Crane Holdings, Co. 2022 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022. The request references 2022 Q4; the filing is an annual Form 10-K, with fourth-quarter supplementary results also disclosed. The company was subsequently renamed Crane NXT, Co. following the planned separation.
Business Context
Crane operated four segments: Aerospace & Electronics, Process Flow Technologies, Payment & Merchandising Technologies, and Engineered Materials. End markets included commercial and defense aerospace, process industries, construction, payment automation, banknotes and security products, and recreational vehicle and building materials.
Major 2022 transactions included the sale of Crane Supply, the divestiture of asbestos-related assets and liabilities, and preparation for the separation into Crane NXT, focused on Payment & Merchandising Technologies, and Crane Company, holding Aerospace & Electronics, Process Flow Technologies and Engineered Materials.
Key Financial Metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net sales | $3,374.9 million | $3,408.0 million | (1.0%) |
| Gross profit | $1,339.8 million | $1,287.7 million | 4.0% |
| Gross margin | 39.7% | 37.8% | +190 bps |
| Operating profit | $369.5 million | $529.2 million | (30.2%) |
| Operating margin | 10.9% | 15.5% | (460 bps) |
| Net income attributable to common shareholders | $401.1 million | $435.4 million | (7.9%) |
| Diluted EPS | $7.01 | $7.36 | (4.8%) |
| Cash from operating activities | $(151.6) million | $498.5 million | $(650.1) million |
| Capital expenditures | $58.4 million | $53.9 million | 8.3% |
Fourth-quarter 2022 net sales were $824.1 million, gross profit was $336.4 million, operating profit was $129.3 million, net income attributable to common shareholders was $97.2 million, and diluted EPS was $1.71.
Segment Performance
| Segment | 2022 Sales | Sales Change | 2022 Operating Profit | Operating Margin |
|---|---|---|---|---|
| Aerospace & Electronics | $667.3 million | 4.5% | $120.3 million | 18.0% |
| Process Flow Technologies | $1,109.4 million | (7.3%) | $168.2 million | 15.2% |
| Payment & Merchandising Technologies | $1,339.9 million | (0.4%) | $333.1 million | 24.9% |
| Engineered Materials | $258.3 million | 13.3% | $32.6 million | 12.6% |
Core sales increased 6.4%, but were offset by unfavorable foreign exchange of $113.6 million and the $139.1 million effect of the Crane Supply divestiture. Segment operating performance generally improved through pricing and productivity, despite inflationary material, labor and manufacturing costs.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $657.6 million at December 31, 2022, compared with $478.6 million at year-end 2021.
- Total debt was $1,243.0 million, including $699.3 million of short-term borrowings and $543.7 million of long-term debt. Net debt was $585.4 million.
- Total debt to capitalization was 39.5%, compared with 19.8% net debt to equity and 23.5% net debt to net capitalization.
- Debt included approximately $399.6 million outstanding under a 364-day credit agreement due in 2023 and $299.7 million of 4.45% notes due in December 2023.
- The company maintained a $650 million five-year revolving credit facility, with no borrowings outstanding at year-end, and a $650 million commercial paper program with no outstanding commercial paper.
- 2022 financing cash flow was positive $106.0 million, principally due to $399.4 million of term-loan proceeds. The company paid $105.9 million of dividends and repurchased $203.7 million of common stock.
- Management stated that available cash, expected operating cash flow, commercial paper capacity and revolving-credit availability were expected to fund short- and long-term requirements, environmental liabilities and pension contributions.
Material Changes Versus 2021
- Revenue declined modestly despite 6.4% core growth, primarily because of the Crane Supply sale and foreign-currency translation.
- Operating profit declined by $159.7 million, largely because of the $162.4 million loss on the asbestos-related divestiture and higher corporate and transaction costs.
- The Crane Supply sale generated a $232.5 million gain and $318.1 million of cash proceeds. The business was sold for CAD 402 million at closing, with a further CAD 5 million working-capital adjustment received in August.
- The asbestos transaction required a $550 million cash contribution funded with cash on hand and short-term borrowings. Asbestos liabilities, insurance receivables and related deferred tax assets were removed from the consolidated balance sheet.
- Operating cash flow turned negative because of the $550 million asbestos-related payment and increased working-capital investment.
- Net restructuring charges were $10.4 million, primarily related to workforce reductions and cost actions initiated in the fourth quarter. Approximately 300 employees, or about 3% of the global workforce, were affected.
- The effective tax rate increased to 28.8% from 13.4%, including the nondeductible loss on the asbestos divestiture and other transaction-related tax items.
Outlook, Risks and Unusual Items
The planned separation was expected to be completed in April 2023, subject to customary conditions and final Board approval. The SEC declared Crane Company's Form 10 registration statement effective on February 7, 2023; shareholders of record on March 23, 2023 were expected to receive one Crane Company share for each Crane Holdings share.
Backlog was $1,563.7 million at December 31, 2022. Management expected approximately 90% of remaining performance obligations to be recognized as revenue in 2023 and an additional 7% by 2024.
- Key operating risks include inflation and raw-material costs, supply-chain constraints, labor availability, foreign-currency movements, cybersecurity incidents, geopolitical instability and variable customer demand.
- Aerospace results depend on commercial air traffic, aircraft production rates, defense appropriations, government contract awards and supplier performance.
- Payment & Merchandising Technologies is exposed to timing and size of central-bank and U.S. government banknote awards, gaming and retail demand, and payment-technology changes.
- The company had $1,944.1 million of goodwill and other intangible assets, approximately 44% of total assets. No impairment charges were recorded in 2022, but impairment remains sensitive to forecasts, discount rates and market conditions.
- Environmental liabilities primarily related to the Goodyear, Arizona site totaled $24.8 million gross at year-end 2022, with $4.8 million of expected government reimbursements. The company stated that the ultimate obligation for certain other sites, including Crab Orchard, could not yet be reasonably estimated.
- Crane Holdings guaranteed certain Crane Company indemnification obligations under the asbestos transaction until the separation, when the filing stated the guarantee would be released.
- Approximately $120 million of 2022 revenue was recognized over time using cost-to-cost estimates, making contract cost and margin estimates a critical audit matter.
Investor Verification Checklist
- Verify completion terms, tax treatment, capitalization and standalone financial statements following the April 2023 separation.
- Assess the refinancing or repayment plan for the approximately $700 million of debt obligations scheduled for 2023.
- Reconcile reported earnings with the $232.5 million Crane Supply gain, $162.4 million asbestos-divestiture loss, $49.8 million of transaction expenses and restructuring charges.
- Monitor conversion of the $1,563.7 million backlog into revenue, including contract-margin revisions and customer concentration.
- Review the sustainability of negative 2022 operating cash flow after excluding the asbestos payment and the effect of working-capital normalization.
- Evaluate exposure to raw-material inflation, supply-chain disruptions, foreign exchange, aerospace recovery, banknote contract timing and cyclical RV demand.
- Track environmental remediation costs, indemnification obligations and any future tax examinations or unrecognized tax benefits.