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 operations 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; 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. 28 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 nine months 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 to ensure that 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 3% impact from unfavorable foreign exchange, partially offset by approximately 5% to 6% core growth. On a year-to-date basis through September 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. From a total earnings point of view, we expect a substantial decrease in operating profit driven primarily by the loss on divestiture of asbestos-related assets and liabilities, higher transaction costs related to the separation, lost earnings from the Crane Supply divestiture, and unfavorable mix, partially offset by the impact of core growth, net of inflation and productivity benefits. Aerospace & Electronics In 2022, we expect Aerospace & Electronics core sales to increase in the mid-single digit range as compared to 2021. 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 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 a 12% unfavorable 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 and slightly weaker demand in Europe. 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 and higher 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. At Crane Payment Innovations, we expect core sales growth in the mid-teens range, driven by strength across most 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. 29 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 low-double digit range as compared to 2021, driven by 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 low-teens range driven primarily by higher pricing. 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 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. Divestiture of asbestos-related assets and liabilities On August 12, 2022, Crane Holdings, Co., Crane Company, a wholly-owned subsidiary of Crane Holdings, Co., and Redco Corporation (“Redco”), then a wholly-owned subsidiary of Crane Company that held liabilities including asbestos liabilities and related insurance assets, entered into a Stock Purchase Agreement (the “Redco Purchase Agreement”) with Spruce Lake Liability Management Holdco LLC (“Redco Buyer”), a long-term liability management company specializing in the acquisition and management of legacy corporate liabilities whereby Crane Company transferred to Redco Buyer all of the issued and outstanding shares of Redco (the “Redco Sale”). In connection with the Redco Sale, Crane Holdings, Co., on behalf of Crane Company, contributed approximately $550 million in cash to Redco, which was funded by a combination of short-term borrowings and cash on hand. Concurrent with the completion of the Redco Sale, Redco Buyer contributed $83 million in cash to Redco. Pursuant to the terms of the Redco Purchase Agreement, Crane Company and Redco Buyer will each indemnify the other for breaches of representations and warranties, breaches of covenants and obligations and certain liabilities, subject to the terms of the Redco Purchase Agreement. While indemnification by each of Crane Company and Redco Buyer to the other party for breach of representations and warranties is capped at $83 million, in each case, based on the terms and subject to certain limitations as set forth in the Redco Purchase Agreement, liability of each of Crane Company and Redco Buyer for breaches of covenants and obligations and for indemnified liabilities is generally uncapped. Such covenants and obligations include that Redco has agreed to indemnify Crane Company and its affiliates for all claims arising out of asbestos liabilities, and Crane Company has agreed to indemnify Redco and its affiliates for all other historical liabilities of Redco, which include certain potential environmental liabilities. Crane Holdings, Co. has guaranteed the full payment and performance of Crane Company’s indemnification obligations under the Redco Purchase Agreement. Upon consummation of the previously announced separation transaction pursuant to which, among other things, all outstanding shares of Crane Company will be distributed to Crane Holdings, Co.’s stockholders, Crane Holdings, Co. will be released from its guarantee of Crane Company’s indemnification obligations under the Redco Purchase Agreement. 