Crane Co (CR) 2004 Q3 法說會逐字稿

Good day and welcome, everyone, to the Crane Co. third quarter 2004 earnings conference call. Today's call is being recorded. At this time, I would like to turn the call over to the Director of Investor Relations, and Corporate Communications, Miss Pamela Styles. Please go ahead ma'am.

Thank you, Stephanie, and good morning, everyone. Welcome to our Crane Co third quarter 2004 earnings release conference call. 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 after which we will respond to questions. Also in the room with us today, we have Gus Dupont, our VP and General Counsel, and Joan Nano, our VP and Corporate Controller. Before I turn the all over to Eric, let me note several items for you.

This call will include both a full discussion of the agreement in principal to settle our Company's asbestos liability with finality, which we announced in conjunction with our earnings, and it will also include abbreviated comments on our third quarter earnings performance from operations.

We have prepared power point slides to help take you through the agreement. They are available on our website. And we will be talking to each of the slides in order.

Beginning this quarter, we have added SG&A to the income statement attached to the earnings release for your immediate reference. I would also like to remind everyone that the Crane Co's annual analyst conference will be held in New York on December 14. We will be pleased to have you all join us, and we will provide our 2005 guidance at this conference. We would greatly appreciate your RSVP to attend for those of you who do expect to attend for our planning purposes.

One last note before we get into our prepared remarks, we need to remind everyone that the comments we make on this call may include some forward-looking statements. We would refer you to the cautionary language at the bottom of our earnings press release, and at the beginning of the power point presentation. 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. Before I would start with my comments, I wanted to make sure you saw our press release on George Scimone, our CFO. George unfortunately is not sure as to when he can return to work and has decided to go on long-term medical disability. Not happy about it, but we've begun a new search for a new CFO. We very much value George's contribution to the Company, and look forward to his rejoining us as soon as he can in a suitable role.

Overall, I am very pleased with the third quarter. The increase in operating profits in four of our five segments and even results in engineer materials resulting in an operating income before the charge related to the asbestos settlement environmental costs of 56 cents per share, a 19% increase. These results exceeded our earnings per share guidance range for operations, which were between 50 to 55 cents. The most important news in this quarter, however, is our very successful negotiation to reach an agreement in principal that permanently remove the asbestos liability from our Company. This is a very positive milestone for us. The asbestos agreement, and to a much lesser extent an agreed upon plan with the EPA resulted in the 238 million, or $4.04 per share charge for the third quarter. Our press release provides both GAAP and non-GAAP disclosure of our income from operations, both before and after the charge. Let me turn now to the powerpoint slides on our website to take you through the agreement in principle.

We have an agreement in principle to resolve all current and future asbestos claims against the Company. That agreement is with attorneys who represent the majority of current claimants. There are nine leading attorneys who represent that majority, and all nine of them have signed a master settlement agreement. And we have an agreement in principal with an independent representative for all future claimants. As I mentioned, there is an after-tax charge of $238 million, or $4.04 per share. No change in business operations or relationships with customers and suppliers is expected. This is true for either the units participating in the 524(G) filing or the rest of Crane Co [audio difficulty] very clear that we, as with all our presentations, and our filings with with the SEC, that we are studying and exploring any and all feasible alternatives to resolve our asbestos liability, as long as we thought it was in the best interests of our shareholders. Quite frankly, we have been parallel tracking both the federal legislation and this comprehensive settlement.

It became clear that the federal legislation was not going to happen this year. Highly uncertain for the future. And we were able--after extensive negotiations to achieve, with the nine lawyers representing the current claimants and the independent representative of future claimants, a transaction that we feel is in the best interest of our shareholders. Our objectives are simple. Remove the asbestos uncertainty from the Crane Co stock valuation and address the liability of permanently with finality. We have an outstanding Company, and we need to get focused on growing it.

There has been a dramatic escalation in claims. As you can see from this chart, the blue line represents the claims, and at the end of 2000, outstanding claims against Crane were approximately 5,000. Four years later, they are at 80,000. And the red line shows the cumulative defense and settlement costs, and you can see the dramatic increase.

Every quarter, we report in our filings both the settlement and defense costs. This chart points out that in 2001, our gross settlement costs were $800,000. In the first nine months of this year, those same settlement costs were $14.3 million. The costs to defend ourselves against these claims in 2001 was $2.3 million. In the first nine months of this year, it was $18 million.

So the costs in 2001 and pre-tax, pre-insurance had gone from 3.1 million to 32 million in just nine months of this year. Those nine month numbers, as you can see, are double what it was for the nine months in 2003. I want to note that Crane never manufactured asbestos.

Certain of our pumps, valves and boilers did contain gaskets, seals, that were manufactured by others that had asbestos material. Our insurance recoveries have covered approximately 40% of the costs. We are different from many companies. We have a consortium of insurance companies, a number of those insurance companies have gone bankrupt, in part due to their asbestos exposure, and as a result of that, our insurance coverage -- only covers -- has covered approximately 40%, and the remainder of costs are negative charges impacting our income statement.

You will recall that at the end of 2002, the Company set up a five-year reserve to 2007 that totaled pre-tax, pre-insurance, $200 million. Again, that reserve was just until 2007. To put that in context, the estimated cost of the comprehensive settlement that we have negotiated here for all the entire liability, which as you know, under these -- under asbestos can stretch out 40 to 50 years, is $578 million, including the expenses, so 578 versus the 200 that we set up to get us through 2007. There can be no question about there hasn't been a cloud of uncertainty over our Crane Co valuation and our typical fashion, we've been very straightforward about the nature of this liability. And our reporting on it. I have three quotes here from different Wall Street analysts, I mentioned Merrill Lynch in August, the current share price implies investors are attributing an $8-10 share discount due to the asbestos liability. This is at the higher end of the $3-10 per share range that we estimate. I would note that our after-tax charge was $4.04.

J.P. Morgan, in July, we believe asbestos represents a significant risk at Crane. Citigroup Smith Barney "overall, asbestos remains a dark cloud hanging over the Company." Turning now to the specifics of the comprehensive settlement, there's two components of the agreement in principle.

The first is the settlement trust, and that settlement trust is to deal with the current asbestos claims. And a 524 -- what is called a 524 (G) post-petition trust, which is to deal with future claims. I want to note here that the U.S. Congress has provided the only structure through federal legislation that one can utilize to eliminate the asbestos liability in its entirety. That structure is known as Section 524 (G) of the bankruptcy code.

I also want to emphasize here, and I will have the details in a few minutes, that in our case, only a subsidiary of the Company will be utilizing the 524 (G) structure, as as I said, I will explain that in detail. Importantly, this is specific legislation enacted by Congress in 1994, specifically designed to resolve, and the only available structure to resolve the asbestos liability, and it provides us an accompanying -- with asbestos an ability to establish a trust for all future claimants, that's what is known as a 524 (G), and the ability to obtain an injunction so that all future claimants are channeled to that trust, and not to the company. This, of course, will require court confirmation.

Specifically, on the two components to the agreement, the master settlement agreement will have $280 million in cash paid into the settlement trust on or about February 23. This will be paid on the conclusion of the solicitation of the current claimants, the minimum vote there of 75%. I want to again note that nine of the leading trial lawyers representing a majority of the current claimants against us have already signed the master settlement agreement indicating their approval of the transaction. The 524 post-petition trust for the future claimants will only be established and funded when the court approves the plan of reorganization. That trust will be funded with $10 million in cash, $70 million in stock or cash at solely at Crane Co's option, and $150 million 20-year note at 6% interest rate from Crane Co. Again, the trust will be funded upon approval by the court of the plan of reorganization, that's for future claimants only, that have malignancies.

