Crane Co (CR) 2002 Q3 法說會逐字稿

Good day, everyone, and welcome to the Crane Co. third quarter 2002 earnings release teleconference call.

Today's call is being recorded.

At this time I would like to turn the call over to the director of investor relations, Ms. Pamela Styles (ph). Ms. Styles (ph), please go ahead, ma'am.

Thank you operator and good morning. Welcome to our Crane Co. third quarter 2002 earnings release conference call. I'm Pam Styles (ph), Director of Investor Relations and strategic planning.

This morning on our call we have Eric Fast, our President and CEO, and Mike Raithel, our Vice President and CFO. Eric will open our call with a few comments on the quarter and Mike will follow with a detailed discussion of our operating results.

Before we begin, I'd like to mention to you all that we will be hosting our Crane Co. annual analyst's conference in New York City on November 14th. If you have not yet received an invitation, please call my office for details and we'll greatly appreciate all of your RSVPs as early as possible.

Also on September 30th we launched our redesigned CraneCo.com Web site. The redesign was done to keep up with the pace of change at Crane Co. and the new design and significant new content includes more narrative and information on Crane's business initiatives and operating focus, as well as on our businesses and products and on our acquisitions, philanthropy, environmental policy, and our company history.

As a reminder, the comments we make on this call may include some forward-looking statements. We would refer you to the disclaimer language at the bottom of our earnings press release and also on our annual report and 10-K pertaining to forward-looking statements.

Let me turn the call over to Eric.

Thank you, Pam (ph). From my perspective, the third quarter was a very solid quarter operationally in a difficult market, but with several nonoperating charges. We earned 34 cents in the third quarter, in line with our earnings guidance with 34 cents to 36 cents, which included the 5 cents per share charge for the cost to inspect the Hydro-Aire fuel pumps, which we previously announced.

Segment operating results were lower than prior year, with the exception of engineering materials with RV market demand was very strong. The rest of the our businesses, which make up roughly 80 percent of our end markets, are experiencing difficult or depressed markets, particularly aerospace and chemical processing. You will note our corporate expenses increased due to environmental and asbestos costs, which I will refer to later.

On the M&A front, we had one small acquisition of a U.S. distributor of valves and actuators and one small divestiture for 3 million of our core tech operations. We are continuing to pursue additional acquisition opportunities and have seen a modest pickup in activity.

The expense in corporate includes 5.6 million for environmental costs related to the environmental remediation of one Superfund (ph) site in the Phoenix area, where the company has been cleaning up soil and groundwater for more than a decade. Recent tests have revealed both wider contamination and new contaminants in the groundwater, which is a reason for this charge, which covers projected costs for additional remediation over the next five years.

We indicated in our last earnings call that we would be updating you on asbestos on a quarterly basis. We saw a significant increase in asbestos claims during the quarter, from 25,000 to 43,000 pending claims, almost entirely due to filings from several firms in Mississippi. Our normal practice is to rigorously challenge each claim in terms of product identification. Demands by Mississippi firms to settle all claims at one time, coupled with the significant risk of proceeding to trial in Mississippi, led us to the same conclusion of every other defendant in these suits, which was to settle.

As a result, we settled 9,000 claims in Mississippi, and we took a charge of 4.3 million to cover this settlement and other pending claims in Mississippi. Actual settlement costs preinsurance for the nine months ended September were $1.8 million versus $1.2 million through the six months ended June. These actual settlement costs do not include the additional provision for Mississippi.

We continue to believe, after discussing pending claims with counsel, that the resolution of these claims will not have a material adverse effect on the company's financial position or cash flow.

As you know, we also had a 4 million charge in the quarter at Hydro-Aire to inspect roughly 35,000 fuel pumps, and that charge is included in the aerospace segment result. Importantly, we found the problem; it was a wire chafing situation. We immediately notified Boeing and the FAA. We identified the cause, which was either assembly or repair-related, not engineering, and put practices in place so that there is no safety concern. All 35,000 pumps are subject to inspection with the cooperation of the airlines, and we are reimbursing the airlines for their inspection costs.

Mike will provide a lot more details, but I did want to mention that we continue to produce strong pre-cash flow in the quarter, with debt as a percent of capital at a conservative 24 percent at September 30 versus 28 percent at June 30.

We continue to expect fourth quarter 2002 earnings per share to be 33 cents to 35 cents, which will result in $1.46 to $1.48 earnings per share for the full year. Based on our preliminary review of 2003, we are targeting a range of $1.65 to $1.75 earnings per share for next year, reflecting continued difficult operating environments. I would caution that we are only halfway through our formal planning process and the environment, particularly commercial aerospace, remains highly uncertain.

Now let me turn the call over to Mike for a review of details of the quarter.

Good morning. Our total company sales in the quarter were 386 million. That's 9 percent from the prior year. Operating profits were 31.9 million, down 38 percent from the prior year as reported, and operating margins were 8.3 percent compared to 12.1 last year. Earnings per share were 34 versus 30 last year.

