43

 
$
45.37

 
$
74.72

 
$
63.21

 
0.33

 
0.33

Fourth
 
$
54.66

 
$
44.86

 
$
63.11

 
$
53.63

 
0.33

 
0.33

 
 
 
 
 
 
 
 
 
 
$
1.32

 
$
1.26

On December 31, 2015, there were approximately 2,319 holders of record of Crane Co. common stock.

We did not make any open-market share repurchases of our common stock during the three months ended December 31, 2015. We routinely receive shares of our common stock as payment for stock option exercises and the withholding taxes due on stock option exercises and the vesting of restricted stock awards from stock-based compensation program participants.

Page 14






Page 15



Item 6. Selected Financial Data.
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
 
 
For the year ended December 31,
(in millions, except per share data)
 
2015

 
2014

 
2013

 
2012

 
2011

Net sales
 
$
2,740.5

 
$
2,925.0

 
$
2,595.3

 
$
2,579.1

 
$
2,500.4

Operating profit from continuing operations (a)
 
372.9

 
316.3

 
347.9

 
310.4

 
36.6

Interest expense
 
(37.6
)
 
(39.2
)
 
(26.5
)
 
(26.8
)
 
(26.3
)
Income from continuing operations before taxes (a)
 
336.5

 
281.2

 
326.0

 
284.6

 
14.8

Provision (benefit) for income taxes (b)
 
106.5

 
87.6

 
105.1

 
88.4

 
(8.1
)
Income from continuing operations
 
230.0

 
193.6

 
220.9

 
196.2

 
22.8

Discontinued operations, net of tax (c)
 

 

 

 
21.6

 
3.7

Net income attributable to common shareholders (b)
 
$
228.9

 
$
192.7

 
$
219.5

 
$
217.0

 
$
26.3

Earnings per basic share (b)
 
 
 
 
 
 
 
 
 
 
Income from continuing operations attributable to common shareholders
 
$
3.94

 
$
3.28

 
$
3.79

 
$
3.40

 
$
0.39

Discontinued operations, net of tax
 

 

 

 
0.38

 
0.06

Net income attributable to common shareholders
 
$
3.94

 
$
3.28

 
$
3.79

 
$
3.78

 
$
0.45

Earnings per diluted share (b)
 
 
 
 
 
 
 
 
 
 
Income from continuing operations attributable to common shareholders
 
$
3.89

 
$
3.23

 
$
3.73

 
$
3.35

 
$
0.38

Discontinued operations, net of tax
 

 

 

 
0.37

 
0.06

Net income attributable to common shareholders
 
$
3.89

 
$
3.23

 
$
3.73

 
$
3.72

 
$
0.44

Cash dividends per common share
 
$
1.32

 
$
1.26

 
$
1.16

 
$
1.08

 
$
0.98

Total assets
 
$
3,341.6

 
$
3,450.8

 
$
3,559.6

 
$
2,889.9

 
$
2,843.5

Long-term debt
 
$
749.3

 
$
749.2

 
$
749.2

 
$
399.1

 
$
398.9

Accrued pension and postretirement benefits
 
$
235.4

 
$
278.3

 
$
151.1

 
$
233.6

 
$
178.4

Long-term asbestos liability
 
$
470.5

 
$
534.5

 
$
610.5

 
$
704.2

 
$
792.7

Long-term insurance receivable — asbestos
 
$
108.7

 
$
126.8

 
$
148.2

 
$
171.8

 
$
209.0


(a)
Includes i) environmental liability provisions of $55.8 and $30.3 in 2014 and 2011, respectively; ii) a lawsuit settlement of $6.5 in 2014; and iii) an asbestos provision, net of insurance recoveries, of $241.6 in 2011.
(b)
Includes the tax effect of items cited in note (a) as well as i) loss on divestiture of a small business of $1.1 in 2014; ii) gain on divestiture of real estate of $4.2 in 2014; iii) withholding taxes related to acquisition funding of $2.9 in 2013; and iv) gain on the sale of a product line of $2.0 in 2013.
(c)
Includes gain on divestiture of $19.2, net of tax, in 2012.




Page 16

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included under Item 8 of this Annual Report on Form 10-K.
We are a diversified manufacturer of highly engineered industrial products. Our business consists of four segments: Fluid Handling, Payment & Merchandising Technologies, Aerospace & Electronics and Engineered Materials. Our primary markets are chemical, power, oil & gas, aerospace & defense, along with a wide range of general industrial and consumer related end markets.
Our strategy is to grow earnings and cash flow by focusing on manufacture of highly engineered industrial products for specific markets where our scale is a relative advantage, and where we can compete based on our proprietary and differentiated technology, our deep vertical expertise, and our responsiveness to unique and diverse customer needs. We continuously evaluate our portfolio, pursue acquisitions that complement our existing businesses and that are accretive to our growth profile, selectively divest businesses where appropriate, and pursue internal mergers to improve efficiency. We strive to foster a performance-based culture focused on productivity and continuous improvement, to attract and retain a committed management team whose interests are directly aligned with those of our shareholders, and to maintain a focused, efficient corporate structure.

Results of Operations — For the Years Ended December 31, 2015, 2014 and 2013
 
 
For the year ended December 31,
 
2015 vs 2014
Favorable /
(Unfavorable) Change
 
2014 vs 2013 Favorable /
(Unfavorable) Change
(in millions, except %)
 
2015

 
2014

 
2013

 
$

 
%

 
$

 
%

Net sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fluid Handling
 
$
1,091

 
$
1,264

 
$
1,289

 
$
(172
)
 
(14
)%
 
$
(25
)
 
(2
)%
Payment & Merchandising Technologies
 
703

 
712

 
381

 
(9
)
 
(1
)%
 
331

 
87
 %
Aerospace & Electronics
 
691

 
696

 
694

 
(5
)
 
(1
)%
 
2

 
 %
Engineered Materials
 
255

 
253

 
232

 
2

 
1
 %
 
21

 
9
 %
Total net sales
 
$
2,741

 
$
2,925

 
$
2,595

 
$
(185
)
 
(6
)%
 
$
330

 
13
 %
Sales growth:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Core business
 
 
 
 
 
 
 
$
(35
)
 
(1
)%
 
$
9

 
 %
Foreign exchange
 
 
 
 
 
 
 
(134
)
 
(5
)%
 
(11
)
 
 %
Acquisitions/dispositions
 
 
 
 
 
 
 
(15
)
 
 %
 
332

 
13
 %
Total sales growth
 
 
 
 
 
 
 
$
(185
)
 
(6
)%
 
$
330

 
13
 %
Operating profit:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fluid Handling
 
$
125

 
$
182

 
$
195

 
$
(56
)
 
(31
)%
 
$
(13
)
 
(7
)%
Payment & Merchandising Technologies
 
101

 
69

 
35

 
32

 
47
 %
 
34

 
98
 %
Aerospace & Electronics
 
145

 
138

 
160

 
7

 
5
 %
 
(22
)
 
(14
)%
Engineered Materials
 
48

 
37

 
34

 
12

 
32
 %
 
2

 
7
 %
Corporate Expense
 
(48
)
 
(54
)
 
(76
)
 
6

 
11
 %
 
23

 
30
 %
Corporate — Environmental charge
 

 
(56
)
 

 
56

 
NM

 
(56
)
 
