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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Mark One:

For the Quarterly Period Ended June 30, 2004

OR

For the Transition Period from              to             

Commission File Number: 1-1657

CRANE CO.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (203-363-7300)

(Not Applicable)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

The number of shares outstanding of the issuer’s classes of common stock, as of July 23, 2004

Common stock, $1.00 Par Value – 58,999,127 shares

Part I - Financial Information

Item 1. Financial Statements

Crane Co. and Subsidiaries

Consolidated Statements of Operations

(In Thousands)

(Unaudited)

See Notes to Consolidated Financial Statements

2

Part I - Financial Information

Item 1. Financial Statements

Crane Co. and Subsidiaries

Consolidated Balance Sheets

(In Thousands)

(Unaudited)

See Notes to Consolidated Financial Statements

3

Part I - Financial Information

Item 1. Financial Statements

Crane Co. and Subsidiaries

Consolidated Balance Sheets

(In Thousands)

(Unaudited)

See Notes to Consolidated Financial Statements

4

Part I - Financial Information

Item 1. Financial Statements

Crane Co. and Subsidiaries

Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

See Notes to Consolidated Financial Statements

5

Part I – Financial Information

Item 1. Financial Statements

Notes to Consolidated Financial Statements (Unaudited)

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and the instructions to Form 10-Q and, therefore, reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim period presented. These interim consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Net sales and operating profit by segment are as follows:

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Part I – Financial Information

Item 1. Financial Statements

Notes to Consolidated Financial Statements (Unaudited)

The Company has two stock-based compensation plans: the Stock Incentive Plan and the Non-Employee Director Stock Compensation Plan. In accounting for its stock-based compensation plans, the Company applies the intrinsic value method prescribed by APB No. 25, “Accounting for Stock Issued to Employees.” Intrinsic value is the amount by which the market price of the underlying stock exceeds the exercise price of the stock option or award on the measurement date, generally the date of grant. Stock-based employee compensation expense is not reflected in net income, as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The pro forma net income and earnings per share listed below reflect the impact of measuring compensation expense for options granted in the three-month and six-month periods ended June 30, 2004 and 2003 in accordance with the fair-value-based method prescribed by SFAS 123, “Accounting for Stock-Based Compensation” and amended by SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” These amounts may not be representative of future years’ amounts, as options vest over a three-year period and, generally, additional awards are made each year.

Changes to goodwill are as follows:

Goodwill increased approximately $31 million during the six-month period ended June 30, 2004 primarily due to the acquisition of P.L. Porter Co. in January 2004.

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Part I – Financial Information

Item 1. Financial Statements

Notes to Consolidated Financial Statements (Unaudited)

Changes to intangible assets are as follows:

Intangible assets totaled $69.8 million, net of accumulated amortization of $41.8 million at June 30, 2004. Included within this amount is $12.2 million of intangibles with indefinite useful lives, consisting of trade names which are not being amortized under SFAS No. 142.

A summary of intangible assets follows:

Amortization expense for these intangible assets is expected to be approximately $7.7 million in 2005, $6.2 million in 2006, $5.6 million in 2007, $5.0 million in 2008 and $4.5 million in 2009.

In January 2004, the Company acquired P. L. Porter Co. (“Porter”) for a purchase price of $45 million. The fair value estimates of assets acquired and liabilities assumed will be finalized within one year from the transaction date. Porter is a leading manufacturer of motion control products for airline seating and is located in Woodland Hills, California. Porter holds leading positions in both electromechanical actuation and hydraulic/mechanical actuation for aircraft seating, selling directly to seat manufacturers and to the airlines. Electrically powered seat actuation systems provide motive power and control features required by premium class passengers on competitive international routes. Porter products not only provide passenger comfort with seat back and foot rest adjustment, but also control advanced features such as lumbar support and in-seat massage. In addition to seats installed in new aircraft, airlines refurbish and replace seating several times during an aircraft’s life along with maintenance and repair requirements. Porter’s 2003 annual sales were approximately $32 million.

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Part I – Financial Information

Item 1. Financial Statements

Notes to Consolidated Financial Statements (Unaudited)

Also in January 2004, the Company acquired the Hattersley valve brand and business together with certain related intellectual property and assets from Hattersley Newman Hender, Ltd., a subsidiary of Tomkins plc for a purchase price of $6 million. Hattersley branded products include an array of valves for commercial, industrial and institutional construction projects. This business has been integrated into Crane Ltd., which is part of the Fluid Handling Segment.

