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Item 2. Management’s Discussion and Analysis

2022-05-04 compared with 2021-11-02 · 153 added, 235 removed, 112 unchanged (78% of the section changed)

12 unchanged sentences

Such factors also include, among others:

uncertainties regarding the extent and duration of the impact of the COVID-19 pandemic on many aspects of our business, operations and financial performance, as detailed in Part II, Item 1A of this Quarterly Report on Form 10-Q;

changes in economic, financial and end-market conditions in the markets in which we operate;

fluctuations in raw material prices;

inflationary pressures;

supply chain disruptions;

the effects of any government imposed vaccine mandates on the workforce;

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;

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 ability to value and successfully integrate acquisitions and to realize synergies and opportunities for growth and innovation, and to attract and retain highly qualified personnel and key management;

the risks that any regulatory approval that may be required for the Engineered Materials divestiture is delayed or is not obtained, that the Engineered Materials divestiture does not close or that the related transaction agreement is terminated, or that the benefits expected from the Engineered Materials divestiture will not be realized or will not be realized within the expected time period;

a reduction in congressional appropriations that affect defense spending and our ability to predict the timing and award of substantial contracts in our banknote business;

adverse effects on our business and results of operations, as a whole, as a result of increases in asbestos claims or the cost of defending and settling such claims;

adverse effects as a result of environmental remediation activities, costs, liabilities 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 other risks noted in reports that we file with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, and subsequent reports filed with the Securities and Exchange Commission.

We do not undertake any obligation to update or revise any forward-looking statements.

changes in global economic conditions (including inflationary pressures) and geopolitical risks, including macroeconomic fluctuations that may harm our business, results of operation and stock price;

the effects of the ongoing coronavirus pandemic on our business and the global and U.S.

economies generally;

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;

potential exposure from numerous lawsuits for asbestos-related personal injury;

our ability to source components and raw materials from suppliers, including disruptions and delays in our supply chain;

demand for our products, which is variable and subject to factors beyond our control;

governmental regulations and failure to comply with those regulations;

fluctuations in the prices of our components and raw materials;

loss of personnel or being able to hire and retain additional personnel needed to sustain and grow our business as planned;

risks from environmental liabilities, costs, litigation and violations that could adversely affect our financial condition, results of operations, cash flows and reputation;

risks associated with conducting a substantial portion of our business outside the United States;

being unable to identify or complete acquisitions, or to successfully integrate the businesses we acquire, or complete dispositions, including the disposition of our Engineered Materials segment;

adverse impacts from intangible asset impairment charges;

potential product liability or warranty claims;

being unable to successfully develop and introduce new products, which would limit our ability to grow and maintain our competitive position and adversely affect our financial condition, results of operations and cash flow;

significant competition in our markets;

additional tax expenses or exposures that could affect our financial condition, results of operations and cash flows;

inadequate or ineffective internal controls;

risks related to our holding company proposal to be voted on by our stockholders at our 2022 annual stockholder meeting, which are further described in the section entitled “Risk Factors Related to the Holding Company Proposal” in the registration statement on Form S-4 (File No.

333-263119) filed by our wholly-owned subsidiary, Crane Holdings, Co.;

specific risks relating to our reportable segments, including Aerospace & Electronics, Process Flow Technologies, Payment & Merchandising Technologies and Engineered Materials;

the ability and willingness of the parties to meet and/or perform their obligations under any contractual arrangements that are entered into among the parties in connection with our previously announced proposed business separation and any of their obligations to indemnify, defend and hold the other party harmless from and against various claims, litigation and liabilities;

our ability to achieve some or all the benefits that we expect to achieve from our proposed business separation;

and other risks noted in reports that we file with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, and subsequent reports and other documents filed by us or Crane Holdings, Co.

with the Securities and Exchange Commission, including any registration statement relating to our proposed business separation.

We do not undertake any obligation to update or revise any forward-looking statements to reflect any future events or circumstances.

Pending Holding Company Reorganization

On February 28, 2022, Crane Co., a Delaware corporation (“Crane Co.”), Crane Holdings, Co., a Delaware corporation and wholly-owned subsidiary of Crane Co.

(“Crane Holdings”), and Crane Transaction Company, LLC, a Delaware limited liability company and wholly-owned subsidiary of Crane Holdings (“Merger Sub”), entered into an Agreement and Plan of Merger, pursuant to which Crane Co.

will merge with Merger Sub, with Crane Co.

surviving the merger as a wholly-owned subsidiary of Crane Holdings (the “Reorganization Merger”).

The Reorganization Merger is subject to specific conditions, including approval by Crane Co.’s stockholders at its 2022 Annual Meeting of Stockholders.

Following the Reorganization Merger, Crane Holdings intends for Crane Co.

(which will, as of that time, be a wholly-owned subsidiary of Crane Holdings) to convert from a Delaware corporation to a Delaware limited liability company (such conversion, together with the Reorganization Merger, the “Reorganization”).

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Pending Separation

On March 30, 2022, Crane Co.

announced that its Board of Directors unanimously approved a plan to pursue a separation into two independent, publicly-traded companies (the “Separation”).

The Separation is expected to occur through a tax-free distribution and is expected to be completed within approximately 12 months, subject to the satisfaction of customary conditions and final approval by Crane Co.’s Board of Directors.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OUTLOOK - CONTINUING OPERATIONS

1 unchanged sentence

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 2021, we expect a total year-over-year sales increase of approximately 14%, driven by low-double digit core growth following the substantial core sales decline in 2020 attributable to the COVID-19 pandemic, an approximate 2.5% benefit from favorable foreign exchange, and a slight acquisition benefit.