NM

Total operating profit
 
$
373

 
$
316

 
$
348

 
$
57

 
18
 %
 
$
(32
)
 
(9
)%
Operating margin %:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fluid Handling
 
11.5
%
 
14.4
%
 
15.1
%
 
 
 
 
 
 
 
 
Payment & Merchandising Technologies
 
14.4
%
 
9.7
%
 
9.1
%
 
 
 
 
 
 
 
 
Aerospace & Electronics
 
21.0
%
 
19.9
%
 
23.1
%
 
 
 
 
 
 
 
 
Engineered Materials
 
19.0
%
 
14.5
%
 
14.8
%
 
 
 
 
 
 
 
 
Total operating margin %
 
13.6
%
 
10.8
%
 
13.4
%
 
 
 
 
 
 
 
 


Page 17

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Items Affecting Comparability of Reported Results
The comparability of our operating results from operations for the years ended December 31, 2015, 2014 and 2013 is affected by the following significant items:
Acquisition-Related Costs
During 2015, we recorded pre-tax integration costs of $7.2 million. During 2014, we recorded the following costs associated with the acquisition of MEI: 1) pre-tax integration costs of $9.8 million and 2) pre-tax acquisition related inventory and backlog amortization of $4.8 million. During 2013, we recorded the following costs associated with the acquisition of MEI: 1) pre-tax transaction costs of $22.8 million, 2) pre-tax inventory step-up and backlog amortization of $4.7 million, and 3) withholding taxes of $2.9 million related to cash marshaling activities supporting payment for the acquisition.
Restructuring and Related Costs
In 2015, we recorded pre-tax restructuring charges and related costs of $11 million, substantially all of which was related to the repositioning activities in our Fluid Handling and Aerospace & Electronics segments. In 2014, we recorded pre-tax restructuring charges and related costs of $33.0 million, of which $22.7 million was related to the repositioning activities in our Fluid Handling and Aerospace & Electronics segments and $10.3 million was related to the acquisition of MEI.
Divestiture of Crane Water
In 2014, we sold Crane Water which was formerly part of our Fluid Handling segment for $2.1 million. The business had sales of approximately $5 million in 2014 and $15 million in 2013.
Lawsuit Settlement
In 2014, we recorded a pre-tax lawsuit settlement of $6.5 million related to the Roseland Site. Please refer to Note 10, "Commitments and Contingencies" for further discussion of the Roseland Site.
Environmental Charge
In 2014, we recorded a pre-tax charge of $49 million to extend accrued costs to 2022 at the Goodyear Site and a $6.8 million charge for expected remediation costs associated with the Roseland Site which are expected to be completed by 2017. Please refer to Note 10, "Commitments and Contingencies" for further discussion of the Goodyear Site and Roseland Site.
Divestiture of a Product Line
In 2013, as part of the execution of regulatory remedies associated with the MEI acquisition, we sold a product line, which was formerly part of our Payment & Merchandising Technologies segment, to Suzo-Happ Group for $6.8 million. Sales of this product line were $15.1 million in 2013.

2015 compared with 2014
Sales decreased by $185 million, or 6%, to $2,741 million in 2015. Net sales related to operations outside the United States for the year ended December 31, 2015 and 2014 were 38% and 41% of total net sales, respectively. The year-over-year change in sales included:
a decline in core sales of $35 million, or 1%;
unfavorable foreign currency translation of $134 million, or 5%;
the impact of the divestiture of Crane Water and the completion of a previously disclosed transition services agreement of $15 million, or 0.5%.
Operating profit increased by $57 million, or 18%, to $373 million in 2015. The increase in operating profit reflected the absence of environmental charges and a lawsuit settlement recorded in 2014, coupled with higher operating profit in our Payment & Merchandising Technologies, Engineered Materials and Aerospace & Electronics segments, partially offset by lower operating profit in our Fluid Handling segment.








Page 18

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

2014 compared with 2013
Sales increased $330 million, or 13%, to $2.925 billion in 2014. Net sales related to operations outside the United States for the year ended December 31, 2014 and 2013 were 41% of total net sales. The year-over-year change in sales included:
an increase in core sales of $9 million, or 0.3%;
unfavorable foreign exchange of $11 million, or 0.4%;
an increase in revenue from acquisitions, net of dispositions, of $332 million, or 13%.
Operating profit decreased $32 million, or 9%, to $316 million in 2014. The decrease in operating profit was driven by environmental charges and a lawsuit settlement recorded in 2014, coupled with lower operating profit in our Aerospace & Electronics and Fluid Handling segments, partially offset by higher operating profit in our Payment & Merchandising Technologies and Engineered Materials segments.
 
 
For the year ended December 31,
(in millions)
 
2015
 
2014
 
2013
Net income before allocation to noncontrolling interests
 
$
230.0

 
$
193.6

 
$
221.0

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
Currency translation adjustment
 
(70.1
)
 
(114.0
)
 
2.9

Changes in pension and postretirement plan assets and benefit obligation, net of tax benefit
 
(8.4
)
 
(136.5
)
 
76.5

Other comprehensive (loss) income
 
(78.5
)
 
(250.5
)
 
79.3

Comprehensive income before allocation to noncontrolling interests
 
151.5

 
(56.9
)
 
300.3

Less: Noncontrolling interests in comprehensive income
 
1.1

 
0.9

 
1.4

Comprehensive income (loss) attributable to common shareholders
 
$
150.4

 
$
(57.8
)
 
$
298.8


2015 compared with 2014
For the year ended December 31, 2015, comprehensive income before allocations to noncontrolling interests was $151.5 million. The comprehensive income before allocations to noncontrolling interests was a result of net income before allocations to noncontrolling interests of $230.0 million, partially offset by foreign currency translation adjustments of $70.1 million and unamortized losses on pension plans of $8.4 million. The unrealized loss on foreign currency translation adjustments of the balance sheets of foreign subsidiaries from local currencies to U.S. dollars was primarily due to the weakening of the euro, British pound, Canadian dollar and Japanese yen against the U.S. dollar. The unamortized losses on pension plans were primarily due to a decrease in assumed discount rates, lower than expected return on pension plan assets, and the adoption of revised actuarial mortality tables in 2014.

2014 compared with 2013
For the year ended December 31, 2014, comprehensive loss before allocations to noncontrolling interests was $56.9 million. The comprehensive loss before allocations to noncontrolling interests was a result of unamortized losses on pension plans of $136.5 million and the unrealized loss on foreign currency translation adjustments of $114.0 million, substantially offset by net income before allocations to noncontrolling interests of $193.6 million. The unamortized losses on pension plans were primarily due to a decrease in assumed discount rates, lower than expected return on pension plan assets, and the adoption of revised actuarial mortality tables in 2014. The unrealized loss on foreign currency translation adjustments of the balance sheets of foreign subsidiaries from local currencies to U.S. dollars was primarily due to the weakening of the euro, British pound, Canadian dollar and Japanese yen against the U.S. dollar.


