Crane (CR) Beats Q4 Earnings & Sales, Revises ’18 Guidance

Crane Co. CR kept its earnings steak alive in the fourth quarter of 2017, with earnings beating estimates by 1 cent or 0.85%. Average earnings surprise for the first three quarters of 2017 was 3.18%.

Excluding the impact of special items, Crane’s earnings in the quarter came in at $1.18 per share, topping the Zacks Consensus Estimate of $1.17. Also, the bottom line increased 15.7% from the year-ago tally of $1.02.

Special items in the quarter include 8 cents per share of transaction related charges, 13 cents of after-tax repositioning charges (net of property sales gain) and $1.44 charge related to change in the tax law.

For 2017, the company’s earnings, excluding the impact of special items, were $4.53 per share, above the year-ago tally of $4.23. The figure, however, was in line with the Zacks Consensus Estimate.

Core, Forex and Buyout Gains Drive Revenues

Crane’s revenues in the fourth quarter totaled $714.2 million, increasing 4.8% year over year. The improvement was driven by 2% core sales growth, 2% gain from favorable foreign currency movements and 1% benefit from acquired assets.

Also, the top line beat the Zacks Consensus Estimate of $709.5 million by 0.7%.

At the quarter end, total order backlog was $725.7 million, up 1% sequentially.

Crane generates revenues under four heads, results of which are briefly discussed below.

Revenues from Aerospace & Electronics segment totaled $184.9 million, down 0.9% year over year. It represented 25.9% of fourth-quarter revenues. Order backlog was $373.6 million, up 7.2% sequentially.

Payment & Merchandising Technologies segment generated revenues of $194.4 million, down 0.1% year over year. It represented 27.2% of fourth-quarter revenues. Order backlog was $76.4 million, down 12.8% sequentially.

Engineered Materials segment’s revenues were $62.7 million, increasing 4.7% year over year. It represented 8.8% of fourth-quarter revenues. Order backlog for the segment decreased 2.2% sequentially to $13.6 million.

Revenues from Fluid Handling increased 13.2% year over year to $272.2 million. It represented 38.1% of fourth-quarter revenues. Order backlog was $262.1 million, down 2.5% sequentially.

For 2017, the company’s total revenues were $2,786 million, up 1.4% year over year and in line with the Zacks Consensus Estimate.

Margins Mixed

In the quarter, Crane’s cost of goods sold increased 5% year over year and as a percentage of revenues came in at 63.8% versus 63.6% in the prior-year quarter. Gross margin fell 20 basis points (bps) to 36.2%. Selling, general and administrative expenses, as a percentage of revenues were 21% compared with 21.6% in the year-ago quarter.

Operating profit before special items increased 7.8% year over year to $108.6 million in the quarter. Operating margin was 15.2%, up 40 bps from the year-ago quarter.

Balance Sheet and Cash Flow

Exiting the fourth quarter, Crane’s cash and cash equivalents were $706.2 million, above $572.2 million at previous-quarter end. Long-term debt was down 33.8% sequentially to $494.1 million.

Net cash generated from operating activities totaled $143.4 million, down 4.2% year over year. Capital spending was $14.7 million, above $13 million spent in the year-ago quarter. Free cash flow in the quarter declined 5.9% year over year to $128.7 million. Dividend paid in the quarter was approximately $19.6 million.

Concurrent with the earnings release, the company announced that its board of directors has approved the payment of a quarterly dividend of 35 cents to shareholders on record as of Feb 28. The current quarterly dividend rate represents 6% growth over the earlier rate of 33 cents. Annualized dividend rate now stands at $1.40 per share.

The dividend declared will be paid on Mar 9, 2018.

Outlook

In the quarters ahead, Crane anticipates gaining from solid organic growth potential, acquired business of Crane Currency (completed Jan 10), tax cuts following the implementation of Tax Cuts and Jobs Act (TCJA) and its repositioning initiatives. These positive aspects will boost the company’s profitability, enabling double-digit earnings growth annually in the years ahead.

The Crane Currency buyout is predicted to add roughly 15 cents to earnings per share in 2018. This accretion is projected to increase to $1 by 2021. The new tax law will likely yield 50 cents per share benefit annually and will enable the company to accelerate investments in its growth projects (amounting $20 million and $10 million in 2018 and 2019, respectively, on a pre-tax basis). These investments will negate 25 cents of tax-related benefit in 2018, 15 cents in 2019 and nil from 2020. Actions related to facility consolidations will strengthen the company’s ability to meet customers demand and reduce costs, resulting in 10 cents earnings accretion in 2018 and then rising to 35 cents by 2020.

Effective tax rate, post the implementation of TCJA, will be roughly 22%, down 8-9% from the tax rate before the enactment of TCJA.

For 2018, the company anticipates earnings, excluding special items, to be within the $5.35-$5.55 per share range. GAAP earnings are predicted to be $4.65-$4.85. Earlier the company had projected earnings to be within $4.85-$5.05 per share. Core sales are estimated to be in the 2-4% range and acquired assets of Crane Currency will add revenues of $400 million. Foreign currency translation will positively impact the top line.

Cash flow from operating activities is anticipated to be within $345-$375 million while capital spending is likely to total $125 million. Free cash flow is projected to be $220-$250 million.

Crane Company Price, Consensus and EPS Surprise

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