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. 26 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 June 30, 2024, we drew down $215.0 million, net 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 six months ended June 30, 2024. We expect to substantially complete these restructuring actions in 2025. OpSec 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 customary purchase price adjustments. We utilized $210 million from our Revolving Facility and cash on hand to fund the acquisition. 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. In connection with the acquisition of OpSec, we renamed our “Crane Currency” reportable segment to “Security and Authentication Technologies,” which consists of the Crane Currency business and the acquired OpSec business. 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. 27 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 2024 versus the second quarter 2023 , unless otherwise specified. Three Months Ended June 30, Favorable/(Unfavorable) Change (in millions) 2024 2023 $ % Net sales $ 370.6 $ 352.4 $ 18.2 5.2 % Cost of sales $ 209.7 $ 184.0 $ (25.7) (14.0) % as a percentage of sales 56.6 % 52.2 % Selling, general and administrative $ 93.3 $ 99.6 $ 6.3 6.3 % as a percentage of sales 25.2 % 28.3 % Operating profit $ 67.6 $ 68.8 $ (1.2) (1.7) % Operating margin 18.2 % 19.5 % Other income (expense): Interest income 0.4 0.2 0.2 100.0 % Interest expense (12.4) (14.1) 1.7 12.1 % Miscellaneous (expense) income, net (0.2) 1.0 (1.2) (120.0) % Total other expense, net (12.2) (12.9) 0.7 5.4 % Income before income taxes 55.4 55.9 (0.5) (0.9) % Provision for income taxes 13.8 12.7 (1.1) (8.7) % Net income attributable to common shareholders $ 41.6 $ 43.2 $ (1.6) (3.7) % Sales increased by $18.2 million, or 5.2%, to $370.6 million in 2024. The change in sales included: • benefit in sales from the May 2024 OpSec acquisition of $20.5 million, or 5.8%, • core sales growth of $2.9 million, or 0.8%, driven primarily by higher core sales at CPI; and • unfavorable foreign currency translation of $5.2 million, or 1.4%. Cost of sales increased by $25.7 million, or 14.0%, to $209.7 million in 2024. The increase was driven primarily by the impact from the OpSec acquisition, unfavorable mix in CPI, and higher material and other manufacturing costs in SAT, partially offset by productivity gains. Selling, general and administrative expenses decreased by $6.3 million, or 6.3%, to $93.3 million in 2024. The decrease was driven primarily by lower transaction related expenses, cost saving actions, and favorable foreign currency translation, partially offset by the impact from the OpSec acquisition. Operating profit decreased by $1.2 million, or 1.7%, to $67.6 million in 2024. The decrease was primarily driven by unfavorable product mix at CPI, and the impact from the OpSec acquisition, partially offset by lower transaction related expenses, and productivity gains. Our effective tax rate for the three months ended June 30, 2024 is higher than the prior year’s comparable period primarily due to the mix of non-U.S. earnings. 28 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 (in millions) 2024 2023 $ % Net sales by product line: Payment Acceptance and Dispensing Products $ 190.6 $ 193.1 $ (2.5) (1.3) % Services 33.8 32.8 1.0 3.0 % Total net sales $ 224.4 $ 225.9 $ (1.5) (0.7) % Cost of sales $ 114.6 $ 111.8 $ (2.8) (2.5) % as a percentage of sales 51.1 % 49.5 % Selling, general and administrative $ 48.4 $ 49.3 $ 0.9 1.8 % as a percentage of sales 21.6 % 21.8 % Operating profit $ 61.4 $ 64.8 $ (3.4) (5.2) % Operating margin 27.4 % 28.7 % Sales decreased by $1.5 million, or 0.7%, to $224.4 million in 2024, driven by unfavorable foreign currency translation of $4.2 million, or 1.9%, partially offset by higher core sales of $2.7 million, or 1.2%. • Sales of Payment Acceptance and Dispensing Products decreased by $2.5 million, or 1.3%, to $190.6 million in 2024. The decrease was driven by unfavorable foreign currency translation of $4.2 