30 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a summary of the loss on divestiture of asbestos-related assets and liabilities: (in millions) Cash $ (550.0) Current insurance receivable (13.8) Long-term insurance receivable (49.4) Deferred tax asset (107.9) Current asbestos liability 62.5 Long-term asbestos liability 509.7 Loss on divestiture of asbestos-related assets and liabilities, before transaction costs (148.9) Transaction costs (13.5) Loss on divestiture of asbestos-related assets and liabilities $ (162.4) Sale of Crane Supply On April 8, 2022, the Company entered into an agreement to sell the Crane Supply business for CAD 380 million on a cash-free and debt-free basis. Subsequent to net working capital and other closing adjustments, the sale closed on May 31, 2022 for CAD 402 million. In August 2022, the Company received CAD 5 million related to a final working capital adjustment. The Company recognized a total gain on sale of $ 232.5 million. 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 Crane Holdings, Co.’s Board of Directors. 31 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results from Operations – Three 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 third quarter 2022 versus the third quarter 2021, unless otherwise specified. Third Quarter Change (dollars in millions) 2022 2021 $ % Net sales $ 815.1 $ 893.8 $ (78.7) (8.8) % Cost of sales 485.6 556.3 (70.7) (12.7) % as a percentage of sales 59.6 % 62.2 % Selling, general and administrative 198.3 192.7 5.6 2.9 % as a percentage of sales 24.3 % 21.6 % Loss on divestiture of asbestos-related assets and liabilities 162.4 — 162.4 NM Operating (loss) profit (31.2) 144.8 (176.0) (121.5) % Operating margin (3.8) % 16.2 % Other income (expense): Interest income 1.4 0.2 1.2 NM Interest expense (13.5) (11.0) (2.5) (22.7) % Gain on sale of business 3.8 — 3.8 NM Miscellaneous income, net 4.5 3.6 0.9 25.0 % Total other expense (3.8) (7.2) 3.4 NM (Loss) income before income taxes (35.0) 137.6 (172.6) (125.4) % Provision for income taxes 24.3 21.0 3.3 NM Net (loss) income attributable to common shareholders $ (59.3) $ 116.6 $ (175.9) (150.9) % Sales decreased by $78.7 million, or 8.8%, to $815.1 million in 2022. Net sales related to operations outside the United States were 29.3% and 38.1% of total net sales for the quarters ended September 30, 2022, and 2021, respectively. The year-over-year change in sales included: • an increase in core sales of $17.2 million, or 1.9%, which was primarily comprised of higher pricing; • unfavorable foreign currency translation of $36.4 million, or 4.1%; and • a decrease in sales of $59.5 million, or 6.7%, primarily related to the sale of Crane Supply. Cost of sales decreased by $70.7 million, or 12.7%, to $485.6 million in 2022. The decrease is primarily related to the sale of Crane Supply of $43.2 million, or 7.8%, and favorable foreign currency translation of $21.9 million, or 3.9%. Selling general and administrative expenses increased by $5.6 million, or 2.9%, to $198.3 million in 2022 primarily related to an $10.9 million, or 5.7%, increase in transaction related expenses supporting the planned Separation, partially offset by favorable foreign currency translation of $6.8 million, or 3.5%. Operating profit decreased by $176.0 million, to a $31.2 million operating loss in 2022. The decrease in operating profit is primarily related to the loss on divestiture of asbestos-related assets and liabilities of $162.4 million, and the impact of the sale of Crane Supply of $11.3 million. During the third quarter of 2022, the Company completed the divestiture of asbestos-related assets and liabilities and recorded a loss of $162.4M. Based on existing U.S. income tax guidance, the Company did not record an income tax benefit related to this transaction. However, the Company released a valuation allowance previously recorded against certain state deferred tax assets based on available evidence indicating it to be more likely than not the Company will realize a state income tax benefit for certain non-asbestos related future tax deductions. Specifically, the Company considered the impact of the lack of future asbestos settlement and defense payments on state taxable income, projected future state taxable income exclusive of reversing deferred taxes, the Company’s U.S. business resulting net deferred tax liability position after the asbestos-related transaction, and the lack of separate state income tax filings. 