Crane Co. Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2018, compared with the corresponding 2017 periods. The filing identifies the registrant as Crane Co.; the provided metadata identifies Crane NXT, Co.
Business Context and Reporting Period
Crane operated through four reportable segments: Fluid Handling, Payment & Merchandising Technologies, Aerospace & Electronics, and Engineered Materials. The January 2018 acquisition of Crane Currency materially expanded the Payment & Merchandising Technologies segment and contributed $348.1 million of nine-month sales.
The unaudited interim financial statements were prepared under U.S. GAAP. The company adopted ASC 606 revenue recognition on January 1, 2018 using the modified retrospective method, recording a $6.7 million increase to opening retained earnings.
Financial Performance and Key Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net sales | $855.8 million | $695.9 million | $2,505.8 million | $2,071.8 million |
| Operating profit | $123.9 million | $102.1 million | $331.2 million | $301.0 million |
| Operating margin | 14.5% | 14.7% | 13.2% | 14.5% |
| Net income attributable to common shareholders | $97.0 million | $68.2 million | $246.4 million | $200.5 million |
| Diluted EPS | $1.59 | $1.13 | $4.04 | $3.32 |
| Effective tax rate | 17.6% | 29.4% | 19.7% | 29.4% |
| Dividends per share | $0.35 | $0.33 | $1.05 | $0.99 |
- Third-quarter sales increased 23.0%, operating profit increased 21.4%, and net income attributable to common shareholders increased 42.2% year over year.
- Nine-month sales increased 20.9%, while operating profit increased 10.0% and net income attributable to common shareholders increased 22.9%.
- Nine-month operating cash flow was $222.4 million, compared with $174.2 million in 2017.
- Capital expenditures were $75.6 million and acquisition spending was $648.0 million during the first nine months. Investing cash flow was negative $722.3 million.
- Cash and cash equivalents were $323.6 million at September 30, 2018, down from $706.2 million at December 31, 2017.
- Total debt was approximately $1.04 billion, consisting of $106.3 million of short-term borrowings and $937.5 million of long-term debt, compared with approximately $743.5 million at year-end 2017.
- The company had no borrowings under its $550 million revolving credit facility at September 30, 2018. Commercial paper outstanding was $106.3 million.
- Accounts receivable were $565.0 million and inventories were $412.0 million at September 30, 2018. Total assets were $4.11 billion and total equity was $1.53 billion.
Material Changes Versus the Prior Comparable Period
- Reported growth was driven primarily by acquisitions. For the third quarter, acquisitions contributed $131.8 million of sales, core sales contributed $40.1 million, and unfavorable foreign exchange reduced sales by $12.0 million. For the nine months, acquisitions contributed $359.3 million, core sales contributed $47.6 million, and favorable foreign exchange contributed $27.1 million.
- Payment & Merchandising Technologies sales increased 73.6% in the third quarter and 62.2% year to date, primarily from Crane Currency. Its year-to-date operating margin declined to 14.8% from 20.8% because of acquisition integration costs, inventory step-up and backlog amortization, and strategic investments.
- Aerospace & Electronics sales and operating profit increased 10.2% and 19.7%, respectively, in the third quarter, supported by military programs and aftermarket demand.
- Fluid Handling sales increased 4.4% in the third quarter, but operating profit declined 1.0% due primarily to restructuring charges and higher material costs.
- Engineered Materials sales declined 12.0% in the third quarter and 9.5% year to date, primarily because of lower recreational vehicle demand. Year-to-date operating profit decreased 17.8%.
- Interest expense increased by $3.0 million in the third quarter and $12.5 million year to date because of additional acquisition-related debt.
- The lower effective tax rate primarily reflected the Tax Cuts and Jobs Act, including the lower U.S. federal statutory rate.
- Foreign currency translation reduced comprehensive income by $32.8 million versus the prior-year quarter and by $112.9 million versus the prior-year nine-month period.
Guidance, Outlook, Risks, and Unusual Items
- Management expected 2018 sales growth of approximately 20%, consisting of more than 15% from acquisitions, approximately 2% to 4% core growth, and a slight foreign-exchange benefit.
- Management expected improved operating profit from productivity, repositioning actions, higher core volumes, and acquired businesses, partially offset by acquisition and integration costs, strategic growth investments, higher input costs, and tariffs.
- Management expected approximately $125 million of 2018 capital expenditures, including $56 million related to Crane Currency.
- Crane Currency integration included closure of Swedish printing operations and a transition to a Malta facility. The company expected workforce reductions of approximately 170 employees, additional charges of $2.4 million in 2018 and $2.6 million in 2019, and recurring annual pretax savings of approximately $23 million.
- Separate 2017 repositioning actions were expected to generate approximately $30 million of recurring annual pretax savings, with additional restructuring and facility-consolidation costs expected through 2020.
- Backlog was $1.112 billion at September 30, 2018. Management expected to recognize approximately 68% of remaining performance obligations in 2018 and 26% in 2019.
- Asbestos liabilities were $542 million, offset by $98 million of estimated insurance receivables. The company had 29,323 pending asbestos claims and recorded $46.4 million of net asbestos-related cash payments during the first nine months.
- Environmental liabilities at the Goodyear site were $35.1 million, with a $7.7 million receivable for expected U.S. government reimbursements. A potential Crab Orchard environmental obligation was considered probable but could not reasonably be estimated.
- The company identified potential additional tariffs and the risk of retaliatory trade measures as a new material risk that could adversely affect costs, global markets, and demand.
- The company continued to finalize provisional accounting for the Tax Cuts and Jobs Act, including GILTI and BEAT provisions. Further adjustments could affect the effective tax rate.
- Goodwill and intangible assets increased substantially following the Crane Currency acquisition. The filing states that impairment testing depends on management forecasts, discount rates, market conditions, and other assumptions; no impairment indicators were identified as of September 30, 2018.
Most Important Facts for an Investor to Verify
- Verify the legal registrant and corporate name, because the filing is for Crane Co. while the request metadata identifies Crane NXT, Co.
- Assess the sustainability of earnings growth excluding the Crane Currency acquisition and other acquisition-related effects.
- Review leverage, interest expense, commercial paper usage, debt maturities, and compliance with subsidiary debt covenants.
- Evaluate whether the projected restructuring savings and Crane Currency integration benefits offset integration costs, amortization, tariffs, and higher input costs.
- Monitor asbestos claim activity, insurance recoveries, environmental obligations, and the sensitivity of recorded liabilities to actuarial and legal assumptions.
- Reconcile reported margins with the effects of restructuring charges, acquisition costs, inventory step-up, backlog amortization, pension presentation changes, and the ASC 606 adoption.
- Track cash conversion, working-capital requirements, pension contributions, capital expenditures, dividends, and future acquisition spending.