Crane Co (CR) 2011 Q3 法說會逐字稿

Thank you for standing by and welcome to the Crane Company's third quarter 2011 analyst teleconference. At this time all participants are in a listen-only mode. There will be a presentation followed by a question and answer session. (Operator Instructions) Please be advised that this conference is being recorded today October 25, 2011. I would now like to hand the conference to our speaker for today Mr. Koch. Please go ahead Sir.

Thank you operator. Good morning everyone. Welcome to Crane's third quarter 2011 earnings release conference call. I am Dick Koch, Director of Investor Relations. On our call this morning we have Eric Fast, our President and CEO; Andrew Kraut, our Principal Financial Officer; and Richard Maue, our Principal Accounting Officer. We will start off our call with a few prepared remarks after which will respond to questions. Just a reminder, the comments we make on this call may include some forward-looking statements. We refer you to the cautionary language at the bottom of our earnings release and also in our annual report 10-K and subsequent filings pertaining to forward-looking statements. Also during the call, we will be using some non-GAAP numbers which are reconciled to comparable GAAP numbers at the end -- at the table at the end of our press release which is available on our website www.CraneCo.com in the Investor Relations section.

Before turning the microphone to Eric, I would like to invite you to attend our annual Investor Day conference on Thursday, February 16 in New York City. Please mark your calendars. Now let me turn the call over to Eric.

Thank you, Dick. I'm pleased with our third quarter as we continue to show significantly improved results. Sales grew 18% in the quarter led by core sales increase of 11%. We have registered double digit core growth in each quarter and thus far in 2011, driven by recovering end markets and solid execution. Operating profit increased 31% in the quarter and operating margin was 12.5%, continuing the journey to the 13% margin we have said we could achieve when core sales returned to $2.6 billion. Our earnings per share increased 27% versus the third quarter of 2010. Sales operating margins and earnings for the quarter improved both on a year-over-year and sequential basis. We continue to have a successful year in 2011 and results have been encouraging.

In April we raised our full year earnings guidance based on higher core growth expectations. We again raised earnings guidance in July based on the better than expected results. And reflecting our confidence in the Company's future, we also announced a 13% increase in the quarterly dividend. We are raising the lower end of our 2011 EPS guidance by $0.05 to a range of $3.35 to $3.45. Sales in 2011 are expected to increase in a range of 15% to 16%, the higher end of prior guidance; reflecting a 9% to 10% core growth, 3% from favorable foreign exchange translation, and 3% from acquisitions. Our free cash flow guidance remains a range of $140 million to $160 million. Although our current business trends are not signaling a severe downturn, we recognize that there are clear indications of slower global economic growth in 2012.

It is important to understand that Crane Co. is positioned better than it was when the world changed in late 2008. Similar to the end of 2008, we have ample liquidity, a strategy of maintaining our customer facing activities, and the ability to execute acquisitions. Over the past 3 years, our actions and accomplishments have made us an even stronger Company. Including a business portfolio strength into acquisitions, significant reductions in our cost base, and a broader geographic reach, particularly in emerging markets.

In the Aerospace & Electronics, we have completed several very large development programs including the brake control system for the 787, reducing our risk and positioning us to benefit from increased revenues associated with the new platforms. In Fluid Handling, we have effectively executed internal mergers, rationalized costs and dramatically changed how we approach the market. We now have an expanded global sales force focused on key verticals and selling bundled solutions to customers worldwide. In our shorter cycle businesses of Engineer Materials and Merchandising Systems, we have substantially reduced our fixed cost base through plant consolidation. Since 2008, we have closed 3 Engineer Materials facilities reducing the number of manufacturing sites from 8 to 5 and consolidated 2 large North America Vending operations into a single location.

Our later, long cycle businesses in Aerospace Electronics and Fluid Handling continue to provide strong sales and earnings growth and are on track to deliver significantly improved results over what we anticipated at the beginning of this year. We remain optimistic about the prospects for commercial airspace given large OEM backlogs, a healthier airline industry, and the more moderate oil prices. Fluid Handling backlog, again, increased sequentially and we feel that both of these segments are well positioned going into the fourth quarter and into 2012. We now expect Aerospace Group sales to be about $400 million in 2011 and we continue to expect Fluid Handling and operating margins to exceed 13% for the year.