million, or 2.2%, partially offset by higher core sales of $1.7 million, or 0.9%. Unfavorable foreign currency translation primarily reflected 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 $1.0 million, or 3.0%, to $33.8 million in 2024, primarily driven by favorable pricing. Cost of sales increased by $2.8 million, or 2.5%, to $114.6 million, as lower material and other manufacturing costs, productivity gains and favorable foreign currency translation were more than offset by unfavorable mix. Selling, general and administrative expense decreased by $0.9 million, or 1.8%, to $48.4 million, primarily due to lower compensation and benefits through cost saving actions, and favorable foreign currency translation. Operating profit decreased by $3.4 million, or 5.2%, to $61.4 million in 2024. The decrease primarily reflected unfavorable mix of $13.2 million, or 20.3%, partially offset by lower material and other manufacturing costs, and productivity gains of $8.1 million, or 12.5%. 29 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Security and Authentication Technologies Three Months Ended June 30, Favorable/(Unfavorable) Change (in millions) 2024 2023 $ % Net sales by product line: Banknotes and Security Products $ 124.1 $ 125.5 $ (1.4) (1.1) % Authentication Products and Solutions 22.1 1.0 21.1 NM Total net sales $ 146.2 $ 126.5 $ 19.7 15.6 % Cost of sales $ 95.1 $ 72.2 $ (22.9) (31.7) % as a percentage of sales 65.0 % 57.1 % Selling, general and administrative $ 27.1 $ 19.6 $ (7.5) (38.3) % as a percentage of sales 18.5 % 15.5 % Operating profit $ 24.0 $ 34.7 $ (10.7) (30.8) % Operating margin 16.4 % 27.4 % Sales increased by $19.7 million, or 15.6%, to $146.2 million in 2024, primarily driven by the sales benefit from the OpSec acquisition of $20.5 million, or 16.2%. • Banknote and security product sales decreased by $1.4 million, or 1.1%, to $124.1 million in 2024, reflecting lower core sales predominantly driven by lower volumes in international markets impacted by the timing of shipments, and unfavorable foreign currency translation, as the Swedish krona and the euro weakened against the U.S. dollar. • Authentication products and solutions sales increased to $22.1 million in 2024, primarily driven by the sales benefit from the OpSec acquisition. Cost of sales increased by $22.9 million, or 31.7%, to $95.1 million in 2024, primarily due to the impact from the OpSec acquisition, and higher material and other manufacturing costs, partially offset by productivity gains. Selling, general and administrative expense increased by $7.5 million, or 38.3%, to $27.1 million in 2024, primarily due to the impact from the OpSec acquisition. Operating profit decreased by $10.7 million, or 30.8%, to $24.0 million in 2024, reflecting higher material and other manufacturing costs net of favorable pricing of $8.0 million, or 23.1%, and the impact from the OpSec acquisition of $5.4 million, or 15.6%, partially offset by productivity gains of $5.2 million, or 15.0%. 30 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 2024 versus the first six months of 2023, unless otherwise specified. Six Months Ended June 30, Favorable/(Unfavorable) Change (in millions) 2024 2023 $ % Net sales $ 684.2 $ 681.5 $ 2.7 0.4 % Cost of sales $ 370.9 $ 358.4 $ (12.5) (3.5) % as a percentage of sales 54.2 % 52.6 % Selling, general and administrative $ 187.6 $ 188.4 $ 0.8 0.4 % as a percentage of sales 27.4 % 27.6 % Restructuring charges, net $ 2.7 $ — $ (2.7) NM Operating profit $ 123.0 $ 134.7 $ (11.7) (8.7) % Operating margin 18.0 % 19.8 % Other income (expense): Interest income 1.0 0.4 0.6 150.0 % Interest expense (22.3) (24.5) 2.2 9.0 % Related party interest expense — (2.5) 2.5 NM Miscellaneous income, net 0.4 2.4 (2.0) (83.3) % Total other expense, net (20.9) (24.2) 3.3 13.6 % Income before income taxes 102.1 110.5 (8.4) (7.6) % Provision for income taxes 22.7 23.6 0.9 3.8 % Net income attributable to common shareholders $ 79.4 $ 86.9 $ (7.5) (8.6) % Sales increased by $2.7 million, or 