Page 19

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FLUID HANDLING
(in millions, except %)
 
2015

 
2014

 
2013

Net sales by product line:
 
 
 
 
 
 
Process Valves and Related Products
 
$
681

 
$
805

 
$
821

Commercial Valves
 
316

 
362

 
365

Other Products
 
94

 
96

 
102

Total net sales
 
1,091

 
1,264

 
1,289

Operating profit
 
125

 
182

 
195

Restructuring and related charges*
 
10

 
15

 

Assets
 
888

 
963

 
996

Operating margin
 
11.5
%
 
14.4
%
 
15.1
%
*
The restructuring and related charges are included in operating profit and operating margin.
2015 compared with 2014
Fluid Handling sales decreased by $172 million, or 14%, to $1,091 million, driven by unfavorable foreign currency translation of $89 million, or 7%, a core sales decline of $78 million, or 6%, and the impact of the divestiture of Crane Water of $5 million, or 0.4%.

Sales of Process Valves and Related Products decreased by $124 million, or 15%, to $681 million in 2015, including a core sales decline of $75 million, or 9%, and unfavorable foreign currency translation of $49 million, or 6%, as both the British pound and euro weakened against the U.S. dollar. The decrease in core sales reflected lower sales in chemical, oil and gas, power, and general industrial end markets. The lower sales were driven by a significant decline in global oil prices and weaker economic conditions in Europe and Asia.
Sales of Commercial Valves decreased by $46 million, or 13%, to $316 million in 2015, reflecting unfavorable foreign currency translation of $39 million, or 11%, as the British pound and Canadian dollar weakened against the U.S. dollar. Core sales decreased $7 million, or 2%, reflecting lower sales in non-residential construction in the United Kingdom and municipal end markets in continental Europe.
Fluid Handling operating profit decreased by $56 million, or 31%, to $125 million in 2015. The decrease was driven by a $40 million impact from the lower sales, unfavorable product mix, price and to a lesser extent, unfavorable foreign exchange, partially offset by a decrease in restructuring and related charges.
2014 compared with 2013
Fluid Handling sales decreased by $25 million, or 2% to $1,264 million, driven by a core sales decline of $10 million, or 0.8%, unfavorable foreign currency translation of $7 million, or 0.5%, and the impact of the divestiture of Crane Water of $8 million, or 0.6%.

Sales of Process Valves and Related Products decreased by $16 million, or 2%, to $805 million in 2014, including a core sales decline of $14 million, or 2%, and unfavorable foreign currency translation of $2 million, or 0.2%. The decrease in core sales reflected lower sales in chemical and oil and gas end markets, partially offset by higher sales in the general industrial end market. The lower sales in chemical and oil & gas end markets were primarily driven by project delays and lower investments in chemical and refining applications for our severe service valves.
Sales of Commercial Valves decreased by $3 million, or 1%, to $362 million in 2014, including unfavorable foreign currency translation of $4 million, or 1%, as the Canadian dollar weakened against the U.S. dollar, partially offset by a core sales increase of $2 million, or 0.4%. The increase in core sales was primarily driven higher sales to the commercial building construction end market in the United Kingdom.
Sales of Other Products decreased by $6 million, or 6%, in 2014 to $96 million, primarily driven by the impact of the divestiture of Crane Water.
Fluid Handling operating profit decreased by $13 million, or 7%, to $182 million in 2014 driven by an unfavorable product mix, the restructuring charge of $15 million recorded in 2014 and a $2 million impact from the lower sales, partially offset by productivity gains and lower pension expense.


Page 20

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

PAYMENT & MERCHANDISING TECHNOLOGIES
(in millions, except %)
 
2015

 
2014

 
2013

Net sales by product line:
 
 
 
 
 
 
Payment Acceptance and Dispensing Products
 
$
496

 
$
513

 
$
201

     Merchandising Equipment
 
207

 
199

 
180

Total net sales
 
703

 
712

 
381

Operating profit
 
101

 
69

 
35

Acquisition, integration and restructuring related charges*
 
7

 
24

 
6

Assets
 
1,178

 
1,210

 
1,383

Operating margin
 
14.4
%
 
9.7
%
 
9.1
%
*
The acquisition, integration and restructuring related charges are included in operating profit and operating margin.
2015 compared with 2014  
Payment & Merchandising Technologies sales decreased by $9 million, or 1%, to $703 million in 2015, reflecting unfavorable foreign currency translation of $42 million, or 6%, and the impact of a transition services agreement related to a divested product line of $10 million, or 1%, partially offset by a core sales increase of $43 million, or 6%
Sales of Payment Acceptance and Dispensing Products decreased $16 million, or 3%, to $496 million in 2015, reflecting unfavorable foreign currency translation of $38 million, or 7%, as the British pound, Japanese yen, Canadian dollar, and euro weakened against the U.S. dollar and the aforementioned impact of a transition services agreement related to a divested product line which reduced sales by $10 million, or 2%. These decreases were partially offset by a core sales increase of $31 million, or 6%, reflecting higher sales in retail, gaming, vending, and transportation end markets, partially offset by lower sales to the financial services markets.
Sales of Merchandising Equipment increased $8 million, or 4%, to $207 million in 2015, reflecting a core sales increase of $11 million, or 6%, partially offset by unfavorable foreign currency translation of $4 million, or 2%, as the British pound weakened against the U.S. dollar. The increase in core sales reflected higher sales to certain large bottler customers as well as full line operators in 2015.
Payment & Merchandising Technologies operating profit increased by $32 million, or 47%, to $101 million in 2015. The increase was primarily driven by the impact from higher core sales, a decrease in acquisition, integration and restructuring related charges of $17 million and synergy savings of $14 million, partially offset by unfavorable product mix and unfavorable foreign exchange.
2014 compared with 2013  
Payment & Merchandising Technologies sales increased by $331 million, or 87%, to $712 million in 2014, reflecting sales related to the acquisition of MEI of $340 million, or 89%, partially offset by a core sales decline of $4 million, or 1%, and unfavorable foreign currency translation of $4 million, or 1%. 
Sales of Payment Acceptance and Dispensing Products increased $312 million, or 155%, to $513 million in 2014, reflecting the aforementioned impact related to the acquisition of MEI of $340 million, or 169%, partially offset by a core sales decline of $22 million, or 11%, and unfavorable foreign currency translation of $6 million, or 3%, as the Canadian dollar and Japanese yen weakened against the U.S. dollar. The decrease in core sales was driven by lower demand in the retail and gaming end markets, partially offset by strength in the financial services market.
Sales of Merchandising Equipment increased $20 million, or 11%, to 199 million, reflecting a core sales increase of $18 million, or 10%, and favorable currency translation of $2 million, or 1%. The increase in core sales reflected a return in capital spending by certain large bottler customers to 2012 levels.
Payment & Merchandising Technologies operating profit increased by $34 million, or 98%, to $69 million in 2014, primarily driven by the impact of the MEI acquisition, partially offset by an $18 million increase in acquisition, integration and restructuring-related charges in 2014.


