Crane Co (CR) 2004 Q1 法說會逐字稿

Good day and welcome everyone to the Crane Co. first quarter 2004 earnings conference call. Today's call is being recorded. At this time, I'd like to turn the call over to the Director of Investor Relations, Ms. Pamela Styles.

Thank you operator and good morning everyone. Welcome everyone to our Crane Co. first quarter 2004 earnings release conference call. As you know, I'm Pam Styles, Director of Investor Relations and Corporate Communications. This morning on our call, we have Eric Fast, our President and CEO and Acting CFO, who has a few prepared remarks for us, after which we will respond to questions. Joan Nano, our Vice President and Corporate Controller, is also the room with us today; George Simoni (ph), our Vice President and CFO, is still on medical leave.

Before we get into our prepared remarks, just a reminder that the comments and 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 in our annual report, 10-K and subsequent filings pertaining to forward-looking statements. With that, let me turn the call over to Eric.

Thank you, Pam. We tried to provide quite extensive analytical detail in our earnings press release and the 8K on both operations and asbestos, so I don't intend to recite the numbers. I do want to share some overall observations and briefly comment on the individual business segments.

First quarter results were very solid and encouraging, with net income up 34 percent and EPS at 37 cents, versus 28 cents in the prior year’s first quarter. All five segments reported increases in sales and operating profits and four of the five segments had improved margins, the exception being aerospace and electronics.

Total Company sales were 448 million, up 19 percent from the prior year first quarter. Base business sales, excluding acquisitions and favorable foreign currency, grew roughly 4 percent. The improvement in operating profit came from both acquisitions and the base business. We spent $2.5 million, or 3 cents per share, for severance, compared to 5 million, or 6 cents per share, in the first quarter of 2003. Headcount in North America and Western Europe has been reduced 8.5 percent, or nearly 650 people since the beginning of 2003. Approximately 15 percent of our total Company headcount is now in low cost locations versus 11 percent at the beginning of 2003. We remain focused on relentlessly driving improved productivity in our businesses and expect that our lower cost base will allow us to leverage the benefit of improved market demand.

The Signal Technologies Etex (ph) acquisitions acquired last year for $167 million continue to produce very solid results. Importantly, the acquired management teams remain in place and have executed the integration actions as planned. During the first quarter, we invested an additional $51 million in acquisitions, the largest of which was P.L. Porter for the aerospace group. We also invested 23 million to repurchase 755,000 shares of our common stock to mitigate dilution from option exercises and because we believe it is a good investment.

Turning now to some brief comments on the segments. In the Aerospace and Electronics segment, our guidance has improved from slightly to moderately higher -- operating results, reflecting the improved market tone and the P.L. Porter acquisition. Porter has 40 percent of the first-class electromechanical seat actuation market and is benefiting from seat refurbishment by the airlines as a strength in marketing to attract the business traveler. Operating profit margins were 17 percent in the first quarter, compared with 19 percent in the first quarter of 2003, reflecting unfavorable mix of aftermarket and OEM business, market pricing pressure and lower margins in the recently acquired businesses which have not yet been fully integrated into the Company. Over the course of the year, margins are expected to return to approximately 20 percent for the segment.

The press release noted several large awards which have positively increased segment backlog. We are particularly pleased with the $16 million order from Federal Express, which validates our modernization and upgrade strategy.

Performance in our Engineering and Material segments reflect a continued strong demand FRP in the RV and transportation markets. Importantly, competing materials of aluminum and steel have experienced substantial price increases. Aluminum, for example, is at an eight-year price peak, which now makes our FRP material competitive on a cost basis and offers the opportunity to take greater market share. Market strength, competitive material substitution, new products and disciplined cost management should offset rising raw material costs during 2004. Thus, we expect operating profit from this segment to be moderately higher in 2004, which is a modest upward revision of our expectations.

While Merchandising Systems end markets remain depressed in the first quarter, improving trends in employment and commercial office vacancies suggest a better market tone moving forward. First quarter results were achieved through disciplined cost control in the North American vending business and reduced severance, 1.3 million versus 2.8 million in the prior year's quarter at the European coin (indiscernible) business. Improved market tone, new product initiatives at both businesses and disciplined control of cost should result in improved results in 2004.