I want to emphasize, again, that only a portion of the Company, which is MCC and its subsidiaries will file what is called a pre-packaged plan of reorganization. MCC and subsidiaries consists of the U.S. fluid handling businesses only, which represent about 11% of the Crane Co operating profit. The pre-packaged plan of reorganization is pre-packaged in the sense that we have an agreement on the dollar amount of the asbestos liability. We have no other agreements. And no other agreements were necessary as we intend to pay any and all of the other creditors and obligations of MCC as per the existing contractual terms. Crane Co importantly is not included in the pre-packaged Chapter 11 filing.

All operations of MCC and subsidiaries, the filing entities, will continue to operate as subsidiaries of Crane Co, both during and after the emergence -- before, during, and after the emergence from the Chapter 11 process. Crane Co, I might add, will be providing total financial support to MCC and its subsidiaries. We are retaining the insurance risk. We expect it to cover approximately 30% of the settlement costs from insurance reimbursements and we expect those -- we've been very conservative here from a cash flow point of view and we expect those reimbursements to start some time in 2007.

I want to emphasize again that the business operations of MCC and Crane Co -- we expect no disruptions in those businesses. There will be no management or middle management changes or layoffs related to the settlement. All non-asbestos creditors, including all suppliers, will be paid 100% on current contractual terms. We have provided -- Crane Co will be providing a $20 million working capital facility to MCC. And there should be no change with any customers, distributor, JV partners, or interruptions whatsoever in our day-to- day business.

This chart highlights the MCC holdings, it is 20% of revenues, and 11% of operating profits will be only that portion that files the plan of reorganization. The rest of Crane will not participate and be a part of that. Again, the entities are basically our U.S. fluid handling businesses.

The process and timing here we're announcing today, an agreement in principle, that we have with the majority of the current claimants and an independent representative for the future claimants. We will be soliciting votes over the course of the next three or four months. There will be a funding of the master settlement agreement on about February 23. And sometime within 60 days after that, we will file this pre-packaged plan of reorganization and that will include the funding for the settlement trust. We expect that it will be 6 to 12 months that it will take the court -- time for the court to approve the plan of reorganization. And when the court does approve it, we will then fund the future trust, I've used the date of June of '06, just as a rough proxy. We would hope that it would be sooner.

But again, the funding of the futures trust is $10 million in cash, $7 million in stock or cash at our option, and $150 million, 20-year note. We have arranged -- we have a commitment from J.P. Morgan to underwrite, fully underwritten 450 million in new credit facilities. That is a $300 million revolving credit at the facility which is now been extended for -- it will be for five years, through 2009. And $150 million term loan for five years for 450 in total.

I would note that at the end of the September, we had borrowings under the revolver or short-term of about 44 million and we had 32 million in cash. So clearly, the funding of the settlement trust for $280 million is more than amply covered by the $450 million in available credit facility. Fully expect and are committed to remain investment grade, as we -- with this announcement and going through this process, and you will be hearing from the rating agencies, I'm sure. The additional annual after-tax interest cost in the first year is only approximately 10 cents per share, and of course, will decline thereafter as we rapidly pay off the settlement trust. The current dividend policy and capital expenditures spending will all remain, as I see no changes in this.

We see this as totally business as usual for the companies suppliers, and customers, and employees. Our suppliers will continue to be paid in full, and on contractual terms. I would note that upon the filing of the plan of reorganization, sometime probably next March, that MCC will ask the court to ratify for continuation of normal payments to suppliers of all the filing subsidiaries. We fully expect that request to be honored. But I want to emphasize that if for some unforeseen reason it wasn't, Crane Co has committed to guarantee the payment of all supplier options of the filing subsidiaries in accordance with normal payment terms. So no one -- there should be no supplier disruption.

Crane Co will remain investment grade. We have plenty of available credit. And we have made sure that everybody gets -- will get paid according to normal terms. This is one of the number of items that sets apart this plan from what you might normally expect in a pre-packaged plan of reorganization.

I think it is helpful to look at a comprehensive view of the settlement cash resources. This was over the life of the transaction. How are we paying for -- who and how is it getting paid for. The 510 comprehensive settlement consists of the 280 current, and the 230 for the futures. We have 68 million in other payments for expenses, lawyers, bankers, other settlements that will be made here prior to the filing for a total amount of $578 million.

The tax benefit that we expect between reductions in current tax payments and refunds is $201 million of that amount, that's approximately 35% of the $578 million. We do expect insurance recoveries to cover about 30%, or 153 million, and operating cash flow of 154 and perhaps using the stock of 70 or cash will be the remainder. I would note that on the utilization of the stock or cash, we will be governed by making sure that we maintain our investment grade debt rating. Importantly again, the financing is in place. We look at -- we see peak borrowings here at approximately 300 million, versus available facilities of 450. And we will rapidly return to existing leverage ratios by 2006.

We are looking to pay off this settlement trust in two years. If you think of the 280, this is -- Crane Co is a company that generates free cash flow after capital expenditures and dividends approaching $100 million a year, and we expect $150 million in cash from reduced taxes and refunds in the next 18 or so months. So between the two, we will have the 280 paid off very rapidly, and this does not assume any insurance proceeds from the insurance companies which we may well get sooner.

We also have a settlement of our environmental obligation. This is our Phoenix Good Year site. This is a superfund site where we manufactured compound for munitions. This was -- we picked this up in an acquisition in 1985. Our customer was the U.S. government. The materials and equipment were used in -- we used in manufacturing was the government-owned and was specified.

We have been involved, really since 1990, in testing and remediation of this site. In fact, -- and we have filed a claim against the Department of Justice for reimbursement. Our negotiations, however, are with the EPA, which has also filed suit against us. Suffice it to say that there have been extensive negotiations here. Never really been in agreement with the EPA until recently, where we now have an agreement with them to work on -- with a work plan for the remediation.

You will note that we had spent $24 million on the superfund site to date. That the estimated cost to -- of this work -- the remediation agreement and the work plan is approximately $40 million in the amount of the pre-tax charge that we've taken. I would note that the 40 million charge does not reflect any potential recovery from our claim against the Department of Defense. And it also assumes that we don't find anything different than what we've currently found on this site that needs to be remediated.

Page 19 has a very detailed reconciliation. This is primarily for the institutional investors and the analysts. I won't walk through it, but you can see it carefully steps down the anticipated insurance, existing reserves, net of insurance, the additional reserve required, the tax impact, and how you get to the $4.04 charge in the third quarter. We're happy to help people out later if they need that, but in typical Crane fashion, we wanted to be transparent about the charge.

In summary, these -- we view this as very positive news for our shareholders, employees, customers, and suppliers. We feel strongly it removes a cloud of uncertainty so we can move forward and focus on profitable growth without all the distraction and uncertainty with respect to the liability and most importantly, the way this plan is set up, it should be business as usual for all Crane entities, including MCC and its subsidiaries, with no management changes as a result of this. No employee layoffs related to settlement. And suppliers and customers conducting business with us on a business as usual basis.

That took a while, but let me just take a few minutes now to touch upon some of the highlights of our third quarter results from operations. Many of our markets continued to show improved demand in the third quarter resulting in the increased new orders across all our segments. Reflective of the fact that we have predominantly late cycle businesses. While demand improves, the well-documented continuing escalation of raw material prices mitigated the margin improvement we would normally expect on increased volume.