Just to be clear, operating profits included the $4 million charge for pump inspections and included 5.6 million for the additional environmental cost, 4.3 million for the Mississippi asbestos claims. In addition to that, we had $1 million in severance costs during the quarter. We've reduced our head count by about 170 people. So these numbers are - include all these items. A lot of people are excluding these items. We've included them.

Operating activities generated cash flow of $53 million in the third quarter, and we've generated $138.2 million year to date. Free cash flow year to date after dividends and net capital spending is $106 million. That's $1.76 a share, and we're in line to make our cash flow projections for the year.

And just as a reminder, we've restated the prior year to exclude goodwill on our press release from the operating segments, and I'm going to talk about each operating segment with the goodwill exclusion in the prior year.

Aerospace sales of 80.1 million were down 21 percent from the prior year. Operating profit 14.8 million, was down 44 percent from the prior year, and this includes the $4 million charge for the pump inspections of approximately -- for 35,000 fuel pumps in our Hydro-Aire.

Including the impact of the Hydro-Aire charge, for the pump inspections, operating margins were still strong at 18.4 percent. Without this charge, operating margins would have been 23.4. And during the quarter aerospace reduced its workforce by 130 people and incurred about $600,000 in severance costs.

Interpoint, our micro electronics business in this segment, produced solid results, and operating profits were up 50 percent from the prior year on a 24 percent decline in sales. Interpoint continues to utilize this low cost high warrant (ph) facility and to achieve productivity improvements across this organization. The results have been very strong here. If you recall in 2000 Interpoint lost $5 million, so this has been a big turnaround in the aerospace group.

The overall backlog totaled 199 million at the end of September. That was down 20 million from June, and it's down 87 million from the third quarter of last year. The aerospace market remains very weak. After market orders were down 6 percent from the prior year, and after market sales were off 18%. The after market backlog now is down 35 percent from the prior year level.

Now, although the after market orders have remained weak from a historic perspective, we've seen sequential improvement in after market orders since the fourth quarter of 2001, so every quarter has gotten a little bit better. It's nowhere near the historic level.

So, the aerospace group continues to see weakness in the commercial aerospace and after market orders during the quarter and we would expect 2002 operating profit now to be approximately 35 percent below 2001, and this includes the $4 million charge for the pump inspections at Hydro-Aire.

We expect the aerospace market to remain weak in 2003, and assuming current published (inaudible) rates and after market maintenance activity at the current level, we would expect a further reduction of about 10 percent in operating profit from the 2002 levels.

Turning now to engineered materials -- sales were 81.8 million. They're up 8 percent. Base business sales -- that excludes acquisitions and divestitures -- were up 9 percent, and operating profit of 14.9 million was up 44 percent from last year. The last year's results included plumbing in the third quarter. We sold plumbing at the end of the third quarter and plumbing incurred about a 900,000 loss in the third quarter of last year. The year to date sales were about $8 million. Third quarter sales, actually, were about $8 million.

Overall margins improved 18.2 percent compared to 13.7 percent last year, and the recent Lasco (ph) acquisition contributed about $10 million in sales and had an operating profit margin of around 14 percent. We have achieved synergy savings to date on Lasco (ph) of about 1.9 million. We've got 600,000 from material cost savings, $1 million from SG&A savings, and we've got about 300,000 in the productivity savings in the plant, which is basically line speeds and product yields. And we expect to exceed the productivity savings, certainly in the plan in the coming months.

Versus the prior year, Kemlite shipments to the RV (ph) market in the quarter were up 50 percent. And transportation shipments were up 20 percent on strengthening reefer van -- refrigerated van shipments. Year to date RV production of production levels were up about 16 percent. Kemlite's sales to the RV (ph) market are up 37 percent. So we've gained share against competing materials in the quarter. And we are currently running the Kemlite Jonesborough (ph) facility flat out. So that plant is operating at capacity supplying the RV (ph) market.

And there is a little bit of concern about the West Coast dock strike out there because we do get supplies of our fiberglass from Japan here, so that could impact us a little bit in the fourth quarter.

Driving end (ph) production year to date is down about 19 percent, but the principal market of Kemlite this -- in dry vans is really for the refrigerated vans, and that was down only 8 percent and we are seeing improvement in that quarter to quarter.

In the quarter we sold (ph) CorTec. This business had sales through nine months of about $10 million and they had lost about $1 million. At Resistoflex operating results were very weak with operating profits down 17 percent from the prior year, and it continues to suffer from the weak chemical process industry and cost of closing its Bay City facility. We expect annual savings of about 2.5 million from this consolidation and we have currently spent about $1 million to date consolidating it, and expect a million 8 in total.

We expect the recreational vehicle market to remain strong and truck-trailer market to improve slightly in both the fourth quarter of 2002 and through 2003. And based on the strong performance at Kemlite we currently expect the engineered materials profit to be up 20 percent for the full year 2002, and we expect a similarly strong performance in 2003 from the strong RV sales and also from the savings of their plant consolidation at Resistoflex.

