Crane Company (CR) 2026 Q3 法說會逐字稿

Welcome to the Crane Company third-quarter 2026 earnings conference call. (Operator Instructions)

I would like to now turn the call over to Allison Poliniak, Vice President of Investor Relations. Please go ahead.

Thank you, Stephanie, and good day, everyone. Welcome to our third-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 questions. And just a reminder, the comments 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, both of which are available on our website at craneco.com in the Investor Relations section.

Now let me turn the call over to Alex.

Thank you, Allison, and good morning, everyone. Crane delivered another quarter of record performance, reflecting the strength of our portfolio, broad-based demand across our end markets, exceptional execution throughout the company and the continued success of our acquisition strategy.

Demand remains very strong across Aerospace and Advanced Technologies. Momentum continues to build within Process Flow Technologies, and our recent acquisitions are performing well ahead of expectations. Together, these drivers resulted in 8% core sales growth, strong operating leverage, record margins, record earnings and a record backlog, while reinforcing our confidence in the outlook for both 2026 and 2027.

Of note, order activity was particularly strong in Process Flow Technologies, where core orders increased 20% year over year and 8% sequentially. This, combined with exceptional strength and resilience across the Aerospace and Advanced Technologies, total company backlog increased 9% year-over-year, providing strong visibility as we close out the year and enter 2027.

Execution continues to be a key differentiator. Adjusted operating margin expanded 130 basis points to a record 22.5% despite the temporary dilutive impact of our recent acquisitions. These results demonstrate our ability to translate growth into meaningful earnings expansion while continuing to invest for the future.

Our acquisitions continue to significantly exceed expectations. Revenue growth, margin expansion and earnings contribution are all ahead of plan. And we now expect to achieve our 10% ROIC hurdle approximately 18 months earlier than originally anticipated. We expect these acquisitions to contribute approximately $0.30 per share to 2026 earnings, up from our previous expectation of $0.20 per share, with operating margins expanding more than 500 basis points this year.

These incredible results reinforce our confidence in the Crane Business System and our ability to create substantial shareholder value through disciplined capital deployment. We are equally excited about the opportunities ahead, including the pending acquisition of Trillium Pumps.

Given our strong year-to-date performance, record backlog levels and confidence in both our core and acquired businesses, we are raising our full year adjusted EPS outlook by $0.35 at the midpoint to a range of $7.23 to $7.38 per share.

Turning to Aerospace & Advanced Technologies, the segment continues to perform exceptionally well. Demand remains robust across commercial aerospace, defense and space, supported by a record backlog and a growing pipeline of opportunities.

Commercial aerospace remains healthy with solid OE demand and continued strength in aftermarket. On the defense side, investment remains very strong as customers continue to prioritize missile defense, radar, advanced power conversion and space-based capabilities, all areas where we continue to invest and win.

Strong execution and continued program wins are providing increasing visibility into the future growth. As a result, we continue to expect 2026 core growth modestly above the high end of our long-term 7% to 9% growth framework, while leveraging that growth between 35% and 40%.

The team continues to execute at a very high level, and we remain highly confident in the long-term growth opportunities across the segment. Process Flow Technologies also delivered an outstanding quarter. The business returned to core growth while delivering record profitability.

Core sales increased 6%, orders grew 20% and adjusted operating margins expanded despite the dilutive impact of recent acquisitions. More importantly, the transformation of the portfolio continues to gain momentum.

Growth was broad-based across cryogenics, power, wastewater, nuclear and general industrial markets. We secured additional wins in cryogenics supporting the growing space launch market, new pharmaceutical orders related to GLP-1 capacity expansion and further wins in wastewater and power.

For the full year, our outlook has improved, driven by solid core growth in the second half. We now expect low single-digit core growth full year and continued margin expansion.

We also continue to enhance the quality of the portfolio through disciplined capital allocation. The announced acquisition of Trillium Pumps strengthens our position in the attractive water and wastewater market, while the announced divestiture of our Building Services and Utilities business further sharpens the strategic focus of the segment.

Before moving on, I want to recognize and thank the outstanding BS&U team. For nearly 120 years, this business has been an important part of Crane, built by incredibly talented people who consistently deliver results the right way.

We are grateful for their many contributions and proud of what they have accomplished. As they begin this next chapter, I'm confident they have a bright future ahead. Together, these actions continue to reposition PFT around highly engineered mission-critical technologies, serving attractive growth markets, including pharmaceuticals, water and wastewater, power, cryogenics and nuclear.