The higher raw material costs mostly impacted engineering materials and fluid handling. In both these segments we have plans to raise prices again throughout the rest of this year and into 2005. Assuming no further material cost escalation. While there will continue to be a negative impact in the fourth quarter, we expect our price increases to cover the higher raw material cost going into the first quarter of 2005. We also continue to see supply chain disruptions, across almost all of our businesses.

Supplier onetime deliveries for Crane in September, for example, were 78%. Supply chain issues that particularly impacted our commodity valve businesses, which include Crane valve North America and Crane limited in the U.K. In both these units, we were in the process of changing the business model from one where we manufacture the valves in either the U.S. or U.K., to having the valves supplied from China either from our own plants or third party suppliers. While we are making progress every month, these transition supply chain issues will continue to be present for the next several quarters. Because of the time, I won't provide additional comments on individual segments, although I am happy to answer questions on them.

I would note that we are tightening our full-year guidance for earnings from operations before the impact of the third quarter charge to $1.95 to $2, from $1.90 to $2.05. We believe that fourth quarter 2004 earnings per share from operations should be in the range of 49 to 54 cents.

We are lowering our free cash flow guidance after CapEx dividends and asbestos to 80 to 90 million, from 90 to 110 million previously indicated, due to the substantial impact of asbestos-related payments and operating working capital requirements to support higher sales. With that, I will turn the call back over to Pam.

Thank you, Eric.

Everyone, before we open up our call for your questions, let me reiterate that we will be providing our 2005 guidance at our annual analyst conference in December. Also, to help each of you out, as you're looking at the charge, let me provide you with a road map of where the charge impacted our balance sheet line items. Other current tax assets, $115 million. Other assets $112 million. Accrued liabilities, approximately $339 million. Other liabilities, $127 million. Retained earnings, a reduction of $238 million.

Interest expense was higher year-over-year for the third quarter due to higher debt levels for acquisitions, share repurchases, -- and share repurchases in the first half of the year, and higher working capital requirements to support the higher sales volumes as well as to support the higher asbestos-related costs.

Lastly, for those of you in queue to ask questions, particularly because of the nature of the announcement on this press release, we would ask that each of you limit the number of your questions to just one or two at a time. You're welcome to get back into the queue again. We believe this is a courtesy to extend to each of your colleagues, it will give the greatest number of people an opportunity to ask questions in the time we have available. And it will provide everyone the opportunity to hear questions from multiple perspectives. We also will welcome questions from any analysts and/or investors on our call. With that, we're done with our prepared comments. Stephanie, you may now open up the call for questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Deane Dray with Goldman Sachs.

Thank you, good morning. Try to boil down the questions, first. It would be -- it would appear to us that the earnings impact that you're talking about with regard to the interest expense only being 10 cents, kind of walk us through your assumptions there, because it certainly seems to us that the fluid handling business in the U.S. is actually larger than 11% of your operating income. So if you would kind of walk us through where you're getting the interest expense, and is that first year '05, or are you including '06?

Deane, let me -- there is no change in our financial reporting here. The MCC will be consolidated and reported as -- on our consolidated income statement and reporting, the interest expense is merely, if you take the master settlement agreement for $280 million, multiply it by 3%, and tax effective by 35%, you get about 10 cents a share -- actually 8 or 9 cents but we use 10.

That's only the master settlement but the 524(G) would also --

Remember, the 524(G) is not funded until we -- the court says we approve all of this, and you got a permanent channeling injunction and we're free from asbestos, so that's likely -- the date I'm using is June of '06. I hope that it is going to be sooner than that. But again, it is not part of -- it is not in '05.

Right. It is not an '05 number but it would be a contingent liability. Have you also considered -- Remember I have 100 million in free cash flow and the tax benefits of the 280 is going to disappear quickly. We will pay it off. With regard to your relationships with customers and so forth, would you consider that there is a potential that as you declare the businesses bankrupt, that there will be competitive issues that lost business, competitively selling pumps, folks like Pent Air [ph] and ITT would be able to say that that is, you know, that -- why would you buy from Crane if that business is bankrupt?

Well, of course our competitors are going to say that. But what's unusual about this, Deane, is that the Crane Co is standing behind 100%, all the obligations of MCC and the subsidiaries. What is unusual here is we have a pre-packaged plan of reorganization where the only thing pre-packaged that was required to be pre-packaged is the asbestos liability. Everybody else gets paid exactly according to contractual terms. I don't expect any supplier disruptions. I don't expect any disruptions with our clients.

And Crane Co, which is an investment grade credit, standing fully behind all the obligations and in customer support of MCC. So I think our competitors will try to make noise about it, but, you know, wait and see what the rating agencies say about this, and which we expect them to reaffirm the investment grade. I mean this is very unusual, and you may say it sounds bad, but that's the only structure that Congress gave us to do it. And I think we set this up so it is as minimal disruption as possible.

So you don't see any lost business as a result of this?

Deane, I think we've got to be extraordinarily sensitive that our competitors are going to use the sound of it on really important pieces of business, and the leadership of the Company will have to be front and center with -- including me, with those customers to say hey, this is Crane Co, we've eliminated the uncertainty and its investment grade credit with $100 million of available credit over what they need to satisfy all the obligations. I honestly think, Deane, that once -- there is going to be -- it is going to take us a while to communicate this, but after 30 days or so, I think this will die down rapidly, because the market -- you know, our big customers, Dow, Dupont, these are sophisticated people, and we have been around for 150 years, they know that.

I will get back in line for other questions thank you.

We will go next to Scott Graham with Bear Stearns.

Good morning. I want to piggyback on that last question. Are you implying that the, Eric, that in 2006, assuming your timetable is correct, it will only be at that point when the court approvings this thing that it affects the 11% of operating income? In other words, at that point is that operating income come off the books an into discontinued operations?

No, no, no. There will no change in our financial reporting. There is no such thing as a discontinued operation. MCC, we own 100% of the stock before we filed the plan, during the plan, and after the court says we like this plan, and it will all be channeled in the trust. So there is -- we never lose those earnings. In fact, I consider that, as you know, one of the real opportunities that we have, is to improve those earnings, and these are businesses that we want and like and will be, as I said before, during, and after, part of Crane.

Okay. Second question relates to really the whole insurance situation, where, you know, you are retaining your insurance, but that insurance has dropped from 40 to 30% on the coverage. Could you maybe tell us a little bit about that and is there a connection between that and the operating cash flow of 154? Or is that just off of your free cash flow?

The insurance dollar amount that we use, I think it was 153, wasn't it,, Pam? Yeah, it was 153 million, which representing 30%. We have been assuming 40%. One of the -- we've been -- I think we've been conservative here. But in some cases, insurance companies will have to pay -- normally they assume that they are going to pay this out over 40 years. I think -- we think some insurance companies will assume, you know -- want to pay this out over a long period of time; others will want to settle it up front for a smaller amount because of the discounted present value. We've retained the insurance. So it is our responsibility to negotiate those settlements individually with each of the different insurance companies. We thought 30% was appropriate under the circumstances.

That is just for modeling purposes, Scott.

