Crane NXT, 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 Holdings, Co., 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 Holdings, Co. 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. In addition, we have based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. There are a number of other factors, including risks and uncertainties related to the ongoing COVID-19 pandemic, that could cause actual results or outcomes to differ materially from those expressed or implied in the forward-looking statements. Such factors also include, among others: 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 successfully complete our pending separation as planned; being unable to identify or complete acquisitions, or to successfully integrate the businesses we acquire, or complete dispositions; 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; 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. Holding Company Reorganization On May 16, 2022, Crane Co., a Delaware corporation (“Crane Co.”), completed its previously announced reorganization merger pursuant to the Agreement and Plan of Merger, dated as of February 28, 2022 (the “Reorganization Agreement”), by and among Crane Co., Crane Holdings, Co., a Delaware corporation (“Crane Holdings”), and Crane Transaction Company, LLC, a Delaware limited liability company and, as of immediately prior to the consummation of such merger, a wholly-owned subsidiary of Crane Holdings (“Merger Sub”). The Reorganization Agreement provided for the merger of Crane Co. and Merger Sub, with Crane Co. surviving the merger as a wholly-owned subsidiary of Crane Holdings (the “Reorganization Merger”). Following the Reorganization Merger, on May 16, 2022, Crane Co. (which, as a result of the Reorganization Merger, became a wholly-owned subsidiary of Crane Holdings) converted from a Delaware corporation into a Delaware limited liability company named “Crane LLC” (such conversion, together with the Reorganization Merger, the “Reorganization”). Following the Reorganization, substantially all of the assets of Crane LLC were distributed, assigned, transferred, conveyed and delivered to, and related liabilities of Crane LLC were assumed by, Crane Holdings. On May 17, 2022, Crane LLC converted from a Delaware limited liability company to a Delaware corporation named “Crane Co.” Subsequently, on May 26, 2022, Crane Co. filed a 29 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certificate of Amendment to its Certificate of Incorporation (the “Certificate of Amendment”) with the Secretary of State of the State of Delaware, which became effective upon filing, pursuant to which the Company officially changed its name from “Crane Co.” to “Redco Corporation.” The “Crane Co.” name has been reserved for future use by Crane Holdings. Pending Separation On March 30, 2022, the Company 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 the Company’s Board of Directors. 30 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OUTLOOK Overall 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. As we exited 2021 and through the first half of 2022, we have experienced supply chain disruptions impacting timely access to certain components and raw materials, as well as significant inflationary pressure across most businesses; in response, we have initiated pricing actions throughout the first half to ensure we cover the higher costs and protect our margin profile. For 2022, we expect a total year-over-year sales decline of approximately 1% to 2%, driven by a 4% unfavorable impact from the divestiture of Crane Supply and a 2.5% to 3% impact from unfavorable foreign exchange, partially offset by approximately 5% to 6% core growth. On a year-to-date basis through June 30 2022, stronger pricing has been the primary contributor to our core growth across most businesses. We continue to expect higher pricing on a full-year basis to approximately offset the impact of inflation. We expect a slight improvement in operating profit driven primarily by the impact of core growth, net of inflation, productivity benefits, both partially offset by higher transaction and repositioning related costs, the impact of the Crane Supply divestiture, and unfavorable mix. Aerospace & Electronics In 2022, we expect Aerospace & Electronics core sales to increase in the high-single digit range as compared to 2021, driven by both higher volumes and 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 business to decline given material availability challenges, and difficult 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, price and strong productivity, partially offset by unfavorable mix. Process Flow Technologies In 2022, we expect Process Flow Technologies sales to decrease approximately 10% driven by an unfavorable 