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 sales” exclude currency effects and, where applicable, the first-year impacts of acquisitions and divestitures. 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; demand for its products, which is variable and subject to factors beyond its control; fluctuation in the prices of, or disruption in its ability to source, components and raw materials, and delays in the distribution of its products; information systems and technology networks failures, breaches in data security, theft of personally identifiable and other information, and non-compliance with its contractual or other legal obligations regarding such information; risks associated with conducting a substantial portion of its business outside the U.S.; being unable to successfully develop and introduce new products, which would limit its ability to grow and maintain its competitive position; loss of personnel or being able to hire and retain additional personnel needed to sustain and grow its business as planned; being unable to identify or complete acquisitions, or to successfully integrate the businesses the Company acquires; governmental regulations and failure to comply with those regulations; risks from litigation, claims and investigations, including those related to product liability and warranties, and employee, commercial, intellectual property and environmental matters; risks related to its ability to improve productivity, reduce costs and align manufacturing capacity with customer demand; the ability to protect its intellectual property; significant competition in the Company's markets; adverse impacts from intangible asset impairment charges; additional tax expenses or exposures; inadequate or ineffective internal controls; and risks related to the Separation, including not obtaining the intended tax treatment of the Separation transaction, failure of Crane Company to perform under the various transaction agreements and actual or potential conflicts of interest with Crane Company; 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, 2023, 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. 22 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Recent Transactions Credit Facilities We are party to a senior secured credit agreement (the “Credit Agreement”) entered into on March 17, 2023, which provides for (i) a $500 million, five-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. As of March 31, 2024, we drew down $25.0 million on our Revolving Facility . 2024 Restructuring In the first quarter of 2024, in response to challenging industry conditions, we initiated workforce reductions in Crane Payment Innovations (“CPI”), incurring $2.7 million of severance charges during the three months ended March 31, 2024. We expect to substantially complete these restructuring actions in 2025. Acquisition On May 3, 2024, we acquired the OpSec Security business (“OpSec”), for a base purchase price of $270 million on a cash-free and debt-free basis, subject to a later adjustment reflecting OpSec’s net working capital, cash, the assumption of certain debt-like items, and OpSec's transaction expenses. We utilized $210 million from our Revolving Facility and cash on hand to fund the acquisition. Transaction costs incurred for the quarter ended March 31, 2024 were $3.9 million. OpSec is a global leader in brand protection and authentication solutions, serving the world’s most recognized brands, as well as government agencies and financial insti tutions. 2024 Segment Update In connection with our acquisition of OpSec, we renamed our “Crane Currency” reportable segment to “Security and Authentication Technologies,” which will consist of the Crane Currency business and the acquired OpSec business. Our CPI segment will remain unchanged. This updated structure is consistent with how the Chief Operating Decision Maker will allocate resources and assess performance, and better aligns with our mission to secure, detect and authenticate our customers’ most valuable assets. The updated segment presentation will be effective in the second quarter of 2024 and has no effect on the first quarter’s financial results presented herein. 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. 23 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 Unaudited Consolidated and Combined Condensed Financial Statements and related notes. All comparisons below refer to the first three months of 2024 versus the first three months of 2023, unless otherwise specified. Three Months Ended March 31, Favorable/(Unfavorable) Change (dollars in millions) 2024 2023 $ % Net sales $ 313.6 $ 329.1 $ (15.5) (4.7) % Cost of sales $ 161.2 $ 174.4 $ 13.2 7.6 % as a percentage of sales 51.4 % 53.0 % Selling, general and administrative $ 94.3 $ 88.8 $ (5.5) (6.2) % as a percentage of sales 30.1 % 27.0 % Restructuring charges, net $ 2.7 $ — $ (2.7) NM Operating profit $ 55.4 $ 65.9 $ (10.5) (15.9) % Operating margin 17.7 % 20.0 % Other income (expense): Interest income 0.6 0.2 0.4 200.0 % Interest expense (9.9) (10.4) 0.5 4.8 % Related party interest expense — (2.5) 2.5 NM Miscellaneous income, net 0.6 1.4 (0.8) (57.1) % Total other expense, net (8.7) (11.3) 2.6 23.0 % Income before income taxes 46.7 54.6 (7.9) (14.5) % Provision for income taxes 8.9 10.9 2.0 18.3 % Net income attributable to common shareholders $ 37.8 $ 43.7 $ (5.9) (13.5) % Sales decreased by $15.5 million, or 4.7%, to $313.6 million in 2024. The change in sales included: • a decrease in core sales of $13.9 million, or 4.2%, driven primarily by lower volumes at Crane Payment Innovations (“CPI”), and • unfavorable foreign currency translation of $1.6 million, or 0.5%. Cost of sales decreased by $13.2 million, or 7.6%, to $161.2 million in 2024. The decrease was driven primarily by productivity gains net of inflation, lower manufacturing costs, and the impact of lower sales volumes, partially offset by unfavorable mix. Selling, general and administrative expenses increased by $5.5 million, or 6.2%, to $94.3 million in 2024. The increase was driven primarily by professional services, including higher transaction related expenses of $2.3 million, or 2.6%. Operating profit decreased by $10.5 million, or 15.9%, to $55.4 million in 2024. The decrease was primarily driven by CPI lower volumes and unfavorable mix, partially offset by favorable pricing net of inflation and productivity gains. Our effective tax rate for the three months ended March 31, 2024 is lower than the prior year’s comparable period primarily due to a higher equity compensation deduction. 