Okay. If I may, last question, there is -- there was a reference that you made within the call that certain amounts that were being expensed, period expenses, these things will ultimately go away. Could you maybe tell us what sort of a quarterly --

No, no there is no ongoing charge in the P&L for this. If you will look on page 16 of the presentation, it says other asbestos-related payments, are $68 million. We have taken all of our estimated costs for accountants, PR people, lawyers, bankers, the cost to run this through the plan of the reorganization, as well as some costs of settlements that we continue to make before we file the plan are included in the $68 million. The only expense you will see in our P&L is the additional interest expense associated with the -- when we -- the $280 million settlement.

I understand that. I didn't want to interrupt. But what I was asking is historically, over the last, you know, call it four, eight quarters, I got the impression that there was still some expense, even beyond the reserve that was hit hit the earnings per share number each quarter.

Not really. We set up the reserve in 2002 to cover that for -- through 2007. So I would say no.

Okay, so there is no windfall from that, okay, thank you.

We will go next to Brian Jacoby with Morgan Stanley.

Yes, good morning. Question, can you lay out again just the timing of how the debt hit, I mean you're going to borrow essentially $280 million in February '05, and then how does the second part, the $150 million in borrowings or the notes that will be put into this trust, when is the timing of that and effectively what is your balance sheet impact on the debt side? How does the debt hit? And how --

You will see -- we actually put a note into the master settlement agreement. I think it is funded at whatever the Fed funds rate is. So when we -- you will see a $280 million obligation to the settlement agreement at the end of the year. We are paying basically, I think it is, you know, very low interest rate. 1.77%. Then we will fund on or about February 23, assuming we've got the vote, conditions are met, we will fund the 280 million by drawing down on the 450 million dollars of available credit facilities. And we will then proceed to repay that with money we get from taxes because we reduce taxes. Any refund that we get and our pre cash flow which is approximately $90-110 million a year.

We do not put the note in or additional cash or additional stock, no other payments are made, until the court says you're finished with the plan of reorganization, set up the 524(G) trust, and all future claimants go against that, and then we will fund that. We expect that to be 6 to 12 months after we file the plan of reorganization, some call it March. I've used -- in the charts here, just to be conservative, I've used June of '06. But that funding doesn't occur until we're finished.

Okay.

And as I said, we have been successful in negotiating, it could be either -- it is 10 million in cash, the note for 150, and 70 million in stock or cash, and depending upon cash flows, and depending upon the timing of that, I have the flexibility to use stock to make sure that we -- depends upon where the stock price is, and our ability -- it is important to us that we maintain our investment grade credit rating.

And presumably it sounds like you've said you -- that this has been laid out to the rating agencies?

Absolutely.

And you hope to hear from them soon?

Well, I'm sure we will hear from the rating agencies soon. I'm looking forward to it.

Okay. Great. All right. Thank you.

Our next question comes from Douglas Kirsome [ph] with JP Morgan.

Yes, thanks. I am just looking at the model here that I put together and it looks that EBITDA is 1.4 times. When the 280 comes on, assuming about 100 million in free cash flow, and the 50 million less taxes, due to a tax yield, I'm getting to a number that is about at year-end '05 two times, debt to EBITDA. Am I kind of directionally right?

I didn't -- I haven't done the numbers the way you've done them. I think about it, we generate free cash flow after CapEx and dividends of 100 million, and I expect to get at 50 million in reduced tax payments in '05. I expect to get another $60 million tax refund at the latest in June of '06, and I expect to get another 35 million reduction in current year's taxes in '06, so there is 150 million of that that is going to come in just from taxes to pay the 280. Plus, my 100 million in '05 and 100 million of free cash flow in '06. That's the way I think about it.

Okay. That's the numbers that I've gotten, so it is about two times. When you get to '06, you're assuming that yield -- you will get to similar credit measures than have you today?

Yes.

All right. Thanks, that's it.

You're welcome.

Our next question comes from Matt Summerville with McDonald Investments.

A couple of questions, Eric. On the future piece that you said you need approval from the court before you go ahead, or you need approval for the reorganization, other companies that have been out there doing this, I would imagine there is a few we could track down, but what kind of success rate have they had, and has the average time just to try and understand the rationale behind the 6 to 12 months, is that kind of the time frame in which it has taken them to work through the process?

Well, the first thing I would say, Matt, is that our situation is very different from everybody, the half dozen companies that have used this process. I would also emphasize that with respect to the futures, that there was a lot of thought and careful processes to go through, making sure that we had a very sophisticated, extraordinarily well respected, and extremely knowledgeable independent representative who had his own bankers and lawyers to represent the future claimants. And you know, I think we feel that we're -- our process has been different and has been -- we've learned the lessons perhaps from some of the older processes and that this should go well.

Okay. And then a follow-up, I don't know if you can comment, but with respect to the MSA, it sounds like with the nine attorneys you're working with, you have, based on your comments, I guess I can conclude, do have you more than 50%, you know, basically signed off on it right now. Is that accurate?

Yes.

And then, can you get a little more granular in terms of how much more or how many more you need?

We will need to get the agreements stipulated to, we need to have the legislation stipulated to, we need to have at least 75% of the vote, but we're very confident of getting that. The signatories on the MSA agreement are, you know, among the most prominent names of attorneys who are involved in the asbestos legislation, includes Steve Caisson [ph], Joe Rice [ph], Perry Wise [ph], the Bud Barren [ph] firm, you know, there's nine of them and they're among the prominent leaders here, so their signatory to the MSA indicates their approval and support of the transaction. And that's what gives us confidence here.

Great. Thanks. I will get back in queue.

We will go next to Ned Armstrong with Friedman Billings Ramsey.

I just wanted to make sure I understand the timing of some of these funding activities here. With regard to the insurance recoveries, did I read correctly that you did not anticipate receiving those recoveries until 2007?

I felt, to the rating agencies and the banks, and frankly for our ability to negotiate with the insurance companies in an aggressive manner, that we didn't want to have to assume that we needed the proceeds from the insurance to pay off the 280 million quickly. So all of the cash flow estimates for the next two years to pay off, we assume no insurance money. That being said, we have already been in touch with each of our insurance carriers, we've had informal discussions alerting to them to this, that this could happen, over the last 10 days. We expect to start serious negotiations with them next month.

Okay.

And then -- but I haven't assumed it because, again, we wanted to have flexibility. Some will be more inclined for cash now. Some will be more inclined to resolve this over a long period of time and we wanted to give ourselves flexibility to negotiate, and we're conservative about it.

With respect to the tax benefit, you expect to recover that in 2005?

It is going to be again 50 million that we get in '05 from a reduction in current tax payments. There is 60 million that will come in no later than June of '06. And there will be another 35 million that we recapture in '06 to a reduction in current year's taxes. The rest will come in after that.

Great. Thank you.

Our next question comes from Wendy Caplan with Wachovia securities.

Thank you. Good morning. Could you talk about -- it sounds, this is just a clarification, it sounds as if this does not affect the global initiatives in terms of the non U.S. fluid handling businesses. Is that correct?

That's correct.

Okay. And --

But I would argue that it doesn't affect the initiatives of our U.S. fluid handling businesses, because it is business as usual.

Okay.

I seen no changes. I mean we're sensitive to the competitors will use the sound of this, but there shouldn't be changes.

Okay. And Eric, can you tell us what the filing does to near-term acquisition plans for Crane Co?

Well, I think fully when we borrow $280 million to fund the master settlement agreement, we're going to have to be pulling our horns and be substantially -- make sure that our focus is repaying the 280. Again, I'm firmly committed to our investment grade guidelines, I'm not going to do anything to jeopardize that. So clearly, we're going to be financially more constrained here. At least for a year. With respect to our acquisition activity.

