Crane Co (CR) 2011 Q4 法說會逐字稿

Good day, everyone, and welcome to Crane's fourth quarter 2011 earnings conference call. Today's call is being recorded. At this time I would like to turn the call over to Director of Investor Relations, Mr. Richard Koch. Please go ahead, sir.

Thank you, operator. Good morning, everyone. Welcome to Crane's fourth quarter 2011 earnings release conference call. I'm Dick Koch, Director of Investor Relations. On our call this morning we have Eric Fast, our President and CEO, and Andrew Krawitt, our Principal Financial Officer, and Richard Maue, our Principal Accounting Officer. We will start off our call with a few prepared remarks after which we 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 the comparable GAAP numbers in the table at the end of your press release, which is available on our website at 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 on Thursday, February 16 in New York City. Please let us know if you wish to attend. Now let me turn the call over to Eric.

Thank you, Dick. Last night we reported 2011 results, which we extended the time horizon of our asbestos liability from 2017 to 2021, reflecting the more stable trends we have experienced over the last several years. In addition, we increased the environmental liability for our legacy Superfund Site in Arizona. Excluding the special items, as outlined in our press release yesterday, Crane's full year EPS of $3.43 increased 32% from 2011 and was a record for the Company, significantly exceeding the $2.80 to $3 EPS range that we expected a year ago.

Fourth quarter results capped off a very successful year in 2011. Sales grew 10% in the quarter with core sales up 7%. Excluding special items, operating profit increased 26% in the quarter and operating margin was 12.6%, continuing the journey to the 13% margin goal, which we now expect to achieve in 2012. Earnings per share also excluding special items increased 29% versus the fourth quarter of 2010. We are optimistic about our 2012 prospects for our later, longer-cycle businesses within Aerospace & Electronics and Fluid Handling. These segments delivered significantly better than anticipated results in 2011 and are positioned to benefit from exposure to their late-cycle end markets. We note that these segments accounted for 80% of Crane's segment operating profit in 2011.

Our outlook is relatively stable for our short-cycle Engineered Materials and Merchandising Systems segments with the potential for some slight improvements in 2012. Although a slower global economy is a likely scenario as we look forward, Crane is well positioned to achieve profitable growth in 2012. We invested during the 2009 economic downturn even while we took out costs and we have maintained our customer focus strategy throughout. As we have indicated before, the maturation of the Crane business system combined with solid management teams is enabling us to execute well and win in the marketplace. We expect a combination of end market growth, gains in market share, and focus on productivity to drive improved results in 2012.

For 2012, sales are expected to increase 3% to 5%, reflecting 5% to 6% core growth and a benefit from the WTA acquisition of less than 1%, partially offset by an unfavorable foreign exchange translation of approximately 2%. We expect EPS to be in a range of $3.75 to $3.95, or a 9% to 15% increase compared to 2011, excluding the special items. Our free cash flow guidance is in a range of $160 million to $190 million. Andrew will now take you through the businesses and provide some additional financial information.

Thank you, Eric. I will turn now to segment comments, which compare the fourth quarter of 2011 to 2010 before the special items identified in our press release last night. Aerospace & Electronics sales increased 7% to $172 million, while operating profit increased 17% to $39 million. Operating margins improved to 22.6% from 20.7% in the prior year. Sales in the Aerospace Group increased $13 million, or 13%, to $108 million. OEM revenue grew 10% with increases to both commercial and military customers. Sales to Business Jet OEMs continued their recovery from depressed levels, while sales to large and regional aircraft manufacturers grew more moderately.

Aftermarket sales increased 18% reflecting higher sales revenues for commercial and military applications, as well as higher modernization and upgrade sales, primarily for the C-130 Carbon Brake Control Upgrade program. Our more traditional aftermarket sales, excluding M&U, increased 13% compared to the fourth quarter of 2010. The OEM aftermarket mix was 60% to 40% in the fourth quarter of 2011, compared to a 62% to 38% mix in the fourth quarter of 2010. Operating profit in the Aerospace Group increased by approximately $9 million, reflecting very good leverage of the higher sales. In the fourth quarter of 2011, Aerospace engineering spending was $11 million, the eighth straight quarter of investment at this level and consistent with our targeted development spending range of 10% to 12% of Aerospace Group sales.

