Crane Co. 2018 Q1 Form 10-Q Summary
Reporting period: Three months ended March 31, 2018; filed May 1, 2018. The filing identifies the registrant as Crane Co. and reports four segments: Fluid Handling, Payment & Merchandising Technologies, Aerospace & Electronics, and Engineered Materials. Financial statements are unaudited.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $799.1 million | $673.4 million | +18.7% |
| Operating profit | $94.3 million | $93.3 million | +1.1% |
| Operating margin | 11.8% | 13.9% | Down 210 bps |
| Income before taxes | $84.4 million | $87.9 million | -4.0% |
| Effective tax rate | 18.6% | 28.0% | Down 940 bps |
| Net income attributable to common shareholders | $68.7 million | $63.1 million | +8.9% |
| Diluted EPS | $1.13 | $1.05 | +7.6% |
| Dividends per share | $0.35 | $0.33 | +6.1% |
| Operating cash flow | $74.2 million | $3.5 million | +$70.7 million |
Sales growth consisted of a $103.2 million acquisition benefit, a $27.5 million favorable foreign-exchange impact, and a $5.0 million decline in core sales. The lower operating margin reflected acquisition-related and integration charges, acquired inventory and backlog amortization, restructuring costs, and higher corporate costs.
Segment results
| Segment | Q1 2018 sales | Year-over-year sales | Q1 2018 operating profit |
|---|---|---|---|
| Fluid Handling | $266.6 million | +11.3% | $28.1 million |
| Payment & Merchandising Technologies | $292.4 million | +49.6% | $36.5 million |
| Aerospace & Electronics | $170.4 million | +4.3% | $34.2 million |
| Engineered Materials | $69.7 million | -6.9% | $12.4 million |
Payment & Merchandising Technologies included $99.8 million of Crane Currency sales following the January 2018 acquisition. Its operating profit declined 4.9% because of $5.2 million of acquisition-related and integration charges and $6.4 million of acquired inventory step-up and backlog amortization. Engineered Materials declined because of weaker recreational-vehicle demand and higher material costs.
Cash flow, balance sheet, debt, and liquidity
- Cash and cash equivalents were $642.3 million at March 31, 2018, down from $706.2 million at December 31, 2017.
- Investing cash outflow was $699.5 million, including $672.3 million paid for Crane Currency and $27.5 million of capital expenditures.
- Financing cash inflow was $550.9 million, primarily from commercial paper and debt issuance, partly offset by debt repayments, dividends, and financing costs.
- Total debt was approximately $1.41 billion, consisting of $272.7 million of short-term borrowings and current maturities and $1.14 billion of long-term debt, compared with approximately $743.5 million at December 31, 2017.
- The company had $272.7 million outstanding under a commercial paper program with a $500 million limit and no borrowings under its $550 million revolving credit facility.
- In April 2018, the company repatriated $294 million of non-U.S. cash and used part of it to repay the $200 million outstanding under its three-year term loan.
- Management stated that cash, expected operating cash flow, available borrowing capacity, and access to debt markets should be sufficient for capital requirements, acquisitions, dividends, and asbestos, environmental, and pension obligations.
Material changes versus Q1 2017 and year-end 2017
- Crane Currency was acquired on January 10, 2018 for a base purchase price of $800 million; net cash paid was $672.3 million. It contributed $99.8 million of sales and an approximately $0.9 million operating loss from acquisition through March 31.
- Goodwill increased to $1.45 billion from $1.21 billion, primarily from $231.0 million of preliminary goodwill recognized for Crane Currency. Net intangible assets increased to $521.0 million from $276.8 million.
- Debt increased materially to fund the acquisition, although the company issued $350 million of 4.20% senior notes due 2048 and repaid $250 million of 2.75% notes due December 2018 and $100 million under a 364-day credit agreement.
- The company adopted ASC 606 using the modified retrospective method, increasing opening retained earnings by $6.7 million. Q1 2018 revenue and cost of sales were increased by $12.4 million and $9.7 million, respectively, compared with the prior recognition method.