Excluding acquisitions and favorable foreign currency impacts, revenues in Fluid Handling were flat. Operating profit improved 18 percent to 8.7 million versus 7.4 million in the comparable prior year's quarter. I would note that the first quarter is one of seasonably low activity. Increasing commodity costs are a focus as Fluid Handling does have more exposure to commodity price increases than our other segments. We have announced surcharges and pricing increases, which if held at the levels announced, should pass through much of these cost increases. We are and will continue to benefit throughout 2004 from the aggressive actions taken last year to improve the cost structure of our Fluid Handling businesses.

Operating profit was flat in the Valve business as pricing remains very aggressive. There are encouraging signs of improved profitability and utilization at end-users in the chemical processing industry and we expect better margins in the second quarter from a reduced cost and better orders. Crane Limited's integration of its recent acquisitions are on track and the acquisition operating results are as planned. Market conditions for Limited's traditional valve business remained challenging with project pricing at very aggressive levels.

Pumps and Systems continued their achieve leverage from increased volumes and savings from productivity initiatives, which is reflected in their 10.6 percent operating profit margin in the first quarter of '04, a 280 basis point improvement compared with the prior quarter a year ago. We continue to expect a strong increase in operating profit in 2004 from our Fluid Handling segment as the combined benefits and improved markets, realization of cost reductions achieved through facility closures and severed actions and our planned price increases should offset any net negative impact from higher commodity costs.

Control segments experienced improved conditions in the truck, hydraulic and oil & gas markets. We believe full year operating profit from this segment will increase slightly in 2004. Commodity prices began to rise dramatically in the last few weeks of the fourth quarter of 2003 and continued to rise throughout the first quarter of 2004. Our largest commodity purchases include iron, steel, nickel, copper and resins and the segments with the greatest of these materials -- the greatest of these materials content are Fluid Handling and Engineered Materials. We are today in a much better position as an organization to handle the commodity price headwinds than we would have been several years ago. We have corporate level procurement oversight of the entire company and a broad new array of tracking tools and purchasing programs throughout our businesses.

While commodity costs have increase dramatically, we're hopeful that we can manage through this environment by negotiating the balance of surcharges and price increases with our suppliers and customers to mostly flow through the higher costs.

We are reducing our full-year 2004 free cash flow guidance to 90-110 million from the range of 110-120 million, reflecting primarily working capital needs to support the higher sales levels and to a lesser extent, increased asbestos payments. As is our practice, we do not intend to comment on our estimate of the Company's asbestos liability beyond what we've said in the press release and 8-K. I would highlight, however, and I quote from the 8-K -- we saw an increase in settlement and defense costs in the quarter and new claims filed in certain jurisdictions also increase significantly during the first quarter. Historically, the weight of new claims and related costs has varied significantly from quarter to quarter. While one quarter is not indicative of a trend, the cost in new filings continue this pace, they could have an adverse effect on the Company's estimate of asbestos liability. I invite you to read the full discussion on the subject in the form 8-K, which we filed yesterday with our earnings release.

Finally, I'll recap by reiterating -- I'm pleased by our performance in the quarter and what we see as encouraging signs in the marketplace and our order book. We are increasing our full year's earnings guidance to $1.92 to $2.05, up from $1.85 cents to $2 for reasons I mentioned earlier. We believe the second quarter 2004 earnings-per-share should been the range of 48-53 cents. I'm going by memory, but I think it was 44 cents in the second quarter a year ago.

I believe truly that we are a better Company and we're just getting started. With that, I'll turn the call back over to Pam.

