Crane Company (CR) Earnings Call Transcript & Summary

Welcome to the Crane Company's Second Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Allison Poliniak, Vice President of Investor Relations.

Thank you, Tasha, and good day, everyone. Welcome to our second quarter 2026 earnings release conference call. I'm Allison Poliniak, Vice President of Investor Relations. On our call this morning, we have Alex Alcala, President and Chief Executive Officer; and Rich Maue, our Executive Vice President and Chief Financial Officer; along with Jason Feldman, Senior Vice President, Treasury and Tax, who's on for Q&A. We will start off our call with a few prepared remarks from Alex and Rich, after which we will respond to your questions. And just a reminder, the comments that we make on this call will include some forward-looking statements. We refer you to the cautionary language at the bottom of our earnings release and also in our annual report, 10-K and subsequent filings pertaining to forward-looking statements. Also during the call, we will be using some non-GAAP numbers, which are reconciled to the comparable GAAP numbers in tables at the end of our press release and accompanying slide presentation, those of which are available on our website at www.craneco.com in the Investor Relations section. Now let me turn the call over to Alex.

Thank you, Allison, and good morning, everyone. We delivered record second quarter results. that reflected strong execution across the company and continued momentum across our portfolio. That excellent performance included solid 5% core sales growth, strong operating leverage and the continued benefits of our recent acquisitions. And momentum continues to build across the company. Total backlog increased 5% sequentially during the quarter, with core sequential backlog growth across both segments, providing further visibility and confidence as we move into the second half of the year. Aerospace & Advanced Technologies led the way, delivering 13% core sales growth driven by broad-based strength across both commercial aerospace and defense markets. Backlog also increased to a record of nearly $1.3 billion with core year-over-year backlog growth of 11%. At Process Flow Technologies, we delivered a second consecutive quarter of sequential core backlog growth, providing increased visibility and supporting our confidence in a strong second half. Execution remains excellent with another quarter of adjusted operating dilution from our January acquisition. Combined with positive and improving demand trends, this momentum positions us well for the second half and also as we head into 2027. Overall, operational execution was exceptional. Total company adjusted operating margin expanded 180 basis points to a record 21.3%, driven by strong core margins in both segments impacted by favorable pricing, strong productivity and disciplined cost management. These results demonstrate our ability to convert growth into new earnings expansion, while continuing to invest in the long-term opportunities across the portfolio. The performance of our acquisitions has been outstanding. Integration activities continue to progress ahead of plan. Operational performance has exceeded our expectations, and we are realizing synergies faster than anticipated, while also identifying new opportunities for growth and margin improvement. With 6 months now behind us, I'm incredibly pleased with all aspects of the four acquired businesses. All our associates at Panametrics, Druck, Reuter-Stokes and optek together with our dedicated integration teams are leveraging these businesses incredible technology, combined with the process and disciplined cadence of Crane business system to achieve results well ahead of plan to date. And my thanks to the team for driving it every day. It's clear that our vision for these businesses are becoming some of our best and most profitable businesses in Crane is materializing well ahead of schedule. As a result, we now expect our recent acquisitions to contribute approximately $0.20 per share to full year earnings, up from our prior expectation of approximately $0.15 per share. Another clear example of our ability to leverage the Crane business system in our incredible culture and talent to drive tremendous shareholder value through accelerated inorganic growth. This is incredibly exciting for Crane. Given our strong first half performance, record backlog levels and continued confidence in both our core and acquired businesses, we are raising our full year adjusted EPS outlook by $0.20 at this point, to a range of $6.85 to $7.05 per share. Highly modular and adaptable standard system [Audio gap] in and low-risk development. Clear examples of our capabilities and our ability to win share on new and growing applications. Our Defense Power business, which many of you visited during our investor meeting in Fort Walton Beach last year continues to build momentum. We are seeing accelerating demand in our power solutions for our AESA radar platforms, while also expanding our position in emerging vehicle electrification programs. In addition to the XM30-demonstrator win, that we previously discussed, we secured additional power content on another hybrid electric combat ground vehicle program during the quarter. Overall, we continue to see strength across the aerospace and defense demand environment. The backlog we've built, along with the new programs and opportunities, our Aerospace and Advanced Technologies teams have secured continue to provide us with great visibility well beyond 2026. Looking to the balance of the year, we now expect full year core sales growth for the segment to land just above the high end of our long-term 7% to 9% range. Very confident for yet another outstanding year at Aerospace and Advanced Technologies. Process Flow Technologies delivered another strong quarter, and we remain confident in our ability to consistently outperform the markets we serve over the long term. Over the past several years, as you know, we have strategically shifted the portfolio towards attractive end markets and align well with our differentiated technologies, strong customer relationships, and leading competitive positions, providing a solid foundation for sustained growth and market share gains. Overall demand for the quarter was in line with our expectations and execution strong driven an 80 basis points improvement in adjusted margins, again, even with the dilutive impact of the acquisitions. Momentum in cryogenics remained strong, driven by capacity needs within the space long segment. We secured projects for both ASX and Blue Origin in the quarter. We continue to win in this market based on our differentiated engineering support and manufacturing services. In nuclear, we continue to support restarts of existing facilities such as Constellation Energy's, Crane Clean Energy Center, and we remain well positioned for future growth given our positioning for Westinghouse AP1000 builds in our core business and for waste given their strong positioning in the nuclear space. For the full year, we expect core growth to be consistent with our initial guidance of flat to up to low single digits, leveraging within our targeted range of 30% to 35% and and driving margin expansion despite market headwinds. In summary, we delivered a very strong first half and continue to build momentum across the portfolio. Our businesses are performing well. our end markets remain attractive, and we are exceptionally well positioned to continue generating strong results and drive further long-term shareholder value. That strong position also provides us with significant strategic flexibility. As we look ahead, acquisitions remain an important lever to further enhance our growth and earnings profile. We remain active in evaluating opportunities and are encouraged by both the quality and breadth of activity across our pipeline. While timing and competitive dynamics are always difficult to predict, we believe we are well positioned to deploy capital in a disciplined and value-creative manner. Our focus on M&A remains consistent, adding highly engineered mission-critical technologies that strengthen our existing franchises, increase our exposure to attractive end markets and support long-term margin expansion. We continue to see strong opportunities across both Aerospace and Advanced Technologies and process flow technologies. Now let me turn the call over to our CFO, Mr. Rich Maue, for more specifics on the quarter.