Market conditions in the Aerospace industry remain positive, with the International Air Transport Association recently projecting that global passenger demand will grow 4% in 2012, down slightly from its previous forecast. We note that cargo demand is expected to be flat in 2012, down from the IATA's previous forecast of 4.2% growth. We expect to achieve higher sales and profits as we benefit from increasing build rates for large commercial aircraft, new products and our expanded global sales force. We will provide additional detail at our Investor Day next month.

Electronics sales declined $2 million, or 3%, to $64 million. Electronics' operating profit decreased approximately $3 million as operating margin returned to a more normal mid-teens level from a very strong margin in the prior year. In 2012, we forecast reasonably stable results from the Electronics Group despite reductions in overall defense spending. We expect that growth in our commercial business, which comprises about one-third of sales, to offset a slight decline in defense-related sales.

Aerospace & Electronics backlog was $411 million at the end of the fourth quarter, slightly higher than the September 2011 level of $409 million, but lower than the December 2010 backlog level of $431 million. Importantly, the year-end 2011 backlog that is scheduled to ship in 2012 is similar to the comparable year-end 2010 amount. In addition, several defense-related orders that we previously expected to receive in the fourth quarter of 2011 are now anticipated in the first quarter of 2012. We believe that the segment backlog remains at a healthy level as we begin 2012.

Engineered Materials sales were flat at $45 million. Demand for our RV-related applications was down 4% as several RV OEMs temporarily shut down manufacturing in mid-December. Dealers have reduced their inventories, reflecting current economic uncertainties. Building products and transportation related sales increased 3% and 11% respectively. Operating margins were 10.1% compared to 7.7% in the fourth quarter of 2010, and operating profit improved to $4.6 million from $3.5 million, benefiting from price increases early in the year and continued productivity initiatives. In 2012, we believe that we can grow sales despite challenging end market conditions by expanding our content to customers and developing new applications. We are targeting both existing and new markets such as ocean-going containers, decorative interior wall panels, and walls and floors for more fuel efficient step vans.

Merchandising System sales of $86 million increased $10 million, or 13%, primarily reflecting sales associated with the December 2010 acquisition of Money Controls. Excluding the impact of Money Controls, Payment Solutions sales were similar to prior year levels. Vending sales declined slightly as economic softness in Europe more than offset higher sales in North America. Segment operating profit of $7.7 million increased from $2.9 million and operating margins improved to 8.9% from 3.8%, reflecting improved operating results in both Vending and Payment Solutions, including a positive contribution from Money Controls. We expect modestly better results in 2012 led by growth in our Global Payment Solutions business and overall margin improvement.

Fluid Handling sales increased 13.7% to $297 million, with a core sales increase of 11.4%, an increase in sales from the W.T. Armatur acquisition of 1.9%, and a favorable foreign currency translation of 0.4%. This marks the fifth 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 significant improvement in our late, long-cycle energy business and generally saw results across Fluid Handling. We are comfortable with our December backlog of $314 million, although it is somewhat lower than the September level of $329 million. Compared to December 2010, backlog is up a strong 15%, or 13% excluding the impact of WTA.

Overall, order activity remains encouraging, although the rate of growth has slowed somewhat from earlier in 2011. Market conditions in Europe have softened for major chemical companies, but demand in the Americas remains strong, with MRO benefiting from healthy plant operating rates and catch-up maintenance. The North American power market continues to recover at a gradual pace.

Fluid Handling operating profit of $39 million was 19% higher, primarily reflecting the higher sales, and operating margin was 13%, a 50 basis point improvement. The relationship between customer pricing and input costs was generally in balance during the fourth quarter. For 2012, we are expecting further sales growth and margin improvement over 2011 levels, led by our Energy and ChemPharma business units, which have significant late-cycle exposure combined with an expanded sales force. We will provide additional detail at our Investor Day next month.