32 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The combination of a loss on the asbestos-related transaction and the lack of a related tax benefit resulted in the Company’s negative tax rate for the three months ended September 30, 2022. This negative tax rate represents a tax expense recorded against a book loss. In this context, the Company’s tax rate for the three months ended September 30, 2022, is higher than the prior year’s comparable period primarily due to the absence of a tax benefit recorded against the asbestos-related transaction as well as higher non-U.S. taxes, partially offset by the aforementioned release of valuation allowance and the statutory U.S. deduction related to our non-U.S. subsidiaries’ income. Our effective tax rate for the three months ended September 30, 2022 is higher than the statutory U.S. federal tax rate of 21% primarily due to the absence of a tax benefit recorded against the asbestos-related transaction, 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 the aforementioned release of valuation allowance, 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 Net (loss) income before allocation to noncontrolling interests $ (59.3) $ 116.6 Components of other comprehensive income, net of tax Currency translation adjustment (77.7) (24.8) Changes in pension and postretirement plan assets and benefit obligation, net of tax 2.3 5.2 Other comprehensive loss, net of tax (75.4) (19.6) Comprehensive (loss) income before allocation to noncontrolling interests (134.7) 97.0 Less: Noncontrolling interests in comprehensive income (0.3) (0.1) Comprehensive (loss) income attributable to common shareholders $ (134.4) $ 97.1 For the three months ended September 30, 2022, comprehensive loss before allocation to noncontrolling interests was $134.7 million compared to comprehensive income of $97.0 million in the same period of 2021. The $231.7 million decrease was primarily driven by lower net income before allocation to noncontrolling interests of $175.9 million driven by the loss on the divestiture of asbestos-related assets and liabilities, and a $52.9 million year-over-year unfavorable impact of foreign currency translation adjustments, primarily related to the British pound and euro. 33 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Segment Results of Operations - Three Month Periods Ended September 30, Aerospace & Electronics Third Quarter Change (dollars in millions) 2022 2021 $ % Net sales by product line: Commercial Original Equipment $ 63.7 $ 62.2 $ 1.5 2.4 % Military Original Equipment 57.1 58.4 (1.3) (2.2) % Commercial Aftermarket Products 34.8 30.2 4.6 15.2 % Military Aftermarket Products 11.6 17.8 (6.2) (34.8) % Total net sales $ 167.2 $ 168.6 $ (1.4) (0.8) % Cost of sales $ 106.8 $ 102.3 $ 4.5 4.4 % as a percentage of sales 63.9 % 60.7 % Selling, general and administrative $ 32.2 $ 33.8 $ (1.6) (4.7) % as a percentage of sales 19.3 % 20.0 % Operating profit $ 28.2 $ 32.5 $ (4.3) (13.2) % Operating margin 16.9 % 19.3 % Supplemental Data: Backlog $ 591.6 $ 478.5 $ 113.1 23.6 % Sales decreased $1.4 million, or 0.8%, to $167.2 million in 2022, with higher pricing more than offset by lower volumes. • Sales of Commercial Original Equipment increased $1.5 million, or 2.4%, to $63.7 million in 2022, reflecting strong demand from aircraft manufacturers as the industry aircraft build rates continue to recover from the COVID-19 related slowdown, partially offset by material availability constraints. • Sales of Military Original Equipment decreased $1.3 million, or 2.2%, to $57.1 million in 2022, primarily reflecting lower shipments due to order timing and material availability. • Sales of Commercial Aftermarket Products increased $4.6 million, or 15.2%, to $34.8 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, along with higher pricing. • Sales of Military Aftermarket Products decreased $6.2 million, or 34.8%, to $11.6 million in 2022, primarily reflecting timing of government orders for certain programs. Cost of sales increased by $4.5 million, or 4.4%, to $106.8 million in 2022, primarily reflecting unfavorable mix. Selling, general and administrative expense decreased by $1.6 million, or 4.7%, to $32.2 million in 2022, primarily reflecting a decrease of $2.6 million, or 7.7%, in administrative and engineering costs partially offset by higher selling costs. Operating profit decreased by $4.3 million, or 13.2%, to $28.2 million in 2022, primarily reflecting unfavorable mix of $4.5 million, or 13.8%. Pricing actions and strong productivity approximately offset higher material, labor, and other manufacturing costs. 