Crane Co (CR) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Crane Co. third-quarter 2014 earnings call.

(Operator Instructions)

As a reminder, today's conference is being recorded. I would now like to turn the conference over to Mr. Jason Feldman, Director of Investor Relations. Sir, please go ahead.

Thank you operator, and good morning everyone. Welcome to our third-quarter 2014 earning release conference call. I'm Jason Feldman, Director of Investor Relations. On our call this morning we have Max Mitchell, our President and Chief Executive Officer, and Rich Maue, our Chief Financial 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 and tables at the end of our press release and accompanying slide presentations, both of which are available on our website at www.craneco.com in the investor relations section. Now let me turn the call over to Max.

Thank you, Jason. As outlined in our press release last night, excluding special items Crane's third quarter EPS was $1.12, up 8% compared to the third quarter of 2013. Sales of $727 million increased 14%, driven primarily by the acquisition of MEI, with core growth of 0.3%, along with a slight tailwind from foreign exchange. Third quarter results fell short of our expectations, largely related to external market conditions, and we are reducing our full-year guidance, excluding special items, to a range of $4.40 to $4.50, down $0.20 at the midpoint from a prior guidance.

I'm going to discuss what transpired during the third quarter, and Rich Maue will walk you through additional details as well as our revised outlook for the balance of the year. There were two primary causes of the earnings shortfall relative to our expectations in the quarter. First, Fluid Handling organic growth rates were softer than expected. Outstanding quotes are taking longer than normal to convert to orders. In addition, some quotes are tied to projects that are being pushed out a bit. And lastly on a smaller scale, some customers are delaying acceptance of existing in-house orders. This had a direct impact on us in the quarter.

Second, Aerospace and Electronics margins were lower than prior year, driven primarily by three issues. Planned and encouraged incremental investment spending, incremental one-time costs associated with an accelerated product launch, and soft defense sales. I would like to expand on each of these, starting with Fluid Handling where we were surprised by weaker than expected organic growth. In February at our Investor Day we guided to 2.5% organic growth for Fluid Handling. At that time, we were seeing process valve orders down year over year in the low to mid-single digit range throughout the first quarter. However, given improving quoting activity, we have line of sight to a better order profile for the second quarter and the rest of the year.

The second quarter developed generally as expected from an order and a revenue perspective. Process valve orders during the second quarter increased in the mid-single digit range. And importantly, our project funnel of outstanding quotes was up approximately 20% year to date as of the end of the second quarter. In addition to very solid quoting activity, the average lag between quote and firm order received, shortened approximately 25% throughout the first half of this year. Our customers were compressing time schedules, and on average were increasing the velocity of orders placed from initial quote.

Based on these trends we expected orders for core process valve business to increase in the high single digit range during the third quarter. Based on our anticipated mix, about half of those orders were expected to be related to projects with six to nine month lead times. The other half typically would have been shorter cycle projects and MRO activity with lead times of less than 60 days, a substantial portion of which we would have expected to be shipped within the quarter. Based on these trends described, exiting the second quarter we felt we had good confidence in our outlook.

However, during the third quarter we saw a pronounced reversal of the second-quarter trends. Specifically, while quoting activity remains solid and the backlog of open quotes continues to build, the average time between quote and firm order lengthened materially through the quarter, increasing approximately 35% compared to the first half. The sales shortfall in the third quarter was primarily related to our chemical end market, particularly in the Americas and Europe, but with some softness across other regions, including the Middle East.

While less significant to our results in the quarter, power was the other area in which we saw a change. We had very strong orders during the first quarter in power. During the second quarter, order rates decelerated but quote activity actually improved. Similar to chemical, we have a large volume of open quotes, but a very sluggish pace of conversion to orders in the third quarter. In power we do believe that projects in the Americas are moving forward with only modest delays. In China however, we believe the change reflects shifting supply demand dynamics, which may be slowing the pace of investments.