Turning now to more detail on our total Company results and forecasts. The extension of our asbestos liability estimate from 2017 to 2021 resulted in a $157 million charge to income in the fourth quarter, net of insurance and taxes. The asbestos provision has no immediate cash impact. We generally expect that our annual after-insurance after-tax cash outflow associated with our asbestos liability will be in a range of $40 million to $50 million over the next several years, similar to the level of outflow experienced during 2010 and 2011. We estimate net after-tax cash outflow in 2012 to be approximately $55 million, reflecting lower insurance receipts this year, but we expect a return to more normal insurance recoveries in 2013.

The decision to extend the asbestos liability estimate was based on several factors. First, the number of mesothelioma claims being filed against the Company and associated settlement costs have stabilized over the past several years and in our opinion the outlook for mesothelioma claims expected to filed and resolved in the forecast period is reasonably stable. Second, there have been favorable developments in the trend of case law, which has been a contributing factor in stabilizing the asbestos claims activity and related settlement costs. Third, there have been significant actions taken by certain state legislatures and courts over the past several years that have reduced the number and types of claims that can proceed to trial, which has been a significant factor in stabilizing the asbestos claims activity. Fourth, the Company has now entered into coverage-in-place agreements with almost all of its excess insurers, which enables the Company to project a more stable relationship between settlement and defense costs paid by us and reimbursed expense from our insurers.

Our estimated insurance recoverable through 2021 represents 25% of the gross asbestos liability and we have assumed a 35% tax rate to estimate the asbestos liability, net of insurance and taxes.

During the fourth quarter we also increased the environmental liability for our legacy Superfund Site in Goodyear, Arizona by $20 million on an after-tax basis. The updated liability reflects additional site remediation requirements including an extension of the time horizon through 2016. Please note that our free cash flow guidance of $160 million to $190 million for 2012 includes the effect of both the asbestos and environmental related cash flows.

Looking at operating results for overall Crane, we again experienced raw material cost pressure in the quarter consistent with the trend we have seen over the past year. In aggregate, though, increases in our selling prices effectively offset this impact. Foreign currency translation had a negligible impact on EPS 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 full year 2011 basis, foreign currency translation positively benefited EPS by about $0.08.

Our fourth quarter tax rate, excluding special items, was 28.6% in 2011, compared to 29.5% in the fourth quarter of 2010, primarily due to lower international taxes. Our full year 2011 tax rate of 30.5%, also excluding special items, was in line with our expectations and just slightly lower than our guidance of 31%.

Free cash flow was a strong $78 million in the fourth quarter of 2011, after the effect of a $30 million discretionary pension contribution that we made in December. This compares to free cash flow of $67 million in the fourth quarter of 2010. Absent the effect of this discretionary pension contribution, full year free cash flow of $145 million was within our October guidance range of $140 million to $160 million.

Capital spending for the fourth quarter of 2011 was $7 million, equal to capital spending in the fourth quarter of 2010. For the full year of 2011, capital expenditures were $35 million, a $14 million increase over 2010, as we invested to effectively leverage our existing facilities.

We took the opportunity in the fourth quarter to proactively offset our expected 2012 share dilution and repurchased approximately 650,000 shares of our common stock for about $30 million. Our policy is not to preannounce purchases, but to report them at the close of the applicable quarter. For the full year of 2011, we repurchased approximately 1.7 million shares for about $80 million.

Our balance sheet remains strong and we ended the quarter with $245 million in cash. We also have access to our $300 million revolving credit facility. Half of our long term debt of $400 million is due in 2013, and the other half is due in 2036.