34 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Process Flow Technologies Third Quarter Change (dollars in millions) 2022 2021 $ % Net sales by product line: Process Valves and Related Products $ 186.2 $ 176.6 $ 9.6 5.4 % Commercial Valves 30.4 95.8 (65.4) (68.3) % Pumps and Systems 33.4 26.7 6.7 25.1 % Total net sales $ 250.0 $ 299.1 $ (49.1) (16.4) % Cost of sales $ 153.0 $ 197.2 $ (44.2) (22.4) % as a percentage of sales 61.2 % 65.9 % Selling, general and administrative $ 55.7 $ 57.6 $ (1.9) (3.3) % as a percentage of sales 22.3 % 19.3 % Operating profit $ 41.3 $ 44.3 $ (3.0) (6.8) % Operating margin 16.5 % 14.8 % Supplemental Data: Backlog $ 353.7 $ 351.4 $ 2.3 0.7 % Sales decreased by $49.1 million, or 16.4%, to $250.0 million in 2022, driven by a $59.5 million, or 19.9%, impact from the sale of Crane Supply and $15.4 million, or 5.1%, of unfavorable foreign currency translation, partially offset by core sales growth of $25.7 million, or 8.6%. Core sales growth was driven by higher pricing, partially offset by slightly lower volumes due to material availability constraints. • Sales of Process Valves and Related Products increased by $9.6 million, or 5.4%, to $186.2 million in 2022, reflecting an increase in core sales driven by higher pricing, partially offset by unfavorable foreign currency translation as the euro weakened against the U.S. dollar. Demand remained generally strong in the Chemical, Pharmaceutical and General Industrial end markets. • Sales of Commercial Valves decreased by $65.4 million, or 68.3%, to $30.4 million in 2022, primarily driven by the impact of the divestiture of Crane Supply of $59.5 million, or 62.1%, and, to a lesser extent, unfavorable foreign currency translation as the British pound weakened against the U.S. dollar. • Sales of Pumps & Systems increased by $6.7 million, or 25.1%, to $33.4 million in 2022, primarily driven by higher sales to municipal customers. Cost of sales decreased by $44.2 million, or 22.4%, to $153.0 million, primarily related to the impact of the sale of Crane Supply of $43.2 million, or 21.9%, increased productivity of $4.0 million, or 2.0%, and favorable foreign currency translation of $9.8 million, or 5.0%, partially offset by increased material, labor and other manufacturing costs of $13.0 million, or 6.6%. Selling, general and administrative expense decreased by $1.9 million, or 3.3%, to $55.7 million primarily related to the sale of Crane Supply of $5.0 million, or 8.7%, and favorable foreign currency translation of $3.3 million, or 5.7%, offset by increased administrative and selling costs of $7.1 million, or 12.3%. Operating profit decreas ed by $3.0 million, or 6.8%, to $41.3 million in 2022. The decrease primarily reflected $11.3 million, or 25.5%, impact from the sale of Crane Supply, and unfavorable foreign currency translation of $2.4 million, or 5.4%, partially offset by higher pricing net of inflation, and productivity gains of $11.7 million, or 26.4%. 35 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Payment & Merchandising Technologies Third Quarter Change (dollars in millions) 2022 2021 $ % Net sales by product line: Payment Acceptance and Dispensing Products $ 220.8 $ 206.0 $ 14.8 7.2 % Banknotes and Security Products 114.3 159.8 (45.5) (28.5) % Total net sales $ 335.1 $ 365.8 $ (30.7) (8.4) % Cost of sales $ 174.9 $ 208.4 $ (33.5) (16.1) % as a percentage of sales 52.2 % 57.0 % Selling, general and administrative $ 73.5 $ 73.7 $ (0.2) (0.3) % as a percentage of sales 21.9 % 20.1 % Operating profit $ 86.7 $ 83.7 $ 3.0 3.6 % Operating margin 25.9 % 22.9 % Supplemental Data: Backlog $ 499.8 $ 387.9 $ 111.9 28.8 % Sales decreased $30.7 million, or 8.4%, to $335.1 million in 2022, driven by unfavorable foreign currency translation of $20.5 million, or 5.6%, and lower core sales of $10.2 million, or 2.8%. The lower core sales reflected lower volumes, largely offset by higher pricing. • Sales of Payment Acceptance and Dispensing Products increased $14.8 million, or 7.2%, to $220.8 million in 2022. The increase reflected higher core sales of $25.9 million, or 12.6%, partially offset by unfavorable foreign currency translation of $11.1 million, or 5.4%, 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 customers and strong pricing across all end markets. • Sales of Banknotes and Security Products decreased $45.5 million, or 28.5%, to $114.3 million in 2022. The decrease primarily related to lower core sales of 36.1 million, or 22.6%, and unfavorable foreign currency translation of $9.4 million, or 5.9%, as the euro weakened against the U.S. dollar. The core sales decrease reflected a year-over-year comparison against record sales in the third quarter of 2021. Cost of sales decreased by $33.5 million, or 16.1%, to $174.9 million primarily reflecting lower volumes of $26.4 million, or 12.7%, favorable foreign currency translation of $12.0 million, or 5.8%, and strong productivity of $6.5 million, or 3.1%, partially offset by an increase in material, labor and other manufacturing costs of $14.2 million, or 6.8%. Operating profit increased by $3.0 million, or 3.6%, to $86.7 million in 2022. The increase primarily reflected higher pricing net of inflation, and productivity gains of $29.3 million, or 35.0%, and favorable mix of $2.8 million, or 3.3%, partially offset by lower volumes of $23.0 million, or 27.5%, and unfavorable foreign currency translation of $5.1 million, or 6.1%. 