In addition to the overall slowdown of quote to order conversion as previously mentioned, we are also seeing some project investment decisions and start dates pushing to the right. Some customers have also delayed our shipment of preexisting orders and backlog, but this has been at a smaller contributor to our overall miss in the quarter.

At this time, we are not seeing our customers cancelling orders or projects, but we are seeing a material shift in decision-making to release those orders and manage projects and spend more closely. We believe this is in response to the generally more volatile and mixed global macroeconomic outlook and political unrest. Our win rate is stable, and we have a very large pipeline of open quotes.

Overall market conditions appear to be generally good, but given our recent experience, we have less predictability as to when outstanding quotes will convert to orders. And we expect a certain amount of lumpiness and volatility to remain in the short term. While we expect some continued uncertainty in the fourth quarter, all indicators continue to point to continued long-term secular strength building through 2016.

To put this all in perspective, sales and orders did fall short of our expectations in the quarter; however, for Fluid Handling overall, adjusting for currency and last quarter's small divestiture, backlog is up 10.4% year to date, up 2.6% year over year, and down less than 2% sequentially. We play in the late cycle portion of the chemical space, and we remain confident we will participate fully in the US chemical up-cycle, as well as long-term growth in other geographies and end markets.

Despite the weak revenue performance in the quarter, we are pleased with execution of Fluid Handling. The 120 basis points year-over-year improvement in margins reflects strong productivity activity efforts that more than offset a very negative mix and modestly lower volumes. For the fourth quarter, based on the trends just described, we expect overall Fluid Handling results to be similar to the third quarter, with the continuation of last quarter's general market conditions.

Moving onto Aerospace and Electronics, excluding special items, margins declined 320 basis points year over year to 19.2%. More than half of that decline is directly related to higher engineering expense. We have discussed the elevated levels of intentional investment expense over the last two quarters. The increased spending is being driven by programs we won over the last year, and as well ongoing quoting and bidding support for new opportunities that continue to present themselves. The level of conscious and welcome investment spending in the quarter was not materially different from the first half of this year.

Investment spending in Aerospace is likely to remain at similar levels, as we need to support recent wins with R&D, and in some cases CapEx. And we will continue to pursue opportunities that are being presented to us, that our teams continue to uncover by providing highly engineered solutions our customers value. We look forward to sharing updates at our next Investor Day on new programs and initiatives that have already added new revenue through 2030, above and beyond the $2.6 billion of single-aisle wins, we discussed this past February.

The remainder of the decline was primarily related to a product launch at Aerospace specific to our cabin business, and lower electronics defense sales. At Aerospace, we recently introduced a new line of breakthrough seat actuation products that had substantial weight and reliability benefits compared to our older product line. Demand for these new products has been strong, and we saw margin deterioration related to temporary supply chain inefficiencies. Our new suppliers for this product were unable to ramp up as quickly as our end customer demand, and resourcing or second sourcing some of those components temporarily added costs. This issue is isolated, and largely behind us. And we expect an improvement in Aerospace margins in the fourth quarter and 2015.

Electronics sales declined just under 10%, driven by weaker defense-related shipments. We don't believe defense market conditions have changed, and the market is stable to down slightly. We believe our decline in defense-related sales is timing-related. Third quarter order activity in Electronics improved, though a substantial portion of orders received are for delivery in 2015.

Performance at Fluid Handling and Aerospace and Electronics was partially offset by a particularly strong quarter for Payment and Merchandising Technologies, where we saw volumes increase substantially and strong margins driven by synergy, realization, and productivity initiatives. While margins are tracking above our initial expectations, please remember that there is typically a seasonal drop-off in revenue in the fourth quarter.

At engineered materials, sales to the RV market remained very strong, partially offset by a slight decline in building materials. Despite good revenue growth, the product mix was unfavorable compared to prior year, and material cost pressures rose during the quarter. We do expect some recovery here with declining oil prices. This is also a seasonal business, and the fourth quarter tends to be weakest in the RV end market., Rich Maue will provide more specific details on the business' financial performance and our outlook for the rest of 2014.