And finally, quickly, since we are such a litigious society, does this activity put us at any risk for future litigation, do you think, on the part of existing Crane employees, that may part of future layoffs that are in fact related not to asbestos, but lowering costs in the businesses?

I don't see that. I mean we're not -- whatever programs that we've got, we would be doing with or without this. And I've been formidably saying that whatever -- with respect to -- we are not doing additional layoffs or asset sales or anything like that as a result of this comprehensive settlement.

Thank you very much.

We will go next to David Smith with Smith Barney.

I think most of it has been answered, but just to clarify, what happens if 75% agree to go with it and the 25% don't, can you just clarify what happens there? And then also, what if the 280 for the current is not enough? Is that a hard number or is it -- is it a moving target? Just can you clarify that stuff for me?

The 280 and -- for the current is a hard number. So that there is more claims, it is, you know, the claimants get less. And the 230 is a hard number. I will ask Gus Dupont, our General Counsel to respond to the -- if we get 75% and move forward, what about the 25%.

Well, that's something that we are going to be looking at over the next three to four months, as we solicit acceptance to the plan, I mean we won't be sending out that request for acceptance probably for another 45 to 60 days. But as they come in, we will be looking at the returns and understanding both the percentage that develops from the solicitation, and frankly the nature of the naysayers. I mean that may be a neutral opposition that can be overcome, it may be something more significant than that, and that's what we would take into consideration in evaluating going forward with the plan at that time.

But assuming we hit the 75%, according to the legislation, we would go ahead and file our pre-packaged plan of reorganization. The hurdle is the 75%. We're confident about getting more.

Now, there is a chance then that anything above the 75 that doesn't get included, would still be out there?

No they would be brought into the plan of reorganization and be treated like everybody else.

That's what I am kind of getting at. Okay. Is there any other specific companies that you can point to that this has been successful in the past?

Well, -- I think Halliburton [ph] might be one, but I'm not positive. There is a half dozen companies that have been utilizing the 524(G). It is set up for this specific purpose. I think we are -- our situation is unique in that we've got a big healthy strong company. And we're using it to facilitate the elimination of the asbestos liability. And continuing business as usual. But I don't know what else I can add to that.

Okay.

And I'm going to let you off the hook here and ask you a question about the business. Whew, you are probably breathing a sigh of relief. No, I'm -- listen, we've worked long and hard on this. We think this is a huge win for the Company and it is just important, most of us are not used to understanding this kind of structure, and it is different in our case, and I think it is important that people understand it.

Yeah. No, I agree. In your materials business, I'm feeling, I guess, as far as cost offsets go, and is the top line of that business looking, do you think kind of peakish? I know it has been strong for a long time now, but I know the second quarter saw a great year-over-year increase. It seemed to taper off a bit this quarter. I'm not quite sure what may have caused that. Maybe you could talk a bit about that.

We continue to see positive indications in the transportation and RV market. It is a little bit lower than what the market had thought at the beginning of the year. But the signs there are all positive. And we expect to be okay on the top line. I would note that resin costs here represent about 40% of our raw materials spend.

Resin costs are up 100% since the beginning of the year. That impacted us, when you look at the -- the impact is about $1.5 million in the third quarter. On higher material costs, that we didn't offset by price increases yet. We expect that to continue to be the case. Maybe slightly larger than the fourth. However, importantly, we do expect to be fully recovered as we start into the first quarter of 2005 in terms of the price increases covering the material costs there.

Okay. That's great. And then what about taking that one step further into fluid handling, what are the price increases or the cost increases you're seeing there?

We are seeing the same kind of material cost pressures there, and we are having less success in getting them covered by price increases, but we have more price increases planned for the fourth quarter, and in the first part of next year, and we're moving aggressively to get that offset. Is there any number you can throw at in terms of the increase of cost of goods sold in that business? Well, they won't let me say. I would give you a ballpark that the -- when I look at the direct material variances in the Company, the fluid handling was -- I think it was about 9 million. On the standard cost, fluid handling was about -- the total Company was about $9 million for the quarter and fluid handling was a little over 4. So there's been a big impact in fluid handling.

Okay. Great. Thank you.

We will go next to Ron Epstein with Merrill Lynch.

Eric, when we look at the settlement, in your view, what are the biggest risks? Is it that the 45% of, you know, the future folks that have to approve it or I mean -- going forward, what are the risks in this?

I think from my perspective, we have hired the best advisors in the world. From my background, I have some experience in these kinds of negotiations. And I think that we have gone to substantial lengths to eliminate the risks. Let's start with that.

You know, we've looked and studied in the past and said, let's try to set this up so that when the outside world looks at it, they're happy and pleased with what has been done here. I think that's the first touch -- that's the way you eliminate risk. I would say, if you ask me what I worry about, I worry about that we get some adverse changes in the law, in terms of how 524(G) is handled and accepted. I'm not too concerned about getting the vote because I've got the nine leading among the leaders here, so I'm not really worried about getting the vote. We could see some disruptions once we file the plan of reorganization, the insurance companies might say we've impaired their case, but I'm not worried about that, because there's legal precedent that says we clearly haven't impaired their case and I've retained that. So, you know, I'm just kind of talking out loud. I think importantly, we set this up so it is good to go. And my biggest concern is there is some change in the court ruling or opinion, and other than that, I think we're prepared to handle whatever kind of comes our way.

Okay. Just a second question.

And again, the most important aspect -- put aside everything else. The only thing -- what's been agreed to here is the settlement of the asbestos liability, and that deals with the currents and the futures, and we've got really top-notch people representing the best of the best, representing both of those. Nobody else is impaired here. So why should anybody else have anything to say about it? So I feel like we've really gone to great lengths to -- let's isolate it , get the best of the best to represent the liability, and let's move forward aggressively.

Now, in terms of -- and I think, I got the answer to this, I just want to make sure. So the dilution in '05 would be just the extra interest expense, the 10 cents?

Yes, sir.

Okay.

Yeah, that's right.

And then just one last question. I don't know if you can answer this or not. But the timing of it, why now? Of this announcement of -- why now in terms of the timing?

Well, the announcement happened last night because yesterday was the day I got the nine signatures and the current -- and the signature from -- on the current lawyers representing the currents, and as well as the signature for the futures representative, and I think it was something like 6:00 last night that we got the last one. So that's -- that's a show stopper right there. You got to have that. But they all came in yesterday.

As I indicated, this didn't just happen. We have been working on this, parallel tracking this with the potential for federal legislation for over a year. There is a long history of study, exploration, and negotiation here as we try to work with the people again, the experts, and attorneys representing currents and futures, to see if we can reach an agreement in principal on a comprehensive settlement. Once it became clear that federal legislation was not going to happen, we turned our attention to this even more, and I think in a very recent period we're able to negotiate what we felt was an agreement that is in the uncertainty of asbestos and is beneficial to our shareholders.

Okay. And then just --

That's the reason for the timing.

Okay. And then just one last question. Besides the extra interest expense payments, what are the other cash flow impacts over the next couple of years of this?

None.

Okay. Thanks.

We will go next to Mario Gabelli with Gabelli & Company.

Just to follow-up and flush out one of my question, dynamics, Eric, well done. I think you are like Alexander the Great, you came up to a knot, but what if legislation miraculously passes before this thing is signed? Then what happens?

