Crane NXT, Co. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains information about Crane NXT, 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 con dition. Investors 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 “Crane NXT,” “we,” “us” and “our” refer to Crane NXT, Co. and its subsidiaries, including when Crane NXT, Co. was named “Crane Holdings, Co.” unless the context implies otherwise. References to the “Business” refer to our business, including prior to the Separation (as defined below) when it was a business of Crane Holdings, Co. References herein to “Holdings” refer to Crane Holdings, Co. and its subsidiaries prior to the consummation of the Separation unless the context implies otherwise. On April 3, 2023, Holdings was separated (the “Separation”) into two independent, publicly-traded companies, Crane NXT, Co. and Crane Company (“SpinCo”) through a pro-rata distribution (the “Distribution”) of all the issued and outstanding common stock of SpinCo to the stockholders of Holdings As part of the Separation, the Aerospace & Electronics, Process Flow Technologies and Engineered Materials businesses of Holdings were spun off to SpinCo. Also, as part of the Separation, Holdings retained the Payment and Merchandising Technologies business and was renamed “Crane NXT, Co.” on April 3, 2023. Following the consummation of the Separation, our common stock is listed under the symbol “CXT” on the New York Stock Exchange. 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 investors 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 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; business and economic disruptions associated with extraordinary public health issues such as large-scale health epidemics or pandemics; 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; the ability and willingness of Crane NXT, Co. and SpinCo 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 Commiss ion, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, and subsequent reports and other documents filed with the Securities and Exchange Commission. We do not undertake any obligation to update or revise any forward-looking statements to reflect any future events or circumstances. 23 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Recent Transactions Separation On April 3, 2023, Holdings completed the Separation, as described in Note 1, "Organization and Basis of Presentation”, in the accompanying Unaudited Consolidated and Combined Condensed Financial Statements above, through the Distribution of all the issued and outstanding common stock of SpinCo to the stockholders of Holdings. Immediately following the consummation of the Separation on April 3, 2023, Holdings was renamed “Crane NXT, Co.” In connection with the Separation, SpinCo paid a one-time cash dividend in the amount of $275 million to Holdings. on April 3, 2023, prior to the consummation of the Separation. The proceeds of the dividend, along with cash on hand, was used to repay the $300 million of 4.45% senior notes due in December 2023. In addition, Holdings transferred $84 million of cash to Crane NXT as part of the Separation. Credit Facilities We are party to a new senior secured credit agreement (the “Credit Agreement”) entered into on March 17, 2023, which provides for (i) a $500 million, 5 -year revolving credit facility (the “Revolving Facility”) and (ii) a $350 million, 3-year term loan facility (the “Term Facility”), funding under each of which became available in connection with the Separation, upon the satisfaction of customary conditions of facilities of this type. On March 31, 2023, we borrowed the full amount of the Term Facility. In June 2023, we repaid $50 million on the Term Facility. Related Party Agreements On April 3, 2023, we entered into definitive agreements with SpinCo in connection with the Separation. The agreements set forth the terms and conditions of the Separation and provide a framework for our relationship with SpinCo following the Separation, including the allocation between us and SpinCo of our and SpinCo’s assets, liabilities and obligations attributable to periods prior to, at and after the Separation. These agreements include the Separation and Distribution Agreement, which contains certain key provisions related to the Separation, as well as a Transition Services Agreement, a Tax Matters Agreement, an Employee Matters Agreement and an Intellectual Property Matters Agreement. Basis of Presentation See Note 1, “Organization and Basis of Presentation” for more details on financial statement presentation basis and Note 2, “Related Parties” for expense allocation methodologies on carve-out financial information. 