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Text: I'm Jason Feldman, Vice President of Investor Relations.
craneco.com in the Investor Relations section.
Another exceptional quarter with solid results across the board.
Even in this environment of persistent inflationary pressures, random supply and logistics issues and continued various COVID recovery conditions globally.
We finished the third quarter with record adjusted earnings per share from continuing operations of $1.89 up 103% compared to last year along with extremely strong adjusted operating margins of 16.8%.
We delivered adjusted core sales growth of 19% with a number of strong leading indicators reflected in core order growth of 31% and core backlog growth of 13% compared to last year.
Based on this performance, we are raising our adjusted earnings per share from continuing operations guidance by $0.35 to a range of $6.35 to $6.45, which is effectively our 5th guidance increase this year.
Remember that our original guidance for 2021 was $4.90 to $5.10 and that guidance included $0.44 of earnings contribution from Engineered Materials.
That means we have effectively raised guidance more than $1.80 on a comparable basis since January.
Compared to 2020 on a like-for-like basis excluding Engineered Materials in both periods, our current guidance midpoint of $6.40 compares to 2020 earnings per share of approximately $3.52 reflecting more than 80% year-over-year earnings per share growth.
Absolutely stellar performance by any measure.
While uncertainty will continue related to COVID variance, sporadic supply chain constraints, inflation and overall global resource challenges, we have a high level of confidence in our revised guidance based on our team's outstanding performance driving customer satisfaction and proactively and effectively managing inflation and the supply chain.
For context, we were approximately price cost neutral in the third quarter.
Let me put our performance in perspective another way.
The midpoint of the updated guidance at $6.40 is well above our prior peak pre-COVID adjusted earnings per share of $6.02 in 2019, but with some notable differences this year compared to 2019.
Again, the $6.02 in 2019 included earnings contribution from Engineered Materials, which is now classified as discontinued operations and excluded from our '21 guidance.
Second, many of our end markets are also still in the early stages of recovery and still remain well below the pre-COVID peak levels with the exception of Crane Currency and our defense business.
And thinking about 2022 and beyond, it is worth noting that the commercial side of our Aerospace Electronics business in 2021 will still be approximately $150 million in sales and approximately $80 million in operating profit below 2019 levels this year, and the recovery to pre-COVID levels in this business alone will add about $1 per share to EPS.
At Payment & Merchandising Technologies, Crane Payment Innovations will be $200 million below pre-COVID levels in 2021 with more than half of that amount in our very high margin Payment Solutions business.
This business continues to benefit from very favorable long-term macro drivers that are accelerating given Global Human Resource and constraints, labor shortages, and wage inflation helping our customers drive productivity and security by automating their payment and transaction processes.
In the Process Flow Technologies, we saw the inflection to positive core growth in the second quarter on the process side of the business with sustainable and improving demand across our strongest end-markets including chemical.
So let me reiterate the message that we have been consistently communicating.
We are innovating and developing new products and solutions to provide value for our customers.
We are executing on numerous growth initiatives across our businesses and we operate with a consistent cadence and discipline of the Crane Business System to drive growth, productivity, and cost savings.
We have demonstrated an ability to balance those objectives extremely well, delivering on margins and free cash flow while maintaining 100% of our investments in strategic growth initiatives throughout the entirety of the pandemic.
We are and we will continue to drive above market growth.
Paired with the market recovery in our consistent execution, we're very excited about our growth prospects, strong top line growth and solid operating leverage driving substantial growth in free cash flow incredibly delivering on expectations.
I discussed at our February Investor Day event how Crane was at an inflection point for accelerating growth after years of organic investments and consistently excellent execution.
In the first quarter you saw substantial evidence of that inflection and the related themes from Investor Day reading through.
At our May Aerospace & Electronics Investor Event we showed you numerous examples of how we continue to effectively drive above market growth and our expectation of a 7% to 9% sales compound average growth rate over the next ten years.
Also in May, we announced the sale of Engineered Materials as part of our strategic portfolio management process to improve our overall growth profile while continuing our simplification journey, and today you can see even more evidence of that inflection in our core sales growth as well as in our orders and backlog.
Consistently executing on our investor thesis, that being we are well positioned for accelerating organic growth as our end markets continue to recover.
We are outgrowing our end markets because of our consistent and ongoing investment in technology, new product development, and commercial excellence.