36 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Engineered Materials Third Quarter Change (dollars in millions) 2022 2021 $ % Net sales by product line: FRP - Recreational Vehicles $ 24.9 $ 28.9 $ (4.0) (13.8) % FRP - Building Products 29.0 23.7 5.3 22.4 % FRP - Transportation 8.9 7.7 1.2 15.6 % Total net sales $ 62.8 $ 60.3 $ 2.5 4.1 % Cost of sales $ 51.2 $ 47.2 $ 4.0 8.5 % as a percentage of sales 81.5 % 78.3 % Selling, general and administrative $ 4.9 $ 6.5 $ (1.6) (24.6) % as a percentage of sales 7.8 % 10.8 % Operating profit $ 6.7 $ 6.6 $ 0.1 1.5 % Operating margin 10.7 % 10.9 % Supplemental Data: Backlog $ 18.5 $ 18.0 $ 0.5 2.8 % Sales increased $2.5 million, or 4.1%, to $62.8 million in 2022, with higher pricing more than offsetting a decline in volume. The increase reflected higher sales to building products customers and, to a lesser extent, transportation customers, offset by lower sales to recreational vehicle manufacturers. Cost of sales increased $4.0 million, or 8.5%, to $51.2 million in 2022, related primarily to higher raw material costs and, to a lesser extent, higher labor, and other manufacturing costs of $8.8 million, or 18.6%, offset by lower volumes of $4.9 million, or 10.4%. Selling, general and administrative expense decreased by $1.6 million, or 24.6%, to $4.9 million primarily due to lower administrative costs. Operating profit increased by $0.1 million, or 1.5%, to $6.7 million in 2022, reflecting strong pricing offset by lower volumes and inflation. 37 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results from 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 2022 versus the first nine months of 2021, unless otherwise specified. Year-to-Date Change (dollars in millions) 2022 2021 $ % Net sales $ 2,550.8 $ 2,582.8 $ (32.0) (1.2) % Cost of sales 1,547.4 1,593.5 (46.1) (2.9) % as a percentage of sales 60.7 % 61.7 % Selling, general and administrative 1 600.8 553.5 47.3 8.5 % as a percentage of sales 23.6 % 21.4 % Loss on divestiture of asbestos-related assets and liabilities 162.4 — 162.4 NM Operating profit 240.2 435.8 (195.6) (44.9) % Operating margin 9.4 % 16.9 % Other income (expense): Interest income 2.3 1.1 1.2 109.1 % Interest expense (36.0) (36.0) — — % Gain on sale of business 232.5 — 232.5 NM Miscellaneous income, net 22.8 17.2 5.6 32.6 % Total other income (expense) 221.6 (17.7) 239.3 NM Income before income taxes 461.8 418.1 43.7 10.5 % Provision for income taxes 157.9 54.8 103.1 188.1 % Net income attributable to common shareholders $ 303.9 $ 363.3 $ (59.4) (16.4) % 1 2021 includes restructuring gains of $14.3 million. Sales decreased by $32.0 million, or 1.2%, to $2,550.8 million in 2022. Net sales related to operations outside the United States were 33.1% and 37.5% of total net sales for the nine months ended September 30, 2022 and 2021, respectively. The year-over-year change in sales included: • an increase in core sales of $129.3 million, or 5.0%; • unfavorable foreign currency translation of $80.1 million, or 3.1%; and • a decrease in sales of $81.3 million, or 3.1%, related to the sale of Crane Supply. Cost of sales decreased by $46.1 million, or 2.9%, to $1,547.4 million in 2022. The decrease is primarily related to the sale of Crane Supply of $59.4 million, or 3.7%, favorable foreign currency translation of $50.4 million, or 3.2%, lower volumes of $46.7 million, or 2.9%, and strong productivity of $43.6 million, or 2.7%, partially offset by an increase in material, labor and other manufacturing costs of $136.7 million, or 8.6%, and unfavorable mix of $23.3 million, or 1.5%. Selling general and administrative expenses increased by $47.3 million, or 8.5%, to $600.8 million in 2022. The increase was driven primarily by increased costs of $63.7 million, or 11.5%, including transaction costs o f $33.8 million, or 5.9%, supporting the Crane Supply and asbestos divestiture as well as the planned Separation, partially offset by favorable foreign currency translation of $15.4 million, or 2.8%. Operating profit decreased by $195.6 million, or 44.9%, to $240.2 million in 2022. The decrease in operating profit is primarily related to the loss on divestiture of asbestos-related assets and liabilities of $162.4 million, or 37.2%, lower volumes of $51.0 million, or 11.7%, higher transaction costs of $35.7 million, or 8.2%, unfavorable mix of $23.3 million, or 5.3%, and lost profit from the sale of Crane Supply of $15.1 million, or 3.5%, offset by higher pricing net of inflation, and productivity gains, of $77.4 million, or 17.8%. Operating profit in 2021 included net restructuring gains of $14.3 million. Other income increased $239.3 million to $221.6 million reflecting the gain on the sale of the Crane Supply business of $232.5 million. 