Crane Co (CR) 2007 Q3 法說會逐字稿

Good day everyone and welcome to today's Crane Company third quarter 2007 earnings analyst 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, Mr. Richard Koch. Please go ahead, sir.

Thank you, operator. Good morning everyone. Welcome to Crane's Third Quarter 2007 Earnings Release Conference Call. I'm Richard Koch, Director of Investor Relations.

On our call this morning, we have Eric Fast, our President and CEO and Bob Vipond, our Vice President and CFO. We will start off our call with a few prepared remarks, after which we will respond to questions. Just as a reminder, 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 Release and also in our Annual Report 10K and subsequent filings pertaining to forward-looking statements.

During the call, we will be using some non-GAAP numbers which are reconciled for the comperable GAAP numbers in the table at the end of our Press Release which is available on our website at www.craneco.com, in the Investor Relations section. We have posted slides on our website as well that you may wish to refer to during our call. Slide two also contains our forward-looking language and there is an appendix to the slides which provides additional non- GAAP reconciliation. To make year to year comparisons easier, we've expanded the non-GAAP table to include information on both the income statement for the third quarter and projected full year results as well as certain balance sheet items. Now let me turn the call over to Eric.

Thank you, Dick. Last night, we reported our third quarter earnings which included an extension of the time horizon and the estimate of our asbestos liability from 2011-2017. Excluding the asbestos provision, we have record earnings per share for any quarter in Crane's history. To offer some perspective on the asbestos provision, since 2004, we have experienced a significant decline in new claims reflecting state tort reform and the exposure of fraudulent medical claims. Our experience, national trends, and consultation with outside experts indicate a more stable environment going forward. As a result, our current four-year liability estimate to 2011 of 204 million has been extended an additional six years to 2017 with an additional provision of $250 million after insurance and after tax. The asbestos provision has no immediate cash impact but will affect cash over the next decade. The annual after-tax cash outflow for the asbestos liability is expected to range from $30 to 40 million over the next 10 years which can be compared to 2006 cash provided from operating activities of $182 million. Bob Vipond will provide additional information on the asbestos provision during his remarks.

Let me now highlight several key operating items for the third quarter. We effectively leveraged our 17% sales increase into a 26% EPS increase excluding the asbestos provision on a fully diluted EPS basis. Fluid Handling net record sales and operating profits: Their operating margin approached 13% which is the strongest -- which is strong progress towards our goal of 15% margins for this segment. Reflecting the success of our strategy, Engineering Material margins improved to 19.5%, a sharp rebound over the prior year's third quarter of 13.5%. Merchandising systems operating profit has already surpassed the full-year guidance we provided for this segment last December. Cash flow from operating activities was solid, more than double the third quarter last year, and backlog remained strong in both Aerospace and Fluid Handling.

Turning now to specific segment comments. The Aerospace Group sales of $108.3 million increased 17.9 million or 20% from 90.2 million in the prior year period with higher demand coming from both commercial and military customers. In the Aerospace Group, the positive earnings impact of strong OEM and aftermarket demand was offset by an $8.1 million increase in engineering expense over the prior year. Demand for our Aerospace products continued to be strong in the quarter and is expected to remain strong for at least several more years, and our goal remains for operating profit margin to be 20%. In the Aerospace Group, OEM and aftermarket sales were higher than last year. OEM sales grew 23% and aftermarket sales grew at 15%. The OEM aftermarket mix was 59% to 41% compared with last year's third quarter mix of 58% and 42%. Our engineering spending, all of which is expensed, is a key investment in Aerospace's future. As we described on our first and second quarter earnings call, in 2007, we are spending heavily on three major landing solutions program, the Boeing 787, the Joint Strike Fighter and the Airbus A400 M.

Our engineering spending in the third quarter of 2007 was nearly $19 million compared to the 15 million in the first quarter and 17 million in the second quarter. I continue to expect this spending to decline noticeably in 2008. Electronics Group sales of 50.7 million increased 1.6 million or 3% due to higher sales in microwave and microelectronics solution. The Electronics Group operating profit decreased approximately $1 million from the third quarter of 2006 due to a higher engineering spending on the Boeing 787. Engineering Materials in the third quarter, Engineering Materials sales and operating profit grew by 13% and 62% respectively over 2006.

