Business Context and Reporting Period
Crane Co. reported its fiscal year ended December 31, 2019. The company was a diversified manufacturer operating through four segments: Fluid Handling; Payment & Merchandising Technologies; Aerospace & Electronics; and Engineered Materials. The filing is for Crane Co.; the supplied metadata identifies Crane NXT.
Products serve process industries, construction, payment automation, banknote production, aerospace, defense, space, recreational vehicles and other industrial markets. Approximately 13,000 employees operated across the Americas, Europe, the Middle East, Asia and Australia. Non-U.S. operations represented 36% of sales and 44% of assets in 2019.
Key Financial Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $3,283.1 million | $3,345.5 million | Down 1.9% |
| Operating profit | $210.4 million | $441.3 million | Down 52.3% |
| Operating margin | 6.4% | 13.2% | Down 6.8 points |
| Income before taxes | $170.7 million | $411.4 million | Down 58.5% |
| Net income attributable to common shareholders | $133.3 million | $335.6 million | Down 60.3% |
| Diluted EPS | $2.20 | $5.50 | Down 60.0% |
| Effective tax rate | 21.7% | 18.4% | Up 3.3 points |
| Operating cash flow | $393.9 million | $413.8 million | Down $19.9 million |
| Capital expenditures | $68.8 million | $108.8 million | Down $40.0 million |
| Cash and cash equivalents | $393.9 million | $343.4 million | Up $50.5 million |
| Total debt | $991.4 million | $949.2 million | Up $42.2 million |
| Total debt to capitalization | 40.2% | Not clearly provided in the filing text | Not clearly provided |
| Cash dividends per share | $1.56 | $1.40 | Up 11.4% |
Operating cash flow exceeded capital expenditures by approximately $325.1 million. Financing cash outflows were $124.6 million, including $93.2 million of dividends and $79.9 million of share repurchases. Net debt was $597.5 million, compared with $605.8 million in 2018. The company reported investment-grade senior unsecured debt ratings of BBB with a Stable outlook from S&P and Baa2 with a Stable outlook from Moody’s.
Segment Results
| Segment | 2019 Sales | Sales Change | 2019 Operating Profit | 2019 Margin |
|---|---|---|---|---|
| Fluid Handling | $1,117.4 million | Up 1.4% | $131.7 million | 11.8% |
| Payment & Merchandising Technologies | $1,158.3 million | Down 7.9% | $177.3 million | 15.3% |
| Aerospace & Electronics | $798.8 million | Up 7.4% | $189.4 million | 23.7% |
| Engineered Materials | $208.6 million | Down 14.2% | $26.8 million | 12.9% |
Backlog increased to $1,155.2 million at December 31, 2019, from $1,072.6 million. Aerospace & Electronics backlog increased to $567.4 million, while Fluid Handling, Payment & Merchandising Technologies and Engineered Materials backlog declined. Management expected approximately 80% of remaining performance obligations to be recognized as revenue in 2020.
Material Changes Versus the Prior Comparable Period
- Sales declined primarily because of $52.8 million of unfavorable foreign currency translation and a $13.1 million decrease in core sales; acquisitions contributed $3.5 million.
- Operating profit was substantially reduced by a $229.0 million net asbestos provision and an $18.9 million net environmental provision recorded in 2019. These provisions were not recorded in 2018.
- Fourth-quarter 2019 included the asbestos and environmental provisions, producing an operating loss of $135.4 million and a net loss attributable to common shareholders of $112.6 million for the quarter.
- Fluid Handling and Aerospace & Electronics improved, supported by productivity, volume and mix. Payment & Merchandising Technologies declined due primarily to lower banknote sales, including the absence of Venezuela sales and lower U.S. government sales. Engineered Materials declined because of lower recreational vehicle production.
- Restructuring charges increased to $17.5 million from $7.2 million on the consolidated statements of operations; total restructuring and related charges discussed by management were $29.1 million in 2019 versus $14.7 million in 2018.
- On December 31, 2019, the company acquired Cummins-Allison for $160 million on a cash-free, debt-free basis, paying $156.2 million net of cash acquired. The acquisition was funded partly with $150 million of commercial paper and was integrated into CPI.
- On January 31, 2020, after year-end, the company acquired CIRCOR’s Instrumentation & Sampling Business for $172 million. Funding included $100 million of commercial paper, $67 million drawn under the revolving credit facility and cash on hand.
Guidance, Outlook, Risks and Unusual Items
Management Outlook
- For 2020, management expected total sales growth of approximately 7%, driven by approximately 8% acquisition benefits, partly offset by a slight core sales decline and unfavorable foreign exchange.
- Management expected operating profit to improve, principally because the 2019 asbestos and environmental provisions were not expected to recur.
- Fluid Handling sales were expected to rise in the mid-single digits, Payment & Merchandising Technologies sales in the mid-teens, Aerospace & Electronics core sales to decline in the low- to mid-single digits, and Engineered Materials sales to decline slightly.
- Expected 2020 capital expenditures were approximately $75 million. Expected net asbestos settlement and defense payments were approximately $50 million, and expected defined benefit pension contributions were approximately $21.4 million.
Principal Risks and Contingencies
- Asbestos exposure is the most significant unusual item and estimation risk. The company had 29,056 pending claims at year-end, recorded an aggregate asbestos liability of $712 million through 2059 and an insurance receivable of $98 million. The 2019 estimate involved substantial actuarial and legal judgment and may change materially.
- Environmental liabilities primarily relate to the Goodyear, Arizona site. The gross estimated liability was $46.9 million, with a $9.7 million receivable for expected U.S. government reimbursements. The company also faces unresolved allocation and remediation uncertainty at the Crab Orchard Superfund site.
- The Boeing 737 MAX grounding and production suspension were expected to reduce 2020 Aerospace & Electronics sales and operating profit. Management assumed production would resume at a limited rate, but timing remained uncertain.
- Results are exposed to cyclical end markets, customer capital spending, defense appropriations, central-bank banknote awards, RV production, raw-material prices, tariffs, foreign exchange, supply-chain disruptions and the coronavirus outbreak identified in the filing.
- Goodwill and other intangible assets totaled approximately $1,977.5 million, or about 45% of total assets. No impairment was recorded in 2019, but future impairment depends on forecast cash flows, market conditions and discount rates.
- The company had $149.4 million of commercial paper outstanding, $842.0 million of long-term debt and a $550 million revolving credit facility with no borrowings outstanding at year-end. Fixed cash obligations, excluding uncertain asbestos and certain other long-term liabilities, totaled $2,535.0 million.
- Restructuring actions were expected to generate annualized savings of approximately $53 million in 2020 and $63 million in 2021, but required additional charges in 2020 and 2021.
Facts Investors Should Verify
- Reconcile reported 2019 earnings with and without the $229.0 million asbestos provision, $18.9 million environmental provision and other restructuring and acquisition-related charges.
- Monitor asbestos claim counts, settlement costs, insurance recoveries and changes to the liability estimate through 2059.
- Assess the integration, earnings contribution and leverage impact of Cummins-Allison and the subsequent I&S acquisition.
- Verify the timing and extent of Boeing 737 MAX production recovery and its effect on Aerospace & Electronics orders, margins and backlog.
- Evaluate whether the projected $53 million and $63 million restructuring savings are realized and whether additional restructuring costs are incurred.
- Track Payment & Merchandising Technologies banknote order timing, U.S. government demand and the sustainability of CPI growth.
- Review liquidity after acquisitions, commercial paper maturities, asbestos payments, pension contributions, dividends, share repurchases and planned capital expenditures.
- Consider sensitivity to foreign exchange, raw-material prices, tariffs, RV production, defense spending and broader economic conditions.