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. (which was renamed to Crane NXT, Co. effective as of immediately following the consummation of the Separation on April 3, 2023), 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. References herein to “we,” “us,” “our,” “Crane Holdings, Co.” and the “Company” refer to Crane NXT, Co. and our subsidiaries. Prior to April 3, 2023, Crane NXT, Co. was named “Crane Holdings, Co.” Accordingly, we refer to Crane NXT, Co.as “Crane Holdings, Co.” in certain disclosures that are as of dates or related to periods ended prior to April 3, 2023. 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 effects of the 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 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 (as a result of the Separation, Crane Holdings, Co. retained its Payment & Merchandising Technologies segment and spun-off its Aerospace & Electronics, Process Flow Technologies and Engineered Materials segments to Crane Holdings, Co.’s stockholders); the ability and willingness of Crane NXT, Co. and Crane Company to meet and/or perform their obligations under any contractual arrangements entered into among the parties in connection with the 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 the 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, 2022, and subsequent reports and other documents filed by us with the Securities and Exchange Commission, including any registration statement relating to our 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 Recent Transactions Separation On April 3, 2023, Crane Holdings, Co., was separated into two independent, publicly-traded companies in a transaction in which Crane Holdings, Co. retained its Payment & Merchandising Technologies segment and spun-off its Aerospace & Electronics, Process Flow Technologies and Engineered Materials segments to Crane Holdings, Co. stockholders. Upon consummation of the Separation, each of our stockholders received one share of Crane Company common stock for every one share of our common stock held on March 23, 2023, the record date for the distribution. 29 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results from Operations – Three Month Periods Ended March 31, The following information should be read in conjunction with our condensed consolidated financial statements and related notes. All comparisons below refer to the first quarter 2023 versus the first quarter 2022, unless otherwise specified. First Quarter Favorable/(Unfavorable) Change (dollars in millions) 2023 2022 $ % Net sales $ 842.9 $ 871.5 $ (28.6) (3.3) % Cost of sales 481.3 526.2 44.9 8.5 % as a percentage of sales 57.1 % 60.4 % Selling, general and administrative 209.4 198.3 (11.1) (5.6) % as a percentage of sales 24.8 % 22.8 % Operating profit 152.2 147.0 5.2 3.5 % Operating margin 18.1 % 16.9 % Other income (expense): Interest income 1.0 0.3 0.7 233.3 % Interest expense (17.0) (11.1) (5.9) (53.2) % Miscellaneous (expense) income, net (2.4) 3.5 (5.9) (168.6) % Total other expense (18.4) (7.3) (11.1) 152.1 % Income before income taxes 133.8 139.7 (5.9) (4.2) % Provision for income taxes 28.1 34.7 6.6 19.0 % Net income attributable to common shareholders $ 105.7 $ 105.0 $ 0.7 0.7 % Sales decreased by $28.6 million, or 3.3%, to $842.9 million in 2023. The year-over-year change in sales included: • an increase in core sales of $54.2 million, or 6.2%, which was driven primarily by higher pricing; • unfavorable foreign currency translation of $21.0 million, or 2.4%; and • a decrease in sales related to the May 2022 divestiture of Crane Supply of $61.7 million, or 7.1%. Cost of sales decreased by $44.9 million, or 8.5%, to $481.3 million in 2023. The decrease is primarily related to the impact of the sale of Crane Supply of $46.0 million, or 8.7%, strong productivity gains of $17.2 million, or 3.3%, favorable foreign currency translation of $12.0 million, or 2.3%, the impact of lower volumes of $9.6 million, or 1.8%, partially offset by unfavorable mix of $23.9 million, or 4.5%, and an increase in material, labor and other manufacturing costs of $17.6 million, or 3.3%. Selling, general and administrative expenses increased by $11.1 million, or 5.6%, to $209.4 million in 2023 primarily related to a $19.9 million, or 10.0%, increase in administrative expenses, including transaction related expenses of $11.7 million, or 5.9%, partially offset by the impact of the sale of Crane Supply of $6.0 million, or 3.0%, and favorable foreign currency translation of $4.0 million, or 2.0%. Operating profit increased by $5.2 million, or 3.5%, to $152.2 million in 2023. The increase primarily reflected higher pricing net of inflation, and productivity, of $43.9 million, or 29.9%, partially offset by unfavorable mix of $23.9 million, or 16.3%, the impact of the sale of Crane Supply of $9.7 million, or 6.6%, and unfavorable foreign currency translation of $5.1 million, or 3.5%. Our effective tax rate for the three months ended March 31, 2023 is lower than the prior year’s comparable period primarily due to a greater benefit related to share-based compensation. Our effective tax rate for the three months ended March 31, 2023 is equal to the statutory U.S. federal tax rate of 21%. The effective tax rate is the result of permanent increases and decreases that net against each other and offset. 