We expect operating profit to nearly double compared to 2020, driven by a combination of operating leverage on higher volumes, strong productivity, favorable mix, and restructuring and acquisition related charges recorded last year that will not repeat in 2021, and carry-over savings related to COVID-19 related repositioning actions.

As we exited 2021 and through the first quarter of 2022, we have experienced significant inflationary pressure across most businesses and have initiated pricing actions to ensure we cover the higher costs and protect our margin profile.

For 2022, we expect a total year-over-year sales increase of approximately 3% to 4%, driven by approximately 5% core growth, partially offset by a 1% to 2% impact from unfavorable foreign exchange.

On a year-to-date basis through March, substantially all of our core growth has been driven by price to offset the impact of inflation.

We expect higher pricing on a full-year basis to approximately offset the impact of inflation.

We expect a 1% to 2% improvement in operating profit driven primarily by productivity benefits and operating leverage on higher volumes, partially offset by higher transaction related costs, primarily related to the Separation and unfavorable mix.

This Outlook does not include any potential impacts from the pending Crane Supply divestiture which is expected to close in the second quarter of 2022.

If such transaction closes in 2022, it would result in a decrease in sales and operating profit relative to the Outlook described here in both the Overall and Process Flow Technologies sections.

Aerospace & Electronics

In 2021, we expect Aerospace & Electronics core sales to decline slightly compared to 2020 as the COVID-19 pandemic had a major impact on business and leisure air travel beginning in the early part of the second quarter of last year which has only recently began to recover.

Accordingly, we expect a slight decline in our commercial business driven by lower aircraft build rates and lower airline flight hours.

We expect a slight decline in our defense businesses given very challenging comparisons to 2020 where these markets exhibited very strong growth.

We expect the segment’s operating profit to increase slightly compared to 2020 driven primarily by the carry-over savings related to COVID-19 related repositioning actions and the absence of restructuring related costs and strong productivity, partially offset by the impact of the lower sales volume.

In 2022, we expect Aerospace & Electronics core sales to increase in the high-single digit range as compared to 2021, primarily driven by higher volumes and, to a lesser extent, price.

We expect a substantial improvement in our commercial OEM business driven by higher aircraft build rates, and we expect a substantial improvement in our commercial aftermarket business given continued recovery in airline flight hours following two years of depressed demand due to the impacts of COVID-19.

We expect our defense OEM business to be flat and our defense aftermarket businesses to be slightly lower given challenging comparisons to recent years where these markets exhibited very strong growth.

We expect segment operating profit to increase in the low double-digit range as compared to 2021 driven primarily by the impact of operating leverage on higher volumes.

Process Flow Technologies

In 2021, we expect Process Flow Technologies sales to increase in the low-double digit range compared to 2020, driven by core sales growth in the low-double digit range following the substantial core sales decline in 2020 attributable to the COVID-19 pandemic;

favorable foreign exchange of approximately 4%;

and a small benefit from the I&S acquisition.

We expect Process Valves and Related Products sales to increase in the low-teens digit range compared to 2020, driven by high-single digit core sales growth, an approximate 3% benefit from favorable foreign exchange, and a small benefit from the I&S acquisition.

We expect Commercial Valves sales to increase nearly 30% compared to 2020 driven by close to 20% core sales growth, and high-single digit favorable foreign exchange.

The higher core sales relates to increased spending in non-residential end markets primarily in Canada and the U.K.

We expect Pumps and Systems sales to increase nearly 20% compared to 2020, driven by growth in the U.S.

municipal, non-residential construction and military end markets.

We expect an improvement in the segment’s operating profit and operating margin compared to 2020, driven by the impact of the higher sales, strong productivity, lower restructuring and acquisition related charges, and carry-over savings primarily related to COVID-19 related repositioning actions.

In 2022, we expect Process Flow Technologies sales to increase slightly driven by low- to mid-single digit core growth, partially offset by a low single-digit impact from unfavorable foreign exchange.

As a result of inflationary pressures, we expect additional price to supplement volume growth during the year.

We expect Process Valves and Related Products sales to increase in the low- to mid-single digit range as compared to 2021, driven by mid-single digit core sales growth, partially offset by a low-single digit impact from unfavorable foreign exchange.

We expect Commercial Valves sales to decline in the mid-single digit range with a low-single digit decline in core sales and a low-single digit impact from unfavorable foreign exchange.

We expect Pumps and Systems sales to increase in the high-single digit range as compared to 2021, driven by strong demand across municipal and non-residential U.S.

We expect an improvement in the segment’s operating profit as compared to 2021 in the low-single digit range, driven by strong productivity and operating leverage on higher volumes as well as higher pricing to cover inflationary pressures.

Payment & Merchandising Technologies

In 2021, we expect Payment & Merchandising Technologies sales to increase approximately 20% compared to 2020, driven primarily by high-teens core sales growth, and an approximate 3% benefit from favorable foreign exchange.

At Crane Payment Innovations, we expect core sales growth in the mid-teen range, driven by broad-based strength across most vertical end markets following the substantial core sales decline in 2020 attributable to the COVID-19 pandemic.

At Crane Currency, we expect core sales to increase more than 20% compared to 2020 primarily driven by higher sales to the U.S.

Government, and to a lesser extent, by higher sales to international customers.

We expect the segment’s operating profit and operating margin to increase substantially compared to 2020, driven by the impact from the higher sales volume, favorable mix, strong productivity, carry-over savings associated with COVID-19 related repositioning actions, and the absence of restructuring and acquisition-related costs.