Thank you, Max. I'll turn now to segment comments, which compare the third quarter of 2014 to 2013, excluding special items, as outlined in the press release, slide presentation and the accompanying non-GAAP tables. After the segment comments, I will provide some additional detail on our revised outlook.

In the third quarter, Fluid Handling sales of $314 million declined 2.4%, with a core sales decline of 2%. The core sales decline was primarily a result of weaker sales in our process valve business. Fluid Handling operating profit rose 6% to $49 million. Operating margins rose 120 basis points to 15.7%, despite the decline in sales. The solid margin performance primarily reflected productivity gains, some benefit from lower pension expense, partially offset by lower volume and substantially unfavorable mix. Fluid Handling backlog was $350 million at the end of September. After adjusting for the second-quarter divestiture of Crane Water, our backlog is up 6.5% versus the end of 2013, down 5.4% versus the end of June, and down slightly compared to the same period last year. Further adjusting for currency, backlog is up 10.4% compared to the end of 2013, down 1.4% sequentially, and up 2.6% compared to the same period last year.

As Max discussed, quoting activity remained solid, but since the end of the second quarter quotes are taking much longer than normal to convert to orders, which is a change from what we experienced during the first half. This is important to note because while large projects within our process valve business have six-plus month lead times, roughly half the business is fairly short-cycle MRO and small project-base sales with lead times of 30 to 60 days. Weakening activity in this area was the primary reason our sales came in below expectations.

For our process valve business specific to chemical, demand was particularly soft in the quarter across the Americas, China, and Europe. Based on strong second-quarter quoting activity including order momentum, we had expected an improvement in the Americas, and to a lesser extent Europe. This didn't materialize quite as expected, as conversion from quote to order slowed considerably. At this point while we still expect improvement in the Americas, the timing remains uncertain. For Europe and China we expect demand will remain weak in the fourth quarter.

In the power markets we saw a more pronounced declined in demand than expected, particularly in China. In the United States while orders were also down slightly, we expect a modest improvement in the fourth quarter. Refining slowed compared to the first half of 2014 and the prior year, most notably in the Americas and the Middle East. For the fourth quarter, we expect continued softness in the Americas, partially offset by project activity in the Middle East and China.

With respect to our commercial valve-related businesses, commercial construction and mining activity in Canada continues to be soft. We are seeing signs of stabilization in our UK- and Middle East-based businesses, including continued positive order momentum over the last several months.

Payment and Merchandising Technology sales of $181 million increased $97 million, or 116% versus the prior year, driven primarily by the MEI acquisition. Core sales rose 9.4%, and currency translation increased sales by 1.1%. Crane Payment Innovation sales were approximately flat compared to last year. We continued to see strength in the retail end market, and Conlux Japan showed solid growth with continued market share gains. In addition, both Payment and Merchandising systems sales into the vending end market improved nicely compared to last year.

Segment operating profit of $27.1 million increased 244% from $7.9 million last year, primarily reflecting the impact of the MEI acquisition. Operating margin increased 560 basis points to 15% from 9.4% in the same quarter last year. We were very pleased with the margins in the quarter, with the improvement driven primarily by higher volumes, synergy realization, and productivity initiatives.

The MEI integration is progressing well, and we remain on track to deliver $0.20 of accretion in 2014. Synergy realization in the quarter was $3 million, bringing the year-to-date total to $6 million. We are on track to exceed our $7 million synergy target for 2014, and continue to expect an annual run rate of at least $25 million of synergies by 2016.

Aerospace and Electronics sales declined 2.6% (sic - see press release "1.5%) to $167.2 million compared to $169.8 million in the third quarter of 2013. Segment operating profit decreased 16% to $32.1 million, and operating margins decreased to 19.2% from 22.4% in the prior year. As Max discussed, the margin decline was the result of incremental investment spending, incremental costs associated with the acceleration of a new product launch which is now behind us, and softer defense electronics sales.

