Crane Company — Q1 2023 Form 10-Q Summary
Business context and reporting period
The filing covers the quarter ended March 31, 2023, immediately before Crane Company became an independent public company on April 3, 2023. Crane Company comprises the Aerospace & Electronics, Process Flow Technologies, and Engineered Materials businesses spun off from Crane Holdings, Co., which retained Payment & Merchandising Technologies and was renamed Crane NXT, Co.
The historical Crane Company financial statements are unaudited condensed combined statements prepared on a carve-out basis. They include allocations of centralized corporate costs, taxes, cash management, and financing; therefore, historical results may not represent results as an independent company.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $513.8 million | $538.9 million | Down 4.7% |
| Operating profit | $86.3 million | $70.2 million | Up 22.9% |
| Operating margin | 16.8% | 13.0% | Up 380 basis points |
| Net income | $61.8 million | $54.1 million | Up 14.2% |
| Net margin | 12.0% | 10.0% | Improved |
| Cash used in operating activities | $(71.6) million | $(74.3) million | Improved by $2.7 million |
| Capital expenditures | $8.9 million | $10.5 million | Down $1.6 million |
Sales declined primarily because the May 2022 Crane Supply divestiture reduced sales by $61.7 million and unfavorable foreign currency translation reduced sales by $8.7 million. Core sales increased $45.4 million, or 8.4%, primarily from higher pricing.
Cost of sales declined 11.5% to $307.0 million, reducing cost of sales as a percentage of revenue to 59.8% from 64.4%. Selling, general and administrative expense decreased 1.0% to $120.5 million, although separation-related costs increased. The filing does not provide a standalone adjusted EBITDA measure.
Cash and cash equivalents were $292.0 million at March 31, 2023, compared with $426.9 million at December 31, 2022. Working capital consumed $155.2 million of operating cash, driven mainly by increases in accounts receivable and inventories. Cash used in financing activities was $55.9 million, including repayment of the $400 million 364-day credit facility, partly offset by $344.1 million of net transfers from the parent.
At March 31, the combined balance sheet reported no short-term borrowings. In connection with the separation, Crane Company had a $500 million, five-year revolving facility and a $300 million, three-year term loan facility. Crane Company borrowed the full term loan on April 3 and prepaid $35 million on May 3. It also paid a $275 million one-time dividend to Crane Holdings, Co. on April 3.
Segment results and material changes
| Segment | Q1 2023 sales | Sales change | Q1 2023 operating profit | Operating margin |
|---|---|---|---|---|
| Aerospace & Electronics | $180.1 million | Up 14.6% | $37.7 million | 20.9% |
| Process Flow Technologies | $271.4 million | Down 12.8% | $63.3 million | 23.3% |
| Engineered Materials | $62.3 million | Down 11.5% | $11.4 million | 18.3% |
- Aerospace & Electronics: Sales benefited from commercial aerospace recovery, stronger military and defense demand, and commercial aftermarket growth. Backlog increased to $644.8 million from $508.4 million.
- Process Flow Technologies: Core sales grew 9.7%, but reported sales declined because of the Crane Supply divestiture and currency effects. Process Valves and Pumps and Systems grew, while Commercial Valves declined substantially. Margin improved to 23.3% from 15.7% due to pricing, productivity, and volume benefits.
- Engineered Materials: Sales and profit declined because of lower volumes, particularly with recreational vehicle manufacturers. Backlog fell to $16.8 million from $30.4 million.
Total backlog was $1.024 billion at March 31, 2023; management expects to recognize approximately 79% in 2023, 18% in 2024, and the balance thereafter.
Outlook, commentary, risks, and unusual items
The filing does not provide specific full-year financial guidance. Management stated that available cash, expected operating cash flow, and revolving-credit availability are expected to fund short- and long-term requirements, environmental obligations, and pension contributions.
- Supply-chain constraints, material availability, inflation, labor and raw-material costs, foreign exchange, and demand volatility remain material operating risks.
- Management identified commercial aerospace recovery and defense demand as drivers for Aerospace & Electronics, while recreational vehicle weakness affected Engineered Materials.
- Separation-related costs included $10.9 million in Q1 2023 versus $1.8 million in Q1 2022. The filing cautions that future standalone corporate costs may differ materially from historical allocations.
- Pension expense included $1.8 million of settlement costs and $1.1 million of curtailment losses. Expected 2023 pension and postretirement contributions were $18.1 million and $0.5 million, respectively.
- Crane Company remains responsible for significant environmental matters, including the Goodyear and Roseland sites, and indemnification obligations related to the Crab Orchard site. The Goodyear gross estimated liability was $23.7 million, but the filing states that potential obligations beyond current accruals cannot presently be reasonably estimated.
- The company reported no remaining asbestos obligations after the Redco sale. Q1 2023 asbestos-related costs and payments were zero, compared with $13.0 million of costs and $7.5 million of net cash payments in Q1 2022.
- The company cited risks related to the separation agreements, transition services, tax matters, indemnities, internal controls, cybersecurity, litigation, product liability, acquisitions, and potential intangible-asset impairment.
Important facts for investors to verify
- Reconcile carve-out historical results with Crane Company’s post-separation reporting and determine the effect of standalone corporate costs.
- Verify post-separation debt balances, interest rates, covenant compliance, and the impact of the $275 million dividend and $35 million term-loan prepayment.
- Assess whether the strong core pricing and productivity gains can offset volume, mix, inflation, currency, and supply-chain pressures.
- Monitor Aerospace & Electronics backlog conversion and Process Flow Technologies demand after the Crane Supply divestiture.
- Evaluate Engineered Materials exposure to recreational vehicle demand and its comparatively low backlog.
- Review environmental accruals, insurance reimbursements, indemnification arrangements, and the currently unquantifiable Crab Orchard exposure.
- Confirm the sustainability of liquidity given negative first-quarter operating cash flow and substantial working-capital requirements.