Given that the economic environment is highly uncertain, visibility is extremely limited for our short cycle Engineer Materials and Merchandising Systems businesses. Raw material costs, although abating in some cases, remain elevated when compared to historical levels. These 2 segments are generally tracking to the Investor Day guidance that we provided back in February. While we remain alert to signs of a slowdown, our strategy today is to stay on offense and to focus on profitable growth. The maturation of the Crane Business System combined with solid management teams is enabling us to execute well and win in the marketplace. We continue to invest in our future to effectively leverage our existing facilities. Through new product development, more efficient machining operations, upgraded ERP systems, and a continuing emphasis on engineering sales and marketing. At the same time, we continue to drive productivity across the Company while carefully controlling costs. Andrew will now take you through the businesses and provide some additional financial information.

Thank you Eric. I will now turn to segment comments compare the third quarter of 2011 to 2010. Aerospace & Electronics sales increased 20% to $172 million. While operating profit increased 40% to $36 million. Operating margin increased to 20.7% in the third quarter, from 17.7% in the prior year. Backlog was $410 million at the end of the quarter. Lower than $431 million at the end of 2010, but above the September 2010 level of $402 million. Since the backlog decline from year end is largely due to timing differences between orders and sales we remain confident about order trends and the momentum in the business as we look forward.

Sales in the Aerospace Group increased $21 million or 25% to $106 million during the quarter. OEM sales increased 22% reflecting broad-based growth across large commercial transports, regional, and business jets. After-market sales increased 29% reflecting higher spares and repairing overhaul revenues as well as modernization and upgrade sales primarily for the C-130 carbon brake control upgrade. Excluding modernization and upgrade, our more traditional after-market sales increased 16% compared to the third quarter of 2010, a rate similar to what we experienced in the second quarter of 2011. Both commercial and defense related activity contributed to the after-market sales increase. The OEM after-market mix was 59% to 41% in the third quarter of 2011. Slightly more favorable than the 60% to 40% mix in the third quarter of 2010, but slightly less favorable than the 57% to 43% mix in the second quarter of 2011.

Operating profit in the Aerospace Group increased by approximately $8 million reflecting good leverage of the higher sales. In the third quarter of 2011. Aerospace engineering spending was $11 million, the seventh straight quarter of investment at this level and consistent with our targeted development spending range of 10% to 12% of Aerospace Group sales. Current market conditions in the Aerospace industry remain positive. With the International Air Transport Association recently projecting that passenger traffic will increase 5.9% in 2011, up from a previous estimate of 4.4%. Passenger load factors are at historically high levels with only a small portion of in-production aircraft parked.

Airline industry profitability has improved in 2011 and oil prices have moderated. Offsetting this in part, is lower than expected industry freight activity in 2011 which IATA now expects to increase only slightly above 2010 levels. In addition, concerns regarding slowing global economic growth could negatively impact results. Given the current environment as well as higher than expected third quarter sales, we are now forecasting that 2011 Aerospace Group sales will comfortably exceed $400 million versus our guidance in February of $365 million. For 2012, the IATA is projecting that both passenger and cargo markets will grow approximately 4%. Higher billed rates for large commercial aircraft should positively impact our future results and we will continue to leverage our recently expanded global sales force. In addition, we expect to benefit from sales of new products that we have developed over the past several years. Including the brake control system for the Boeing 787 and the landing gear control unit for the Airbus A320.

Electronics Group sales in the third quarter increased $8 million or 14% to $66 million led by increases in Power Solutions and Microelectronics sales. Demand from the commercial aviation market drove improved results in Power Solutions, while higher sales to medical device customers benefited Microelectronics. The Electronics operating profit increased approximately $2 million compared to the third quarter of 2010 with operating margins of remaining in the mid teens. We expect our 2011 Electronics sales will increase at least 10% compared to 2010, which is slightly better than our Investor Day guidance.

