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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Mark One:

For the Quarterly Period Ended September 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 October 25, 2004

Common stock, $1.00 Par Value – 59,053,387 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

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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

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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 nine-month periods ended September 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 nine-month period ended September 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 $66.8 million, net of accumulated amortization of $43.8 million at September 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, Goodwill and Other Intangible Assets.

A summary of intangible assets follows:

Amortization expense for these intangible assets is expected to be approximately $7.8 million in 2005, $6.3 million in 2006, $5.7 million in 2007, $5.1 million in 2008 and $4.6 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.

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.

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Part I - Financial Information

Item 1. Financial Statements

Notes to Consolidated Financial Statements (Unaudited)

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

Agreement in Principle to Settle Asbestos Liability

The Company reached an agreement in principle with attorneys representing a majority of persons with current asbestos-related personal injury claims against the Company (the “Current Claimants”) and an independent representative of potential future claimants with potential asbestos-related personal injury claims against the Company (the “Future Claimants”) to resolve all current and future asbestos-related personal injury claims against the Company. The comprehensive asbestos settlement will have two components: first, a trust to pay settlements of asbestos claims by Current Claimants; and second, a trust to pay settlements of claims by Future Claimants, which will be structured and implemented pursuant to Section 524(g) of the U.S. Bankruptcy Code.

Settlement of Current Claims

On October 21, 2004, MCC Holdings, Inc., an indirect wholly owned subsidiary of the Company formerly known as Mark Controls Corporation (“MCC”), entered into a Master Settlement Agreement with representatives of a majority of Current Claimants who were diagnosed with asbestos-related personal injuries prior to June 9, 2004. At the same time, MCC and the representatives of Current Claimants entered into an MCC Settlement Trust Agreement, which provides for a $280 million trust (the “MCC Settlement Trust”) to be funded and administered to pay asbestos-related personal injury claims settled under the Master Settlement Agreement. Under the terms of the Master Settlement Agreement, eligible Current Claimants with malignant conditions and severe asbestosis who meet all criteria to qualify for payment, all as set forth in the Master Settlement Agreement, are entitled to receive up to ninety percent (90%) of the value of their agreed settlement amount from the MCC Settlement Trust and retain a claim against MCC for the unpaid balance. Eligible qualified Current Claimants with conditions other than those set forth above are entitled to receive up to $1,000 per claim. Any remaining unpaid balance of the agreed settlement amount will be payable by the Post-Petition Trust (as defined below). MCC may terminate the Master Settlement Agreement if it determines on or before February 22, 2005 that an insufficient number of Current Claimants have agreed to become parties to the settlement or if there is a material change in the case law regarding Section 524(g) trusts. See the section entitled “Settlement of Future Claims” for more information on the Post-Petition Trust.

Pursuant to the MCC Settlement Trust Agreement, the MCC Settlement Trust is to be funded by:

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Part I - Financial Information

Item 1. Financial Statements

Notes to Consolidated Financial Statements (Unaudited)

Settlement of Future Claims

In connection with the Master Settlement Agreement, the Company and MCC reached an agreement in principle with representatives of the Current Claimants and with a representative of the Future Claimant on a proposed “pre-packaged” filing of a plan of reorganization for MCC and the Company’s U.S. fluid handling subsidiaries under Chapter 11 of the Bankruptcy Code (the “Plan”), which is anticipated to occur in March 2005.

The Plan will provide for the creation of a separate $230 million trust (the “Post-Petition Trust”) in addition to the MCC Settlement Trust. Under the Plan, all asbestos claims of Future Claimants against the Company and its subsidiaries, including the unpaid portion of claims by Current Claimants, will be channeled to the Post-Petition Trust. The Plan contemplates that the Bankruptcy Court will issue a channeling injunction under Section 524(g) of the Bankruptcy Code in connection with the confirmation of the Plan, pursuant to which the Company, MCC, the other filing entities and all other subsidiaries of the Company will be protected from future asbestos-related personal injury claims. The channeling injunction is an essential element of the Plan, and issuance of the channeling injunction requires that at least seventy-five percent (75%) of the votes cast by asbestos claimants entitled to vote on the Plan must have been cast in favor of the Plan.