Sales in the Aerospace group were $110.7 million, an increase of 3.3% from the third quarter of last year. Commercial OEM sales increased 4%, total after-market sales increased 5%, and commercial spares improved in the low single digit range. The OEM to after-market mix was 63% to 37% percent, consistent with the third quarter of last year.

Electronics group sales were $56.5 million, a 9.8% decline from the third quarter of 2013, driven primarily by weaker sales of defense-related products. As Max mentioned, we expect both sales and operating profit for the segment to improve in the fourth quarter and next year. Aerospace and Electronics backlog was $404.8 million at the end of the third quarter compared to $361.3 million at December 31, 2013 and $381.8 million at September 30, 2013.

Engineering Material sales increased $2.8 million, or 4.5% to $64.7 million. Sales of RV-related products increased 10% versus the prior year, while transportation sales declined 4% and building products declined 1%. Operating profit decreased $1.8 million to $9 million, and operating margins were 14% versus 17.4% in the third quarter of 2013. The margin decline was primarily a result of negative product mix and higher material input costs, partially offset by leverage on the higher volumes.

Turning now to more detail on our total Company results and forecasts. Our third-quarter tax rate was 27.5% on a GAAP basis compared to 30.1% in the thirds quarter of 2013. Excluding the impact of the special items, our third-quarter tax rate was 31.9%, which compares to 27.7% in the third quarter of 2013. We continue to expect our 2014 full-year tax rate, excluding special items, to be roughly 31%, which includes the assumption that legislation will be enacted during 2014 that extends the US Federal Research Tax Credit retroactive to January 1, 2014. As a reminder, the increase in our forecasted 2014 tax rate reflects the January 2013 benefit from the reinstatement of the R&D tax credit which was retroactive to 2012, coupled with increased earnings in the US and Japan as a result of the acquisition of MEI.

In the quarter, free cash flow decreased $17 million from last year to $57 million. On a year-to-date basis, free cash flow increased $9 million to $81 million. We ended the quarter with $302 million in cash, up $31 million from year-end 2013. Total debt at the end of September was $864 million compared to $875 million at December 31, 2013.

During the third quarter, we increased our legacy environmental liability for the Goodyear Arizona site by $31.9 million on an after-tax basis. The updated liability reflects additional site remediation requirements, as well as an extension of the time horizon through 2022. Importantly, the future annual cash flow impact for this site is expected to remain stable at current levels. In addition, we recorded a $4.4 million after-tax charge related to a legacy site in Roseland, New Jersey. This charge covers costs through 2017, at which time we expect to have completed required remediation at the site.

We are updating our 2014 EPS guidance to a range of $4.40 to $4.50 per share, excluding special items. Using the midpoints, this represents a decline of $0.20 from the guidance we provided in January. We expect full-year core growth of between 0% and 1%. The primary reason for the guidance revision is the shortfall versus our expectations at Fluid Handling, as well as we discussed, following by Aerospace and Electronics. We believe that Payment and Merchandising Technologies will attribute more to our full-year earnings than we guided to at Investor Day, with Engineered Materials slightly below that guidance.

Compared to our original full-year guidance, there were two additional factors that had an impact on our guidance revision. First, based on current exchange rates, currency is approximately a $0.05 headwind. Second, on a full-year basis, instability in Russia and the Ukraine is expected to be also about a $0.05 headwind, primarily related to customer credit availability rather than direct impact from sanctions.

Overall, we expect fourth-quarter earnings similar to the third quarter. Fluid Handling should deliver results comparable to the third quarter, reflecting our current backlog position and recent trends. Our expected improvement in Aerospace and Electronics sales and margins, along with a $0.05 benefit from the R&D tax credit, is expect to offset the normal seasonal typical decline for the fourth quarter in Engineered Materials and Payment and Merchandising Technologies. I will now turn it back to Max before we take questions.