In 2022, we expect Payment & Merchandising Technologies sales to increase in the low- to mid-single digit range as compared to 2021, driven by mid-single digit core sales growth, partially offset by a low-single digit impact from unfavorable foreign exchange.

Higher pricing is expected to offset higher inflation and sustain margins.

At Crane Payment Innovations, we expect core sales growth in the low-double digit range, driven by broad-based strength across all vertical markets, together with higher pricing.

At Crane Currency, we expect core sales to decline in the high-single digit range as compared to 2021 due to lower expected sales to international customers, reflecting challenging comparisons to a record year of project activity and growth in 2021.

We expect the segment’s operating profit to be similar as compared to 2021, with higher prices and strong productivity to be approximately offset by inflationary pressures and unfavorable sales mix.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results from Continuing Operations – Three Month Periods Ended September 30

Results from Continuing Operations – Three Month Periods 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 third quarter 2021 versus the third quarter 2020, unless otherwise specified.

Third Quarter Change

All comparisons below refer to the first quarter 2022 versus the first quarter 2021, unless otherwise specified.

First Quarter Change

(dollars in millions) 2022 2021 $ %

Net sales $ 801.1 $ 779.6 $ 21.5 2.8 %

Cost of sales 473.8 470.5 3.3 0.7 %

as a percentage of sales 59.1 % 60.4 %

Selling, general and administrative 193.7 182.2 11.5 6.3 %

as a percentage of sales 24.2 % 23.4 %

Restructuring gain, net — (13.1) 13.1 NM

Operating profit 133.6 140.0 (6.4) (4.6) %

Acquisition-related and integration charges 1

— 2.7 (2.7) NM

Restructuring and related charges, net 1

0.8 1.4 (0.6) (42.9) %

Operating margin 16.7 % 18.0 %

7 unchanged sentences

Net income from continuing operations attributable to common shareholders $ 94.7 $ 103.4 $ (8.7) (8.4) %

1 Acquisition-related and integration charges and restructuring and related (gains) charges, net are included in operating profit and operating margin.

Supplemental Data:

Transaction related expenses 1

1 Amounts included within Selling, general & administrative costs.

Sales increased by $21.5 million, or 2.8%, to $801.1 million in 2022.

Net sales related to operations outside the United States were 40.4% and 38.6% of total net sales for the quarters ended September 30, 2021 and 2020, respectively.

Net sales by destination related to operations outside the United States were 47.7% and 48.6% of total net sales for the quarters ended March 31, 2022 and 2021, respectively.

The year-over-year change in sales included:

• an increase in core sales of $134.3 million, or 19.6%;

• favorable foreign currency translation of $12.7 million, or 1.8%.

Operating profit increased by $62.3 million, or 82.1%, to $138.2 million in 2021.

The increase in operating profit reflected higher operating profit in all segments, partially offset by higher corporate costs.

Operating profit in the third quarter of 2021 included restructuring and related charges of $0.8 million.

Operating profit in the third quarter of 2020 included acquisition-related and integration costs of $2.7 million related to the I&S and Cummins-Allison acquisitions and restructuring and related charges of $1.4 million.

• an increase in core sales of $35.5 million, or 4.6%, which in aggregate which was primarily comprised of higher pricing;

• unfavorable foreign currency translation of $14.0 million, or 1.8%.

Cost of sales increased by $3.3 million, or 0.7% to $473.8 million in 2022.

The increase is primarily related to an increase in material, labor and other manufacturing costs of $24.6 million, or 5.2%, partially offset by productivity gains of $14.8 million, or 3.1%, and favorable foreign currency translation of $8.7 million, or 1.8%.

Selling general and administrative expenses increased by $11.5 million, or 6.3%, to $193.7 million in 2022.

The increase was driven primarily by an increase in selling costs of $7.8 million, or 4.3%, transaction related expenses of $6.1 million, or 3.3%, primarily related to the Separation, partially offset by favorable foreign currency translation of $2.6 million, or 1.4%.

Operating profit decreased by $6.4 million, or 4.6%, to $133.6 million in 2022.

The decrease in operating profit is related to transaction related expenses of $6.1 million, and net restructuring gain of $13.1 million related to prior repositioning actions which did not repeat in 2022, offset by $12.9 million of operational improvement across the segments.

Other expense decreased $2.0 million, or 21.5%, to $7.3 million, primarily reflecting lower interest expense following the repayment of the 364-day credit facility in April 2021.

Our effective tax rate is affected by a number of items, both recurring and discrete, including the amount of income we earn in different jurisdictions and their respective statutory tax rates, acquisitions and dispositions, changes in the valuation of our deferred tax assets and liabilities, changes in tax laws, regulations and accounting principles, the continued availability of statutory tax credits and deductions, the continued reinvestment of our overseas earnings, and examinations initiated by tax authorities around the world.

Our effective tax rate attributable to continuing operations for the three months ended September 30, 2021 is lower than the prior year’s comparable period primarily due to higher foreign tax credits utilized, partially offset by a lower amount of U.S.

federal research credits generated.

Our effective tax rates attributable to continuing operations for the three months ended September 30, 2021 is lower than the statutory U.S.

federal tax rate of 21% primarily due to tax credit utilization, partially offset by state taxes net of federal benefit, statutory inclusions, and nondeductible expenses.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our effective tax rate attributable to continuing operations for the three months ended March 31, 2022 is higher than the prior year’s comparable period primarily due to higher non-U.S.

taxes, partially offset by a greater benefit related to share-based compensation.

