Crane Co 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This Quarterly Report on Form 10-Q contains information about Crane Company some of which includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements other than historical information or statements about our current condition. You can identify forward-looking statements by the use of terms such as “believes,” “contemplates,” “expects,” “may,” “could,” “should,” “would,” or “anticipates,” other similar phrases, or the negatives of these terms. Reference herein to “Crane,” “the Company,” “we,” “us” and “our” refer to Crane Company and its subsidiaries unless the context specifically states or implies otherwise. References to “core business” or “core sales” in this report include sales from acquired businesses starting from and after the first anniversary of the acquisition but exclude currency effects. Amounts in the following discussion are presented in millions, except employee, share and per share data, or unless otherwise stated. We have based the forward-looking statements relating to our operations on our current expectations, estimates and projections about us and the markets we serve. We caution you that these statements are not guarantees of future performance and involve risks and uncertainties. These statements should be considered in conjunction with the discussion in Part I, the information set forth under Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023. We have based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Accordingly, our actual outcomes and results may differ materially from what we have expressed or forecast in the forward-looking statements. Any differences could result from a variety of factors, including the following: • The effect of changes in economic conditions in the markets in which we operate, including financial market conditions, end markets for our products, fluctuations in raw material prices, inflationary pressures, supply chain disruptions and access to key raw materials, higher interest rates and the financial condition of our customers and suppliers; • Economic, social and political instability, currency fluctuation and other risks of doing business outside of the United States; • The impact of commercial air traffic levels which are affected by a different array of factors including general economic conditions and global corporate travel spending, or terrorism; • Competitive pressures, including the need for technology improvement, successful new product development and introduction and any inability to pass increased costs of raw materials to customers; • Our ongoing need to attract and retain highly qualified personnel and key management; • Our ability to successfully identify, value and integrate acquisitions and to realize synergies and opportunities for growth and innovation; • Information systems and technology networks failures and breaches in data security, personally identifiable and other information, non-compliance with our contractual or other legal obligations regarding such information; • Our ability to achieve some or all the benefits that we expect to achieve from our business separation; • The ability of the U.S. government to terminate our government contracts; • The impact of governmental regulations and failure to comply with those regulations; • A reduction in congressional appropriations that affect defense spending; • The outcomes of legal proceedings, claims and contract disputes; • Adverse effects as a result of further increases in environmental remediation activities, costs and related claims; • Investment performance of our pension plan assets and fluctuations in interest rates, which may affect the amount and timing of future pension plan contributions; and • Adverse effects of changes in tax, environmental and other laws and regulations in the United States and other countries in which we operate. 27 Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Recent Transactions CryoWorks Acquisition Effective May 1, 2024, the Company completed the acquisition of CryoWorks, Inc. (“CryoWorks”) for $61 million on a cash-free and debt-free basis, subject to a net working capital adjustment. On April 29, 2024, we borrowed approximately $50 million under the Company’s existing Revolving Facility to fund the Cryoworks acquisition. CryoWorks is a leading supplier of vacuum insulated pipe systems for hydrogen and cryogenic applications. CryoWorks will be included in the Process Flow Technologies segment. Outlook Our sales depend heavily on industries that are cyclical in nature or are subject to market