Solid execution continues to leverage that growth into earnings and strong free cash generation, which creates substantial flexibility for capital deployment.
A continued evidence of the value we create through acquisitions with stellar performance at Crane Currency, Cummins Allison, and instrumentation and sampling.
Inflection, we have clear momentum with increasing traction from our growth initiatives.
We will continue to generate substantial and sustainable value for all of our stakeholders.
Despite our impressive track record of the results, we believe there is unrecognized value in our stock and the strength of our medium and long-term outlook.
And that was one of the key factors behind our newly announced $300 million share repurchase authorization.
You should view this as both a return of cash to shareholders following consistently outstanding operational performance and strong free cash generation, as well as a sign of management and the Board's conviction that we have a lot of runway for growth ahead of us.
I have an easy job today because I think our results speak for themselves.
Even in these challenging times, we have continued to execute.
At Aerospace & Electronics, sales of $169 million increased 7% compared to last year.
Segment margins improved 370 basis points to 19.3%.
In the quarter, total aftermarket sales continued to gain momentum and increased 24% compared to last year after 3% of growth last quarter.
The strength was driven by commercial aftermarket with spares, repair, and modernization and upgrade sales all up substantially.
On the military side, spares and repair both improved in the 10% range but military modernization and upgrade sales were lower.
Commercial OE sales increased 31% in the quarter following 4% growth last quarter.
As expected, defense OE sales declined in the teens.
On a year-to-date basis, defense OE sales are down 6% after three years of double-digit growth.
Given our strong position in major project -- projects that we have already won that will be ramping up over the next few years we remain confident in our ability to grow our defense business at a high single-digit CAGR from 2021 through 2030.
The fourth quarter of last year marked the trough for both sales and margins at Aerospace & Electronics.
While the delta variant had some short-term impact on demand, the overall momentum in the industry continues.
Specifically, we expect near-term relaxation of international air travel rules and rising global vaccination rates to drive higher levels of air travel in the months and quarters ahead.
Looking ahead to next quarter we expect segment sales to be similar to the third quarter with margins in the low teens.
The sequential margin decline in the fourth quarter is primarily related to shipment timing and mix with very high commercial aftermarket sales in the third quarter relative to the fourth quarter.
On a full-year basis at Aerospace & Electronics, we should close the year with sales just down very slightly compared to last year and with margins above 7.16% both well ahead of our original guidance for this year.
As we enter 2022, we expect sales will continue to improve as air travel recovery progresses and the expected timing of a recovery to pre-COVID levels continues to get pulled forward.
And remember that our confidence in our outlook for this business is about more than just a market recovery.
We are seeing continued accelerating growth resulting from years of consistent investment in technology.
For example, during the third quarter we were selected for a $60 million program over a 15 year life with our advanced high accuracy, high performance, pressure sensing technology for a newly targeted adjacent multiplatform turbofan engine application.
In this particular case, we replaced an incumbent supplier who had the business for many years.
Another example of winning because of the strength of our technology and capabilities, just as we described at our May Aerospace & Electronics Investor Day, which by the way, that is still available to stream on our website today.
This is a new targeted application of our historic Sensing technology, a huge win for our team, and just the beginning.
And our investments will continue to take us beyond our historical core markets, expanding our addressable market and aligning our business with accelerating secular trends.
For example, within the last month we were awarded a $20 million contract for a low Earth orbit satellite constellation using a version of our multi-mix microwave technology with most production sales expected in 2023.
We also remain extremely excited about our positioning in investments related to the long-term trends in this industry, most notably electrification.
That gave us the confidence to share our 7% to 9% sales CAGR target at last May's Investor Day event.
We continue to make substantial progress advancing the technology that will be the critical enabler for a more electric world for more electric and hybrid electric military ground vehicles to electric propulsion aircraft, electric urban air mobility vehicles, and advanced radar and guidance systems.
All of these applications require greater levels of electrification and a greater need for integration of power conversion, sensing, and thermal management systems, all that are core technology competencies in our business.
We continue to work closely with nearly every major participant in this emerging space and have already been selected for numerous prototyping demonstrator programs.
We are seeing the tangible benefit from our investments materialize in these awards.
Process Flow Technologies, sales of $299 million increased 19% driven by a 16% increase in core sales and a 3% benefit from favorable foreign exchange.
Process Flow Technologies operating profit increased by 60% to $46 million.