Thanks, Eric. Before we open up the call the question for questions, let me provide a few extra details. Cost of sales in the quarter were $306 million, SG&A was $104 million. Included within these categories was depreciation and amortization of $13.8 million. Goodwill as a percent of our total assets was 32.2 percent. Interest expense was $2.6 million higher compared to the prior years first quarter, while the company carried more debt for acquisitions, share repurchases and from the 5.5 percent, 10-year financing completed in the third quarter of 2004; that substituted for the $100 million, 8.5 percent tranche which we retired on March 15th. Average working capital as a percentage of sales for the first quarter of 2004 was 22.2 percent, compared with 23.1 percent at December 31, 2003. With that, we are done with our prepared comments. Operator, you may now open the call up for questions.

(Operator Instructions). Wendy Gapprin (ph), Wachovia Securities.

Good morning. My question is related to the, of course, the Fluid Handling segment. Last month in a presentation that you posted on your web site, you indicated that Fluid Handling margin could reach 8 percent in '04. According to my quick calculation, for the next three quarters, it would have to approach 10 percent in order to get to that level. Have you adjusted your expectation? And can you talk, Eric, strategically about the segment -- what it brings to Crane as -- we've talked about this ad nauseum -- but in terms of whether it is a business that can be fixed or should be fixed? Thanks.

The first quarter in Fluid Handling had a number of puts and takes, but generally is I would say tracking our plans. I would remind you and point to the fact that it is seasonably and low quarter and margins have always not been good there. We have not changed our guidance for Fluid Handling and we are confident about achieving that guidance. The margins are -- should come in as planned. They will be a little bit less, Wendy, because we're going to have price increases that we're putting in that are going to offset the commodity -- increases in commodity costs, so there is kind of -- you will see more buy (ph). So there will be some pressure on the margins as we just get the price increases and the commodity costs, and it is kind of a pass-through.

But generally, I remain, we remain, confident about the progress that has been made here and we do expect you to see margin improvements over prior year in each quarter. I think we did -- our margins in the second quarter last year in Fluid Handling were about 7.3 percent and we expect to do a little bit better than that in the second quarter. And if you will note in the third and fourth, they were at the 5 percent levels. And we're holding to our guidance, which is suggesting that we expect those margins to be better. We remain fully committed to this business. It's not an issue with us. We still have a lot of work to do. And if we can get -- I'm starting to see incipient signs of a little bit better market environment with a more stable MRO. Projects are still spotty, but if we can get a little help from the market, it would be a helpful. But I would disagree with you on all of your observations, frankly. Now that you haven't been right so far. Is that fair enough?

That's fair.

Don't get misled by the first quarter here.

Okay. But you would agree, then, that the next three quarters would have to be close to double digits, if not double digits in order to get there?

I'm just cautioning you a little bit, because I have price increases that I didn't plan and I'm just passing through commodities and that's going to depress margins a little bit, right? We're looking for real margin improvement here year-over-year. There is no question about that.

One other question on the working capital. Can you -- better than year-end. Can you talk about what we should expect at year-end '04, what your goals are and where specifically we should see that?

In terms of, what, working capital as a percent of sales?

Exactly.

I don't know what that number was.

Pam mentioned it was 22 percent at the quarter, it was 23 at the end of the year, and I'm just wondering if there was a corporate goal, in terms of where that should be by year-end '04?

I don't have that number off the top of my head here. Can I get that for you?

Sure. No problem. Thanks.

I'm the acting CFO, not the permanent one.

Dean Dray, Goldman, Sachs & Co.

Thank you, good morning. I'd like to comeback at the Fluid Handling business for a second. Be very interested in hearing, Eric, about the price increases and surcharges. Just give us a sense of how -- what on a percentage basis, how much are you looking for. What have your competitors done? Are you leading the charge, are you following? And might there be any pull-in when you've announced these price increases?

You mean orders ahead of the price increases?

Correct.

Yes. I think there's a little -- some of the orders are probably ahead of the price increases. These are not -- the price increases, again, it varies by product and different businesses and I would say they are ranging kind of the 3-7 percent on certain products. To date, these price increases are being rolled out. In a few cases, they have been implemented and it looks to be okay. And then the rest of them are going to be rolled out here -- the remainder of this over the next 60 days. And I don't expect all of them to stick, but I think for the first time, there's -- people understand that these are real cost increases that we have. And I expect them for the most part to start to get some traction here.