Page 21

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

AEROSPACE & ELECTRONICS
(in millions, except %)
 
2015

 
2014

 
2013

Net sales by product line:
 
 
 
 
 
 
Commercial Original Equipment
 
$
349

 
$
351

 
$
341

Military Original Equipment
 
153

 
159

 
167

Commercial Aftermarket
 
132

 
134

 
133

Military Aftermarket
 
57

 
52

 
54

Total net sales
 
691

 
696

 
694

Operating profit
 
145

 
138

 
160

Restructuring and related charges*
 

 
8

 

Assets
 
559

 
512

 
512

Operating margin
 
21.0
%
 
19.9
%
 
23.1
%
*
The restructuring and related charges are included in operating profit and operating margin.
2015 compared with 2014
Aerospace & Electronics sales decreased $5 million, or 0.7%, to $691 million in 2015. The commercial market and military market accounted for 70% and 30%, respectively, of total segment sales in 2015. Sales to original equipment manufacturer ("OEM") and aftermarket customers were 73% and 27%, respectively, in 2015.
Sales of Commercial Original Equipment decreased by $1.4 million, or 0.4%, to $349 million in 2015. The sales decrease was driven by lower shipments to regional aircraft customers, lower engineering sales and lower sales for other commercial applications, partially offset by higher sales to manufacturers of large commercial transport aircrafts.
Sales of Military Original Equipment decreased by $6 million, or 4%, to $153 million in 2015. The sales decrease reflected lower build rates related to certain military platforms.
Sales of Commercial Aftermarket decreased by $2 million, or 1%, to $132 million in 2015. The sales decrease reflected lower sales to airlines and other aftermarket customers.
Sales of Military Aftermarket increased by $5 million, or 9%, to $57 million in 2015. The sales increase was driven by higher military modernization and upgrade product sales primarily associated with the B-52H brake control upgrade program for the U.S. Air Force.
Aerospace & Electronics operating profit increased by $7 million, or 5%, to $145 million in 2015, primarily as a result of strong productivity and repositioning benefits, a decrease in restructuring and related charges and a favorable product mix, partially offset by higher engineering expense.
2014 compared with 2013  
Aerospace & Electronics sales increased $2 million, or 0.3%, to $696 million in 2014. The commercial market and military market accounted for 70% and 30%, respectively, of total segment sales in 2014.  Sales to OEM and aftermarket customers were 73% and 27%, respectively, in 2014.
Sales of Commercial Original Equipment increased by $10 million, or 3%, to $351 million in 2014. The sales increase was driven by higher sales to manufacturers of large commercial transport aircrafts as industry build rates increased.
Sales of Military Original Equipment decreased by $7 million, or 4%, to $159 million in 2014. The sales decrease reflected a decline in market demand for microwave components and lower product shipments for space applications. 
Aerospace & Electronics operating profit decreased by $22 million, or 14%, to $138 million in 2014, primarily due to an increase in engineering and new product development spending supporting new program wins and higher costs associated with new product launches in our cabin business, restructuring and related charges of $8 million and an unfavorable product mix driven by stronger demand in early commercial programs which tend to carry lower margins, partially offset by productivity gains.

Page 22

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ENGINEERED MATERIALS
(in millions, except %)
 
2015

 
2014

 
2013

Net sales by product line:
 
 
 
 
 
 
FRP- Recreational Vehicles
 
$
134

 
$
134

 
$
114

FRP- Building Products
 
83

 
82

 
84

FRP- Transportation
 
38

 
38

 
35

Total net sales
 
255

 
253

 
232

Operating profit
 
48

 
37

 
34

Assets
 
228

 
229

 
233

Operating margin
 
19.0
%
 
14.5
%
 
14.8
%
2015 compared with 2014
Engineered Materials sales increased by $2 million, or 1%, to $255 million in 2015.
Sales of Fiberglass-reinforced plastic panels ("FRP") to recreational vehicle ("RV") manufacturers increased slightly, resulting from higher sales of our RV-related applications as RV OEM build rates remained strong throughout 2015, primarily reflecting low fuel prices and continued low interest rates.
Sales of FRP to building products customers increased $1 million, or 2%, to $83 million in 2015, reflecting a modest recovery in commercial construction end markets in the United States.
Engineered Materials operating profit increased by $12 million, or 32%, to $48 million in 2015, reflecting lower raw material costs, primarily resin, and strong productivity gains.
2014 compared with 2013
Engineered Materials sales increased by $21 million, or 9%, to $253 million in 2014.
Sales of FRP to RV manufacturers increased by $20 million, or 18%, to $134 million in 2014, reflecting higher demand for our RV-related applications as RV OEM build rates remained strong, with both dealer and retail demand continuing through 2014.
Sales of FRP to building products customers decreased $2 million, or 3%, to $82 million in 2014, reflecting a slow recovery in commercial construction end markets in the United States.
Sales of FRP to transportation-related customers increased by $3 million, or 10%, to $38 million in 2014, reflecting higher sales in Latin America, timing of a large fleet build with one customer in North America and higher sales of aerodynamic side skirts for trailers.
Engineered Materials operating profit increased by $2 million, or 7%, to $37 million, in 2014, reflecting a $6 million impact from the higher sales and strong productivity gains, partially offset by an unfavorable product mix and higher raw material costs, primarily resin and substrates.




Page 23

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CORPORATE
(in millions, except %)
 
2015

 
2014

 
2013

Corporate expense
 
$
(48
)
 
$
(54
)
 
$
(76
)
Corporate expense — Environmental
 

 
(56
)
 

Total Corporate
 
(48
)
 
(109
)
 
(76
)
Interest income
 
2

 
2

 
2

Interest expense
 
(38
)
 
(39
)
 
(26
)
Miscellaneous
 
(1
)
 
2

 
3

2015 compared with 2014
Total Corporate decreased by $62 million, or 56%, to $48 million in 2015, primarily due to the absence a $49 million charge related to an increase in the Company's liability at its Goodyear Site, a $6.8 million charge for expected remediation costs associated with our Roseland Site and a $6.5 million charge related to a lawsuit settlement recorded in 2014.
2014 compared with 2013 
Total Corporate increased by $33 million, or 45%, to $109 million in 2014, primarily due to the aforementioned $49 million charge related to our Goodyear Site, a $6.8 million charge related to our Roseland Site and a $6.5 million charge related to a lawsuit settlement. These increases were partially offset by $20.4 million lower MEI acquisition related costs in 2014 compared to 2013.
Income Tax
(in millions, except %)
 
2015

 
2014

 
2013

Income before tax — U.S.
 
$
262

 
$
142

 
$
177

Income before tax — non-U.S.
 
75

 
139

 
149

Income before tax — worldwide
 
337

 
281

 
326

Provision for income taxes
 
107

 
88

 
105

Effective tax rate
 
31.7
%
 
31.2
%
 
32.2
%
Our effective tax rate is affected by a number of items, both recurring and discrete, including the amount of income we earn in different jurisdictions and their respective statutory tax rates, acquisitions and dispositions, changes in the valuation of our deferred tax assets and liabilities, changes in tax laws, regulations and accounting principles, the continued availability of statutory tax credits and deductions, the continued reinvestment of our overseas earnings, and examinations initiated by tax authorities around the world. See Application of Critical Accounting Policies included later in this Item 7 for additional information about our provision for income taxes. A reconciliation of the statutory U.S. federal tax rate to our effective tax rate is set forth in Note 2 of the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

2015 compared with 2014
Our effective tax rate was higher in 2015 than in 2014 primarily because we earned a higher amount of income in jurisdictions with higher statutory tax rates, partially offset by a higher U.S. federal tax benefit from domestic manufacturing activities.
2014 compared with 2013 
Our effective tax rate was lower in 2014 than in 2013 primarily because our 2013 effective tax rate included the unfavorable effects of non-deductible transaction costs and withholding taxes related to the MEI acquisition. However, this was partially offset by less benefit from the U.S. federal research credit in 2014. While our 2014 effective tax rate includes one year’s worth of benefit for the credit because it was extended during 2014 with retroactive effect to January 1, 2014, our 2013 effective tax rate included two years’ worth of credit because it was extended during 2013 with retroactive effect to January 1, 2012.