24 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Segment Results of Operations - Three Month Periods Ended March 31, Crane Payment Innovations Three Months Ended March 31, Favorable/(Unfavorable) Change (dollars in millions) 2024 2023 $ % Net sales by product line: Payment Acceptance and Dispensing Products $ 176.4 $ 192.7 $ (16.3) (8.5) % Services 32.6 31.1 1.5 4.8 % Total net sales $ 209.0 $ 223.8 $ (14.8) (6.6) % Cost of sales $ 104.8 $ 107.4 $ 2.6 2.4 % as a percentage of sales 50.1 % 48.0 % Selling, general and administrative $ 48.8 $ 54.6 $ 5.8 10.6 % as a percentage of sales 23.3 % 24.4 % Restructuring charges, net $ 2.7 $ — $ (2.7) NM Operating profit $ 52.7 $ 61.8 $ (9.1) (14.7) % Operating margin 25.2 % 27.6 % Sales decreased by $14.8 million, or 6.6%, to $209.0 million in 2024, driven by lower core sales of $12.6 million, or 5.6%, and unfavorable foreign currency translation of $2.2 million, or 1.0%. • Sales of Payment Acceptance and Dispensing Products decreased $16.3 million, or 8.5%, to $176.4 million in 2024. The decrease reflected lower core sales of $14.1 million, or 7.3%, primarily in gaming as customers adjust inventory levels to reflect reduced lead times. Included in the sales decrease is unfavorable foreign currency translation of $2.2 million, or 1.1%, primarily reflecting the weakening of the Japanese Yen against the U.S. dollar, partially offset by the strengthening of the British pound against the U.S. dollar. • Service revenue increased by $1.5 million, or 4.8%, to $32.6 million in 2024, primarily driven by favorable pricing. Cost of sales decreased by $2.6 million, or 2.4%, to $104.8 million in 2024, as unfavorable mix was more than offset by the impact of lower sales volumes, lower manufacturing costs and productivity gains. Selling, general and administrative expense decreased by $5.8 million, or 10.6%, to $48.8 million in 2024, primarily due to lower reserves on customer receivables driven by higher collections. Operating profit decreased by $9.1 million, or 14.7%, to $52.7 million in 2024. The decrease primarily reflected unfavorable mix of $11.2 million, or 18.1%, lower volumes of $10.7 million, or 17.3%, partially offset by favorable pricing and productivity gains of $14.0 million, or 22.7%. Restructuring charges of $2.7 million, or 4.4%, were mostly offset by cost saving actions. 25 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Crane Currency Three Months Ended March 31, Favorable/(Unfavorable) Change (dollars in millions) 2024 2023 $ % Net sales $ 104.6 $ 105.3 $ (0.7) (0.7) % Cost of sales $ 56.4 $ 67.0 $ 10.6 15.8 % as a percentage of sales 53.9 % 63.6 % Selling, general and administrative $ 28.0 $ 20.7 $ (7.3) (35.3) % as a percentage of sales 26.8 % 19.7 % Operating profit $ 20.2 $ 17.6 $ 2.6 14.8 % Operating margin 19.4 % 16.7 % Banknote and security product sales decreased by $0.7 million, or 0.7%, to $104.6 million in 2024, reflecting lower core sales of $1.4 million, or 1.3%, predominantly driven by lower volumes in the U.S. Currency business. Cost of sales decreased by $10.6 million, or 15.8%, to $56.4 million in 2024, primarily due to favorable mix, the impact of lower sales volumes and productivity gains net of inflation. Selling, general and administrative expense increased by $7.3 million, or 35.3%, to $28.0 million in 2024, primarily due to higher compensation and benefits, and higher engineering costs associated with the U.S. Currency redesign program. Operating profit increased by $2.6 million, or 14.8%, to $20.2 million in 2024, reflecting favorable mix of $5.0 million, or 28.4%, partially offset by lower volumes of $2.8 million, or 15.9%. 26 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources Three Months Ended March 31, (in millions) 2024 2023 Net cash provided by (used for): Operating activities $ 9.5 $ 35.5 Investing activities (12.5) (4.0) Financing activities 10.6 (46.6) Effect of exchange rates on cash, cash equivalents and restricted cash (7.9) 2.6 Decrease in cash, cash equivalents and restricted cash $ (0.3) $ (12.5) 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, by paying dividends and/or repurchasing shares, and by repaying prepayable debt. 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 and our term facility, is expected to be sufficient to finance our short- and long-term capital requirements. In the three months ended March 31, 2024, we drew down $30.0 million and repaid $5.0 million on our Revolving Facility. Operating Activities Cash provided by operating activities was $9.5 million in the first three months of 2024, as compared to $35.5 million during the same period last year. The decrease in cash provided by operating activities was primarily driven by increased working capital requirements. Investing Activities Cash used for investing activities consists of cash used for capital expenditures. Capital expenditures are made primarily for increasing capacity, replacing equipment, supporting new product development, and improving information systems. Cash used for investing activities was $12.5 million in the first three months of 2024, as compared to $4.0 million in the comparable period last year. The increase in cash used for investing activities was primarily driven by higher cash used for capital expenditures to support the U.S. Currency redesign program and other capital projects. Financing Activities Cash provided by (used for) financing activities consists primarily of d ividend payments to shareholders, repayments of indebtedness, proceeds from the issuance of long-term debt and debt issuance cost on new credit facilities . Cash provided by financing activities was $10.6 million during the first three months of 2024 compared to cash used for financing activities of $46.6 million in the comparable period last year. The increase in cash provided by financing activities was primarily driven by lower net transfers to Crane, partially offset by lower debt proceeds and higher dividend payments. Recent Accounting Pronouncements Information regarding new accounting pronouncements is included in Note 1 to our Unaudited Consolidated and Combined Condensed Financial Statements. 27 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, 2023.