11.5% impact from the divestiture of Crane Supply and a low- to mid-single digit impact from unfavorable foreign exchange, partially offset by mid-single digit core growth. We expect stronger pricing to offset inflationary pressures. We expect Process Valves and Related Products sales to be approximately flat compared to 2021, with mid-single digit core sales growth approximately offset by a mid-single digit impact from unfavorable foreign exchange. We expect Commercial Valves sales to decline substantially driven primarily by the impact of the Crane Supply divestiture, and to a lesser extent, the impact of 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. end markets. We expect a mid-single digit decline in the segment’s operating profit as compared to 2021, driven primarily by the impact of the Crane Supply divestiture, as well as transaction and repositioning costs, largely offset by core growth, inclusive of higher pricing, as well as strong productivity. Payment & Merchandising Technologies In 2022, we expect Payment & Merchandising Technologies sales to increase in the low-single digit range as compared to 2021, driven by mid-single digit core sales growth, partially offset by a low- to mid-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 mid-teens 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 to the low-double 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 modestly higher compared to 2021, with the impact of core growth inclusive of higher prices, together with strong productivity, to be approximately offset by inflationary pressures and unfavorable sales mix. 31 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Engineered Materials In 2022, we expect Engineered Materials sales to increase in the mid-single digit range as compared to 2021, driven by mid-single digit core growth which includes notable pricing gains to offset the impact of inflation. We expect the core growth to be driven primarily by higher sales to recreational vehicle and building product customers. We expect the segment’s operating profit to increase in the mid-teens range driven primarily by higher pricing. 32 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results from Operations – Three Month Periods Ended June 30, The following information should be read in conjunction with our condensed consolidated financial statements and related notes. All comparisons below refer to the second quarter 2022 versus the second quarter 2021, unless otherwise specified. Second Quarter Change (dollars in millions) 2022 2021 $ % Net sales $ 864.3 $ 855.5 $ 8.8 1.0 % Cost of sales 535.7 523.5 12.2 2.3 % as a percentage of sales 62.0 % 61.2 % Selling, general and administrative 204.2 187.4 16.8 9.0 % as a percentage of sales 23.6 % 21.9 % Operating profit 124.4 144.6 (20.2) (14.0) % Operating margin 14.4 % 16.9 % Other income (expense): Interest income 0.6 0.4 0.2 50.0 % Interest expense (11.4) (11.4) — — % Gain on sale of business 228.7 — 228.7 NM Miscellaneous income, net 14.8 9.7 5.1 52.6 % Total other income (expense) 232.7 (1.3) 234.0 NM Income before income taxes 357.1 143.3 213.8 149.2 % Provision for income taxes 98.9 5.0 93.9 NM Net income attributable to common shareholders $ 258.2 $ 138.3 $ 119.9 86.7 % Sales increased by $8.8 million, or 1.0%, to $864.3 million in 2022. Net sales related to operations outside the United States were 33.3% and 36.6% of total net sales for the quarters ended June 30, 2022, and 2021, respectively. The year-over-year change in sales included: • an increase in core sales of $60.3 million, or 7.1%, which was primarily comprised of higher pricing; • unfavorable foreign currency translation of $29.7 million, or 3.5%; and • a decrease in sales of $21.8 million, or 2.5%, related to the sale of Crane Supply. Cost of sales increased by $12.2 million, or 2.3% to $535.7 million in 2022. The increase is primarily related to an increase in material, labor and other manufacturing costs of $57.3 million, or 10.9%, partially offset by favorable foreign currency translation of $19.7 million, or 3.8%, productivity gains of $13.8 million, or 2.6%, and lower volumes of $12.4 million, or 2.4%. Selling general and administrative expenses increased by $16.8 million or 9.0%, to $204.2 million in 2022. The increase was driven primarily by higher transaction related expenses of $16.4 million, or 8.8%, and an increase in selling costs of $4.2 million, or 2.3% , partially offset by favorable foreign currency translation of $6.0 million, or 3.2%. Operating profit decreased by $20.2 million, or 14.0%, to $124.4 million in 2022. The decrease in operating profit is related to higher transaction related expenses of $19.6 million, or 13.6%, and unfavorable mix of $16.1 million, or 11.1%, partially offset by