I will finish with a couple of comments regarding the 2012 guidance that Eric outlined earlier. Assuming the US Congress passes legislation during 2012 which extends the research tax credit retroactive to January 1, 2012, we expect our tax rate to be approximately 30% in 2012. Our guidance also includes an increase in pension expense, reflecting lower discount rates and incorporating 2011 investment returns. We currently estimate 2012 pension expense of approximately $20 million versus roughly $6 million in 2011.

We will provide specific sales, operating profit, and margin guidance for each segment at our February Investor Day. We hope you will be able to join us either in person or via webcast. 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.

Thank you. (Operator Instructions)

Deane Dray, Citigroup.

Thank you. Good morning, everyone. The first is more of a comment on the asbestos true-up of your -- what you believe the 10-year liability is. And the comment is you all have provided terrific disclosures through the years, so we're not surprised to see you true this back up to the 10-year, original 10-year estimate. And just based upon the claims and insurance recoveries, that has actually been again terrific disclosure and it does not raise our eyebrow here in terms of what your liability is, but that we appreciate that disclosure.

Thank you, Deane.

The question regarding and very interesting is your bias and your exposure to more late-cycle markets between the Aerospace and Fluid Handling. The first question is, can you talk a bit more about your visibility into both the Energy markets and the ChemPharma? Quote activity, increases in capacity you have seen with the customers. Just give us a sense that this late cycle really is gaining traction.

Let me take the first shot at that. Andrew can fill it in. The first thing I look at is the heart of Fluid Handling, which is our Process Valve business serving chemical -- ChemPharma and Energy. When I look at that, again, the heart of Fluid Handling, our backlogs are up substantially. That gives me a lot of confidence going into next year. We continue the rate of -- when we look at both projects and MRO, Deane, we track this on a monthly basis. And clearly the rate of growth is not as rapid as it was early in the year. It has slowed, but we are still seeing year over year growth in both our MRO and our project business. We feel very confident about our Process Valve and Fluid Handling business going into 2012.

Are you assuming a lift from pricing in 2012 in this business?

Well, we remain vigilant on pricing. I feel comfortable that our backlog is appropriately priced, as we are quite -- as you know from following us a long time, we are very disciplined there. And we're -- we -- how do I say this, Andrew? We -- I don't anticipate any issues in price versus material going into 2012. We did a good job this year. We covered it. And I am confident that we can cover it next year, should there be material pressure. We (multiple speakers) --

-- and balanced, Deane, next year.

That's helpful. Then related to the backlog, given the visibility on the valve side, I'm still surprised to see the total backlog kind of lagging expectations, up a percent year over year. So it sounds like some of that is on the Aerospace side. Could you just take us through the dynamics on the backlog and why we may not have seen it build to the pace that would suggest at this point in the cycle?

I would just say from -- I will let Andrew cover Aerospace & Electronics, but we -- as a company, I don't look at total backlog. We look at the backlog in our Aerospace & Electronics and then our Fluid Handling businesses and that's where we are really focused. And we feel very comfortable with both of those backlogs. The earlier, shorter-cycle businesses, book and ship businesses, Deane, I'm just not so sure it helps much to look at those backlogs. And I might add, as Andrew said, we expect them to be relatively stable to slightly up next year. Andrew, you want to comment on Aerospace & Electronics?

Deane, we've talked a little bit about this over the past year. But as we have said, I think -- well, we've certainly said it on at least one previous call -- we booked some large orders in the fourth quarter of 2010. And a portion of those orders that we booked at the end of 2010 will ship in 2012.

We also talked a little bit about in 2011 we had a couple of sort of one-time items where we moved a project out of our Electronics backlog related to a program cancellation that might come back at a future date. And we also removed another order from our backlog associated with a contract that more accurately should have been booked over a longer period of time.

So a number of factors sort of contribute to the backlog, but we believe that the backlog remains at a healthy level. And as we stated in our remarks, when we compare where we are today versus where we were a year ago in terms of what we expect to ship in the upcoming year, we are in a pretty similar position. And also, there were several defense-related Electronics orders that we thought we would receive in Q4 in 2011 that are now sort of slipping into 2012. But we think it's a healthy backlog level, Deane.

