Crane Co. Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2020. The filing registrant is Crane Co.; the provided metadata identifies Crane NXT, Co. Financial statements are unaudited and presented in millions except per-share data.
Business Context
Crane operates through Fluid Handling, Payment & Merchandising Technologies, Aerospace & Electronics, and Engineered Materials. Results were materially affected by COVID-19, including weaker demand, supply-chain disruption, reduced commercial aerospace activity, and lower payment and vending equipment demand. The company completed the January 2020 acquisition of CIRCOR International’s Instrumentation & Sampling business for net cash paid of $169.2 million and continued integrating the December 2019 Cummins-Allison acquisition.
Key Financial Metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $734.8 | $772.3 | $2,210.5 | $2,445.6 |
| Operating profit | $84.9 | $109.3 | $204.0 | $345.8 |
| Operating margin | 11.6% | 14.2% | 9.2% | 14.1% |
| Net income attributable to common shareholders | $56.6 | $72.5 | $134.2 | $245.9 |
| Diluted EPS | $0.97 | $1.19 | $2.28 | $4.05 |
| Dividends per share | $0.43 | $0.39 | $1.29 | $1.17 |
| Operating cash flow | Not separately provided | Not separately provided | $208.1 | $171.0 |
- Q3 sales declined 4.9%, while nine-month sales declined 9.6% year over year.
- Q3 operating profit declined 22.3%; nine-month operating profit declined 41.0%.
- Q3 net income attributable to common shareholders declined 21.9%; nine-month net income declined 45.4%.
- Q3 effective tax rate was 25.0%, compared with 22.5% in the prior-year quarter; the nine-month rate was 23.1%, compared with 22.3%.
- Cash and cash equivalents were $544.6 at September 30, 2020, compared with $393.9 at December 31, 2019.
- Total debt was approximately $1,324.1, consisting of $481.4 of short-term borrowings and $842.7 of long-term debt. Estimated fair value of total debt was $963.6.
- Total current assets were $1,622.1 versus current liabilities of $1,143.1. The reported current ratio was approximately 1.4x.
- Backlog was $1,084.1 at September 30, 2020; management expected to recognize approximately 44.3% in 2020 and 47.7% in 2021.
Cash Flow, Capital Allocation, and Liquidity
- Operating activities generated $208.1 during the first nine months, up from $171.0 in 2019, primarily due to lower working-capital usage despite lower earnings.
- Investing activities used $245.9, including $169.2 for the I&S acquisition and $60.0 for purchases of marketable securities. Capital expenditures were $20.6.
- Financing activities provided $187.3, including $343.9 of proceeds from the 364-day term loan facility. The company paid $75.4 of dividends and repurchased $70.0 of shares.
- The company entered into a senior unsecured 364-day credit facility in April 2020 and had $346.1 outstanding at September 30, 2020. Its commercial paper program had a $550 million capacity, and its $550 million revolving credit facility expires in December 2022.
- Management stated that cash, expected operating cash flow, the commercial paper program, revolving facility, and 364-day facility were expected to fund operating needs, capital requirements, asbestos and environmental payments, and pension contributions.
- Management reduced expected 2020 capital expenditures to approximately $40 million from a previously projected $75 million.
Material Changes Versus Prior Comparable Period
- Core sales declined $103.8, or 13.4%, in Q3 and $387.2, or 15.8%, for the first nine months, primarily because of COVID-19. Acquisions added $56.5 in Q3 and $157.0 year to date.
- Fluid Handling Q3 sales declined 8.6% and operating profit declined 26.8%; I&S contributed $14.8 of Q3 sales.
- Payment & Merchandising Technologies Q3 sales increased 11.4% and operating profit increased 15.4%, supported by Cummins-Allison and strong banknote sales, despite a 40.3% core decline in payment acceptance and dispensing products.
- Aerospace & Electronics Q3 sales declined 20.4% and operating profit declined 48.1%, driven by lower commercial OEM and aftermarket activity. Military sales increased.
- Engineered Materials Q3 sales declined 3.6%, while operating profit increased 52.5% due to productivity, cost reductions, and lower material costs.
- The company recorded $10.3 of acquisition-related and integration charges and $22.6 of restructuring charges during the first nine months. The 2020 repositioning program involved workforce reductions of approximately 1,000 employees, or about 9% of the global workforce.
- Goodwill increased to $1,589.8 from $1,472.4 at year-end 2019, primarily due to the I&S acquisition, purchase-price adjustments, and currency translation.
Guidance, Outlook, Risks, and Unusual Items
- Management expected 2020 sales of approximately $2.9 billion to $2.95 billion, including a core sales decline of 17% to 19%.
- Management expected lower operating profit and margins across most segments because of COVID-19 volume reductions, partly offset by approximately $100 million of incremental cost-reduction benefits and the absence of $247.9 of 2019 asbestos and environmental provisions.
- COVID-19 risks include additional demand deterioration, supply-chain and logistics interruptions, employee availability constraints, customer payment delays, reduced access to credit markets, and higher funding costs.
- Commercial aerospace was particularly pressured by lower aircraft build rates, reduced airline schedules, and the Boeing 737 MAX production pause. Military aerospace and banknote demand provided partial offsets.
- Asbestos liabilities were $679.0 at September 30, 2020, with an associated insurance receivable of $89.0. The estimate covers pending and projected claims through 2059 and is subject to significant uncertainty.
- There were 29,308 pending asbestos claims at September 30, 2020. Net asbestos settlement and defense payments were $23.7 during the first nine months, and management expected approximately $50 million for full-year 2020.
- The Goodyear environmental liability was $41.1, with a $7.8 receivable for expected U.S. government reimbursements. The company could not reasonably estimate any obligation beyond currently accrued amounts for the site.
- Goodwill and indefinite-lived intangible asset sensitivity analyses were performed in light of COVID-19-related market valuation declines. No impairment was recorded, but a material future charge remains possible if assumptions change.
Investor Verification Points
- Verify the registrant identity and corporate history, because the filing is for Crane Co., while the request metadata refers to Crane NXT, Co.
- Assess whether COVID-19-related core sales declines, especially in commercial aerospace, payment equipment, Fluid Handling, and Engineered Materials, are temporary or structural.
- Reconcile reported liquidity with the $481.4 of short-term borrowings, the $346.1 364-day facility balance, commercial paper maturities, and the availability of committed facilities.
- Monitor integration benefits, purchase-price allocations, goodwill, and intangible-asset impairment risk related to Cummins-Allison and I&S.
- Track asbestos claims, settlement costs, insurance recoveries, actuarial assumptions, and potential changes to the $679.0 liability.
- Evaluate whether cost reductions and the 2020 workforce reductions can offset lower volumes without impairing operational capacity or future growth.
- Confirm achievement of the stated 2020 sales outlook, core sales decline range, approximately $40 million capital-expenditure target, and approximately $50 million asbestos cash-payment expectation.