- Backlog was $977 million at March 31, 2018, with approximately 93% expected to be recognized as revenue in 2018 and an additional 5% by 2019.
- Restructuring actions initiated in Q4 2017 targeted approximately 300 employee reductions and facility consolidations. The company expects approximately $30 million of recurring annual savings after implementation, with $16.7 million of additional restructuring and facility-consolidation charges expected during 2018–2020.
Guidance, outlook, and management commentary
- For full-year 2018, management expects sales growth of more than 20%, including acquisition benefits of more than 15%, core sales growth of approximately 2%–4%, and a modest favorable foreign-exchange effect.
- Management expects operating profit to improve through productivity, repositioning benefits, higher core volume, and acquired earnings, partly offset by higher transaction and integration costs, strategic growth investments, and input costs.
- Fluid Handling sales are expected to increase in the mid-single-digit range, with improved operating profit and margins.
- Payment & Merchandising Technologies sales are expected to increase more than 50%, primarily from Crane Currency, while operating profit is expected to be modestly higher despite substantially higher integration costs and strategic investments.
- Aerospace & Electronics core sales are expected to increase in the mid-single-digit range, but operating profit is expected to decline because of the absence of a prior-year property-sale gain and higher strategic investments.
- Engineered Materials sales and operating profit are expected to decline, primarily because of lower recreational-vehicle and transportation demand.
- Expected 2018 capital expenditures are approximately $125 million, including $56 million related to Crane Currency. Expected net asbestos payments are approximately $60 million, environmental payments approximately $7 million, and pension and postretirement contributions approximately $30 million.
Risks, contingencies, and unusual items
- Asbestos liabilities were $596 million at March 31, 2018, including $85 million classified as current; related insurance receivables were $108 million. Approximately 30,990 claims were pending. Management’s estimate extends projected costs through 2059 and is subject to significant litigation, claims, settlement-cost, insurance, and legal uncertainties.
- Gross asbestos settlement and defense costs incurred were $14.8 million in Q1 2018, while net cash payments after insurance recoveries were $2.9 million.
- The Goodyear environmental liability was $39.0 million, with an $8.5 million receivable for expected U.S. government reimbursements. The company could not reasonably estimate any obligation beyond current accruals through 2022.
- The company considers a loss probable regarding the Crab Orchard environmental site but stated that the amount cannot currently be reasonably estimated.
- Crane Currency purchase-price allocations remain preliminary; future adjustments to acquired assets, liabilities, goodwill, and intangible values could be material.
- The company’s provisional accounting for the Tax Cuts and Jobs Act included an $87 million charge in Q4 2017. A further $0.3 million tax expense was recorded in Q1 2018, and additional measurement-period adjustments could be recorded through Q4 2018.
- Key operating risks include cyclical end markets, foreign-exchange movements, commodity and labor costs, acquisition integration, execution of restructuring actions, debt levels, goodwill and intangible-asset impairment, environmental obligations, and asbestos litigation.
Investor verification items
- Verify the final purchase-price allocation and integration performance of Crane Currency, including acquired backlog, intangible assets, goodwill, and expected synergies.
- Reconcile reported sales and operating profit with acquisition, foreign-exchange, ASC 606, pension-presentation, and other non-recurring effects.
- Monitor leverage, commercial-paper balances, term-loan repayment, interest expense, and compliance with debt covenants.
- Assess whether projected core sales growth, approximately $30 million of restructuring savings, and segment margin expectations are being achieved.
- Track asbestos claims, settlement costs, insurance recoveries, and changes in actuarial assumptions or litigation outcomes.
- Review the final TCJA accounting, including GILTI and BEAT treatment, repatriation taxes, and any deferred-tax adjustments.
- Evaluate environmental exposures, particularly the Goodyear and Crab Orchard matters, where future costs may differ materially from recorded amounts.