Okay, good question, Mario. If there's different stages here of exposure, and Gus, correct me if I get this wrong. And that was one of the issues and why we hesitated here, and we we're parallel tracking it. If the paster settlement agreement is funded, and you get federal legislation, which means you have to have federal legislation in the next five months, we would be out $280 million pre-tax.

Right.

If we're in the plan of reorganization -- we described the probability to that to be extremely low. You would have to get legislation in a lame duck session, and it is just not going to happen. We spent a lot of time trying to understand that. I think if you talk to people who are involved, they will say the same.

If we're in the plan of reorganization, and during that period of the plan of reorganization, and you get federal legislation, so it would say it happened sometime in 2005, then we would not be required to fund the note, or the rest of the settlement agreement, and assuming that it was swept into the new legislation, nobody knows what the new legislation looks like. Once we're out, and we have court confirmation, and the post-petition trust is funded, you were to get federal legislation, and assuming we were swept in, the note would be canceled. $150 million note would be canceled.

Sounds like your Martha Stewart, you tipped your penalty now and if you get --

Mario, we were unwilling to --

I got it. Eric, you mentioned that you were not likely to do acquisitions but this doesn't preclude someone else, you know, Cooper Industries had this issue and Danhurt [ph] kind of challenged them in terms of giving the shareholders alternative and that turned out to be their version of a poison pill.

Correct.

You have lots of financial engineering opportunities. You can sell a division. You can sell a segment. Your business is currently intact and all we're doing is removing $4 out of the intrinsic value of the enterprise and knocking off a dime which declines on a per share basis. So I think that is pretty obvious. On the other side, you become -- you have eliminated your poison pill.

Yes, sir, we have.

Okay. Thanks. Good. I thought it was pretty simple deal and took a lot to implement. Thanks.

We will go next to Curt [ph] Woodworth with J.P. Morgan.

Hi, good morning. I have a quick question regarding the post-petition trust of 230. You know, given the recent escalation in claims, how comfortable are you with that number? And what happens, you know, theoretically later down the road if the claims exceed that number, and who has to bear that responsibility?

We have an agreement on the amount in the master settlement agreement and the 524(G) post-petition trust of 280 and 230, and those numbers will not change.

Okay. And what happened --

[multiple speakers] have any risk, those numbers get higher, because there is no claims that come in.

There is no chance that number could change.

Those numbers will not change because we get more claims than were anticipated.

Okay. And then, you know, on your decision to try to source more from China, on fluid handling, with some of the commodity valves, can you talk a little bit through your expectations there, and maybe quantify it at all?

Well, the decision is, is that you're in the commodity end of the valve business, which is basically the gate growths and checks, bronze and iron, and some of the non-specked steel, the historical business model is to have a foundry in North America, or the U.K., and to machine it, and assemble it, and test it, in the same shop, and to buy the material for the castings, maybe overseas, but usually kind of locally, and that doesn't work in today's global world for non-specked products. So we have been aggressively closing facilities. Last year you will recall we close our iron foundry in Washington, Iowa, and we have been aggressively moving our sourcing here, both in our own plant and third party suppliers, so that at most, we're doing some assembly tests here in North America or the U.K.

That's the business model that we think one needs to have to compete successfully in that end of the market. And we're well on the way to having that new business model established. It's going to be the -- the transition is bumpier than we expected. For example, this summer, they reduced power in China from, you know, they cut out two days worth of power so you had to close the plants. It has taken us longer on the toolinging and patterns. There has been some disruptions with people trying to get into Long Beach ports, so there is a variety of issues, some of which frankly was our own sales and operations planning on that supply chain. But I'm confident about the business model.

Great. Thank you.

We will go next to Jim Drury with New York Life.

Hi, thanks. Most of my questions have been answered, and I apologize if this is in the material that you provided but I wanted to ask if there were, and if you could talk about any financial covenants in the new bank agreement and whether or not they've changed from the one that you are replacing?

I don't think they are significantly different. I don't recall the details, but we have plenty of latitude. I mean -- Yes. General counsel just told me it is no change.

Okay.

And it is 450 million of available credit, and absent acquisitions, we think we needed 300 and a little bit more than that.

Right, the old one was 300, right?

Yeah, but we extended it for three years to 2009 and we also got a term loan on top of it.

Okay. The other question I wanted to ask you is the tax sources of repayment that you mentioned earlier, are those estimates, are they taxable income dependent, or do they come to you no matter what, do you think?

Yeah, why don't I let our Vice President of Taxes, Tom Noonan, answer that.

Good morning. The first number that Eric threw out was the $50 million that we'll get that back through reduced 2005 estimated tax payments. That is taxable income dependent. It is based upon our current forecast of what income we will generate in 2005.

Okay.

But it is only an issue of timing if that forecast is off. By that, I mean that if that forecast is too high and we generate less taxable income, we will get less than the $50 million back but the second number that Eric threw out which was the $63 million from the tax refund, will go up by that same amount. And that is because that net operating loss will be carried back and we have sufficient capacity and taxable income in the last ten years to absorb that.

Okay. Thanks, that helps.

Our next question comes from Deane Dray with Goldman Sachs.

Thank you. The first is a question that relates to why would you have conducted this conference call today with -- because obviously, 98% of the questions have been all about the trust, and the implications and so forth, when we had a third quarter earnings report that there are a number of unanswered questions, so in the spirit of Reg FD, you really should have another conference call just to talk about the quarter.

Dean, I'm happy to stay here as long as you would like to answer any and all questions on the operations. The fact of the matter is, we got the signatures from the nine lawyers yesterday. I had a chance -- we had all of our senior people in here for two days, and President's meetings, I had a chance to brief them last night, but trust me, I will spend the rest of the day with you on operations.

Okay. So let me circle back --

We still got 150 people on the call so --

Let me circle -- I do have questions about operating conditions and some deteriorations that we've seen. But I just like to -- since the topic is the asbestos trust, I would like to go back to an earlier question about your assumption that this is 11% of your operating income. So based upon the segment reporting, fluid handling is about 36% of total revenues. Now, well, actually it is higher than, that but what is the percent that is North America? Based upon prior disclosure, you said about 80%. Is that correct?

If you look at the chart, at the pie chart on page 12, MCC Holdings, Inc., the filing entities, represented about 20% of the 1.6 billion sales in '03. Okay? And the operating income of the -- this is just the U.S. fluid handling assets. The operating income was 11%. Again, there will be no change in our financial reporting. There is no discontinued operations. We own this. The stock in these subsidiary, and we are going to report them as if this never happened. You will see no change.

Okay. So what part of U.S. fluid handling is not included in this bankruptcy trust?

All of U.S. fluid handling is in MCC Inc. and its subsidiaries.

So why would that only be 20% then when fluid handling is closer to --

Because we have international fluid handling assets.

And your fluid handling international is higher?

Is not included in the filing. But again, it is a mistake. I don't see that we're going to run these businesses any differently than we are going to run our international fluid handling businesses. They're going to be run all the same with the same management, someone reporting either to me or Dennis Ucko [ph] or other senior leadership here. There will be no change. It doesn't matter whether they're in or not.

And then the point that there, the two numbers are fixed, the settlement trust at 280, and the futures claims at 230, now one of the issues is the futures could still be challenged, because what you're doing, one of the conditions that you need in this arrangement is that your current settlement will pay out non-cancer claims, where as your futures is restricted only to cancer claims. And do you have a sense that that is going to be challenged or not?

