Crane Co. Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. The filing is for Crane Co., not Crane NXT, Co.; the source text does not indicate the later corporate name. Financial statements are unaudited.
Business Context
Crane reported four segments: Fluid Handling; Payment & Merchandising Technologies; Aerospace & Electronics; and Engineered Materials. The company serves industrial, payment and currency, aerospace and defense, recreational vehicle, transportation, and building-product markets.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $772.3 million | $855.8 million | $2,445.6 million | $2,505.8 million |
| Operating profit | $109.3 million | $123.9 million | $345.8 million | $331.2 million |
| Operating margin | 14.2% | 14.5% | 14.1% | 13.2% |
| Net income attributable to common shareholders | $72.5 million | $97.0 million | $245.9 million | $246.4 million |
| Diluted EPS | $1.19 | $1.59 | $4.05 | $4.04 |
| Cash flow from operations | Not separately provided | Not separately provided | $171.0 million | $222.4 million |
Q3 gross margin was approximately 36.0%, versus 36.3% in the prior-year quarter, based on reported net sales and cost of sales. The nine-month gross margin was approximately 36.3%, versus 35.7% in the prior-year period.
- Liquidity: Cash and cash equivalents were $388.8 million at September 30, 2019, compared with $343.4 million at December 31, 2018.
- Debt: Current maturities were $7.4 million and long-term debt was $934.9 million. Total reported debt was approximately $942.3 million. No borrowings were outstanding under the $550 million commercial paper program or $550 million revolving credit facility.
- Capital spending: $50.9 million during the first nine months; management expected approximately $80 million for full-year 2019.
- Dividends: $70.1 million paid during the first nine months; quarterly dividend was $0.39 per share versus $0.35 in the prior-year quarter.
- Backlog: Total remaining performance obligations were $1,138.3 million at September 30, 2019. Management expected approximately 45% to be recognized in 2019 and an additional 41% by 2020.
Material Changes Versus Prior Comparable Period
- Q3 sales declined 9.8%, including an 8.2% core-sales decline, a 1.4% unfavorable foreign-exchange impact, and a 0.2% divestiture impact.
- Q3 operating profit declined 11.8%, while the operating margin decreased to 14.2% from 14.5%. Lower volumes in Payment & Merchandising Technologies and Engineered Materials outweighed improvement in Fluid Handling and Aerospace & Electronics.
- Payment & Merchandising Technologies Q3 sales fell 24.0%, principally because banknote and security-product sales declined 59.0%, reflecting the absence of 2018 Venezuela sales and lower U.S. government sales.
- Aerospace & Electronics Q3 sales increased 4.1% and operating profit increased 11.1%. Fluid Handling operating profit increased 16.4% despite a 0.9% sales decline.
- Engineered Materials Q3 sales declined 16.8% and operating profit declined 32.2%, primarily due to lower recreational-vehicle demand.
- For the first nine months, sales declined 2.4%, but operating profit increased 4.4% and operating margin improved to 14.1% from 13.2%. Aerospace & Electronics and Fluid Handling drove the operating-profit improvement.
- Operating cash flow declined $51.4 million year over year, principally due to higher working-capital requirements and the absence of significant Venezuela-related cash receipts recorded in 2018.
- Acquisition-related and integration charges declined, but restructuring and related charges increased. The company adopted ASC 842 leases on January 1, 2019, recognizing a $109.1 million right-of-use asset and a $110.4 million lease liability at adoption.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2019 sales to decline approximately 2% to 3% year over year, driven by slight core-sales contraction and unfavorable foreign exchange, while operating profit was expected to improve through productivity and repositioning benefits.
- Management expected Fluid Handling and Aerospace & Electronics sales and profitability to improve, while Payment & Merchandising Technologies and Engineered Materials were expected to weaken.
- Restructuring actions included the planned closure of Crane Currency printing operations in Sweden and transition to Malta, with approximately 170 positions affected. Management expected approximately $23 million of annual recurring pretax savings from these actions and approximately $30 million from broader repositioning actions.
- Asbestos liabilities were $474 million at September 30, 2019, including $66 million current; related insurance receivables were $77 million. Management estimated approximately $50 million of 2019 net asbestos settlement and defense payments. The estimate extends through 2059 and is subject to substantial litigation, actuarial, insurance, and legislative uncertainty.
- The Goodyear environmental remediation liability was $26.0 million, with a $6.0 million receivable for expected U.S. Government reimbursement. The ultimate obligation for the Crab Orchard site could not be reasonably estimated.
- Q3 miscellaneous expense increased materially, primarily because of higher non-service pension expense related to reduced expected pension returns. The effective tax rate rose to 22.5% from 17.6% in Q3 and to 22.3% from 19.7% for the first nine months, partly because of a 2018 tax-reform-related adjustment.
- Management stated that liquidity, operating cash flow, available credit facilities, commercial paper capacity, and access to debt markets should be sufficient for expected capital requirements, liabilities, pension contributions, dividends, and other obligations.
Investor Verification Checklist
- Confirm the issuer identity and corporate-history relationship between Crane Co. and Crane NXT, Co.
- Verify the sustainability of Payment & Merchandising Technologies sales and backlog after the Venezuela-related comparison effects.
- Assess whether restructuring and productivity savings offset weaker end markets, foreign exchange, and volume pressure.
- Review working-capital trends and the conversion of reported earnings into operating cash flow.
- Evaluate asbestos liability assumptions, insurance recoveries, claims trends, and potential sensitivity to adverse litigation outcomes.
- Confirm debt maturities, interest costs, covenant capacity, and availability of the commercial paper and revolving-credit facilities.
- Monitor recreational-vehicle demand affecting Engineered Materials and commercial, military, and aftermarket trends affecting Aerospace & Electronics.