How about on the potential for pull-ins? Buying ahead?

I don't think it's material in either way. I think the more material comment is what we perceive as a stable -- a better, more stable market in the MRO. I mean, look at the chemical processing industry there. Operating profits are up, utilization is up. That means they need to maintain the plant. So I would not say it's growing, but it is at least not going down stable, and I think that is the more powerful issue here.

And you cited that end market particularly as being still weak?

We are at 10-year lows in this market. And -- but I would describe it -- we described it as weak because it's 10 years low, but it's not going down any more, as best we can determine.

And them within fluid, what is the inventory situation today? And was there any restructuring expenses flowed through this segment or the other segments, please?

There wasn't any real restructuring expenses this year in Fluid Handling. It's kind of businesses as usual. And there is nobody in Crane making inventory here to absorb overhead. If we have a choice, we will reduce inventory and take the hit on operating profit.

Okay, thank you.

Ned Armstrong (ph), Friedman Billings & Ramsey.

Good morning. In the Engineered Materials area, could you just elaborate on some of the successes that you are capitalizing on, as far as material substitution goes?

I don't have the specifics here. But it is -- the issue is we have -- we control 70 percent of the FFRP share in trailers and RVs. But when you look at the overall market versus aluminum and other materials, we control more like 30 or 40 percent. So for the first time, we can sell not only features and benefits, but on a more comparable cost. And this is -- we are -- I'm confident as a general statement that we are having an impact and taking some market share.

The second piece of this is not just the material substitution, but taking our products and finding new uses for them, which is as decorator panel and -- for the front end of fast food restaurants. So that business -- the Kemlight remains very solid and couldn't feel better to me.

As a portion of sales in that business, removing they RVs and the truck trailers, what percentage of sales is the remainder of the new applications and substitute products portion of it?

The new applications today relatively small.

And where do you, over your near-term, meaning the next year or two or three years, hope that percentage goes to or what is a realistic goal for that percentage?

I love the question, because that is the exact dialogue and discussions that I am having with Kemlite management team. And together, we think that there is a lot of opportunity for new products, new applications and taking our product to different parts of the world. But frankly, we have not quantified it yet. But that is the number one challenge to be the Kemlite management team, and you just helped me.

Okay, thank you.

Operator, I would like Joan Nano just to comment on this working capital as a percent of sales. What's the number, Joan?

The projection for 2004 is 22 percent or better.

For working capital as a percent of sales, okay.

Next question.

Scott Graham, Bear Stearns.

Good morning. I have several questions. I am going to try to extract one additional piece of asbestos information out of you, Eric, if you don't mind. Was the increase in the cost, the cash outlay we saw this quarter (inaudible) I assume that that was not mutually exclusive to the rise in filings in certain jurisdictions, or was it more of an across-the-board type of increase in cash outlay?

I'm just going to refer you to the 8-K, Scott. The language in the 8-K, it's not possible to forecast when the cash payments related to asbestos liability would be expended, all right? And we have some language in there that talks about jurisdictions and settlements and different terms of settlements and insurance. I got to stick -- on asbestos, we go out of our way to take all our clothes off and say -- here it is in the 8-K and I'm going to leave it where it is. I'm sorry.

I understand -- I'm just going to assume that the certain jurisdictions means that that's a little bit of a higher cost to settle there. But nevertheless, let me move onto the fluid handling business where the backlog looks like it increased 10 percent ex-currency. Do you have available at your fingertips the gross margin of the backlog as it relates -- versus, let's say, this time this year versus this time last year?

No.

No, you don't okay. This question relates to working capital. Some pretty significant number in the first quarter cash flow. And I was wondering if you could tell us -- was there a piece in there relating to acquisition? That was a pretty big number. I know you were saying we have to support sales. But that was a pretty big number.

First off, I'm in an environment that I haven't been here for the four years that I've been at Crane, which is we have our core businesses increasing sales. And there is going to be some working capital demands. There's nothing really unusual in those numbers. I would say that our cash -- utilization cash was higher than we expected. But the first quarter historically for us is not -- we don't generate a lot of cash in the first half of the year. It almost all comes in the third and fourth quarter.

