Crane NXT, Co. — Fiscal 2023 Form 10-K Summary
Business context and reporting period
Crane NXT reported fiscal-year results for the year ended December 31, 2023. The company operates through two segments: Crane Payment Innovations (CPI), which provides payment, dispensing, detection, sensing, software and service solutions; and Crane Currency, which provides banknote and product-security technologies.
On April 3, 2023, Crane Holdings separated into Crane NXT and Crane Company. Crane NXT retained the Payment and Merchandising Technologies businesses. Periods before the separation are presented as combined carve-out financial statements and include allocations of certain historical corporate costs; therefore, prior-period results may not be fully indicative of future stand-alone results.
Key financial metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Net sales | $1,391.3 million | $1,339.9 million | Up 3.8% |
| Operating profit | $286.8 million | $301.3 million | Down 4.8% |
| Operating margin | 20.6% | 22.5% | Down 190 basis points |
| Income before taxes | $239.8 million | $248.3 million | Down 3.4% |
| Net income | $188.3 million | $204.9 million | Down 8.1% |
| Diluted EPS | $3.28 | $3.61 | Down 9.1% |
| Operating cash flow | $276.3 million | $306.0 million | Down 9.7% |
| Capital expenditures | $31.1 million | $21.3 million | Up $9.8 million |
Core sales increased $57.5 million, or 4.3%, primarily from favorable pricing, while foreign-currency translation reduced reported sales by $6.1 million. Net income included higher interest expense and a higher effective tax rate of 21.5%, compared with 17.5% in 2022.
Segment performance
- CPI: Sales were $886.4 million, up 1.4%. Operating profit increased 11.8% to $242.8 million, and operating margin expanded to 27.4% from 24.8%. Growth benefited from pricing, productivity gains and cost-saving actions, partly offset by unfavorable mix, lower volumes and currency effects. Backlog was $216.8 million, down from $372.9 million.
- Crane Currency: Sales were $504.9 million, up 8.4%. Operating profit declined 0.9% to $116.3 million, and operating margin decreased to 23.0% from 25.2%. Higher volume and productivity were offset by unfavorable product mix, particularly increased U.S. demand for lower-denomination banknotes. Backlog increased to $243.0 million from $192.7 million.
Liquidity, debt and capital structure
- Cash and cash equivalents were $227.2 million at December 31, 2023, compared with $230.7 million a year earlier.
- Total debt declined to $644.9 million from $844.8 million. Net debt was $417.7 million, compared with $614.1 million in 2022.
- Debt-to-capitalization improved to 40.1% from 51.9%; net debt-to-net capitalization improved to 30.2% from 43.9%.
- Year-end debt included approximately $103.1 million under the term facility, $198.6 million of 6.55% notes due 2036 and $346.6 million of 4.20% notes due 2048. The company repaid $245.0 million of its term facility and redeemed $300.0 million of 4.45% notes in 2023.
- The company has a $500 million five-year revolving facility and a $350 million three-year term facility. It stated that cash, expected operating cash generation and available revolver capacity should be sufficient for short- and long-term requirements.
- Contractual obligations totaled $1.362 billion, including $655.0 million of debt principal, $536.2 million of fixed interest payments, $79.6 million of operating lease payments and $42.0 million of purchase obligations.
Material changes and unusual items
- Separation-related transaction expenses were $20.9 million in 2023, largely professional-service fees, and contributed to a $39.2 million increase in corporate expense.
- A $275.0 million dividend from Crane Company to Holdings and an $84.0 million cash transfer to Crane NXT were recorded in connection with the separation. The company also reported $285.2 million of net transfers to Crane.
- Restructuring charges were $0.5 million in 2023, compared with $6.2 million in 2022. The remaining 2022 restructuring liability was $0.6 million at year-end.
- Goodwill and other intangible assets totaled $1.150 billion, or approximately 54% of total assets. No impairment charges were recorded in 2023, and both reporting units had fair values significantly above carrying values in the annual impairment test.
- Approximately $211 million of product revenue was recognized over time, primarily using cost-to-cost estimates for customized and U.S. government contracts. Revenue recognition for these contracts was identified as the critical audit matter.
- Total backlog was $459.8 million at year-end; management expected approximately 85% to convert to revenue in 2024, 9% in 2025 and the remainder thereafter.
Outlook, commentary and risks
Management expects 2024 capital expenditures of approximately $50 million, primarily supporting capacity, the U.S. Currency redesign program and other capital projects. The filing does not provide a clear full-year 2024 revenue or earnings forecast.
- Demand is variable and exposed to cyclical end markets, including retail, gaming, banking and central-bank banknote programs.
- Key risks include raw-material and component inflation, supply-chain disruption, foreign-exchange volatility, cybersecurity incidents, international operations, competition, product development execution and employee retention.
- The company is exposed to contract-award timing and order variability in Crane Currency, including U.S. government and central-bank activity.
- The separation creates risks related to tax treatment, indemnification and other obligations under agreements with Crane Company, as well as potential competition or conflicts of interest.
- The company reported no reasonable possibility of a material loss or additional material loss from disclosed legal proceedings as of December 31, 2023.
- Management and Deloitte & Touche LLP concluded that internal control over financial reporting was effective, and Deloitte issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether the post-separation cost structure, particularly corporate expense, normalizes after the $20.9 million of 2023 transaction costs.
- Whether CPI backlog conversion and new orders recover following the decline in year-end backlog.
- Whether Crane Currency can sustain its higher backlog while mitigating unfavorable product mix and margin pressure.
- The pace of term-loan repayment, interest costs and compliance with the 3.50-to-1.00 maximum net leverage covenant and 3.00-to-1.00 minimum interest-coverage covenant.
- Cash conversion, working-capital requirements and the planned increase in 2024 capital expenditures.
- Potential tax exposure under the Tax Matters Agreement, including $16.5 million of gross unrecognized tax benefits and the $7.1 million indemnification receivable from Crane Company.
- Progress on separation-related systems and services, cybersecurity controls, and the conversion of the $459.8 million backlog into reported revenue.