Overall sales increased 9.1 million with the increase due to Noble Composites. Solid performance from Noble, disciplined cost control and improved yields in the plant and lower customer support payments have resulted in a 19.5% operating profit margin compared to 13.5% last year. Noble Composites which was acquired last fall had sales of nearly 12 million in the third quarter and operated near capacity. In May, we broke ground for the expansion of Noble which will double its capacity. The expansion is on track and should be complete by the end of the first quarter of 2008. On September 14, we acquired the composite panel business which was a portion of the [inaudible] segment of Owens Cornings Composite Solutions Unit which produces a high gloss reinforced plastic panel very similar to what Noble produces. We will optimize our manufacturing this type of panel when the Noble expansion is completed. [Inaudible] also manufactures a non [inaudible] fiberglass panel called SeaTech which Crane did not previously make. This provides us with important technology and manufacturing capability to service a niche market for our recreational vehicle customers. Seatech is substrate-free thus allowing us to handle darker colors than paint which are increasingly in demand from high-end motor home, RV OEM.

Merchandising Systems: With the acquisition completed in 2006, sales increased 34% and operating profit increased 10% to $9.8 million. We continue to be pleased with the performance of our payment systems business which experienced higher demand and this traditional gaming and amusement market which resulted in improved operating profit. In the traditional snack and foods vending machine business, including the AP acquisition last September, operating profits improved over the third quarter reflecting greater productivity in the St. Louis plant following the integration of AP into that facility. We are continuing our efforts to satisfy the needs of major customers for our can and bottle vending machine and believe the actions we are taking in 2007 will position us for significant improvement in 2008.

During the next six months, the Merchandising Systems segment is introducing a number of important new products including its [inaudible ] payment system for the vending channel and the new glass front [inaudible], both of which are designed to improve the profitability of the operator. While performance at Dixie-Narco has been below our expectations, the other acquisitions we made in 2006 are making a solid contribution to the earnings growth for the merchandising system segment as a whole.

As we look at the overall performance for the first nine months, sales were up 65%, operating profit of 31 million is up 83% and operating margin is at 10.6%. Fluid Handling, which represents about 43% of Crane's total sales, turned in a strong quarter with sales increasing 15%, operating profit growing 28% and a profit margin of 12.9%. All three of these measures of performance were records for this segment. Strong broad-based demand from the chemical and pharmaceutical industries, energy which includes electric power and oil and gas, and non-residential construction were reflected in core sales growth of 11%. We are being disciplined on pricing particularly in light of the raw material escalation issues that the entire industry is facing, and in fact, we've selectively raised prices. New orders for Fluid Handling continued their solid pace and the backlog at the end of September was 31% above year ago levels. We continue to evolve our energy in chem/pharma market focus that we told you about at our December investment conference which is bringing us closer to our customer needs.

As we look at the overall performance of the company's fourth quarter, we are expecting improvement of more than 20% in our operating profit over the prior year lead by Fluid Handling based on its strong backlog. Our EPS guidance of $0.63 to $0.70 shows less of an increase over 2006 due to $0.10 per share of additional taxes from asbestos and the R&D tax credit which was recorded in its entirety in the fourth quarter last year. For the full year, our improved guidance of $3.11 to $3.18 per diluted share which excludes the second quarter U.S. Government settlement and the full year impact of the third quarter asbestos provision meaningful it exceeds our original guidance last December of 2.80-2.95. Let me now turn the call over to Bob Vipond, our CFO.

Thank you, Eric. I'd like to discuss several financial issues with you before turning to our asbestos slide. First, a few explanatory comments on the tax rate. Excluding the asbestos provision, the company's tax rate was 27% for the quarter compared to 32% for the same quarter last year. As stated in our press release, the primary reasons for the significant decrease were the absence of research and development credits in the third quarter of 2006 and lower foreign taxes in the third quarter of 2007. Both the size and applicable tax rate of 35% of the asbestos provision significantly impacts both our third quarter and fourth quarter reported tax rate. In the third quarter, our reported tax rate was increased from the previously mentioned 27% to 38% as a result of the asbestos provision, but this is actually a favorable result as the higher rate is a tax benefit rate, not a tax expense rate. We now expect our annual tax rate, excluding asbestos, to be at the low end of our previously announced range of 31 to 32%. We now expect our reported annual tax rate to be 43 to 44% with a 12 percentage point difference relating solely to the asbestos provision. The fourth quarter impact of the third quarter asbestos provision is expected to be an increase in the quarterly tax rate of about 5 percentage points and the resulting decrease in forecasted fourth quarter EPS of $0.06.