productivity gains of $16.0 million, or 11.1%. Other income increased $234.0 million to $232.7 million, related to the gain on the sale of the Crane Supply business of $228.7 million. Our effective tax rate for the three months ended June 30, 2022, is higher than the prior year’s comparable periods primarily due to the reversal of a deferred tax asset established in the prior period that relates to the sale of a subsidiary, partially offset by earnings in jurisdictions with statutory tax rates lower than the United States. Our effective tax rate for the three months ended June 30, 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 United States, expenses that are statutorily 33 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 June 30, (in millions) 2022 2021 Net income before allocation to noncontrolling interests $ 258.2 $ 138.3 Components of other comprehensive income, net of tax Currency translation adjustment (75.9) 7.6 Changes in pension and postretirement plan assets and benefit obligation, net of tax 3.5 5.2 Other comprehensive income, net of tax (72.4) 12.8 Comprehensive income before allocation to noncontrolling interests 185.8 151.1 Less: Noncontrolling interests in comprehensive income (0.1) (0.1) Comprehensive income attributable to common shareholders $ 185.9 $ 151.2 For the three months ended June 30, 2022, comprehensive income before allocations to noncontrolling interests was $185.8 million compared to $151.1 million in the same period of 2021. The $34.7 million increase was driven by higher net income before allocation to noncontrolling interests of $119.9 million, partially offset by an $83.5 million year-over-year unfavorable impact of foreign currency translation adjustments, primarily related to the British pound and Canadian dollar. 34 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Segment Results of Operations - Three Month Periods Ended June 30, Aerospace & Electronics Second Quarter Change (dollars in millions) 2022 2021 $ % Net sales by product line: Commercial Original Equipment $ 60.6 $ 53.7 $ 6.9 12.8 % Military Original Equipment 57.1 62.8 (5.7) (9.1) % Commercial Aftermarket Products 29.0 25.3 3.7 14.6 % Military Aftermarket Products 14.8 15.7 (0.9) (5.7) % Total net sales $ 161.5 $ 157.5 $ 4.0 2.5 % Cost of sales $ 101.2 $ 96.6 $ 4.6 4.8 % as a percentage of sales 62.7 % 61.3 % Selling, general and administrative $ 32.1 $ 30.1 $ 2.0 6.6 % as a percentage of sales 19.9 % 19.1 % Operating profit $ 28.2 $ 30.8 $ (2.6) (8.4) % Operating margin 17.5 % 19.6 % Supplemental Data: Backlog $ 534.4 $ 472.9 $ 61.5 13.0 % Sales increased $4.0 million, or 2.5%, to $161.5 million in 2022. • Sales of Commercial Original Equipment increased $6.9 million, or 12.8%, to $60.6 million in 2022, reflecting strong demand from aircraft manufacturers as the industry aircraft build rates continue to recover from the COVID-19 related slowdown. • Sales of Military Original Equipment decreased $5.7 million, or 9.1%, to $57.1 million in 2022, primarily reflecting lower shipments due to order timing and material availability. • Sales of Commercial Aftermarket Products increased $3.7 million, or 14.6%, to $29.0 million in 2022, reflecting continued strong 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 $0.9 million, or 5.7%, to $14.8 million in 2022, primarily reflecting timing of government orders for certain programs. Cost of sales increased by $4.6 million, or 4.8%, to $101.2 million in 2022, primarily reflecting $6.8 million, or 7.0%, of increased material, labor and other manufacturing costs, offset by $3.1 million, or 3.2%, of productivity gains. Selling, general and administrative expense increased by $2.0 million, or 6.6%, to $32.1 million in 2022, primarily reflecting an increase of $1.5 million, or 5.0%, in engineering costs. Operating profit decreased by $2.6 million, or 8.4%, to $28.2 million in 2022, primarily reflecting unfavorable mix of $1.8 million, or 5.8%. Higher pricing offset higher material, labor, and other manufacturing costs. 35 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Process Flow Technologies Second Quarter Change (dollars in millions) 2022 2021 $ % Net sales by product line: Process Valves and Related Products $ 186.7 $ 184.3 $ 2.4 1.3 % Commercial Valves 77.2 98.2 (21.0) (21.4) % Pumps and Systems 32.1 28.2 3.9 13.8 % Total net sales $ 296.0 $ 310.7 $ (14.7) (4.7) % Cost of sales $ 191.2 $ 205.3 $ (14.1) (6.9) % as a percentage of sales 64.6 % 66.1 % Selling, general and administrative $ 64.2 $ 58.9 $ 5.3 9.0 % as a percentage of sales 21.7 % 19.0 % Operating profit $ 40.6 $ 46.5 $ (5.9) (12.7) % Operating margin 13.7 % 15.0 % Supplemental Data: Backlog $ 348.6 $ 344.1 $ 4.5 1.3 % Sales decreased by $14.7 million, or 4.7%, to $296.0 million in 2022, driven