30 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Comprehensive Income Three Months Ended March 31, (in millions) 2023 2022 Net income before allocation to noncontrolling interests $ 105.7 $ 105.0 Components of other comprehensive income (loss), net of tax Currency translation adjustment 12.7 (21.6) Changes in pension and postretirement plan assets and benefit obligation, net of tax 2.7 3.3 Other comprehensive income (loss), net of tax 15.4 (18.3) Comprehensive income before allocation to noncontrolling interests 121.1 86.7 Less: Noncontrolling interests in comprehensive income (0.1) 0.1 Comprehensive income attributable to common shareholders $ 121.2 $ 86.6 For the three months ended March 31, 2023, comprehensive income before allocation to noncontrolling interests was $121.1 million compared to $86.7 million in the same period of 2022. The $34.4 million increase was primarily driven by a $34.3 million year-over-year favorable impact of foreign currency translation, primarily related to the British pound and euro. 31 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Segment Results of Operations - Three Month Periods Ended March 31, Aerospace & Electronics First Quarter Favorable/(Unfavorable) Change (dollars in millions) 2023 2022 $ % Net sales by product line: Commercial Original Equipment $ 68.4 $ 58.7 $ 9.7 16.5 % Military Original Equipment 61.9 57.4 4.5 7.8 % Commercial Aftermarket Products 37.9 28.6 9.3 32.5 % Military Aftermarket Products 11.9 12.5 (0.6) (4.8) % Total net sales $ 180.1 $ 157.2 $ 22.9 14.6 % Cost of sales $ 111.0 $ 97.4 $ (13.6) (14.0) % as a percentage of sales 61.6 % 62.0 % Selling, general and administrative $ 31.4 $ 31.7 $ 0.3 0.9 % as a percentage of sales 17.4 % 20.2 % Operating profit $ 37.7 $ 28.1 $ 9.6 34.2 % Operating margin 20.9 % 17.9 % Supplemental Data: Backlog $ 644.8 $ 508.4 $ 136.4 26.8 % Sales increased $22.9 million, or 14.6%, to $180.1 million in 2023, primarily due to higher volumes and strong pricing. • Sales of Commercial Original Equipment increased $9.7 million, or 16.5%, to $68.4 million in 2023, 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 increased $4.5 million, or 7.8%, to $61.9 million in 2023, primarily reflecting strong demand from defense and space customers. • Sales of Commercial Aftermarket Products increased $9.3 million, or 32.5%, to $37.9 million in 2023, reflecting continued strong demand from the airlines due to improving air traffic. • Sales of Military Aftermarket Products decreased $0.6 million, or 4.8%, to $11.9 million in 2023, primarily reflecting timing of government orders for certain programs. Cost of sales increased by $13.6 million, or 14.0%, to $111.0 million in 2023, primarily reflecting an unfavorable mix of $9.7 million, or 10.0%, increased volumes of $5.7 million, or 5.9%, partially offset by $3.1 million, or 3.2%, of productivity gains. Operating profit increased by $9.6 million, or 34.2%, to $37.7 million in 2023. The increase primarily reflected higher pricing net of inflation and productivity of $12.0 million, or 42.7%, coupled with the impact from higher volumes of $6.2 million, or 22%, partially offset by an unfavorable mix of $9.7 million, or 34.5%. 32 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Process Flow Technologies First Quarter Favorable/(Unfavorable) Change (dollars in millions) 2023 2022 $ % Net sales by product line: Process Valves and Related Products $ 202.9 $ 182.9 $ 20.0 10.9 % Commercial Valves 30.6 98.2 (67.6) (68.8) % Pumps and Systems 37.9 30.2 7.7 25.5 % Total net sales $ 271.4 $ 311.3 $ (39.9) (12.8) % Cost of sales $ 150.1 $ 196.8 $ 46.7 23.7 % as a percentage of sales 55.3 % 63.2 % Selling, general and administrative $ 58.0 $ 65.5 $ 7.5 11.5 % as a percentage of sales 21.4 % 21.0 % Operating profit $ 63.3 $ 49.0 $ 14.3 29.2 % Operating margin 23.3 % 15.7 % Supplemental Data: Backlog $ 363.0 $ 372.4 $ (9.4) (2.5) % Sales decreased by $39.9 million, or 12.8%, to $271.4 million in 2023, driven by a $61.7 million, or 19.8%, impact from the sale of Crane Supply and $8.3 million, or 2.7%, of unfavorable foreign currency translation, partially offset by core sales growth of $30.2 million, or 9.7%. Core sales growth was driven by higher pricing and volumes. • Sales of Process Valves and Related Products increased by $20.0 million, or 10.9%, to $202.9 million in 2023, reflecting an increase in core sales, partially offset by