38 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Our effective tax rates for the nine months ended September 30, 2022 is higher than the prior year’s comparable period primarily due to the absence of a tax benefit recorded against the asbestos-related transaction and the reversal of a deferred tax asset established in a prior period that relates to the sale of a subsidiary, partially offset by the aforementioned release of valuation allowance and statutory U.S. tax credits and a deduction related to our non-U.S. subsidiaries’ income. Our effective tax rate for the nine months ended September 30, 2022 is higher than the statutory U.S. federal tax rate of 21% primarily due to the absence of a tax benefit recorded against the asbestos-related transaction, 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 the aforementioned release of valuation allowance, excess share-based compensation benefits, tax credit utilization, and the statutory U.S. deduction related to our non-U.S. subsidiaries’ income. Comprehensive Income Nine Months Ended September 30, (in millions) 2022 2021 Net income before allocation to noncontrolling interests $ 303.9 $ 363.3 Components of other comprehensive income (loss), net of tax Currency translation adjustment (175.2) (52.1) Changes in pension and postretirement plan assets and benefit obligation, net of tax 9.1 15.3 Other comprehensive loss, net of tax (166.1) (36.8) Comprehensive income before allocation to noncontrolling interests 137.8 326.5 Less: Noncontrolling interests in comprehensive income (0.3) 0.6 Comprehensive income attributable to common shareholders $ 138.1 $ 325.9 For the nine months ended September 30, 2022, comprehensive income before allocations to noncontrolling interests was $137.8 million compared to $326.5 million in the same period of 2021. The $188.7 million decrease was primarily driven by a $123.1 million unfavorable impact of foreign currency translation adjustments primarily related to the British pound and euro, and lower net income before allocation to noncontrolling interests of $59.4 million. 39 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) 2022 2021 $ % Net sales by product line: Commercial Original Equipment $ 182.9 $ 170.5 $ 12.4 7.3 % Military Original Equipment 171.5 184.0 (12.5) (6.8) % Commercial Aftermarket Products 92.5 75.1 17.4 23.2 % Military Aftermarket Products 38.9 50.6 (11.7) (23.1) % Total net sales $ 485.8 $ 480.2 $ 5.6 1.2 % Cost of sales $ 305.4 $ 298.2 $ 7.2 2.4 % as a percentage of sales 62.9 % 62.1 % Selling, general and administrative $ 96.0 $ 92.7 $ 3.3 3.6 % as a percentage of sales 19.8 % 19.3 % Operating profit $ 84.4 $ 89.3 $ (4.9) (5.5) % Operating margin 17.4 % 18.6 % Sales increased $5.6 million, or 1.2%, to $485.8 million in 2022, with higher pricing more than offsetting lower volumes. • Sales of Commercial Original Equipment increased $12.4 million, or 7.3%, to $182.9 million in 2022, reflecting strong demand from aircraft manufacturers as the industry aircraft build rates continue to recover from the COVID-19 related slowdown, partially offset by material availability constraints. • Sales of Military Original Equipment decreased $12.5 million, or 6.8%, to $171.5 million in 2022, primarily reflecting lower shipments due to order timing and material availability. • Sales of Commercial Aftermarket Products increased $17.4 million, or 23.2%, to $92.5 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, along with higher pricing. • Sales of Military Aftermarket Products decreased $11.7 million, or 23.1%, to $38.9 million in 2022, primarily reflecting timing of government orders for certain programs. Cost of sales increased by $7.2 million, or 2.4%, to $305.4 million in 2022, primarily reflecting $22.0 million, or 7.4%, of increased material, labor and other manufacturing costs, partially offset by $10.3 million, or 3.5%, of productivity gains, and lower volumes of $5.3 million, or 1.8%. Selling, general and administrative expense increased by $3.3 million, or 3.6%, to $96.0 million in 2022, primarily reflecting higher selling costs of $3.4 million, or 3.7%. Operating profit decreased by $4.9 million, or 5.5%, to $84.4 million in 2022, primarily reflecting higher costs of $7.7 million, or 8.6%, lower volumes of $7.1 million, or 8.0%, partially offset by higher pricing, net of inflation and increased productivity of $11.6 million, or 13.0%. 