Thanks, Rich. While there is substantial economic and political uncertainty across several of our end markets and geographies, we continue to focus on execution and those factors which are within our control. We had expected and planned for better sales in the quarter. But our overall margin performance demonstrates our ability to perform in a difficult environment. While disappointing with the results, we are encouraged by progress on our key initiates. We continue to gain traction on new product development initiatives across the organization. At Fluid Handling we also delivered strong margin expansion, despite negative product mix and revenue declines. Further, we continue to expect to pick-up in chemical investment, although the timing appears to be moving further to the right.

At Payment and Merchandising Technologies, the MEI integration is progressing very well, and margins are tracking above our expectations. While fourth quarter is seasonally softer for this segment, we continue to have a strong position in our key end markets. Aerospace and Electronics margins will improve, reflecting better performance across this segment. And we are excited about the new opportunities we have won, as well as those we are still pursuing. At Engineered Materials we expect to benefit going forward from a nonresidential construction recovery. Our Restructuring initiatives in Electronics and Fluid Handling are on track.

We will be visiting with all of our businesses over the month of November to understand the latest market and business updates as we dial-in expectations for 2015. And we will provide that guidance, as usual, during our fourth-quarter conference call in late January, with a more detailed guidance discussion at our February Investor Day. Now the let me turn it over to Jason.

Thank you, Max and Rich. This marks the end of our prepared comments. Operator, we're now ready to take questions.

Thank you.

(Operator Instructions)

Our first question comes from the line of Ajay Kejriwal of FBR Capital Markets. Your line is now open.

Thank you, good morning. Max, maybe just to start with a broader question here and I asked this in the back drop of most industrials actually reporting decent earnings here, and the performance last night really sticks out. And I know you mentioned a number of issues related to end markets, and you provided good detail, but wondering whether some of these issues, such as the product launch expenses, et cetera might have been anticipated with some more visibility now?

So, specific to Aerospace, Ajay?

Yes, so that was one and I think Engineered Materials, you called out some material input costs. I'm wondering that a lot of these items across the board -- and I know in Fluid, you talked extensively about end markets, product, those order cycles lengthening during the course of the quarter. But I'm wondering whether you might have had some visibility early on, or is this more like a systems issue which caused you to be surprised here?

No system issue. Let's start with Fluid Handling. And we tried to paint this picture of what we saw with the real order momentum that we had exiting the second quarter. There was a significant drop-off in quote to order conversion in July and August, and we really needed to see this play out through the quarter. It did catch us a bit by surprise. I think we have heard some of our peers also discuss similar volatilities, similar uncertainty. Now it does seem to vary depending on where others are playing. Specifically, up stream oil and gas versus mid and down, heavier mix towards chemicals.

My sense is that there's nothing unusual here that others haven't felt in the third quarter, and as I continue to analyze the announcements that are coming out, not only from our peers but also from EPC's and our customers, there's a consistent theme of generally strong US markets that are expected to continue to do well as we head into 2015 and 2016.

Europe continues to be soft generally, and is going to be sluggish. China, there's a -- clearly appears to be a bit of a slow-down here. I think things continue to play out in terms of severity, and this is what we're watching closely on a global basis into the fourth quarter. So within Fluid Handling, I don't think that we could have caught anything sooner, and that's the message that we want to convey.

On the cabin launch specifically, this is related to a new product launch that the end customers are the airlines. Our customers are those providers of interior cabins that are bidding competitively on a tighter time line than the normal aerospace program, if you will. Once those are won and bid by our customers, those providing the interior cabin solutions, we have a tighter timeline with which we need to develop.

I'm very proud of the team's effort here at our new solution within the cabin actuation, it had stronger demand than we anticipated, and we chased to quite a few opportunities that we were quite successful with. That ended up compressing our time line in terms of developing and delivering on the -- to meet the customers' expectations. The team made the right call to make sure that we accelerated whatever it took in terms of the supply chain that was not fully brought up to speed to handle the amount of capacity necessary with the rate of demand that we saw.