Importantly, we are not finished. We continue to see attractive opportunities to further strengthen the portfolio and remain confident in our ability to outperform the markets we serve over the long term.

To summarize, Crane is performing at a very high level. Our businesses are executing exceptionally well. Our end markets remain attractive. Our acquisitions are exceeding expectations. Our portfolio continues to become stronger and more resilient. We will enter 2027 with record backlog, strong momentum across both segments, increasing earnings power and significant strategic flexibility.

As we look towards 2027, our confidence continues to grow. Over the summer, we completed strategy reviews across all our businesses, and those reviews reinforce our long-term growth framework. In particular, 4 themes stand out. First, Aerospace and Advanced Technologies remains exceptionally well positioned. Strong aerospace and defense demand, combined with the benefits of years of investment in differentiated technologies, creating a resilient portfolio gives us confidence in the segment's ability to deliver attractive growth for many years to come.

Second, the transformation of the Process Flow Technologies portfolio is gaining momentum. While the benefits are increasingly visible in our results today, we believe we are still in the early innings of that value creation journey as we continue to reshape the portfolio around higher growth, higher margin and less cyclical markets.

Third, our acquisition strategy continues to create meaningful value. We have significant capacity to deploy capital, a robust pipeline of opportunities and a proven ability to integrate businesses and accelerate earnings, margins and returns.

And last, but most important, we have an incredible intangible asset, the Crane Business System. The combination of world-class processes and a high-performance culture built on focus, intensity and accountability continues to differentiate Crane and drive sustainable value creation.

Simply put, our businesses are performing very well. Our portfolio is stronger, it has ever been, and we continue to see significant opportunities to create value through both organic and inorganic growth.

Before turning it over to Rich, I'm pleased to announce that we will host our next Investor Day on February 9 in New York City. We look forward to sharing more about our strategy, growth opportunities and long-term outlook at that event.

With that, I'll turn the call over to Rich.

Thank you, Alex. Another outstanding quarter with certainly more to come. Alex, as you just said, the Crane Business System, this machine that we have and this unique culture is what enables us to consistently deliver the results that we do quarter after quarter.

And it reminded me of the Academy award-winning movie Fletch during an iconic scene where Chevy Chase was impersonating Gordon Liddy, an airplane mechanic supervisor. During that scene, I was reflecting on our well-oiled machine, and I thought about all our coaching to our leadership teams and even how we talk with our investors.

When Fletch proclaims, it's so simple. Maybe you need a refresher course. It's all ball bearings nowadays, guys. Now you just prepare that fester valve with that 3-in-1 oil and some gauze pads, and I'm going to need about 10 quarts of antifreeze preferably Prestone. No, make that Quaker State and we'll just keep delivering top quartile results quarter after quarter.

And with that in mind, let me start off with total company results. Total sales were up 28% in the quarter compared to last year with 8% core growth, reflecting broad-based strength across both Process Flow Technologies and Aerospace and Advanced Technologies.

Sales from our 4 acquisitions contributed 21% growth in the quarter, once again outperforming our expectations. Adjusted operating profit increased 36%, reflecting the impact of the higher core sales, contributions from the acquisitions, productivity and favorable pricing net of inflation, another outstanding result.

And total core FX-neutral backlog was up 9% compared to the prior year, reflecting strength at both Aerospace and Advanced Technologies and Process Flow Technologies. Core orders increased 11% year-over-year with continued strength in Aerospace and Advanced Technologies, up 2% as expected.

And when excluding a multiyear order received in the same period last year, we were up in the mid-teens and Process Flow Technologies up an exceptional 20%. We generated strong free cash flow in the quarter and repaid $170 million of debt, resulting in pro forma net leverage today at 1.1 times, a very strong balance sheet that positions us well for further M&A.

Before discussing segment performance, I wanted to remind everyone that our adjusted results exclude the net benefit from IEEPA tariff recoveries recorded during the quarter. Once again, in our view, it's important to isolate these onetime benefits from the true underlying operating trends in the business.

A few more details on the segments in the quarter here. Starting with Aerospace and Advanced Technologies. Sales of $344 million increased 27% in the quarter, with core sales up 9.5%. Our record backlog of nearly $1.3 billion increased 9% on a core basis and increased 20%, including the impact of the Druck acquisition. Once again, demand remains very strong across our highly diverse portfolio.

Top line strength in our core business was driven by the commercial OE ramp as well as ongoing broad-based strength within the defense market. Total aftermarket remained strong, bolstered by military and when isolating prior year initial provisioning was up 11%, with core commercial aftermarket up at a high single-digit rate, exactly what we expected.