Turning now to merchandising systems, sales totaled 39.8 million, down 28 percent from the prior year, and operating profit was one a million, or 86 percent lower than the prior year level. Margins were only 2.5 percent compared to 13 percent in 2001. And as previously stated, we have unfavorable comparisons throughout 2002 from NRI (ph) due to the completions of the euro conversion in 2001 and an overstock situation at almost all our customers and also continuing low vending demand in Europe. NRI (ph), our coin (ph) validation business in Europe, operated at an annual rate of only $20 million in the third quarter. And this compares to a rate of about $80 million last year, so they've taken a tremendous drop in their sales level year over year.

National Vendors operating profit improved to 6.6 percent of sales compared to a loss from the prior year. The market in both North America remains very soft, with no improvement in employment or office occupancy rates in the quarter. And this is what drives National Vendor sales. Operationally, National Vendors is fixed and they're now on the offensive trying to gain market debt share. They've introduced four new products this year. They've introduced a frozen food machine, they've introduced their Surevan (ph) feature to make sure you get your money back or you get vended products. They're introducing a new coffee machine, and also introduced a new small food machine.

We expect full year 2002 operating profit to be about 75 percent lower than the prior year, and while we expect cost improvement from both businesses, the end market in automated merchandising in both Europe and the United States is expected to remain weak throughout 2003, resulting in only modest improvement over 2001. And in addition, we expect to incur significant costs to right size the European operations, and this will happen in 2003.

Turning now to food (ph) handling, sales were 168.1 million, even with last year. Operating profit was 12.9 million, slightly above last year. Margins improved 30 basis points to 7.7 percent due to improvement in our pump business and Crane Supply's operating margins. Crane Valve (ph) shipments were down slightly in the quarter and the business continues to be impacted by the extremely weak chemical process industry and a sharp decline in the power industry in the quarter.

Valve's (ph) operating profits were also lower from last year. They were -- they've declined to 7.7 percent from 8.7 percent and the decline in the quarter was due to the sharp falloff in the power market and the continued weakness in the CPI market.

Sales in the short cycle business pump business were up 9 percent and pump margins improved 240 basis points to 9.4 percent in the quarter, and this is a result of the higher sales and also the benefit of the plant consolidation, which we did in 2001.

Crane Supply sales were down or operating profits improved to over 8 percent of sales in the quarter. We expected 20 percent improvement in operating profit in 2002 principally from acquisitions in this business, and we expect a similar increase in 2003, as procurement in foreign and sourcing initiatives, (inaudible) rationalizations, and sales synergies are expected to offset the impact of continued weakness in the chemical process and power industries.

In this regard, I'd like to note that we have just signed a joint venture in China to manufacture pumps and components primarily for sale to the wastewater and sewage market in the United States, and we were already sourcing from this company and now we were owned 90 percent of this joint -- 70 percent of this joint venture, and we have to invest about $10 million and the annual sales of the joint venture are expected to be about $20 million.

Turning now to controls, sales were 16.2 million, essentially even with the prior year, excluding Ferguson (ph) and Powers (ph). If you recall, we formed a joint venture with Ferguson in the third quarter of last year, and also we sold our Powers (ph) unit.

Sales were down 30 percent as reported, and operating profit of 1.3 million improved from last year. Both businesses in the segment were profitable. Barksdale's sales were up in the quarter due to heavy demand in their air suspension valves, due to the class 8 truck market OEMs as they ramped up to meet the new EPA emission mandates, and this strong demand is not expected to continue.

Dynalco Azonix continued to suffer from weak market conditions, primarily in the oil and gas industry, and we expect operating results from ongoing operations to be flat in 2002. And operating results in 2003 are expected to increase slightly in line with the industry performance. Corporate expense levels were higher in the quarter from the additional cost from environmental remediation and asbestos, which Eric discussed earlier, and this was partly offset by lower compensation costs. We are on an EVA (ph) program, and as your operating results go down, so does this compensation expense.

Last, on the income statement, we've adjusted full-year tax rate now down to 32 percent. This is comparable to the rate we had in the -- in 2001 just if you adjust for goodwill and this will be the rate for the fourth quarter.

As Eric indicated, our balance sheet remains very strong. Net debt was 222 million at the end of September. 24 percent of the total capital. This compares to 35 percent one year ago, and we expect to make our 120 million of free cash flow target for the year.

And through September we have reduced inventories by about $32 million if you take out the acquisitions and divestitures in the current year, so we've done a good job with inventories this year and we expect to have similar improvement in inventories going into next year.

Finally, we expect earnings to be 33 cents to 35 cents per share in the fourth quarter and $1.46 to $1.48 per share for the full year. And these are preliminary. 2003 full year guidance is $1.65 to $1.70 as the bulk of our end markets continue to suffer. We are still in the middle of our planning process and will provide expectations for the first quarter on our next conference call.

That's the end of our prepared comments. Operator, we're ready to take the questions.

