Crane NXT, Co. (CXT) FY 2021 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included under Item 8 of this Annual Report on Form 10-K.

We are a diversified manufacturer of highly engineered industrial products. Our operations are comprised of four segments: Aerospace & Electronics, Process Flow Technologies, Payment & Merchandising Technologies, and Engineered Materials. Our primary end markets include process industries (chemical production, oil & gas, power, and general industrial), non-residential and municipal construction, payment automation solutions, banknote design and production, aerospace, defense and space, along with a wide range of general industrial and certain consumer related end markets.

Our strategy is to grow earnings and cash flow by focusing on the manufacturing of highly engineered industrial products for specific markets where our scale is a relative advantage, and where we can compete based on our proprietary and differentiated technology, our deep vertical expertise, and our responsiveness to unique and diverse customer needs. We continuously evaluate our portfolio, pursue acquisitions that complement our existing businesses and are accretive to our growth profile, selectively divest businesses where appropriate, and pursue internal mergers to improve efficiency. We strive to foster a performance-based culture focused on productivity and continuous improvement, to attract and retain a committed management team whose interests are directly aligned with those of our shareholders, and to maintain a focused, efficient corporate structure.

We will continue to execute this strategy while remaining committed to the values of our founder, R.T. Crane, who resolved to conduct business "in the strictest honesty and fairness; to avoid all deception and trickery; to deal fairly with both customers and competitors; to be liberal and just toward employees; and to put my whole mind upon the business."

Due to rounding, numbers presented throughout this report may not add up precisely to totals we provide and percentages may not precisely reflect the absolute figures.

Recent Transactions

On May 16, 2021, we entered into an agreement to sell the Engineered Materials segment to Grupo Verzatec S.A. de C.V. for $360 million on a cash-free and debt-free basis. The sale is subject to customary closing conditions and regulatory approvals. We determined that the Engineered Materials segment met the criteria of being reported as a discontinued operation as of June 30, 2021. As a result, the related assets, liabilities and operating results of Engineered Materials are presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for all periods presented. Throughout this Annual Report on Form 10-K, unless otherwise indicated, amounts and activity are presented on a continuing operations basis. See Item 8 under Note 3, “Discontinued Operations,” in the Notes to Consolidated Financial Statements for additional details.

This section of this Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2020 and 2019. Segment discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020.

19

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results from Continuing Operations

20

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Items Affecting Comparability of Reported Results

The comparability of our results from continuing operations for the years ended December 31, 2021, 2020 and 2019 is affected by the following significant items:

Restructuring and Related (Gains) Charges, net

In 2021, we recorded total pre-tax restructuring and related gains of $9.6 million primarily related to a gain on the sale of real estate. In 2020, we recorded total pre-tax restructuring and related charges of $36.8 million primarily in response to the adverse economic impact of COVID-19 and integration actions related to the Cummins-Allison acquisition. In 2019, we recorded total pre-tax restructuring and related charges of $29.1 million; $9.9 million was related to the repositioning actions initiated in December 2019 in our Process Flow Technologies segment, $5.9 million was related to the acquisition of Crane Currency, and $13.3 million was related to our 2017 repositioning actions.

We expect pre-tax savings subsequent to completing all actions for all programs to approximate $165 million. Please refer to the individual segment discussion and analysis that follows, as well as Item 8 under Note 16, "Restructuring" in the Notes to Consolidated Financial Statements for further discussion.

Transaction Related Expenses

During 2021, we recorded pre-tax transaction related expenses of $8.2 million related to the divestiture of Engineered Materials and other professional fees.

Acquisition-Related and Integration Charges

During 2020 and 2019, we recorded pre-tax acquisition-related and integration charges of $12.9 million and $5.2 million, respectively. Please refer to Item 8 under Note 2, "Acquisitions" in the Notes to Consolidated Financial Statements for further discussion.

Asbestos Provision, net

In 2019, we recorded a pre-tax provision, net of insurance recoveries of $229.0 million associated with updating our estimated asbestos liability through the generally accepted end point in 2059. Please refer to Item 8 under Note 13, "Commitments and Contingencies" in the Notes to Consolidated Financial Statements for further discussion.

Environmental Provision, net

In 2019, we recorded a pre-tax provision, net of reimbursements of $18.9 million to extend accrued costs through 2027 at the former manufacturing site in Goodyear, Arizona (the "Goodyear Site"). Please refer to Note 13, "Commitments and Contingencies" in the Notes to Consolidated Financial Statements for further discussion.

OVERALL

2021 compared with 2020

Sales increased by $418.7 million, or 15.2%, to $3,180.0 million in 2021. The year-over-year higher sales included:

•an increase in core sales of $343.1 million, or 12.4%;

•favorable foreign currency translation of $70.6 million, or 2.6%; and

•an increase in sales related to acquisitions of $5.0 million, or 0.2%.