Could you tell us what portion of the inventory is A.R. currently on the books relates to acquisitions of the first quarter?

I don't have that breakouts, Scott.

We don't have that detail here, Scott.

Pam, can you get back to me with that number?

I will look to see what I can get, yes.

Okay, thank you.

Matt Summerville, McDonald Investments.

(multiple speakers) - questions. First, Eric, on the Aerospace business, can you talk a little bit about the fact that you saw some mix shifts in that business in the first quarter and how the mix of business -- you anticipate that progressing throughout the year? And also talk about -- it sounded like you saw pick-up in your OEM Aerospace business and I wanted to get some more color on that as well?

We're seeing, on the OEM side, we're seeing it in the military and we're seeing it on the commercial, a little bit on the commercial, both in the regional and the business aircraft. The reason for the adverse margin and the -- adverse --17 percent margins are adverse. The reason for the decline in the first quarter margin in this segment was largely due to the fact that a year ago, we had abnormally high aftermarkets because of fuel pump repairs caused by people X-raying the fuel pumps and realizing they can do some more repairs with them. And that stays with us partially through the second quarter. So we have less commercial aftermarket. It was okay, but it was a lot less than it was last year because last year was unusually high. We also had some odds and ends, what I would call expenses in the P&L, in the first quarter. But these are superbly run businesses. There has been no change. And as I said in my comments, you will see margins come back for the whole segment and begin to approach at the 20 percent level.

When you say that you're approaching the 20 level, is that sort of a year-end exit -- run rate on the exit of the year?

No, that is for the year.

A couple of quick other items on Fluid Handling. You just mentioned a little bit about chemical process. Could you talk about some of the other major end markets in your valves business and what you're seeing there from either a positive or a negative standpoint?

I would say the tone throughout is better. Oftentimes, it's the tone and not in orders. But the tone is better. I think that a number of improvements that we have put in are businesses, in terms of front-end work, in terms of people and coverages and products is benefiting. I would note some other work being done at Crane Valves North America, which is our low-end kind of commodity gate (indiscernible) and check, seeing some progress there, maybe a little bit -- it's still going down, but a little bit better tone in the power business. So I like the tone. And as I look around the fluid handling businesses, with some exceptions notably, the UK, it feels more stable to me. And if we can get a positive revenue environment here, I am comfortable that we have the costs in-line.

With respect to the commodity, the heightening commodity costs here, do you have a figure, in terms of -- in Fluid Handling -- how much your raw material costs were up first quarter '04 versus first quarter '03 on a dollar basis?

I do, and it's not material.

What about then --

It's not material in the first quarter, but they're going to be -- we quantified that for the valve businesses. And for the other businesses in fluid handling, I'm not -- I don't see why we should be disclosing it. But other than to say that -- again, we have the tools to buy each individual unit and to wrap it up for the whole company so that we can calculate exactly what those price increases are, what the impact is going to be on the cost of our products and to allow us to be able to properly set new prices in the marketplace to try to offset it if they hold. That is a capability that we did not really have several years ago.

To shift gears (indiscernible) materials -- as far the top line momentum you've seen in that business, is there a number that you can talk about, in terms of how much growth you see out of that segment this year on the top line, and in general, whether you see more of that growth coming from underlying improvements in the end markets in which you serve, relative to gaining share on things like steel and aluminum?

I think it big driver is the marketplace and we're continuing to see it strong in the second quarter here with RVs, transportation. So clearly, the dominant issue is -- is the marketplace -- but in working with the management team, our challenge to the management team is here, we have an opportunity, in terms of taking share from materials substitution that we haven't had. And now we're going to track it and monitor that. And then secondly, what about all of these other uses for our material? What we don't want to do is just rive away with the market here. So my whole focus is on how much market share, and then secondly, what new markets can we penetrate with our material? As we move through the year, we will start to talk about that more.

Thanks a lot, Eric.

Thank you.

David Smith, Smith Barney.