Great. Thank you.

Ajay Kejriwal, FBR Capital.

Thank you. Good morning. Just first maybe a clarification on that pension point today. $20 million for '12, is that a total pension expense number, or is that a year-on-year increase?

Ajay, the $20 million is what we expect for total pension expense in 2012. That compares to about $6 million that we expensed in 2011. So, about a $14 million increase year over year.

Got it. And that's baked into your guidance?

That is baked into the guidance.

Got it. Good. And then on Aero margins, obviously very strong in the quarter and I guess part of that is the mix. But when I think about '12, looking at aftermarket continuing to grow. So I guess any color on how should we think about the margin improvement from here? Is that 20%, 22%, is that kind of sustainable?

I won't comment specifically except to say that from an overall Company perspective, we expect to leverage incremental sales at about a 25% rate and we actually internally try to do a little bit better than that. So, I will leave it as sort of a general response at this point and then we'll get into more specifics around the growth in our Aerospace sales at our Investor Day next month.

That's fair. Wondering if you can maybe just talk conceptually about the R&D expense. You've done a great job taking that down last couple of years. Has it kind of stabilized at the current rate, or you think with new programs that could go up from here?

As we mentioned in our remarks, we have had a similar level of R&D spending for the past several quarters. And we are very focused on maintaining our R&D as a percentage of Aerospace Group sales in that 10% to 12% range. There clearly will be programs as we go forward that we'll need to support and we will have to budget accordingly, but we are very confident in communicating a 10% to 12% of sales range for R&D spending going forward.

All right. Good. Thank you.

Robert Barry, UBS.

Good morning. First, a quick follow-up on Deane's question. When you were talking, Eric, about the Process Valves, kind of the heart, were you just referring to the piece that is not Pumps and Supply? Is that what you meant?

Pumps and Supply. And there is a Water and a Commercial Valve business that is located in the UK are the other three pieces.

Got you. I was wondering if you could expand a little bit on what you are seeing in Europe and how the demand trended there during the quarter and what you are assuming for growth in the Europe parts of the business for next year or for '12?

Do you want to frame that for --?

Let me just frame it up a little bit, Rob. About 25% to 30% of Crane's sales by destination relate to Europe. So, that includes the United Kingdom. For Fluid Handling, it's about 30% that relates to Europe. In thinking about our European exposure, about half of it is in the UK and about half in Western Europe, mainly in Germany. And as a reminder, our European customer base includes some pretty large companies with global operations and lots of cash, which make us feel better. Our sales and earnings guidance in 2012 does include the effect of some softening demand, as well as a somewhat weaker Euro, So we built that into guidance as well. But I wanted to just frame up that we're talking about 25% to 30% of the Company with European exposure.

From a Company point of view, since our strategy plans in August and our putting together our annual plans in the fall, we have assumed that the European sector was going to go -- in the aggregate was going to have a mild recession, zero or negative 1% growth. And we have incorporated that in our plan. I think the key is is the bulk of what we have in Western Europe is in Germany. In their Fluid Handling business, the bulk of it is with BASF, Bayer, the major German industrial companies which are in great shape and feed stock is getting cheaper. So, just how much that is going to be impacted we'll have to see, but our customers are in good shape here. We are not dealing with the consumers.

Yes. Question on Aero. You talked about orders slipping. I think you have mentioned that last quarter, maybe the last couple of quarters. Wondering if you could elaborate on what you are attributing that to, or what you attribute that to? If you think there is a risk that continues to happen until there is clarity on the budget in 2013 and beyond -- the defense budget?

I can't point to anything. I would say it is the uncertainty around the defense budget. And again, just primarily it really just relates to the Electronics business, which is a smaller piece of that segment.

And I would just add, we are tending to see orders [split] rather than being canceled.

Yes, that's fair.

Yes. And then just finally, I was wondering if you could comment on Money Controls. Did that -- did it actually grow in 2011? And what is your expectation for Money Controls in 2012?