We have gone to great lengths, the independent representative for the futures is a fella by the name of David Austin [ph], he was, I think General Counsel on the Manhole [ph] Trust, he is universally well respected, highly sophisticated, and he has had the benefit of all of our -- whatever documentation and numbers that we had from our actuarial forensic experts on asbestos. He had all of that documentation. He had his own independent advisor in that regard. He had his own independent lawyer. And he had his own banker helping him review through this. So we have gone to great lengths to make sure that was arm's length and with somebody I think that is universally respected.

Okay. And then on the environmental charts, did we just miss that in a prior filing because we looked to see where that had been cited as a material or potentially material environmental risk.

Deane, if you will notice last quarter, we filed a whole -- in the 8-K, we filed a whole issue on it, that these discussions were going on, that it was uncertain, that we had filed -- we had -- we substantially stepped up our disclosure of that and it has always been disclosed generally in our footnotes on the environment. But we substantially -- go back and look at the 8-K last quarter.

All right. And then on the current business condition, I would say what was most concerning were margin declines on the aerospace and engineered materials, year-over-year, aerospace space being down 200 basis points and engineered materials down 170. How much is of that unrecoverable raw material cost, how much is of that is either lost business or pricing? How would you --

I will repeat word for word my comment on engineering materials because I think it is very important for investors to understand. Resin costs and other materials represent 40% of the raw material spend, and those resin costs have increased 100% from the beginning of the year.

In the third quarter, we incurred about a 1.5 million of higher material costs net of the price increases that we had put in place. And we expect to incur a similar kind of additional cost net of price increases, maybe a little bit higher in the fourth quarter. However, with the price increases that we're putting in place, and those planned for January 1, we expect to be fully recovered in engineering materials as we start the first quarter of 2005. As it relates to material costs and prices.

With respect to aerospace and electronics, we had an excellent quarter. In the aerospace group, the volume was all OEM-related, after-market was basically flat. We leveraged some of the volume and our margins were better than last year, even including Porter. We do not yet have the full benefit of the PL Porter integration and margin improvement because we will not be consolidating that plan until sometime second or third quarter next year. The deterioration was in electronics. Which as we said in the second quarter, that there were disruptions in the California plant closure. Those continue.

We again have some production and through-put issues and increases in our past dues, an we got some bookings that were later than we had expected. So the deterioration there was in the electronics group, not in the aerospace group. I would note that Doug Spidler [ph], who oversees our controls group, has also assumed responsibilities for the electronics group.

Do you have a book to bill on the aerospace side?

We don't give that out.

Okay. Thank you.

We will go next to Matt Summerville with McDonald Investments.

Eric, on his question on raw materials, you did a good walk through on your expectation for the incremental hit that you anticipate to incur in engineering materials. I was wondering, if you could, at a minimum then, go through the same analysis on fluid handling, and then if it is appropriate, any of the other businesses.

Well, I don't think it is a big deal in the rest of our businesses. The steel increase is definitely impacting our merchandising systems, but as you saw, their margins went from 5% to 9%. So we've got a dramatic improvement in margins.

And we've been able through some very some modest price increases, but frankly, just better price yield realization in terms of how we're structuring our incentive programs. Substantial lean activities in the plant. And productivity improvements, we've been able to more than offset what has been some painful steel increases, so we're in good shape, I think, in merchandising systems, although we would be even a lot better if we didn't have it. Again, I thought they had just an outstanding quarter, and a dramatic improvement in merchandising systems. Fluid handling really is the other area where the material is impacting us. I kind of characterized it before in articulating, there is $4 million of direct material variances and the standard costs that we incurred in the quarter - when you think about it as standard costs.

Is that net of price increases or before?

No, that's before.

Okay.

The way that would be calculated. The way I look at fluid handling is -- I will give you some comments. You know, we've got several operations here that have returned to plus 10% margins that really are showing the benefit of prior year plan consolidation, offshore sourcing initiatives, and I would include in that resistaflex [ph], our line pipe business, and for some time now, the last three quarters, our pump business. We continue to get excellent results from Crane Supply, which had really a solid performance in the quarter. And I'm encouraged by signs of increased demand in the chemical processing industry and the general industrial markets for our industrial valve businesses, and we didn't, as you saw there, both volume and leverage were up overall for all of fluid handling.

We are and continue to struggle with the commodity valve businesses, which are in the U.K. and in the U.S. Crane Valve North America in the U.S., Limited in the U.K. And it relates to this business model change and disruptions in the supply chain. The disruptions in the supply chain have meant that, you know, we've got stock-outs. Extended lead times. Just general higher costs. Often times, we might be missing one of the parts that we need to assemble, and it's late coming in from China. And then again, frankly, we need to work on creating a more sophisticated sales and operations planning model when you've got a supply chain that's got to come from China. And as opposed to within 15 miles of your own plant, where you both have a foundry to make the castings and machine it and do it.

The only other comment I would make here is that we've got a small marine valve business that is in Norway that continues to struggle, and has also impacted results. So I think I was pretty clear in my September comments that the improvements in the valve business is going to be slow. But that it is on track, and that it is coming, but certainly slower than we would like. I think in the quarter, we did see some overall improvements in fluid handling and improvement in margin.

Okay. Looking out to the fourth quarter then in fluid handling, what are you guys looking for in terms of core growth for that business based upon what you're seeing in the more significant end markets, some of which you mentioned that you compete?

Well given, you know, we have not given a new specific guidance on a segment by segment basis, Matt, here, what we've done is, as you know, we gave guidance on the segments, and we had a $10 million kind of reserve at the corporate level, and rather than give individual guidance at this point on the segments, we've tightened our guidance for the year to $1.95 to $1.90. And let it go at that.

In order to, just from a housekeeping standpoint on the income statement, what effective tax rate should we be using to get to that 56 cents.

I'm sorry, could you repeat that question?

Yeah, just from the -- the operating number, the 56 cents, what effective tax rate did you guys book in the third quarter, and what should we be thinking for the fourth quarter?

Well, the fourth quarter rate is going to be impacted, unfortunately, by the charge we take for asbestos and environmental because what we're forced to do under the accounting rules is calculate an effective rate for the entire year, including those charges, and then apply that rate to the remaining quarters in the year, which would be the fourth quarter.

But what's the rough rate in the third quarter and then the rough rate for the fourth quarter is what he's asking.

Okay. Hold on one second. The rate in the fourth quarter will be approximately 34.6%, which is higher than the 31% rate we've been running. And the rate in the third quarter is 35%, and those two rates were impacted by the higher tax rate on the two charges.

Okay. Thanks.

Our next question comes from Charles Newhauser with Rich & Tange [ph].

Just to beat the horse here, my understanding of what you're telling us is that you're going to retain the ownership of the businesses that are going to be filing Chapter 11, and consolidate the returns, and I think, although you haven't said it, any future cash flows that these businesses will produce will accrue to current shareholders or the Company, Crane Co.

Yes, yes, yes.

In the past, you have stressed that the earning power of those businesses is substantially higher than it is today, or that some of your future upside earnings growth will come from shaping up these fluid handling businesses.

Yes, sir.

All of which still should be a future benefit to the Company.

Absolutely.

Okay. So I'm a little confused as to why you would even -- why you would make a point that it is only 11% of the operating income if all of that is true?

If I had to do it all over again, I would take the slide out.

Thank you for a straight answer. Thanks very much.

It was the only one with color in it.

We will go next to Wendy Caplan with Wachovia Securities.