Let me call your attention to the non-GAAP financial tables which accompany our press release and deal with several items from the Income Statement Balance Sheet in our free cash flow. Our third quarter cash flow from operations included 83% of total cash inflow before related asbestos payments and 8 million of net asbestos payments for total cash inflow of 75 million. During the quarter, we were able to reduce working capital by 10 million while our sales were essentially equal with the second quarter. Compared to the third quarter of 2006, the cash flow from operations improved by 40 million including improved operating performance of 27 million and 13 million of reduced asbestos outflows, primarily because of higher insurance receipts from excess carriers for previously paid settlements and defense costs. Capital spending was 12 million in the third quarter of 2007 compared to 5 million in '06, primarily a result of our investment in Noble Composite expansion.

For all of 2007, we expect free cash flow will be near the low end of the guidance range of 175 to 190 million, compared to the 154 million we generated in 2006. The ratio of net debt to total capitalization is included in our accompanying non-GAAP financial measures and is influenced by the $250 million charge recorded from the asbestos liability. Including from the impact of the revision, it remains a conservative 24.5%. We have increased our earnings guidance for the full year 2007 from 29 2.90 to 3.05 to 3.11 to 3.18 per diluted share. The revised guidance includes $2.42 per diluted share for the first month of 2007 which excludes the second quarter U.S. Government settlement and a third quarter asbestos provision plus our fourth quarter guidance of $0.63 to $0.70 and adds back the $0.06 adverse tax impact on the fourth quarter associated with the third quarter asbestos provision. Without these adjustments, our earnings guidance for the full year 2007 on a GAAP basis is a loss of 1.08 to 1.15 per basic share. As previously disclosed, we will discontinue providing quarterly earnings guidance in 2008.

Let me ask you to now turn to the slide that we posted on our website that will help explain the asbestos provision we announced last night. The purpose of this supplemental presentation is to review the impact of the extension of the asbestos liability and to share with you the changes we have been experiencing and the dynamics of the liability including defense costs and related insurance negotiations. These changes have led us to conclude that the outlook for the liability is more stable and that it is reasonable to extend the estimate of our liability to the year 2017. The impact of the provision on our reported third quarter financial results is also detailed to insure that you understand the results of our ongoing operating businesses excluding the provision. The slide two as Dick talked about includes a forward-looking statement disclaimer. I would emphasize that by its very nature the estimation of this liability is forward-looking and subject to many variables that will evolve in the future, particularly over a long period out to the year 2017.

Turning to slide three, the income statement impact of the expansion of the asbestos liability from 2011 to 2017 is portrayed on this page. The provision resulted in a 250 million after-tax charge and reduced reported earnings per basic share by $4.18. Our ongoing operating results before the provision were a record $0.87 per diluted share for the quarter. The 2006 third quarter included a benefit of $0.05 per share from a reimbursement from the government for previously incurred environmental remediation costs which has been excluded from the analysis to compare ongoing operating results. Turning to slide four, the balance sheet impact of extending the asbestos liability to 2017 is detailed on this page. The leftmost column represents the asbestos liability remaining from our previously established reserve established in 2004 which is reflected in our estimated liability of 204 million after-tax and was for the liability through to the year 2011.

The next column shows the additional 250 million after-tax provision through 2017 which also extends the time frame by six years. The right column reflects our total after- insurance and after-tax liability of 454 million through 2017. The asbestos liability includes both the forecast liability per settles pending and future claims and the related defense cost. Approximately 2/3 of this estimated liability of 1.055 billion pre-tax is for claims that have not yet been filed but which we project will be filed through 2017. The insurance receivable is the estimated amount expected to be paid by our insurers which will partially offset the estimated liability. The tax benefit reflects the tax deductability of the forecast cost net of the anticipated insurance receipts. Let me stress here that this asbestos provision had no immediate cash impact but will affect our cash over the next decade. We are confident that we have the capacity to deal with this ongoing liability.