Thank you, Alex. Another outstanding quarter for Crane. Let me start off with total company results. Total sales were up 26% in the quarter compared to last year with 5% core growth, driven primarily by the ongoing strength within the Aerospace and Advanced Technologies segment. Sales from our four acquisitions contributed 20% of the growth in the quarter, which was above expectations. Adjusted operating profit increased 37%, reflecting the impact of the higher core sales contribution from the acquisitions productivity and favorable pricing net of inflation, another outstanding result. And total core FX-neutral backlog was up 7% compared to the second quarter of last year and up 5% sequentially. And primarily reflecting continued strength at Aerospace and Advanced Technologies, though backlog was up sequentially again at process flow technologies. And core orders increased 2% year-over-year with Aerospace and Advanced Technologies up 5% and process flow technologies approximately flat. Orders and backlog across the acquisitions were also solid and continuing to support a stronger full year outlook. We repaid $100 million of debt in the quarter and another $90 million subsequent to the quarter, resulting in pro forma net leverage today at about 1.2x, a very strong balance sheet that positions us well for further M&A. Before discussing segment performance, I want to highlight that our adjusted results both adjusted EPS and adjusted margins exclude a benefit from EPA tariff recoveries recorded during the quarter, we believe it is important to isolate these onetime recoveries from the true underlying operating trends in the business, and we do not expect any material incremental amounts for the balance of the year. A few more details on the segments in the quarter. Starting with Aerospace & Advanced Technologies, sales of $339 million increased 31% in the quarter with core sales up 13.3%. Our record backlog of nearly $1.3 billion increased 11% on a core basis and increased 20%, including Druck. On a sequential basis, core backlog increased 7%. Once again, as reinforced at the air show last week, demand remains very strong across our highly diverse portfolio. In addition to the wins that Alex just talked about, we continue to respond to increasing RFPs and RFQs across several defense programs supporting missile defense and for military orders -- foreign military orders for the F-16 brake control upgrade program continue to grow. Again, continued momentum giving us high confidence in our multiyear outlook. Let me spend a minute on the core business in the quarter. On the OE side, sales remained strong with both commercial and military up double digits driven by our commercial customers as well as ongoing strength within the defense market. Total aftermarket was up 8% in the quarter, with growth similar across both commercial and military customers. Taken all together, we remain very confident in our full year segment outlook and expect full year core sales growth slightly ahead of our 7% to 9% algorithm. Adjusted segment margin was excellent and above expectations at 25.8% compared to 26.6% last year down slightly reflecting the expected dilutive impact from the Druck acquisition. This was an outstanding result given Druk's outperformance in the quarter as well as continued strong performance in our core A&E business. Moving to Process Flow Technologies. In Q2, we delivered sales of $386 million, up 21% compared to a year ago with core sales down 1.4% with the acquisitions of Panametrics, Reuter-Stokes and optek adding nearly 22 points of growth and foreign exchange contributed 0.8 percentage points of growth in the quarter. Compared to the prior year, core FX central backlog at PFT decreased 2%, but on a sequential basis, improved 2% and core FX-neutral orders were approximately flat, consistent with our expectations. Adjusted operating margin of 22.2% was approximately 80 basis points above last year, and this was inclusive of the dilutive impact from the Reis acquisition. And like Aerospace and Advanced Technologies results were above our expectations given better performance across both our core businesses and each acquired business. Productivity continues to read through as well as price net cost. In summary, an excellent quarter. Moving to the nonoperational items below the segments. Corporate expense for the quarter was $19 million as expected. And for 2026, we continue to forecast corporate expense to be in the range of $80 million to $85 million. Net nonoperating expense for the quarter was $17 million, and we continue to estimate full year net nonoperating expense of approximately $58 million. And lastly, we continue to estimate our tax rate for 2026 to approximately 23%. Taking all of this into account, our performance to date as well as risks and opportunities we see ahead. And as Alex mentioned, we are raising our adjusted full year guidance by $0.20 to a range of $6.85 to $7.05. Looking at the cadence of the second half, we expect Q3 to be similar to Q2 with Q4 modestly lower, reflecting normal historical seasonality. Overall, an outstanding first half and momentum continues to build. And with that strong performance, for anyone considering investing in Crane or those looking to potentially invest more in Crane. I am reminding you of the wisdom imparted by the award-winning actor, Matthew Broderick, playing the fan favorite Ferris Bueller in the movie Ferris Bueller's Day Off. Life moves pretty fast. If you don't stop and look around once in a while, you could miss it. And with that, operator, we are now ready to take our first question.