Page 24

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

LIQUIDITY AND CAPITAL RESOURCES
Our operating philosophy is to deploy cash provided from operating activities, when appropriate, to provide value to shareholders by reinvesting in existing businesses, by making acquisitions that will complement our portfolio of businesses, by divesting businesses that are no longer strategic and by paying dividends and/or repurchasing shares.
Our current cash balance of $364 million, together with cash we expect to generate from future operations and the $451 million available under our Commercial Paper ("CP") Program and revolving credit facility, is expected to be sufficient to finance our short- and long-term capital requirements, as well as to fund payments associated with our asbestos and environmental liabilities, restructuring and acquisition integration activities and expected pension contributions. In addition, we believe our credit ratings afford us adequate access to public and private markets for debt. We have borrowings totaling $49.0 million outstanding under our CP Program as of December 31, 2015. There are no other significant debt maturities coming due until 2018.
We have an estimated liability of $546 million for pending and reasonably anticipated asbestos claims through 2021, and while it is probable that this amount will change and we may incur additional liabilities for asbestos claims after 2021, which additional liabilities may be material, we cannot reasonably estimate the amount of such additional liabilities at this time. Similarly, we have an estimated liability of $64 million related to environmental remediation costs projected through 2022 related to our Goodyear Site.
As of December 31, 2015, our non-U.S. subsidiaries held approximately $358 million of cash, which would be subject to additional tax upon repatriation to the United States. Our current plans do not anticipate that we will need funds generated from our non-U.S. operations to fund our U.S. operations. In the event we were to repatriate the cash balances of our non-U.S. subsidiaries, we would provide for and pay additional U.S. and non-U.S. taxes in connection with such repatriation.
Operating Activities
Cash provided by operating activities, a key source of our liquidity, was $229.3 million in 2015, compared to $264.0 million in 2014.  The decrease primarily resulted from higher working capital requirements and higher environmental payments, partially offset by lower defined benefit plan and postretirement contributions and lower net asbestos-related payments. Net asbestos-related payments in 2015 and 2014 were $49.9 million and $61.3 million, respectively. In 2016, we expect to make payments related to asbestos settlement and defense costs, net of related insurance recoveries, of approximately $50 million, environmental payments of approximately $12 million and contributions to our defined benefit plans of approximately $8 million.
Investing Activities
Cash flows relating to investing activities consist primarily of cash provided by divestitures of businesses or assets and cash used for acquisitions and capital expenditures. Cash used for investing activities was $35.2 million in 2015, compared to $25.8 million in 2014. The increase in cash used for investing activities was primarily due to the absence of proceeds from a 2014 purchase price adjustment related to the acquisition of MEI and the divestiture of a small business, coupled with lower proceeds from the disposition of capital assets. These were partially offset by lower capital expenditures. Capital expenditures are made primarily for increasing capacity, replacing equipment, supporting new product development and improving information systems. We expect our capital expenditures to approximate $50 million in 2016, reflecting anticipated increases in capital assets required to support product development initiatives, primarily in our Aerospace & Electronics segment.
Financing Activities
Financing cash flows consist primarily of payments of dividends to shareholders, share repurchases, repayments of indebtedness, proceeds from the issuance of commercial paper and proceeds from the issuance of common stock. Cash used for financing activities was $143.8 million in 2015, compared to $133.0 million in 2014. The higher levels of cash used for financing activities was primarily due to higher payments of outstanding indebtedness, partially offset by less cash used for open market share repurchases (we repurchased 398,095 shares of our common stock at a cost of $25 million in 2015 and 812,793 shares of our common stock at a cost of $50 million in 2014).

Page 25

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Financing Arrangements
Total debt was $799 million and $850 million as of December 31, 2015 and 2014, respectively. The Company’s indebtedness as of December 31, 2015 was as follows:
$250 million of 2.75% notes due 2018;
$300 million of 4.45% notes due 2023;
$199 million of 6.55% notes due 2036;
$49 million of borrowing outstanding under our commercial paper program; and
$1 million of other debt.
2.75% notes due 2018 - In December 2013, the Company issued five year notes having an aggregate principal amount of $250 million. The notes are unsecured, senior obligations that mature on December 15, 2018 and bear interest at 2.75% per annum, payable semi-annually on June 15 and December 15 of each year. The notes have no sinking fund requirement, but may be redeemed, in whole or part, at our option. These notes do not contain any material debt covenants or cross default provisions. If there is a change in control of the Company, and if as a consequence, the notes are rated below investment grade by both Moody’s Investors Service and Standard & Poor’s, then holders of the notes may require us to repurchase them, in whole or in part, for 101% of the principal amount plus accrued and unpaid interest. Debt issuance costs are deferred and included in Other assets and then amortized as a component of interest expense over the term of the notes. Including debt issuance cost amortization, these notes have an effective annualized interest rate of 2.92%.
4.45% notes due 2023 - In December 2013, the Company issued 10 year notes having an aggregate principal amount of $300 million. The notes are unsecured, senior obligations that mature on December 15, 2023 and bear interest at 4.45% per annum, payable semi-annually on June 15 and December 15 of each year. The notes have no sinking fund requirement, but may be redeemed, in whole or part, at our option. These notes do not contain any material debt covenants or cross default provisions. If there is a change in control of the Company, and if as a consequence, the notes are rated below investment grade by both Moody’s Investors Service and Standard & Poor’s, then holders of the notes may require us to repurchase them, in whole or in part, for 101% of the principal amount plus accrued and unpaid interest. Debt issuance costs are deferred and included in Other assets and then amortized as a component of interest expense over the term of the notes. Including debt issuance cost amortization, these notes have an effective annualized interest rate of 4.56%.
6.55% notes due 2036 - In November 2006, the Company issued 30 year notes having an aggregate principal amount of $200 million. The notes are unsecured, senior obligations of the Company that mature on November 15, 2036 and bear interest at 6.55% per annum, payable semi-annually on May 15 and November 15 of each year. The notes have no sinking fund requirement, but may be redeemed, in whole or in part, at the option of the Company. These notes do not contain any material debt covenants or cross default provisions. If there is a change in control of the Company, and if as a consequence, the notes are rated below investment grade by both Moody’s Investors Service and Standard & Poor’s, then holders of the notes may require the Company to repurchase them, in whole or in part, for 101% of the principal amount plus accrued and unpaid interest. Debt issuance costs are deferred and included in Other assets and then amortized as a component of interest expense over the term of the notes. Including debt issuance cost amortization; these notes have an effective annualized interest rate of 6.67%.
Commercial paper program - On March 2, 2015, the Company entered into a commercial paper program (the “CP Program”) pursuant to which it may issue short-term, unsecured commercial paper notes (the “Notes”) pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933, as amended. Amounts available under the CP Program may be borrowed, repaid and re-borrowed from time to time, with the aggregate principal amount of the Notes outstanding under the CP Program at any time not to exceed $500 million. The Notes will have maturities of up to 397 days from date of issue. The Notes will rank at least pari passu with all of our other unsecured and unsubordinated indebtedness. At December 31, 2015, Notes with a principal amount of $49.0 million were outstanding.  The net proceeds of the issuances of the Notes were used to repay amounts under our revolving credit facility and for general corporate purposes.
Other financing arrangements
On May 27, 2015, the Company entered into an amendment ("Amendment No. 2") to the Company’s five-year, $500 million Second Amended and Restated Credit Agreement. Amendment No. 2, among other things, (i) extends the maturity date under the Second Amended and Restated Credit Agreement to May 27, 2020 and (ii) amends the facility fee and applicable margins on the revolving loans made pursuant to the Second Amended and Restated Credit Agreement.  Following the effectiveness of Amendment No. 2, at the Company’s current credit rating, the facility fee is reduced by 5 basis points to 0.15% while the applicable margin on revolving loans is increased by 5 basis points to 0.10% for base rate loans and 1.10% for LIBOR loans.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In May 2012, the Company entered into a five year, $300 million Amended and Restated Credit Agreement (as subsequently amended, and increased to $500 million, the “facility”), which is due to expire in May 2017. The facility allows the Company to borrow, repay, or to the extent permitted by the agreement, prepay and re-borrow funds at any time prior to the stated maturity date, and the loan proceeds may be used for general corporate purposes including financing for acquisitions. Interest is based on, at our option, (1) a LIBOR-based formula that is dependent in part on the Company's credit rating (LIBOR plus 105 basis points as of the date of this Report; up to a maximum of LIBOR plus 147.5 basis points), or (2) the greatest of (i) the JPMorgan Chase Bank, N.A.'s prime rate, (ii) the Federal Funds rate plus 50 basis points, or (iii) an adjusted LIBOR rate plus 100 basis points, plus a spread dependent on the Company’s credit rating (5 basis points as of the date of this Report; up to a maximum of 47.5 basis points). At December 31, 2015, there were no outstanding borrowings under the facility. The facility contains customary affirmative and negative covenants for credit facilities of this type, including the absence of a material adverse effect and limitations on the Company and its subsidiaries with respect to indebtedness, liens, mergers, consolidations, liquidations and dissolutions, sales of all or substantially all assets, transactions with affiliates and hedging arrangements. The facility also provides for customary events of default, including failure to pay principal, interest or fees when due, failure to comply with covenants, the fact that any representation or warranty made by us is false in any material respect, default under certain other indebtedness, certain insolvency or receivership events affecting us and our subsidiaries, certain ERISA events, material judgments and a change in control of the Company. The facility contains a leverage ratio covenant requiring a ratio of total debt to total capitalization of less than or equal to 65%. At December 31, 2015, our ratio was 41%, as follows:
(in millions) December 31,
2015
Short-term borrowings
$
49.6