by a $21.8 million, or 7.0%, impact from the sale of Crane Supply and $12.4 million, or 4.0%, of unfavorable foreign currency translation, partially offset by core sales growth of $19.4 million, or 6.2%. • Sales of Process Valves and Related Products increased by $2.4 million, or 1.3%, to $186.7 million in 2022, reflecting an increase in core sales of $9.8 million, or 5.3%, partially offset by unfavorable foreign currency translation of $7.5 million, or 4.1%, primarily due to the euro weakening against the U.S. dollar. The higher core sales reflected continued solid demand across end markets together with higher pricing. • Sales of Commercial Valves decreased by $21.0 million, or 21.4%, to $77.2 million in 2022, primarily driven by the impact of the divestiture of Crane Supply of $21.8 million, or 22.2%, and unfavorable foreign currency translation of $4.8 million, or 4.9%, as the British pound weakened against the U.S. dollar. These decreases were partially offset by higher core sales of $5.6 million, or 5.7%, reflecting improvement in demand in Canadian non-residential construction markets and, to a lesser extent, the U.K. non-residential construction markets, and higher pricing. • Sales of Pumps & Systems increased by $3.9 million, or 13.8%, to $32.1 million in 2022, reflecting higher demand from municipal and non-residential construction end markets and higher pricing. Cost of sales decreased by $14.1 million, or 6.9%, to $191.2 million, primarily related to the impact of the sale of Crane Supply of $16.2 million, or 8.0%, favorable foreign currency of $7.9 million, or 3.9%, and productivity benefits of $4.5 million, or 2.2%, partially offset by a $15.8 million, or 7.7%, increase in material, labor and other manufacturing costs. Selling, general and administrative expense increased by $5.3 million, or 9.0%, to $64.2 million primarily reflecting an increase of $5.2 million, or 8.9%, in administrative costs consisting primarily of transaction related expenses, and $2.0 million, or 3.4%, in engineering and selling costs, partially offset by favorable foreign currency translation of $3.0 million, or 5.1%. Operating profit decreas ed by $5.9 million, or 12.7%, to $40.6 million in 2022. The decrease primarily reflected a $3.8 million, or 8.2%, impact from the sale of Crane Supply, and a $3.1 million, or 6.7%, impact from unfavorable mix. Higher pricing offset the impact of higher material, labor, and other manufacturing costs. 36 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Payment & Merchandising Technologies Second Quarter Change (dollars in millions) 2022 2021 $ % Net sales by product line: Payment Acceptance and Dispensing Products $ 211.4 $ 197.3 $ 14.1 7.1 % Banknotes and Security Products 122.6 130.9 (8.3) (6.3) % Total net sales $ 334.0 $ 328.2 $ 5.8 1.8 % Cost of sales $ 182.8 $ 174.9 $ 7.9 4.5 % as a percentage of sales 54.7 % 53.3 % Selling, general and administrative $ 70.5 $ 75.4 $ (4.9) (6.5) % as a percentage of sales 21.1 % 23.0 % Operating profit $ 80.7 $ 77.9 $ 2.8 3.6 % Operating margin 24.2 % 23.7 % Supplemental Data: Backlog $ 482.0 $ 374.7 $ 107.3 28.6 % Sales increased $5.8 million, or 1.8%, to $334.0 million in 2022, driven by higher core sales of $22.8 million, or 6.9%, partially offset by unfavorable foreign currency translation of $16.9 million, or 5.1%. • Sales of Payment Acceptance and Dispensing Products increased $14.1 million, or 7.1%, to $211.4 million in 2022. The increase reflected higher core sales of $22.5 million, or 11.4%, partially offset by unfavorable foreign currency translation of $8.4 million, or 4.3%, primarily due to the British pound and Japanese yen weakening against the U.S. dollar. The core sales increase primarily reflected higher sales to gaming and vending customers together with higher pricing. • Sales of Banknotes and Security Products decreased $8.3 million, or 6.3%, to $122.6 million in 2022. The decrease primarily related to unfavorable foreign currency translation of $8.5 million, or 6.5%, as the euro weakened against the U.S. dollar. Cost of sales increased by $7.9 million, or 4.5%, to $182.8 million primarily related to an increase in material, labor and other manufacturing costs of $23.2 million, or 13.3%, unfavorable mix of $10.8 million, or 6.2%, partially offset by favorable foreign currency translation of $11.6 million, or 6.6%, lower costs of $8.6 million, or 4.9 %, due to lower volumes, and higher productivity of $5.7 million, or 3.3%. Selling, general and administrative expense decreased by $4.9 million, or 6.5%, to $70.5 million primarily reflecting favorable foreign currency translation, and productivity, of $3.8 million, or 5.0%. Operating profit increased by $2.8 million, or 3.6%, to $80.7 million in 2022. The increase primarily reflected higher pricing net of inflation, and productivity gains, of $21.6 million, or 27.7 %, partially offset by unfavorable mix of $10.8 million, or 13.9%, and lower volumes of $5.4 million, or 6.9%, and unfavorable foreign currency translation of $2.4 million, or 3.0%. 