conditions, which may cause customer demand for our products to be volatile and unpredictable. Demand in these industries is affected by fluctuations in domestic and international economic conditions, as well as currency fluctuations, commodity costs, and a variety of other factors. For 2024, we expect a total year-over-year sales increase of approximately 10%, driven by approximately 4% to 6% core growth, and approximately 5% sales contribution from the Baum lined piping GmbH, Vian Enterprises, Inc. and CryoWorks, Inc. acquisitions. We expect an improvement in operating profit driven primarily by lower transaction related expenses, productivity benefits, operating leverages on higher volumes, higher pricing net of inflation and contributions from acquisitions, partially offset by unfavorable mix. Aerospace & Electronics In 2024, we expect Aerospace & Electronics sales to increase in the mid-teens range compared to 2023, driven by approximately 12% core sales and a 4% to 5% contribution from the Vian Enterprises, Inc. acquisition. We expect a substantial improvement in our commercial OEM business driven by higher aircraft build rates, and we expect an improvement in our commercial aftermarket business given continued recovery in airline flight hours. We expect our defense OEM sales to grow slightly, but the defense aftermarket businesses are expected to grow significantly given continued global geopolitical uncertainty which is driving increased demand to replace legacy product sales. We expect segment operating profit and operating margin to increase compared to 2023 driven primarily by the impact of operating leverage on higher volumes, pricing and productivity benefits. Process Flow Technologies In 2024, we expect Process Flow Technologies sales to increase approximately 7% driven by contribution from the Baum lined piping GmbH and CryoWorks, Inc. acquisitions, with core sales increasing approximately 1%. We expect Process Valves and Related Products sales to increase in the mid to high single digit range compared to 2023, driven by mid- to high-single digit contribution from acquisitions, with core sales approximately flat. We expect Commercial Valves sales to increase in the low- to mid-single digit range, and we expect Pumps and Systems sales to increase in the mid- to high-single digit range compared to 2023, driven by strong demand across municipal and non-residential U.S. end markets. We expect an improvement in segment operating profit and operating margin compared to 2023, driven primarily by productivity and higher pricing net of inflation, partially offset by lower volumes and unfavorable mix. Engineered Materials In 2024, we expect Engineered materials sales to be flat compared to 2023, with a modest increase in sales to the Recreational Vehicle market, offset by a decline in sales to the Transportation market. We expect operating profit and operating margin to be approximately flat compared to 2023. 28 Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results from Continuing Operations – Three Months Ended March 31, The following information should be read in conjunction with our condensed consolidated financial statements and related notes. All comparisons below refer to the first quarter 2024 versus the first quarter 2023, unless otherwise specified. First Quarter Favorable/(Unfavorable) Change (dollars in millions) 2024 2023 $ % (1) Net sales $ 565.3 $ 513.8 $ 51.5 10.0 % Cost of sales 344.8 306.9 (37.9) (12.3) % as a percentage of sales 61.0 % 59.7 % Selling, general and administrative 131.1 129.4 (1.7) (1.3) % as a percentage of sales 23.2 % 25.2 % Operating profit 89.4 77.5 11.9 15.4 % Operating margin 15.8 % 15.1 % Other income (expense): Interest income 1.2 0.9 0.3 33.3 % Interest expense (7.2) (6.6) (0.6) (9.1) % Miscellaneous expense, net (1.3) (0.5) (0.8) NM Total other expense, net (7.3) (6.2) (1.1) (17.7) % Income from continuing operations before income taxes 82.1 71.3 10.8 15.1 % Provision for income taxes 17.3 15.4 (1.9) (12.3) % Net income from continuing operations attributable to common shareholders $ 64.8 $ 55.9 $ 8.9 15.9 % (1) Variances designated as “NM” indicates such calculation is not meaningful. Sales increased by $51.5 million, or 10.0%, to $565.3 million in 2024. The period-over-period change in sales included: • an increase in sales related to the BAUM and Vian acquisitions of $25.8 million, or 5.0%; • an increase in core sales of $24.1 million, or 4.7%, which was driven primarily by higher pricing; and • favorable foreign currency translation of $1.6 million. Cost of sales increased by $37.9 million, or 