Crane Company Form 10-Q Summary
Business Context and Reporting Period
Crane Company reported unaudited results for the three and six months ended June 30, 2023. On April 3, 2023, Crane Holdings, Co. completed its separation into Crane Company and Crane NXT, Co. Crane Company retained Aerospace & Electronics, Process Flow Technologies, and Engineered Materials; Payment & Merchandising Technologies is reported as discontinued operations.
Key Financial Metrics
| Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 |
|---|---|---|---|---|
| Net sales | $509.6 million | $530.3 million | $1,023.4 million | $1,069.1 million |
| Operating profit | $63.1 million | $43.7 million | $140.6 million | $106.5 million |
| Operating margin | 12.4% | 8.2% | 13.7% | 10.0% |
| Continuing operations net income | $43.3 million | $206.6 million | $99.2 million | $252.7 million |
| Diluted EPS from continuing operations | $0.75 | $3.63 | $1.73 | $4.40 |
| Net income attributable to common shareholders | $45.6 million | $258.2 million | $151.3 million | $363.2 million |
Q2 sales declined 3.9%, while operating profit increased 44.4%. Core sales increased 4.7%, primarily from pricing, but were more than offset by the 2022 divestiture of Crane Supply and unfavorable foreign currency translation. Cost of sales fell to 60.5% of sales from 66.5%, reflecting productivity and the divestiture; SG&A increased to 27.1% of sales from 25.2%, partly because of separation-related costs.
Six-month sales declined 4.3%, while operating profit increased 32.0%. Core sales increased 6.6%, offset by the Crane Supply divestiture and foreign exchange. The effective tax rate on continuing operations was 24.4% in Q2 and 22.8% for the first six months, compared with 27.6% and 28.0%, respectively, in the prior-year periods.
Segment Performance
- Aerospace & Electronics: Q2 sales increased 17.2% to $189.2 million and operating profit increased 35.8% to $38.3 million. The operating margin improved to 20.2% from 17.5%, supported by commercial aerospace recovery, aftermarket demand, defense demand, pricing, and productivity.
- Process Flow Technologies: Q2 sales decreased 11.1% to $263.2 million, primarily because of the Crane Supply divestiture, but operating profit increased 24.6% to $50.6 million. The operating margin improved to 19.2% from 13.7%, driven by pricing and productivity.
- Engineered Materials: Q2 sales decreased 21.4% to $57.2 million, mainly from lower recreational-vehicle volumes. Operating profit increased 34.2% to $9.8 million, and the operating margin increased to 17.1% from 10.0%.
Cash Flow, Liquidity, and Debt
- Cash used in operating activities from continuing operations was $53.0 million for the first six months of 2023, compared with $30.7 million used in the prior-year period. Working capital used $183.3 million, including $63.9 million for inventories and $28.1 million for receivables.
- Capital expenditures were $20.8 million, compared with $17.5 million in the prior-year period. Prior-year investing cash flow included $314.3 million of proceeds from the Crane Supply sale.
- Cash and cash equivalents were $218.9 million at June 30, 2023, compared with $427.0 million at December 31, 2022. The decrease reflected separation-related distributions, debt repayments, dividends, and working-capital investment.
- Long-term debt was $262.3 million at June 30, 2023, with no short-term borrowings and no borrowings under the revolving facility. The company has a $500 million, five-year revolving facility and a $300 million, three-year term facility. It prepaid $36.9 million of the term facility during Q2.
- Management stated that cash, expected operating cash generation, and available revolver capacity should be sufficient for expected short- and long-term capital requirements and pension contributions. The company was in compliance with its debt covenants at June 30, 2023.
Material Changes, Outlook, Risks, and Unusual Items
- The separation substantially changed the company’s financial presentation and capital structure. A $275 million one-time dividend was paid to Crane Holdings, Co. before the separation, and $578.1 million of separation-related cash outflows were reported in financing activities.
- Prior-year results included a $228.7 million gain on the sale of Crane Supply; the absence of that gain materially reduced reported net income and EPS comparisons in 2023.
- Discontinued operations contributed $2.3 million of after-tax income in Q2 and $52.1 million for the first six months of 2023, compared with $51.6 million and $110.5 million, respectively, in the prior-year periods.
- Total backlog was $1,042.5 million at June 30, 2023. Management expects approximately 65% of remaining performance obligations to be recognized in 2023, 29% in 2024, and the balance thereafter. The filing does not provide formal full-year earnings or revenue guidance.
- Management cited demand recovery in commercial aerospace, strong defense and space demand, airline aftermarket activity, pricing, and productivity benefits. Risks include inflation and higher interest rates, supply-chain disruptions, raw-material costs, foreign exchange, demand volatility, cybersecurity, regulatory and tax matters, environmental liabilities, litigation, acquisitions, product liability, and separation-related indemnification obligations.
- Environmental liabilities remain significant. The estimated gross Goodyear Site liability was $22.9 million at June 30, 2023, with $7.8 million classified as current and a $4.3 million receivable for expected U.S. government reimbursements. The company stated that the ultimate Crab Orchard Site obligation cannot currently be reasonably estimated.
- The company recorded no asbestos-related costs or payments in 2023 and stated that it no longer has obligations for pending or future asbestos claims following the Redco sale.
- Approximately 160 employees were included in the 2022 repositioning program, which is expected to be completed in the first quarter of 2024. The company also expects to complete its 2019 European manufacturing consolidation program in the fourth quarter of 2023.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2023, with no material changes in internal control over financial reporting during the quarter.
Most Important Facts to Verify
- Whether aerospace demand, backlog conversion, and supply-chain availability support continued growth in Aerospace & Electronics.
- Whether pricing and productivity can offset inflation, unfavorable mix, and potentially weaker volumes in Process Flow Technologies and Engineered Materials.
- The sustainability of positive operating cash flow after the substantial first-half working-capital investment.
- Debt repayment progress, interest expense, covenant compliance, and remaining revolver availability.
- The final tax, indemnification, environmental, and other liabilities associated with the Crane NXT separation and legacy sites.
- How comparisons should be interpreted given discontinued operations, the Crane Supply divestiture, and the one-time prior-year gain.