Good morning, guys. Eric, just to lead on a little further on the materials side, how much for the full year do you expect material price increases to rise? And maybe if you could give us a sense by quarter, that would be better. And then, just a sense of how you think the offset would be, and then by quarter, if you expect a negative impact and if it will progress to a positive impact for the year. It sounds like the most impact is in Fluid Handling and Engineering and Materials. But just where you see the best ability to gain, in terms of price as well.

I think we really didn't feel much in the first quarter. But you feel it coming as you hold it off, and I think we're going to see -- our judgment is that much of -- I don't know exactly what percent, but I'm just thinking as the numbers and the anecdotal comments that have been made here. I think a lot of that, the cost increases, should be -- we should be really starting to see them in the second quarter. I don't know whether it's 60 percent or 50 percent or 70 percent, but my guidance is in that area, and that is why we are putting through our price increases. You have to give people 30 to 45 days notice on contracts. But I am not looking for adverse results in the second quarter because of it at this point. Let me say it that way, okay?

On net-net first?

It's fairly different by the different businesses. In the case of Engineered Materials, we have some six-month contracts that say that prices cannot be increased by more than 5 percent. So I have some protection there on some resins and other materials. And then in the case of iron and steel, I have no protection.

It almost sounds to me like you expect to not see a negative impact.

We are working very hard to try and mitigate the increased costs through passing them along. So this will be the first time in three or four years you would see us with an ability to pass along some price increases. And I can't say that it is all going to get in, but I think a fair amount of price increases that we're going with are going to get in place and they're going to offset. Now that means more revenues but higher expenses and you're not getting any margin on it, which is why I cautioned Wendy, who hesitated just a little bit there on Fluid Handling at 8 percent. But generally, that's how we're trying to run the business. And I feel very good about our ability to measure it. In terms of future cost increases, there is some anecdotal comments out there that maybe in a couple of these areas, prices has kind of stabilized. But I don't really have any more color than that to give you.

Realizing that you haven't got a lot of competition on the FRP side, and as for prices, it sounds like costs are rising as well and you probably can recapture better there. Are you seeing increases from your competitors on the Fluid Handling side?

We are -- somebody asked that also, so I didn't answer that. We are seeing price increases, in some cases ahead of us, in a number of cases following us as they should, given our market leading positions. And it's kind of all over the map, but I would say generally, we're definitely not alone in this.

On your Engineered Materials --.

We all have roughly the same material content and mix in our products. So I just cannot imagine that the marketplace is not going to be rational here and just kind of generally in-line.

Right. One other thing. On the Engineering and Materials backlog, you saw 49 percent sequential increase and about 79 percent year-over-year. You mentioned RV, but is RV increasing that much year-over-year still, or is some of that being driven or a lot it being driven by the truck trailer market?

First off, it's good backlog, because remember, we're book and ship here in four or five, six days. It's good backlog. I think most of it is RVs, but some of it is clearly in trucks. Trucks -- the whole industry is up, what, Pam, 25 percent or so? So it is both RVs and trailers.

Okay. Lastly on aerospace, you mentioned th8e new acquisition impacting margins. Can you talk about that briefly?

I will give you an example. P.L. Porter is business we brought in the first quarter. We've publicly announced all of the people that -- it's going to -- sometime over the next 18 months, we're going to close the plant and move it into our hydro air (ph) facility. Now frankly, the orders there are better than we expected. We are seeing a lot about -- more opportunity than we expected. And if I have to delay that plant closure to make sure that we service the marketplace and take care of these orders, I will. There's some synergy savings here from having one plant instead of two that we have not taken yet. I don't plan on taking it for awhile, but I would even put it off if I was comfortable that we can take market share. Right now, (indiscernible) maybe we could take market share. It's that kind of -- we just -- at Signal, we just consolidated the California plant into Arizona at the end of the year. And really, we still have had some tag ends and some issues with that in the first quarter and now we're starting to get that behind us. So it is those kinds of issues. We have a lot of that also going on in fluid handling with Etex.

Great, thanks.

Steve Tusa, J.P. Morgan.