Operating profit increased by $262.1 million, or 109.1%, to $502.3 million in 2021. The increase in operating profit reflected higher operating profit in each of our segments, partially offset by higher corporate costs. Operating profit in 2021 included net restructuring and related gains of $9.6 million and transaction related expenses of $8.2 million. Operating profit in 2020 included restructuring and related charges of $36.8 million and acquisition-related and integration charges of $12.9 million.

21

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

2020 compared with 2019

Sales decreased by $313.2 million, or 10.2%, to $2,761.3 million in 2020. The year-over-year lower sales included:

•a decrease in core sales of $532.1 million, or 17.3%, partially offset by

•an increase in sales related to acquisitions of $211.7 million, or 6.9%; and

•favorable foreign currency translation of $7.2 million, or 0.2%.

Operating profit increased by $57.1 million, or 31.2%, to $240.2 million in 2020. The increase in operating profit reflected the absence of the $229.0 million asbestos provision, net and the $18.9 million environmental provision, net, together with lower corporate costs. These increases were largely offset by lower operating profit in each of our segments. Operating profit in 2020 included restructuring and related charges of $36.8 million and acquisition-related and integration charges of $12.9 million. Operating profit in 2019 also included restructuring and related charges of $29.1 million and acquisition-related and integration charges of $5.2 million.

Comprehensive income

For the year ended December 31, 2021, comprehensive income before allocation to noncontrolling interests was $462.2 million compared to $197.9 million in 2020. The $264.3 million increase was primarily driven by $254.3 million of higher net income before allocation to noncontrolling interests and a $149.6 million increase primarily related to changes in pension discount rates, partially offset by a $139.6 million unfavorable impact of foreign currency translation adjustments, primarily related to the British pound and euro.

22

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

AEROSPACE & ELECTRONICS

Aerospace & Electronics sales decreased $12.4 million, or 1.9%, to $638.3 million in 2021. The commercial market and military market accounted for 52% and 48%, respectively, of total segment sales in 2021. Sales to OEM and aftermarket customers in 2021 were 74% and 26% of total sales, respectively.

•Sales of Commercial Original Equipment increased by $3.0 million, or 1.3%, to $229.4 million in 2021.

•Sales of Military Original Equipment decreased by $19.0 million, or 7.3%, to $239.7 million in 2021, primarily reflecting challenging comparisons to particularly strong sales growth during the prior three years.

•Sales of Commercial Aftermarket increased by $11.5 million, or 12.4%, to $104.5 million in 2021, primarily reflecting higher demand driven by a rebound in commercial air traffic following the 2020 impact of COVID-19.

•Sales of Military Aftermarket decreased by $7.9 million, or 10.9%, to $64.7 million in 2021, primarily reflecting particularly strong sales in the prior year.

Aerospace & Electronics operating profit increased by $9.3 million, or 9.2%, to $110.0 million in 2021, primarily as a result of savings from 2020 repositioning actions of $19.0 million and productivity benefits of $16.5 million, largely offset by the impact of lower sales volumes of $21.3 million and $4.9 million of other items, net.

23

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Process Flow Technologies

Process Flow Technologies sales increased by $190.8 million, or 19.0%, to $1,196.6 million in 2021, driven by higher core sales of $145.2 million, or 14.5%, favorable foreign currency translation of $40.6 million, or 4.0% and a benefit from the January 2020 acquisition of Instrumentation & Sampling (“I&S”) of $5.0 million, or 0.5%.

•Sales of Process Valves and Related Products increased by $85.5 million, or 13.5%, to $717.1 million in 2021. The increase reflected higher core sales of $66.2 million, or 10.4%, favorable foreign currency translation of $14.3 million, or 2.3%, primarily reflecting the strengthening of the euro against the U.S. dollar, and a benefit from the acquisition of I&S of $5.0 million, or 0.8%. The higher core sales primarily reflected broad based strengthening across chemical, pharmaceutical, and general industrial end markets that continue to recover from the 2020 impact of COVID-19.

•Sales of Commercial Valves increased by $87.9 million, or 30.7%, to $374.2 million in 2021 primarily driven by a core sales increase of $62.3 million, or 21.8%, and favorable foreign currency translation of $25.6 million, or 8.9%, as the Canadian dollar and British pound strengthened against the U.S. dollar. The higher core sales reflected higher demand in Canadian non-residential construction markets, and to a lesser extent, higher demand in UK non-residential construction markets.

•Sales of Pumps and Systems increased by $17.4 million, or 19.8%, to $105.3 million in 2021, primarily reflecting higher demand from municipal and non-residential construction end markets.

Process Flow Technologies operating profit increased by $84.8 million, or 86.8%, to $182.5 million in 2021. The increase primarily reflected the impact of higher sales volumes of $45.2 million, productivity benefits of $24.7 million, the absence of acquisition-related and integration charges of $6.3 million, lower restructuring costs of $16.4 million which included a gain on the sale of real estate related to prior repositioning actions, partially offset by $7.8 million of other items, net.