Turning to slide five, we always feel it is important to remind our investors and employees that Crane never manufactured asbestos, but that the current tort system permits plaintiffs to pursue Crane because the products we manufactured and sold incorporated asbestos products provided to Crane by suppliers. Our estimated insurance coverage was 40% for the estimated liability through 2011 and is now 33% as we extend the time frame of our asbestos liability estimate by six years. This adjustment to our insurance coverage is largely due to several policy buyouts that have generated 47 million over the past two years. Turning to slide six, the changes that have occurred since we last extended our asbestos liability in 2004 are primarily related to state tort reform implemented in a number of important states and the enhanced scrutiny imposed by the court on the sometimes questionable medical screening practices uncovered in many of the earlier cases brought before the courts. This has resulted in a significant decline in a rate of new claims being filed and many pending claims not being pursued in the courts. The result is a lot less volatility in the tort system and in the outlook for our asbestos liability.

Turning to slide seven, you can see that it portrays a significant decline in the incoming new claims. In 2006, new claims were 10% of what they were in 2002, and our new claims during the first nine months of 2007 suggest that we will have even fewer new claims in 2007 than we had in 2006. Turning to slide eight, this graph illustrates the impact these changing factors have had on the pending claims over the last three years and especially illustrates the change in recent conditions compared to 2004 when we established our liability through 2011. Claims outstanding increase of 18,000 in 2001 to approximately 85 thousand in 2004. Since then, for the reasons outlined earlier, claims appear to have stabilized and are beginning to decline. Future experience could of course be different from the past three years. Turning to slide nine, a significant underlying driver of our liability has been and will continue to be mesothelioma claims which account for approximately 85% of our historical settlement and defense costs. The three years of experience we have gained since 2004 leads us to feel more confident that in addition to a declining rate of new claims, the settlement values for these significant claims are more predictable.

On slide ten, this chart of new mesothelioma claims illustrates the climbing rate of new claims since 2004 and is consistent with the national trend reported to us by our outside experts. Please note that the 2007 bar on the right is September year-to-date and projected the total year would indicate an annual trend of about 1,200 claims. It should be noted that the filings in 2004 and 2005 were inflated to have degree as Crane Company was added to previously pending cases by amendment. Our liability estimate projects a relatively stable but slowly declining number of new mesothelioma claims each year through 2017. Turning to slide 11, we have been and will continue evaluating this important liability every quarter and have concluded that the trends included in our modeling have been significantly confirmed with values updated for our most recent experience. At this point in time, although the American civil litigation system can be unpredictable, the outlook appears more stable and this makes us more comfortable in extending our estimates. We feel there is little likelihood that a federally mandated solution will occur to change this outlook.

Regarding insurance coverage, we have now reached settlement understandings with a substantial majority of our excess insurers with the remainder expected to be concluded by the end of 2008. The estimate of our insurance recoveries has been updated to reflect the successful conclusion of these negotiations, including several policy buyouts for lump sum cash settlements. All of these dynamics have reinforced our view that we can reasonably extend our estimate of the liability through 2017. Turning to slide 12, the purpose of this chart is to show our asbestos-related cash requirements compared to the total cash flow of Crane. The top line of this chart is Crane's cash flow from operations after capital expenditures and before asbestos. The purple portion at the bottom of the graph shows how much of the cash flow has been used to pay settlements and defense costs after insurance recoveries in the tax benefit. The green section shows a significant free cash flow Crane has produced after asbestos which has been used to reward our shareholders with dividends and provide funds for acquisitions.

We feel that this is a powerful portrayal of the underlying strength of the Crane operating model, notwithstanding the realities of the cash flow required to satisfy asbestos claimants. In 2006, our cash flow from ops after capital expenditures but before asbestos was 181 million and our after-insurance and after-tax asbestos payments were 26 million resulting in free cash flow of 155 million. Please note that the right-most bar is for our September year-to-date results which are not comperable to the annual values shown to the left. Since we project our after-insurance and after-tax asbestos payments will be 30-40 million in the coming years, we expect to be able to comfortably satisfy our asbestos-related obligations. Turning to slide 13, our final page, reinforces the underlying financial strength of Crane with 162 million of cash on hand at the end of the third quarter. During the third quarter, we also extended the maturity of our $300 million revolving credit facility for an additional three years to 2012. We also wanted to once again reaffirm our strong committment to maintaining our investment credit rating.