0.4%, to $684.2 million in 2024. The change in sales included: • sales benefit from the OpSec acquisition of $20.5 million, or 3.0%, • core sales decline of $11.0 million, or 1.6%, driven primarily by lower volumes at CPI, and • unfavorable foreign currency translation of $6.8 million, or 1.0%. Cost of sales increased by $12.5 million, or 3.5%, to $370.9 million in 2024. The increase was driven primarily by unfavorable mix, and the impact of the OpSec acquisition, partially offset by productivity gains, the impact of lower sales volumes, and favorable foreign currency translation. Selling, general and administrative expenses decreased by $0.8 million, or 0.4%, to $187.6 million in 2024. The decrease was driven primarily by cost saving actions, favorable foreign currency translation, and productivity gains, partially offset by the impact from the OpSec acquisition. Operating profit decreased by $11.7 million, or 8.7%, to $123.0 million in 2024. The decrease was primarily driven by CPI unfavorable mix and lower volumes, as well as the impact from the OpSec acquisition, partially offset by favorable pricing across both segments and productivity gains. Our effective tax rate for the six months ended June 30, 2024 is higher than the prior year’s comparable period primarily due to the mix of non-U.S. earnings. 31 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 (in millions) 2024 2023 $ % Net sales by product line: Payment Acceptance and Dispensing Products $ 367.0 $ 385.8 $ (18.8) (4.9) % Services 66.4 63.9 2.5 3.9 % Total net sales $ 433.4 $ 449.7 $ (16.3) (3.6) % Cost of sales $ 219.4 $ 219.2 $ (0.2) (0.1) % as a percentage of sales 50.6 % 48.7 % Selling, general and administrative $ 97.2 $ 103.9 $ 6.7 6.4 % as a percentage of sales 22.4 % 23.1 % Restructuring charges, net $ 2.7 $ — $ (2.7) NM Operating profit $ 114.1 $ 126.6 $ (12.5) (9.9) % Operating margin 26.3 % 28.2 % Sales decreased by $16.3 million, or 3.6%, to $433.4 million in 2024, driven by lower core sales of $9.9 million, or 2.2%, and unfavorable foreign currency translation of $6.4 million, or 1.4%. • Sales of Payment Acceptance and Dispensing Products decreased $18.8 million, or 4.9%, to $367.0 million in 2024. The decrease reflected lower core sales of $12.4 million, or 3.2%, as favorable pricing was more than offset by lower volumes primarily in gaming as customers adjust inventory levels to reflect reduced lead times. Included in the sales decrease is unfavorable foreign currency translation of $6.4 million, or 1.7%, 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 $2.5 million, or 3.9%, to $66.4 million in 2024, primarily driven by favorable pricing. Cost of sales increased by $0.2 million, or 0.1%, to $219.4 million in 2024, as lower manufacturing costs, the impact of lower sales volumes, productivity gains and favorable foreign currency translation were more than offset by unfavorable mix. Selling, general and administrative expense decreased by $6.7 million, or 6.4%, to $97.2 million in 2024, primarily due to cost saving actions, and lower reserves on customer receivables driven by higher collections. Operating profit decreased by $12.5 million, or 9.9%, to $114.1 million in 2024. The decrease primarily reflected unfavorable mix of $24.3 million, or 19.2%, and lower volumes of $11.9 million, or 9.4%, partially offset by favorable pricing, lower manufacturing costs and productivity gains of $24.4 million, or 19.2%. Cost saving actions of $4.9 million, or 3.9%, were mostly offset by restructuring charges and unfavorable foreign currency translation. 