To follow onto Charlie's question, when I first saw the release, I thought oh, good they're finally getting rid of those businesses.

Hey, Wendy.

Yes.

It has been an hour and a half so you will appreciate this. Shell's comment was that this is one hell of a way to get people diverted off of fluid handling margins.

But to focus on it for a second again, with looking at two-thirds of your fluid handling business in the quarter, with the valve group and Crane Limited, and those businesses have been enormously disappointing, and given that much of those businesses are what we would call commodity valves, are they great, do they stand at greater risk in terms of losing ground because of this bankruptcy filing?

I hope not. Again, I addressed the leadership of the Company last night. I think the leadership understood that this is business as usual. Our competitors are going to try to use it. But we are - the leadership understand understands it. We are reaching out to customers. Today we got a letter going to all of our customers explaining business as usual. This should not be in any way disruptive to the business.

And have we gotten feedback from any of those large customers about this program?

No, but what I told the presidents is that I'm perfectly happy to get on the phone with any CEO of any supplier and any customer that has any issue or to personally go see them. I do not believe that once we get past the next 30 or so days, that -- and people understand what we've done here and that it's investment grade credit and Crane has been here for 150 and is going to be here for another 150 years, that this is going to be disruptive in any way. We may find at the margin that if somebody has a choice, he doesn't really care who he uses, that he uses somebody else because he doesn't understand it shall and it is our job and the leadership of the Company to make sure that we have proactively gone to every customer and make sure that they understand it and explain it.

Okay. And finally, and I'm sure the lawyers are going to put their hands over your mouth in terms of answering this, but can you think of any conceivable additional charges that could be taken related to this asbestos issue or the current environmental litigation or is this -- does this totally take care of it?

What I would say is based on what we know today, we have no reason to believe that this is not adequate. If you recall, in the past, we have consistently said we could not -- don't hold us responsible for the reserve. We can't estimate it. We can't do it. I feel in this case we've got an arrangement on the 230 and the 280. The asbestos is -- it is set. We tried to estimate the expenses. We think that we're covered and we're affirmatively saying we believe it is adequate.

With respect to the environmental, to set it up for the next 10 years, and my only qualification there is -- and I've got a 200-page work plan that we've agreed with the EPA to remeditate it, and we've been able to estimate those costs. The only risk areas there is that we -- while we're remediating and testing, that we find something else, that's in the [audio difficulty], that the EPA says is our responsibility. But today, we have been working on this site since 1990. We haven't found that. So I feel we're in a much better position in terms of being affirmative that we think this is based on everything we know today, this is good. And adequate.

Thank you, Eric.

We will go next to Scott Graham with Bear Stearns.

I was just curious about, what the other potential-- let's say windfalls-- that this might mean for the operations, Eric. Obviously there has been a lot of management a lot of your time, dedicated to this process, and I was just wondering if, if there is anything else here that we might be missing, that, you know, would be of benefit to the company on a go-forward basis, even beyond management time. Obviously there has been a lot of management time, a lot of your time, dedicated to this process, and I was just wondering if, if there is anything else here that we might be missing, that would be of benefit to the Company on a go-forward basis, even beyond management time.

Well, first off, we have been successful, Scott, in making this a very small team in Corporate, and until just this week, get the rest of the Company, start to sensitize some of the key leadership in the rest of the Company. So we have been very successful in doing that. It has been a tremendous amount of time, effort, and commitment from a small group of us, led by General Counsel, Gus Dupont, on this. I do feel that we have had some resistance from people, and people have hesitated to join us because of asbestos concerns. I think this eliminates that. And I know for one, that it is going to free up my time to do what I like to do, which is to spend it in the business. But it is going to be more of a subjective qualitative kinds of things than anything we can quantitatively point to.

Okay. Last question, but two parts to it. Aerospace and electronics. Maybe compare and contrast what happened in aerospace which was -- looks like a tremendous quarter and what that means for fourth quarter, but also in the electronics business, which continues to have these supply chain issues, and the plant closure issue, late bookings, what the third quarter means for the fourth quarter, and that --

I think that the aerospace team, as long as we continue to have a stable after-market and the OEM business coming in, and I don't see a reason for that to change, we expect to continue to see a good results in our aerospace. I would note that, for example, we got the good results in aerospace but we spent $2 million more than we planned on new products and engineering development for future programs. So we're not holding back on trying to grow that business. I think there is a caveat, we all got to watch here, which is the financial condition of the airlines could create a substantial amount of uncertainty here. I do think that the electronics, it was not just a kind of a third quarter issue. This will continue into the fourth quarter, and maybe even into the early parts of next year. Again, we have a very attractive business with margins in the -- you know, kind of mid teens area, not quite there in the quarter, in a business that we expect to have kind of high teens margins. I do expect that in the fourth quarter, we will go a long way towards working through those issues but they will continue to be with us in the fourth quarter, and early into '05.

Okay. Thank you.

We will go next to Ron Epstein with Merrill Lynch.

Just two quick follow-up questions. Eric, when were you talking about aerospace before, you mentioned that the mix was more weighted towards OEM, and after market was actually pretty light.

After-market was exactly that, military and commercial was in the aggregate was flat in the quarter.

I'm just curious, why was that the case, given that air traffic miles has been actually growing pretty quick and the problem with the airlines isn't the traffic, it is their yields. When do you expect to see after-market impacted by the traffic at the airlines?

What's happened is our heavy after-market content is mostly on the Boeing planes and the planes that are coming off the desert are largely the newer air bus planes, and the older Boeing, the DC-8s and 9's are staying on the plains and we have both our fuel pumps and brakes on those. So you know, that's in part, resulting in our flat after-market.

Do you expect that to change? Or would we need to see those older aircraft stopped, come out into the desert?

We are at the moment, at least the short-term here, we're not planning on any improvement in the after-market.

Okay. Fair enough. And just a quick question, you mentioned this before, and I just didn't jot it down fast enough, on that 280 million dollars, what is the interest rate? Initially, we put a note in the trust last night that goes at 1.77%, for 270 million.

It is actually 10 million for --

Okay. Until February, and then when we fund it, we will borrow under the -- our resolving credit, which is whatever the short-term rates are at some tiny premium over Fed funds rate.

Okay. That's great. Thank you.

Our last question comes from Matt Summerville with McDonald Investments.

Just on the insurance thing, you had the 40% before, and you're using 30 now. What's the rationale behind that again, just to make sure I fully understand that?

The rationale is we want to make sure that we've got a reasonable estimate here. The old estimate was an estimate arrived at business as usual, which means we would be settling these claims over the next 40 years. And we're now going to be resolving them in a very rapid point of time, some of the insurance companies may choose to give us cash today. Some of them may choose it to do it longer in the future. Some of them may choose to argue more with us as to what the appropriate settlement is, and we felt that given the discounted cash flows that they were to pay us today, and looking at that, our judgment was 30% was more appropriate.

Okay. Thank you.

We have no further questions at this time.

Thank you, Stephanie. Everyone, we greatly appreciate your time and hanging in there for this exceptionally long conference call. We had a lot of really good questions. If you have any additional questions, please feel free to call me, and we will address those questions. We need to let everyone go on with their day and invite you to look at our resources on our website, and also as a reminder, please RSVP for our upcoming analyst conference to help us with our planning. With that, let me conclude the call and thank you all for your time and interest and investment in Crane, and and do feel free to call us.

This does conclude today's teleconference. Thank you for your participation. You may now disconnect.