37 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Engineered Materials Second Quarter Change (dollars in millions) 2022 2021 $ % Net sales by product line: FRP - Recreational Vehicles $ 32.2 $ 24.8 $ 7.4 29.8 % FRP - Building Products 31.8 26.5 5.3 20.0 % FRP - Transportation 8.8 7.8 1.0 12.8 % Total net sales $ 72.8 $ 59.1 $ 13.7 23.2 % Cost of sales $ 60.6 $ 46.7 $ 13.9 29.8 % as a percentage of sales 83.2 % 79.0 % Selling, general and administrative $ 4.9 $ 4.7 $ 0.2 4.3 % as a percentage of sales 6.7 % 8.0 % Operating profit $ 7.3 $ 7.7 $ (0.4) (5.2) % Operating margin 10.0 % 13.0 % Supplemental Data: Backlog $ 22.0 $ 17.6 $ 4.4 25.0 % Sales increased $13.7 million, or 23.2%, to $72.8 million in 2022. The increase reflected higher sales to recreational vehicle manufacturers, building products customers and, to a lesser extent, transportation customers. Cost of sales increased $13.9 million, or 29.8%, to $60.6 million in 2022, related primarily to higher raw material costs and, to a lesser extent, higher labor, and other manufacturing costs. Operating profit decreased by $0.4 million, or 5.2%, to $7.3 million in 2022, primarily reflecting higher pricing net of inflation, and productivity gains, of $1.1 million or 14.3%, partially offset by unfavorable mix of $0.5 million, or 6.5%. 38 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results from Operations – Six Month Periods Ended June 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 six months of 2022 versus the first six months of 2021, unless otherwise specified. Year-to-Date Change (dollars in millions) 2022 2021 $ % Net sales $ 1,735.7 $ 1,688.9 $ 46.8 2.8 % Cost of sales 1,061.8 1,037.0 24.8 2.4 % as a percentage of sales 61.2 % 61.4 % Selling, general and administrative 1 402.5 360.9 41.6 11.5 % as a percentage of sales 23.2 % 21.4 % Operating profit 271.4 291.0 (19.6) (6.7) % Operating margin 15.6 % 17.2 % Other income (expense): Interest income 0.9 0.9 — — % Interest expense (22.5) (25.0) 2.5 10.0 % Gain on sale of business 228.7 — 228.7 NM Miscellaneous income, net 18.3 13.6 4.7 34.6 % Total other income (expense) 225.4 (10.5) 235.9 NM Income before income taxes 496.8 280.5 216.3 77.1 % Provision for income taxes 133.6 33.8 99.8 295.3 % Net income attributable to common shareholders $ 363.2 $ 246.7 $ 116.5 47.2 % 1 2021 includes restructuring gains of $13.3 million Sales increased by $46.8 million, or 2.8%, to $1,735.7 million in 2022. Net sales related to operations outside the United States were 34.8% and 37.2% of total net sales for the six months ended June 30, 2022 and 2021, respectively. The year-over-year change in sales included: • an increase in core sales of $112.2 million, or 6.6%; • unfavorable foreign currency translation of $43.6 million, or 2.6%; and • a decrease in sales of $21.8 million, or 1.3%, related to the sale of Crane Supply. Cost of sales increased by $24.8 million, or 2.4%, to $1,061.8 million in 2022. The increase is primarily related to an increase in material, labor and other manufacturing costs of $91.3 million, or 8.8%, and unfavorable mix of $18.2 million, or 1.8%, partially offset by productivity gains of $29.0 million, or 2.8%, and favorable foreign currency translation of $28.5 million, or 2.7%, impact of the sale of Crane Supply of $16.2 million, or 1.6%, and lower volumes of $10.4 million, or 1.0%. Selling general and administrative expenses increased by $41.6 million, or 11.5%, to $402.5 million in 2022. The increase was driven primarily by higher transaction related and other expenses of $22.4 million, or 6.2%, increased engineering and selling costs of $18.9 million, or 5.2%, and the absence of restructuring gains in 2021 of $13.3 million which did not repeat in 2022, partially offset by favorable foreign currency translation of $8.6 million, or 2.4%, and productivity gains of $4.1 million, or 1.1%. Operating profit decreased by $19.6 million, or 6.7%, to $271.4 million in 2022. The decrease in operating profit reflected higher transaction costs of $25.6 million, or 8.9%, unfavorable mix of $18.2 million, or 6.3%, and the absence of a restructuring gain from 2021 of $13.3 million, or 4.6%, partially offset by productivity gains and restructuring savings of $36.7 million, or 12.6%. Incremental pricing offset the impact of continued inflation. Other income increased $235.9 million to $225.4 million reflecting the gain on the sale of the Crane Supply business of $228.7 million. 