The Plan will set forth distribution procedures for the allocation of funds to the claimants. The Plan will also provide that, in addition to the asbestos claims that arise subsequent to the Master Settlement Agreement, the unpaid portion of the claims that were settled pursuant to the Master Settlement Agreement will be entitled to distributions from the Post-Petition Trust.

Upon final Court approval of the Plan, the Post-Petition Trust will be funded as follows:

The only operations of the Company that will be included in the pre-packaged Chapter 11 filing will be those that comprise the Company’s U.S. fluid handling businesses, including Crane Valves North America (domestic only), Crane Nuclear, Inc. (which also does business as Crane Valve Services), Pacific Valves, Resistoflex-Industrial, Xomox Corporation (domestic only), Crane Pumps & Systems, Inc. (domestic only) and Crane Environmental, Inc. (formerly Cochrane).

The comprehensive asbestos settlement is subject to, among other things, execution of the Master Settlement Agreement by additional representatives of Current Claimants, acceptance of a plan of reorganization by Current Claimants and the representative of Future Claimants, Bankruptcy Court approval, and there being no material change in case law governing Section 524(g) trusts.

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Part I - Financial Information

Item 1. Financial Statements

Notes to Consolidated Financial Statements (Unaudited)

Effects on the Consolidated Financial Statements

In prior periods, the liability recorded for asbestos claims constituted management’s best estimate, based on the Company’s past experience, of costs for pending and reasonably anticipated future claims through 2007, including estimated amounts recoverable from insurers. As discussed above, the Company has reached an agreement in principle with attorneys representing a majority of Current Claimants and an independent representative of Future Claimants to resolve all current and future asbestos claims against the Company, subject to certain Bankruptcy Court proceedings and other contingencies. As a result the Company has adjusted the asbestos liability to reflect the full amount of the proposed settlement and certain related costs.

The aggregate charge in the third quarter 2004 is based on a gross settlement cost of $510 million and additional costs of $68 million for asbestos-related settlement and defense costs and professional fees and expenses, partly offset by anticipated insurance recoveries of $153 million (using a 30% recovery assumption) and existing reserves of $103 million, resulting in a total pre-tax, non-cash asbestos charge of $322 million. After anticipated tax benefits of $109 million, the total after-tax charge for the third quarter 2004 was $213 million, or $3.60 per share.

The Company is retaining its rights under applicable insurance policies and has initiated discussions with a number of its insurers regarding their participation in the comprehensive settlement. Management’s estimate of the anticipated insurance recoveries may be affected by a number of factors and future developments, including the financial viability of the insurance companies, the method in which settlement costs will be allocated to the various insurance policies and the years covered by those policies, how settlement and other costs will be covered by the insurance policies, interpretation of the effect on coverage of various policy terms and limits and their interrelationships, the timing and terms of insurer reimbursements, and the positions insurers may take on the agreement reflected in the settlement. After taking these issues into consideration, the Company anticipates recovering approximately 30% of the aggregate settlement amount. The Company made this estimate after considering the terms of the available insurance coverage, the financial viability of the insurance companies, the status of negotiations with its insurers and considering the advice of legal counsel. This insurance receivable is included in other assets.

In the event that the settlement is not consummated in accordance with the terms set forth in the Master Settlement Agreement and the proposed Plan terms or in the event that the amount and timing of insurer reimbursements varies from management’s current anticipation, the ultimate liability for the resolution of asbestos-related claims could be substantially revised. Such a revision could have a material impact on the Company’s financial position, results of operations and cash flows.

Information Regarding Claims and Costs

As of September 30, 2004, the Company was a defendant in cases filed in various state and federal courts alleging injury or death as a result of exposure to asbestos. Activity related to asbestos claims during the periods indicated was as follows:

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Part I - Financial Information

Item 1. Financial Statements

Notes to Consolidated Financial Statements (Unaudited)

Of the 78,632 pending claims as of September 30, 2004, approximately 25,000 claims were pending in New York and approximately 33,000 claims were pending in Mississippi.

The gross settlement and defense costs (before insurance recoveries and tax effects) for the Company in the nine months ended September 30, 2004 and 2003 totaled $32.3 million and $14.9 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 in the nine months ended September 30, 2004 and 2003 amounted to $18.3 million and $6.2 million, respectively. Detailed below are the comparable amounts for the periods indicated.