Looking forward into 2012, we recognize that defense related orders could be canceled or delayed due to ongoing budget negotiations. However, it is important to remember that the defense portion of our Electronics business is concentrated on intelligence, surveillance, and reconnaissance or ISR. A market that we expect to continue to grow despite reductions in overall government spending. In addition, the commercial portion of our Electronics business which primarily derives demand from the commercial aviation market comprises about one-third of Electronics Group sales.

Engineered Materials sales declined 3% in the third quarter. Demand for our RV related applications decreased 12% as several RV OEMs slowed manufacturing. RV dealers continue to manage their inventory levels down reflecting concerns about the economy. Transportation and building products related sales in the third quarter increased 9% and 5% respectively. Operating margins were 11.1% compared to 14.5% in the third quarter of 2010. And operating profit declined to $5.9 million from $8 million. Although we implemented price increases in the first half of the year that improved our price cost relationship in the third quarter, the pricing environment remains very competitive. Raw material costs such as resin have remained higher than expected and continue to impact our margins.

Overall in 2011 for Engineered Materials, we project an increase in sales and profit in the same general range as our Investor Day guidance, but results could come in a bit lower than this guidance given recent economic trends. RV dealer inventories appear to be in balance at generally reduced levels. We do not expect a repeat of the inventory restocking that occurred in the fourth quarter of 2010. Demand from transportation related customers has slowed somewhat, and we forecasted building product sales will remain lackluster until nonresidential building starts show meaningful improvement.

We are continuing our efforts to expand our content to existing customers and find new applications in existing as well as new markets, such as ocean going containers, decorative interior wall panels, and walls and floors for more fuel-efficient step vans. In addition, we are driving productivity initiatives to reduce scrap and improve yields helping us to mitigate our operating margin decline in the face of slowing seasonal and cyclical and market demand. Merchandising system sales of $99 million increased $22 million or 28% primarily reflecting $14 million of sales associated with the December 2010 acquisition of Money Controls, as well as sales growth in both our Payments Solutions and Vending businesses. Segment operating profit of $10.8 million increased from $6.3 million in the prior year due to higher core sales and continued improvements in operating efficiency. Operating margins improved to 11% from 8.1%.

We are clearly seeing the benefits of the Crane Business System reading through in our operations in Williston, South Carolina where we successfully consolidated our North American Vending machine manufacturing operations nearly 2 years ago. In addition, we are continuing our new product development activities including online vending and vending machines that will be compliant with the Americans with Disabilities Act. The integration of Money Controls into our global Payment Solutions business continues to progress well and we are on track to achieve our planned synergies. Money Controls was profitable in the third quarter and we continue to believe that it will be slightly accretive to our full year 2011 earnings.

For the full year, the Merchandising Systems segment is tracking to the guidance we provided at Investor Day with sales and operating profit both expected to increase over 2010 levels. Fluid Handling sales increased 19% to $304 million in the third quarter with a core sales increase of 11%, a favorable foreign currency impact of 6%, and the W.T. Armatur acquisition contributing 2%. This marks the fourth consecutive quarter that core sales have increased on a year-over-year basis continuing the gradual recovery in Fluid Handling which began in late 2010. We saw notable sales in order strength in our late, long cycle Energy and ChemPharma businesses as momentum continues to build. Backlog remains solid at $329 million and is 21% higher than at the end of 2010. Although, we note that the third quarter level includes about $5 million from the WTA acquisition.

As we have pointed out previously, we feel that our backlog is properly priced reflecting our disciplined pricing methodology. We are seeing improvement in both MRO and project related business and quote activity remains strong. The favorable trends we saw in the second quarter are continuing and many of our customers are releasing funds for projects that were previously on hold. Spending by chemical companies and refineries is strong due to higher plant operating rates, catch-up maintenance, de-bottle necking projects and better industry profits. North American power market customers are engaging in significant refurbishment activities, while Asian power markets are also continuing their recovery.