39 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 rates for the six months ended June 30, 2022, is higher than the prior year’s comparable periods primarily due to the reversal of a deferred tax asset established in the prior period that relates to the sale of a subsidiary, partially offset by earnings in jurisdictions with statutory tax rates lower than the United States. Our effective tax rate for the six months ended June 30, 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 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. Comprehensive Income Six Months Ended June 30, (in millions) 2022 2021 Net income before allocation to noncontrolling interests $ 363.2 $ 246.7 Components of other comprehensive income (loss), net of tax Currency translation adjustment (97.5) (27.3) Changes in pension and postretirement plan assets and benefit obligation, net of tax 6.8 10.1 Other comprehensive loss, net of tax (90.7) (17.2) Comprehensive income before allocation to noncontrolling interests 272.5 229.5 Less: Noncontrolling interests in comprehensive income — 0.7 Comprehensive income attributable to common shareholders $ 272.5 $ 228.8 For the six months ended June 30, 2022, comprehensive income before allocations to noncontrolling interests was $272.5 million compared to $229.5 million in the same period of 2021. The $43.0 million increase was primarily driven by higher net income before allocation to noncontrolling interests of $116.5 million, partially offset by a $70.2 million year over year unfavorable impact of foreign currency translation adjustments primarily related to the British pound and Canadian dollar. 40 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Segment Results of Operations - Six Month Periods Ended June 30, Aerospace & Electronics Year-to-Date Change (dollars in millions) 2022 2021 $ % Net sales by product line: Commercial Original Equipment $ 119.2 $ 108.3 $ 10.9 10.1 % Military Original Equipment 114.4 125.6 (11.2) (8.9) % Commercial Aftermarket Products 57.7 44.8 12.9 28.8 % Military Aftermarket Products 27.3 32.8 (5.5) (16.8) % Total net sales $ 318.6 $ 311.5 $ 7.1 2.3 % Cost of sales $ 198.6 $ 195.9 $ 2.7 1.4 % as a percentage of sales 62.3 % 62.9 % Selling, general and administrative $ 63.8 $ 58.8 $ 5.0 8.5 % as a percentage of sales 20.0 % 18.9 % Operating profit $ 56.2 $ 56.8 $ (0.6) (1.1) % Operating margin 17.6 % 18.2 % Sales increased $7.1 million, or 2.3%, to $318.6 million in 2022. • Sales of Commercial Original Equipment increased $10.9 million, or 10.1%, to $119.2 million in 2022, reflecting strong demand from aircraft manufacturers as the industry aircraft build rates continue to recover from the COVID-19 related slowdown. • Sales of Military Original Equipment decreased $11.2 million, or 8.9%, to $114.4 million in 2022, primarily reflecting lower shipments due to order timing and material availability. • Sales of Commercial Aftermarket Products increased $12.9 million, or 28.8%, to $57.7 million in 2022, reflecting strong 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 $5.5 million, or 16.8%, to $27.3 million in 2022, primarily reflecting timing of government orders for certain programs. Cost of sales increased by $2.7 million, or 1.4%, to $198.6 million in 2022, primarily reflecting $14.4 million, or 7.4%, of increased material, labor and other manufacturing costs, partially offset by $6.6 million, or 3.4%, of productivity gains and favorable mix of $3.4 million, or 1.7%. Selling, general and administrative expense increased by $5.0 million, or 8.5%, to $63.8 million in 2022, primarily reflecting continued increases in engineering investments and higher selling costs. Operating profit decreased by $0.6 million, or 1.1%, to $56.2 million in 2022, primarily reflecting higher costs partially offset by higher pricing and productivity. 41 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Process Flow Technologies Year-to-Date Change (dollars in millions) 2022 2021 $ % Net sales by product line: Process Valves and Related Products $ 369.6 $ 358.6 $ 11.0 3.1 % Commercial Valves 175.4 187.7 (12.3) (6.6) % Pumps and Systems 62.4 52.5 9.9 18.9 % Total net sales $ 607.4 $ 598.8 $ 8.6 1.4 % Cost of sales $ 388.1 $ 396.1 $ (8.0) (2.0) % as a percentage of sales 63.9 % 66.1 % Selling, general and administrative 1 $ 129.7 $ 106.1 $ 23.6 22.2 % as a percentage of sales 21.4 % 17.7 % Operating profit $ 89.6 $ 96.6 $ (7.0) (7.2) % Operating margin 14.8 % 16.1 % 1 2021 includes net restructuring gains of $12.6 million Sales increased by $8.6 million, or 1.4%, to $607.4 million in 2022, driven by higher core sales of $47.7 million, or 8.0%, partially offset by the impact of the sale of Crane Supply of $21.8 million, or 3.6%, and unfavorable foreign currency translation of $17.2 million, or 2.9%. • Sales of Process Valves and Related