12.3%, to $344.8 million in 2024. The increase is primarily related to higher material, labor and other manufacturing costs of $30.8 million, or 10.0%, driven by the higher sales, coupled with the impact from the BAUM and Vian acquisitions of $21.9 million, or 7.1%, partially offset by strong productivity gains and favorable mix of $16.7 million, or 5.4%. Selling, general and administrative expenses increased by $1.7 million, or 1.3%, to $131.1 million in 2024, which was primarily driven by the impact from the BAUM and Vian acquisitions. Operating profit increased by $11.9 million, or 15.4%, to $89.4 million in 2024. The increase is primarily due to strong productivity gains of $13.2 million, or 17.0%, coupled with favorable mix and higher volumes of $8.4 million, or 10.8%, partially offset by higher material, labor and other manufacturing costs net of higher pricing of $10.4 million, or 13.4%. Our effective tax rate for the three months ended March 31, 2024, is slightly lower than the prior year’s comparable period primarily due to lower non-U.S. taxes and lower statutorily non-deductible transaction costs. Our effective tax rate for the three months ended March 31, 2024, is equal to the statutory U.S. federal tax rate of 21%. The effective tax rate is the result of permanent increases and decreases that net against each other and offset. These increases and decreases include earnings in jurisdictions with statutory tax rates higher than the United States, expenses that are statutorily non-deductible for income tax purposes and U.S. state taxes, partially offset by excess share-based compensation benefits, tax credit utilization, and the statutory U.S. deduction related to our non-U.S. subsidiaries’ income. 29 Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Comprehensive Income Three Months Ended March 31, (in millions) 2024 2023 Net income before allocation to noncontrolling interests $ 64.8 $ 105.7 Components of other comprehensive (loss) income, net of tax Currency translation adjustment (12.4) 12.7 Changes in pension and postretirement plan assets and benefit obligation, net of tax 3.0 2.7 Other comprehensive (loss) income, net of tax (9.4) 15.4 Comprehensive income before allocation to noncontrolling interests 55.4 121.1 Less: Noncontrolling interests in comprehensive income (0.1) (0.1) Comprehensive income attributable to common shareholders $ 55.5 $ 121.2 For the three months ended March 31, 2024, comprehensive income before allocation to noncontrolling interests was $55.4 million compared to $121.1 million in the same period of 2023. The $65.7 million decrease was primarily driven by lower net income before allocation to noncontrolling interests of $40.9 million, reflecting absence of income from discontinued operations in 2024 compared to 2023, and a $25.1 million year-over-year unfavorable impact of foreign currency translation, primarily related to the British pound and euro. 30 Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Segment Results of Operations - Three Months Ended March 31, Aerospace & Electronics First Quarter Favorable/(Unfavorable) Change (dollars in millions) 2024 2023 $ % Net sales by product line: Commercial Original Equipment $ 85.5 $ 68.4 $ 17.1 25.0 % Military Original Equipment 71.4 61.9 9.5 15.3 % Commercial Aftermarket Products 50.7 37.9 12.8 33.8 % Military Aftermarket Products 18.3 11.9 6.4 53.8 % Total net sales $ 225.9 $ 180.1 $ 45.8 25.4 % Cost of sales $ 141.7 $ 111.0 $ (30.7) (27.7) % as a percentage of sales 62.7 % 61.6 % Selling, general and administrative $ 35.9 $ 31.4 $ (4.5) (14.3) % as a percentage of sales 15.9 % 17.4 % Operating profit $ 48.3 $ 37.7 $ 10.6 28.1 % Operating margin 21.4 % 20.9 % Supplemental Data: Backlog (a) $ 791.8 $ 644.8 $ 147.0 22.8 % (a) Includes $53.5 million of backlog as of March 31, 2024, pertaining to the Vian acquisition. Sales increased $45.8 million, or 25.4%, to $225.9 million in 2024, primarily due to higher volumes and pricing of $36.7 million, or 20.4%, and the impact of the Vian acquisition of $9.0 million, or 5.0%. • Sales of Commercial Original Equipment increased $17.1 million, or 25.0%, to $85.5 million in 2024, reflecting strong demand from aircraft manufacturers as the industry aircraft build rates continue to recover from the COVID-19 related slowdown, partially offset by component availability constraints. • Sales of Military Original Equipment increased $9.5 million, or 15.3%, to $71.4 million in 2024, primarily reflecting strong demand from defense customers. • Sales of Commercial Aftermarket Products increased $12.8 million, or 33.8%, to $50.7 million in 2024, reflecting continued strong demand from the airlines due to improving air traffic and inventory restocking. • Sales of Military Aftermarket Products increased $6.4 million, or 53.8%, to $18.3 million in 2024, reflecting stronger demand for military products in response to heightened geopolitical tensions, globally. Cost of sales increased by $30.7 million, or 27.7%, to $141.7 million in 2024, primarily reflecting higher material and other manufacturing costs of $19.3 million, or 17.4%, increased volumes of $12.4 million, or 11.2%, the impact from the Vian acquisition of $9.4 million, or 8.5%, partially offset by productivity gains of $5.3 million, or 4.8%, and favorable mix of $5.1 million, or 4.6%. Selling, general and administrative expenses increased $4.5 million, or 14.3%, to $35.9 million, primarily related to higher administrative costs of $4.0 million, or 12.7%. Operating profit increased by $10.6 million, or 28.1%, to $48.3 million in 2024. The increase primarily reflected the impact from higher volumes of $14.0 million, or 37.1%, coupled with productivity gains and favorable mix of $10.9 million, or 28.9%, partially offset by higher material, labor and other manufacturing costs net of higher pricing of $12.9 million, or 34.2%. 31 Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Process Flow Technologies First Quarter Favorable/(Unfavorable) Change (dollars in millions) 2024 2023 $ % Net sales by product line: Process Valves and Related Products $ 214.0 $ 202.9 $ 11.1 5.5 % Commercial Valves 32.9 30.6 2.3 7.5 % Pumps and Systems 37.4 37.9 (0.5) (1.3) % Total net sales $ 284.3 $ 271.4 $ 12.9 4.8 % Cost of sales $ 161.7 $ 150.1 $ (11.6) (7.7) % as a percentage of sales 56.9 % 55.3 % Selling, general and administrative $ 65.7 $ 58.0 $ (7.7) (13.3) % as a percentage of sales 23.1 % 21.4 % Operating profit $ 56.9 $ 63.3 $ (6.4) (10.1) % Operating margin 20.0 % 23.3 % Supplemental Data: Backlog (a) $ 393.3 $ 363.0 $ 30.3 8.3 % (a) Includes $8.3 million of backlog as of March 31, 2024, pertaining to the Baum acquisition. Sales increased by $12.9 million, or 4.8%, to $284.3 million in 2024, primarily driven by the impact of the BAUM acquisition of $16.8 million, or 6.2% and favorable foreign currency translation of $1.5 million, or 0.6%, partially offset by lower core sales of $5.4 million, or 2.0%. Lower core sales were driven by lower volumes. • Sales of Process Valves and Related Products increased by $11.1 million, or 5.5%, to $214.0 million in 2024, primarily driven by the impact of the BAUM acquisition, partially offset by lower core sales. • Sales of Commercial Valves increased by $2.3 million, or 7.5%, to $32.9 million in 2024, reflecting an impact from favorable foreign currency translation and a modest increase in core sales. Cost of sales increased by $11.6 million, or 7.7%, to $161.7 million, primarily related to the impact of the BAUM acquisition of $12.6 million, or 8.4%, higher material, labor and other manufacturing costs of $10.9 million, or 7.3%, and unfavorable foreign currency translation of $1.0 million, or 1%, partially offset by the impact of lower volumes of $7.6 million, or 5.1%, and net productivity gains of $5.1 million, or 3.4%. Selling, general and administrative expenses increased by $7.7 million, or 13.3%, to $65.7 million, primarily related to higher selling and administrative costs of $7.5 million, or 12.9%, partially driven by the impact of the BAUM acquisition. Operating profit decreas ed by $6.4 million, or 10.1%, to $56.9 million in 2024. The decrease is primarily due to lower volumes, higher selling, administrative and manufacturing costs , and unfavorable mix of $15.3 million, or 24.2%, partially offset by productivity gains of $6.8 million, or 10.7%, the net impact from the Baum acquisition of $1.2 million, or 1.9% and other savings of $0.8 million, or 1.2%. 32 Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Engineered Materials First Quarter Favorable/(Unfavorable) Change (dollars in millions) 2024 2023 $ % Net sales by product line: FRP - Recreational Vehicles $ 19.1 $ 20.3 $ (1.2) (5.9) % FRP - Building Products 28.8 32.3 (3.5) (10.8) % FRP - Transportation 7.2 9.7 (2.5) (25.8) % Total net sales $ 55.1 $ 62.3 $ (7.2) (11.6) % Cost of sales $ 41.4 $ 45.8 $ 4.4 9.6 % as a percentage of sales 75.1 % 73.5 % Selling, general and administrative $ 5.6 $ 5.1 $ (0.5) (9.8) % as a percentage of sales 10.2 % 8.2 % Operating profit $ 8.1 $ 11.4 $ (3.3) (28.9) % Operating margin 14.7 % 18.3 % Supplemental Data: Backlog $ 12.8 $ 16.8 $ (4.0) (23.8) % Sales decreased $7.2 million, or 11.6%, to $55.1 million in 2024, primarily reflecting lower volumes of $6.0 million, or 9.6%. The decrease was primarily driven by lower sales in Building Products and Transportation end markets. Cost of sales decreased $4.4 million, or 9.6%, to $41.4 million in 2024, primarily related to lower volumes of $3.8 million, or 8.3%. Operating profit decreased by $3.3 million, or 28.9%, to $8.1 million in 2024, primarily reflecting the impact from lower volumes. 