Total comprehensive income for the three-month and six-month periods ended June 30, 2004 and 2003 is as follows:

As of June 30, 2004, the Company was a defendant, among a number of defendants, typically over 50 and frequently in the hundreds, in cases filed in various state and federal courts alleging injury or death as a result of exposure to asbestos. These filings generally do not provide meaningful information with respect to the alleged sources of the claimants’ asbestos exposure, and a significant proportion of such cases are typically dismissed for lack of credible product identification against the Company. Activity related to asbestos claims during the periods indicated was as follows:

Of the 75,428 pending claims as of June 30, 2004, approximately 25,000 claims were pending in New York and approximately 32,000 claims were pending in Mississippi. A substantial majority of the New York claims have been placed on a deferred docket and are ineligible for trial on the merits without medical evidence of asbestos-related disease.

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Part I – Financial Information

Item 1. Financial Statements

Notes to Consolidated Financial Statements (Unaudited)

Generally, the Company has required evidence of exposure to asbestos-containing materials in products manufactured or sold by the Company, as well as medical evidence of asbestos-related disease, as a prerequisite to settling an asbestos claim. A significant proportion of the resolved claims against the Company have been dismissed without payment because these criteria are not satisfied. Despite this litigation posture, the Company has recognized that the number of asbestos claims pending against it continues to increase, and the settlement demands from asbestos claimants continue to escalate. The Company believes that federal legislation establishing a trust fund to compensate asbestos victims is the most appropriate solution to the asbestos litigation problem. The Company has been actively monitoring, studying and supporting developments in federal legislation during the past year and believes that there is a reasonable possibility that legislation will be passed in the current or next Congress. In addition, the Company continues to monitor and study the structured settlement transactions announced by certain other asbestos defendants. The Company continues to explore all feasible alternatives available to resolve its asbestos liability in a manner consistent with the best interest of the Company’s shareholders.

New asbestos claims filed in certain jurisdictions and the costs of defending and settling asbestos claims continued at somewhat higher levels in the second quarter of 2004. While the rate of new claims and settlement costs have varied significantly from quarter to quarter, if these higher rates continue it could have an adverse effect on the Company’s estimate of its asbestos liability.

The gross settlement and defense costs (before insurance recoveries and tax effects) for the Company in the six months ended June 30, 2004 totaled $9.0 million and $11.9 million, respectively. The Company’s total pre-tax cash payments for settlement and defense costs net of the Company’s cost sharing arrangement with insurers amounted to $6.2 million in the six months ended June 30, 2004. Detailed below are the comparable amounts for the periods indicated.

These amounts are not necessarily indicative of future period amounts, which may be higher or lower than those reported. It is not possible to forecast when the cash payments related to the asbestos liability will be fully expended; however, it is expected such cash payments will continue for many years. Payment uncertainty results from the significant proportion of unasserted claims included in the estimated asbestos liability as well as variability of timing and terms of settlements and insurance reimbursement. It is expected that cash payments will increase in proportion to increases the Company has experienced in overall claim activity and settlement and defense costs. In addition, there will be periods during which cash payments increase because the Company’s insurance coverage for asbestos claims involves multiple insurers, with different policy terms and certain gaps in coverage, and, consequently, the timing and amount of insurance reimbursement will vary.

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Part I – Financial Information

Item 1. Financial Statements

Notes to Consolidated Financial Statements (Unaudited)

The liability recorded for asbestos claims constitutes management’s best estimate, based on the Company’s past experience, of costs for pending and reasonably anticipated future claims through 2007. For claims that will be filed beyond 2007, management believes that the level of uncertainty is too great to provide for reasonable estimation of the number of future claims, the nature of such claims, or the cost to resolve them and, accordingly, no accrual has been recorded for any costs which may be incurred beyond 2007. A long-term liability was recorded to cover the estimated cost of asbestos claims through 2007 and a long-term asset was recorded representing the probable insurance reimbursement for such claims (approximately 40 percent of settlement and defense costs). The Company’s liability for asbestos-related claims before insurance recoveries, which is included in other liabilities, was $182 million and $193 million at June 30, 2004 and December 31, 2003, respectively, or $109 million and $116 million, respectively, after probable insurance recoveries. At June 30, 2004 and December 31, 2003 approximately 50% and 60%, respectively, of the asbestos liability represented the estimated cost of unasserted claims against the Company.

