Crane Co. 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018, including fourth-quarter results. The source filing identifies the registrant as Crane Co.; the request metadata refers to Crane NXT, Co. The company operated through four segments: Fluid Handling; Payment & Merchandising Technologies; Aerospace & Electronics; and Engineered Materials.
Business context and key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $3,345.5 million | $2,786.0 million | +20.1% |
| Operating profit | $441.3 million | $388.4 million | +13.6% |
| Operating margin | 13.2% | 13.9% | Down 70 basis points |
| Income before taxes | $411.4 million | $367.5 million | +11.9% |
| Net income attributable to common shareholders | $335.6 million | $171.8 million | +95.3% |
| Diluted EPS | $5.50 | $2.84 | +93.7% |
| Cash flow from operating activities | $413.8 million | $317.5 million | +30.3% |
| Capital expenditures | $108.8 million | $49.0 million | +122.0% |
| Cash and cash equivalents | $343.4 million | $706.2 million | Down $362.8 million |
| Total debt | $949.2 million | $743.5 million | +27.7% |
Sales growth consisted of $470.9 million from acquisitions, $76.7 million of core growth and $11.9 million of favorable foreign-exchange translation. Net sales outside the United States represented 37% of consolidated sales.
Segment performance
| Segment | 2018 sales | Sales change | 2018 operating profit | Operating margin |
|---|---|---|---|---|
| Fluid Handling | $1,101.8 million | +5.7% | $118.8 million | 10.8% |
| Payment & Merchandising Technologies | $1,257.0 million | +61.8% | $186.0 million | 14.8% |
| Aerospace & Electronics | $743.5 million | +7.5% | $164.2 million | 22.1% |
| Engineered Materials | $243.2 million | -11.7% | $37.8 million | 15.5% |
Payment & Merchandising Technologies benefited substantially from the January 10, 2018 acquisition of Crane Currency, which contributed $458.2 million of sales and approximately $33.8 million of operating profit after closing. Engineered Materials declined primarily because of lower recreational-vehicle production and higher raw-material costs.
Material changes versus prior comparable period
- Crane Currency was acquired for a base purchase price of $800 million; net cash paid after adjustments was $648.0 million. The acquisition added banknote and security-product operations and increased goodwill and intangible assets.
- Payment & Merchandising Technologies sales increased $480.3 million, primarily from Crane Currency. Its operating margin declined from 18.8% to 14.8% because of acquisition-related charges, inventory and backlog amortization, and integration costs.
- Operating profit included $19.8 million of acquisition-related and integration charges, $9.1 million of acquisition-related inventory and backlog amortization, and $14.7 million of restructuring and related charges.
- The effective tax rate declined to 18.4% from 53.1%. The 2017 rate included an $87.0 million one-time charge related to the U.S. Tax Cuts and Jobs Act; 2018 included a $4.8 million related tax benefit.
- Net debt increased materially to $605.8 million from $37.3 million, reflecting acquisition financing despite debt repayments during the year. Debt to total capitalization was 38% at year-end.
- Backlog increased to $1,072.6 million from $725.7 million, led by Payment & Merchandising Technologies and Aerospace & Electronics. Approximately 93% of remaining performance obligations were expected to be recognized as revenue in 2019.
Cash flow, liquidity and debt
Operating cash flow was $413.8 million, including $63.9 million of net asbestos-related cash payments and $59.8 million of defined-benefit plan and postretirement contributions. Investing cash flow was negative $752.3 million, principally because of the Crane Currency acquisition and higher capital expenditures. Financing cash flow was negative $7.9 million after debt issuance and repayments, dividends of $83.5 million and share repurchases of $50.1 million.
Year-end debt consisted primarily of $298.6 million of 4.45% notes due 2023, $198.2 million of 6.55% notes due 2036, $345.9 million of 4.20% notes due 2048, and acquired European loan facilities. No commercial paper or revolving-credit borrowings were outstanding at year-end. The company had $343.4 million of cash, including $336 million held by non-U.S. subsidiaries, and investment-grade ratings of BBB from S&P and Baa2 from Moody’s, both with stable outlooks.
Guidance, outlook, risks and unusual items
Management expected 2019 sales to decline approximately 2%, reflecting a slight core-sales decline and a 1% to 2% unfavorable foreign-exchange effect. Operating profit was expected to improve through productivity, repositioning benefits, and lower acquisition-related and restructuring costs.
- Fluid Handling sales were expected to grow at a low-single-digit rate, with improved operating profit and margin.
- Payment & Merchandising Technologies sales were expected to decline at a high-single-digit rate, including lower Crane Currency sales to one particular customer, while operating profit and margin were expected to improve.
- Aerospace & Electronics core sales were expected to grow at a mid-single-digit rate, although defense original-equipment sales were expected to decline from the 2018 radar-program comparison.
- Engineered Materials sales were expected to be comparable with 2018, with slightly lower operating profit and margin.
- Management expected approximately $90 million of 2019 capital expenditures and approximately $50 million of 2019 net asbestos settlement and defense payments.
- The company expected additional 2019 restructuring and facility-consolidation charges of approximately $9.9 million, with additional charges of $1.6 million expected in 2020. Expected recurring annual savings from the actions were approximately $30 million.
Material risks include asbestos litigation, environmental remediation, cyclical end markets, raw-material and tariff costs, foreign-exchange exposure, government-contract compliance, defense-spending changes, acquisition integration, banknote-contract timing, cybersecurity, pension funding, tax examinations and potential goodwill or intangible-asset impairment.
Asbestos liabilities totaled approximately $517 million at December 31, 2018, with $91 million of related insurance receivables and 29,089 pending claims. The company recorded a $33.1 million gross environmental liability for the Goodyear Site, partially offset by a $6.7 million expected U.S. government reimbursement receivable. No goodwill impairment was recorded in 2018; goodwill and other intangible assets totaled approximately $1.9 billion.
Investor verification items
- Verify the legal entity and corporate name, because the source filing is for Crane Co., while the request metadata identifies Crane NXT, Co.
- Reconcile reported 2018 earnings growth with the prior-year $87 million tax charge and the 2018 acquisition-related and restructuring items.
- Assess the sustainability of Crane Currency revenue, backlog and margins, including customer concentration and the expected 2019 decline.
- Review debt maturities, fixed-interest obligations, liquidity, foreign cash balances and compliance with credit-facility covenants.
- Evaluate asbestos liability assumptions, insurance recoveries, claim trends and expected annual cash payments through 2059.
- Monitor Engineered Materials exposure to RV demand and resin costs, and Aerospace & Electronics exposure to defense-program timing and commercial-aircraft cycles.
- Confirm the effects of ASC 606 adoption, including the $6.7 million opening retained-earnings adjustment and changes in contract assets, liabilities and inventory.