24

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

PAYMENT & MERCHANDISING TECHNOLOGIES

Payment & Merchandising Technologies sales increased $240.3 million, or 21.8%, to $1,345.1 million in 2021, reflecting higher core sales of $210.6 million, or 19.1%, and favorable foreign currency translation of $29.7 million, or 2.7%.

•Sales of Payment Acceptance and Dispensing Products increased $134.9 million, or 20.1%, to $805.7 million in 2021. The increase reflected higher core sales of $123.3 million, or 18.4%, and favorable foreign currency translation of $11.6 million, or 1.7%, primarily reflecting the strengthening of the British pound against the U.S. dollar. The core sales increase primarily reflected higher sales to gaming, retail, vending and transportation customers as end markets continued to recover from the 2020 impact of COVID-19.

•Sales of Banknotes and Security Products increased $105.4 million, or 24.3%, to $539.4 million in 2021. The increase reflected higher core sales of $87.3 million, or 20.1%, and favorable foreign currency translation of $18.1 million, or 4.2%, as the euro strengthened against the U.S. dollar. The core sales increase reflected substantially higher sales of banknotes, globally.

Payment & Merchandising Technologies operating profit increased by $206.9 million, or 205.7%, to $307.5 million in 2021. The increase primarily reflected the impact of higher sales volumes of $100.7 million and, to a lesser extent, favorable mix of $41.9 million, productivity benefits of $34.7 million, lower restructuring and related costs of $23.5 million and acquisition-related and integration charges of $6.5 million which did not repeat in the current year, partially offset by $0.4 million of other items, net.

CORPORATE

Total Corporate expense increased by $38.9 million, or 66.2%, in 2021 primarily related to higher compensation and benefit costs of $19.0 million and transaction related expenses of $8.2 million.

25

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTEREST AND MISCELLANEOUS INCOME, NET

Interest expense decreased $8.4 million, or 15.2%, resulting from the absence of interest paid for the 364-day credit facility that was paid in April 2021 and lower amounts outstanding under the commercial paper facility beginning in the second quarter of 2021 . Miscellaneous income, net, increased $5.6 million, or 37.6%, primarily reflecting a gain on sale of a property.

INCOME TAX

Our effective tax rate is affected by a number of items, both recurring and discrete, including the amount of income we earn in different jurisdictions and their respective statutory tax rates, acquisitions and dispositions, changes in the valuation of our deferred tax assets and liabilities, changes in tax laws, regulations and accounting principles, the continued availability of statutory tax credits and deductions, and examinations initiated by tax authorities around the world. See "Application of Critical Accounting Policies" included later in this Item 7 for additional information about our provision for income taxes. A reconciliation of the statutory U.S. federal tax rate to our effective tax rate is set forth in Item 8 under Note 10, "Income Taxes" in the Notes to Consolidated Financial Statements.

26

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

LIQUIDITY AND CAPITAL RESOURCES

Our operating philosophy is to deploy cash provided from operating activities, when appropriate, to provide value to shareholders 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, and by paying dividends and/or repurchasing shares. 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 transaction.

Our current cash balance, together with cash we expect to generate from future operations along with our commercial paper program or borrowings available under our revolving credit facility is expected to be sufficient to finance our short- and long-term capital requirements, as well as to fund payments associated with our asbestos and environmental liabilities and expected pension contributions. In addition, we believe our investment grade credit ratings afford us adequate access to public and private debt markets.

In July 2021, we entered into a $650 million, 5-year Revolving Credit Agreement, which replaced the existing $550 million revolving credit facility. We also increased the size of our Commercial Paper Program (“CP Program”) to permit the issuance of short-term, unsecured commercial paper notes in an aggregate principal amount outstanding not to exceed $650 million at any time (up from $550 million, previously). See Item 8 under Note 14, “Financing,” in the Notes to Consolidated Financial Statements for details regarding our financing arrangements.

On April 15, 2021, we repaid the amount outstanding under the 364-Day Credit Agreement which we entered into to enhance financial flexibility and maintain maximum liquidity in response to the uncertainty in the global markets resulting from the COVID-19 pandemic.

Operating Activities

Cash provided by operating activities from continuing operations, a key source of our liquidity, was $466.7 million in 2021, compared to $284.1 million in 2020. The increase in cash provided by operating activities from continuing operations was primarily driven by higher net income, partially offset by higher asbestos-related payments. Net asbestos-related payments in 2021 and 2020 were $44.9 million and $31.1 million, respectively. In 2022, we expect to make payments related to asbestos settlement and defense costs, net of related insurance recoveries, of approximately $45 million.

