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. 27 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 September 30, 2024, we drew down $310.5 million and repaid $160.5 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 nine months ended September 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 $210.0 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. De La Rue Authentication Solutions Acquisition On October 15, 2024, we signed a definitive agreement with De La Rue Holdings, a wholly-owned subsidiary of De La Rue plc, to acquire its authentication business (“De La Rue Authentication Solutions”) for 300 million British pounds (approximately $390 million) in cash, subject to customary adjustments. The transaction is expected to close in the first half of 2025, subject to customary closing conditions. Transaction costs incurred for the three-and-nine months ended September 30, 2024, were $3.3 million and $5.0 million, respectively. De La Rue Authentication Solutions is a leading global provider of digital and physical security and authentication technologies to governments and brands. De La Rue Authentication Solutions will be combined with OpSec within the Security and Authentication Technologies segment upon close. 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. 28 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results from Operations – Three Month Periods Ended September 30, The following information should be read in conjunction with our Unaudited Consolidated and Combined Condensed financial statements and related notes. All comparisons below refer to the third quarter 2024 versus the third quarter 2023 , unless otherwise specified. Three Months Ended September 30, Favorable/(Unfavorable) Change (in millions) 2024 2023 $ % Net sales $ 403.5 $ 352.9 $ 50.6 14.3 % Cost of sales $ 232.2 $ 187.4 $ (44.8) (23.9) % as a percentage of sales 57.5 % 53.1 % Selling, general and administrative $ 96.3 $ 85.8 $ (10.5) (12.2) % as a percentage of sales 23.9 % 24.3 % Operating profit $ 75.0 $ 79.7 $ (4.7) (5.9) % Operating margin 18.6 % 22.6 % Other income (expense): Interest income 0.4 0.3 0.1 33.3 % Interest expense (13.4) (12.8) (0.6) (4.7) % Miscellaneous income, net 1.3 0.7 0.6 85.7 % Total other expense, net (11.7) (11.8) 0.1 0.8 % Income before income taxes 63.3 67.9 (4.6) (6.8) % Provision for income taxes 16.2 16.0 (0.2) (1.3) % Net income attributable to common shareholders $ 47.1 $ 51.9 $ (4.8) (9.2) % Sales increased by $50.6 million, or 14.3%, to $403.5 million in 2024. The change in sales included: • a benefit in sales from the May 2024 OpSec acquisition of $32.3 million, or 9.1%, • core sales growth of $16.7 million, or 4.7%, driven primarily by higher core sales in Security and Authentication Technologies (“SAT”) as a result of favorable pricing and higher banknote volumes in our international currency business, and • favorable foreign currency translation of $1.6 million, or 0.5%. Cost of sales increased by $44.8 million, or 23.9%, to $232.2 million in 2024. The increase was driven primarily by the impact of the OpSec acquisition, unfavorable mix, higher material and other manufacturing costs in SAT, and unfavorable foreign currency translation, partially offset by productivity gains. Selling, general and administrative expenses increased by $10.5 million, or 12.2%, to $96.3 million in 2024. The increase was driven primarily by the impact of the OpSec acquisition. Operating profit decreased by $4.7 million, or 5.9%, to $75.0 million in 2024. The decrease was primarily driven by unfavorable mix in both segments, and the impact of the OpSec acquisition, partially offset by productivity gains and the impact of cost saving actions. Our effective tax rate for the three months ended September 30, 2024 was higher than the prior year’s comparable period primarily due to the mix of non-U.S. earnings. 