24 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 Unaudited Consolidated and Combined Condensed financial statements and related notes. All comparisons below refer to the second quarter 2023 versus the second quarter 2022, unless otherwise specified. Three Months Ended June 30, Favorable/(Unfavorable) Change (dollars in millions) 2023 2022 $ % Net sales $ 352.4 $ 334.0 $ 18.4 5.5 % Cost of sales $ 184.0 $ 182.8 $ (1.2) (0.7) % as a percentage of sales 52.2 % 54.7 % Selling, general and administrative $ 99.6 $ 77.8 $ (21.8) (28.0) % as a percentage of sales 28.3 % 23.3 % Operating profit $ 68.8 $ 73.4 $ (4.6) (6.3) % Operating margin 19.5 % 22.0 % Other income (expense): Interest income 0.2 0.1 0.1 100.0 % Interest expense (14.1) (10.5) (3.6) (34.3) % Related party interest expense — (3.6) 3.6 NM Miscellaneous income, net 1.0 2.1 (1.1) (52.4) % Total other expense, net (12.9) (11.9) (1.0) (8.4) % Income before income taxes 55.9 61.5 (5.6) (9.1) % Provision for income taxes 12.7 12.7 — — % Net income attributable to common shareholders $ 43.2 $ 48.8 $ (5.6) (11.5) % Sales increased by $18.4 million, or 5.5%, to $352.4 million in 2023. The change in sales included: • an increase in core sales of $21.4 million, or 6.4%, driven primarily by higher pricing; and • unfavorable foreign currency translation of $3.0 million, or 0.9%. Cost of sales increased by $1.2 million, or 0.7%, to $184.0 million in 2023. The increase is primarily related to the impact of unfavorable mix of $15.6 million, or 8.5%, predominantly offset by strong productivity gains of $14.0 million, or 7.7%. Selling, general and administrative expenses increased by $21.8 million, or 28.0%, to $99.6 million in 2023. The increase was driven primarily by increased administrative expenses related to higher compensation and benefit costs, and professional services to support the Separation, including $15.2 million, or 19.5%, of transaction related expenses. Operating profit decreased by $4.6 million, or 6.3%, to $68.8 million in 2023. The decrease primarily reflected higher administrative expenses of $22.6 million, or 30.8%, to support the Separation, including $15.2 million, or 20.7%, of transaction related expenses. Operating segment performance was strong across the businesses with pricing actions net of inflation and strong productivity of $29.1 million, or 39.6%, and higher volumes of $4.2 million, or 5.7%, more than offsetting unfavorable mix of $15.6 million, or 21.3%. Our effective tax rate for the three months ended June 30, 2023 is 22.7% which is higher than the prior year’s comparable period primarily due to transaction related expenses to support the separation, partially offset by foreign tax credits. Our effective tax rates for the three months ended June 30, 2023, is higher than the statutory U.S. federal tax rate of 21% primarily due to net permanent increases that impact the statutory tax rate. 25 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Segment Results of Operations - Three Month Periods Ended June 30, Crane Payment Innovations Three Months Ended June 30, Favorable/(Unfavorable) Change (dollars in millions) 2023 2022 $ % Net sales by product line: Payment Acceptance and Dispensing Products $ 193.1 $ 181.3 $ 11.8 6.5 % Services 32.8 30.1 2.7 9.0 % Total net sales $ 225.9 $ 211.4 $ 14.5 6.9 % Cost of sales $ 111.8 $ 109.1 $ (2.7) (2.5) % as a percentage of sales 49.5 % 51.6 % Selling, general and administrative $ 49.3 $ 51.0 $ 1.7 3.3 % as a percentage of sales 21.8 % 24.1 % Operating profit $ 64.8 $ 51.3 $ 13.5 26.3 % Operating margin 28.7 % 24.3 % Sales increased by $14.5 million, or 6.9%, to $225.9 million in 2023, driven by higher core sales of $17.0 million, or 8.0%, partially offset by unfavorable foreign currency translation of $2.5 million, or 1.1%. • Sales of Payment Acceptance and Dispensing Products increased by $11.8 million, or 6.5%, to $193.1 million in 2023. The increase reflected higher core sales of $14.3 million, or 7.9%, partially offset by unfavorable foreign currency translation of $2.5 million, or 1.4%, primarily due to the Japanese yen and Australian dollar weakening against the U.S. dollar. The core sales increase primarily reflected higher component sales and higher pricing year over year. • Service revenue increased by $2.7 million, or 9.0%, to $32.8 million in 2023, primarily driven by a higher pricing and to a lesser extent, volume of service contract sales. Cost of sales increased by $2.7 million, or 2.5%, to $111.8 million, primarily reflecting unfavorable mix of $3.8 million, or 3.5%, and increased material, labor, and other manufacturing costs of $2.7 million, or 2.5%, partially offset by productivity gains of $3.0 million, or 2.7%. Selling, general and administrative expense decreased by $1.7 million, or 3.3%, to $49.3 million, primarily due to restructuring savings of $2.5 million, or 4.9%. Operating profit increased by $13.5 million, or 26.3%, to $64.8 million in 2023. The increase is primarily due to higher pricing net of inflation, and productivity gains, of $13.1 million, or 25.5%, restructuring savings of $2.7 million, or 5.3%, and higher volumes of $2.2 million, or 4.3%, partially offset by unfavorable mix of $3.8 million, or 7.4%. 26 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Crane Currency Three Months Ended June 30, Favorable/(Unfavorable) Change (dollars in millions) 2023 2022 $ % Net sales $ 126.5 $ 122.6 $ 3.9 3.2 % Cost of sales $ 72.2 $ 73.7 $ 1.5 2.0 % as a percentage of sales 57.1 % 60.1 % Selling, general and administrative $ 19.6 $ 19.5 $ (0.1) (0.5) % as a percentage of sales 15.5 % 15.9 % Operating profit $ 34.7 $ 29.4 $ 5.3 18.0 % Operating margin 27.4 % 24.0 % Banknote and security product sales increased by $3.9 million, or 3.2%, to $126.5 million in 2023, reflecting higher core sales of $4.5 million, or 3.7%, predominantly driven by higher volumes in international markets, partially offset by unfavorable foreign currency translation of $0.6 million, or 0.5%. Cost of sales decreased $1.5 million, or 2.0%, to $72.2 million in 2023, primarily due to strong productivity gains of $13.7 million, or 18.6%, partially offset by unfavorable mix of $11.8 million, or 16.0%. Selling, general and administrative expense increased by $0.1 million, or 0.5%, to $19.6 million in 2023 mainly due to higher selling expenses partially offset by favorable foreign currency translation. Operating profit increased by $5.3 million, or 18.0%, to $34.7 million in 2023, primarily due to productivity gains of $15.2 million, or 51.7%, and higher volumes of $1.9 million, or 6.5%, partially offset by unfavorable mix of $11.8 million, or 40.1%. 27 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 Unaudited Consolidated and Combined Condensed Financial Statements and related notes. All comparisons below refer to the first six months of 2023 versus the first six months of 2022, unless otherwise specified. Six Months Ended June 30, Favorable/(Unfavorable) Change (dollars in millions) 2023 2022 $ % Net sales $ 681.5 $ 666.6 $ 14.9 2.2 % Cost of sales $ 358.4 $ 361.9 $ 3.5 1.0 % as a percentage of sales 52.6 % 54.3 % Selling, general and administrative $ 188.4 $ 154.4 $ (34.0) (22.0) % as a percentage of sales 27.6 % 23.2 % Operating profit $ 134.7 $ 150.3 $ (15.6) (10.4) % Operating margin 19.8 % 22.5 % Other income (expense): Interest income 0.4 0.1 0.3 300.0 % Interest expense (24.5) (21.0) (3.5) (16.7) % Related party interest expense (2.5) (7.3) 4.8 65.8 % Miscellaneous income, net 2.4 2.9 (0.5) (17.2) % Total other expense, net (24.2) (25.3) 1.1 4.3 % Income before income taxes 110.5 125.0 (14.5) (11.6) % Provision for income taxes 23.6 26.7 3.1 11.6 % Net income attributable to common shareholders $ 86.9 $ 98.3 $ (11.4) (11.6) % Sales increased by $14.9 