Our effective tax rate attributable to continuing operations for the three months ended March 31, 2022 is higher than the statutory U.S.

federal tax rate of 21% primarily due to earnings in jurisdictions with statutory tax rates higher than the U.S., 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.

Comprehensive Income

Three Months Ended

September 30,

(in millions) 2022 2021

7 unchanged sentences

Comprehensive income attributable to common shareholders $ 86.6 $ 77.6

For the three months ended September 30, 2021, comprehensive income before allocations to noncontrolling interests was $97.0 million compared to $101.0 million in the same period of 2020.

The $4.0 million decrease was driven by a $65.8 million year over year unfavorable impact of foreign currency translation adjustments, primarily related to the euro, partially offset by higher net income before allocation to noncontrolling interests of $60.0 million.

For the three months ended March 31, 2022, comprehensive income before allocations to noncontrolling interests was $86.7 million compared to $78.4 million in the same period of 2021.

The $8.3 million increase was driven by a $13.3 million year-over-year favorable impact of foreign currency translation adjustments, primarily related to the British pound and Japanese yen, partially offset by lower net income before allocation to noncontrolling interests of $3.4 million.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Segment Results of Operations - Three Month Periods Ended September 30

Segment Results of Operations - Three Month Periods Ended March 31,

Aerospace & Electronics

Third Quarter Change

First Quarter Change

(dollars in millions) 2022 2021 $ %

5 unchanged sentences

Total net sales $ 157.2 $ 154.1 $ 3.1 2.0 %

Operating profit $ 32.5 $ 24.5 $ 8.0 32.7 %

Backlog $ 478.5 $ 498.1 $ (19.6) (3.9) %

Operating margin 19.3 % 15.6 %

Aerospace & Electronics sales increased $11.6 million, or 7.4%, to $168.6 million in 2021.

• Sales of Commercial Original Equipment increased $14.7 million, or 30.9%, to $62.2 million in 2021, reflecting higher shipments to aircraft manufacturers as the industry begins to recover from the COVID-19 related slowdown, and stronger demand for modular power products.

• Sales of Military Original Equipment decreased $12.5 million, or 17.6%, to $58.4 million in 2021, primarily reflecting challenging comparisons to particularly strong sales in the same period last year.

• Sales of Commercial Aftermarket Products increased $10.0 million, or 49.5%, to $30.2 million in 2021, reflecting higher demand from the airlines due to improving air traffic as the industry continues to recover from the COVID-19 related slowdown.

• Sales of Military Aftermarket Products decreased $0.6 million, or 3.3%, to $17.8 million in 2021, primarily reflecting lower sales for Modernization & Upgrade programs.

Aerospace & Electronics operating profit increased by $8.0 million, or 32.7%, to $32.5 million in 2021, primarily as a result of the impact of higher sales volumes, productivity benefits, and benefits form 2020 cost actions.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Process Flow Technologies

Third Quarter Change

(dollars in millions) 2021 2020 $ %

Net sales by product line:

Process Valves and Related Products $ 176.6 $ 153.9 $ 22.7 14.7 %

Commercial Valves 95.8 76.1 19.7 25.9 %

Pumps and Systems 26.7 22.3 4.4 19.7 %

Total net sales $ 299.1 $ 252.3 $ 46.8 18.5 %

Cost of sales $ 97.4 $ 99.4 $ (2.0) (2.0) %

as a percentage of sales 62.0 % 64.5 %

Selling, general and administrative $ 31.7 $ 28.7 $ 3.0 10.5 %

as a percentage of sales 20.2 % 18.6 %

Operating profit $ 28.1 $ 26.0 $ 2.1 8.1 %

Acquisition-related and integration charges 1

$ — $ 1.7 $ (1.7) NM

Restructuring and related charges, net 1

$ 1.9 $ 1.2 $ 0.7 58.3 %

Backlog $ 351.4 $ 304.8 $ 46.6 15.3 %

Operating margin 17.9 % 16.9 %

1 Acquisition-related and integration charges and restructuring and related charges, net are included in operating profit and operating margin.

Process Flow Technologies sales increased by $46.8 million, or 18.5%, to $299.1 million in 2021, driven by higher core sales of $38.9 million, or 15.4%, and favorable foreign currency translation of $7.9 million, or 3.1%.

• Sales of Process Valves and Related Products increased by $22.7 million, or 14.7%, to $176.6 million in 2021.

The increase reflected higher core sales of $20.5 million, or 13.3%, and favorable foreign currency translation of $2.2 million, or 1.4%, primarily due to the British pound and euro strengthening against the U.S.

The higher core sales primarily reflected improving demand across chemical and general industrial end markets.

• Sales of Commercial Valves increased by $19.7 million, or 25.9%, to $95.8 million in 2021, primarily driven by a core sales increase of $14.1 million, or 18.5%, and favorable foreign currency translation of $5.6 million, or 7.4%, as the Canadian dollar and British pound strengthened against the U.S.

The higher core sales primarily reflected broad-based improvement in demand across the Canadian, and, to a lesser extent, U.K., non-residential construction markets.

• Sales of Pumps & Systems increased by $4.4 million, or 19.7%, to $26.7 million in 2021, reflecting broad-based improvement in demand across municipal, non-residential construction, and military end markets.

Process Flow Technologies operating profit increas ed by $18.4 million, or 71.0%, to $44.3 million in 2021.