[Operator Instructions] Our first question is coming from Amit Mehrotra.

Maybe I just wanted to start on process flow, any notable observations in growth trends as you sort of progress through the quarter? I understand organic growth was negative. Obviously, organic orders were a little bit negative. But maybe any thoughts on any evolution on that on that rate as you progress through the quarter? And just any expectations around organic growth or core growth for the back half of the year as well.

Yes. Sure, Amit. So we're feeling very positive about PFT in the second half. When we went into the year, we expected the first half to be the softest, and we are pleased to see two quarters of sequential backlog improvement and sales improvement. As we progress through the quarter, we saw orders strengthening. And I'll speak more about it. So the demand trends are very positive in position as well for a second half. It could have very well been a positive outcome based on the trends that we've seen from a year-over-year basis. We saw quote activity starting to increase and many areas of strength, including in the chemical production, which is a bit of a new green spot where we're starting to see customers talk about and report volume growth, in particular, in the Americas. So all signs are quite positive in the second half. I expect PFT to turn positive growth year-over-year in the second half. Very confident about that with those trends. In addition, I think in addition to chemical and the Americas starting to show some further signs, we continue to see industrial demand be very strong, building backlog in our businesses that driven industrial power, power gen, in the United States, at gas combined cycle plants, we continue to build back work in that area, water wastewater, cryogenics. So all those trends make me very positive about PFT in the second half.

Great. Got it. That's helpful. And just as a quick follow-up, I noticed kind of your more stronger comments on the M&A pipeline. It does seem across diversified industrial that there has been a recent uptick in activity. Maybe just give a little bit more color there on kind of there have been shifts in in sort of getting closer to the finish line on stuff? And are you still seeing opportunities sort of like PSI that -- I know PSI was really kind of three deals in one, so to speak. But would be curious to see if you're seeing deals where you can both kind of see accretion on the technology stack as well as sort of meaningful opportunity for margin expansion. So if you can just talk about that it would be appreciated.