The company's strong operating earnings and cash flow combined with our substantial cash on hand provide a firm and balanced foundation for future growth. Now, back to you, Dick.

Thank you, Bob. This marks the end of our prepared comments. Operator? We are now ready to take questions.

Thank you, sir.

[OPERATOR INSTRUCTIONS]. We'll go first to Deane Dray with Goldman Sachs.

Thank you, good morning, gentlemen.

Good morning.

First of all, instead of a question is a statement and that is first of all that asbestos detail that you provided are very helpful and I appreciate the detail that you walked through because it is complicated and we would agree with your assessment that there's not a big economic impact here, but again, the detail is very helpful. We would agree that the new claims we received on slide 7 & 8 are very stable. Where I have a question is you are showing an increase in the cost for settlements, and I know that entirely reflective of who is -- what kinds of claims you're settling that quarter but there is an increase, and so what's your expectation regarding settlement costs because they did spike up this quarter to 100 thousand per settlement but I know that could be very misleading.

Yes, it really is, Deane. It's over such a long period of time that the way we've modeled it , we used a rolling two years to constantly look at our claim rates and our dollars by disease type to make sure we're capturing the recent trends which is what we've done here. We've really used an average of '05, ' 06 and nine months year-to-date '07 and there are cases that come and go, but we use a big averaging constantly update it so it goes up and it goes down and it just depends on the cases, the specific cases that are in the queue at any one

Sure and as we get longer in the asbestos history, you'll get more meso cases so you'll get a higher settlement cost. Is there any -- can you give us any color on your expense cost ? There's indications that your expense costs are beginning to spike. Is that becoming an

Well, we really, we have included in here our defense costs. They're about 55% of the total liability of the [inaudible]. We have a strategy in place to aggressively manage those costs and it obviously is influenced by the number of cases we're working on. We are aggressively working with our outside counsel to make sure we control those costs and don't expect them to be rising versus the run rate we have this year.

Okay, that's helpful, and on insurance, you used to be at a 40% coverage and you've ratcheted that down which looks conservative to us down to 33%. What's the risk there that that could go lower? Is there any challenge in any particular policy or do you feel comfortable with that coverage?

We feel -- we really do feel comfortable with it. Like I said, the main reason it went from 40 to 33 is because of the policy buyouts that we've negotiated over the last couple of years. The remainder that's in there is really for coverage in place we call it agreements, as the settlement and defense costs rolled through and we get recoveries from the specific excess insurers, but we're comfortable with that .

And we use an outside expert to validate that, Deane

Good and then last question is on asbestos and I do have a couple of believe it or not operating questions to ask. What was the triggering factor on why you took the extension this quarter, and in your answer, can you weave in why there would be a tax impact on the fourth quarter?

Well, let me address the first thing and we obviously looked at this every quarter as we're required to do and in looking at the influence of the factors, meaning settlement rates, incoming claim rates, our defense costs and strategies, we thought we really needed time and we felt after looking at the experience since we took the last extension at the end of '04 that it in fact we saw the trends and confirmation of the model that we thought it was prudent for us to go ahead and now we're more confident in our ability to look forward past the year 2011.

And Deane, I would add that we started to see the trend so the next thing we did was to reach out to other industry participants to see whether these trends were national in scope and so we confirmed that and then we reached out to outside experts so there was a pretty lengthy process here to try to make sure that we were all in the same place and that we had a handle on this.

Great, and then on that tax implication on the fourth quarter?

Yes, I'll try to be tax accountant here for a minute. The asbestos provision doesn't qualify from an accounting standpoint as being a discrete event. Therefore, it's loaded into the entirety of the -- all 12 months rate and therefore, it has an additional effect rolling into the fourth quarter.

Got it, all right

$0.06.

