Business Context and Reporting Period
This filing is Crane Co.’s Form 10-K for the fiscal year ended December 31, 2017. The company operated four segments: Fluid Handling; Payment & Merchandising Technologies; Aerospace & Electronics; and Engineered Materials. The filing predates the company’s later Crane NXT name and does not refer to Crane NXT, Co.
Crane manufactured engineered industrial products serving chemical, oil and gas, power, payment technology, vending, aerospace and defense, recreational vehicle, transportation, and building-product markets. Approximately 37% of 2017 revenue and 36% of assets were outside the United States. The company had approximately 10,600 employees.
Key Financial Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net sales | $2,786.0 million | $2,748.0 million | Up 1% |
| Operating profit | $401.9 million | $200.3 million | Up 101% |
| Operating margin | 14.4% | 7.3% | Up 7.1 points |
| Income before taxes | $367.5 million | $164.1 million | Up $203.4 million |
| Net income attributable to common shareholders | $171.8 million | $122.8 million | Up 40% |
| Diluted EPS | $2.84 | $2.07 | Up 37% |
| Cash flow from operations | $317.5 million | $318.1 million | Essentially flat |
| Capital expenditures | $49.0 million | $51.5 million | Down $2.5 million |
| Cash and equivalents | $706.2 million | $509.7 million | Up $196.5 million |
| Total debt | $743.5 million | $745.3 million | Down $1.8 million |
Gross profit was $1,015.1 million, implying a gross margin of approximately 36.4%, compared with approximately 36.0% in 2016. The effective tax rate increased to 53.1% from 24.6%, primarily because of an $87.1 million provisional charge related to the Tax Cuts and Jobs Act. Dividends were $1.32 per share, or approximately $78.4 million in total. The company repurchased 331,632 shares for $25.0 million.
- Fluid Handling: Sales of $1,042.5 million, up 4%; operating profit of $111.8 million, down 6%; margin of 10.7%.
- Payment & Merchandising Technologies: Sales of $776.7 million, up 4%; operating profit of $148.5 million, up 10%; margin of 19.1%.
- Aerospace & Electronics: Sales of $691.4 million, down 7%; operating profit of $160.2 million, up 7%; margin of 23.2%.
- Engineered Materials: Sales of $275.4 million, up 7%; operating profit of $49.5 million, up 1%; margin of 18.0%.
Backlog was $726 million at December 31, 2017, compared with $691 million at December 31, 2016. Research and development expense was $58.5 million.
Material Changes Versus the Prior Comparable Period
- Sales increased $38 million, consisting of $31 million of core growth and a $14 million net acquisition benefit, partly offset by $7 million of unfavorable foreign exchange.
- Operating profit increased $202 million, largely because 2016 included a $192.4 million asbestos provision and a $5.0 million Huttig legal settlement charge. The 2017 result included $7.8 million of transaction costs and $13.0 million of restructuring charges, net of a property-sale gain.
- Payment Acceptance and Dispensing Products grew 13%, while Merchandising Equipment declined 14% because of lower capital spending by certain U.S. bottler customers.
- Aerospace sales declined because a large military program shipped in 2016 did not repeat and commercial business-jet and wide-body demand was weaker; productivity and a property-sale gain nevertheless increased segment profit.
- Restructuring actions affected approximately 300 employees, or about 3% of the global workforce. The company expects approximately $30 million of recurring annual savings after completing the actions, with an additional $16.7 million of restructuring and facility-consolidation costs expected during 2018–2020.
- The company acquired Westlock Controls for $40 million and Microtronic AG for approximately $18 million during 2017.
Guidance, Outlook, Risks and Unusual Items
Management expected 2018 sales to increase approximately 18.5%, driven by about 15% from acquisitions, approximately 3% core growth, and a 0.5% foreign-exchange benefit. Management expected operating profit to improve through productivity, repositioning actions, higher core volume, and acquisitions, partly offset by integration costs and strategic growth investments.
On January 10, 2018, after the reporting period, Crane completed the $800 million cash-free, debt-free acquisition of Crane Currency, a banknote and banknote-security supplier. Management expected Payment & Merchandising Technologies sales to increase more than 50% in 2018, primarily from this acquisition. Purchase-price allocation and pro forma results were not available in the filing.
To fund the acquisition, the company used cash, issued $340 million of commercial paper, and drew $100 million under a 364-day credit agreement and $200 million under a three-year term loan. On February 5, 2018, it issued $350 million of 4.20% senior notes due 2048 and used proceeds and cash to repay the $100 million 364-day borrowing. It also issued notice to redeem the $250 million of 2.75% notes due December 2018.
- Asbestos: The company had 32,234 pending claims and an aggregate asbestos liability of $605 million at year-end, partially offset by a $115 million insurance receivable. Net asbestos cash payments were $62.5 million in 2017. Estimates are highly sensitive to claim volumes, settlement costs, defense costs, litigation outcomes, insurance recoveries, and legislative or judicial developments.
- Environmental: The Goodyear Site liability was $41.2 million, with an $8.5 million expected reimbursement receivable from the U.S. government. The company also reported a probable but not reasonably estimable potential obligation relating to the Crab Orchard Superfund Site.
- Tax: The $87 million TCJA charge was provisional under SAB 118 and could change during the 2018 measurement period.
- Pension: Defined-benefit plans had a funded status deficit of $166.6 million. The company expected approximately $25 million of pension contributions in 2018.
- Other risks: Key exposures include cyclical end markets, aerospace and defense spending, central-bank banknote contract timing, raw-material costs, foreign exchange, acquisition integration, government-contract compliance, cybersecurity, product liability, environmental obligations, and goodwill impairment.
Goodwill and net other intangible assets totaled approximately $1.484 billion, or about 41% of total assets. No goodwill or intangible-asset impairment was recorded in 2017, 2016, or 2015. The company’s independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm the company identity: the source is Crane Co.’s 2017 Form 10-K, not a filing under the Crane NXT name.
- Reconcile reported 2017 earnings with the absence of the 2016 asbestos charge and the inclusion of the provisional $87 million TCJA charge.
- Assess the post-year-end Crane Currency acquisition, including final purchase-price allocation, integration costs, leverage, and realized synergies.
- Review asbestos claim trends, the $605 million liability, the $115 million insurance receivable, and annual cash-payment requirements.
- Evaluate liquidity after the acquisition financing, including the $340 million commercial-paper issuance, term loan, 2048 notes, and 2018 note redemption.
- Test management’s 2018 outlook against segment-specific assumptions, particularly the more-than-50% Payment & Merchandising Technologies sales growth expectation.
- Monitor the provisional TCJA accounting, pension funding needs, environmental contingencies, raw-material inflation, foreign-exchange exposure, and potential goodwill impairment.