And adjusted segment margin was exceptional at 26.3%, ahead of our core leverage expectations and up 100 basis points year-over-year. That performance is notable given the higher OE sales and expected dilution from the Druck acquisition, and it speaks to the resiliency of our margin profile, irrespective of any changes in OE aftermarket mix.

Druck continued to outperform our expectations, and our core A&E business delivered another very strong quarter. Taken all together, we remain very confident in our full year segment sales outlook and continue to expect full year core sales growth slightly ahead of our 7% to 9% algorithm.

The diversity of the overall AAT portfolio supports the durability of that 7% to 9% regardless of periodic changes in sales composition, whether that be in OE versus aftermarket or commercial versus military.

Moving on to Process Flow Technologies. In Q3, we delivered sales of $413 million, up 29% compared to a year ago, with core sales up 6.2% and the acquisitions of Panametrics, ReuterStokes and optek-Danulat adding nearly 24 points of growth.

Demand improved significantly in the quarter. Compared to the prior year, core FX-neutral backlog at PFT increased 8% on a sequential basis was up 2% and core FX-neutral orders were up 20% year-over-year and up 8% sequentially. Adjusted operating margin was a record 24% and was 80 basis points above the prior year and like AAT, results were above our expectations given better performance across both our core businesses and each of our three acquired businesses. In summary, another outstanding quarter.

Moving to the nonoperational items below the segments, corporate expense for the quarter was $20 million as expected. And for the full year, we expect to be within our previously guided $80 million to $85 million range. Net non-operating expense in the quarter was $14 million, and we continue to estimate full year 2026 net nonoperating expense of approximately $58 million. And lastly, we continue to estimate our tax rate for the year to approximately 23%.

Taking all of this into account, our performance to date as well as the risks and opportunities we see ahead, as Alex mentioned, we are raising our adjusted full year guidance by $0.35 to a range of $7.23 to $7.38. Overall, again, an outstanding year-to-date and momentum continues to build.

And with that, operator, we are now ready to take our first questions.

(Operator Instructions) Jeff Sprague, Vertical Research.

On TSI, Alex, obviously, very, very encouraging. Is the endpoint now much higher on this than you thought also? Obviously, you're ahead of schedule on what you wanted to do.

But is the upside here even bigger than you thought? Maybe you could kind of frame that relative to how you initially bridged the deal shortly after you closed it.

Yes. Thank you, Jeff. So yes, the upside is higher. I think we had that five-year mark where we're going to go from $60 million EBITDA to $150 million in five years. Now we think that's going to be quicker than that.

And then when we look at the five-year mark, the growth is going to be higher and the margins are going to be higher as well, so upside to that five-year reference point for sure.

And then one of the other sort of interesting things here, and I don't know if it's how you plan to approach all deals, but a lot of companies that are doing deals, right, seem to be allergic to trying to fix stuff. They just want to pay for growth.

I'm not saying that everything you'll be looking to buy is a fixer upper, but both PSI and Trillium, right, they seem to run good assets, maybe not run the way they should be an opportunity to kind of run it through your business system. As you look at the M&A pipeline, is there a lot of that sort of asset opportunity out there?

Yes, Jeff. So every -- yes, that's a good observation. I think we do look at deals from the lens of CBS. So we obviously would see more opportunity than the seller. But each deal is different. There's other deals. You may remember optek, which we also did earlier this year, smaller deal we don't talk a lot about.

But that was a high-growth business, very well run, and we're just adding contributing to it. So, I think we're open to a combination of circumstances, certainly not opposed to turnarounds or improvements like what we've been doing. It's all about where we see shareholder value creation and a combination of a path to improving the portfolio when we're hitting that three-, five-year mark.

Matt Summerville, D.A. Davidson.

I was wondering if you could maybe comment, you've sold the business up in Canada. You're in the process of selling the UK business. Are there more consequential portfolio actions still to be had specific to PFT? And I'm also curious, sort of tangential to that, given that I would assume that transaction in isolation is going to be dilutive, maybe comment on that and maybe how much Trillium can backfill relative to that dilution?

Yes. Thanks, Matt. So there is no more substantial divestitures that we're looking at right now. We evaluate the portfolio every year and our thinking could change. But if you recall, like you mentioned, we divested that Crane Supply in Canada exposure to nonresidential construction.

This business in BS&U primary exposure is also nonresidential. So this completes our exit of that market, a very well-run business, operated by a great team, but not really aligned to the markets that we're trying to expand into. As far as the accretion dilution, I'll let Rich answer that.