That one we understand, all right, just two operating issues and I apologize for dominating the questions here but I did want to get these two in. The first is, Eric, very interesting on Engineering Materials. You didn't have to talk about the quality issue that you all have the expense of over the past several quarters. Is that behind you now?

Well, it's tracking exactly what we expected. First off, we didn't consider it a quality issue. We felt strongly that there were distortion issues in the industry and as someone provided a product we needed to stand behind our product. We're not at all suggesting that it was our products fault, let me make that clear. That being said, we took a strategy to stand behind our product. I think the industry has recognized that we're people you can do business with and those product support costs have substantially mitigated this year as we both have -- as we work with the industry to provide an industry solution which is a combination of improved fabrication processes in the industry and we've continue to improve our product offering.

Great. That's helpful and then last question relates to the Aerospace, the incremental spending on research, engineering and so forth. We've seen from a number of companies on 787 programs where incremental R&D/integration has been pushed back onto the suppliers and is it fair to say that this is the same sort of 787 delays where you need to help out?

We're saying we're certainly struggling like everybody else is with the challenges on the 787. I think the movement of FirstFlight will allow us to do this in a more orderly fashion, and -- which means that in terms of our spending and in terms of doing things in order, we shipped, I think it gives us better control over the program. That being said the extended, you've got engineers working longer periods of time, but overall, I think it's the extent of the FirstFlight was a good thing.

Sure and we've seen it across-the-board in the suppliers so it should not be surprising but just wanted to hear that color. Thank you very much. Okay, thank you.

We'll take our next question from Shannon O'Callaghan of Lehman Brothers.

Good morning.

Good morning.

Just a question on Fluid Handling. I mean, you know, obviously a really strong quarter there this quarter. On the margins, you know, last quarter, you know, you had said that the operating leverage you got last quarter was a little disappointing, this quarter it's really good. Can you just talk about the variance, what sort of changed quarter to quarter or are you doing something better than what you were seeing last quarter?

I would first off, it's business as usual. Secondly, in the second quarter, we didn't do a good job leveraging the incremental sales. To OP, we only leveraged it about 10% and in the third quarter here, we leveraged that incremental sales 20%. Thirdly, I think we were impeded a little bit more on material versus price earlier in the year and as I look at the third quarter, we did a much better job on some of the price increases that we implemented in the second quarter, took effect in the third quarter and you can see a better price versus material balance here.

Okay. And then, you know , just a follow-up to Deane's there, in terms of R&D expense for Aerospace, do you have an updated annual estimate for that

I don't really.

Okay. I mean, it's going to be higher than 66 though, right?

Yes, well we're at 19 million in the third quarter, so --

Okay, that run rate will probably continue in the fourth?

Well, yes. We've said that. Really, my focus, Shannon, with Greg Ward, our focus is how do we manage our overall engineering expense in 2008 to make sure that it comes down, that we have meaningful if reduced engineering expense next year, and Greg and I are fully engaged on that project.

It's still, you know, think it can go down a few points even with sort of the 787 delays?

Yes, I do.

Okay, and then, you know, just on the tax rate, you know, in the quarter, the 27%, you know, as mentioned, you know, the lower foreign taxes, Bob maybe is there a reason that doesn't continue or can you explain that a little bit?

Well, I mean a part of it in there, Shannon, was because there were four countries that announced during the third quarter reduced tax rates, so it was a one-time impact because of our deferred tax assets and liabilities in those countries, most notably Germany and the UK. That's a one-time thing. It's just a one-time thing off the balance sheet, Shannon. The other parts were some restructuring that we did, our tax guys did to try to take advantage of some [inaudible] overseas. That's, you know, it's going to impact for -- I mean more a one time and try to take advantage of things but I would reinforce once again that I did say that we're expecting the overall rate excluding the asbestos to be toward that lower end of that 31 to 32% range we gave you before for the year. So I'd focus you on that for your modeling.

And I mean is that sort of a -- does any of that continue in terms of the remaining kind of at the lower end of that going forward? I mean should we be thinking about something closer to 31 in the future or?

We haven't talked much about it, but when we look at the outer years in '08, we've got really more upward pressure on our tax rate than downward pressure even. It's going to be a challenge to keep it stable to slightly up.

Okay. Thanks a lot.

We'll take our next question from Scott Graham of Bear Stearns.