Thank you, ma'am. Our question and answer session will be conducted electronically. If you would like to ask a question, please firmly press the star key followed by the digit 1 on your touch-tone telephone. We will put you in queue in the order you signal. If your question has been asked and answered before you ask it and you would like to remove yourself, press the pound key. Again if you would like to ask a question, press the star key followed by the digit 1. And we do ask if you are on a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

For our first question, we go to Dean Drey (ph) with Goldman Sachs.

Good morning. First question would be just some clarification on the asbestos side. That was a big jump in claims where last quarter it sounded like it was one firm bringing the big jump in suits; sounds like more have stepped in. And just clarification also that the settlement was just to -- with one firm, and so how many others in this additional incremental in Mississippi may be settled in the near term?

Dean, the previously -- up to June, most of the claims had been in New York and they have been all from one firm. In the third quarter we started to see it in Mississippi, and the 9,000 claims settlement is with one firm. The provision that we took covers the 9,000 claims plus the other claims that have been -- what we anticipate to settle. The other claims that have currently been filed in Mississippi.

And how does that work out pretax average settlement per claimant? And is it distinguished between those? Maybe give us a sense of what the claim status is?

Well, I think after insurance -- is it after insurance? No, pre-insurance it's about 360 bucks per claimant.

And are there Meso (ph) within that, or are these all asymptomatic?

No, this is -- it's a mix, but it's not really the issue. We didn't settle them that way. You know what I mean?

It got settled in bulk?

It got settled in bulk, and I think there were a couple Meso (ph) cases included in the 9,000.

That is the strategy they use, they'll put some Meso (ph) cases in. So how many other potential settlements are there and what kind of time frame?

I don't know.

Okay. And do your estimates for next year include any asbestos charges? I know you flow these through.

Well, we -- again, my first comment was that we didn't anticipate all these claims to be filed in Mississippi at this rate, nor did we anticipate that rather than to just go for one case that they would demand that we settle, you know, not just one, but settle all. So, you know, I would say that it's difficult to provide an estimate on the outlook. I will say that we have tried to incorporate thinking and charges into next year in our current assessment. Whether those are going to be accurate or not, I don't know.

Okay. And just last asbestos question here. Do you -- would you potentially challenge any of these in court or will you settle?

Our policy is to fight every one of them.

Okay.

This is the first time we've chosen to do this, but at the end of the day in Mississippi in this particular case, there were dozens and dozens of defendants and at the end of the day we were the only defendant left, or one of two left out of literally dozens and dozens. And even though we had good facts in this case, the venue was one we chose not to fight.

Okay.

But our standard practice is to get the facts and fight them. And frankly, until the last minute, we were on that same path here in Mississippi.

Okay. Thank you. And then a question on the fluid side. I'd be interested in the joint venture to setting up in China. What percent of your business now is in wastewater and who would you think your primary competitors would be on the wastewater side?

Well, I don't have the specific breakouts, Dean (ph), but we can certainly get that for you. We've had, really over the last 18 months, a very successful record with this particular company, F&Q (ph), sourcing, buying pumps, and then selling them into the market, particularly these little sump pumps and grinder pumps. And this, in our view on fluid handling, that for standard product you need to make it in a low-cost country, and this is just part of our overall fluid handling strategy to make sure there are Crane-controlled entities in those low cost countries.

So these are sump pumps and grinders?

Those are the initial two products, but we have a whole stream of them that are going to come out of this JB (ph).

Good. And then a question for Mike on the tax rate. You said 32 percent. But what was driving this quarter's tax rate, lower tax rate?

First of all, we finalized our return. And actually we booked the foreign tax credits when we received the dividends and we finally consummated those this last quarter. And it's an estimate going into the year where you're going to come. I mean, it should be -- we should have had it locked at the beginning of the year but it's similar to what we had last year and I expect it's going to be the tax rate going into next year.

This was a true-up quarter?

Yes, it was. It probably impacted the third quarter by $1 million, Dean (ph).

All right. Thank you.

For our next question we go to Don McDougal (ph) with JP Morgan.

Good morning, Eric and Mike and Pam (ph). I guess I have an additional question on asbestos. Sorry to beat this dead horse. The 25,000 that you came into the quarter with I think was the number, and then you said you picked up a bunch and went to 43. The charge - I just want to be clear. The charge is for the increment that you picked up this quarter, primarily on Mississippi cases, correct?

The charge relates to the 9,000 cases that we settled and what we anticipate on the additional Mississippi cases that are currently filed, so we kind of said that this is the deal we cut here. We expect those other cases to kind of come in at the same rate.

So of the 18,000 increases, that's pretty much all Mississippi?

Almost all Mississippi.

Yes.

Okay. Are there any reserves right now on the 25,000 that you came into the quarter on?

Yes. We think we've got what we know about now covered in our reserve.

Okay. Okay. I guess the next question is, this was a pretty significant jump. I guess I don't have enough experience in this, but what are your lawyers say about whether this is -- what are the chances that this is the beginning of a wave? There's a lot of people out there in Mississippi, you know. Can we see these kinds of numbers sustained into next year?