Operating margins increased 410 basis points to $15.5%, primarily reflecting higher volumes, favorable price cost dynamics and strong execution and productivity.
Sequentially, FX-neutral backlog increased 3% and with FX-neutral orders down 5%.
Compared to the prior year, FX-neutral backlog increased 14% and FX-neutral core orders increased 20%.
During the first quarter, order growth was strongest in our shorter cycle commercial business.
Then in March, orders at our core process business inflected positive on a year-over-year basis, and that trend has continued for the last six months.
We continue to see clear evidence of improving end demand and in some cases ongoing release of pent-up demand.
Through the third quarter, order growth is still a little stronger in our commercial business, but process orders are not far behind with growth in the mid-teens range.
As orders convert to sales in these core process markets later into 2022, we continue to expect strong operating leverage.
Trends in activity in the process markets are similar to last quarter.
Broadly, we are seeing signs of new capital projects moving through the pipeline and we expect to see more projects converting to orders in 2022.
By vertical, chemical remains strong driven heavily by continued consumer demand, and general industrial markets also improved further along with industrial activity and production.
For pharmaceuticals we are seeing a number of projects we started after being put on hold, given the intense focus on vaccine production over the last 18 months.
Many of these restarted projects are related to diabetes treatment, oncology drugs and biologics.
Refinery and power markets remain fairly flat.
From a geographic perspective, year-to-date orders have been strongest in North America.
MRO orders are stable at approximately pre-COVID levels.
Project related orders are up substantially compared to last year, and based on our project funnel we expect further pickup next year.
In Europe, MRO activity slowed in the third quarter consistent with normal seasonality and summer shutdowns.
Adjusted for seasonality, MRO activity is close to normal pre-COVID levels and project activity has progressively improved over the last several months with project orders above 2019 levels.
In China, we are seeing some new project delays related to government requirements for new energy assessment approvals.
No cancellations, but project progress has slowed given these new requirements.
While the markets continue to improve, we are also very excited about progress with our growth initiatives in Process Flow Technologies.
In February we discussed a breakthrough innovation to our triple offset valve line, the FK-TrieX.
This product just launched a few months ago, but we are already seeing great momentum with chemical and petrochemical customers that quickly recognize the value this new valve design offers.
Bidirectional shut off, superior fugitive emissions control, high flow, a self-cleaning design and lower weight.
We installed our first valve during the third quarter at a US chemical plant in a polymer application.
Typically it takes years after launch to get customer approvals for a new valve design, but we believe we are on track for $5 million of sales next year, growing to $30 million within five years.
Also on the process side, our tough seat metal seated ball valve launched earlier this year focused on slurry and high cycle applications with a superior design that gives a valve a 50% longer life.
We are on track for about $3 million of sales this year, which should double in 2022.
We also have exciting developments in our municipal pump business, our chopper pump which we introduced in 2018 reduces clogging and cut -- cuts maintenance costs by 75%.
That value proposition is driving 30% growth this year, and we are adding about 10 new customers each month to our existing base of approximately 250 municipalities.
Taken together, these growth initiatives and many others across the segment are driving above market growth.
For Process Flow Technologies overall, our full year outlook continues to improve with full-year margins in the mid 14% range, full year core sales growth in the low double digits, a 4% FX benefit, and the $5 million of contribution from acquisitions that we saw in the first quarter.
For the fourth quarter, that implies a modest sequential decline in sales and margins given typical and expected seasonality and associated mix.
At Payment & Merchandising Technologies, sales of $366 million in the quarter increased 31% compared to the prior year, driven by 29% core sales growth and a 2% benefit from favorable foreign exchange.
Sales increased substantially across both Crane Currency and Crane Payment Innovations, although Payment Innovation sales are still well below pre-COVID run rates.
Segment operating profit increased 87% to $83 million.
Operating margins increased 680 basis points to 2.26%.
Continued impressive performance again at Crane Currency and with Crane Payment Innovations now recovering and contributing meaningfully.
For Crane Payment Innovations, similar trends to the last quarter and across the business we are seeing accelerating results from growth initiatives.
Starting with retail, our solutions provide productivity through automation, security and hygiene, and that value proposition is resonating now more than ever.
Retailers in the service industry in general are struggling with labor availability and inflationary wage pressure and they are investing in productivity.
Our solutions provide immediate value and have high proven ROIs and those returns are even more attractive in the current environment.