unfavorable foreign currency translation as the euro weakened against the U.S. dollar. Sales growth was driven primarily by strength in the Chemical vertical. • Sales of Commercial Valves decreased by $67.6 million, or 68.8%, to $30.6 million in 2023, primarily driven by the impact of the divestiture of Crane Supply of $61.7 million, or 62.8%, 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 $7.7 million, or 25.5%, to $37.9 million in 2023, reflecting an increase in core sales primarily driven by higher volumes across all key end markets. Cost of sales decreased by $46.7 million, or 23.7%, to $150.1 million, primarily related to the impact of the sale of Crane Supply of $46.0 million, or 23.4%, productivity gains of $4.9 million, or 2.5%, and favorable foreign currency translation of $4.6 million, or 2.3%, partially offset by increased material, labor and other manufacturing costs and of $5.4 million, or 2.7%, and the impact of the higher volumes of $4.0 million, or 2.0%. Selling, general and administrative expense decreased by $7.5 million, or 11.5%, to $58.0 million primarily related to the impact of the sale of Crane Supply of $6.0 million, or 9.2%, and favorable foreign currency translation of $1.8 million, or 2.7%. Operating profit increas ed by $14.3 million, or 29.2%, to $63.3 million in 2023. The increase is primarily due to higher pricing net of inflation and productivity of $18.6 million, or 38%, the impact of higher volumes of $6.2 million, or 12.7%, partially offset by the impact from the sale of Crane Supply of $9.7 million, or 19.8%. 33 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Payment & Merchandising Technologies First Quarter Favorable/(Unfavorable) Change (dollars in millions) 2023 2022 $ % Net sales by product line: Payment Acceptance and Dispensing Products $ 223.8 $ 211.0 $ 12.8 6.1 % Banknotes and Security Products 105.3 121.6 (16.3) (13.4) % Total net sales $ 329.1 $ 332.6 $ (3.5) (1.1) % Cost of sales $ 174.4 $ 179.1 $ 4.7 2.6 % as a percentage of sales 53.0 % 53.8 % Selling, general and administrative $ 75.3 $ 69.3 $ (6.0) (8.7) % as a percentage of sales 22.9 % 20.8 % Operating profit $ 79.4 $ 84.2 $ (4.8) (5.7) % Operating margin 24.1 % 25.3 % Supplemental Data: Backlog $ 556.0 $ 429.0 $ 127.0 29.6 % Sales decreased $3.5 million, or 1.1%, to $329.1 million in 2023, driven by unfavorable foreign currency translation of $12.4 million, or 3.7%, partially offset by higher core sales of $8.9 million, or 2.7%. The higher core sales reflected higher pricing, largely offset by lower volumes. • Sales of Payment Acceptance and Dispensing Products increased $12.8 million, or 6.1%, to $223.8 million in 2023. The increase reflected higher core sales of $21.7 million, or 10.3%, partially offset by unfavorable foreign currency translation of $8.9 million, or 4.2%, primarily due to the British pound and Japanese yen weakening against the U.S. dollar. The core sales increase primarily reflected higher component sales. • Sales of Banknotes and Security Products decreased $16.3 million, or 13.4%, to $105.3 million in 2023. The decrease primarily related to lower core sales of $12.8 million, or 10.5%, and unfavorable foreign currency translation of $3.5 million, or 2.9%, as the euro weakened against the U.S. dollar. The core sales decrease primarily reflected lower sales to the U.S. Government. Cost of sales decreased by $4.7 million, or 2.6%, to $174.4 million, primarily reflecting lower volumes of $9.0 million, or 5.0%, strong productivity of $8.5 million, or 4.7%, and favorable foreign currency translation of $7.4 million, or 4.1%, partially offset by an unfavorable mix $14.2 million, or 7.9%, and increased in material, labor and other manufacturing costs of $6.0 million, or 3.4%. Selling, general and administrative expense increased by $6.0 million, or 8.7%, to $75.3 million, primarily due to higher selling and administrative expenses of $9.1 million, or 13.1%, partially offset by favorable currency translation of $2.1 million, or 3.0%. Operating profit decreased by $4.8 million, or 5.7%, to $79.4 million in 2023. The decrease primarily reflected an unfavorable mix of $14.2 million, or 16.9%, lower volumes of $12.0 million, or 14.3%, and unfavorable foreign currency translation of $2.9 million, or 3.4%, partially offset by higher pricing net of inflation and productivity gains of $24.7 million, or 29.3%. 