The Company’s asbestos liability is based on its estimated cost of pending claims plus unasserted claims through 2007. In determining this estimate, both average annual incremental claims and costs per claim are significant assumptions. Costs per claim vary depending on a number of factors, including the nature of the alleged exposure, the injury alleged and the jurisdiction where the claim was filed. As these factors vary among different jurisdictions, the Company’s estimate of the liability is a composite of estimates for certain jurisdictions which are then aggregated together, and it is not practicable to project a single average cost per claim for all pending claims. The estimated liability for New York claims includes a substantial discounting of such claims due to the deferred docket noted above. This discount rate is significantly higher than the dismissal rate applied to substantially all other jurisdictions. The gross estimated cost of projected asbestos claims is reduced by approximately 40% representing the Company’s probable insurance recovery. In 2002, as a result of dramatic increases in annual incremental claims and claim costs, management changed the basis for these assumptions to an analysis of the past few years of experience as compared to the long-term historical averages previously used, which thereby increased the aggregate estimated liability. In 2003, the Company reviewed its estimate in light of a number of factors and developments including the New York deferred docket referred to above, the substantial reduction in new claims filed in Mississippi and New York, the increase in new claims filed in other jurisdictions, the proportion of claims dismissed for lack of product identification and the increasing settlement demands from claimants. Future projections of these trends are inherently uncertain, and while the Company believes its current estimate of the asbestos liability is a reasonable judgment, there can be no assurance about future developments.

A significant portion of the Company’s settlement and defense costs are paid by its primary insurers and one umbrella insurer up to the agreed available limits of the applicable policies. The Company has substantial excess coverage policies that are expected to respond to asbestos claims as settlements and other payments exhaust the underlying policies, but there is no cost sharing or allocation agreement yet in place with the excess insurers. The same factors that affect developing estimates of probable settlement and defense costs for asbestos-related liabilities also affect estimates of the probable insurance payment, as do a number of additional factors. These additional factors include the financial viability of the insurance companies, the method in which losses will be allocated to the various insurance policies and the years covered by those policies, how settlement and defense costs will be covered by the insurance policies and interpretation of the effect on coverage of various policy terms and limits and their interrelationships.

The Company has determined it probable that approximately 40% of the estimated gross liability will be paid by the Company’s insurers. This determination was made after considering the terms of the available insurance coverage, the financial viability of the insurance companies, the status of negotiations with its insurers and consulting with legal counsel. This insurance receivable is included in other assets.

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Part I – Financial Information

Item 1. Financial Statements

Notes to Consolidated Financial Statements (Unaudited)

Estimation of the Company’s ultimate exposure for asbestos-related claims is subject to significant uncertainties, as there are multiple variables that can affect the timing, severity and quantity of claims. The Company cautions that its estimated liability is based on assumptions with respect to future claims, settlement and defense costs based on recent experience during the last few years that may not prove reliable as predictors. A significant upward or downward trend in the number of claims filed, depending on the nature of the alleged injury, the jurisdiction where filed and the quality of the product identification, or in the costs of defending claims, could change the estimated liability, as would any substantial adverse verdict at trial. A legislative solution or a structured settlement transaction could also change the estimated liability.

Since many uncertainties exist surrounding asbestos litigation, the Company will continue to evaluate its estimated asbestos-related liability and corresponding estimated insurance reimbursement as well as the underlying assumptions used to derive these amounts and the process of making the estimate. These uncertainties may result in the Company incurring future charges to operations to adjust the carrying value of recorded liabilities and assets, particularly if escalation in the number of claims and settlement and defense costs continues or if legislation or another alternative solution is implemented; however, the Company is currently unable to estimate such future changes. Although the resolution of these claims may take many years, amounts recorded for the liability under generally accepted accounting principles are not discounted, and the effect on results of operations, cash flow and financial position in any given period from a revision to these estimates could be material.

The components of net periodic cost are as follows:

The Company expects, based on current actuarial calculations, to contribute cash of $4 million to its defined benefit plans and $2 million to its other postretirement benefit plans in 2004. Through the first six months of 2004 the Company has contributed $.6 million to its defined benefit plans. The Company contributed cash of $3.2 million to its defined benefit plans and $3.5 million to its other post-retirement benefits plans in 2003.

Cash contributions in subsequent years will depend on a number of factors including the investment performance of plan assets and changes in employee census data affecting the Company’s projected benefit obligations.