Hi, good morning.

Good morning.

Several questions for you. The engineering materials sales on a year-over-year basis, the decline was less than what we've seen in the last couple quarters. I was wondering, are you sensing nearing the bottom there, Eric?

No. Our planning is as we go into 2008 is for soft sales in those markets, in our traditional markets, and we're looking to take markets, we're looking to -- we have specific plans here to look to take a market share in particularly in RV's and then we've got the Noble expansion and we've got the [inaudible] addition which will give us the manufacturing efficiency.

Would you mind unbundling that number for us a little bit more? RV and building, you said it was down modestly. What was transport on? Was that 15 to 20?

What was transport in the third quarter? 20%.

And then international?

International was up.

So the other two were down about 2 to 3% each modestly?

Yes, that's right.

On the Aerospace, the growth was substantial. It's been like that the last couple quarters. Can you continue to do a 15 to 20% growth for the next couple quarters in this business?

Well, when we look at the industry characteristics, we feel that we've got a couple good years here of solid demand. I'm not going to try to estimate what it's going to be on quarter to quarter basis, but we don't see in our planning any reason why the demand shouldn't be think particularly since most of the planes that have been -- these guys are sold out through 2012 and most of the demand has been from the overseas airlines, the U.S. airlines haven't come in yet. Our challenge then just given that demand is control of the engineering spend A and then B make sure we have the throughput and the plants to leverage the volume.

Okay on the Aerospace operating margin, if we X out the spend increment and also noting that OEM grew faster than aftermarket, it looks to me like the operating margin was up pretty smartly X that spend, yet again OEM sales growth exceeded after market. What were the drivers there?

Boy I haven't done the math that way.

I think what you're saying, Scott, is you've excluded the increase in the engineering spend in your analysis?

Yes.

We have a first class business here and first class market shares and technology and we're just spending a lot of money on these new products to get them delivered, primarily around the brake solutions and the two big programs which are the 787 and the A400. Remember, we have 75 development programs in our Aerospace Group alone and really but the big spend is in these two that we need to get there.

Right. I was asking the question in a positive way, Eric. [unintelligible]

[LAUGHTER].

Thanks for the help.

The number actually looked pretty good and I was wondering what Greg was doing over there to drive what looks like a couple hundred basis point increase X that number.

It's the underlying business, Scott, is performing well. It's the engineering we're grappling with. You're right

Good. Did the Dixie-Narco business, I'm sure, Brad Ellis is unhappy with what's going on over there. It was a pretty big sequential decline in sales. Can you walk us through that a little bit. Was that all Coke and Pepsi?

I think that the -- first off, the second-half sales in the can and bottle business are always a lot much weaker than the first half, and secondly, on Coke and Pepsi, all I would say specifically is we continue to work intimately with them to become a long-term strategic supplier. Thirdly, I just point out that our merchandising system segment has already exceeded the guidance that we gave to everybody for the full year and they've exceeded in the nine months and then finally, the way, what I would say is more broadly that if you include all our acquisitions last year, so add Noble to them but also including Dixie-Narco's disappointing results, on the $283 million that we spent in acquisitions, our EBITDA results this year are such that we look at in the first full year of operations we paid about six times EBITDA. We think that that's a record that's going to create value for our shareholders.

That's fair, okay. Last question relates to the fourth quarter guidance which just looking at the midpoint of it, it would seem to suggest something comfortably north of 20% operating profit growth and it would seem to me that there would have to be some type of sequential improvements in one of these businesses to get to that type of level. Could you talk about which business you see in the fourth quarter or businesses you see in the fourth quarter doing better than they did in the third quarter?

I'd rather not get into details up and down from a quarter to quarter basis. I specifically said in my remarks though that the leader here will be Fluid Handling, and importantly the backlog there so the issue is the throughput, but clearly, Fluid Handling is going to provide the leadership.

And just to refresh your recollections, Scott, last year's OP was 53.5 million in the fourth quarter.

Yes.

So if you do the math, at 20%, it's not going to get you to -- we're still going to have the sequential decline in OP from Q3 to Q4.

Well it's seasonal yes, but still it looks like more than 20%. No matter, I'll model it to that, thank you.

Well, I don't argue with your math, Scott.

