Crane Co. Form 10-Q Summary
Reporting period: Three months ended March 31, 2019; filed April 30, 2019. The filing is for Crane Co., the predecessor company associated with the provided Crane NXT metadata. Financial statements are unaudited.
Business Context
Crane operates through four reportable segments: Fluid Handling; Payment & Merchandising Technologies; Aerospace & Electronics; and Engineered Materials. Net sales are exposed to cyclical industrial, construction, aerospace, defense, payment, currency, and recreational-vehicle markets.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $831.7 million | $799.1 million | +4.1% |
| Operating profit | $113.7 million | $94.3 million | +20.6% |
| Operating margin | 13.7% | 11.8% | +190 basis points |
| Net income attributable to common shareholders | $82.4 million | $68.7 million | +19.9% |
| Diluted EPS | $1.36 | $1.13 | +20.4% |
| Cash flow from operations | $(100.4) million | $74.2 million | $(174.6) million |
| Capital expenditures | $19.8 million | $27.5 million | $(7.7) million |
Revenue growth included $45.8 million of core growth and $7.0 million of net acquisition-related sales, partly offset by $20.2 million of unfavorable foreign currency translation. The effective tax rate increased to 21.0% from 18.6%.
Segment performance: Fluid Handling sales were $273.7 million and operating profit was $34.1 million. Payment & Merchandising Technologies sales were $303.8 million and operating profit was $43.2 million. Aerospace & Electronics sales were $194.6 million and operating profit was $44.8 million. Engineered Materials sales were $59.6 million and operating profit was $9.4 million.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $256.8 million at March 31, 2019, down from $343.4 million at December 31, 2018.
- Total debt was approximately $1.00 billion based on reported short-term borrowings, current maturities, and long-term debt; estimated fair value was $990.1 million.
- Commercial paper outstanding was $55.5 million, compared with none at year-end 2018. The company had no borrowings under its $550 million revolving credit agreement, which expires in December 2022.
- Total assets were $4.14 billion and total equity was $1.59 billion at March 31, 2019.
- The company adopted ASC 842 on January 1, 2019, recognizing $112.7 million of operating lease right-of-use assets and $114.6 million of lease liabilities at March 31, 2019.
Material Changes Versus the Prior Comparable Period
- Operating profit benefited from higher volume, productivity, repositioning savings, and the absence of significant 2018 acquisition-related inventory step-up and backlog amortization.
- Acquisition-related and integration charges declined to $1.1 million from $5.2 million. Restructuring and related charges increased to $5.0 million from $0.8 million.
- Operating cash flow changed from a $74.2 million inflow to a $100.4 million outflow, primarily because of a $203.4 million use of operating working capital. Management cited significant cash receipts from a large international customer in 2018 that did not recur.
- Investing cash outflow declined to $20.0 million from $699.5 million because the prior-year period included $672.3 million of net cash paid for the Crane Currency acquisition.
- Comprehensive income declined to $84.6 million from $103.7 million, primarily because of a $26.2 million unfavorable year-over-year change in currency translation.
- Dividend per share increased to $0.39 from $0.35. No open-market share repurchases were made during the quarter.
Guidance, Outlook and Management Commentary
- Management expects 2019 sales to decline approximately 2% year over year, reflecting a slight core sales decline and a 1% to 2% unfavorable foreign-exchange impact.
- Management expects operating profit to improve, driven by productivity, repositioning benefits, and lower acquisition-related and restructuring costs.
- Fluid Handling is expected to grow sales in the low single-digit range, with improved operating profit and margin.
- Payment & Merchandising Technologies sales are expected to decline in the high single-digit range, primarily because of lower core sales and foreign exchange; operating profit and margin are nevertheless expected to improve.
- Aerospace & Electronics core sales are expected to increase in the mid single-digit range, with higher operating profit and margin.
- Engineered Materials sales are expected to be comparable with 2018, while operating profit and margin are expected to decline slightly.
- Backlog was $1.11 billion at March 31, 2019; management expects approximately 87% of remaining performance obligations to be recognized as revenue in 2019.
- Management expects approximately $90 million of 2019 capital expenditures and approximately $50 million of net asbestos settlement and defense payments.
Risks, Contingencies and Unusual Items
- Asbestos liabilities totaled $504 million at March 31, 2019, including $66 million classified as current. Related insurance receivables totaled $87.9 million. The estimates extend through 2059 and are subject to significant litigation, claims, insurance, legal, and actuarial uncertainty.
- There were 28,498 pending asbestos claims at March 31, 2019. Gross asbestos settlement and defense costs incurred were $26.5 million in the quarter, while net cash payments were $9.7 million.
- The company reported a $30.9 million gross environmental liability for the Goodyear Site, including a $10.9 million current portion, partially offset by a $6.0 million U.S. government reimbursement receivable.
- A probable loss exists regarding the Crab Orchard Superfund Site, but the filing states that the amount cannot currently be reasonably estimated.
- Restructuring actions include the planned closure of Crane Currency printing operations in Sweden and transition to Malta. Additional 2019 charges of approximately $2.4 million are expected for these actions, with anticipated recurring annual savings of approximately $23 million.
- Goodwill was $1.41 billion and net intangible assets were $471.0 million. Management reported no impairment indicators, but impairment testing depends on estimates of future cash flows, growth, margins, discount rates, and market conditions.
- Management states that forward-looking results may be affected by cyclical demand, foreign currency, commodity costs, customer concentration, economic conditions, litigation, environmental obligations, and execution of restructuring actions.
Investor Verification Checklist
- Verify the sustainability of operating-margin improvement after excluding acquisition-related, inventory step-up, and restructuring effects.
- Monitor working-capital conversion and whether operating cash flow normalizes after the unusually large Q1 cash use.
- Reconcile the company’s 2019 sales outlook with segment backlog, particularly the expected decline in Payment & Merchandising Technologies.
- Assess asbestos claim activity, insurance recoveries, and potential changes to the liability estimate.
- Review debt maturities, commercial-paper usage, interest costs, and liquidity relative to planned capital expenditures, dividends, pension contributions, and contingencies.
- Confirm the legal entity and reporting name, because the filing identifies the registrant as Crane Co., while the request metadata identifies Crane NXT, Co.