Fluid Handling operating profit of $41 million was 23% higher than the prior year, primarily reflecting the higher sales and operating margin was 13.5%, 50 basis points higher than last year's third quarter. The relationship between customer pricing and input costs was somewhat favorable during the third quarter reflecting the implementation of selective price increases over the past year. Operating leverage for overall Fluid Handling in the third quarter was lower than we would normally expect as a considerable portion of the sales increase was derived from foreign exchange. In addition, inventory step up effects and transaction costs associated with the WTA acquisition totaled approximately $1.2 million during the quarter.

In July, we announced that Crane had acquired WTA, a manufacturer of highly engineered valves with zero fugitive emissions used in service applications. WTA which had 2010 sales of approximately $21 million, is expected to be slightly dilutive to earnings in 2011. The addition of WTA's bellow sealed globe valve compliments our existing product offering of low fugitive emission valve technology and aligns directly with our objectives of providing comprehensive solutions for demanding chemical and petrochemical applications. For Fluid Handling, we remain confident about sales going forward driven by a later, longer cycle process valves businesses. For the full year of 2011, we continue to expect Fluid Handling will exceed our February Investor Day guidance for both sales and operating profits within operating margin in excess of 13%.

Turning now to more detail on our total Company results and forecast. We, again, experienced input costs pressure in the quarter but in aggregate our increase in selling prices effectively offset this impact. Commodity prices generally have declined over the past few months, yet several key commodity prices remain elevated versus historical levels. Foreign currency translation positively impacted EPS by approximately $0.03 in the quarter. As a reminder, the operating profit impact of foreign currency translation for Crane tends to be about 10% to 15% of the revenue impact. On a year-to-date basis, foreign currency translation has positively benefited EPS by approximately $0.08. Given recent currency movements, we now expect only a small benefit from foreign currency in the fourth quarter.

Third quarter corporate costs were higher than the prior year driven by higher compensation costs associated with our improved earnings forecast, higher medical expenses, and also some professional fees related to normal tax consulting that we incurred in the quarter. Some of the increase was timing related. Our current full year forecast for corporate expense is about $58 million, which implies a sequential reduction to about $14 million in the fourth quarter. Our tax rate in the third quarter of 2011 was 31% compared to 28.3% in the third quarter of 2010. As the tax rate in the prior year benefited from the closure of certain tax audits. We continue to expect our 2011 full year tax rate to be approximately 31% or perhaps just a bit lower. Please remember that our EPS guidance range of $3.35 to $3.45 includes a $0.05 per share gain we recorded in miscellaneous income in the first quarter primarily related to the sale of real estate.

Overall free cash flow was positive $40 million in the third quarter of 2011 compared to negative $10 million in the third quarter of 2010. The prior year period included a $25 million discretionary pension contribution as well as an increase in working capital to support a higher sales level. As Eric mentioned earlier we are maintaining our free cash flow guidance in a range of $140 million to $160 million for the full year. Recognizing that this implies a very strong cash flow for the balance of the year. The fourth quarter is a seasonal strong cash flow period for the Company and we expect to generate significant cash through working capital reduction. Capital spending for the third quarter of 2011 was $9 million an increase over the $5 million spent in the third quarter of 2010. Our capital expenditure guidance for 2011 remains at $40 million, compared with $21 million in 2010.

We did not repurchase any shares of our common stock during the third quarter of 2011 and our policy is not to preannounce purchases but to report them at the close of the applicable quarter. On a year-to-date basis we have repurchased approximately 1,056,000 shares for about $50 million. Our balance sheet remains strong and we ended the quarter with $211 million in cash. We also have access to our $300 million revolving credit facility. Half of our long term debt of $400,000 is due in 2013 and the other half is due in 2036. Now back to you Dick.

Thank you Eric and Andrew. This marks the end of our prepared comments. Operator we are now ready to take questions.

We will now begin the question-and-answer session. (Operator Instructions) Deane Dray.