Investing Activities

Cash flows relating to investing activities from continuing operations consist primarily of cash used for acquisitions, capital expenditures and cash provided by divestitures of businesses or assets. Cash provided by investing activities from continuing operations was $1.9 million in 2021, compared to cash used for investing activities from continuing operations of $228.0 million in 2020. Cash used for investing activities in 2020 was driven by the acquisition of I&S for $169.5 million. There were no similar acquisitions in 2021. In addition, there was $30 million of net proceeds from the sale of marketable securities in 2021 compared to $30 million of cash used for the purchase of marketable securities in 2020. Capital expenditures are made primarily for increasing capacity, replacing equipment, supporting new product development and improving information systems. We expect capital expenditures of approximately $60 million in 2022.

Financing Activities

Financing cash flows consist primarily of dividend payments to shareholders, share repurchases, repayments of indebtedness, proceeds from the issuance of long-term debt and commercial paper and proceeds from the issuance of common stock. Cash used for financing activities from continuing operations was $557.9 million in 2021, compared to cash provided by financing activities from continuing operations of $55.1 million in 2020. The increase in cash used for financing activities from continuing operations was driven by the $348.1 million repayment of the outstanding amount under the 364-Day Credit Agreement in 2021, compared to proceeds of $343.9 million received from the same 364-Day Credit Agreement in 2020.

27

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Financing Arrangements

Total debt was $842.4 million and $1,218.6 million as of December 31, 2021 and 2020, respectively. Our indebtedness as of December 31, 2021 was as follows:

•$299.4 million of 4.45% notes due 2023;

•$198.5 million of 6.55% notes due 2036; and

•$346.3 million of 4.20% notes due 2048.

As of December 31, 2021, our total debt to total capitalization ratio was 31.5%, computed as follows:

See Item 8 under Note 14, “Financing,” in the Notes to Consolidated Financial Statements for details regarding our financing arrangements.

Credit Ratings

As of December 31, 2021, our senior unsecured debt was rated BBB by S&P Global Ratings with a Stable outlook and Baa2 with a Stable outlook by Moody’s Investors Service. We believe that these ratings afford us adequate access to the public and private debt markets.

Contractual Obligations

Under various agreements, we are obligated to make future cash payments in fixed amounts. These include payments under our long-term debt agreements and rent payments required under operating lease agreements. The following table summarizes our fixed cash obligations as of December 31, 2021:

(a) Debt includes scheduled principal payments.

(b) Pension benefits are funded by the respective pension trusts. The postretirement benefit component of the obligation is approximately $2.4 per year for which there is no

trust and will be directly funded by us. Pension benefits are included through 2029.

(c) As the timing of future cash outflows is uncertain, the following long-term liabilities (and related balances) are excluded from the above table: Long-term asbestos liability

($549.8), long-term environmental liability ($25.8) and gross unrecognized tax benefits ($31.6) and related gross interest and penalties ($4.9).

28

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Capital Structure

The following table sets forth our capitalization:

In 2021, equity increased $304.0 million as a result of net income before allocation to noncontrolling interests of $435.4 million, changes in pension and post retirement plan assets and benefit obligations, net of tax of $96.0 million and the impact of equity-based awards and related settlement activities of $39.0 million. These increases were partially offset by cash dividends of $100.9 million, currency translation adjustment of $69.2 million and share repurchases of $96.3 million.

29

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OUTLOOK - CONTINUING OPERATIONS

Overall

Our sales depend heavily on industries that are cyclical in nature or are subject to market conditions which may cause customer demand for our products to be volatile and unpredictable. Demand in these industries is affected by fluctuations in domestic and international economic conditions, as well as currency fluctuations, commodity costs, and a variety of other factors.

For 2022, we expect a total year-over-year sales increase of approximately 3% to 4%, driven by approximately 5% core growth, partially offset by a 1% to 2% impact from unfavorable foreign exchange. We expect an improvement in operating profit driven primarily by productivity benefits and operating leverage on higher volumes, partially offset by unfavorable mix.

Aerospace & Electronics

In 2022, we expect Aerospace & Electronics core sales to increase in the high-single digit range compared to 2021. We expect a substantial improvement in our commercial OEM business driven by higher aircraft build rates, and we expect a substantial improvement in our commercial aftermarket business given continued recovery in airline flight hours following two years of depressed demand due to the impacts of COVID-19. We expect our defense OEM to be flat and defense aftermarket businesses to be slightly lower given challenging comparisons to recent years where these markets exhibited very strong growth. We expect segment operating profit and operating margin to increase compared to 2021 driven primarily by the impact of operating leverage on higher volumes.

Process Flow Technologies

In 2022, we expect Process Flow Technologies sales to increase approximately 1% driven by approximately 3% core growth, partially offset by a 2% impact from unfavorable foreign exchange.