The increase primarily reflected the impact of higher sales volumes and productivity benefits.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Payment & Merchandising Technologies

Third Quarter Change

(dollars in millions) 2021 2020 $ %

Net sales by product line:

Payment Acceptance and Dispensing Products $ 206.0 $ 161.6 $ 44.4 27.5 %

Banknotes and Security Products 159.8 115.6 44.2 38.2 %

Total net sales $ 365.8 $ 277.2 $ 88.6 32.0 %

Operating profit $ 83.7 $ 40.5 $ 43.2 106.7 %

Acquisition-related and integration charges 1

$ — $ 1.0 $ (1.0) NM

Restructuring and related (gains) charges, net 1

$ (1.1) $ 0.2 $ (1.3) NM

Supplemental Data:

Backlog $ 508.4 $ 481.6 $ 26.8 5.6 %

Operating margin 22.9 % 14.6 %

1 Acquisition-related and integration charges and restructuring and related (gains) charges, net are included in operating profit and operating margin.

Payment & Merchandising Technologies sales increased $88.6 million, or 32.0%, to $365.8 million in 2021, driven by higher core sales of $83.8 million, or 30.3%, and favorable foreign currency translation of $4.8 million, or 1.7%.

• Sales of Payment Acceptance and Dispensing Products increased $44.4 million, or 27.5%, to $206.0 million in 2021.

The increase reflected higher core sales of $41.9 million, or 26.0%, and favorable foreign currency translation of $2.5 million, or 1.5%, primarily due to the British pound strengthening against the U.S.

The core sales increase primarily reflected higher sales to gaming and vending customers.

• Sales of Banknotes and Security Products increased $44.2 million, or 38.2%, to $159.8 million in 2021.

The increase reflected higher core sales of $41.9 million, or 36.2%, and favorable foreign currency translation of $2.3 million, or 2.0%, as the euro strengthened against the U.S.

The core sales increase primarily reflected higher sales to international customers, and to a lesser extent, higher sales to the U.S.

Payment & Merchandising Technologies operating profit increased by $43.2 million, or 106.7%, to $83.7 million in 2021.

The increase primarily reflected the impact of higher sales volumes .

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results from Continuing Operations – Nine Month Periods Ended September 30

The following information should be read in conjunction with our condensed consolidated financial statements and related notes.

All comparisons below refer to the first nine months of 2021 versus the first nine months of 2020, unless otherwise specified.

Year-to-Date Change

(dollars in millions) 2021 2020 $ %

Net sales $ 2,409.5 $ 2,077.6 $ 331.9 16.0 %

Operating profit 415.1 186.3 228.8 122.8 %

Acquisition-related and integration charges 1

— 10.3 (10.3) NM

Restructuring and related (gains) charges, net 1

(8.6) 25.9 (34.5) NM

Operating margin 17.2 % 9.0 %

Other income (expense):

Interest income 1.1 1.3 (0.2) (15.4) %

Interest expense (36.0) (41.3) 5.3 12.8 %

Miscellaneous income, net 17.2 10.6 6.6 62.3 %

Total other expense (17.7) (29.4) 11.7 39.8 %

Income from continuing operations before income taxes 397.4 156.9 240.5 153.3 %

Provision for income taxes 71.9 36.6 35.3 96.4 %

Net income from continuing operations attributable to common shareholders $ 325.5 $ 120.3 $ 205.2 170.6 %

1 Acquisition-related and integration charges and restructuring and related (gains) charges, net are included in operating profit and operating margin.

Sales increased by $331.9 million, or 16.0%, to $2,409.5 million in 2021.

Net sales related to operations outside the United States were 39.8% and 38.3% of total net sales for the nine months ended September 30, 2021 and 2020, respectively.

The year-over-year change in sales included:

• an increase in core sales of $257.3 million, or 12.4%;

• favorable foreign currency translation of $69.6 million, or 3.4%;

• an increase in sales related to a benefit from the January 2020 I&S acquisition of $5.0 million, or 0.2%.

Operating profit increased by $228.8 million, or 122.8%, to $415.1 million in 2021.

The increase in operating profit reflected higher operating profit in our Payment & Merchandising Technologies, Process Flow Technologies and Aerospace & Electronics segments, partially offset by higher corporate costs.

Operating profit in the first nine months of 2021 included net restructuring and related gains of $8.6 million and disposition costs of $1.3 million.

Operating profit in the first nine months of 2020 included restructuring and related charges of $25.9 million and acquisition-related and integration charges of $10.3 million.

Other expense decreased $11.7 million, or 39.8%, to $17.7 million primarily reflecting a gain on sale of a property, a curtailment gain related to our pension plan and lower interest expense resulting from the absence of interest paid for the 364-day credit facility that was paid in April 2021.

Our effective tax rate attributable to continuing operations for the nine months ended September 30, 2021 is lower than the prior year’s comparable period primarily due to higher foreign tax credits utilized, partially offset by a lower reversal of tax accruals.

Our effective tax rates attributable to continuing operations for the nine months ended September 30, 2021 is lower than the statutory U.S.

federal tax rate of 21% primarily due to tax credit utilization, partially offset by state taxes net of federal benefit, statutory inclusions, and nondeductible expenses.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Comprehensive Income

Nine Months Ended

September 30,

(in millions) 2021 2020

Net income before allocation to noncontrolling interests $ 363.3 $ 134.2

Components of other comprehensive income (loss), net of tax

Currency translation adjustment (52.1) 13.2

Changes in pension and postretirement plan assets and benefit obligation, net of tax 15.3 10.4

Other comprehensive loss, net of tax (36.8) 23.6

Comprehensive income before allocation to noncontrolling interests 326.5 157.8

Noncontrolling interests in comprehensive income 0.6 —

Comprehensive income attributable to common shareholders $ 325.9 $ 157.8

For the nine months ended September 30, 2021, comprehensive income before allocations to noncontrolling interests was $326.5 million compared to $157.8 million in the same period of 2020.