Long-term debt
749.3

Total indebtedness
$
798.9

Total shareholders’ equity
1,139.4

Capitalization
$
1,938.3

Total indebtedness to capitalization
41
%
All outstanding senior, unsecured notes were issued under an indenture dated as of April 1, 1991. The indenture contains certain limitations on liens and sale and lease-back transactions.
At December 31, 2015, the Company had open standby letters of credit of $23 million issued pursuant to a $125 million uncommitted Letter of Credit Reimbursement Agreement, and certain other credit lines.
Credit Ratings
As of December 31, 2015, our senior unsecured debt was rated BBB by Standard & Poor’s with a Stable outlook and Baa2 with a Stable outlook by Moody’s Investors Service. We believe that these ratings afford us adequate access to the public and private markets for debt.
Contractual Obligations
Under various agreements, we are obligated to make future cash payments in fixed amounts. These include payments under our long-term debt agreements and rent payments required under operating lease agreements. The following table summarizes our fixed cash obligations as of December 31, 2015:
 
 
Payment due by Period
(in millions)
 
Total

 
2016

 
2017
-2018

 
2019
-2020

 
After
2021

Long-term debt (1)
 
$
750.0

 
$

 
$
250.0

 
$

 
$
500.0

Fixed interest payments
 
402.5

 
33.3

 
66.6

 
52.9

 
249.7

Operating lease payments
 
59.6

 
17.1

 
26.4

 
9.1

 
7.0

Purchase obligations
 
114.6

 
108.0

 
6.3

 
0.3

 

Pension benefits (2)
 
484.6

 
42.1

 
85.5

 
92.4

 
264.6

Other long-term liabilities reflected on Consolidated Balance Sheets (3)
 

 

 

 

 

Total
 
$
1,811.3

 
$
200.5

 
$
434.8

 
$
154.7

 
$
1,021.3

(1)
Excludes original issue discount.
(2)
Pension benefits are funded by the respective pension trusts. The postretirement benefit component of the obligation is approximately $1 million per year for which there is no trust and will be directly funded by us. Pension benefits are included through 2025.
(3)
As the timing of future cash outflows is uncertain, the following long-term liabilities (and related balances) are excluded from the above table: Long-term asbestos liability ($471 million), long-term environmental liability ($49 million) and gross unrecognized tax benefits ($45 million) and related gross interest and penalties ($6 million).

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Capital Structure
The following table sets forth our capitalization:
(in millions, except %) December 31,
 
2015

 
2014

Short-term borrowings
 
$
49.6

 
$
100.8

Long-term debt
 
$
749.3

 
$
749.2

Total debt
 
798.9

 
850.0

Less cash and cash equivalents
 
363.5

 
346.3

Net debt *
 
435.4

 
503.8

Equity
 
1,150.8

 
1,070.6

Net capitalization*
 
$
1,586.2

 
$
1,574.4

Net debt to equity*
 
37.8
%
 
47.1
%
Net debt to net capitalization*
 
27.4
%
 
32.0
%
*
Net debt, a non-GAAP measure, represents total debt less cash and cash equivalents. As of December 31, 2015, our non-U.S. subsidiaries held approximately $358 million of cash, which would be subject to additional tax upon repatriation to the United States. We report our financial results in accordance with U.S. generally accepted accounting principles (U.S. GAAP). However, management believes that certain non-GAAP financial measures, which include the presentation of net debt, provide useful information about our ability to satisfy our debt obligation with currently available funds. Management also uses these non-GAAP financial measures in making financial, operating, planning and compensation decisions and in evaluating the Company’s performance.
    