We expect Process Valves and Related Products sales to increase in the low- to mid-single digit range compared to 2021, driven by mid-single digit core sales growth, partially offset by a low-single digit impact from unfavorable foreign exchange. We expect Commercial Valves sales to decline in the mid-single digit range with a low-single digit decline in core sales and a low-single digit impact from unfavorable foreign exchange. We expect Pumps and Systems sales to increase in the high-single digit range compared to 2021, driven by strong demand across municipal and non-residential U.S. end markets.

We expect an improvement in the segment’s operating profit and operating margin compared to 2021, driven by strong productivity and operating leverage on higher volumes.

Payment & Merchandising Technologies

In 2022, we expect Payment & Merchandising Technologies sales to increase in the low- to mid-single digit range compared to 2021, driven by mid-single digit core sales growth, partially offset by a low-single digit impact from unfavorable foreign exchange.

At Crane Payment Innovations, we expect core sales growth in the low-double digit range, driven by broad-based strength across all vertical markets. At Crane Currency, we expect core sales to decline in the high-single digit range compared to 2021 due to lower expected sales to international customers.

We expect the segment’s operating profit to be similar compared to 2021, with higher prices and strong productivity approximately offset by inflationary pressures and unfavorable sales mix.

30

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

APPLICATION OF CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. Our significant accounting policies are more fully described in Item 8 under Note 1, “Nature of Operations and Significant Accounting Policies” in the Notes to Consolidated Financial Statements. Certain accounting policies require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. On an ongoing basis, we evaluate our estimates and assumptions, and the effects of revisions are reflected in the financial statements in the period in which they are determined to be necessary. The accounting policies described below are those that most frequently require us to make estimates and judgments and, therefore, are critical to understanding our results of operations. We have discussed the development and selection of these accounting estimates and the related disclosures with the Audit Committee of our Board of Directors.

Revenue Recognition. In accordance with Accounting Standards Codification (“ASC”) Topic 606 “Revenue from Contracts with Customers,” we recognize revenue when control of the promised goods or services in a contract transfers to the customer, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We account for a contract when both parties have approved and committed to the terms, each party’s rights and payment obligations under the contract are identifiable, the contract has commercial substance, and it is probable that we will collect substantially all of the consideration.

We primarily generate revenue through the manufacture and sale of engineered industrial products. Each product within a contract generally represents a separate performance obligation, as we do not provide a significant service of integrating or installing the products, the products do not customize each other, and the products can function independently of each other. Control of products generally transfers to the customer at a point in time, as the customer does not control the products as they are manufactured. We exercise judgment and consider the timing of right to payment, transfer of risk and rewards, transfer of title, transfer of physical possession, and customer acceptance when determining when control transfers to the customer. As a result, revenue from the sale of products is generally recognized at a point in time - either upon shipment or delivery - based on the specific shipping terms in the contract.

When products are customized or products are sold directly to the U.S. government or indirectly to the U.S. government through subcontracts, revenue is recognized over time because control is transferred continuously to customers, as the contract progresses. We exercise judgment to determine whether the products have an alternative use to us. When an alternative use does not exist for these products and we are entitled to payment for performance completed to date which includes a reasonable profit margin, revenue is recognized over time. When a contract with the U.S. government or subcontract for the U.S. government contains clauses indicating that the U.S. government owns any work-in-progress as the contracted product is being built, revenue is recognized over time. The measure of progress applied by us is the cost-to-cost method as this provides the most faithful depiction of the pattern of transfer of control. Under this method, we measure progress by comparing costs incurred to date to the total estimated costs to provide the performance obligation. This method effectively reflects our progress toward completion, as this methodology includes any work-in-process amounts as part of the measure of progress. Costs incurred represent work performed, which corresponds with, and thereby depicts, the transfer of control to the customer. Total revenue recognized and cost estimates are updated on a monthly basis.

Income Taxes.  We account for income taxes in accordance with ASC Topic 740 “Income Taxes” (“ASC 740”), which requires an asset and liability approach for the financial accounting and reporting of income taxes. Under this method, deferred income taxes are recognized for the expected future tax consequences of differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. These balances are measured using the enacted tax rates expected to apply in the year(s) in which these temporary differences are expected to reverse. The effect of a change in tax rates on deferred income taxes is recognized in income in the period when the change is enacted.

Based on consideration of all available evidence regarding their utilization, we record net deferred tax assets to the extent that it is more likely than not that they will be realized. Where, based on the weight of all available evidence, it is more likely than not that some amount of a deferred tax asset will not be realized, we establish a valuation allowance for the amount that, in our judgment, is sufficient to reduce the deferred tax asset to an amount that is more likely than not to be realized. The evidence we consider in reaching such conclusions includes, but is not limited to; (1) future reversals of existing taxable temporary differences, (2) future taxable income exclusive of reversing taxable temporary differences, (3) taxable income in prior carryback year(s) if carryback is permitted under the tax law, (4) cumulative losses in recent years, (5) a history of tax losses or credit carryforwards expiring unused, (6) a carryback or carryforward period that is so brief it limits realization of tax benefits, and (7) a strong earnings history exclusive of the loss that created the carryforward and support showing that the loss is an aberration rather than a continuing condition.