The answer is we don't know.

Okay.

I expect that there's going to be additional cases filed, claims filed in Mississippi; whether we're going to settle them or defend them, and how many more there's going to be, I honestly can't say.

Well, let's talk about some of the operating businesses. On aerospace, you gave us the number for after market sales, Mike. I didn't catch what you did on OE. If you could give us the actual original equipment sales and, if you could, split that between commercial and defense.

The defense side of the business is -- hardly any defensive (ph) left in 10 percent in this segment. I don't really have the breakout for the quarter. But the mix in this thing, if you include everybody, the mix runs about -- when you just talk about Hydro-Aire and ELDEC and also Lear, it's the mix between the after market and the OEM is still about 33 percent.

Okay.

But the OEM was probably about 50 million in the quarter.

Okay. And on the after market, the sales were down, obviously. I don't recall what the actual sales number was last quarter. Could you give us what the sequential trend on after market was?

The after market orders are improving slightly since the fourth quarter of last year. The sales in the after market were down 18 percent this quarter. I think they were down a little bit higher than that last quarter. But we brought down the backlog significantly from last year.

But instead of looking at it on a year over year basis, if you looked at the absolute dollar of after market sales, 3Q versus 2Q, what would that look like?

I think it's relatively flat. It's been running about $20 million a quarter.

Okay. And you had provided, I guess, some initial thoughts on '03 and kind of said that if your after market trend remains what you see now, so essentially flat, is that what's baked into the guidance range that you laid out this morning?

Yes, it is.

Don, we're -- you recall that previously, on Park Plains (ph), for example, we had expected 600, 700, 800 of those planes to come back off the desert, 2003 and 2004. The guidance that we've given you assumes that the number of planes on the desert remain stable -- relatively stable. That is, you might see it go up here a little bit short term, but by the end of next year so that we're now looking for a broad group of planes to come off the desert to impact our after market in the numbers we've given you.

The OEM numbers that are forecast is based on is based on Boeing's kind of published -- I'm not sure what they actually have published now in the last couple days, given the American and Delta announcement, but we're looking at, you know, something like 275 planes from Boeing next year. And I think they've been saying publicly 275 to 300, so we're kind of at the low end of the range. But clearly American and Delta's announcement are not encouraging.

And I know you guys are operating typically bearing (ph) by product, but somewhere in the range of a six month to nine month lead time. Are the OE results -- OEM results we saw this quarter, you said somewhere around 50 million, is that reflecting already what's likely to be the production rate next year at Boeing?

The answer to that I think is yes because we're six months ahead of what they're saying. But understand, they're changing -- they're constantly changing these production levels.

Right.

I haven't really looked at it that way, Don. I mean, I think that way, but I haven't actually looked at the numbers or questioned the aerospace guys. We can get that for you.

Okay. That would be helpful.

Turning to engineered materials, if you could, you mentioned fiberglass, West Coast issue, but aside from that, could you talk about what you expect in terms of raw material costs? We've seen some of the oil price is pretty high, natural gas is up. What's baked into your plan on that front?

You know, they have done a tremendous job in reducing these costs throughout this year, and they continue to drive those costs down. And we have renegotiated our resin cost for the next year now. So they're locked into these plan numbers that we have.

At least through the end of the first quarter.

Okay. And the final question is, you know, looking at your balance sheet, you've got a lot of room to do stuff, you know. What are the odds here of a stepped-up share buyback versus continued emphasis on bolt-on acquisitions?

As you know, Don, our strong premise (ph) has been to do the acquisitions. We've been frustrated in that effort, or maybe just too disciplined. We are seeing a little bit more activity. And again, our first preference, I have consistently said that if we're not successful in doing that, we would look to buy the stock, or if we felt the stock was inappropriately priced. And while we did not buy any stock in the third quarter, we have started to buy -- we have bought a little bit here in October.

Thanks.

You're welcome.

For our next question we go to Wendy Kaplan (ph) with Wachovia Securities.

Thank you. Could you speak a little bit about some of the process industries that you serve in fluid handling, some sense of demand across the market, specifically whether certain end markets have deteriorated or continue to bump along the bottom, or whether you've seen any strengthening across those end markets?

We see power falling off -- power as falling off a cliff. Not declining gradually, but there's substantially reduced demand. People are backing up orders, canceling previous orders. It's a mess. We see the chemical processing industry, which is a big commitment for us, to be bouncing along the bottom and with no strength and no sense of direction. It continues just to feel very weak.

There was a little noise when I was in Europe on the review that some of the quote activity picked up a little bit and we're watching it because some of the chemical companies, you know, they've got some firming prices, but I don't really see it in the order book. Our day-to-day business through distribution is, I would describe as weak.

So, what we see in the process industries here is the only way you're going to be able to hold sales is if you're taking market share. And in fact, in fluid handling, our plan for next year, other than the synergy sales, is the way we're going to have to get there is through margin improvement, improvement through facility rationalization, productivity, moving to lower cost countries. You know, it's going to be making money the hard way.