For environmental matters, the Company records a liability for estimated remediation costs when it is probable that the Company will be responsible for such costs and they can be reasonably estimated. Generally, third party specialists assist in the estimation of remediation costs. The environmental remediation liability at September 30, 2004 is primarily for the former manufacturing site in Goodyear, Arizona (the “Site”) discussed below.

The Site was operated by UniDynamics/Phoenix, Inc. (“UPI”), which became an indirect subsidiary of the Company in 1985 when the Company acquired UPI’s parent company UniDynamics Corporation. UPI manufactured explosive and pyrotechnic compounds, including components for critical military programs, for the U.S. government at the Site from 1962 to 1993, under contracts with the Department of Defense and other government agencies and certain of their prime contractors. No manufacturing operations have been conducted at the Site since 1994. The Site was placed on the National Priorities List in 1983, and is now part of the Phoenix-Goodyear Airport North Superfund site. In 1990 the Environmental Protection Agency (“EPA”) issued administrative orders requiring UPI to design and carry out certain remedial actions, which UPI has done. Groundwater extraction and treatment systems have been in operation at the Site since 1994. A soil vapor extraction system was in operation from 1994 to 1998, was restarted in 2004, and is currently in operation. Since 1994 the on-site groundwater treatment facility and soil vapor extraction system have removed approximately 46,000 pounds of trichloroethylene (“TCE”) from the soil and groundwater at the Site.

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Part I - Financial Information

Item 1. Financial Statements

Notes to Consolidated Financial Statements (Unaudited)

In September 2004, after extensive negotiations regarding the scope of work to be undertaken at the Site after discovery of additional TCE contamination and the detection of perchlorate during routine testing, the Company reached agreement with the EPA on a work plan for further investigation and remediation activities at the Site. This agreement is expected to be incorporated into a consent decree between the Company and the EPA in the near future. The Company recorded a before-tax charge of $40 million in the third quarter 2004 for the estimated costs through 2014 of further environmental investigation and remediation at the Site, based on this agreement in principle with the EPA.

The investigation, monitoring and remediation activities undertaken by the Company at the Site have cost over $25 million since 1985. In November 2003, the Company and UPI brought suit under Section §113 of the Comprehensive Environmental Response, Compensation and Liability Act against the federal government and several of its agencies for contribution and indemnification for these costs. As investigation and clean-up activities at the Site are expected to continue for a number of years, the Company’s action against the government also seeks contribution with respect to future costs. Although the Company has been in discussions with the government concerning these claims, the government to date has not agreed to commit to paying any contribution to clean-up costs at the Site. In 2003, the EPA submitted to the Company a claim for approximately $2.8 million in past costs allegedly incurred at the Site, and the Company has requested and is reviewing the EPA’s supporting documentation of these costs. In August 2004 the EPA advised the Company that a formal demand for an additional $3.5 million in EPA past costs should be expected by the Company.

On July 8, 2004, the Environment & Natural Resources Division of the U.S. Department of Justice filed a lawsuit against the Company and UPI seeking reimbursement of the $2.8 million in alleged costs. The government’s action also seeks an injunction requiring UPI to comply with the terms of two earlier administrative orders; entry of a declaratory judgment regarding the Company’s and UPI’s liabilities; and both civil penalties and punitive damages. The Company has instructed its attorneys to continue to vigorously pursue the Company’s claim against the government, and to defend the counter-suit by the Department of Justice, with the objective of reaching a fair and reasonable allocation of liability for past and future costs in the context of a prudent and scientifically sound plan for the further investigation and clean-up of the Site. The Company does not believe that the ultimate liability for costs to be incurred in connection with the Site will have a material effect on the Company’s financial condition or cash flows; however, there can be no assurance that such costs will not have a material adverse effect on the Company’s results of operations in any given period.

