Crane Co. Form 10-Q Summary
Reporting period: Three months ended March 31, 2017, compared with the first quarter of 2016. The filing registrant is Crane Co.; the request metadata identifies Crane NXT, Co.
Business Context and Financial Metrics
The company reports four segments: Fluid Handling, Payment & Merchandising Technologies, Aerospace & Electronics, and Engineered Materials. The financial statements are unaudited and prepared under U.S. GAAP.
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $673.4 million | $660.0 million | Up 2.0% |
| Operating profit | $96.6 million | $85.5 million | Up 13.0% |
| Operating margin | 14.3% | 13.0% | Up 130 basis points |
| Net income attributable to common shareholders | $63.1 million | $55.0 million | Up 14.7% |
| Diluted EPS | $1.05 | $0.93 | Up 12.9% |
| Dividends per share | $0.33 | $0.33 | Unchanged |
| Operating cash flow | $3.5 million | $(18.0) million | Improved $21.5 million |
| Capital expenditures | $9.6 million | $11.0 million | Down $1.4 million |
Sales growth included 4.1% core growth, offset by 1.8% unfavorable foreign-currency translation and a 0.3% divestiture impact. Net sales outside the United States represented 35.0% of total sales, compared with 36.1% in the prior-year quarter.
- Payment & Merchandising Technologies: Sales increased 13.7% to $195.5 million and operating profit increased 39.6% to $39.1 million, primarily on higher core sales.
- Engineered Materials: Sales increased 9.7% to $74.9 million; operating profit increased 2.2% to $14.0 million.
- Fluid Handling: Sales declined 3.4% to $239.6 million, but operating profit increased 6.7% to $27.1 million due to productivity and lower costs.
- Aerospace & Electronics: Sales declined 4.8% to $163.4 million and operating profit declined 3.0% to $32.1 million, primarily because a large military program did not repeat.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $504.8 million at March 31, 2017, compared with $509.7 million at December 31, 2016.
- Total assets were $3.451 billion and total equity was $1.232 billion.
- Long-term debt was $745.5 million, consisting of $250 million of 2.75% notes due 2018, $300 million of 4.45% notes due 2023, and $200 million of 6.55% notes due 2036.
- No borrowings were outstanding under the $500 million commercial paper program or the $500 million revolving credit facility, which matures in 2020.
- The company stated that cash, expected operating cash flow, available borrowing capacity and access to debt markets should be sufficient for capital needs, acquisitions, dividends, and asbestos, environmental and pension obligations.
- Financing cash flow was negative $6.8 million, primarily reflecting $19.6 million of dividends, partly offset by $12.8 million from stock-option exercises.
Material Changes Versus the Prior Comparable Period
- Profitability improved more rapidly than sales: operating margin increased from 13.0% to 14.3%, and net income increased 14.7%.
- Payment & Merchandising Technologies was the primary earnings growth driver, while Aerospace & Electronics declined because of lower military original-equipment sales and weaker commercial demand.
- Operating cash flow improved from an $18.0 million use to $3.5 million provided, mainly because of lower working-capital requirements and higher earnings. Working capital still used $62.8 million of cash.
- Net asbestos-related cash payments increased to $14.7 million from $10.8 million. Gross asbestos settlement and defense costs incurred increased to $28.0 million from $21.3 million.
- The company adopted new guidance for deferred-tax balance-sheet classification and inventory measurement; management reported no material impact.
- On April 28, 2017, after quarter-end, the company acquired Westlock Controls for $40 million in cash. Westlock reported approximately $32 million of 2016 sales.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2017 sales to decline approximately 2% year over year, including 3% unfavorable foreign exchange and a 0.5% transition-services impact, partly offset by approximately 1% core sales growth.
- Management expected substantial improvement in full-year operating profit and margins, supported by the absence of an asbestos provision, productivity, higher core volume, product mix and lower Aerospace & Electronics engineering expense.
- Expected segment trends were mid-single-digit sales declines in Fluid Handling and Aerospace & Electronics, mid-single-digit growth in Payment & Merchandising Technologies, and slight growth in Engineered Materials.
- Expected 2017 cash obligations included approximately $55 million of net asbestos payments, $13 million of environmental payments, and $12 million of pension contributions. Capital expenditures were expected to approximate $50 million.
- Asbestos liabilities totaled $674 million at March 31, 2017, with $136 million of estimated insurance recoveries. The liability reflects claims projected through 2059 and is subject to significant uncertainty regarding claim volumes, litigation outcomes, settlement costs, insurance recoveries and legal developments.
- The company had 35,560 pending asbestos claims at March 31, 2017. No change was made to the asbestos estimate during the quarter.
- The Goodyear environmental remediation liability was $47.5 million, with a $10.6 million receivable for expected U.S. government reimbursements. A separate Crab Orchard environmental matter was considered probable, but the amount of any obligation could not be reasonably estimated.
- Goodwill totaled $1.158 billion and net intangible assets totaled $278.8 million. Management reported no impairment indicators, but future impairment charges could result if operating performance or valuation assumptions deteriorate.
- The effective tax rate was 28.0%, compared with 27.9% in the prior-year quarter. Results benefited from share-based compensation tax effects, which management noted can be volatile.
Most Important Facts for Investors to Verify
- Whether the expected 2017 sales decline and substantial margin improvement are tracking against actual quarterly results.
- The sustainability of Payment & Merchandising Technologies growth and the effect of retail, transportation, vending, financial-services and gaming demand.
- The impact of the completed military program on Aerospace & Electronics sales, backlog and margins.
- Quarterly asbestos claims, cash payments, insurance recoveries and any changes to the liability estimate through 2059.
- Cash conversion, working-capital needs and funding of the expected $50 million capital program, dividends, pension contributions and environmental obligations.
- The integration and financial contribution of the $40 million Westlock Controls acquisition.
- Potential effects of foreign exchange, cyclical end markets, commodity costs, litigation, environmental remediation and future accounting-standard adoption.