33 Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources Three Months Ended March 31, (in millions) 2024 2023 Net cash (used for) provided by: Operating activities from continuing operations $ (79.9) $ (105.4) Investing activities from continuing operations (114.5) (8.7) Financing activities 87.9 (67.8) Discontinued operations — 30.5 Effect of exchange rates on cash and cash equivalents (3.7) 4.0 Decrease in cash and cash equivalents $ (110.2) $ (147.4) Our operating philosophy is to deploy cash provided from operating activities, when appropriate, to provide value to shareholders by reinvesting in existing businesses, by making acquisitions that will strengthen and complement our portfolio, by divesting businesses that are no longer strategic or aligned with our portfolio and where such divestitures can generate capacity for strategic investments and initiatives that further optimize our portfolio, and by paying dividends and/or repurchasing shares. At any given time, and from time to time, we may be evaluating one or more of these opportunities, although we cannot assure you if or when we will consummate any such transactions. Our current cash balance, together with cash we expect to generate from future operations and borrowing capacity available under our revolving credit facility, is expected to be sufficient to finance our short- and long-term capital requirements, as well as to fund expected pension contributions. We have available borrowing capacity of $800 million under a 5-year revolving credit facility (“Revolving Facility”) through March 2028 and a $300 million, 3-year term loan facility (“Term Facility”) through March 2026. At March 31, 2024, there was $247 million outstanding under the Term Facility and $110 million outstanding under the Revolving Facility. For more information regarding our borrowings under the Revolving Facility in connection with our acquisition of CryoWorks, see “Recent Transactions – CryoWorks Acquisition” above. Operating Activities Cash used for operating activities from continuing operations was $79.9 million in the first three months of 2024, as compared to $105.4 million during the same period last year. The decrease in cash used for operating activities from continuing operations was primarily driven by the $10.1 million increase in net income adjusted for the exclusion of non-cash items and a decrease in working capital investments of $22.2 million, primarily due to lower income tax payments and lower payments for inventory. Investing Activities Cash flows relating to investing activities from continuing operations consist primarily of cash used for capital expenditures and acquisitions of businesses. Cash used for investing activities from continuing operations was $114.5 million in the first three months of 2024, as compared to $8.7 million in the comparable period of 2023. The increase in cash used for investing activities is primarily related to the acquisition of Vian for $102.5 million and the $3.1 million final working capital adjustment related to the BAUM acquisition. Financing Activities Financing cash flows consist primarily of dividend payments to shareholders, repayments of indebtedness, proceeds from our Credit Facilities and proceeds from the issuance of common stock. During the first three months of 2023, financing cash flows also includes activities associated with the distribution of Crane NXT, Co. in support of the Separation. Cash provided by financing activities was $87.9 million during the first three months of 2024 compared to cash used for financing activities of $67.8 million in the comparable period of 2023. The increase in cash provided by financing activities was primarily driven by; • $158.1 million increase in net borrowings; • $14.9 million decrease in dividends paid; partially offset by • $21.4 million increase in payments for taxes related to net share settlements of equity awards, net of proceeds from stock options. 34 Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in the information called for by this item since the disclosure in our Annual Report on Form 10-K for the year ended December 31, 2023.