Business Context and Reporting Period
Crane Co. (now identified in the request as Crane NXT, Co.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The company operated through four reportable segments: Fluid Handling, Payment & Merchandising Technologies, Aerospace & Electronics, and Engineered Materials.
The period included the January 10, 2018 acquisition of Crane & Co., Inc. (“Crane Currency”), a banknote and security-products supplier, for a base purchase price of $800 million and net cash consideration of $672.3 million. Crane Currency contributed $221.4 million of sales and approximately $7.1 million of operating profit from acquisition through June 30, 2018.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2018 | Three Months Ended June 30, 2017 | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 |
|---|---|---|---|---|
| Net sales | $851.0 million | $702.5 million | $1,650.0 million | $1,375.9 million |
| Operating profit | $113.0 million | $105.8 million | $207.3 million | $199.0 million |
| Operating margin | 13.3% | 15.1% | 12.6% | 14.5% |
| Net income attributable to common shareholders | $80.7 million | $69.2 million | $149.4 million | $132.3 million |
| Diluted EPS | $1.32 | $1.14 | $2.45 | $2.19 |
| Dividends per share | $0.35 | $0.33 | $0.70 | $0.66 |
Six-month operating cash flow was $131.4 million, compared with $70.4 million in the prior-year period. Capital expenditures were $44.0 million, compared with $20.8 million, and net cash used for investing activities was $715.8 million, primarily reflecting the Crane Currency acquisition. Cash and cash equivalents were $318.2 million at June 30, 2018, down from $706.2 million at December 31, 2017.
Total debt was approximately $1.109 billion, consisting of $171.4 million of commercial paper and current maturities and $937.1 million of long-term debt. The company had no borrowings under its $550 million revolving credit facility, which expires in December 2022. Shareholders’ equity was $1.444 billion.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales increased 21.1%; six-month sales increased 19.9%. The second-quarter increase consisted of 17.6% from acquisitions, 1.8% core growth, and 1.7% favorable foreign-exchange translation. For the six-month period, acquisitions contributed 16.5%, foreign exchange 2.8%, and core sales 0.5%.
- Net income attributable to common shareholders increased 16.6% in the quarter and 12.9% year to date, aided by lower effective tax rates of 23.1% and 21.1%, respectively, versus 30.5% and 29.4% in the prior-year periods.
- Operating margins declined because of higher acquisition-related and integration costs, acquisition-related inventory step-up and backlog amortization, restructuring costs, and strategic growth investments. Six-month acquisition-related and integration charges were $9.2 million versus $2.6 million, and inventory step-up and backlog amortization was $8.5 million.
- Payment & Merchandising Technologies sales increased 63.6% in the quarter and 56.6% year to date, primarily from Crane Currency. The segment’s operating margin declined to 14.2% from 21.1% in the quarter and to 13.4% from 20.4% year to date.
- Aerospace & Electronics delivered 9.4% quarterly sales growth and a 15.2% increase in operating profit, while Fluid Handling sales increased 5.0%. Engineered Materials sales declined 9.8% and operating profit declined 15.8%, primarily due to lower recreational-vehicle demand and higher material costs.
- Comprehensive income attributable to common shareholders declined to $38.5 million in the quarter and $142.2 million year to date, primarily because of unfavorable foreign-currency translation adjustments.
Guidance, Outlook, Risks and Unusual Items
Management expected 2018 sales to increase more than 20%, driven by acquisition benefits of more than 15%, core sales growth of approximately 2% to 4%, and a modest favorable foreign-exchange benefit. Management expected operating profit to improve through productivity, repositioning actions, higher core volume, and acquisition contributions, partially offset by higher acquisition and integration costs, strategic growth investments, and input costs.
Backlog was $1.097 billion at June 30, 2018; management expected approximately 83% of remaining performance obligations to be recognized as revenue in 2018, 13% by 2019, and the balance thereafter.
- Management expected approximately $125 million of 2018 capital expenditures, including $56 million related to Crane Currency.
- Management expected approximately $60 million of net asbestos-related payments, $7 million of net environmental payments, and approximately $30 million of pension and postretirement contributions in 2018.
- Restructuring actions initiated in 2017 involved approximately 300 employees and facility consolidations. The company expected $16.7 million of additional restructuring and facility-consolidation costs from 2018 through 2020 and anticipated recurring annual pretax savings of approximately $30 million.
- The asbestos liability was $559 million at June 30, 2018, with $104 million of estimated insurance recoveries. The company had approximately 29,920 pending asbestos claims and reported $34.9 million of net asbestos-related cash payments during the first six months.
- Environmental liabilities included a $36.2 million gross liability for the Goodyear site, partially offset by a $7.7 million government reimbursement receivable. A potential Crab Orchard remediation obligation was considered probable but could not be reasonably estimated.
- The company identified newly imposed or potential tariffs, including on steel, aluminum, and products involving China, as a risk that could adversely affect costs, demand, and global markets.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method, increasing opening retained earnings by $6.7 million. The filing states that the adoption increased reported 2018 revenue by $6.2 million for the quarter and $18.6 million year to date.
- Tax accounting under the Tax Cuts and Jobs Act remained provisional. The company recorded an $87 million provisional 2017 charge and expected to finalize related calculations by December 31, 2018.
Most Important Facts for Investors to Verify
- Whether Crane Currency achieves the expected operating contribution and integration benefits, including the effect of acquisition-related amortization and financing costs.
- Whether core sales growth develops as projected, particularly in Payment & Merchandising Technologies and the cyclical Engineered Materials business.
- Operating-margin recovery relative to the stated productivity and restructuring savings, after strategic investments and input-cost pressures.
- Debt reduction, commercial-paper usage, interest expense, and liquidity following the Crane Currency acquisition.
- The sustainability of asbestos liability and insurance-recovery assumptions, including claim trends, settlement costs, insurer solvency, and future cash payments.
- Potential effects of tariffs, foreign-exchange movements, commodity costs, and cyclical end-market demand.
- Final purchase-price accounting for Crane Currency, which remained preliminary and could result in material adjustments during the measurement period.
- Implementation effects of ASC 606, the pending lease standard, and finalization of provisional Tax Cuts and Jobs Act accounting.