Non-GAAP financial measures, which may be inconsistent with similarly captioned measures presented by other companies, should be viewed in the context of the definitions of the elements of such measures we provide and in addition to, and not as a substitute for, our reported results prepared and presented in accordance with U.S. GAAP.
In 2015, equity increased $80 million, primarily as a result of net income attributable to common shareholders of $229 million and stock option exercises of $11 million, partially offset by cash dividends of $77 million, changes in currency translation adjustment of $70 million, open-market share repurchases of $25 million and changes in pension and postretirement plan assets and benefit obligations, net of tax, of $8 million.
Off-Balance Sheet Arrangements
We do not have any majority-owned subsidiaries that are not included in the consolidated financial statements, nor do we have any interests in or relationships with any special purpose off-balance sheet financing entities.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OUTLOOK
Overall
Our sales depend heavily on industries that are cyclical in nature or are subject to market conditions which may cause customer demand for our products to be volatile and unpredictable. Demand in these industries is affected by fluctuations in domestic and international economic conditions, as well as currency fluctuations, commodity costs, and a variety of other factors.
We remain generally cautious about global economic conditions and the demand for our products, particularly in our Fluid Handling segment. For 2016, we expect a total year-over-year sales decline of approximately 2% driven by unfavorable foreign exchange, with core sales approximately flat compared to 2015.
Consistent with our focus on productivity, we undertook certain repositioning actions in our Fluid Handling and Aerospace & Electronics segments in 2014 and 2015. The costs associated with these repositioning actions were $11.6 million in 2015 and $22.7 million in 2014. Savings associated with these repositioning actions were $14 million in 2015, and we expect incremental savings of $18 million in 2016.
In connection with the acquisition of MEI, we recorded $6.6 million in 2015 and $20.1 million of integration and restructuring costs in 2014. We realized approximately $10 million of acquisition-related synergies in 2014, $14 million in 2015, and we expect an incremental $9 million of synergies in 2016.
Fluid Handling
In 2016, we expect Fluid Handling sales to decline in the high single-digit range compared to 2015, driven by a mid single-digit core sales decline and unfavorable foreign currency translation.
We expect Process Valves and Related Products sales to decline in the low double-digit range compared to 2015, driven by a low double-digit sales decline and unfavorable foreign currency translation. Core sales are expected to decline because of slow economic growth and continued weakness in oil prices, which contribute to lower levels of customer capital spending and project delays across the power, oil & gas, chemical, and general industrial end markets.
We expect Commercial Valves sales to decline in the mid single-digit range compared to 2015, driven by unfavorable foreign exchange, partially offset by a slight improvement in core sales. Core sales are expected to improve slightly, driven by market share gains, largely offset by soft market conditions in the United Kingdom, Middle East, and Canadian non-residential construction markets.
Our Other Products sales are expected to be approximately flat compared to 2015 given the relative stability of the U.S. municipal market.
For the segment, we expect a modest decline in operating profit compared to 2015, as the negative impact from lower core sales and unfavorable foreign currency will be partially offset by productivity initiatives, repositioning benefits, and lower repositioning costs.
Payment & Merchandising Technologies
We expect Payment & Merchandising Technologies sales to increase in the low single-digit range compared to 2015, with a mid single-digit improvement in core sales partially offset by unfavorable foreign currency translation. We expect core sales to improve across both CPI and Merchandising Systems. At CPI, we expect core sales improvement to be driven by several vertical end markets including transportation, vending, and financial services. At Merchandising Systems, we expect an improvement in core sales driven primarily by better demand from large bottler customers. We expect the segment’s operating profit to increase compared to 2015 driven by the higher sales, integration synergies, and lower integration costs, partially offset by unfavorable foreign currency.
Aerospace & Electronics
We expect Aerospace & Electronics core sales to increase in the mid single-digit range compared to 2015. For 2016, we expect that commercial market conditions will remain generally positive. We expect commercial aftermarket sales to decline in the low single digit range primarily because of lower retrofit program sales. Although we expect defense markets to remain relatively flat, we expect our military sales to increase substantially as a result of a large contract for our microwave products, along with higher sales for a major military aerospace program. We expect segment operating profit in 2016 to improve slightly compared to 2015 driven by higher sales and repositioning benefits, partially offset by unfavorable product mix and higher engineering spending.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Engineered Materials
In 2016, we expect the Engineered Materials segment sales will be approximately flat compared to the prior year. We expect modest growth in sales to the RV and building products markets, offset by a decline in sales to the transportation market. Segment operating profit is expected to decline modestly, primarily from a contraction in the spread between raw material costs and pricing.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. Our significant accounting policies are more fully described in Note 1, “Nature of Operations and Significant Accounting Policies” to the Notes to the Consolidated Financial Statements. Certain accounting policies require us 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. On an ongoing basis, we evaluate our estimates and assumptions, and the effects of revisions are reflected in the financial statements in the period in which they are determined to be necessary. The accounting policies described below are those that most frequently require us to make estimates and judgments and, therefore, are critical to understanding our results of operations. We have discussed the development and selection of these accounting estimates and the related disclosures with the Audit Committee of our Board of Directors.

Revenue Recognition.  Sales 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.
In May 2014, the Financial Accounting Standards Board ("FASB") issued new accounting guidance related to revenue recognition. This new standard will replace all current U.S. GAAP guidance on this topic and eliminate all current industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. In July 2015, the FASB agreed to a one-year deferral of the effective date; the new standard is now effective for reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption of the new revenue standard is permitted, however, entities reporting under U.S. GAAP are not permitted to adopt the standard earlier than the original effective date, December 15, 2016. The new standard can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. We are currently evaluating when to adopt the new standard, the impacts of adoption and the implementation approach to be used.
Inventories. Inventories include the costs of material, labor and overhead and are stated at the lower of cost or market. We regularly review inventory values on hand and record a provision for excess and obsolete inventory primarily based on historical performance and our forecast of product demand over the next two years. The reserve for excess and obsolete inventory was $48.4 million and $47.9 million at December 31, 2015 and 2014, respectively.
Income Taxes.  We account 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, we record 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, we establish a valuation allowance for the amount that, in our judgment, is sufficient to reduce the deferred tax asset to an amount that is more likely than not to be realized. The evidence we consider 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.

We account 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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.

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

In determining whether the earnings of our non-U.S. subsidiaries are permanently reinvested overseas, we consider the following:

Our history of utilizing non-U.S. cash to acquire non-U.S. businesses,
Our current and future needs for cash outside the U.S. (e.g., to fund capital expenditures, business operations, potential acquisitions, etc.),
Our 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 our 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.
Goodwill and Other Long-Lived Assets.  As of December 31, 2015, we had $1.168 billion of goodwill. Our business acquisitions typically result in the acquisition of goodwill and other intangible assets. We follow the provisions under ASC Topic 350, “Intangibles – Goodwill and Other” (“ASC 350”) as it relates to the accounting for goodwill in our 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 impairment exists. Impairment testing takes place more often than annually if events or circumstances indicate a change in the impairment status. 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. At December 31, 2015, we had seven reporting units.
When performing our annual impairment assessment, we compare the fair value of each of our reporting units to their respective carrying value. Goodwill is considered to be potentially impaired when the net book value of a 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 our most recent annual impairment assessment, ranged between 10.0% and 12.5% (a weighted average of 10.8%), reflecting the respective inherent business risk of each of the reporting units tested. This methodology for valuing our reporting units (commonly referred to as the Income Method) has not changed since the prior year. 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 our best estimates based on current and forecasted market conditions, and the 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 our discounted cash flow results where fair value is estimated based on earnings before income taxes, depreciation, and amortization (EBITDA) and revenue multiples determined by available public information of comparable businesses. While we believe we have made reasonable estimates and assumptions to calculate the fair value of our 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 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, we applied a hypothetical, reasonably possible 10% decrease to the fair values of each reporting unit. The results of this hypothetical 10% decrease would still result in a fair value calculation exceeding our carrying value for each of our reporting units. No impairment charges have been required during 2015, 2014 and 2013.
As of December 31, 2015, we had $317 million of net intangible assets, of which $27 million were intangibles with indefinite useful lives, consisting of trade names. We amortize the cost of other intangibles over their estimated useful lives unless such lives are deemed indefinite. Indefinite lived intangibles are tested annually for impairment, or when events or changes in circumstances indicate the potential for impairment. If the carrying amount of the indefinite lived intangible exceeds the fair value, the intangible asset is written down to its fair value. Fair value is calculated using discounted cash flows.
In addition to annual testing for impairment of indefinite-lived intangible assets, we review all of our long-lived assets, including intangible assets subject to amortization, 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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 asset 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 consideration of 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 our 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 long-lived 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 fair value. Judgments that we make which impact these assessments relate to the expected useful lives of long-lived assets and our ability to realize any undiscounted cash flows in excess of the carrying amounts of such assets. Such judgments 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 fair value of long-lived assets, there is risk that the carrying value of our long-lived assets may require adjustment in future periods. Historical results to date have generally approximated expected cash flows for the identifiable cash flow generating level. We believe that there have been no events or circumstances which would more likely than not reduce the fair value of our long-lived and amortizable intangible assets below their carrying value.
Contingencies.  The categories of claims for which we have estimated our liability, the amount of our liability accruals, and the estimates of our related insurance receivables are critical accounting estimates related to legal proceedings and other contingencies. Please refer to Note 10, “Commitments and Contingencies”, of the Notes to the Consolidated Financial Statements for further discussion.
Asbestos Liability and Related Insurance Coverage and Receivable.  As of December 31, 2015, we had an aggregate asbestos liability of $546 million for pending claims and future claims projected to be filed against us through December 31, 2021. Estimation of our 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 have retained the firm of Hamilton, Rabinovitz & Associates, Inc. (“HR&A”), a nationally recognized expert in the field, to assist management in estimating our asbestos liability in the tort system. HR&A reviews 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 HR&A to project future asbestos costs is based largely on our experience during a base reference period of eleven quarterly periods (consisting of the two full preceding calendar years and three additional quarterly periods to the estimate date) for claims filed, settled and dismissed. 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. Using that information, HR&A estimates the number of future claims that would be filed against us through our forecast period 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. Our liability estimate is augmented for the estimated cost of defending asbestos claims in the tort system. 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. Management believes that the level of uncertainty regarding the various factors used in estimating future asbestos costs is too great to provide for reasonable estimation of the number of future claims, the nature of such claims or the cost to resolve them for years beyond the indicated estimate. In addition to claim experience, we 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. Based on this evaluation, we determined that no change in the estimate was warranted for the period ended December 31, 2015. Nevertheless, if certain factors show a pattern of sustained increase or decrease, the liability could change materially; however, all the assumptions used in estimating the asbestos liability are interdependent and no single factor predominates in determining the liability estimate. Because of the uncertainty with regard to and the interdependency of such factors used in the calculation of our asbestos liability, and since no one factor predominates, we believe that a range of potential liability estimates beyond the indicated forecast period cannot be reasonably estimated.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In conjunction with developing the aggregate liability estimate referenced above, we also developed an estimate of probable insurance recoveries for our asbestos liabilities. As of December 31, 2015, we had an aggregate asbestos receivable of $129 million. In developing this estimate, we considered our coverage-in-place and other settlement agreements, as well as 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.
Environmental.  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 at December 31, 2015 is substantially all for the Goodyear Site. Estimates of the Company’s environmental liabilities at the Goodyear Site are based on currently available facts, present laws and regulations and current technology available for remediation, and are recorded on an undiscounted basis. These estimates consider the Company’s prior experience in the Goodyear Site investigation and remediation, as well as available data from, and in consultation with, the Company’s environmental specialists. Estimates at the Goodyear Site are subject to significant uncertainties caused primarily by the dynamic nature of the Goodyear Site conditions, the range of remediation alternatives available, together with the corresponding estimates of cleanup methodology and costs, as well as ongoing, required regulatory approvals, primarily from the EPA. During the third quarter of 2014, the EPA issued a Record of Decision amendment requiring, among other things, additional source area remediation resulting in the Company recording a charge of $49.0 million, extending the accrued costs through 2022. As of December 31, 2015, the total estimated gross liability for the Goodyear Site was $64 million.
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.
Pension Plans.  In the United States, we sponsor a defined benefit pension plan that covers approximately 19% of all U.S. employees. The benefits are based on years of service and compensation on a final average pay basis, except for certain hourly employees where benefits are fixed per year of service. This plan is funded with a trustee in respect to past and current service. Charges to expense are based upon costs computed by an independent actuary. Contributions are intended to provide for future benefits earned to date. A number of our non-U.S. subsidiaries sponsor defined benefit pension plans that cover approximately 11% of all non-U.S. employees. The benefits are typically based upon years of service and compensation. These plans are generally funded with trustees in respect to past and current service.
The expected return on plan assets component of Net Periodic Benefit Cost is determined by applying the assumed expected return on plan assets to the fair value of plan assets. For one of the U.K. pension plans, a market-related value of assets is used in lieu of the fair value of plan assets for this purpose. The net actuarial loss (gain) is amortized to the extent that it exceeds 10% of the greater of the fair value of plan assets and the projected benefit obligation. The amortization period is the average life expectancy of plan participants for most plans. The amortization period for plans with a significant number of active participants accruing benefits is the average future working lifetime of plan participants. The prior service cost (credit) is amortized over the average future working lifetime of plan participants whose prior service benefits were changed.
The net periodic pension (benefit) cost was $(11) million, $(12) million and $5 million in 2015, 2014 and 2013, respectively. The net periodic pension benefit was $1 million less in 2015 compared to 2014. The reasons for the difference between the net periodic pension benefit gain of $12 million in 2014, and the $5 million loss in 2013, included the return on plan assets in 2013 being $56 million higher than expected ($13 million reduction in net periodic benefit cost), as well as closure of certain defined benefit plans in our U.K. operations recognized at the end of 2013 ($5 million reduction in net periodic benefit costs). In the United States, the increase in discount rate from 4.20% to 4.90% also contributed to the gain of $12 million. Employer cash contributions were $17 million, $24 million and $15 million in 2015, 2014 and 2013, respectively, to our U.S. defined benefit pension plan. We expect, based on current actuarial calculations, to contribute cash of approximately $8 million to our pension plans in 2016. Cash contributions in subsequent years will depend on a number of factors including the investment performance of plan assets.
For the pension plan, holding all other factors constant, a decrease in the expected long-term rate of return of plan assets by 0.25 percentage points would have increased U.S. 2015 pension expense by $1.0 million for U.S. pension plans and $1.1 million for non-U.S. pension plans. Also, holding all other factors constant, a decrease in the discount rate used to determine net periodic pension cost by 0.25 percentage points would have increased 2015 pension expense by $0.2 million for U.S. pension plans and $0.9 million for non-U.S. pension plans.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following key assumptions were used to calculate the benefit obligation and net periodic cost for the periods indicated:
 
 
Pension Benefits
December 31,
 
2015

 
2014

 
2013

Benefit Obligations
 
 
 
 
 
 
U.S. Plans:
 
 
 
 
 
 
Discount rate
 
4.41
%
 
4.10
%
 
4.90
%
Rate of compensation increase
 
N/A

 
N/A

 
3.50
%
Non-U.S. Plans:
 
 
 
 
 
 
Discount rate
 
3.30
%
 
3.01
%
 
4.05
%
Rate of compensation increase
 
2.81
%
 
2.40
%
 
2.56
%
Net Periodic Benefit Cost
 
 
 
 
 
 
U.S. Plans:
 
 
 
 
 
 
Discount rate
 
4.10
%
 
4.90
%
 
4.20
%
Expected rate of return on plan assets
 
7.75
%
 
7.75
%
 
7.75
%
Rate of compensation increase
 
N/A