Products increased by $11.0 million, or 3.1%, to $369.6 million in 2022. The increase reflected higher core sales of $22.4 million, or 6.2%, offset by unfavorable foreign currency translation of $11.4 million, or 3.2%, primarily due to the Euro weakening against the U.S. dollar. The higher core sales primarily reflected broad based demand across end markets that continue to recover from the impact of COVID-19 together with higher pricing. • Sales of Commercial Valves decreased by $12.3 million, or 6.6%, to $175.4 million in 2022, primarily driven by the impact of the divestiture of Crane Supply of $21.8 million, or 11.6%, and unfavorable foreign currency translation of $5.7 million, or 3.0%, as the British pound and Canadian dollar weakened against the U.S. dollar, partially offset by an increase in core sales of $15.2 million, or 8.1%. The higher core sales primarily reflected higher demand in Canadian and, to a lesser extent, U.K., non-residential construction markets and higher pricing. • Sales of Pumps & Systems increased by $9.9 million, or 18.9%, to $62.4 million in 2022, primarily reflecting higher demand from municipal and non-residential construction end markets and higher pricing. Cost of sales decreased by $8.0 million, or 2.0%, to $388.1 million, primarily related to the impact of the sale of Crane Supply of $16.2 million, or 4.1%, and favorable foreign currency of $10.8 million, or 2.7%, partially offset by a $19.5 million, or 5.0%, increase in material, labor and other manufacturing costs. Selling, general and administrative expense increased by $23.6 million, or 22.2%, to $129.7 million primarily reflecting the absence of a prior year net restructuring gain of $12.6 million, or 11.9 %, higher engineering and selling costs of $6.9 million, or 6.5%, and higher transaction costs of $4.2 million, or 4.0%. Operating profit decreased by $7.0 million, or 7.2%, to $89.6 million in 2022, primarily reflecting the impact of the divestiture of Crane Supply of $3.8 million, or 3.9%, and unfavorable mix of $4.9 million, or 5.1%. Strong productivity substantially offset the unfavorable comparison related to the prior year restructuring gain. 42 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Payment & Merchandising Technologies Year-to-Date Change (dollars in millions) 2022 2021 $ % Net sales by product line: Payment Acceptance and Dispensing Products $ 422.4 $ 382.3 $ 40.1 10.5 % Banknotes and Security Products 244.2 283.3 (39.1) (13.8) % Total net sales $ 666.6 $ 665.6 $ 1.0 0.2 % Cost of sales $ 361.9 $ 355.2 $ 6.7 1.9 % as a percentage of sales 54.3 % 53.4 % Selling, general and administrative $ 139.8 $ 146.7 $ (6.9) (4.7) % as a percentage of sales 21.0 % 22.0 % Operating profit $ 164.9 $ 163.7 $ 1.2 0.7 % Operating margin 24.7 % 24.6 % Sales increased $1.0 million, or 0.2%, to $666.6 million in 2022, driven by higher core sales of $26.8 million, or 4.0%, offset by unfavorable foreign currency translation of $25.7 million, or 3.9%. • Sales of Payment Acceptance and Dispensing Products increased $40.1 million, or 10.5%, to $422.4 million in 2022. The increase reflected higher core sales of $51.7 million, or 13.4%, offset by unfavorable foreign currency translation of $11.6 million, or 3.0%, primarily reflecting the weakening of the British pound and Japanese Yen against the U.S. dollar. The core sales increase primarily reflected higher sales to gaming and vending customers, including higher pricing. • Sales of Banknotes and Security Products decreased $39.1 million, or 13.8%, to $244.2 million in 2022. The decrease reflected lower core sales of $25.0 million, or 8.8%, and unfavorable foreign currency translation of $14.1 million, or 5.0%, as the euro weakened against the U.S. dollar. The core sales decrease reflected lower sales to both international customers and the U.S. Government. Cost of sales increased by $6.7 million, or 1.9%, to $361.9 million primarily related to an increase in material, labor and other manufacturing costs of $36.4 million, or 10.2%, unfavorable mix of $14.9 million, or 4.2%, partially offset by favorable foreign currency translation of $17.5 million, or 4.9%, lower costs of $14.4 million, or 4.1 %, due to lower volumes, and productivity gains of $12.8 million, or 3.6%. Selling, general and administrative expense decreased by $6.9 million, or 4.7%, to $139.8 million primarily reflecting lower administrative costs. Operating profit increased by $1.2 million, or 0.7%, to $164.9 million in 2022. The increase primarily reflected higher pricing net of inflation, and productivity, of $37.4 million, or 22.8%, partially offset by lower volumes of $16.6 million, or 10.1%, unfavorable mix of $14.9 million, or 9.1%, and unfavorable foreign currency translation of $4.2 million, or 2.6%. 