Hi good morning. James filling in for Deane. Just wanted to ask is there any way you might be able to quantify the braking systems that you have going into these 7087 platform? What we just learned is that roughly 60 of those planes are expected to be made next year and then Boeing is calling out about 10 planes per month in 2013 so I was wondering if you might be able to quantify your dollar sale to each plane.

James, as we've talked kind of about in the past, as a matter of policy we don't break out the ship set content for particular aircraft. But what I will say, is that the 787 is another plane in the portfolio of airplanes that we have as a company. And to the extent that we have sales associated with the 787 they will be good for us but you shouldn't think of this as a step change in our algorithm associated with the 787.

Okay fair enough. Thank you. And just in fluid seems like recovering very, very well. Which verticals within that business is still haven't recovered yet and that we can look forward to?

Well James, as you've indicated many of the end markets are showing market improvement. To the extent that some of the end markets have still yet to recover, I would point to US commercial construction is still a bit lackluster. And also we have a pipe valve and fitting distributor in Canada and we are seeing some slowing in the bidding activity up there as well.

But on the positive side, and again we mentioned this in our remarks, energy markets and the related demand have really rebounded quite significantly since the end of 2010. Refiners are releasing capital expenditures due to higher crack spreads and increased profitability. We're seeing increased refurbishment activity in the North American power market. The Asian power market is continuing its recovery. Overall chemical plants are up -- are really undertaking a significant number of de-bottle necking projects and we feel good about worldwide demand.

Okay. Terrific. That's all I have. Thank you.

Ajay Kejriwal.

Thanks this is Ben on for Ajay. I just wanted to follow up on the fluid segment. I know some of the European competitors have come out and mentioned the slowing of orders. I just wanted to see if you guys had seen any impact from these austerity measures in Europe any slowing in that geography?

No. Our business -- the signs look good and we are quite confident on our backlog.

Okay thanks. And then maybe just dialing in on Engineering Materials. You guys mentioned RV down 12% it looks like transportation came off pretty significantly as well. What is kind of the outlook in trajectory for that business?

Ben, you mentioned that transportation came up in terms of the growth rate relative to prior quarters because we were still up in the quarter.

Right, it was positive for the quarter but it looked like deceleration from prior quarters.

Right. So we are -- in conjunction with economic trends we are seeing certain truck OEM -- trailer OEM manufacturers reduce production and we're just being cautious about trends in that area. Obviously the first half of the year was a very strong production time period for trailer OEMs.

Okay. Great. Thanks.

Robert Barry.

Hello guys good morning. Just wanted to follow-up on the comments in the prepared remarks about the aerospace backlog just because for 2 quarters in a row now sequentially it has been ticking down.

Well Rob, as you mentioned as we indicated -- we did indicate -- let me just step back. We are not concerned about order trends in aerospace and electronics. A number of factors contributed to a lower backlog at the end of the third quarter as compared to year end of 2010. As you may recall, we booked a large aerospace [MNU] order in the fourth quarter of 2010 and we're benefiting from associated sales in 2011. In electronics, earlier this year we removed a projects from our electronics backlog related to a program cancellation that may come back at a future date. And we also removed an order from our backlog associated with the contact that more accurately will be booked over a several month time period. In addition, there are a couple of orders that we thought we would receive in Q3, but now we expect to receive in Q4, so there is some timing impact. And as we step back we are just not concerned about bookings. Our backlog is at a healthy level and we remain confident in our momentum going into 2012.

You made comments about electronics growing at least 10%. It's been tracking much higher than that. Any thoughts on the fourth quarter? I know that it looks like the comp gets a lot tougher in the fourth quarter.

I would just say that our guidance here is that we expect to do a little better than 10% for the full year and you're right, we are overlapping a different quarter.

Okay. And then just maybe finally to follow-up on the fluid. Also a question on the backlog. The commentary sounds very positive especially comments about delayed project funding getting released but sequentially if you take out the deal it looks like the backlog was about flat. I don't know if seasonality is a factor or bookings versus shipments. Any color there would be helpful as well. Thank you.