Now, this played out through the second and third quarter and while we were aware in the second quarter, the severity of was not fully appreciated until the third quarter and our efforts continued from second to the third quarter. So that's how I would frame up.

That's helpful. Thanks for that. So on the product launch charges, quantify for us the impact on the quarter. Sounds like they are behind you, but maybe just clarify how should we modeling Aerospace margins here in the fourth quarter? And then I had a couple Aerospace questions.

Ajay, it's Rich. I think the way to think about -- maybe, quantification of what Max just talked about specific to Aerospace. So we had a 320 basis point degradation in the quarter, which is roughly, call it $5 million to $5.5 million. $3 million of that degradation was planned investments to support new programs, things that we planned, things that we had been talking about all along.

And then the balance of that number is really split between this issue that arose in cabins. So call the it $1.2 million, or just a little bit north of that in the quarter, and then the other half of that being the impact of the lower defense sales that we experienced in the quarter as well. So from an order of magnitude, we don't like to see $1.2 million in the quarter clearly. It's something we take seriously, but order of magnitude it's about $1.2 million specific to the quarter.

That should go away, I imagine in the fourth quarter and beyond. What about lowered, the impact from defense? How should we be thinking about that? What the issues were? Any more clarity, that would be helpful, too.

Sure, so I mean in that area, we do expect revenues to come back up. In this business, in the defense sector, we tend to see lumpiness in the orders and sales. So we do expect sales to return to a higher level in the fourth quarter where we shouldn't experience that kind of a degradation in Q4.

Got it. That's helpful.

And maybe on Engineered Materials, what were the raw material issues? Is this any specific material that went up in price on you? Might there be something else that caused the surprise?

It's mainly resin based. That's the primary raw material input cost that we monitor which is really, frankly, a magnitude of or a composition of other things like styrene and benzene. The magnitude of the increase that we saw was a little bit quicker than expected.

We had experienced a benzene plant go down. I think it was in the month of either late June or early July, and those costs hit us here in the third quarter. We do expect them to abate, even as we move out of the fourth quarter, or even partially in the fourth quarter, moving forward. But it was mainly around resin and styrene costs which is a primary input cost in materials that we produce in Engineered Materials.

Got it. So some costs bleed into the fourth quarter but then you'd expect more normalized costs into next year?

Yes. We would expect hopefully some benefit from, as Max pointed out in his prepared remarks, the impact of some -- the lower price of oil.

Got it. And last question for me before I pass it on. Max, with the stock having done what it has, really over the past couple of months, do share buy-backs move up the priority list of capital allocation? Or, how should we be thinking about that?

As we've announced previously, Ajay, we don't pre-announce, and our policy is to -- or our capital deployment strategy is to offset dilution. That's all I can really say.

Okay. Thank you.

Our next question comes from the line of Ron Epstein of Bank of America Merrill Lynch. Your line is now open.

Good morning, guys.

Good morning, Ron.

So just maybe a couple details and then maybe one broader kind of strategic question. When we look at the environmental remediation liabilities, what drove the change there? Was it just updating everything? What kind of made that happen now?

And then how do we think the cash -- how do we think about the cash flow from that? And maybe equip the accounting. Do you take the charge now and then the cash flows out over time? Or how does that work?

With respect to the initial charge for our Goodyear, Arizona site, this was part of our normal process that we go through in working closely with the EPA. Really all this was, was updating our normal work plan, extending certain elements of the remediation requirements, and taking costs out through that 2022 time frame. So I think that's important. But equally as important and to your question, we see the cash costs resulting from this as being stable. So we're really just taking the accounting and the liability out further, in a more simplistic way. But the cash requirements to satisfy that liability being relatively stable.