Yes, Matt, yes, I think the way to think about the BS&U business, right, this is a business that does roughly $160 million will be the outlook this year in revenue, and they're essentially at fleet margin. So when you look at that and compare to Trillium, Trillium is $115 million in revenue with below fleet margin. So there'll be some dilution to your point.

Obviously, the timing and the amount -- the timing of the close and the amount will coincide, right? So we're currently thinking that, that will close sometime near the end of the first quarter. So if you try to create a model around that, it's not a full year impact, but we would expect to offset a good portion of that with Trillium in the year. If that helps.

Perfect. And then maybe if you could just provide a little bit more end market and geographic color specific to PFT in the context of that 20% year-on-year improvement you saw in organic order activity.

Yes, Matt. So it's looking quite positive from our perspective for PFT. I think a number of end markets that are seeing the growth, which is a positive from our perspective, makes us confidence on sustainability. Where we've seen the tailwind, those markets where we've been focused on over the last few years in increasing our exposure to cryogenics, which is driven by space launch, water, wastewater, primarily US-based business where it's been resilient.

Pharma, which our backlog is growing, and we expect increased investment in particularly in the US power as well. So all these markets. And of note, chemical continues to be flat, where in the past, we've depended on chemical recovery to boost our growth. That's not the case anymore in PFT.

So that chemical recovery is all upside still. We expect to drive growth without depending on that, and that will be additive to it. I think regionally, US continues to be the best market overall. Europe, pretty flat. I think Middle East has recovered from the first half and continues to be solid. And then we have much less exposure in the rest of the world.

Nathan Jones, Stifel.

Maybe a follow-up around the chemical market there. I would imagine it's probably the tale of a couple of different regions with capacity still coming out of Europe and maybe capacity improvements in the US.

Maybe you could talk about chemical in a little bit more detail from a regional perspective and your outlook for a recovery there. I mean, if Europe just gets to being kind of a flat chemical market or something like that and stops going down, can the US add growth to that? Just how you view the shape of a recovery there?

Yes, Nathan. So yes, I think you stated Europe, we expect to continue to be flat even going into next year. I think the two markets that are the most interesting for us is the US and Middle East. I think the US, as I mentioned in the last call, has held up pretty well.

As you know, when oil prices are high, there's a feedstock advantage on natural gas. So even when there's capacity globally, it makes sense for chemical companies to invest in the US. So we see some sporadic project activity. Middle East also recovering.

I think a full recovery that you'll notice in the P&L will come -- is usually driven by construction, residential construction, durable goods, which I'm not expecting, not counting on, at least in the first half of '27, we'll see after that. But again, very pleased with the transformation of the portfolio that we're much less dependent on that recovery to drive growth.

Maybe just to add, if you recall, like our chemical exposure is mainly in the US, right? So maybe 70% of our chemical exposure is US-based.

I'm going to try and pin you down a little bit more on PSI. The 5-year target was $150 million of EBITDA. You said you're going to get there quicker than that now. Do you have a new target for the 5-year number that's over that $150 million?

Yes. I mean I think it will grow in the 4% to 6% range and be leveraging at that 35%, 40% after the 3-year mark.

Okay. On top of the 150?

Yes, at a minimum.

Myles Walton, Wolfe Research.

I'm curious if I can something off you. Were the acquisitions of PFT about 100 basis points dilutive to the reported margins, just backing into it based on -- you talked about up 500 basis points this year for the acquisitions.

And then if that's the case, the 300 basis points of core margin expansion on 6% core growth, could you just maybe help us understand how you got that kind of operating leverage in the core business?

Yes. I mean, in the quarter, look, it was -- I think you're correct. Our performance from a margin point of view was exceptional. The leverage on the core business, and if I just -- I'll give both in the Aerospace and Advanced Technologies sector, we were just above the high end of our 35% to 40%.

So think low 40s in terms of operating leverage there. And it's a combination of everything, right? We just continue to execute really well from a price cost point of view, a productivity point of view and so forth, even in the face of any changes in mix. So like I said, the durability and resiliency of our Aerospace and Advanced Technologies part of the portfolio, we're going to see that kind of performance irrespective of the composition of revenues.

On the PFT side, we're already accretive in that zone today with the deals as we're exiting the year. Our core leverage in the quarter was just -- I think it was just north of 40%, 40% -- something like that, so fairly solid.

Myles, just to add to that, we've continued to invest in PFT through the cycle. So there's no incremental cost increase that we'll see. So our leverage is pretty strong.

As we continue to mix more into these higher-growth markets, that's also where we are more profitable. So we see this a bit of a flywheel effect where the growth is in our higher-margin businesses. So the incremental leverage will be very solid in PFT as we continue to drive growth.