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Part I - Financial Information

Item 1. Financial Statements

Notes to Consolidated Financial Statements (Unaudited)

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 nine months of 2004 the Company has contributed $2.8 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 postretirement benefit 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 other 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. In addition, there are contingencies and uncertainties relating to the agreement in principle to settle the Company’s asbestos liability described in note 6, including whether law firms representing a sufficient proportion of Current Claimants execute the Master Settlement Agreement, whether the plan of reorganization proposed by MCC is accepted by the Current Claimants and the representative of Future Claimants and approved by the Bankruptcy Court and whether there is any material change in case law governing Section 524(g) trusts. The proposed settlement could also be affected by the introduction or passage of legislation regarding asbestos claims. The actual cost of the proposed settlement may be higher than the cost estimated by the Company if recoveries from the Company’s insurers are less than the 30% recovery assumption described in note 6.

Results from Operations

Third quarter of 2004 compared with third quarter of 2003

The third quarter 2004 net loss was $205.2 million, or $3.48 per share, as compared with net income of $28.1 million, or $.47 per share in same 2003 period. The net loss included non-cash charges for asbestos ($212.4 million, or $3.60 per share) and environmental ($26 million, or $.44 per share) liabilities.

The Company reached an agreement in principle with attorneys representing a majority of Current Claimants and an independent representative of Future Claimants to resolve all current and future asbestos claims against the Company. This comprehensive settlement resulted in the non-cash asbestos charge. The charge also includes anticipated environmental cleanup costs which are based on an agreement with the U.S. Environmental Protection Agency on the scope of work for further investigation and remediation of the Company’s Goodyear, Arizona Superfund site.

Third quarter 2004 sales increased to $477.3 million compared with $425.3 million in the same period of 2003. The sales increase of $52 million, or 12%, included incremental sales from core businesses of $25.6 million (6%), from acquisitions of $14.8 million (3%) and from favorable foreign currency translation of $11.6 million (3%). Market strength resulted in new order increases across most of the Company’s businesses compared with the prior year. The operating loss for the third quarter 2004 was $311.2 million compared with operating profit of $44.8 million in the same period of 2003. The non-cash charges for asbestos and environmental liabilities were included in Corporate operating results. Operating profit also reflected improvement in four of the five operating segments and even results in Engineered Materials. Margin improvement in the Fluid Handling, Merchandising Systems and Controls segments was offset by slight declines in the Aerospace and Electronics and Engineered Materials segments.

Net sales from foreign businesses were 33% and 31% of third quarter total net sales in 2004 and 2003, respectively. Operating profit margins in the third quarter for non-U.S. businesses were 8.1% in 2004 versus 7.1% in 2003 reflecting the benefits of prior workforce reductions and other cost efficiencies at National Rejectors (“NRI”) combined with improvements at Xomox and Crane Supply.

Segment Results

All comparisons below reference the third quarter 2004 versus the third 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

The third quarter 2004 sales increase included $9.2 million of incremental sales from P.L. Porter, acquired in late January 2004, and $7.1 million from core businesses. Core business sales grew 6%, reflecting improved OEM demand. Improved margins in the Aerospace Group were largely offset by a decline in Electronics Group performance.

Aerospace Group sales of $78.8 million increased $21.5 million, or 37%, from $57.4 million in the prior year. Sales increased $12.3 million, or 21%, from core business growth driven by increased OEM delivery rates for both the commercial and military markets and higher military aftermarket sales, and $9.2 million, or 16%, from the P.L. Porter acquisition. Total Aerospace Group operating profit increased 45%. Operating profit margin improved over the prior year driven by the higher mix of military aftermarket and favorable absorption on the strong OEM demand partially offset by lower P.L. Porter margins.

Electronics Group sales of $48.5 million declined 10% with lower shipments to both the commercial and military markets. Operating profit was down 41% and margins declined, reflecting reduced volume due to technical and production throughput issues in certain of its operations, and a temporary facility shutdown at Fort Walton Beach, Florida caused by the recent hurricanes.

Engineered Materials

The third quarter sales increase reflects continued strong demand for fiberglass-reinforced panels, primarily for the truck trailer and recreational vehicle markets, although at a slower rate of increase than in the first half of 2004, and favorable impacts from third quarter price increases in certain markets. Operating profit was flat, despite the higher volume, as the impact of higher resin and styrene costs were not yet fully offset by price increases. Additional price increases are planned in the fourth quarter and into 2005.

Merchandising Systems