Crane Co. Form 10-Q Summary
Note: The supplied filing is for Crane Co., not Crane NXT, Co. It covers the unaudited three months ended March 31, 2020, compared with March 31, 2019.
Business Context and Reporting Period
Crane Co. operates through four reportable segments: Fluid Handling; Payment & Merchandising Technologies; Aerospace & Electronics; and Engineered Materials. The quarter was materially affected by the emerging COVID-19 pandemic, supply-chain disruptions, lower demand, falling oil and gas prices, and reduced commercial aerospace activity.
- Completed the $172.0 million acquisition of CIRCOR’s Instrumentation & Sampling business on January 31, 2020.
- The December 31, 2019 acquisition of Cummins-Allison contributed to Payment & Merchandising Technologies results.
- All facilities were operating as essential businesses at quarter-end, although some operated at reduced levels or shifts.
Financial Performance and Key Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $797.9 million | $831.7 million | Down 4.1% |
| Operating profit | $88.6 million | $113.7 million | Down 22.1% |
| Operating margin | 11.1% | 13.7% | Down 260 basis points |
| Net income attributable to common shareholders | $62.8 million | $82.4 million | Down 23.8% |
| Diluted EPS | $1.05 | $1.36 | Down 22.8% |
| Effective tax rate | 21.8% | 21.0% | Up 80 basis points |
| Dividends per share | $0.43 | $0.39 | Increased |
- Core sales declined $80.3 million, or 9.7%, and unfavorable currency translation reduced sales by $7.1 million. Acquisitions added $53.6 million, or 6.4%.
- Net income margin was approximately 7.9%, compared with approximately 9.9% in the prior-year quarter.
- Operating profit included $5.2 million of acquisition-related and integration charges and $0.1 million of restructuring-related charges, compared with $1.1 million and $5.0 million, respectively, in Q1 2019.
- Other comprehensive loss was $41.6 million, primarily reflecting a $45.2 million unfavorable currency translation adjustment.
Segment Results
| Segment | Q1 2020 Sales | Sales Change | Q1 2020 Operating Profit | Profit Change |
|---|---|---|---|---|
| Fluid Handling | $256.7 million | Down 6.2% | $28.0 million | Down 17.9% |
| Payment & Merchandising Technologies | $297.4 million | Down 2.1% | $26.4 million | Down 38.9% |
| Aerospace & Electronics | $192.9 million | Down 0.9% | $43.8 million | Down 2.2% |
| Engineered Materials | $50.9 million | Down 14.6% | $6.9 million | Down 26.6% |
Backlog was $1.178 billion at March 31, 2020. Management expected to recognize approximately 79% of backlog in 2020 and an additional 11% in 2021.
Cash Flow, Debt and Liquidity
- Operating cash flow was negative $35.5 million, compared with negative $100.4 million in Q1 2019. Working capital used $123.7 million of cash.
- Investing cash flow was negative $177.4 million, including $172.0 million for the I&S acquisition and $7.8 million of capital expenditures.
- Financing activities provided $134.3 million, including commercial paper and revolving-credit borrowings. The company repurchased 1.221 million shares for $70.0 million and paid $25.5 million in dividends.
- Cash and cash equivalents declined to $302.8 million from $393.9 million at December 31, 2019.
- Short-term borrowings increased to $378.7 million from $149.4 million, consisting of $333.5 million of commercial paper and $45.2 million of revolving-credit borrowings.
- Long-term debt was $842.2 million. Total reported debt was approximately $1.221 billion, excluding other liabilities.
- The commercial paper program had a $550 million capacity, and the revolving credit agreement permitted borrowings of up to $550 million and expired in December 2022.
- On April 16, 2020, after quarter-end, the company borrowed $300 million under a new 364-day senior unsecured credit facility plus €40 million of euro-denominated term loans.
- Management stated that cash, expected operating cash flow, available borrowing capacity and access to debt markets were expected to fund operating needs, capital requirements, asbestos and environmental obligations, and pension contributions.
Material Changes Versus the Prior Comparable Period
- Sales declined despite acquisition contributions, as core demand weakened across most businesses.
- Operating margin contracted from 13.7% to 11.1%, driven primarily by lower volumes, unfavorable mix and acquisition-related costs.
- Payment & Merchandising Technologies profit declined sharply despite Cummins-Allison sales, reflecting COVID-19-related demand pressure and integration costs.
- Commercial aerospace weakened because of the Boeing 737 MAX production pause and reduced airline schedules, while military sales increased.
- Currency translation reduced comprehensive income significantly more than in the prior year.
- Debt increased to fund acquisitions and support liquidity, while the company continued share repurchases and increased its quarterly dividend.
- The company adopted the current expected credit loss standard on January 1, 2020; management reported no material adoption adjustment.
Guidance, Outlook and Management Commentary
- Management expected 2020 sales of $2.8 billion to $3.0 billion, representing a core sales decline of 17% to 22%.
- Management expected COVID-19-related volume reductions to substantially offset approximately $100 million of incremental cost-reduction benefits and the absence of $247.9 million of 2019 asbestos and environmental provisions.
- Management expected 2020 capital expenditures of approximately $30 million to $45 million, reduced from the previously disclosed expectation of approximately $75 million.
- Management expected approximately $50 million of 2020 asbestos settlement and defense payments, net of insurance recoveries.
- Pension contributions of $18.2 million were deferred to January 1, 2021 under the CARES Act; expected 2020 contributions were reduced to $3.2 million for pension plans and $2.5 million for postretirement plans.
- Key risks include the duration and severity of COVID-19, customer and supplier financial condition, supply-chain interruptions, reduced aerospace and energy demand, foreign exchange volatility, acquisition integration, asbestos litigation, environmental remediation, pension funding and access to credit markets.
Unusual Items and Contingencies
- Asbestos liability was $696 million at March 31, 2020, with $94 million of recorded insurance receivables. Approximately 29,162 asbestos claims were pending.
- Net asbestos-related cash payments were $11.7 million in the quarter; gross settlement and defense costs incurred were $12.6 million before insurance recoveries and taxes.
- The estimated gross environmental liability for the Goodyear, Arizona site was $44.2 million, including a $10.9 million current portion; a $9.7 million government reimbursement receivable was recorded.
- Management concluded that goodwill and indefinite-lived intangible assets were not impaired based on COVID-19 sensitivity analyses, but stated that material impairment charges could result if assumptions change.
- Restructuring produced a net gain of $1.2 million in Q1 2020. Additional 2020 and 2021 restructuring costs remained expected.
Important Facts for Investors to Verify
- Confirm that the issuer being analyzed is Crane Co.; the supplied filing does not identify Crane NXT, Co.
- Monitor actual COVID-19-driven sales, margins, backlog conversion and cash generation against the $2.8 billion to $3.0 billion 2020 sales outlook.
- Reconcile post-quarter-end borrowing under the 364-day credit facility with total debt, liquidity and covenant capacity.
- Assess integration, earnings contribution and purchase-price allocations for Cummins-Allison and I&S.
- Track asbestos claim activity, settlement costs, insurance recoveries and changes to the liability estimate through 2059.
- Evaluate potential goodwill and intangible-asset impairment if market values, demand or operating forecasts deteriorate.