And your shares, have they shifted significantly?

No, I'm comfortable on two things. First off, I'm comfortable that our businesses are getting stronger every day through our - we've got better people in the businesses, better customer focused, and op ex is starting to take hold where our on-time deliveries, quality, and lead times are not nearly fast enough, but they're clearly getting better, making us a stronger competitor in the marketplace. And I'm comfortable that we're holding shares. And if anything, starting to strengthen that effort to do a more effective job of taking share.

And that taking share would be based on some of these op ex programs versus pricing?

Lowering pricing. We think it's un-American to lower pricing.

Okay. And the nearly $9 million swing in profitability at NRI (ph), can you talk about whether -- you know, how fast we can lower the break even there, or should we expect a loss picture going forward in that business?

It's an important question. NRI has been a business that's run at -- call it $35 million in revenues with 15 percent operating margins for the last several years. In 2001 they were an $80 million business with 25 to 30 percent operating margins, and everybody that we hired was temporary. As you know, NRI is based in Germany, was temporary.

As Mike mentioned it is today, the orders running at about a $20 million annual level in orders, so we have taken out all the temporaries. Frankly, by not adding full-time people last year cost us some money, but - so the expense (ph) is to ask them to leave. But unfortunately we're not back at a $35 million run rate, we're running at 20 million.

Now, we're not planning for -- you know, for next year we're kind of looking for it to be -- call it a $25 million business, maybe low 20s. And as a result of that, we still have a fair amount of permanent staff there equivalent to running a $35 million business.

As you know, in Germany, it takes months of negotiations with the workers counsel (ph) and the social plan to take action there, and we are actively engaged in doing that and we do not expect it to be resolved until the first quarter. So we will clearly have severance-related expenses which we've included in our own thinking when we gave you a range for that operation next year in the first quarter.

Okay. And one more question on CorTec. Your divestiture of CorTec, as I recall, about -- most of that business was trailer-related. What does that say relative to your competitive position now that the reefer market appears to sequentially be strengthening?

It's a completely different market. They were really dealing in truck bodies in the transportation market. A long time ago they used to make these panels for the dry van market, but Kemlite's business is basically in the reefer van. They put the side walls and the roof in the reefer van. It's running about 14,000 units year to date and they were all dry vans. But it has hardly any impact at all on us. The channels were different. They are making panels basically to the truck trailer market now.

Wendy, you recall, (inaudible) I gave this (ph) to Kemlite in terms of looking at it as an internal acquisition, and I was very pleased what Kemlite in terms of getting out the SG&A costs, leveraging procurement and the spend, and leveraging the sales efforts. But even after that, we just didn't feel that it was a competitive product in what was a declining marketplace.

Okay. Thank you very much.

You're welcome.

For our next question we go to Scott Graham (ph) with Bear Stearns.

Yes, good morning.

Good morning, Scott (ph).

I don't think that there is a company that comes more clean than you guys on these conference calls, and I really congratulate you on that. And I guess my question about asbestos is, you know, more open-ended perhaps giving you an opportunity to -- the market is saying something here about the asbestos with the stock price today being off by more than $2.

I know you guys are telling us pretty much everything that you know. Can you maybe tell us what you perceive as the risk factors relative to next year and asbestos overall for the company cash flow expense-wise, perhaps even include, if you are able to, what your specific expense assumptions are for asbestos next year? I know you guys have been asked this question a couple of different ways, but I guess what I'm saying here is that the market is maybe saying that's not enough.

I understand. Scott, I understand the question, and I'd love to have all the answers here. What we are choosing to do as a company, which is our ethos, as you say, is to tell you what we know and to give you the facts as we've got them. I think our disclosure on asbestos on a quarterly basis far surpasses anybody else's kind of disclosure that we've seen, and we're going to continue that practice in terms of suits and settlements and what we're doing.

We just are -- it is taking some -- you know, we didn't anticipate the Mississippi situation when we were sitting here in the June call. As Dean (ph) asked me, you know, how much more do we expect in Mississippi? We're just not sure. So I think that -- I think that, from our perspective, we continue to believe that it's not material to Crane. We are -- I don't see a step function change going on here in and what's happening to us. You can take what we've placed here for Mississippi and put some -- you know, two and three times that and, you know, I still don't think it's material to Crane.

Now, I hope that doesn't happen, but I think it's important to keep this in perspective in relation to the rest of the company.

Me, too. To that end, it seems to me that a $360 per claimant settlement points to how frivolous some of these lawsuits are, bordering on, you know, extortion I think is a word that I've heard. I would just ask you this question. Has there been any situation where you guys have gone to trial and have even come close to being ruled against?

No.

That's what I thought. Let's get on to the better things in life here. The number in engineered materials was terrific, and I was wondering if you could put some color on the building materials piece of that, the building products piece of that.