It is -- the backlog was only up slightly sequentially. There are some foreign currency effects that impact our Fluid Handling backlog and from the end of the second quarter to the end of the third quarter it may of had a small impact on that. Once again, though we feel very confident in our position here in the trends are quite positive. And I will even bring it back Rob to when we think about our later longer cycle businesses for both aerospace, and fluid, and electronics and Fluid Handling, we think we are positioned for continued sales growth in both of these segments.

Rob, this is Eric. I would add that in Fluid Handling, we track by region both our project activity and our MRO activity on a quarter to quarter basis in year-over-year and those -- all those trends through the third quarter look very strong with a lot of targeted activity for new orders. So it feels very robust to us.

Okay. Thank you.

Matt Summerville.

Good morning. Just 1 or 2 follow-ups. Andrew, you had mentioned that electronics group you removed a program that had gotten canceled. Some contracts that were maybe originally thought to be shorter in duration a little longer duration so some adjustment there, some things that maybe we going to be booked in Q3 moving to Q4. Can you tell us is that more on the civilian side of the business on the military side and I guess what is your degree of certainty that those things kind of end up moving forward?

Well Matt there is a little of both. The orders that we mentioned that came out of backlog were military related. The orders that -- a couple of quarters that slipped into Q4 on the commercial side. I think we are cognizant that in today's environment of government spending and what is happening in Washington it is logical to assume that certain of these projects slip a little bit. Once again though, we are confident in our backlog and feel good about our prospects.

If you look at that backlog number is the relative split between civilian and military in the backlog similar to the relative split you are encountering now, civilian versus military in revenue or is there a discernible difference there?

We don't have the exact answer for that. Matt. I would say that --

Why don't we get back to him.

We can follow up.

Okay and then just one follow-up on fluid. I mean everything you have said is pretty encouraging from what you are seeing from a quoting bidding just overall activity standpoint. I guess are we -- should we take away from that this backlog in no way is peaked yet. That this backlog is likely to continue to move higher. Maybe not necessarily every quarter over every quarter but that number is still moving north from here.

We are sitting here. Now we're talking about how long is the delayed long cycle business going to last, right Matt? And all I can say to that is that as we sit here today it feels very -- in particularly in our process valves energy, chemical, power, globally as we sit here today it feels very strong. Both in terms of projects that have been -- people have been working on for the last year or year and a half are being let and started and awarded as well as for the MRO for the de-bottle necking. The efficiency related work in the plants due to the higher utilization. As so as we sit here today it feels very solid to us. And I might add our businesses -- I think our execution in our business is clearly better than it was a year ago. And continuing to improve from the internal mergers and the effective utilization of that global sales force particularly in the emerging markets.

With regards to the merchandising system segment, I have to go back several quarters to see kind of an 11% or better operating margin in this business. Even sequentially on only, I will call it, slightly higher revenue, you saw a pretty nice improvement in operating profitability. Is that being driven by synergies with Money Controls. Is that being driven by efficiencies through single factory, higher volume, or maybe it's a combination? And I guess I'm trying to get a feel for sustainability off these levels.

I think you hit it on the head. It is a combination of those things. We look to continue to achieve increased profitability through those -- through our operational excellence efforts as well as synergies associated with Money Controls. Obviously a portion of that equation is related to volume and we don't want to lose sight of that. But we have made tremendous progress in terms of our operational improvements within vending.

So, Matt this is Eric. I would say that we have consistently said long-term that the payment systems business is a high growth, high margin business. Generally it is going to be -- should be in the mid teens. It won't always be there but should be in the mid teens. I've also said consistently that if we can get a little bit of revenue which we started to see some in the third quarter in our North American vending business where we have got substantially reduced our costs through the plant consolidation that we can start to move our vending margins towards 10%. Just kind of a placeholder and an interim step. And we are confident on both those. I like the progress that we made in the third quarter in vending and long-term for payment systems. It is -- that is the right way to look at that business.

Thanks guys I appreciate the color.