Good morning, guys. I just wanted to get a sense for the acquisition pipeline and wanted to get maybe some comments on how full you think your plate is at this point from both an operating integration standpoint to your financial ability to deploy capital?

I think we have plenty of financial ability to take on whatever we want to take on here. With debt to cap, it's still at 29 percent after spending 51 million and buying the stock, which I'm still just at 29 percent, I still have the free cash flow and plenty of room on the revolver. So we have plenty of financial horsepower. We do have different parts of the business that are kind of challenged at the moment, in terms of our ability to take on acquisitions. But I'm sensitive to that. It's a gating item, but not one with a sense that stops us from doing things.

The marketplace -- we have not seen a, what I would call, an active industrial marketplace. We are seeing very few opportunities in the industrial marketplace, although there are the odd one here and the odd one there that we are taking a hard look at. But it's not like there's 10 acquisitions away from Aerospace and Electronics coming in over the transom. It's 50 here, 150 there, kind of episodic opportunities. We are seeing a lot of opportunities in Defense and Electronics and they are expensive. And really aggressive multiples is one of the things why we bought $23 million of stock here, is we looked at some of those investments versus our own and it was just too difficult to resist. We are showing discipline, in terms of our own price here in that market. We had a situation here recently, for example, for a product, a company we didn't think was as good as the Signal acquisition, which has worked very well for us and it was going for several multiple points more than we paid for Signal. So I felt very good about Signal. But we're not prepared to do that. So while we are seeing a lot of opportunities, we're being very careful in the Defense and Electronics area.

Okay. As far as Merchandising Systems is concerned, was that kind for this quarter in-line with what you guys were expecting? It kind of continues to disappoint somewhat. Are we still kind of just waiting for the markets to come back? It doesn't hurt you much, but what are kind of -- at what point do you kind of re-evaluate that business?

Revenues in the North American business were a little less than we expected and the management team got there by really some proactive control of cost. The operating profit from that segment was right on plan in the first quarter. We are seeing a little bit better environment with coin mech (ph) business in Europe. We should see a better environment here in North America, but we are not yet. But we are absolutely committed in these businesses. We are -- the management team is fully engaged in exploring opportunities of how we grow this business, even with a difficult market. And I am frankly excited about the kinds of things that they are looking into and thinking about, which are premature to talk about. But good, solid work. We're not just sitting here waiting for the market to come back. The market should come back. For the second quarter in a row, we saw occupied commercial space improve. We have better employment numbers and these are the two key drivers that we look to for that market. With a little help and some volume here, we will leverage it to the operating profit.

Okay.

These are good businesses getting better.

Great, thanks a lot guys.

Jim Song (ph), Gabelli.

Hi, good morning. Eric, I guess just getting back to this strong balance sheet, could you just talk about what other use of your cash you might employ if you can't find acquisitions at the right multiple?

I didn't say we couldn't find acquisitions at the right multiple. I think I characterized the marketplace for you. We do have free cash flow. Most of it comes in second part of the year. And I intend to be -- our entire management team and the Board remain incredibly disciplined in making sure that that capital allocation decision is made just in the best possible fashion that we can make it. I'm not sure there's much else I can add to that.

So the priority is still to kind of use the free cash flow to make acquisitions?

Yes sir.

Just a second question. On the Fluid Handling, you had mentioned that the MRO business began to pick up as you exited the quarter. Could you talk a little bit more about that?

I actually read the report from the North American sales at Zomox (ph) and European sales at Zomox, as well as on our Resistoflex, which is our lined pipe, and I've talked directly to the leadership there. And our sense is, and when we look at the day-to-day orders, we are seeing a stabilization we did not see in January. But towards the end of the quarter, we saw a more stable MRO environment. And we are confident that we have not lost any market share there. So as the chemical industry gets better utilization, we should see better orders.

How far down the debt market declines for you, the MRO?

I don't have the peak to trough with me, Jim, to characterize it for you.

But it's pretty substantial, though, right?