29 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Segment Results of Operations - Three Month Periods Ended September 30, Crane Payment Innovations (“CPI”) Three Months Ended September 30, Favorable/(Unfavorable) Change (in millions) 2024 2023 $ % Net sales by product line: Payment Acceptance and Dispensing Products $ 190.9 $ 189.1 $ 1.8 1.0 % Services 34.0 32.5 1.5 4.6 % Total net sales $ 224.9 $ 221.6 $ 3.3 1.5 % Cost of sales $ 113.6 $ 111.1 $ (2.5) (2.3) % as a percentage of sales 50.5 % 50.1 % Selling, general and administrative $ 46.7 $ 50.8 $ 4.1 8.1 % as a percentage of sales 20.8 % 22.9 % Operating profit $ 64.6 $ 59.7 $ 4.9 8.2 % Operating margin 28.7 % 26.9 % Sales increased by $3.3 million, or 1.5%, to $224.9 million in 2024, driven by higher core sales. • Sales of Payment Acceptance and Dispensing Products increased by $1.8 million, or 1.0%, to $190.9 million in 2024. The increase was driven by higher core sales. The favorable foreign currency translation from the strengthening of the British pound against the U.S. dollar was offset by unfavorable foreign currency translation from the weakening of the Japanese yen against the U.S. dollar. • Service revenue increased by $1.5 million, or 4.6%, to $34.0 million in 2024, primarily driven by favorable pricing. Cost of sales increased by $2.5 million, or 2.3%, to $113.6 million, as productivity gains, and lower material and other manufacturing costs were more than offset by unfavorable mix. Selling, general and administrative expense decreased by $4.1 million, or 8.1%, to $46.7 million, primarily due to cost saving actions. Operating profit increased by $4.9 million, or 8.2%, to $64.6 million in 2024. The increase primarily reflected favorable pricing, lower material and other manufacturing costs, and productivity gains of $8.8 million, or 14.7%, the impact of cost saving actions of $2.3 million, or 3.8%, partially offset by unfavorable mix of $6.2 million, or 10.4%. 30 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Security and Authentication Technologies (“SAT”) Three Months Ended September 30, Favorable/(Unfavorable) Change (in millions) 2024 2023 $ % Net sales by product line: Banknotes and Security Products $ 145.4 $ 130.1 $ 15.3 11.8 % Authentication Products and Solutions 33.2 1.2 32.0 NM Total net sales $ 178.6 $ 131.3 $ 47.3 36.0 % Cost of sales $ 118.6 $ 76.3 $ (42.3) (55.4) % as a percentage of sales 66.4 % 58.1 % Selling, general and administrative $ 30.7 $ 22.2 $ (8.5) (38.3) % as a percentage of sales 17.2 % 16.9 % Operating profit $ 29.3 $ 32.8 $ (3.5) (10.7) % Operating margin 16.4 % 25.0 % Sales increased by $47.3 million, or 36.0%, to $178.6 million in 2024, primarily driven by the sales benefit from the OpSec acquisition of $32.3 million, or 24.6%, and higher core sales of $13.4 million, or 10.2%. • Banknote and security product sales increased by $15.3 million, or 11.8%, to $145.4 million in 2024, reflecting higher core sales predominantly driven by higher volumes in international markets, and favorable foreign currency translation, as the euro and the Swedish krona strengthened against the U.S. dollar. • Authentication products and solutions sales increased to $33.2 million in 2024, primarily driven by the sales benefit from the OpSec acquisition. Cost of sales increased by $42.3 million, or 55.4%, to $118.6 million in 2024, primarily due to the impact of the OpSec acquisition, higher material and other manufacturing costs, and unfavorable mix. Selling, general and administrative expense increased by $8.5 million, or 38.3%, to $30.7 million in 2024, primarily due to the impact of the OpSec acquisition. Operating profit decreased by $3.5 million, or 10.7%, to $29.3 million in 2024, reflecting unfavorable mix of $4.3 million, or 13.1%, and the impact of the OpSec acquisition of $3.5 million, or 10.7%, partially offset by productivity gains of $4.2 million, or 12.8%. Favorable pricing and higher volumes of $13.4 million were mostly offset by higher material and other manufacturing costs. 31 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results from Operations – Nine Month Periods Ended September 30, The following information should be read in conjunction with our Unaudited Consolidated and Combined Condensed Financial Statements and related notes. All comparisons below refer to the first nine months of 2024 versus the first nine months of 2023, unless otherwise specified. Nine Months Ended September 30, Favorable/(Unfavorable) Change (in millions) 2024 2023 $ % Net sales $ 1,087.7 $ 1,034.4 $ 53.3 5.2 % Cost of sales $ 603.1 $ 545.8 $ (57.3) (10.5) % as a percentage of sales 55.4 % 52.8 % Selling, general and administrative $ 283.9 $ 274.2 $ (9.7) (3.5) % as a percentage of sales 26.1 % 26.5 % Restructuring charges, net $ 2.7 $ — $ (2.7) NM Operating profit $ 198.0 $ 214.4 $ (16.4) (7.6) % Operating margin 18.2 % 20.7 % Other income (expense): Interest income 1.4 0.7 0.7 100.0 % Interest expense (35.7) (37.3) 1.6 4.3 % Related party interest expense — (2.5) 2.5 NM Miscellaneous income, net 1.7 3.1 (1.4) (45.2) % Total other expense, net (32.6) (36.0) 3.4 9.4 % Income before income taxes 165.4 178.4 (13.0) (7.3) % Provision for income taxes 38.9 39.6 0.7 1.8 % Net income attributable to common shareholders $ 126.5 $ 138.8 $ (12.3) (8.9) % Sales increased by $53.3 million, or 5.2%, to $1,087.7 million in 2024. The change in sales included: • sales benefit from the OpSec acquisition of $52.7 million, or 5.1%, • core sales growth of $5.7 million, or 0.6%, driven primarily by favorable pricing in SAT, and • unfavorable foreign currency translation of $5.1 million, or 0.5%. Cost of sales increased by $57.3 million, or 10.5%, to $603.1 million in 2024. The increase was driven primarily by the impact of the OpSec acquisition, and unfavorable mix, partially offset by productivity gains. Selling, general and administrative expenses increased by $9.7 million, or 3.5%, to $283.9 million in 2024. The increase was driven primarily by the impact of the OpSec acquisition, partially offset by cost saving actions. Operating profit decreased by $16.4 million, or 7.6%, to $198.0 million in 2024. The decrease was primarily driven by unfavorable mix and lower volumes in CPI, the impact of the OpSec acquisition, as well as unfavorable foreign currency translation, partially offset by favorable pricing, net of inflation and productivity gains, and the impact of cost saving actions in CPI. Our effective tax rate for the nine months ended September 30, 2024 was higher than the prior year’s comparable period primarily due to the mix of non-U.S. earnings. 32 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Segment Results of Operations - Nine Month Periods Ended September 30, Crane Payment Innovations Nine Months Ended September 30, Favorable/(Unfavorable) Change (in millions) 2024 2023 $ % Net sales by product line: Payment Acceptance and Dispensing Products $ 557.9 $ 574.9 $ (17.0) (3.0) % Services 100.4 96.4 4.0 4.1 % Total net sales $ 658.3 $ 671.3 $ (13.0) (1.9) % Cost of sales $ 333.0 $ 330.3 $ (2.7) (0.8) % as a percentage of sales 50.6 % 49.2 % Selling, general and administrative $ 143.9 $ 154.7 $ 10.8 7.0 % as a percentage of sales 21.9 % 23.0 % Restructuring charges, net $ 2.7 $ — $ (2.7) NM Operating profit $ 178.7 $ 186.3 $ (7.6) (4.1) % Operating margin 27.1 % 27.8 % Sales decreased by $13.0 million, or 1.9%, to $658.3 million in 2024, driven by lower core sales of $6.6 million, or 1.0%, and unfavorable foreign currency translation of $6.4 million, or 0.9%. • Sales of Payment Acceptance and Dispensing Products decreased $17.0 million, or 3.0%, to $557.9 million in 2024. The decrease reflected lower core sales of $10.6 million, or 1.8%, 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 1.1%, 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 $4.0 million, or 4.1%, to $100.4 million in 2024, primarily driven by favorable pricing. Cost of sales increased by $2.7 million, or 0.8%, to $333.0 million in 2024, as lower material and other 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 $10.8 million, or 7.0%, to $143.9 million in 2024, primarily due to cost saving actions, and lower reserves on customer receivables driven by higher collections. Operating profit decreased by $7.6 million, or 4.1%, to $178.7 million in 2024. The decrease primarily reflected unfavorable mix of $30.5 million, or 16.4%, lower volumes of $12.6 million, or 6.8%, and unfavorable foreign currency translation of $3.1 million, or 1.6%, partially offset by favorable pricing, lower material and other manufacturing costs and productivity gains of $32.4 million, or 17.4%, and the impact of cost saving actions of $7.2 million, or 3.9%. 33 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Security and Authentication Technologies Nine Months Ended September 30, Favorable/(Unfavorable) Change (in millions) 2024 2023 $ % Net sales by product line: Banknotes and Security Products $ 372.9 $ 359.6 $ 13.3 3.7 % Authentication Products and Solutions 56.5 3.5 53.0 NM Net sales $ 429.4 $ 363.1 $ 66.3 18.3 % Cost of sales $ 270.1 $ 215.5 $ (54.6) (25.3) % as a percentage of sales 62.9 % 59.4 % Selling, general and administrative $ 85.8 $ 62.5 $ (23.3) (37.3) % as a percentage of sales 20.0 % 17.2 % Operating profit $ 73.5 $ 85.1 $ (11.6) (13.6) % Operating margin 17.1 % 23.4 % Sales increased by $66.3 million, or 18.3%, to $429.4 million in 2024, reflecting the sales benefit from the OpSec acquisition of $52.7 million, or 14.5%, and higher core sales of $12.3 million, or 3.4%. • Banknote and security product sales increased by $13.3 million, or 3.7%, to $372.9 million in 2024, reflecting higher core sales predominantly driven by favorable pricing, and favorable foreign currency translation, as the euro strengthened against the U.S. dollar. • Authentication products and solutions sales increased by $53.0 million to $56.5 million in 2024, primarily driven by the sales benefit from the OpSec acquisition. Cost of sales increased by $54.6 million, or 25.3%, to $270.1 million in 2024, primarily due to the impact of the OpSec acquisition, and higher material and other manufacturing costs, partially offset by productivity gains. Selling, general and administrative expense increased by $23.3 million, or 37.3%, to $85.8 million in 2024, primarily due to the impact of the OpSec acquisition, and higher engineering costs associated with the U.S. Currency redesign program. Operating profit decreased by $11.6 million, or 13.6%, to $73.5 million in 2024, reflecting higher material and other manufacturing costs net of favorable pricing of $9.3 million, or 11.0%, the impact of the OpSec acquisition of $8.9 million, or 10.4%, higher engineering costs of $4.3 million, or 5.1%, partially offset by productivity gains of $12.9 million, or 15.2%. 34 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources Nine Months Ended September 30, (in millions) 2024 2023 Net cash provided by (used for): Operating activities $ 133.0 $ 197.8 Investing activities (304.4) (16.1) Financing activities 115.8 (176.5) Effect of exchange rates on cash, cash equivalents and restricted cash 2.4 (6.9) Decrease in cash, cash equivalents and restricted cash $ (53.2) $ (1.7) 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 nine months ended September 30, 2024, we drew down $310.5 million and repaid $160.5 million on our Revolving Facility. Operating Activities Cash provided by operating activities was $133.0 million in the first nine months of 2024, as compared to $197.8 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 $304.4 million in the first nine months of 2024, as compared to $16.1 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 $115.8 million during the first nine months of 2024 compared to cash used for financing activities of $176.5 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, and lower repayments on the term facility. Recent Accounting Pronouncements Information regarding new accounting pronouncements is included in Note 1 to our Unaudited Consolidated and Combined Condensed Financial Statements. 35 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.