Building products was actually -- was down a little bit in the quarter. It was down about 14 percent from what it was in the prior year. We've lost some business with Home Depot. It actually was very low priced business, so it wasn't such a great loss to us, but we have lost a little share with Home Depot right there. And I think some of the other mass merchandisers have quit carrying a lower margin product that we have - it's a corrugated, which is basically used in roofs, and it's a very low margin product.

So we have lost some sales there, but it hasn't been very detrimental to the bottom line.

Okay. Within the fluid handling business, are you guys able to estimate what the percent of sales is OEM versus after market? And I don't mean just, you know, the replacement. I mean, you know, just pure after market business. Is there a split that you guys work with?

Yeah, it's very difficult. We do have a business that basically services that, which is a relatively small business. Most of it's sold through distribution though. So there really is an -- there is a repair market over there, but - and it's a project market, but it's very difficult to sort it out.

Okay.

We do track after market for the individual product lines, particularly in pumps, where we look at our margins. We do the same thing at WestAdd (ph). So where we can identify and isolate it and charge for it, we do.

Is it, let's say, maybe 33 percent of the unit sales?

In pumps it's -- well, I'd rather get you the number rather than quote (ph) it.

That's fine.

It's a significant chunk in pumps.

That's fine. My last question is about merchandising systems, where I certainly understand the dynamics of the market that's keeping that weak. But if you strip out the addition or the elimination of goodwill amortization, that business was barely above break even this quarter. And I know you guys don't sit around long on stuff like that that starts to change the dynamics of the business, but I know you've talked about National Rejectors, but is there anything on the vendors' side of things that might still need to be undertaken here?

We think operationally this business is in good shape. They've made some remarkable improvement there just operationally. The company had suffered by some mistakes we had made in management over the last couple years that sticks (ph) now. They're back on the offensive. They're introducing new products to the market that make the operator more profitable. And this is what -- when National Vendors was making 20 percent, they were doing this constantly.

So we're back on the offensive now and introducing those products. The market is really -- it's down 35 percent from what it was two years ago, and it's stayed at a very low level. We're very happy with the management there, and we're also -- we like the business. We think we can do some things with the business. We think there's some real things that we can do here now.

You know, we have -- National Vendors is part of Crane. Crane is very strong. We think we can take some market share here in this market, and actually, they're having a big vending show this week and we've increased our spending at this show and we're spending money on advertising and these new products and we think we're going to gain market share here. The market is dependent on occupancy rates and employment rates, and those things are going down; they're not going up now.

Scott, we are, in my view, starting to take bits and pieces of market share here. And when we get a market that comes back, you will see this business leverage, every sales dollar will bring 40 cents to the bottom line. And we feel good about the momentum and where we are here in the marketplace. It's just a terrible end market, which is not unlike many of our end markets.

Nor any of your peers. Thanks for your time.

You're welcome.

We go next to David Smith (ph) with Salomon Smith Barney.

Good morning. First, a housekeeping question. I didn't see it in the release, but is there a cost of goods sold number for the quarter?

We have a cost of goods sold number for the quarter. We will put this in the Q. The total cost in the quarter was 255 million.

Okay, great. Going down a little bit, you talked a bit about cost savings today. Can you give us a sense going into 2003 the magnitude of cost savings you expect to fall to the EBIT line?

David, we haven't really -- we're in the midst of our planning process, and frankly we're doing it by company.

Yeah.

Remember here, this is -- culturally at Crane under Shel Evans (ph) and I just inherited, there's a very strong cost discipline throughout the company. There's not much fancy about what we have here. I'll start with that, number one.

Number two, as we're going through the planning process with our units, the view is that we are not going to get help on the sales line unless there is very specific new products or specific opportunities that we're going to get. Otherwise it's going to be flat. So that the only way to get the improvement is through a margin. So we are literally going through each of the operations in the planning meetings and challenging them to make sure that they've got the costs in line and the productivity improvements in line when they submit their final plans, which is the first week in December.

But I don't have it yet in an aggregate amount for the whole company.

So we can assume then, based on those comments, that your guidance for 2003, the improvement really is going to be margin driven?

Well, clearly in fluid handling. We're only expecting very -- almost no sales increases, all margin. You'll get some margin improvement in engineer materials. Some of that's going to be volume, but we already run that pretty tight. It's the way we're going to survive -- it's our fundamental philosophy that this is the way we're going to be successful in this environment. We don't have any choice.

Okay. On working capital, it looks like you guys are making some good progress on inventory and receivables aren't doing bad either but for the full year do you have a sense of what kind of a benefit you expect to get in terms of cash flow there? And then maybe some insight into 2003, what's the kind of flat free cash flow guidance you've given so far?

We're best in class on receivables. We need to improve on inventories and also on the payable side of the business. We've taken 30 million out to date and we would expect to probably take another 10 million out in the fourth quarter. This will get us to the 120 million that we need this year. Going into next year overall, we're going to have -- just in round numbers you're going to have net income of $100 million. You're going to have $50 million in amortization and depreciation. We're probably going to have dividends of 25 million, cap ex probably 25 million, again, gets you down to 100; we'll have to take 20 million out of working capital again.