The second one is specific to our site in Roseland, New Jersey, where the New Jersey DEP adopted changes to their standards recently, and that required us to perform some additional work. We completed our work plan actually in the quarter, and we anticipate that the charge that we took will allow us to substantially complete all of our remediation work by 2017 in that regard. And it's a much smaller in scope and scale. I think it's $4 million after tax, so not material.

Okay. Great. And then Max, when you stand back and you look at the portfolio of businesses that you have, now that you've been in the leadership role a little bit longer, how do you think about that portfolio? You kind of know where I'm going. The question I get all the time is, why do they do this? Why do they do that? Meaning in terms of all the broad variation of businesses that you're in. Do you think there's places you need to build out the portfolio? Are there places you need to shave it back? I know you can't be super specific, but can you speak broadly about how you're thinking about your portfolio of companies right now?

Sure, Ron, and I think we'll continue to be consistent here in terms of how we view our strategy at the corporate level. And the portfolio, we think of ourselves as a diversified manufacturer of highly engineered products that deliver above average returns that we are able to reinvest to cash flow. We act as an integrated operating company, and we drive synergies on a global basis with our Crane business systems. As diverse as these businesses appear, there are significant synergies that we drive as an integrated operating company.

We like the portfolio we've had over the last 14 years, we've continued to drive a transformation within that portfolio. There's been careful pruning and significant investment that has focused our portfolio in three key strategic areas of Aerospace and Electronics, Fluid Handling, Payment and Merchandising Technologies. We've said that we will continue to look at bolt-on acquisitions that will strengthen our core, as well as look at near adjacencies. So the update to our strategy as we think about the portfolio, is clearly expanding our lens in terms of near adjacencies in core areas of Fluid Handling and Aerospace and Electronics.

Meanwhile, we have very good businesses within Payment and Merchandising Technologies. The MEI acquisition is doing very well for us. And Engineering Materials continues to be an outstanding business with strong North America presence that we'll be able to leverage for years to come and there's a significant cash flow contributor.

So we like the portfolio. At the same time, without emphasizing the continuing evolution that this portfolio has seen, through careful trimming, synergies, as well as major investment; we're going to continue along that path.

Okay. And just as a follow-on would be, how busy is it on in terms of M&A activity now? As we think out over the more short term, is it just more focus on core operations and what you have?

You know, valuations are a challenge right now. We're going to remain disciplined, and I think that's putting a hurdle in terms of the activity that we see. Each of our businesses has an active funnel, and we have a disciplined process from a business development standpoint, that each of our businesses continue to work within the core bolt-on opportunities.

And we also are looking at a larger, over $100 million opportunities where we can. We find that in terms of the effort and synergies that we're able to capture that we want to focus our capital allocation on those as we continue to move forward. Having said that, right now, it's fairly light in terms of any active acquisition target.

Great, all right. Thank you very much.

(Operator Instructions)

Our next question comes from the line of Brian Konigsberg of Vertical Research Partners. Your line is now open.

Yes. Hi, good morning.

Hi, Brian.

Max, I apologize if you had mentioned this, but just the Fluid Handling trends as far as quoting and booking that has extended into the month of October, is that changed at all or it's the same type of experience you had in Q3?

It's still similar to Q3. It's still too early, Brian. This is something we're going to continue to understand on a daily, weekly, monthly basis here, but we did see that sizable shift. We went from a quote to order average, call it, 14 months on average. And it went as low as 10 to 11 months, and that has extended back out to, call it,14 months. So we see this careful decision making orders that appear to be imminent and less predictable.

And is this type of work, is it related more to green field project work, or are we talking about ground field expansions to bottle necking? Is there some specific niche within, I think I'm referring more to chemical but maybe it extends beyond that, that is particularly a challenge for you?

The change that we saw from Q2 to Q3 was actually fairly broad based.

Okay. And coming back to Aerospace and Electronics, so with the additional investment, are you anticipating you should be able to get some accelerated organic growth emerging in that business, perhaps in 2015? I would think you would want a pretty nice return on what you're spending.