Yes. I mean I think as a general guideline, our focus on any deal that we make and what investors would expect is that any deal that we make is because we think it's accretive to the growth profile will become accretive to the margin, will strengthen our portfolio from a technology standpoint, and also will meet the financial hurdles. So that is the base expectation of any deal you'll see us. We are seeing our funnels get stronger with deals with those characteristics in both and PFT. In fact, they've never been stronger. So activity is solid. Like I mentioned in my comments, the timing is a bit unpredictable. But we have the debt capacity, we have the management capacity, and I think we're well aligned to execute on capital deployment and continuing that with that momentum. Nothing imminent to talk about right now, but I feel optimistic about it.

We'll take our next question from Matt Summerville with D.A. Davidson.

Two questions, both on AAT. Can you help me, or how I think about how best to frame the opportunity you could see ahead with all of this [indiscernible] and incremental militarization around [ FAD, ] Patriot, Tomahawk, et cetera, et cetera, kind of discuss your exposures and how you think about that opportunity as part of your go-forward kind of organic potential? And then I have a follow-up.

Yes. Thanks, Matt. So on missile demand, we see about $35 million of content today. We're on over 10 programs, including those that you mentioned. We're seeing strong demand today increasing, but we're also seeing from our customers, our key activity and forecast that would expand 4x that rate, going to the end of the decade. So we are in a pretty good position. A lot of our electronic power, mod power, microwave content, and we don't have any capacity constraints to supply that demand. So pretty good upside for us in that area.

Yes. Just to add to that a little bit, because of the capacity that Alex mentioned, we're actually getting incremental quotes for potential content wins from others. So not just growth on existing platforms. So another opportunity, I would say, beyond market for us.

Understood. And maybe if you guys could speak to how you're presently thinking about the durability of the commercial aftermarket cycle and overall demand there in seems like maybe you were expecting a little bit of maybe geopolitical induced demand destruction, but that doesn't seem to be coming to fruition. So how would you kind of recalibrate how you're viewing that business today?

Yes, Matt, I would say, just overall, demand is solid, remains solid, right? If you step back, and you look at our aftermarket positioning, think of us as $55 million to $60 million in revenue a quarter in commercial. [Audio gap]

A number of new NPDs that are self-funded that will be launched in the years ahead, starting next year, but we think we'll accelerate I think we've identified various regional commercial opportunities where we have opportunity to drive share in the different businesses. And then on the Druck, the aerospace side, there's a lot of synergies between our A and E business and Druck on growth of new programs. We're starting to see opportunities to gain share there as well. So all these things will become upside to our original thinking.

Great, great. And then just one more. So you highlighted just share gains and some recent wins in AAT. So maybe just if you could touch on what do you think is enabling that for the business? Or what are you doing on the commercial front that's allowing that to happen?

Yes. I think something that we've done well over the last decade and the Max was very adamant about was to continue to invest through the cycles. So we continue to invest in engineering through [indiscernible] it through the ups and downs through the slow demand, and we have this advantage on speed, scalable modular that allows us to move fast on these demonstrators accurately at a reasonable cost, and we're on every demonstrator for the U.S. Air Force. We're on the new CCA opportunities. We're gaining share on the private jets and vehicle electrification, radar, and I think that's been the major key. It's just a continued investment through the cycles that have put us in this good position to win.

We'll take our next question from Myles Walton with Wolfe Research.

Rich, can you size the dilution in the two segments from deals since January?

From a margin perspective, overall, you're referring to or...

Yes. Yes.

Yes. So if you -- I'll speak to the quarter just to give you a sense, right? So we would be probably close to 100 basis points where we were in Q2, close to 100 basis points better in aerospace and advanced technologies. And if you looked at PFT, we'd be closer to -- I think we disclosed on the call, 80 basis points with the dilutive impact, it would be closer to 160, excluding. So the degree of performance on the underlying business is exceptional is what I would say. But I would also say that we expected further dilution coming from the deals they are performing better. So each of the acquisitions are performing better and our core underlying business is performing better. In the first quarter, I think the numbers are similar. I don't have them in front of me, but I would say that they're similar in the first quarter.

Okay, and then within PFT...

A little bit behind what we did in Q2, just given momentum with the deals.

And then within PFT, the implied expansion from a bucket of price cost, and mix, where should we think the most amount of that came from?