Crane NXT, Co. quarterly report, Q3 FY2017

Crane Co. 2017 Q3 Form 10-Q Summary

Business context and reporting period

This filing is for Crane Co. and its subsidiaries for the quarter and nine months ended September 30, 2017. The company reported four segments: Fluid Handling, Payment & Merchandising Technologies, Aerospace & Electronics, and Engineered Materials. The filing predates the company name referenced in the request as Crane NXT, Co.

Financial performance and position

MetricQ3 2017Q3 20169M 20179M 2016
Net sales$695.9 million$694.2 million$2,071.8 million$2,066.5 million
Operating profit$105.4 million$103.8 million$311.0 million$291.9 million
Operating margin15.1%15.0%15.0%14.1%
Net income attributable to common shareholders$68.2 million$63.5 million$200.5 million$186.8 million
Diluted EPS$1.13$1.07$3.32$3.16
  • Q3 sales increased 0.2%, while operating profit increased 1.5% and net income attributable to common shareholders increased 7.4%.
  • Nine-month sales increased 0.3%, operating profit increased 6.5%, and attributable net income increased 7.3%.
  • The nine-month effective tax rate was 29.4%, unchanged from 2016; the Q3 rate declined to 29.4% from 33.0%.
  • Nine-month cash provided by operating activities was $174.2 million, compared with $168.4 million in 2016. Capital expenditures were $34.3 million, and acquisition payments were $54.8 million.
  • Cash and cash equivalents were $572.2 million at September 30, 2017, compared with $509.7 million at December 31, 2016.
  • Long-term debt was $745.9 million, consisting primarily 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 commercial paper or revolving-credit borrowings were outstanding.
  • The company had $1.42 billion of current assets and $535.2 million of current liabilities. Its $500 million commercial paper program and $500 million revolving credit facility were available for liquidity needs.
  • Nine-month dividends paid totaled $58.8 million; the company repurchased 331,632 shares for $25.0 million.

Material changes versus the prior comparable period

  • Q3 consolidated sales benefited from $7.3 million of net acquisition/divestiture effects and $4.5 million of favorable currency translation, offset by a $10.1 million decline in core sales.
  • Nine-month sales reflected $17.9 million of core growth and $8.6 million of net acquisition/divestiture contribution, offset by $21.2 million of unfavorable currency translation.
  • Payment & Merchandising Technologies was the strongest operating contributor: nine-month sales rose 5.6% and operating profit rose 26.7%, driven by payment products and productivity, despite weaker merchandising equipment sales.
  • Fluid Handling Q3 sales rose 8.9% and operating profit rose 6.2%; its backlog increased to $269 million from $228 million at December 31, 2016.
  • Aerospace & Electronics Q3 sales declined 13.2% and nine-month sales declined 9.4%, primarily because a large military program shipped in 2016 did not repeat. Nine-month operating profit declined 5.2%.
  • Engineered Materials Q3 sales rose 6.5% and nine-month sales rose 8.0%, led by recreational vehicle demand.
  • Q3 and nine-month results included transaction-related charges of $0.5 million and $3.1 million, respectively, related to the Westlock Controls and Microtronic acquisitions. The 2016 nine-month comparison also included a $5.0 million legal settlement charge and a $0.4 million restructuring gain.
  • The company acquired Westlock Controls for $40 million in April 2017 and Microtronic for approximately $18 million in June 2017. The acquisitions added $31.5 million of goodwill.

Guidance, outlook, commentary, risks and unusual items

  • Management expected 2017 total sales to increase slightly from 2016, with acquisition-related revenue and slight core growth partly offset by unfavorable foreign exchange.
  • Management expected substantial improvement in operating profit and margins, supported by the absence of an asbestos provision, productivity, favorable mix, and lower Aerospace & Electronics engineering expense.
  • Management expected approximately $50 million of 2017 capital expenditures, approximately $60 million of net asbestos settlement and defense payments, approximately $13 million of environmental payments, and approximately $12 million of defined-benefit plan contributions.
  • The asbestos liability was $630 million at September 30, 2017, including $71 million classified as current. The related insurance receivable was $124 million. The estimate covers pending and projected claims through 2059 and is subject to substantial uncertainty regarding claim volumes, settlements, defense costs, legal developments, and insurance recoveries.
  • The company had 32,075 pending asbestos claims at September 30, 2017. Gross asbestos settlement and defense costs incurred during the first nine months were $75.5 million, while net cash payments were $46.8 million.
  • The estimated Goodyear environmental remediation liability was $43.1 million, partly offset by an $8.5 million receivable for expected U.S. government reimbursements. A separate Crab Orchard environmental obligation was considered probable but could not yet be reasonably estimated.
  • The company entered into a seven-year aircraft lease with a maximum residual value guarantee of $11.1 million and paid $6.7 million related to termination and residual value obligations under a previous aircraft lease.
  • Management stated that no material changes occurred in the previously disclosed risk factors and that disclosure controls were effective as of September 30, 2017.

Important facts for investors to verify

  • Confirm the issuer identity and corporate history because the filing is for Crane Co., while the request identifies Crane NXT, Co.
  • Assess the sustainability of earnings growth excluding favorable tax items, currency translation, acquisition effects, and the absence of prior-period asbestos or legal charges.
  • Monitor Aerospace & Electronics for continued effects from the completed military program and the segment’s declining backlog.
  • Reconcile asbestos liabilities, insurance recoverables, cash payments, and future estimate changes; adverse litigation or insurance developments could materially affect results and liquidity.
  • Review acquisition integration, goodwill of $1.21 billion, and intangible assets of $284.7 million for impairment sensitivity.
  • Evaluate 2018 debt maturities, especially the $250 million of notes due in December 2018, relative to cash generation and available credit.
  • Track the expected adoption effects of the new revenue recognition standard, which the company planned to adopt on January 1, 2018 using the modified retrospective method.