34 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Engineered Materials First Quarter Favorable/(Unfavorable) Change (dollars in millions) 2023 2022 $ % Net sales by product line: FRP - Recreational Vehicles $ 20.3 $ 35.7 $ (15.4) (43.1) % FRP - Building Products 32.3 27.4 4.9 17.9 % FRP - Transportation 9.7 7.3 2.4 32.9 % Total net sales $ 62.3 $ 70.4 $ (8.1) (11.5) % Cost of sales $ 45.8 $ 52.4 $ 6.6 12.6 % as a percentage of sales 73.5 % 74.4 % Selling, general and administrative $ 5.1 $ 4.6 $ (0.5) (10.9) % as a percentage of sales 8.2 % 6.5 % Operating profit $ 11.4 $ 13.4 $ (2.0) (14.9) % Operating margin 18.3 % 19.0 % Supplemental Data: Backlog $ 16.8 $ 30.4 $ (13.6) (44.7) % Sales decreased $8.1 million, or 11.5%, to $62.3 million in 2023, reflecting lower volumes, partially offset by higher pricing. The decrease was driven by lower sales to recreational vehicle manufacturers, offset by higher sales to building products customers and transportation customers. Cost of sales decreased $6.6 million, or 12.6%, to $45.8 million in 2023, primarily related to lower volumes of $10.3 million, or 19.7%, partially offset by higher raw materials, labor, and other manufacturing costs of $5.0 million, or 9.5%. Operating profit decreased by $2.0 million, or 14.9%, to $11.4 million in 2023, reflecting the impact from the lower volumes offset by higher pricing, net of inflation. 35 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources Three Months Ended March 31, (in millions) 2023 2022 Net cash (used for) provided by: Operating activities $ (70.8) $ (55.5) Investing activities (12.8) (13.0) Financing activities (67.8) (97.8) Effect of exchange rates on cash and cash equivalents 4.0 (5.1) Decrease in cash and cash equivalents $ (147.4) $ (171.4) Our operating philosophy is to deploy cash provided from operating activities, when appropriate, to provide value to shareholders by reinvesting in existing businesses, by making acquisitions that will strengthen and complement our portfolio, by divesting businesses that are no longer strategic or aligned with our portfolio and where such divestitures can generate capacity for strategic investments and initiatives that further optimize our portfolio, and by paying dividends and/or repurchasing shares. At any given time, and from time to time, we may be evaluating one or more of these opportunities, although we cannot assure you if or when we will consummate any such transactions. Our current cash balance, together with cash we expect to generate from future operations along with our 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 expected pension contributions. In July 2021, we entered a $650 million, 5-year Revolving Credit Agreement, which replaced the existing $550 million revolving credit facility. The $650 million revolving credit facility and the CP Program were replaced by commitments under a new $500 million, 5-year Revolving Credit Agreement that was entered into on March 17, 2023, with funding available upon consummation of the Separation, subject to customary conditions precedent for facilities of this type. As of the Separation, the CP Program is no longer available. We also entered into a $350 million, 3-year term loan facility. Funding under each facility became available in connection with the Separation, upon the satisfaction of customary conditions of facilities of this type. On March 31, 2023, Crane Holdings, Co. borrowed the full amount of the Term Facility. 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. See Note 10 and Note 11 to our Condensed Consolidated Financial Statements for additional details. On March 31, 2023, we repaid the amount outstanding under the 364-Day Credit Agreement. On April 3, 2023, prior to the consummation of the Separation, Crane Company paid a dividend to Crane Holdings, Co. in the amount of $275 million. On April 4, 2023, we redeemed all of our outstanding 4.45% senior notes due 2023, of which $300 million aggregate principal amount was outstanding upon redemption. Operating Activities Cash used for operating activities was $70.8 million in the first three months of 2023, as compared to $55.5 million during the same period last year. The increase in cash used for operating activities was primarily driven by increased working capital investments supporting higher levels of demand across most businesses. Investing Activities Cash flows relating to investing activities consist primarily of cash used for capital expenditures and cash provided by divestitures of assets. Cash used for investing activities was $12.8 million in the first three months of 2023, as compared to $13.0 in the comparable period of 2022. Capital expenditures are made primarily for increasing capacity, replacing equipment, supporting new product development, and improving information systems. 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 $67.8 million during the first three months of 2023 compared to $97.8 million in the comparable period of 2022. The decreased in cash used for financing activities was primarily driven by the absence of $175.8 million in cash used for share repurchases in the prior year. 36 Recent Accounting Pronouncements Information regarding new accounting pronouncements is included in Note 1 to our Condensed Consolidated Financial Statements. 37 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, 2022.