Let me start with saying that the integration of Money Controls is on track. And we are pleased with our progress. Sales in 2012 declined versus 2011, due in part to lower than expected sales to retail self-checkout customers that we believe is mainly due to timing. We are still pretty bullish -- very bullish on self-checkout, and believe it's a short-term versus a long-term issue. In addition, Money Controls was impacted by some recently enacted German legislation, which is designed to reduce the number of gambling halls in Berlin. So, we have seen a bit of an impact there. But as we step back, we are quite positive about our Payment Solutions business. This acquisition has significantly strengthened our business, and again, we are quite optimistic about prospects longer term.

Yes. Your assumption is that it will grow in 2012?

Payment Systems, yes.

Okay. Thanks, guys.

Matt Summerville, KeyBanc.

Good morning. Just a couple of questions. I was hoping, Andrew, we could clarify the pension a little bit more. That seems like a pretty big increase, I guess, year over year. How much did you have to reduce your discount rate? And then given that you had a pretty sizable voluntary contribution on top of some other money you had put into the plan this year, what does the funded status of that look like at 12-31?

Matt, I don't have the set of discount rates in front of me. We actually have several different plans and each one of them has a slightly different discount rate. But, what you are seeing is the power of a decline in interest rates in terms of what that does to pension expense. But, it was significant and I can -- we will -- we can break out more information on that.

When we look at the overall funded level of our plans worldwide, what we talked about at our February Investor Day, when we looked at 2011, we talked about those pension plans that had liabilities greater than assets were in an underfunded position of about $76 million at that time.

When we look at our pension plans with liabilities greater than assets, which we think is the conservative way to look at this, we are in an underfunded position of about $168 million. So it's about a $92 million increase versus the end of 2010. That being said, we think this overall funded position is very manageable. And, we are staying ahead of it in part by making some discretionary pension contributions. In terms of framing it up, the overall underfunded amount for those plans with liabilities in excess of assets, it's about $168 million. Very manageable.

The relative size of our pension assets to the size of the Company are, compared to most industrial companies, I think is relatively small. Keep in mind in the US, we grandfathered our main pension plan. What year was that?

2005.

2005, and put in a defined contribution plan.

Okay. Then with regards to Fluid, I want to make sure I understand what you are saying. In Europe, it sounds like you are seeing moderation. I want to make sure that I have that adjective correct, and that you are not seeing a decline in your business but a moderation in growth. Then, could you also characterize then what you are seeing that hasn't come up from an emerging market standpoint in Fluid. And then a little more color on order rates in North America there?

I would say -- my comment, Matt, was that we are seeing a moderation in growth, but still growing in our Process Valve business. I'm trying to remember what the data looked like for Europe, but it's clearly a little bit softer than it was in other parts of the world. But importantly, globally, it's still growing and we are seeing a continued flow of orders certainly in China. Power in India is a little rough, but power in the US is better. You want to give some specific comments, Andrew?

Yes. I think, Matt, just to maybe fill in a little bit. I think when we look at our refining markets, significantly better than they were at the end of 2010. We have probably seen them soften just a little bit. As we mentioned, North American power market is continuing what has been a very gradual recovery. We are a little cautious about Asia power markets, mainly by what is happening in India. And when we look at general industrial and commercial related demand here in the US, that has been pretty stable. Chemical plant activity, in the US, it's remaining pretty strong and softened a bit in Europe. And as we've talked about, we are seeing a little bit of slowing in order trends, but still strong in the US, a little softer in Europe. Does that help?

Yes. I appreciate that. And then I apologize if you already answered this, Eric. I think you may have, but I missed it. But I am going just ask it again. The defense orders that have been slipping in Aerospace, I guess, why the comfort that after a couple quarters of slippage those begin to hit the backlog again in Q1? Have you already seen that happen?

It was really just in Electronics, not in the Aerospace Group.

Oh, yes, I apologize. Yes.