We continue to see broad based strength across the space including traditional self checkout systems from the large OEMs and we are also seeing momentum with some retailers partnering directly with us on customized self checkout and kiosk based solutions.
For customized self checkout solutions, our current funnel of opportunities is now approximately $185 million, double the size it was at the end of 2020.
Our semi-attended system solutions like Paypod and Pay Tower are also getting traction with an increasingly wide range of retailers including categories that have not historically been active with automation such as convenience stores.
To put this higher demand into perspective, our funnel of Paypod opportunities today is approximately $13 million, more than four times the size it was at the end of 2019 and more than twice the size it was at the end of last year.
In gaming, the North American and Australian Casino markets are nearly back to pre-COVID levels of activity.
We are now seeing the European and Latin American casinos beginning to recover lagging about 9 to 12 months behind North America.
This is good news for 2022.
We continue to gain share in this market given the strength of our technology as customers realize the benefits of our easy tracks connectivity solution.
The combination of our traditional bill and coin products along with easy tracks and now with the back office and service offerings from the Cummins Allison acquisition give us the most comprehensive cash management solution in the gaming world.
This combination of products and services is also helping our customers substantially improve efficiency and driving incremental revenue by enhancing communication and coordination between the back office and front of the house environments.
The Cummins Allison business has also benefited from customer labor shortages as CITs, casinos and retailers continue to invest in advanced larger scale back office coin and bill counting and sorting units.
Cummins Allison has products with differentiated technology as well as a service offering, which most of our competitors in North America do not have.
At Crane Currency, we continue to see strength in both domestic and international markets and we continue to gain share both with our technology and banknote offerings.
In the United States, we expect continued elevated levels of demand for currency for another few years and we continue working to secure our position on the new series of banknotes that will be rolled out over the next several years.
In our international business, our expanding portfolio of micro optic security products has helped us double the rate of new denominations secured compared to prior years with 15 new denominations won to date this year from a wide range of countries across the Caribbean, Northern and Eastern Europe, Asia, Africa and the Middle East.
When our technology is specified in a new denomination it typically drives recurring revenue from reprints from more than ten years.
We are winning as central banks realize that our technology is more secure and difficult to counterfeit and because it is completely customizable and can be integrated into innovative and stunning banknote designs, such as the new Bahamas $100 banknote.
With our latest products, we also have successfully demonstrated that our technology can be used on any substrate including polymer expanding our addressable market.
We are also very excited about the progress we have made with our Product Authentication and brand protection business.
We believe that our micro-optic technology is the best solution for a high-end authentication applications and far superior to the foils and holograms typically used to prevent counterfeiting for consumer goods.
We recently signed a long-term agreement with Octane5, one of the leaders in the high growth brand licensing management software and security solutions market.
Today, Octane5 supplies some of the world's most iconic and valuable brands with product security and licensing solutions, and with our partnership we have already won a few blue-chip customers with well-known global consumer brands that we hope to share with you more next year.
This is an extremely exciting potential opportunity that opens a new $800 million addressable market to us.
As we have explained all year, we do expect margins to moderate further in the fourth quarter for Payment & Merchandising Technologies given both timing and mix.
We now expect full year margins in the 22% range at or above the high end of our long-term target range of 18% to 22%.
Full year core sales growth is now expected to be in the high teens with a 3% favorable FX benefit.
For the fourth quarter sales should still increase on a year-over-year basis in the mid-single digit range on tough comparisons, but with a substantial sequential decline given the currency shipment timing that we have discussed and explained consistently over the last several quarters.
No surprises here, fully expected.
Given the sequential decline in sales, margins are likely to moderate to the high-teens range in the fourth quarter before rebounding to the 20s again next year.
Turning now to more detail on our total company results and guidance.
We have had extremely strong cash flow performance year-to-date with free cash flow of $286 million compared to $177 million last year.
As a reminder, on May 24th we announced that we had signed an agreement to sell our Engineered Materials segment for $360 million.
That process is ongoing and we continue to work on obtaining regulatory approvals.
When the transaction closes we expect proceeds net of tax to be approximately $320 million.
Our balance sheet is in extremely good shape.
We currently have no short-term or pre-payable debt remaining.
And at the end of the third quarter, we had approximately $450 million of cash on hand.