Our revenues are off in this industry substantially over the course of the last three years. So as a result, all of our facilities have been deleveraging because of the decline in the unit volume. Just if we could get it stable and get some stable prices, that means that all of the cost initiatives that we have undertaken and the productivity improvements should start to flow through to the bottom line.

Right. And net leverage here, you can be greater with the cost reductions you have put in play?

We don't know we could get it, but the entire management team at Crane and the senior operating people are very focused on -- when we get volume, are we properly leveraging it to the operating profit? And red flags go up throughout the Company when we don't get it. And I think that is going to be the test of industrial America, if we do in fact have what appears to be a recovery in the economy here. An then the next question is -- are you just riding the wave of an improved economy, or are you -- have you also taken share and you're leveraging increased share and a better market? And that is going to be the test of good operating management.

Right. Okay, terrific. Thank you.

Ned Armstrong.

Could you talk a little bit about your electronics business and the opportunities there might be in homeland security type applications?

Ned, it's on-track. We had a very strong March there. It was kind of a weak January and February, but a very strong March. The Signal Technology acquisition, as I said, has gone according to plan and we are just very pleased with it.

In the quarter, we did take a couple of large defense orders. I think in the aggregate, they're about $15 million. This, for example, is funding we're getting from the government for wireless networks that take small, cost-effective sensors and then they integrate them into systems that allow you to see intruders in a given space, for example. And our technology is a lot about wireless technology and the fact that these sensors are totally -- thousands and thousands of them cost nothing.

So there is some interesting technology there. I don't really talk about it much. When we bought Signal, we did not put any value on it, and here we have gotten almost over the last two years, we've gotten almost $30 million of funding from the government to drive the development of that. The base business is I think tracking and okay. And orders, we still need some good orders here in April, the rest of April and May. But I think we are feeling good about it. I'm very proud of the fact that we had a $15 million company four years ago in Interpoint that lost $5 million. And today, it's going to be a $250 million company making $40 million, with a real presence in defense electronics. And to go back to Jim's question, that to me is the kind of allocation of resources and attractive markets and businesses with management teams that we're trying do here to create value for the shareholders. And that is a good example of it.

That 30 million you alluded to, is that more pure defense type application, or is there homeland security in there as well, or does it just kind of mesh together?

It's kind of meshed together, but there's definitely homeland security there where this microsensor technology can be used for border patrol, line penetration, pipeline security; it's all mixed in there.

Thank you.

Scott Graham.

I have one question on the acquisitions. Etex, you said, is -- the integration's on plan as well as R.L. (ph) Porter. I was wondering, Eric, last year, you told us you sort of monetized what this Signal synergy opportunity was. Would you be able to monetize a synergy opportunity for those two acquisitions?

For Etex and Porter?

Yes, please.

Well, the ballpark on the Porter closing the plan is a couple million dollars, okay? I think that the bigger synergy opportunity -- forget that. The bigger synergy opportunity is we do the seat actuation for the two seats, then there is a big black box, it's the power that goes in the seat in the middle. And currently, we outsource that. And the question is is whether we can take that $40 million in Aerospace Engineering that we spend every year, and we do these big power boxes all the time, and whether we can't make that one heck of a lot smaller and a lot more powerful and do it ourselves. I don't know the answer to that, but that is a real potential synergy there. An there's again, one box per every two seats on the front side. So we think that there's real opportunity in both of those.

In the case of Etex, it's just blocking and tackling. And I don't have the numbers here right available, but we paid a little over book value for Etex and we have closed the Netherlands facility. I think it had 55 people in it. And the net reduction of people was close to 50. And consolidated the Hitchen (ph) site, we've consolidated the Wask. We are getting all of the synergies that we've planned. In fact, the numbers there would be much better, except our old base businesses has been under real pressure and not done well. So I am personally very pleased with the acquisitions that we've made here are over the last -- in '03 and thus far in '04; they're going as planned.

Okay, thank you.

Ms. Styles, there appears to be no further questions at this time. I'd like to turn the call back over to you.

Thank you very much, operator, and thank you all for your time and interest in Crane Co. If you have any further questions, please of feel free to call me directly.

And this does conclude today's conference call.