The $168.7 million increase was primarily driven by higher net income before allocation to noncontrolling interests of $229.1 million, partially offset by a $65.3 million year over year unfavorable impact of foreign currency translation adjustments primarily related to the euro.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Segment Results of Operations - Nine Month Periods Ended September 30

Aerospace & Electronics

Year-to-Date Change

(dollars in millions) 2021 2020 $ %

Net sales by product line:

Commercial Original Equipment $ 170.5 $ 180.0 $ (9.5) (5.3) %

Military Original Equipment 184.0 196.8 (12.8) (6.5) %

Commercial Aftermarket Products 75.1 74.4 0.7 0.9 %

Military Aftermarket Products 50.6 56.1 (5.5) (9.8) %

Total net sales $ 480.2 $ 507.3 $ (27.1) (5.3) %

Operating profit $ 89.3 $ 87.8 $ 1.5 1.7 %

Restructuring and related charges 1

$ — $ 4.7 $ (4.7) NM

Operating margin 18.6 % 17.3 %

1 Restructuring and related charges are included in operating profit and operating margin.

Aerospace & Electronics sales decreased $27.1 million, or 5.3%, to $480.2 million in 2021.

• Sales of Commercial Original Equipment decreased $9.5 million, or 5.3%, to $170.5 million in 2021, primarily reflecting lower aircraft build rates as a result of COVID-19.

• Sales of Military Original Equipment decreased $12.8 million, or 6.5%, to $184.0 million in 2021, primarily reflecting challenging comparisons to particularly strong sales in the same period last year

• Sales of Commercial Aftermarket Products increased $0.7 million, or 0.9%, to $75.1 million in 2021.

• Sales of Military Aftermarket Products decreased $5.5 million, or 9.8%, to $50.6 million in 2021, primarily reflecting challenging comparisons to particularly strong sales in the same period last year.

Aerospace & Electronics operating profit increased by $1.5 million, or 1.7%, to $89.3 million in 2021, primarily as a result of savings from 2020 repositioning actions, productivity benefits and favorable product mix largely offset by the impact of lower sales volumes.

Sales increased $3.1 million, or 2.0%, to $157.2 million in 2022.

• Sales of Commercial Original Equipment increased $4.0 million, or 7.3%, to $58.7 million in 2022, reflecting higher shipments to aircraft manufacturers as the industry continues to recover from the COVID-19 related slowdown.

• Sales of Military Original Equipment decreased $5.4 million, or 8.6%, to $57.4 million in 2022, primarily reflecting lower shipments due to order timing and material availability.

• Sales of Commercial Aftermarket Products increased $9.1 million, or 46.7%, to $28.6 million in 2022, reflecting higher demand from the airlines due to improving air traffic as the industry continues to recover from the COVID-19 related slowdown together with higher pricing.

• Sales of Military Aftermarket Products decreased $4.6 million, or 26.9%, to $12.5 million in 2022, primarily reflecting lower spares sales.

Cost of sales decreased by $2.0 million, or 2.0%, to $97.4 million in 2022, primarily reflecting $5.2 million, or 5.2%, of favorable mix, $3.5 million, or 3.5%, of productivity benefits, partially offset by a $7.6 million, or 7.7%, increase in material, labor and other manufacturing costs.

Selling, general and administrative expense increased by $3.0 million, or 10.5%, to $31.7 million in 2022, primarily reflecting an increase of $2.0 million, or 7.0%, in engineering costs and $1.0 million, or 3.5%, in selling costs.

Operating profit increased by $2.1 million, or 8.1%, to $28.1 million in 2022, primarily reflecting favorable mix of $5.2 million and productivity benefits of $3.9 million, partially offset by higher manufacturing and engineering costs of $6.0 million.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Process Flow Technologies

Year-to-Date Change

First Quarter Change

(dollars in millions) 2022 2021 $ %

4 unchanged sentences

Total net sales $ 311.3 $ 288.0 $ 23.3 8.1 %

Cost of sales $ 196.8 $ 190.7 $ 6.1 3.2 %

as a percentage of sales 63.2 % 66.2 %

Selling, general and administrative $ 65.5 $ 60.0 $ 5.5 9.2 %

as a percentage of sales 21.0 % 20.8 %

Restructuring charges (gains) $ — $ (12.6) $ 12.6 NM

Operating profit $ 49.0 $ 49.9 $ (0.9) (1.8) %

Acquisition-related and integration charges 1

$ — $ 5.0 $ (5.0) NM

Restructuring and related (gains) charges 1

$ (7.0) $ 7.7 $ (14.7) NM

Operating margin 15.7 % 17.4 %

1 Acquisition-related and integration charges and restructuring and related (gains) charges are included in operating profit and operating margin.

Process Flow Technologies sales increased by $149.7 million, or 20.0%, to $897.9 million in 2021, driven by higher core sales of $106.4 million, or 14.2%, favorable foreign currency translation of $38.3 million, or 5.1%, and a benefit from the January 2020 acquisition of I&S of $5.0 million, or 0.7%.

Supplemental Data:

Backlog $ 372.4 $ 325.4 $ 47.0 14.4 %

Sales increased by $23.3 million, or 8.1%, to $311.3 million in 2022, driven by higher core sales of $28.1 million, or 9.8%, partially offset by unfavorable foreign currency translation of $4.8 million, or 1.7%.