By the end of the year we expect adjusted gross leverage toward the bottom end of the two to three times range target for our current credit rating, and we estimate that by year-end we will have approximately $1 billion of additional capacity.
While we continue to be active in pursuit of acquisitions across both Process Flow Technologies in Aerospace & Electronics as all -- you all know, valuations today are quite lofty and we will remain both financially and strategically disciplined.
Over the long term, we continue to believe that we will be able to add the most value through acquisitions.
However, we will also maintain discipline about our balance sheet efficiency.
As I mentioned last quarter, during periods where our acquisition capacity exceeds the size of our likely an actionable M&A pipeline, we will consider returning excess cash to shareholders rather than maintaining an inefficient balance sheet.
As Max mentioned, we announced Board authorization for $300 million share repurchase program.
We believe this program properly balances two objectives, maintaining balance sheet efficiency while preserving ample financial flexibility for the volume of M&A activity we believe is actionable, while also providing an attractive return of cash to shareholders.
We believe that share repurchases are advantageous at this time given our very high confidence in our medium and long-term outlook, paired with our current stocks -- current discount to both trading peers and fully synergized acquisition multiples.
We will continue to evaluate all capital deployment and strategic portfolio options to drive shareholder return with strict financial discipline and a focus on long-term sustainable value creation.
Turning to guidance, as Max explained we are raising our adjusted earnings per share guidance by $0.35 to a range of $6.35 to $6.45 reflecting continued excellent execution and stronger end markets.
There are four major moving pieces in the higher and narrower guidance range.
First, we now expect a tax rate of approximately 17.5% compared to our prior guidance of 20.5%.
The lower tax rate is a roughly 23% -- $0.23 per share benefit compared to prior guidance.
The lower tax rate primarily reflects discrete items related to the expiration of the statute of limitations on audits in certain jurisdictions.
We continue to expect a tax rate of approximately 21% on a normalized basis.
Second, we now expect corporate cost of approximately $90 million, $10 million or $0.13 per share higher than our prior guidance.
The higher corporate costs reflect a number of factors including a charge related to a foreign pension plan that we are restructuring and a higher professional service cost level particularly legal costs related to M&A due diligence and other matters.
Third, the core operational improvement reflected in the guidance is approximately $0.25 per share compared to the prior guidance.
This improvement reflects strong leverage on sales now forecast at $50 million higher, with full year core sales guidance up 300 basis points to a range of 10% to 12%, partially offset by FX translation down 100 basis points to an approximate 2.5% benefit.
Fourth, in addition to raising the midpoint of our guidance range we narrowed the range from $0.20 per share to $0.10 per share, reflecting both how close we are to the end of the year as well as ongoing supply constraints that are likely to cap further upside this year.
Our revised guidance continues to reflect the same cadence of earnings progression that we have discussed since the beginning of the year.
Specifically, we continue to expect a step down on earnings per share next quarter given order and shipment timing particularly at currency and with the fourth quarter following its usual pattern of seasonality -- seasonally weakest quarter across most of our businesses.
Overall, there is little change to our fourth quarter expectations after adjusting for the changes in assumptions related to corporate expense and our tax rate, but the third quarter was certainly better than we expected given extremely strong operational performance and robust demand.
We also increased free cash flow guidance to a range of $340 million to $365 million, up 17.5 million from prior guidance at the midpoint, reflecting higher earnings and lower capex now forecast at $60 million.
Overall, an excellent year continuing to unfold with outstanding execution from all of our teams driving exceptional results, growth margins, free cash flow, and we remain excited about continued tailwinds in 2022 and 2023 as end markets continue to recover.
Before we turn to Q&A, a quick note about our 2022 Investor Day.
We typically host our Annual Investor Day event the last week of February.
For 2022 we are moving this event given certain scheduling issues and our desire to maximize the likelihood that we can host the event in person.
We are targeting the week of March 28, and we will provide more details as our plans solidify over the next few months.
Operator, we are now ready to take our first question.

user
compname reports q3 non-gaap earnings per share of $1.89 from continuing operations excluding items.
compname reports third quarter 2021 results; raises and narrows 2021 earnings per share guidance; announces new $300 million share repurchase authorization.
q3 non-gaap earnings per share $1.89 from continuing operations excluding items.
raises fy earnings per share view to $6.35 to $6.45 from continuing operations excluding items.
q3 sales rose 21 percent to $834 million.
announced new $300 million share repurchase authorization.

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