43 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Engineered Materials Year-to-Date Change (dollars in millions) 2022 2021 $ % Net sales by product line: FRP - Recreational Vehicles $ 67.9 $ 49.1 $ 18.8 38.3 % FRP - Building Products 59.2 48.3 10.9 22.6 % FRP - Transportation 16.0 15.6 0.4 2.6 % Total net sales $ 143.1 $ 113.0 $ 30.1 26.6 % Cost of sales $ 113.3 $ 89.7 $ 23.6 26.3 % as a percentage of sales 79.2 % 79.4 % Selling, general and administrative $ 9.6 $ 9.2 $ 0.4 4.3 % as a percentage of sales 6.7 % 8.1 % Operating profit $ 20.2 $ 14.1 $ 6.1 43.3 % Operating margin 14.1 % 12.5 % Sales increased by $30.1 million, or 26.6%, to $143.1 million in 2022. The increase reflected higher sales to recreational vehicle manufacturers and building products customers. Cost of sales increased by $23.6 million, or 26.3%, related primarily to higher raw material costs of $24.0 million, or 26.7%, and unfavorable mix of $1.8 million, or 2.0%, partially offset by productivity. Operating profit increased by $6.1 million, or 43.3%, to $20.2 million in 2022, primarily reflecting higher pricing net of inflation, and productivity, of $9.3 million, or 65.9%, offset by the impact of unfavorable mix of $1.8 million, or 12.8%. 44 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources Six Months Ended June 30, (in millions) 2022 2021 Net cash provided by (used for): Operating activities $ 49.0 $ 206.7 Investing activities 289.2 38.7 Financing activities (135.6) (405.2) Effect of exchange rates on cash and cash equivalents (30.6) (4.5) Increase (decrease) in cash and cash equivalents $ 172.0 $ (164.3) 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 along with our commercial paper program or borrowings 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 payments associated with our asbestos and environmental liabilities and expected pension contributions. In addition, we believe our investment grade credit ratings afford us adequate access to public and private debt markets. In July 2021, we entered a $650 million, 5-year Revolving Credit Agreement, which replaced the existing $550 million revolving credit facility. We also increased the size of our Commercial Paper Program (“CP Program”) to permit the issuance of short-term, unsecured commercial paper notes in an aggregate principal amount outstanding not to exceed $650 million at any time (up from $550 million, previously). Please see Note 11 for additional details. In April 2020, to enhance financial flexibility and maintain maximum liquidity in response to the uncertainty in the global markets resulting from the COVID-19 pandemic, we entered a senior unsecured 364-day credit facility (the “364-Day Credit Agreement”). On April 15, 2021, we repaid the amount outstanding under the 364-Day Credit Agreement. Operating Activities Cash provided by operating activities was $49.0 million in the first six months of 2022, as compared to $206.7 million during the same period last year. The decrease in cash provided by operating activities was primarily driven by increased working capital investments supporting higher levels of demand across most businesses, together with higher tax payments in the first half of 2022. Net asbestos-related payments for the first six months of 2022 and 2021 were $23.4 million and $20.2 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 consist primarily of cash used for acquisitions and capital expenditures, and cash provided by divestitures of businesses or assets. Cash provided by investing activities was $289.2 million in the first six months of 2022, as compared to $38.7 million in the comparable period of 2021. The increase in cash provided from investing activities was primarily related to proceeds from the sale of Crane Supply of $314.3 million. Capital expenditures are made primarily for increasing capacity, replacing equipment, supporting new product development, and improving information systems. We expect capital expenditures of approximately $60 million in 2022. Financing Activities 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 was $135.6 million during the first six months of 2022, compared to $405.2 million in the comparable period of 2021. The decrease in cash used for financing activities was driven by the repayment of the term loan of $348.1 million in 2021 which did not repeat in 2022. In 2022, we also had $203.7 million of share repurchases, partially offset by a $104.4 million increase in net borrowings from the issuance of commercial paper. 45 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Recent Accounting Pronouncements Information regarding new accounting pronouncements is included in Note 1 to our Condensed Consolidated Financial Statements. 46 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, 2021.