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Part I – Financial Information

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Form 10-Q contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements present management’s expectations, beliefs, plans and objectives regarding future financial performance, and assumptions or judgments concerning such performance. Any discussions contained in this 10-Q, except to the extent that they contain historical facts, are forward-looking and accordingly involve estimates, assumptions, judgments and uncertainties. There are a number of factors that could cause actual results or outcomes to differ materially from those addressed in the forward-looking statements. Such factors are detailed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003 filed with the Securities and Exchange Commission which are incorporated by reference herein.

Results from Operations

Second quarter of 2004 compared to second quarter of 2003

Second quarter 2004 net income increased to $31.2 million, or $.52 per share, compared with net income of $26.0 million, or $.44 per share, reported in the second quarter 2003.

Sales increased $73.1 million, or 18%, in the second quarter 2004 to $479.1 million compared with $406 million in the second quarter 2003. The $73.1 million sales increase included incremental sales of $35.6 million from acquisitions, $28.1 million from core business growth and $9.4 million from favorable foreign currency translation. Operating profit increased 18% in the second quarter 2004 to $50.8 million compared with $42.9 million in the second quarter 2003. The $7.9 million operating profit increase reflected performance improvement across all segments (but not all businesses) and included $3.0 million of incremental profit from acquisitions. While operating profit margin remained at 10.6% for the second quarter 2004 compared with the second quarter 2003, there was sequential margin improvement from the first quarter 2004 across all segments except Engineered Materials, which continued achieving strong margins of 21.2% (vs. 22.5% in the first quarter 2004).

Net sales from domestic businesses were 69% and 70% of the second quarter total net sales in 2004 and 2003, respectively. Operating profit from domestic businesses was 80% and 77% of the second quarter total operating profit for 2004 and 2003. Operating profit margins in the second quarter for domestic businesses were 12.4% in 2004 compared with 11.7% in 2003 principally due to continued improvements in volume in the Company’s higher-margin Engineered Materials Segment and acquisitions in the Aerospace & Electronics Segment. Operating profit margins in the second quarter for non-U.S. businesses were 6.6% in 2004 versus 8.0% in 2003 reflecting weakness in the Fluid Handling Segment.

Market Conditions

Market conditions continued to be favorable for many of our businesses during the quarter. In particular, the Aerospace & Electronics Segment experienced increased demand from commercial original equipment manufacturers (“OEMs”) and the Engineered Materials Segment continued to see strong demand for fiberglass-reinforced panels from the recreational vehicle (“RV”) and truck trailer market. The performance in certain Fluid Handling businesses continued to be below expectations, as certain end market demand conditions have begun to improve, while higher raw material costs and supply chain disruptions impacted margins.

Segment Results

All comparisons below reference the second quarter 2004 versus the second quarter 2003 (“prior year”), unless otherwise specified.

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Part I – Financial Information

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Aerospace & Electronics

Second quarter 2004 sales included $18.3 million of incremental sales from P.L. Porter, acquired in late January 2004, and Signal Technology Corporation (“STC”), acquired in May 2003. Excluding the impact of these acquisitions, sales increased $4.0 million, or 4%, reflecting improved OEM demand particularly for regional and business jets. Operating margins were lower as a result of the Electronics Group representing a higher proportion of the sales, higher engineering spending on new programs and reduced aerospace aftermarket volume.

Aerospace Group sales of $77.4 million increased $12.3 million, or 19%, from $65.1 million in the prior year. The primary drivers of the sales increase were $8.9 million of sales from the P.L. Porter acquisition, increased aircraft delivery rates to commercial OEMs and stronger military demand. Second quarter operating profit was flat compared with the prior year, reflecting decreased aftermarket sales related to older platforms, higher engineering spending on new programs and continued customer price pressures.

Electronics Group sales of $49.0 million increased $10.0 million, or 26%, from $39.0 million in the prior year. STC provided incremental sales of $9.4 million, accounting for the majority of the sales increase, while disruption from a plant closure and the receipt of power orders late in the quarter negatively impacted shipments. Operating profit increased 11%.

Engineered Materials

Second quarter 2004 results reflect continued strong demand for fiberglass-reinforced panels with each of the company’s markets experiencing increased sales. The RV and truck trailer markets were particularly strong. Operating profit grew 35% and margins improved from the prior year on increased volume and favorable product mix, which offset the impact of higher resin costs.

Merchandising Systems