40 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 $ 555.8 $ 535.4 $ 20.4 3.8 % Commercial Valves 205.8 283.3 (77.5) (27.4) % Pumps and Systems 95.8 79.2 16.6 21.0 % Total net sales $ 857.4 $ 897.9 $ (40.5) (4.5) % Cost of sales $ 541.1 $ 593.2 $ (52.1) (8.8) % as a percentage of sales 63.1 % 66.1 % Selling, general and administrative 1 $ 185.4 $ 163.8 $ 21.6 13.2 % as a percentage of sales 21.6 % 18.2 % Operating profit $ 130.9 $ 140.9 $ (10.0) (7.1) % Operating margin 15.3 % 15.7 % 1 2021 includes net restructuring gains of $12.7 million. Sales decreased by $40.5 million, or 4.5%, to $857.4 million in 2022, driven by the impact of the sale of Crane Supply of $81.3 million, or 9.1%, and unfavorable foreign currency translation of $32.6 million, or 3.6%, partially offset by higher core sales of $73.0 million, or 8.1%. Core sales growth was driven primarily by pricing, with modestly higher volumes. • Sales of Process Valves and Related Products increased by $20.4 million, or 3.8%, to $555.8 million in 2022. The increase reflected higher core sales of $41.7 million, or 7.8%, driven by higher pricing, offset by unfavorable foreign currency translation of $21.7 million, or 4.1%,as the euro weakened against the U.S. dollar. Demand remained generally strong in the Chemical, Pharmaceutical and General Industrial end markets. • Sales of Commercial Valves decreased by $77.5 million, or 27.4%, to $205.8 million in 2022, primarily driven by the impact of the divestiture of Crane Supply of $81.3 million, or 28.7%, and unfavorable foreign currency translation of $10.7 million, or 3.8%, as the British pound weakened against the U.S. dollar, partially offset by an increase in core sales of $14.5 million, or 5.1%. • Sales of Pumps & Systems increased by $16.6 million, or 21.0%, to $95.8 million in 2022, primarily driven by higher sales to municipal customers. Cost of sales decreased by $52.1 million, or 8.8%, to $541.1 million, primarily related to the impact of the sale of Crane Supply of $59.4 million, or 10.0%, favorable foreign currency of $20.5 million, or 3.5%, and productivity gains of $12.8 million, or 2.2%, partially offset by a $32.4 million, or 5.5%, increase in material, labor and other manufacturing costs and unfavorable mix of $8.0 million, or 1.4%. Selling, general and administrative expense increased by $21.6 million, or 13.2%, to $185.4 million primarily reflecting higher administrative and selling costs of $25.3 million, or 15.4%, including transaction related expenses of $4.2 million, and the absence of a prior year net restructuring gain of $12.7 million, or 7.7 %, partially offset by favorable currency translation of $7.5 million, or 4.6%, and the sale of Crane Supply of $6.8 million, or 4.2%. Operating profit decreased by $10.0 million, or 7.1%, to $130.9 million in 2022, primarily reflecting the impact of the sale of Crane Supply of $15.1 million, or 10.7%, and the absence of the prior year restructuring gain of $12.7 million, or 9.0%, partially offset by productivity gains of $15.1 million, or 10.7%. 41 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 $ 643.2 $ 588.3 $ 54.9 9.3 % Banknotes and Security Products 358.5 443.1 (84.6) (19.1) % Total net sales $ 1,001.7 $ 1,031.4 $ (29.7) (2.9) % Cost of sales $ 536.8 $ 563.7 $ (26.9) (4.8) % as a percentage of sales 53.6 % 54.7 % Selling, general and administrative $ 213.3 $ 220.3 $ (7.0) (3.2) % as a percentage of sales 21.3 % 21.4 % Operating profit $ 251.6 $ 247.4 $ 4.2 1.7 % Operating margin 25.1 % 24.0 % Sales decreased $29.7 million, or 2.9%, to $1,001.7 million in 2022, driven by unfavorable foreign currency translation of $46.3 million, or 4.5%, offset by higher core sales of $16.6 million, or 1.6%. The higher core sales were driven by higher pricing, partially offset by lower volumes. • Sales of Payment Acceptance and Dispensing Products increased $54.9 million, or 9.3%, to $643.2 million in 2022. The increase reflected higher core sales of $77.7 million, or 13.2%, offset by unfavorable foreign currency translation of $22.8 million, or 3.9%, primarily reflecting the weakening of the British pound and Japanese Yen against the U.S. dollar. The core sales growth primarily reflected higher sales to Gaming customers and and strong pricing across all end markets. • Sales of Banknotes and Security Products decreased $84.6 million, or 19.1%, to $358.5 million in 2022. The decrease reflected lower core sales of $61.1 million, or 13.8%, and unfavorable foreign currency translation of $23.5 million, or 5.3%, as the euro weakened against the U.S. dollar. The core sales decline primarily reflected lower volumes following a record year in 2021. Cost of sales decreased by $26.9 million, or 4.8%, to $536.8 million, primarily related to lower volumes of $40.8 million, or 7.2%, favorable foreign currency translation of $29.5 million, or 5.2%, and productivity gains of $19.3 million, or 3.4%, partially offset by an increase in material, labor and other manufacturing costs of $50.6 million, or 9.0%, and unfavorable mix of $12.1 million, or 2.1%. Selling, general and administrative expense decreased by $7.0 million, or 3.2%, to $213.3 million, primarily reflecting favorable foreign currency translation of $7.6 million, or 3.4%. Operating profit increased by $4.2 million, or 1.7%, to $251.6 million in 2022. The increase primarily reflected higher pricing net of inflation, and productivity, of $66.7 million, or 27.0%, partially offset by lower volumes of $39.6 million, or 16.0%, unfavorable mix of $12.1 million, or 4.9%, and unfavorable foreign currency translation of $9.2 million, or 3.7%. 