31

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We account for unrecognized tax benefits in accordance with ASC 740, which prescribes a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation, based solely on the technical merits of the position. The tax benefit recognized is the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.

We recognize interest and penalties related to unrecognized tax benefits within the income tax expense line of the Consolidated Statement of Operations, while accrued interest and penalties are included within the related tax liability line of the Consolidated Balance Sheets.

Goodwill and Other Intangible Assets.  As of December 31, 2021, we had $1,412.5 million of goodwill and $465.9 million of net intangible assets, of which $70.6 million were intangibles with indefinite useful lives, consisting of trade names. As of December 31, 2020, we had $1,437.7 million of goodwill and $519.1 million of net intangible assets, of which $70.9 million were intangibles with indefinite useful lives, consisting of trade names.

Our business acquisitions have typically resulted in the recognition of goodwill and other intangible assets. We follow the provisions under ASC Topic 350, “Intangibles – Goodwill and Other” (“ASC 350”) as it relates to the accounting for goodwill in the Consolidated Financial Statements. These provisions require that we, on at least an annual basis, evaluate the fair value of the reporting units to which goodwill is assigned and attributed and compare that fair value to the carrying value of the reporting unit to determine if an impairment has occurred. We perform our annual impairment testing during the fourth quarter. Impairment testing takes place more often than annually if events or circumstances indicate a change in status that would indicate a potential impairment. We believe that there have been no events or circumstances which would more likely than not reduce the fair value of our reporting units below its carrying value. A reporting unit is an operating segment unless discrete financial information is prepared and reviewed by segment management for businesses one level below that operating segment (a “component”), in which case the component would be the reporting unit. As of December 31, 2021, we had seven reporting units. In the second quarter of 2021, the assets and liabilities of our Engineered Materials segment (which is a separate reportable segment and reporting unit) were classified as held for sale. Please refer to Item 8 under 3, “Discontinued Operations” in the Notes to Consolidated Financial Statements for further discussion.

When performing our annual impairment assessment, we compare the fair value of each of our reporting units to our respective carrying value. Goodwill is considered to be potentially impaired when the net book value of the reporting unit exceeds its estimated fair value. Fair values are established primarily by discounting estimated future cash flows at an estimated cost of capital which varies for each reporting unit and which, as of our most recent annual impairment assessment, ranged between 9.5% and 11.5% (a weighted average of 10.7%), reflecting the respective inherent business risk of each of the reporting units tested. This methodology for valuing our reporting units (commonly referred to as the Income Method) has not changed since the adoption of the provisions under ASC 350. The determination of discounted cash flows is based on the businesses’ strategic plans and long-range planning forecasts, which change from year to year. The revenue growth rates included in the forecasts represent best estimates based on current and forecasted market conditions. Profit margin assumptions are projected by each reporting unit based on the current cost structure and anticipated net cost increases/reductions. There are inherent uncertainties related to these assumptions, including changes in market conditions, and management judgment is necessary in applying them to the analysis of goodwill impairment. In addition to the foregoing, for each reporting unit, market multiples are used to corroborate discounted cash flow results where fair value is estimated based on earnings multiples determined by available public information of comparable businesses. While we believe we have made reasonable estimates and assumptions to calculate the fair value of our reporting units, it is possible a material change could occur. If actual results are not consistent with management’s estimates and assumptions, goodwill and other intangible assets may then be determined to be overstated and a charge would need to be taken against net earnings. Furthermore, in order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test, we applied a hypothetical, reasonably possible 10% decrease to the fair values of each reporting unit. The effects of this hypothetical 10% decrease would still result in a fair value calculation exceeding our carrying value for each of our reporting units. No impairment charges have been required during 2021, 2020 or 2019.

Intangibles with indefinite useful lives are tested annually for impairment, or when events or changes in circumstances indicate the potential for impairment. If the carrying amount of an indefinite lived intangible asset exceeds its fair value, the intangible asset is written down to its fair value. Fair value is calculated using relief from royalty method. We amortize the cost of definite-lived intangibles over their estimated useful lives.