Got it. And just a clarification, if I could. The margins up 500 basis points, that's for the full year. So you're saying you're already above that level here in the third and fourth quarter. Is that right, in terms of the PSI acquisition?

Yes. In the second half of the -- yes, in the second half, just mathematically, I think we have to be there. Yes. And so then this PFT performance from a margin perspective, we should think about this as being reasonably sustainable at these levels?

Yes.

Yes. Again, it gets back to our core leverage rate in that 35% to 40% range through cycles. And we expect Q4 to be very, very similar.

Dan DiCicco, BMO Capital Markets.

You mentioned some PFT wins throughout the quarter. I think power, cryogenics, wastewater. Could you provide some color on what you're seeing there?

Yes. If you think about those markets, Dan, cryogenics, the two main markets are space launch, not only the rocket itself, but on the launch pads and those build-outs continue.

So we're seeing good traction there. And then the second biggest market is just general aerospace in the factories with environmental testing. So as aerospace ramp-up continues, we see that demand and the teams are doing an exceptional job.

When you think about power, again, our power business is mainly US-based and the expansion on natural gas combined cycle turbines. That's where we see the momentum. And pharma, similar in the US, the reshoring activity, those funnels are increasing. So capacity expansion in the US, those type of project wins. I think those are some highlights, Dan. We expect to continue those markets to continue through '27.

Ronald Epstein, Bank of America.

This is Andrew Steinhardt on for Ron. I just wanted to ask a quick one on the missile demand and the broader domestic munitions ramp. With several primes securing [UTX] over the past few months, can you talk about how the process towards getting under contract for these programs has looked from your end so far?

Yes, I'll comment and then I'll let Rich comment just to reset. We're about 15 missile programs. I think our jump-off point this year is around $35 million, mostly our different type of product, power products and microwave products. And we expect next year to grow 40%, 50%. A lot of that demand is already in the backlog.

And then the projections after that, 4 to 6 times growth of that 35 base, and I think is where these contracts come into play, securing a bit more growth next year, but also securing that continued expansion and growth through the rest of the decade. Would you add anything?

Yes. I would just echo that, but just say that the demand signals that we're getting just continue to increase. We continue to see a lot of activity, a lot of RFQ work and so forth. To the point that you made, we're seeing a lot of that. It's not slowed, it's increased.

And can you just comment on what the process with these UTX actually looks like from the view of a subcontractor?

Sorry, you broke up a little bit. Can you repeat?

Yes. Just looking to see if you guys could provide some color on what the UCA contracting processes look like of contract.

Yes. I think you asked -- I don't know if everybody heard, but we're seeing some break up how the contract processing looks for that missile demand. So we get RFQ request for tranches of multiyear opportunities for the different programs, and we provide those updated quotes.

And then we align with the customer, secure and then get a contract and a purchase order. So it's all happening at different times and different programs for different tranches for different periods of year just on an ongoing basis. Hope that helps.

(Operator Instructions) Justin Ages, CJS Securities.

Given the ongoing repositioning that you guys have done in PFT, can you give us an update on what the relative contribution of each of the end markets is? You used to say like nuclear, 5%. Anything like that so we can see what the current contributions are?

Yes. I'll give you a quick snapshot. So I think starting with chemical, right? In the past, it's been like 30%. Now, we have it close to 20% in chemical. Water, wastewater is around 14% to 15% general industrial, up 20%. And then our power business, combined with -- when I think -- when I say power, it's gas and nuclear, it's like 15%. What did I miss? I think those are the main ones.

Great. And then given the lingering conflict in the Middle East, can you just remind us what your current exposure there is?

So the exposure is mainly in PFT, and it's less than 5% overall. So what we -- we don't see really any material impact this year or going forward. We saw some delays in shipments earlier in the year that's somewhat normalized. There's plenty of activity. So not really a headwind that we expect.

I'd say maybe tangentially, it's just the freight costs being higher and things like that, that we've been able to more than offset.

This concludes the question-and-answer portion of today's call. I would like to now turn the call back to Alex Alcala for closing remarks.

Thank you for your questions and continued interest in Crane. We have significant momentum across the company, a record backlog and substantial opportunities ahead.

Most importantly, we have a proven team, a proven system. We remain highly confident in Crane's future and our ability to create long-term shareholder value. Thank you, and have a great day.

Thank you. This concludes today's Crane Company third-quarter 2026 earnings conference call. Please disconnect your line at this time and have a wonderful day.