• Sales of Process Valves and Related Products increased by $8.4 million, or 4.8%, to $182.9 million in 2022.

The increase reflected higher core sales of $43.1 million, or 9.1%, favorable foreign currency translation of $15.6 million, or 3.3%, primarily due to the euro strengthening against the U.S.

dollar, and a benefit from the acquisition of I&S of $5.0 million, or 1.1%.

The higher core sales primarily reflected broad based strengthening across end markets that continue to recover from the 2020 impact of COVID-19.

• Sales of Commercial Valves increased by $73.0 million, or 34.7%, to $283.3 million in 2021, primarily driven by a core sales increase of $50.9 million, or 24.2%, and favorable foreign currency translation of $22.1 million, or 10.5%, as the Canadian dollar and British pound strengthened against the U.S.

The higher core sales primarily reflected higher demand in Canadian, and, to a lesser extent, U.K., non-residential construction markets.

• Sales of Pumps & Systems increased by $13.0 million, or 19.6%, to $79.2 million in 2021, primarily reflecting higher demand from municipal and non-residential construction end markets.

Process Flow Technologies operating profit increased by $66.8 million, or 90.1%, to $140.9 million in 2021.

The increase primarily reflected the impact of higher sales volumes, productivity benefits and a gain on the sale of real estate related to prior repositioning actions.

The increase reflected higher core sales of $12.3 million, or 7.0%, partially offset by unfavorable foreign currency translation of $3.9 million, or 2.2%, primarily due to the euro weakening against the U.S.

The higher core sales reflected broad-based strength across process end markets.

• Sales of Commercial Valves increased by $9.0 million, or 10.1%, to $98.2 million in 2022, primarily driven by a core sales increase of $9.9 million, or 11.1%, partially offset by unfavorable foreign currency translation of $0.9 million, or 1.0%, as the British pound weakened against the U.S.

The higher core sales primarily reflected improvement in demand in Canadian non-residential construction markets.

• Sales of Pumps & Systems increased by $5.9 million, or 24.3%, to $30.2 million in 2022, reflecting broad-based improvement in demand across municipal, non-residential construction, and military end markets.

Cost of sales increased by $6.1 million, or 3.2%, to $196.8 million, primarily related to increased volume of $9.2 million, or 4.8%, and an increase in material, labor and other manufacturing costs of $3.7 million, or 1.9%, partially offset by productivity benefits of $4.3 million, or 2.2%, and favorable foreign currency translation of $2.8 million, or 1.5%.

Selling, general and administrative expense increased by $5.5 million, or 9.2%, to $65.5 million primarily reflecting an increase of $4.1 million, or 6.8%, in selling costs and $2.6 million, or 4.3%, in administrative costs, partially offset by favorable foreign currency translation of $1.2 million, or 2.1%.

Operating profit decreas ed by $0.9 million, or 1.8%, to $49.0 million in 2022.

The decrease reflected the impact of higher net restructuring costs of $12.6 million primarily related to the impact of a net restructuring gain on a sale of real estate recorded in the prior year, partially offset by productivity benefits of $5.0 million, leverage on higher sales volumes of $4.8 million and restructuring savings of $1.9 million.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Payment & Merchandising Technologies

Year-to-Date Change

First Quarter Change

(dollars in millions) 2022 2021 $ %

3 unchanged sentences

Total net sales $ 332.6 $ 337.5 $ (4.9) (1.5) %

Cost of sales $ 179.1 $ 180.4 $ (1.3) (0.7) %

as a percentage of sales 53.8 % 53.5 %

Selling, general and administrative $ 69.3 $ 71.7 $ (2.4) (3.3) %

as a percentage of sales 20.8 % 21.2 %

Restructuring gain, net $ — $ (0.5) $ 0.5 NM

Operating profit $ 84.2 $ 85.9 $ (1.7) (2.0) %

Acquisition-related and integration charges 1

$ — $ 5.1 $ (5.1) NM

Restructuring and related (gains) charges, net 1

$ (1.6) $ 13.5 $ (15.1) NM

Operating margin 25.3 % 25.4 %

1 Acquisition-related and integration charges and restructuring and related (gains) charges, net are included in operating profit and operating margin.

Payment & Merchandising Technologies sales increased $209.3 million, or 25.5%, to $1,031.4 million in 2021, driven by higher core sales of $178.5 million, or 21.8%, and favorable foreign currency translation of $30.8 million, or 3.7%.

Supplemental Data:

Backlog $ 429.0 $ 337.0 $ 92.0 27.3 %

Sales decreased $4.9 million, or 1.5%, to $332.6 million in 2022, driven by unfavorable foreign currency translation of $8.9 million, or 2.6%, partially offset by higher core sales of $4.0 million, or 1.2%.

• Sales of Payment Acceptance and Dispensing Products increased $26.0 million, or 14.1%, to $211.0 million in 2022.

The increase reflected higher core sales of $70.7 million, or 13.9%, and favorable foreign currency translation of $11.9 million, or 2.4%, primarily reflecting the strengthening of the British pound against the U.S.

The core sales increase primarily reflected higher sales to gaming, transportation and retail customers.

• Sales of Banknotes and Security Products increased $126.7 million, or 40.0%, to $443.1 million in 2021.

The increase reflected higher core sales of $107.8 million, or 34.0%, and favorable foreign currency translation of $18.9 million, or 6.0%, as the euro strengthened against the U.S.

