Crane Co. (now identified in the request as Crane NXT, Co.) — Q2 2019 Form 10-Q Summary
Reporting period: Quarterly and six-month periods ended June 30, 2019. The filing was signed July 30, 2019. The issuer named in the filing is Crane Co., a diversified industrial company with four reportable segments: Fluid Handling, Payment & Merchandising Technologies, Aerospace & Electronics, and Engineered Materials.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $841.6 million, down 1.1% | $1,673.3 million, up 1.4% |
| Operating profit | $122.8 million, up 8.7% | $236.5 million, up 14.1% |
| Operating margin | 14.6%, versus 13.3% | 14.1%, versus 12.6% |
| Net income attributable to common shareholders | $91.0 million, up 12.8% | $173.4 million, up 16.1% |
| Diluted earnings per share | $1.50, versus $1.32 | $2.85, versus $2.45 |
| Dividends per share | $0.39, versus $0.35 | $0.78, versus $0.70 |
Six-month net cash provided by operating activities was $52.5 million, compared with $131.4 million in the prior-year period. Operating cash flow was reduced by $171.4 million of working-capital use, primarily reflecting accounts payable, accrued liabilities, receivables, and inventory movements.
Capital expenditures were $36.1 million in the first six months, versus $44.0 million in the prior-year period. Cash used in investing activities was $44.2 million, compared with $715.8 million in 2018, when the company paid $672.3 million for the Crane Currency acquisition. Cash used in financing activities was $45.3 million, including $46.7 million of dividends paid.
| Balance-sheet item | June 30, 2019 | December 31, 2018 |
|---|---|---|
| Cash and cash equivalents | $307.0 million | $343.4 million |
| Total debt, including current maturities | Approximately $948.1 million | Approximately $949.2 million |
| Total equity | $1,674.4 million | $1,527.1 million |
| Total assets | $4,141.8 million | $4,042.7 million |
The company had no outstanding borrowings under its $550 million commercial-paper program or $550 million revolving credit facility at June 30, 2019. Management stated that cash, expected operating cash flow, available credit, and access to debt markets were expected to fund operating needs, capital requirements, dividends, and asbestos, environmental, and pension obligations.
Material changes versus the prior comparable period
- Second-quarter sales: Declined $9.4 million, or 1.1%. Core sales increased 1.0%, but unfavorable foreign-currency translation reduced sales by $16.0 million and divestitures reduced sales by $1.5 million.
- Six-month sales: Increased $23.3 million, or 1.4%, reflecting 3.3% core growth and a 0.3% acquisition benefit, partly offset by a 2.2% foreign-exchange headwind.
- Profitability: Operating profit and margins improved despite higher restructuring charges, supported by productivity, repositioning benefits, favorable volumes and mix, and lower acquisition-related costs.
- Payment and Merchandising Technologies: Second-quarter sales fell 10.3%, primarily because banknote and security-product sales declined due to the absence of sales to a large international customer recorded in the prior-year quarter. Segment operating profit nevertheless increased slightly because of lower acquisition-related charges and repositioning benefits.
- Aerospace & Electronics: Second-quarter sales rose 9.2% and operating profit rose 14.1%, driven by higher commercial and military original-equipment and aftermarket sales.
- Engineered Materials: Second-quarter sales fell 11.3% and operating profit fell 33.0%, primarily because of lower recreational-vehicle demand.
- Acquisition and restructuring items: Second-quarter acquisition-related and integration charges declined to $2.4 million from $4.1 million. Restructuring and related charges increased to $6.4 million from $1.7 million. Six-month acquisition-related charges declined to $3.5 million from $9.2 million, while restructuring charges increased to $11.7 million from $2.5 million.
- Accounting: The company adopted ASC 842 lease accounting on January 1, 2019, recognizing a $109.1 million operating right-of-use asset and $110.4 million of lease liabilities at adoption without a retained-earnings adjustment.
Guidance, outlook, risks and unusual items
- Management expected 2019 total sales to decline approximately 1% to 2%, driven by a slight core-sales decline and unfavorable foreign exchange, while operating profit was expected to improve.
- Fluid Handling was expected to post low-single-digit sales growth and improved operating profit and margin.
- Payment & Merchandising Technologies was expected to decline in high-single-digit sales, primarily because of lower Crane Currency sales to one large customer, but profit and margin were expected to improve.
- Aerospace & Electronics was expected to achieve mid- to high-single-digit core-sales growth and improved profitability. Engineered Materials sales and profit were expected to decline because of weaker recreational-vehicle demand.
- Backlog was $1.076 billion at June 30, 2019; management expected approximately 76% of remaining performance obligations to be recognized as revenue in 2019, 20% in 2020, and the balance thereafter.
- Management expected approximately $90 million of 2019 capital expenditures and approximately $50 million of net asbestos settlement and defense payments.
- Asbestos liabilities totaled $491 million at June 30, 2019, including $66 million classified as current, while estimated insurance receivables totaled $83 million. The company reported 28,851 pending asbestos claims and stated that estimates are subject to significant uncertainty.
- The Goodyear environmental remediation liability was $28.5 million, with a $6.0 million receivable for expected U.S. government reimbursements. A separate Crab Orchard environmental matter was considered probable but could not be reasonably estimated.
- Restructuring actions included the planned closure of Crane Currency printing operations in Sweden and workforce reductions of approximately 170 employees. Management expected approximately $23 million of recurring annual savings from those actions and approximately $30 million from broader 2017 repositioning actions.
- Goodwill was $1.414 billion and net intangible assets were $462.2 million at June 30, 2019. Management reported no indicators requiring an interim impairment charge, but impairment estimates depend on projected cash flows, margins, discount rates, and market conditions.
- Management identified cyclical demand, economic conditions, foreign exchange, commodity costs, customer concentration, litigation, asbestos liabilities, environmental obligations, and impairment assumptions as important risk areas. The filing states that disclosure controls were effective and that no material changes in internal control occurred during the quarter.
Most important facts for an investor to verify
- Confirm the issuer and corporate identity: this filing is for Crane Co., not an entity named Crane NXT, Co.
- Assess whether the sharp decline in banknote and security-product sales reflects a temporary comparison issue or a continuing customer-concentration risk.
- Reconcile operating cash flow with earnings, particularly the $171.4 million working-capital use in the first half.
- Review asbestos liability assumptions through 2059, insurance recoverability, claim trends, and potential sensitivity to adverse litigation or legal developments.
- Monitor execution of restructuring programs, expected savings, remaining charges, and their effect on recurring margins.
- Evaluate debt maturities, interest rates, liquidity capacity, and the effect of lease obligations on total financial commitments.
- Track Engineered Materials demand, aerospace backlog conversion, and the sustainability of reported productivity and margin gains.