Business Context and Reporting Period
Crane Holdings, Co. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2022. The company reported four segments: Aerospace & Electronics, Process Flow Technologies, Payment & Merchandising Technologies, and Engineered Materials. The filing follows a May 2022 holding-company reorganization; the company subsequently adopted the Crane Co. name for future use. The filing is the predecessor reporting entity associated with the later Crane NXT structure.
Key Financial Metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $864.3 million | $855.5 million | $1,735.7 million | $1,688.9 million |
| Operating profit | $124.4 million | $144.6 million | $271.4 million | $291.0 million |
| Operating margin | 14.4% | 16.9% | 15.6% | 17.2% |
| Net income | $258.2 million | $138.3 million | $363.2 million | $246.7 million |
| Diluted EPS | $4.54 | $2.33 | $6.32 | $4.17 |
| Operating cash flow | Not separately provided | Not separately provided | $49.0 million | $206.7 million |
- Q2 sales increased 1.0%; six-month sales increased 2.8%. Core sales grew 7.1% in Q2 and 6.6% year to date, offset by unfavorable currency translation and the Crane Supply divestiture.
- Net income included a $228.7 million pretax gain on the sale of Crane Supply. Excluding this unusual item, reported earnings growth was substantially lower than the headline increase.
- Q2 cost of sales rose to 62.0% of sales from 61.2%, while selling, general and administrative expense rose to 23.6% from 21.9%. Higher transaction costs, inflation, unfavorable mix, and material and labor costs pressured margins.
- Cash and cash equivalents were $650.6 million at June 30, 2022, compared with $478.6 million at December 31, 2021. Total debt was approximately $962.3 million, comprising $119.4 million of commercial paper and $842.9 million of long-term debt; calculated net debt was approximately $311.7 million.
- Six-month investing cash flow was $289.2 million, principally reflecting $314.3 million of proceeds from the Crane Supply sale. Financing cash flow used $135.6 million, including $53.1 million of dividends and $203.7 million of share repurchases.
- Backlog was $1,387.0 million at June 30, 2022; management expected to recognize approximately 69% in 2022 and 29% in 2023.
Material Changes Versus the Prior Comparable Period
- Process Flow Technologies Q2 sales declined 4.7% and operating profit declined 12.7%, primarily because of the Crane Supply divestiture, currency effects, and unfavorable mix.
- Aerospace & Electronics sales increased 2.5%, but operating profit declined 8.4% because of unfavorable mix, material availability, and higher engineering costs. Commercial OEM and aftermarket demand improved, while military sales declined.
- Payment & Merchandising Technologies sales increased 1.8% and operating profit increased 3.6%; payment acceptance products grew, while banknote and security-product sales declined.
- Engineered Materials sales increased 23.2%, but Q2 operating profit declined 5.2% as raw-material inflation outpaced pricing benefits. Six-month operating profit increased 43.3%.
- Six-month operating cash flow fell $157.7 million year over year, mainly because of working-capital investment and higher income-tax payments.
- Shares outstanding declined following approximately $203.7 million of six-month repurchases. The quarterly dividend increased to $0.47 per share from $0.43.
Guidance, Outlook, Risks, and Unusual Items
- Management projected 2022 sales to decline approximately 1% to 2%, reflecting the Crane Supply divestiture and unfavorable foreign exchange, partially offset by 5% to 6% core growth. It expected slight operating-profit improvement, with pricing and productivity offsetting inflation, but with pressure from transaction costs, mix, and the divestiture.
- Management expected high-single-digit Aerospace & Electronics core sales growth, approximately 10% Process Flow Technologies sales decline, low-single-digit Payment & Merchandising Technologies sales growth, and mid-single-digit Engineered Materials sales growth.
- The company planned a tax-free separation into two publicly traded companies within approximately 12 months, subject to customary conditions and final board approval. Completion, timing, costs, and expected benefits remained uncertain.
- Supply-chain disruption, inflation, raw-material costs, foreign exchange, cyclical demand, geopolitical and COVID-19 effects, cybersecurity, customer concentration and execution of the separation were identified as risks.
- Asbestos liabilities totaled $580.0 million at June 30, 2022, partially offset by $65.0 million of estimated insurance receivables. The company had approximately 30,099 pending asbestos claims and paid $23.5 million of net asbestos settlement and defense costs in the first six months. Management estimated approximately $45 million of 2022 net asbestos payments, but noted significant uncertainty.
- Environmental liabilities included a $27.1 million gross Goodyear Site liability, with a $6.6 million expected U.S. government reimbursement receivable. Additional environmental obligations at the Crab Orchard Site could not be reasonably estimated.
- The Engineered Materials sale agreement from 2021 was terminated in May 2022, and the segment was presented as continuing operations. The buyer paid a $7.5 million termination fee.
Most Important Facts to Verify
- Reconcile reported EPS and net income with the $228.7 million Crane Supply gain, related taxes, and other transaction expenses.
- Confirm the final scope, timing, separation costs, capital structure, and allocation of asbestos and environmental liabilities for the planned separation.
- Assess whether pricing and productivity will continue to offset inflation, supply-chain constraints, unfavorable mix, and foreign-exchange pressure.
- Monitor operating cash conversion, working-capital requirements, commercial-paper borrowings, and the effect of continued share repurchases on liquidity.
- Review assumptions underlying the $580.0 million asbestos liability and $65.0 million insurance receivable, including claim trends, insurer recoveries, and potential changes in litigation or legislation.