As we painted at Investor Day, some of the programs don't kick in until 2016. But there's no question the return on investment is there on the programs that we're working on.

Okay. And can you also flush out Russia exposure? I guess I wasn't quite clear as to why you think it's going to be such a significant head wind for you. You're not selling directly into the region, but you're concerned about the receiving payment? I wasn't certain what the description was.

Yes. So it wasn't so much about credit in the way of us worried about a receivable so much as, there is impact of sanctions that are impacting our customers directly. And because of that, they have less funding available to invest in systems. And in particular, within our financial services sector and our payment business.

So it's really more of an indirect impact of the sanctions to Crane. So it's not that we have a sanction that we can't ship a product, it's our customer that has a sanction and they don't have the ability to actually fund to acquire components for systems that we would normally be selling into their end markets; in particular in Russia.

Okay.

I was just going to add, and the comparison that I made here was to our full year guidance from the beginning of the year. So that $0.05 or so, some of it digested already. Really not all that significant in the second quarter, a little bit more here in Q3, and then an equal amount in Q4.

Okay. What's your total Russian exposure at this point? Or exposure to customers that are being impacted here? What percent of sales would you say they make-up?

For Crane, total when I -- sales that would go directly into Russia is in the, call it, $25 million to $30 million range. But the sanctions haven't necessarily impacted those sales all that much. It's been more again this indirect exposure to our financial services sector, which is, I want to say about 30% of our CPI business and only a sub component of that. So overall, it's probably, we're talking here a little bit about $4 million worth of sales; $4 million to $5 million worth of sales in the fourth quarter.

May I ask one or two more, actually. Just on MEI, can you just give us an update? So that business as a stand alone, how it has been performing, maybe year-to-date. If you want to give some year-over-year growth comparisons? I was under the assumption it was a little bit more back end weighted. I know the synergies are coming in back end weighted, but I assume the revenue was back end weighted as well. Is it just more heavily concentrated in Q3 than Q4? Maybe you could address those two things? It'd be helpful.

So in terms of the actual synergies themselves?

I guess just MEI. I'm thinking more organic growth. How has it performed year to date? I'm trying to get a sense of, is it growing? Is it not?

Yes, so overall on the year-to-date basis, we've been largely flat. And it's been some exposures that we've had. We've had strength in certain of the verticals, as we've mentioned, but we've seen some headwinds in vending towards the beginning of the year. And we saw some headwinds with respect to our gaming and market as we move to the balance of -- through the third quarter here that we've been talking about. So it's been generally flat, I would say, in terms of our performance there.

From a synergy perspective, we've been out performing a bit. We've, you know, come very close here to the synergy target for the first year. We expect to outdeliver the synergies by a couple of million dollars, which should point us to slightly over achieving the $0.20 EPS accretion target for the full year.

And why is the $25 million over the first several years not increasing as well? Is it a pull forward? Or, is it just conservatism at this point?

Yes, I would say, there's some opportunity there to potentially exceed at this point. We're just not ready to commit.

Okay. Thank you very much. That does it for me.

Thanks, Brian.

I'm showing no further questions at this time. I would now like to turn the conference back over to Mr. Feldman for any further remarks.

Thank you, Operator. This is Max Mitchell. I have a few closing comments before we conclude the call. While third quarter was challenging, we will continue to focus on initiatives within our control. Restructuring and MEI synergies are on or ahead of schedule and we will see benefits from these activities next year. New product development is progressing nicely at Fluid Handling, and we continue to pursue additional opportunities at Aerospace and Electronics. And our Payment and Merchandising business is executing very well.

While we remain somewhat cautious, giving continued macro uncertainty, we continue to believe in the long term opportunities in our end markets and we will make sure that our business is positioned to take advantage of the eventual end market strengthening.

Thank you for your interest in Crane and I look forward to speaking with you next quarter and giving updated guidance on our plans for 2015.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a great day, everyone.