And we have a lot of room for improvement in the inventory side of that and we're driving that across every business.

David, as you know, we've got a long term goal here of working capital as a percent of sales. We want to take one to 1.5 percent reduction in that ratio every year. So that would be, again, the -- call it $20 million in working capital.

Can you pick out a number -- I'm not trying to pin you to something, but if I look at the quarter just, say, taking receivables, inventory subtract payables, it looks like you're about 20 percent and that's definitely down from like 25-ish percent last year. Do you have a direction as to where you want to go on an absolute number?

We said overall we want to go to 20 percent.

Okay.

And every 1 percent from where we are -- we're basically running year to date now 24 percent. Every 1 percent is $15 million.

We've got -- we see a sustained opportunity here over the next several years to continue to take money out of working capital. We will not -- we will reduce inventories before we'll build it to absorb overhead here. And that's a discipline going through our entire company.

Great. Thanks a lot, guys.

You're welcome.

For our next question we go to Bob Atchinson (ph) with Adage Capital.

Good morning, guys. I also compliment you on your honesty about facing some of these issues, especially with the asbestos situation.

Just one question, if I could, on that. As you look at your '03 guidance, were you factoring in a higher or lower total expense number for asbestos specifically?

We haven't disclosed that. I don't think we are going to disclose it.

So directionally, then, you won't give us any sense? As you look at the flow of cases, what should we be thinking? Should we be thinking that '03 should be - and knowing that you've taken some reserves this year, but it's hard for us to tell.

Again, our practice is to tell you everything that we know as of today. We have taken a look out to next year. We've looked at where we've got reserves and taken a stab at it just to make sure that we're being prudent and providing guidance. But other than that, I think it's inappropriate at this time for me to say anything.

Okay. Just on the aerospace business, you do have sales in the business jet and also the regional jet markets. In your outlook into '03, what have you factored in from both of those markets?

We're using -- we're using the production rate that they've given us for regional right now, what the published rates for basically EmbriAir (ph) and Bombardia (ph) are. I think it totals about 300 in the regional, about 350 units for next year.

How about the business jet market?

We're using the published rates there. It's a similar number. I think it's around 340.

Looks to me like it's going to be weaker though.

Yeah. The ...

... noise we got from Bombardia (ph) recently in terms of asking us to kind of delay some shipments. And I look at the used corporate planes in the market, that's well over 300 now. So it's going to be a tough environment there.

Right. Did you hear anything from Gulfstream on that same basis? Because their call at least was a little bit confusing as far as the outlook for Gulfstream.

I haven't, but maybe the aerospace guys have.

And lastly, if I could, you sort of measured the units that -- we've done this in the past sort of as an ABC as you go through your -- the portfolio of companies that you owned. Can you give us an update as to what your sense is of the number of units that are As, Bs, and Cs, and any kind of sense that that gives you as the need for further divestitures?

I don't really grade them A, B, and C, and I'm very consistent on this. This is a company where the core business portfolios in the companies are just outstanding businesses with outstanding business models. And all we've done is where there is some little pieces that don't support a larger company, that's kind of standing out there on its own and there's no real strategic linkage with the rest of the business, we've chosen to sell that. That -- I call it trimming around the edges, and that's going to be an ongoing process here as we go.

Okay.

Again, it's a slight trimming around the edges is all it is to allow us to focus on a smaller number of larger companies where we can make a difference.

Got it. Okay. Thank you.

We go next to Michael Progar (ph) with Clovis Capital Management (ph).

Hi, my question has already been answered. Thank you.

For our next question we go to David Smith (ph) with Salomon Smith Barney.

Hi, just a quick follow-up, guys. On the controls business, it sounds like a lot of the strength there right now has come out of class A truck market. We heard from Danaher (ph) yesterday indicating that class A truck engine production in the fourth quarter was going to drop roughly 50 percent year over year and more sequentially. What are your comments as far as the controls business go? I know it's also facing pretty difficult oil and gas markets. Can you just give us a sense -- a little more clarity going to Q4 in 2003?

This basically affects Barksdale, and Barksdale will be impacted by the dropoff here, but their business is very broad-based. It's not just in this one particular market. So it's going to have an impact on them. It's not going to be detrimental to them.

Okay. So you don't see it ...

We're not expecting much either way here next year in controls versus what they're going to do this year.

Okay, great. Thanks.

And ladies and gentlemen, we have no further questions on our roster at this time.

Very good. Thank you, Rufus (ph), and thank you all for your time and interest and also your investment in Crane. We'll look forward to seeing many of you at our upcoming analyst's conference, and just a reminder to RSVP if you're planning to come. That will help us out greatly. Also, if you have any further questions, please feel free to call us or call me directly, and have a great day.

Ladies and gentlemen, this does conclude the Crane Co. third quarter 2002 earnings release teleconference call. You may disconnect at this time.