Crane Holdings, Co. (now Crane NXT) — Q3 2022 Form 10-Q Summary
Business context and reporting period
This unaudited quarterly report covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods. The company operated through Aerospace & Electronics, Process Flow Technologies, Payment & Merchandising Technologies, and Engineered Materials. The filing reflects the May 2022 holding-company reorganization and the pending separation into two independent public companies.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | First nine months 2022 | First nine months 2021 |
|---|---|---|---|---|
| Net sales | $815.1 million | $893.8 million | $2,550.8 million | $2,582.8 million |
| Operating profit (loss) | $(31.2) million | $144.8 million | $240.2 million | $435.8 million |
| Operating margin | (3.8)% | 16.2% | 9.4% | 16.9% |
| Net income attributable to common shareholders | $(59.3) million | $116.6 million | $303.9 million | $363.3 million |
| Diluted EPS | $(1.06) | $1.96 | $5.30 | $6.14 |
| Dividends per share | $0.47 | $0.43 | $1.41 | $1.29 |
- Q3 sales declined 8.8%, including 1.9% core growth, a 4.1% unfavorable currency impact, and a 6.7% reduction from the Crane Supply divestiture.
- First-nine-month sales declined 1.2%, despite 5.0% core growth, due to unfavorable currency translation of 3.1% and a 3.1% divestiture impact.
- Q3 operating results included a $162.4 million loss on the divestiture of asbestos-related assets and liabilities. The charge included $13.5 million of transaction costs and generally received no related tax benefit.
- First-nine-month results included a $232.5 million gain on the sale of Crane Supply. Crane Supply was sold for CAD 402 million at closing, plus a CAD 5 million final working-capital adjustment.
- Cash used in operating activities was $378.0 million in the first nine months, versus $327.0 million provided in 2021. The 2022 use primarily reflected the $550.0 million asbestos-related funding payment and increased working-capital investment.
- Cash provided by investing activities was $281.4 million, including $318.1 million of proceeds from the Crane Supply sale. Capital expenditures were $36.8 million; management expected approximately $60 million for full-year 2022.
- Cash provided by financing activities was $119.3 million, including $399.4 million of proceeds from a new term loan, partly offset by $203.7 million of share repurchases and $79.5 million of dividends paid.
- Cash and cash equivalents were $438.6 million at September 30, 2022, compared with $478.6 million at December 31, 2021.
- Total debt comprised $399.5 million of short-term borrowings and $843.2 million of long-term debt. The new $400 million senior unsecured 364-day facility was used to partially fund the asbestos-related transaction.
- Backlog was $1,463.6 million at September 30, 2022; management expected approximately 40% to convert to revenue in Q4 2022, 53% in 2023, and the balance thereafter.
Material changes versus prior comparable periods
- Payment & Merchandising Technologies remained the largest segment, with Q3 sales of $335.1 million, down 8.4%, but operating profit increased 3.6% to $86.7 million. Payment acceptance products grew, while banknotes and security products declined against a strong 2021 comparison.
- Process Flow Technologies Q3 sales fell 16.4% to $250.0 million, primarily because of the Crane Supply divestiture and foreign exchange; operating profit decreased 6.8% to $41.3 million.
- Aerospace & Electronics Q3 sales decreased 0.8% to $167.2 million and operating profit decreased 13.2% to $28.2 million, reflecting unfavorable mix and material availability constraints.
- Engineered Materials Q3 sales increased 4.1% to $62.8 million, while operating profit was broadly stable at $6.7 million.
- Corporate operating expense increased substantially, primarily because of separation-related transaction costs.
- Accumulated other comprehensive loss increased to $606.0 million from $440.2 million at year-end 2021, primarily due to currency translation losses. Treasury stock increased to $878.3 million after share repurchases, and shares outstanding declined to approximately 56.1 million.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected 2022 sales to decline approximately 1% to 2%, consisting of approximately 5% to 6% core growth offset by the Crane Supply divestiture and unfavorable foreign exchange. Higher pricing was expected to approximately offset inflation.
- Management expected a substantial full-year operating-profit decline because of the asbestos-related loss, separation transaction costs, lost Crane Supply earnings, and unfavorable mix, partly offset by core growth, pricing, and productivity.
- The company expected the separation into two independent publicly traded companies to occur through a tax-free distribution within approximately 12 months of the March 2022 announcement, subject to customary conditions and board approval.
- The Redco transaction removed asbestos obligations, related insurance assets, and associated deferred tax assets from the balance sheet effective August 12, 2022. However, Crane Company indemnification obligations for certain historical liabilities, including potential environmental liabilities, were generally uncapped, and Crane Holdings guaranteed those obligations until the separation is completed.
- Environmental contingencies remain, including the Goodyear, Roseland, and Crab Orchard sites. The accrued gross Goodyear liability was $26.0 million at September 30, 2022, with a $5.7 million expected U.S. government reimbursement receivable. The company stated that the total potential Crab Orchard obligation could not reasonably be estimated.
- Principal operating risks include inflation, supply-chain and material availability constraints, foreign-exchange exposure, cyclical demand, cybersecurity, regulatory and environmental liabilities, tax exposures, product liability, intangible-asset impairment, and execution risk related to the separation.
- The company reported effective tax rates of negative 69.4% for Q3 and 34.2% for the first nine months, reflecting the asbestos-related loss without a corresponding tax benefit and other discrete tax items.
- Management concluded that disclosure controls were effective as of September 30, 2022, with no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the final structure, timing, financing, tax treatment, and allocation of liabilities in the pending separation.
- Reconcile reported earnings with the $162.4 million asbestos-related loss, the $232.5 million Crane Supply gain, separation costs, and other nonrecurring items.
- Monitor liquidity and refinancing requirements for the $399.5 million short-term borrowing and the 364-day credit facility.
- Assess whether pricing and productivity continue to offset inflation, supply-chain disruption, and foreign-exchange pressure.
- Track backlog conversion, particularly the expected Q4 2022 and 2023 revenue recognition.
- Review environmental indemnification obligations and the unresolved potential exposure at the Crab Orchard site.
- Verify current corporate naming and reporting relationships, because this filing was issued by Crane Holdings, Co. during the reorganization preceding the company’s later Crane NXT identity.