I think that the general observation is that we have seen defense-related orders slip, but we are on a number of different programs, a lot of programs. And it's not as though the programs are being canceled. It's just the intake of orders has slowed down a bit. So we think it's largely timing and there clearly is some uncertainty around the defense budget process.

Thank you.

(Operator Instructions)

Jeff Sprague, Vertical Research.

Thank you. Good morning. Just a couple clean-up questions. Just to be clear on the tax rate, then your guidance is using the 30% as if the R&D tax credit is removed?

That's correct, Jeff. We are assuming that it will be renewed, retroactive to January 1, 2012.

And where would your rate be if it's not renewed?

I don't know what the answer is to that.

It would be a little bit higher, Jeff. Let us come back to you with a little bit further impact.

Jeff, I would point out on the tax rate -- this is Eric -- that last year our guidance for the tax rate was 31%, and this year our guidance is 30% for 2012. And that's due to a lot of good work on international tax this year.

One other thing, as I review some information, Jeff. If that R&D tax credit is not extended, it would probably impact our full-year EPS by about $0.05.

Okay. On asbestos, just trying to square up what you are showing as your new after-tax cash liability and what you said about cash out the door. It looks like you are assuming roughly kind of a linear burn rate on this over that 10 years. Is that correct? At what point do we see this thing start to bend south, if you really kind of get the drift of my question? Is there kind of a tailing off process that is in sight out there in those out years?

My comment would be, for assumption purposes, we've assumed it's relatively stable, $40 million to $50 million, with a little bump because of the hole in our insurance in 2012. Personally, over the last decade, when I came to Crane, there was a little footnote in the annual report and there was 2500 claims in the footnote. And in 2005, they went up to 89,000 claims. And today, we are at roughly 58,000 claims.

And the key here is that you can clearly see the stability that we are experiencing in both -- particularly in the meso area. And then actually a slight decline in our total cost over the last three years, which I am encouraged about. I'm particularly encouraged about the change -- what I'm seeing in the case law development.

And I would point out most recently that there was a - the Supreme Court of California, in a 7-0 decision in the Patrick O'Neill case, ruled that equipment manufacturers cannot be held liable for replacement parts or insulation supplied by others. Now this is obviously -- we have got the same kind of ruling that exists by the Supreme Court in the state of Washington. So I'm sensing -- I feel that there is kind of a changing turn of events here that is positive. That's not -- there are 48 more states to go, and some favorable rulings in the other states. But, I'm more encouraged than I have been for quite some time, both in terms of the case law and the stability. Maybe we have been conservative in setting it up as relatively stable after-tax, after-insurance cash flow for the next 10 years, but that is what we have done.

Great. And then finally, just strategically -- and I know you probably can't hit this completely head on, but there is a lot of liquidity out there, right? I mean, SPX, a big divestiture today. Dover and IR have been cleaning house. ITT breaking up. Tyco breaking up. What is -- the portfolio has coalesced pretty strongly around Fluid and Aero and Electronics.

Yes.

How do you think about where do we go from here, maybe even like in a multi-year framework?

I would say no change in course. We have done a really nice -- we are constantly trimming around the edges, anything that's small and disparate. We have done a lot of internal mergers and we feel good about the portfolio. I would say that you can see some very good work that we have done in Controls that's come through here in 2011 with the results that -- with very strong results. But, you won't see major changes in our portfolio.

On the M&A side, we are -- we continue to hunt and are spending a fair amount of time on it. But, it is a competitive marketplace with relatively high prices. But again, in terms of us doing something on M&A, it will be -- as I said, I have said pretty consistently here, it is probably going to be -- it will be in the areas of Fluid Handling and Process Valves and possibly our Aerospace businesses as our principal areas of focus. Is that helpful?

Yes, it is. Thank you very much.

I am not showing any further questions in the queue. I would like to turn it back over to Richard Koch for closing comments.

Thank you very much for joining us today and please let us know if you want to come to Investor Day. Appreciate it. Bye-bye now.

Thank you. Ladies and gentlemen, thank for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.