32 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Security and Authentication Technologies Six Months Ended June 30, Favorable/(Unfavorable) Change (in millions) 2024 2023 $ % Net sales by product line: Banknotes and Security Products $ 227.5 $ 229.5 $ (2.0) (0.9) % Authentication Products and Solutions 23.3 2.3 21.0 NM Net sales $ 250.8 $ 231.8 $ 19.0 8.2 % Cost of sales $ 151.5 $ 139.2 $ (12.3) (8.8) % as a percentage of sales 60.4 % 60.1 % Selling, general and administrative $ 55.1 $ 40.3 $ (14.8) (36.7) % as a percentage of sales 22.0 % 17.4 % Operating profit $ 44.2 $ 52.3 $ (8.1) (15.5) % Operating margin 17.7 % 22.6 % Sales increased by $19.0 million, or 8.2%, to $250.8 million in 2024, reflecting the sales benefit from the OpSec acquisition of $20.5 million, or 8.8%, partially offset by lower core sales of $1.0 million, or 0.4%. • Banknote and security product sales decreased by $2.0 million, or 0.9%, to $227.5 million in 2024, reflecting lower core sales predominantly driven by lower volumes in international markets impacted by the timing of shipments, and unfavorable foreign currency translation, as the Swedish krona weakened against the U.S. dollar. • Authentication products and solutions sales increased by $21.0 million to $23.3 million in 2024, primarily driven by the sales benefit from the OpSec acquisition. Cost of sales increased by $12.3 million, or 8.8%, to $151.5 million in 2024, primarily due to the impact of the OpSec acquisition, and higher material and other manufacturing costs, partially offset by productivity gains, favorable mix, and the impact of lower sales volumes. Selling, general and administrative expense increased by $14.8 million, or 36.7%, to $55.1 million in 2024, primarily due to higher compensation and benefits, higher engineering costs associated with the U.S. Currency redesign program, and the impact of the OpSec acquisition. Operating profit decreased by $8.1 million, or 15.5%, to $44.2 million in 2024, reflecting higher compensation, benefits and engineering costs of $7.3 million, or 13.9%, the impact of the OpSec acquisition of $5.4 million, or 10.3%, lower sales volumes of $4.7 million, or 9.1%, and higher material and other manufacturing costs net of favorable pricing of $3.6 million, or 6.8%, partially offset by productivity gains of $8.8 million, or 16.8%, and favorable mix of $4.6 million, or 8.8%. 33 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources Six Months Ended June 30, (in millions) 2024 2023 Net cash provided by (used for): Operating activities $ 66.3 $ 95.0 Investing activities (291.1) (8.5) Financing activities 190.2 (43.7) Effect of exchange rates on cash, cash equivalents and restricted cash (9.5) 3.4 Decrease in cash, cash equivalents and restricted cash $ (44.1) $ 46.2 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 Facility and our term facility, is expected to be sufficient to finance our short- and long-term capital requirements. In the six months ended June 30, 2024, we drew down $280.0 million and repaid $65.0 million on our Revolving Facility. Operating Activities Cash provided by operating activities was $66.3 million in the first six months of 2024, as compared to $95.0 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 and acquisitions. Capital expenditures are made primarily for increasing capacity, replacing equipment, supporting new product development, and improving information systems. Cash used for investing activities was $291.1 million in the first six months of 2024, as compared to $8.5 million in the comparable period last year. The increase in cash used for investing activities was primarily driven by the acquisition of OpSec. Financing Activities Cash provided by (used for) financing activities consists primarily of d ividend payments to shareholders, repayments of indebtedness, and proceeds from our credit facilities . Cash provided by financing activities was $190.2 million during the first six months of 2024 compared to cash used for financing activities of $43.7 million in the comparable period last year. The increase in cash provided by financing activities was primarily driven by higher net proceeds from the Revolving Facility used to fund the acquisition of OpSec. Recent Accounting Pronouncements Information regarding new accounting pronouncements is included in Note 1 to our Unaudited Consolidated and Combined Condensed Financial Statements. 34 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.