[LAUGHTER]. Thanks.

And we'll take our next question from Matt Summerville of KeyBanc.

Just a follow-up question on the engineering costs in Aerospace. I guess if I got the numbers right, we've seen sequential uptick as we progress throughout '07. I guess at what point I guess on a quarterly basis has spending peaked at this point and I guess as we start to think about '08, when do you actually think that starts to decline? Is it early in the year, later in the year? Can you just give us a little more detail?

Because of the way the FirstFlight sets up and our plans , it's really still pretty heavy during the first two quarters of next year and then will decline for those two programs. I would remind everybody though that we're going to try to manage the investment engineering investment spending on all 75 programs, so it's not just these two that are impacted and we really haven't provided quarter to quarter guidance on the engineering spend. Our focus is to get the job done here and get it done in a first class way while controlling the

Moving into 2008 and Fluid Handling, based on what you're seeing right now in terms of raw material costs, do you need additional pricing to be in pairity?

Well, I think in the third quarter, we were clearly more than in pairity in Fluid Handling as our pricing covered material costs in the third quarter, so I think the Fluid Handling units are very disciplined about this. You can get caught in a quarter where you get escalating material costs and you put in price increases and you have to announce them and a month later or 45 days later, but over a reasonable period of time we're doing a good job managing that and from what I can see right now they're pretty much in balance.

If you look at the incremental margins in Fluid Handling, there was a sequential improvement from like 10 or 11 to 21 or 22, something like that. I guess what has to happen in Fluid Handling if you're slightly above pairity with price for the raw material cost from the incremental margins to being north of 30? Is this business capable of delivering that kind of incremental margin sustainably assuming demand is okay? I mean your core business was up double digits.

Again, we've got backlog 30% higher than it was a year ago. We've demonstrated that we can keep price in relation to material. You're talking about being able to leverage, you know, your volume over that fixed cost basis. That's a key part of it, and frankly, we've got one of the reasons that the leadership in Fluid Handling has the positions that they do is because there's a lot of opportunity to drive our operational excellence throughout Fluid Handling, and I keep saying the better we get, the more opportunity we see. There's a lot of opportunity for throughput efficiencies here that still exist in Fluid Handling.

When you look at the business overall from an end-market standpoint, are you seeing areas of softness just in Fluid?

The only place that I see, the only place I see is in our decorator fountain pumps in our pump business which we sell to pump the water in your pond in your backyard, and that's, I don't know, 2% of our aggregate Crane sales so we really don't have any residential exposure anywhere.

Great. Thanks a lot.

Thank you.

[OPERATOR INSTRUCTIONS]. We'll go next to Wendy Caplan of Wachovia Securities.

Thank you, good morning. A little more on the Fluid Handling backlog, if you will. Can you help us to understand how the backlog in terms of price and profitability compares to what you're seeing in the P&L, what we saw in the P&L in Q3?

I'm not aware of any differences in that backlog than what you're seeing and there's nothing unusual in the third quarter.

Okay and --

I think the backlog could be larger if we wanted to be less disciplined on price on these major projects, and we're trying to maintain that discipline which is important.

I guess that's my next question. In terms of the project business versus selling product outright, is there anything -- is it weighted in terms of the backlog towards projects or more or less so, and relative to what happened in Q3?

We don't break it out like that, Wendy, but by definition , the backlog is mostly projects, and the MRO business tends to be a book-and-ship business or a business that you ship

Right, but my question is in Q3 --

There's no change in mix there that I'm aware of.

Okay. Okay. Thank you. And anything different in the competitive environment in Fluid Handling in terms of your ability to take share, enter other markets, etc?

Well first off, we are continuing to sharpen our focus around Kent Farmer and the energy business, but I would still characterize that in the very early stages although we're seeing some benefit from that in terms of the global reach. I don't know. I don't have much to add to that.

Okay. Okay, thank you very much. Appreciate your help.

Thank you.

Mr. Koch, there are no further questions at this time. I'll turn the call back over to you for any additional or closing remarks.

Thank you very much, Operator. We appreciate your joining us and your continued interest in Crane. Thank you again, bye-bye.

And that does conclude today's conference call. Thank you for your participation. You may disconnect at this time.