The core sales increase reflected substantially higher sales to both international customers and the U.S.

Payment & Merchandising Technologies operating profit increased by $178.5 million, or 259.1%, to $247.4 million in 2021.

The increase primarily reflected the impact of higher sales volumes, and to a lesser extent, favorable mix, productivity benefits and restructuring savings from 2020 repositioning actions.

The increase reflected higher core sales of $29.2 million, or 15.8%, partially offset by unfavorable foreign currency translation of $3.3 million, or 1.8%, primarily due to the Japanese yen and British pound weakening against the U.S.

The core sales increase primarily reflected higher sales to gaming and retail customers and higher pricing.

• Sales of Banknotes and Security Products decreased $30.9 million, or 20.3%, to $121.6 million in 2022.

The decrease reflected lower core sales of $25.3 million, or 16.6%, and unfavorable foreign currency translation of $5.6 million, or 3.7%, as the euro weakened against the U.S.

The core sales decrease primarily reflected lower sales to international customers, and to a lesser extent, lower sales to the U.S.

Cost of sales decreased by $1.3 million, or 0.7%, to $179.1 million primarily related to productivity benefits of $7.0 million, or 3.9%, favorable foreign currency translation of $5.8 million, or 3.2%, and lower volume of $5.8 million, or 3.2%, partially offset by an increase in material, labor and other manufacturing costs of $13.3 million, or 7.3%, and unfavorable mix of $4.1 million, or 2.3%.

Selling, general and administrative expense decreased by $2.4 million, or 3.3%, to $69.3 million primarily reflecting favorable foreign currency translation of $1.3 million, or 1.8%.

Operating profit decreased by $1.7 million, or 2.0%, to $84.2 million in 2022.

The decrease primarily reflected the impact of lower sales volumes, partially offset by favorable pricing net of inflation and strong productivity .

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Liquidity and Capital Resources

Nine Months Ended

September 30,

Three Months Ended

(in millions) 2022 2021

16 unchanged sentences

Operating Activities

Cash provided by operating activities from continuing operations was $311.7 million in the first nine months of 2021, compared to $197.0 million during the same period last year.

The increase in cash provided by operating activities from continuing operations was primarily driven by higher net income, partially offset by higher working capital levels and pension contributions.

Net asbestos-related payments in the first nine months of 2021 and 2020 were $29.6 million and $23.7 million, respectively.

Cash used for operating activities from continuing operations was $49.3 million in the first three months of 2022, compared to provided by $47.6 million during the same period last year.

The increase in cash used for operating activities from continuing operations was primarily driven by higher working capital levels reflecting higher inventory and higher bonus payments related to strong 2021 performance, partially offset by lower pension contributions.

Net asbestos-related payments in the first three months of 2022 and 2021 were $7.5 million and $10.8 million, respectively.

In 2022, we expect to make payments related to asbestos settlement and defense costs, net of related insurance recoveries, of approximately $45 million.

Investing Activities

Cash flows relating to investing activities from continuing operations consist primarily of cash used for acquisitions, capital expenditures and cash provided by divestitures of businesses or assets.

Cash provided by investing activities from continuing operations was $28.0 million in the first nine months of 2021, compared to cash used for investing activities from continuing operations of $245.3 million in the comparable period of 2020.

The increase in cash provided by investing activities from continuing operations was driven by the absence of cash paid for the acquisition of I&S of $169.2 million.

In addition, there was $30 million of net proceeds from the sale of marketable securities in the first nine months of 2021 compared to $60 million of cash used for the purchase of marketable securities in the first nine months of 2020.

Cash flows relating to investing activities from continuing operations consist primarily of cash used for capital expenditures.

Cash used for investing activities from continuing operations was $12.5 million in the first three months of 2022, compared to cash provided by investing activities from continuing operations of $29.8 million in the comparable period of 2021.

The increase in cash used was primarily related to $20 million of net proceeds from the sale of marketable securities and $14.5 million of proceeds from the disposition of capital assets during the first three months of 2021, both of which did not repeat in the first quarter of 2022.

These were partially offset by a $7.8 million increase in capital expenditures.

Capital expenditures are made primarily for increasing capacity, replacing equipment, supporting new product development and improving information systems.

2 unchanged sentences

Financing Activities

Financing cash flows consist primarily of dividend payments to shareholders, share repurchases, repayments of indebtedness, proceeds from the issuance of long-term debt and commercial paper and proceeds from the issuance of common stock.

Cash used for financing activities from continuing operations was $440.8 million during the first nine months of 2021, compared to cash provided by financing activities from continuing operations of $187.3 million in the comparable period of 2020.

The increase in cash used for financing activities from continuing operations was driven by the $348.1 million repayment of the outstanding amount under the 364-Day Credit Agreement in the first nine months of 2021, compared to proceeds of $343.9 million received from the same 364-Day Credit Agreement in the first nine months of 2020.

This was partially offset by the absence of $70.0 million of cash used for the repurchase of shares in the first nine months of 2020.

Financing cash flows consist primarily of dividend payments to shareholders, share repurchases and repayments of indebtedness, proceeds from the issuance of long-term debt and commercial paper and proceeds from the issuance of common stock.

Cash used for financing activities from continuing operations was $97.8 million during the first three months of 2022, compared to $44.8 million in the comparable period of 2021.

The increase in cash used for financing activities from continuing operations was driven by $175.8 million of share repurchases, partially offset by $104.0 million of net borrowings from the issuance of commercial paper.

Recent Accounting Pronouncements

3 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis