Crane NXT, Co. — Q2 2023 Form 10-Q Summary
Business context and reporting period
Crane NXT provides technology solutions to secure, detect and authenticate assets through two reporting segments: Crane Payment Innovations (CPI) and Crane Currency. The filing covers the quarter and six months ended June 30, 2023. On April 3, 2023, Crane Holdings separated its businesses into Crane NXT and Crane Company (SpinCo); Crane NXT retained the Payment and Merchandising Technologies business and began operating as a standalone public company under the ticker CXT.
Historical pre-Separation results are presented on a combined carve-out basis and may not be indicative of future standalone results. The second quarter of 2023 was the first full quarter after the Separation.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $352.4 million | $334.0 million | $681.5 million | $666.6 million |
| Operating profit | $68.8 million | $73.4 million | $134.7 million | $150.3 million |
| Operating margin | 19.5% | 22.0% | 19.8% | 22.5% |
| Net income | $43.2 million | $48.8 million | $86.9 million | $98.3 million |
| Diluted EPS | $0.75 | $0.86 | $1.51 | $1.73 |
| Cash flow from operations | Not separately provided | Not separately provided | $95.0 million | $121.1 million |
Q2 cost of sales was $184.0 million, or 52.2% of sales, compared with 54.7% in the prior-year quarter. Selling, general and administrative expense was $99.6 million, or 28.3% of sales, versus 23.3% previously. The reported effective tax rate was 22.7% in Q2 and 21.4% for the first six months.
- Segment performance: CPI sales increased 6.9% to $225.9 million and operating profit increased 26.3% to $64.8 million, producing a 28.7% operating margin. Crane Currency sales increased 3.2% to $126.5 million and operating profit increased 18.0% to $34.7 million, producing a 27.4% margin.
- Cash and liquidity: Cash and cash equivalents were $276.9 million at June 30, 2023, compared with $230.7 million at December 31, 2022. Current assets were $701.2 million versus current liabilities of $316.9 million.
- Debt: Short-term borrowings were $9.4 million and long-term debt was $829.6 million at June 30, 2023. Debt included $288.4 million outstanding under the new term facility, $198.7 million of 6.55% notes due 2036 and $346.5 million of 4.20% notes due 2048.
- Cash deployment: Capital expenditures were $8.5 million, dividends paid were $7.9 million and interest paid was $19.8 million during the first six months.
- Backlog: Remaining performance obligations were $485.1 million at June 30, 2023; management expected to recognize approximately 83% in 2023 and the balance in 2024.
Material changes versus the prior comparable period
- Q2 sales increased $18.4 million, or 5.5%, including $21.4 million of core sales growth, primarily from pricing, partly offset by $3.0 million of unfavorable currency translation.
- Six-month sales increased $14.9 million, or 2.2%; core sales increased 4.5%, while unfavorable currency translation reduced sales by 2.3%.
- Q2 operating profit declined $4.6 million, or 6.3%, and six-month operating profit declined $15.6 million, or 10.4%. Results were reduced by higher standalone administrative costs and $15.2 million of Q2 Separation-related expenses, or $17.0 million for the six-month period.
- Productivity gains and pricing more than offset inflation and volume or mix pressures at the operating segments. Companywide Q2 productivity and pricing benefits were reported at $29.1 million, while unfavorable mix reduced results by $15.6 million.
- Crane Currency’s six-month sales declined 5.1% and operating profit declined 19.0%, primarily because of lower volumes, anticipated lower U.S. government sales and unfavorable mix.
- Operating cash flow declined $26.1 million year over year, primarily because of lower net income and working-capital use. Inventories increased to $173.8 million from $145.6 million at year-end.
- The company repaid the $300 million of 4.45% senior notes due December 2023 on April 4, 2023. It borrowed $350 million under a new term facility and repaid $50 million in June.
Guidance, outlook, risks and unusual items
The filing does not provide explicit quarterly or full-year earnings or revenue guidance. Management stated that existing cash, expected operating cash generation and availability under the revolving credit facility are expected to be sufficient to fund short- and long-term capital requirements.
The new senior secured credit agreement includes a $500 million five-year revolving facility and a $350 million three-year term facility. It requires a maximum total net leverage ratio of 3.50 to 1.00, subject to specified acquisition-related exceptions, and a minimum interest coverage ratio of 3.00 to 1.00.
- The Separation generated transition, tax, employee, intellectual-property and other ongoing obligations with SpinCo. Transition services may continue for up to 18 months.
- The Tax Matters Agreement allocates tax liabilities and indemnification obligations between Crane NXT and SpinCo. Gross unrecognized tax benefits were $23.9 million at June 30, 2023; management reported no reasonable possibility of a material tax liability arising from the Distribution.
- Management identified risks involving macroeconomic and geopolitical conditions, inflation, supply-chain disruption, foreign currency, cybersecurity, regulation, demand variability, personnel retention, litigation, environmental matters, acquisitions, intangible-asset impairment, taxes and the ability of Crane NXT and SpinCo to perform their Separation-related obligations.
- The company continued a 2022 CPI workforce-reduction program involving approximately 140 employees. The remaining restructuring accrual was $1.5 million at June 30, 2023, and no significant additional costs were expected.
- No material litigation loss or additional loss was considered reasonably possible as of June 30, 2023. Internal disclosure controls were assessed as effective, with no material changes in internal control over financial reporting.
Important facts for investors to verify
- Confirm the comparability of pre-Separation carve-out results with post-Separation standalone results, including the effect of allocated corporate costs.
- Assess whether Separation-related expenses of $17.0 million for the first six months are nonrecurring and whether new standalone costs will replace them.
- Monitor leverage, interest expense and compliance with the 3.50-to-1.00 net leverage and 3.00-to-1.00 interest coverage covenants.
- Evaluate working-capital trends, particularly the $28.2 million increase in inventories from December 31, 2022, and the decline in operating cash flow.
- Track Crane Currency demand, including anticipated lower U.S. government sales, and the sustainability of CPI pricing and productivity gains.
- Review the Tax Matters Agreement, transition-service arrangements and indemnification provisions with SpinCo for potential future cash obligations.
- Reconcile reported EPS and share counts with the April 3, 2023 distribution and the post-Separation equity structure.