(Operator Instructions) Delroy Warmington

Yes. If I should go back to your merchandising system. You show that 20% top line growth. What percent of that was organic? In other words if you back out the Money Controls revenue -- all the business that in terms of top line growth.

Excluding Money Controls, the merchandising -- we mentioned this in our remarks Del our Money Controls -- hold on. Let me get you that number. Was up 9%.

Okay. And 1 last question. In terms of tax rates of 2012, can we expect a similar tax rate as 2011?

Will provide guidance for 2012 on that measure at our investor day conference in February.

Thanks a million.

Wendy Caplan.

You mentioned -- let's talk a little bit again about the short cycle businesses. Engineered Materials and merchandising systems obviously the consolidation of the facilities for vending has helped a lot. Can you talk about some of the productivity initiatives that you cited for specifically -- I guess for Engineered Materials that you are looking to affect going forward?

Wendy, as part of the algorithm for that business, we're constantly looking for ways to improve productivity. One of the things we looked at -- we look at is called pound based yield. It is a process business where we look to constantly reduce the amount of scrap and waste that is associated with that process. So we put a lot of work in to reducing that. And given the relatively high cost of resin, it can be very effective to do so. So that is one sort of example. But it is embedded in our culture and part of our focus on cost is around productivity efforts.

And I guess my question was, should we expect anything larger in terms of any kind of headcount -- any kind of restructuring. I know you typically run that through the P&L but is there anything larger that we should expect?

We are not contemplating restructuring activities Wendy. I think as you know in the normal course of business, we do analyze the impact of closing facilities as part of our efforts to drive productivity. But we really feel that the actions we took and have taken since 2008 have positioned us well to adapt to changes in demand.

On the headcount side Wendy, we do have -- this is a book and ship business but we have a lot of flexibility to reduce the crew size and the crew teams as we go from 2 shifts to 1.5 just or 1 shift. So we have a lot of flexibility with respect to the direct labor there.

Okay. Thank you Eric. Thanks Andrew.

Jeffrey Sprague.

I got on late so I may have missed this, but could you spend a little time on capital allocation. You stepped up and bought the stock earlier in the year. You did in the third quarter balance sheet. It looks like it is in great shape. Maybe a little color commentary on what the M&A pipeline might look like and what we should expect going into next year.

Okay Jeff. Well our message and the way we think about capital allocation, and we think we have a very balanced capital allocation approach is to first look for internal opportunities to make capital expenditures to drive growth. A huge or a very large portion of our strategy is to grow through acquisition. And we continually look for businesses to acquire businesses that strengthen our existing businesses. And as we mentioned earlier this year, we raised our dividend 15% -- or 13%. We believe that a dividend to be attractive relative to our peers. From a sharing purchase perspective, we did mention on the call that we didn't do anything in the third quarter but we have repurchased about $50 million year-to-date and we do not pre-announce those purchases. So, in thinking about this balance capital allocation approach, we are quite focused now on looking for those acquisitions that will strengthen our existing businesses and I would say that would be the first and foremost kind of priority for use of our cash.

Could you speak to the richness of the -- of the current acquisition pipeline and where valuations are relative to your comfort zone.

There is -- there are targets out there and there has been activity as we have all read about in the press as well. I think clearly prices are back to pre-2008 levels. Private equity is out there. Strategics are well armed as well. So prices have come up a little bit. We don't have anything that is eminent but we remain active looking and things can change quickly.

And I'm sorry if you touched this earlier. Where do you stand particularly in fluid on kind of the price cost dynamic and in particular may be pricing and backlog as we look forward?

We mentioned in our remarks Jeff, that in the quarter we were able to offset [info] cost increases with our customer price increases. And we tend not to talk about the pricing that is in our backlog.

Other then we are very comfortable that we have got a properly priced backlog.

Okay. Terrific. Thank you.

There are no further questions at this time. Please continue.

Thank you very much for joining us today and for your continuing interest in Crane. Thank you.

That does conclude our conference call for today. Thank you for your participating. You may all disconnect.