million, or 2.2%, to $681.5 million in 2023. The change in sales included: • an increase in core sales of $30.3 million, or 4.5%, driven primarily by higher pricing, and • unfavorable foreign currency translation of $15.4 million, or 2.3%. Cost of sales decreased by $3.5 million, or 1.0%, to $358.4 million in 2023. Unfavorable mix of $29.8 million, or 8.2%, was more than offset by productivity gains net of inflation of $16.7 million, or 4.6%, favorable foreign currency translation of $9.1 million, or 2.5%, and lower volumes of $7.5 million, or 2.1%. Selling, general and administrative expenses increased by $34.0 million, or 22.0%, to $188.4 million in 2023. The increase was driven primarily by increased administrative costs o f $34.5 million, or 22.4%, related to higher compensation and benefit costs, and professional services to support the Separation, including transaction related expenses of $17.0 million, or 11.0%. Operating profit decreased by $15.6 million, or 10.4%, to $134.7 million in 2023. The decrease primarily reflected an unfavorable mix of $29.8 million, or 19.8%, lower volumes of $7.8 million, or 5.2%, partially offset by higher pricing net of inflation, and productivity gains, of $26.1 million, or 17.4%. Operating profit in 2023 included transaction related expenses of $17.0 million, or 11.3%. Our effective tax rate for the six months ended June 30, 2023, is 21.4%. This rate is consistent with the prior year’s comparable period. Our effective tax rates for the six months ended June 30, 2023, is higher than the statutory U.S. federal tax rate of 21% primarily due to net permanent increases that impact the statutory tax rate. 28 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Segment Results of Operations - Six Month Periods Ended June 30, Crane Payment Innovations Six Months Ended June 30, Favorable/(Unfavorable) Change (dollars in millions) 2023 2022 $ % Net sales by product line: Payment Acceptance and Dispensing Products $ 385.8 $ 363.0 $ 22.8 6.3 % Services 63.9 59.4 4.5 7.6 % Total net sales $ 449.7 $ 422.4 $ 27.3 6.5 % Cost of sales $ 219.2 $ 218.7 $ (0.5) (0.2) % as a percentage of sales 48.7 % 51.8 % Selling, general and administrative $ 103.9 $ 103.4 $ (0.5) (0.5) % as a percentage of sales 23.1 % 24.5 % Operating profit $ 126.6 $ 100.3 $ 26.3 26.2 % Operating margin 28.2 % 23.7 % Sales increased by $27.3 million, or 6.5%, to $449.7 million in 2023, driven by higher core sales of $38.6 million, or 9.1%, offset by unfavorable foreign currency translation of $11.3 million, or 2.7%. • Sales of Payment Acceptance and Dispensing Products increased $22.8 million, or 6.3%, to $385.8 million in 2023. The increase reflected higher core sales of $34.1 million, or 9.4%, primarily due to higher pricing, partially offset by unfavorable foreign currency translation of $11.3 million, or 3.1%, primarily reflecting the weakening of the British pound, Japanese Yen and Australian dollar against the U.S. dollar. • Service revenue increased by $4.5 million, or 7.6%, to $63.9 million in 2023, primarily driven by a higher volume of service contract sales and higher pricing year over year. Cost of sales increased by $0.5 million, or 0.2%, to $219.2 million, primarily related to increase in material, labor and other manufacturing costs of $10.3 million, or 4.7%, and unfavorable mix of $6.9 million, or 3.2%, partially offset by favorable foreign currency translation of $6.5 million, or 3.0%, productivity gains of $6.3 million, or 2.9%, and lower volumes of $3.6 million, or 1.6%. Selling, general and administrative expense increased by $0.5 million, or 0.5%, to $103.9 million in 2023, primarily reflecting an increase of $6.8 million, or 6.6%, in administrative and sales expenses, partially offset by restructuring savings of $4.2 million, or 4.1%, and favorable foreign currency translation of $1.7 million, or 1.6%. Operating profit increased by $26.3 million, or 26.2%, to $126.6 million in 2023. The increase primarily reflected higher pricing net of inflation, and productivity, of $31.0 million, or 30.9%, and restructuring savings of $4.4 million, or 4.4%, partially offset by unfavorable mix of $6.9 million, or 6.9%, and unfavorable foreign currency translation of $3.1 million, or 3.1%. 