Crane Co. 10-Q Summary
Reporting period: Three months ended March 31, 2021. The filing is for Crane Co. and its subsidiaries; the provided metadata identifies the company as Crane NXT, Co. The financial statements are unaudited and prepared under U.S. GAAP.
Business Context
Crane operated through four reportable segments: Fluid Handling; Payment & Merchandising Technologies; Aerospace & Electronics; and Engineered Materials. Operations were affected by the COVID-19 pandemic, including reduced commercial aerospace activity and continued demand impacts in certain payment markets.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $833.5 million | $797.9 million | 4.5% increase |
| Operating profit | $146.4 million | $88.6 million | 65.2% increase |
| Operating margin | 17.6% | 11.1% | Up 650 basis points |
| Income before taxes | $137.1 million | $80.3 million | 70.7% increase |
| Net income attributable to common shareholders | $108.4 million | $62.8 million | 72.6% increase |
| Diluted EPS | $1.84 | $1.05 | Increase |
| Effective tax rate | 20.9% | 21.8% | Lower by 90 basis points |
| Dividend per share | $0.43 | $0.43 | Unchanged |
Sales growth included $25.2 million of favorable foreign currency translation, $5.4 million of core sales growth, and a $5.0 million benefit from the January 2020 Instrumentation & Sampling acquisition. The quarter included a $13.1 million net restructuring gain, compared with a $1.2 million gain in the prior-year quarter, while Q1 2020 included $5.2 million of acquisition-related and integration charges.
Segment Performance
| Segment | Q1 2021 Sales | Year-over-Year Sales | Q1 2021 Operating Profit |
|---|---|---|---|
| Fluid Handling | $288.0 million | 12.2% increase | $49.9 million |
| Payment & Merchandising Technologies | $337.5 million | 13.5% increase | $85.9 million |
| Aerospace & Electronics | $154.1 million | 20.1% decrease | $26.0 million |
| Engineered Materials | $53.9 million | 5.9% increase | $6.4 million |
Payment & Merchandising Technologies benefited from substantially higher banknote and security product sales, partially offset by lower payment acceptance and dispensing sales. Aerospace & Electronics declined because of lower aircraft build rates and commercial airline flight hours. Engineered Materials benefited from recreational vehicle demand but experienced higher material costs.
Cash Flow, Liquidity and Debt
- Cash provided by operating activities was $50.2 million, compared with cash used of $35.5 million in Q1 2020. The improvement primarily reflected higher earnings and lower working-capital usage, partly offset by higher pension contributions.
- Investing activities provided $29.6 million, compared with $177.4 million used in Q1 2020. The prior-year period included $172.0 million for the I&S acquisition.
- Financing activities used $44.9 million, including $25.0 million of dividends and $27.1 million of commercial-paper repayments. No open-market share repurchases occurred in Q1 2021.
- Cash and cash equivalents increased to $578.4 million from $551.0 million at December 31, 2020.
- Short-term borrowings were $346.9 million and long-term debt was $843.2 million at March 31, 2021. The short-term balance consisted primarily of borrowings under a 364-day credit agreement; no commercial paper was outstanding at quarter-end.
- The company had a $550 million commercial paper program and a $550 million revolving credit agreement expiring in December 2022. On April 15, 2021, after quarter-end, the company repaid the 364-day credit agreement with cash and newly issued commercial paper.
- Management stated that available cash, expected operating cash flow, borrowing capacity and investment-grade credit ratings were sufficient for expected capital needs, dividends, pension contributions, asbestos obligations and environmental liabilities.
Material Changes Versus the Prior Comparable Period
- Revenue increased 4.5%, with foreign exchange accounting for most of the reported growth and core sales increasing 0.7%.
- Operating profit and net income rose sharply, supported by higher volumes, productivity and restructuring savings, as well as the absence of 2020 acquisition and integration costs.
- Operating margin expanded to 17.6% from 11.1%, although the comparison benefited from the $13.1 million restructuring gain in 2021.
- Aerospace & Electronics sales fell 20.1%, and its backlog declined 12.0% to $481.6 million.
- Payment & Merchandising Technologies operating profit increased 225.4%, primarily due to favorable mix, higher banknote sales, productivity and restructuring savings.
- Comprehensive income attributable to common shareholders was $77.6 million, compared with $21.5 million, despite a $34.9 million currency translation loss in Q1 2021.
Guidance, Outlook, Risks and Unusual Items
Management expected approximately 8% total sales growth for 2021, consisting of mid-single-digit core growth, an approximately 2.5% foreign-exchange benefit and a slight acquisition benefit. Management expected operating profit to improve by more than 70%, driven by higher volumes, productivity, repositioning savings and the absence of 2020 acquisition-related and restructuring costs.
- Fluid Handling sales were expected to grow in the high-single-digit range, and Payment & Merchandising Technologies sales in the low-double-digit range.
- Aerospace & Electronics core sales were expected to decline in the mid-single-digit range because of depressed commercial air travel and lower aircraft build rates.
- Engineered Materials sales were expected to increase approximately 20%, driven by recreational vehicle, trailer and selected building-product demand.
- Management expected approximately $75 million of 2021 capital expenditures and approximately $45 million of net asbestos-related payments.
- Total backlog was $1.161 billion at March 31, 2021, with approximately 87% expected to convert to revenue in 2021 and 10% in 2022.
- Asbestos liabilities totaled $657 million, partially offset by an $84 million insurance receivable. The company had 29,407 pending asbestos claims and stated that the estimate was subject to significant uncertainty.
- The Goodyear environmental liability was $37.5 million, with a $7.3 million receivable for expected U.S. government reimbursements. The ultimate obligation for the Crab Orchard site could not be reasonably estimated.
- Key risks included COVID-19 effects, cyclical and volatile end markets, raw-material inflation, foreign-exchange movements, customer and supplier financial condition, acquisition integration, defense spending, aerospace recovery, asbestos litigation, environmental remediation and pension-asset performance.
Investor Verification Items
- Reconcile reported operating improvement with the $13.1 million restructuring gain and the absence of $5.2 million of prior-year acquisition-related charges.
- Assess the sustainability of Payment & Merchandising Technologies growth, particularly banknote demand and the recovery of vending-related payment sales.
- Monitor commercial aerospace exposure, backlog conversion and the pace of recovery in aircraft production and airline flight hours.
- Review liquidity after the April 15, 2021 repayment of the 364-day credit agreement and the subsequent commercial-paper issuance.
- Evaluate future asbestos claims, settlement costs, insurance recoveries and potential changes to actuarial assumptions.
- Verify the identity discrepancy between the request metadata, which names Crane NXT, Co., and the filing itself, which identifies Crane Co.