42 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 $ 92.8 $ 78.1 $ 14.7 18.8 % FRP - Building Products 88.2 72.0 16.2 22.5 % FRP - Transportation 24.9 23.2 1.7 7.3 % Total net sales $ 205.9 $ 173.3 $ 32.6 18.8 % Cost of sales $ 164.5 $ 137.0 $ 27.5 20.1 % as a percentage of sales 79.9 % 79.1 % Selling, general and administrative $ 14.5 $ 15.6 $ (1.1) (7.1) % as a percentage of sales 7.0 % 9.0 % Operating profit $ 26.9 $ 20.7 $ 6.2 30.0 % Operating margin 13.1 % 11.9 % Sales increased by $32.6 million, or 18.8%, to $205.9 million in 2022 with higher pricing more than offsetting a decline in volume. The increase reflected higher sales to building products customers and recreational vehicle manufacturers. Cost of sales increased by $27.5 million, or 20.1%, to $164.5 million, primarily related to higher increase in material, labor and other manufacturing costs of $33.1 million, or 24.2%, including transaction related expenses of $3.6 million, offset by lower volumes of $6.7 million, or 4.9%. Selling, general and administrative expense decreased by $1.1 million, or 7.1%, to $14.5 million primarily reflecting lower administrative costs. Operating profit increased by $6.2 million, or 30.0%, to $26.9 million in 2022, primarily reflecting higher pricing net of inflation, and productivity gains, of $14.2 million, or 68.6%, offset by lower volumes of $5.8 million, or 28.0%. 43 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources Nine Months Ended September 30, (in millions) 2022 2021 Net cash (used for) provided by: Operating activities $ (378.0) $ 327.0 Investing activities 281.4 26.6 Financing activities 119.3 (440.8) Effect of exchange rates on cash and cash equivalents (62.7) (13.0) Decrease in cash and cash equivalents $ (40.0) $ (100.2) 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 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 August 2022, we entered into a $400 million senior unsecured 364-day Credit Agreement. The proceeds were used to partially fund the $550 million contribution related to the Redco Sale. Please see Note 10 and Note 11 to our Condensed Consolidated Financial Statements for additional details. 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 to our Condensed Consolidated Financial Statements 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 used for operating activities was $378.0 million in the first nine months of 2022, as compared to cash provided by activities of $327.0 million during the same period last year. The increase in cash used for operating activities was primarily driven by the $550.0 million payment related to the divestiture of the asbestos-related assets and liabilities, together with increased working capital investments supporting higher levels of demand across most businesses. Net asbestos-related payments for the first nine months of 2022 and 2021 were $29.3 million and $29.6 million, respectively. As a result of the Redco sale, the Company no longer has any obligation with respect to pending and future asbestos-related claims. 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 $281.4 million in the first nine months of 2022, as compared to $26.6 million in the comparable period of 2021. The increase in cash provided by investing activities was primarily related to proceeds from the sale of Crane Supply of $318.1 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. 44 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 provided by financing activities was $119.3 million during the first nine months of 2022, compared to cash used for financing activities of $440.8 million in the comparable period of 2021. The increase in cash provided by financing activities was primarily driven by the $399.4 million in net borrowings from the 364-Day Credit Agreement, compared to a $348.1 million repayment of the outstanding amount under the 364-Day Credit Agreement in the first nine months of 2021. This was partially offset by the $203.7 million of share repurchases in the first nine months of 2022. Recent Accounting Pronouncements Information regarding new accounting pronouncements is included in Note 1 to our Condensed Consolidated Financial Statements. 45 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.