29 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Crane Currency Six Months Ended June 30, Favorable/(Unfavorable) Change (dollars in millions) 2023 2022 $ % Net sales $ 231.8 $ 244.2 $ (12.4) (5.1) % Cost of sales $ 139.2 $ 143.2 $ 4.0 2.8 % as a percentage of sales 60.1 % 58.6 % Selling, general and administrative $ 40.3 $ 36.4 $ (3.9) (10.7) % as a percentage of sales 17.4 % 14.9 % Operating profit $ 52.3 $ 64.6 $ (12.3) (19.0) % Operating margin 22.6 % 26.5 % Banknote and security product sales decreased by $12.4 million, or 5.1%, to $231.8 million in 2023. The decrease primarily related to lower core sales of $8.4 million, or 3.4%, driven by lower volumes and unfavorable foreign currency translation of $4.1 million, or 1.7%, as the euro and Swedish krona weakened against the U.S. dollar. Cost of sales decreased by $4.0 million, or 2.8%, to $139.2 million in 2023. The impact of productivity gains of $20.5 million, or 14.3%, lower volumes of $3.9 million, or 2.7%, and favorable foreign currency translation of $2.6 million, or 1.8%, were partially offset by unfavorable mix of $23.0 million, or 16.1%. Selling, general and administrative expense increased by $3.9 million, or 10.7%, to $40.3 million in 2023, predominantly in selling and engineering expenses. Operating profit decreased by $12.3 million, or 19.0%, to $52.3 million in 2023. The decrease primarily reflected unfavorable mix of $23.0 million, or 35.6%, and lower volumes of $9.0 million, or 13.9%, both driven by anticipated lower sales to the U.S. Government, partially offset by pricing net of inflation, and productivity gains, of $20.2 million, or 31.3%. 30 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources Six Months Ended June 30, (in millions) 2023 2022 Net cash provided by (used for): Operating activities $ 95.0 $ 121.1 Investing activities (8.5) (7.6) Financing activities (43.7) (72.9) Effect of exchange rates on cash and cash equivalents 3.4 (12.6) Increase in cash and cash equivalents $ 46.2 $ 28.0 Our operating philosophy is to deploy cash provided from operating activities, when appropriate, to provide value to stockholders 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. In March 2023, we entered into a new senior secured credit agreement, which provides for a $500 million, 5-year revolving credit facility and 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, we borrowed the full amount of the Term Facility. In June 2023, we repaid $50 million on the Term Facility. On April 3, 2023, prior to the consummation of the Separation, SpinCo paid a dividend to Holdings in the amount of $275 million. On April 4, 2023, we redeemed all our outstanding 4.45% senior notes due 2023, of which $300 million aggregate principal amount was outstanding upon redemption. Operating Activities Cash provided by operating activities was $95.0 million in the first six months of 2023, as compared to $121.1 million during the same period last year. The decrease in cash provided by operating activities was primarily driven by lower net income related to increased transactions costs to support the Separation. Investing Activities Cash flows provided by investing activities consist primarily of cash used for capital expenditures. Cash used for investing activities was $8.5 million in the first six months of 2023, as compared to $7.6 million 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 Cash used for financing activities consist primarily of repayments of indebtedness, proceeds from the issuance of long-term debt and debt issuance cost on new credit facilities . Cash used for financing activities was $43.7 million during the first six months of 2023 compared to $72.9 million in the comparable period of 2022. The decreased in cash used for financing activities was primarily driven by lower net transfers to Crane. Recent Accounting Pronouncements Information regarding new accounting pronouncements is included in Note 1 to our Unaudited Consolidated and Combined Condensed Financial Statements. 31 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.