In addition to annual testing for impairment of indefinite-lived intangible assets, we review all of our definite-lived intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Examples of events or changes in circumstances could include, but are not limited to, a prolonged economic downturn, current period operating or cash flow losses combined with a history of losses or a forecast of continuing losses

32

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

associated with the use of an asset or asset group, or a current expectation that an asset or asset group will be sold or disposed of before the end of its previously estimated useful life. Recoverability is based upon projections of anticipated future undiscounted cash flows associated with the use and eventual disposal of the definite-lived intangible asset (or asset group), as well as specific appraisal in certain instances. Reviews occur at the lowest level for which identifiable cash flows are largely independent of cash flows associated with other long-lived assets or asset groups and include estimated future revenues, gross profit margins, operating profit margins and capital expenditures which are based on the businesses’ strategic plans and long-range planning forecasts, which change from year to year. The revenue growth rates included in the forecasts represent our best estimates based on current and forecasted market conditions, and the profit margin assumptions are based on the current cost structure and anticipated net cost increases or reductions. There are inherent uncertainties related to these assumptions, including changes in market conditions, and management’s judgment in applying them to the analysis. If the future undiscounted cash flows are less than the carrying value, then the definite-lived intangible asset is considered impaired and a charge would be taken against net earnings based on the amount by which the carrying amount exceeds the estimated fair value. Judgments that we make which impact these assessments relate to the expected useful lives of definite-lived assets and its ability to realize any undiscounted cash flows in excess of the carrying amounts of such assets, and are affected primarily by changes in the expected use of the assets, changes in technology or development of alternative assets, changes in economic conditions, changes in operating performance and changes in expected future cash flows. Since judgment is involved in determining the recoverable amount of definite-lived intangible assets, there is risk that the carrying value of our definite-lived intangible assets may require adjustment in future periods. Historical results to date have generally approximated expected cash flows for the identifiable cash flow generating level. We believe there have been no events or circumstances which would more likely than not reduce the fair value of our indefinite-lived or definite-lived intangible assets below their carrying value.

Asbestos Liability and Related Insurance Coverage and Receivable.  We retained an independent actuarial firm to assist management in estimating our asbestos liability in the tort system. The actuarial consultants review information provided by us concerning claims filed, settled and dismissed, amounts paid in settlements and relevant claim information such as the nature of the asbestos-related disease asserted by the claimant, the jurisdiction where filed and the time lag from filing to disposition of the claim. The methodology used by the actuarial consultants to project future asbestos costs is based on our recent historical experience for claims filed, settled and dismissed during a base reference period. Our experience is then compared to estimates of the number of individuals likely to develop asbestos-related diseases determined based on widely used previously conducted epidemiological studies augmented with current data inputs. Those studies were undertaken in connection with national analyses of the population of workers believed to have been exposed to asbestos. Using that information, the actuarial consultants estimate the number of future claims that would be filed against us and estimates the aggregate settlement or indemnity costs that would be incurred to resolve both pending and future claims based upon the average settlement costs by disease during the reference period. This methodology has been accepted by numerous courts. After discussions with us, the actuarial consultants augment our liability estimate for the costs of defending asbestos claims in the tort system using a forecast from us which is based upon discussions with our defense counsel. Based on this information, the actuarial consultants compile an estimate of our asbestos liability for pending and future claims using a range of reference periods based on claim experience and covering claims expected to be filed through the indicated forecast period. The most significant factors affecting the liability estimate are (1) the number of new mesothelioma claims filed against us, (2) the average settlement costs for mesothelioma claims, (3) the percentage of mesothelioma claims dismissed against us and (4) the aggregate defense costs incurred by us. These factors are interdependent, and no one factor predominates in determining the liability estimate. These factors have both positive and negative effects on the dynamics of asbestos litigation in the tort system and the related best estimate of our asbestos liability, and these effects do not move in a linear fashion but rather change over multi-year periods. Accordingly, we continue to monitor these trend factors over time and periodically assesses whether an alternative forecast period is appropriate.

With the assistance of our actuarial consultants, effective as of December 31, 2019, we updated our estimate of the asbestos liability, including the costs of settlement or indemnity payments and defense costs relating to currently pending claims and future claims projected to be filed against us through 2059. Our estimate of the asbestos liability for pending and future claims through 2059 is based on the projected future asbestos costs resulting from our experience using a range of reference periods for claims filed, settled and dismissed. Based on this estimate, we recorded an additional liability of $255 million (an aggregate asbestos liability of $712 million) as of December 31, 2019. Estimation of our exposure for asbestos-related claims is subject to significant uncertainties, as there are multiple variables that can affect the timing, severity and quantity of claims and the manner of their resolution.

Management has made its best estimate of the costs through 2059. Through December 31, 2021, our actual experience during the updated reference period for mesothelioma claims filed and dismissed generally approximated the assumptions in our liability estimate. In addition to this claims experience, we considered additional quantitative and qualitative factors such as the nature of the aging of pending claims, significant appellate rulings and legislative developments, and their respective

33

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

effects on expected future settlement values. Based on this evaluation, we determined that no change in the estimate was warranted for the period ended December 31, 2021. The liability was $612 million and $670 million as of December 31, 2021 and 2020, respectively.

In conjunction with developing the aggregate liability estimate referenced above, we also developed an estimate of probable insurance recoveries for our asbestos liabilities. In developing this estimate, we considered our coverage-in-place and other settlement agreements, as well as a number of additional factors. These additional factors include the financial viability of the insurance companies, the method by which losses will be allocated to the various insurance policies and the years covered by those policies, how settlement and defense costs will be covered by the insurance policies and interpretation of the effect on coverage of various policy terms and limits and their interrelationships. As of December 31, 2021 and 2020, we had an aggregate asbestos insurance receivable of $74 million and $87 million, respectively.

Environmental.  For environmental matters, we record a liability for estimated remediation costs when it is probable that we will be responsible for such costs and they can be reasonably estimated. Generally, third party specialists assist in the estimation of remediation costs. The environmental remediation liability as of December 31, 2021 is substantially all for the former manufacturing site in Goodyear, Arizona (the "Goodyear Site"). Estimates of our environmental liabilities at the Goodyear Site are based on currently available facts, present laws and regulations and current technology available for remediation, and are recorded on an undiscounted basis. These estimates consider our prior experience in the Goodyear Site investigation and remediation, as well as available data from, and in consultation with, our environmental specialists. Estimates at the Goodyear Site are subject to significant uncertainties caused primarily by the dynamic nature of the Goodyear Site conditions, the range of remediation alternatives available, together with the corresponding estimates of cleanup methodology and costs, as well as ongoing, required regulatory approvals, primarily from the EPA. During the fourth quarter of 2019, we received conceptual agreement from the EPA on an alternative remediation strategy which is expected to further reduce the contaminant plume. Accordingly, we recorded a pre-tax charge of $18.9 million, net of reimbursements, to extend our forecast period through 2027 and reflect our revised workplan.  The total estimated gross liability was $32.3 million and $39.8 million as of December 31, 2021 and 2020, respectively.

On July 31, 2006, we entered into a consent decree with the U.S. Department of Justice on behalf of the Department of Defense and the Department of Energy pursuant to which, among other things, the U.S. Government reimburses us for 21% of qualifying costs of investigation and remediation activities at the Goodyear Site. We have recorded a receivable of $7.3 million and $7.8 million for the expected reimbursements from the U.S. Government in respect of the aggregate liability as of December 31, 2021 and 2020, respectively.

Pension Plans.  In the United States, we sponsor a defined benefit pension plan that covers approximately 16% of all U.S. employees. Effective January 1, 2013, pension eligible non-union employees no longer earn future benefits in the domestic defined benefit pension plan. The benefits are based on years of service and compensation on a final average pay basis, except for certain hourly employees where benefits are fixed per year of service. Charges to expense are based upon costs computed by an independent actuary. Contributions are intended to provide for future benefits earned to date. Additionally, a number of our non-U.S. subsidiaries sponsor defined benefit pension plans that cover approximately 9% of all non-U.S. employees. The benefits are typically based upon years of service and compensation. Most of these plans are funded by company contributions to pension funds, which are held for the sole benefit of plan participants and beneficiaries.

The expected return on plan assets component of net periodic benefit cost is determined by applying the assumed expected return on plan assets to the fair value of plan assets. For one of the U.K. pension plans, a market-related value of assets is used in lieu of the fair value of plan assets for this purpose. The net actuarial loss (gain) is amortized to the extent that it exceeds 10% of the greater of the fair value of plan assets and the projected benefit obligation. The amortization period is the average life expectancy of plan participants for most plans. The amortization period for plans with a significant number of active participants accruing benefits is the average future working lifetime of plan participants. The prior service cost (credit) is amortized over the average future working lifetime of plan participants whose prior service benefits were changed.

The net periodic pension benefit was $6.8 million, $6.8 million and $0.6 million in 2021, 2020 and 2019, respectively. The net periodic pension benefit was the same in 2021 compared to 2020, driven by lower interest costs for both U.S. and non U.S. plans offset by higher amortization of a net loss. Employer cash contributions were $26.7 million, $26.1 million and $4.2 million in 2021, 2020 and 2019, respectively.

Holding all other factors constant, a decrease in the expected long-term rate of return on plan assets by 0.25 percentage points would have increased 2021 pension expense by $1.2 million for U.S. pension plans and $1.3 million for non-U.S. pension plans. Also, holding all other factors constant, a decrease in the discount rate used to determine net periodic pension cost by 0.25 percentage points would have decreased 2021 pension expense by $0.2 million for U.S. pension plans and increased 2021 pension expense by $0.8 million for non-U.S. pension plans.

34

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The weighted average assumptions used to determine benefit obligations and net periodic benefit cost are as follows:

The long-term expected rate of return on plan assets assumptions were determined with input from independent investment consultants and plan actuaries, utilizing asset pricing models and considering historic returns. The discount rates we used for valuing pension liabilities are based on a review of high-quality corporate bond yields with maturities approximating the remaining life of the projected benefit obligation.

Recent Accounting Pronouncements

Information regarding new accounting pronouncements is included in Item 8 under Note 1 to the Consolidated Financial Statements.