Crane Co (CR) 2016 Q4 法說會逐字稿

Good day, everyone, and welcome to Crane's fourth-quarter 2016 earnings conference call. Today's call is being recorded. At this time, I would like to turn the call over to the Director of Investor Relations, Mr. Jason Feldman. Sir, please go ahead.

Thank you, operator, and good morning, everyone. Welcome to our fourth-quarter 2016 earnings 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 in tables at the end of our press release and the accompanying slide presentation, both of which are available on our website at www.craneco.com, in the investor relations section. I would also like to invite you to attend our annual Investor Day event on the morning of March 2. Please contact me directly if you would like to reserve a place at the conference. And now let me turn the call over to Max.

Thank you, Jason. As outlined in our press release last night, I am pleased to report that Crane's fourth-quarter EPS, excluding special items, was $1.02, ahead of the $0.91 to $0.99 revised guidance range we provided last quarter. Sales of $681 million were approximately flat compared to last year, with 2.5% organic growth mostly offset by unfavorable foreign exchange. Operating margins, excluding special items, of 14.8% declined modestly compared to last year, but were in line with our expectations.

On a full-year basis, 2016 EPS, excluding special items, was $4.23 per share, up 3% compared to last year, and well above the $3.85 to $4.15 guidance we provided in January of 2016. And we ended the year with sales of $2.7 billion, reflecting 2% of core growth. While foreign exchange largely offset underlying top-line growth, adjusted full-year operating margins of 14.5% improved 20 basis points compared to last year.

I am also particularly proud of delivering full-year free cash flow of $267 million, reflecting outstanding working capital execution across our businesses. We delivered very strong operational results in 2016.

The other notable event this quarter was the extension of our asbestos liability estimate. We last updated this estimate in the fourth quarter of 2011, covering claims expected to be filed through 2021. The new provision, net of tax and insurance, of $125 million, or $2.11 per diluted share, extends the horizon of the liability to the generally accepted endpoint of 2059. Rich will provide some additional details in a few minutes.

Turning to our businesses, in our Fluid Handling end markets, project activity remains depressed but market conditions and order rates are relatively stable, and there are some early signs of potential improvement. Specifically, MRO activity looks like it will turn positive in 2017, and there are some signs of better activity in the US chemical and refining markets, as well as in the Chinese power market.

Excluding foreign exchange, fourth-quarter 2016 Fluid Handling orders declined in the mid-single-digit range compared to 2015, and sequential order trends have stabilized as expected. At this point, we believe that our orders are now at trough. While we expect our markets to remain stable, with some possibility of order growth in 2017, we are forecasting a small core sales decline this year given the lower backlog as we enter the year, and due to the normal lag between orders and revenue.

While the pace of the recovery is still uncertain, our 2014 and 2015 restructuring and cost actions have properly positioned our cost base for the current environment and we expect 2017 segment margins flat, despite the anticipated core sales decline and further unfavorable foreign exchange impacts. We continue to invest for growth across Fluid Handling and with substantial focus on new product development, channel management initiatives, and improvements in customer-facing processes. Further, we remain optimistic about the long-term prospects for this business, given secular trends supporting future investment, particularly in chemical markets in the United States and power markets globally. We remain committed to our long-term margin target of 14% to 19% for this business.

At Payment and Merchandising Technologies we had another really great year, and we are very excited about the momentum in this business. Full-year core growth was 8.5%, following 6% core growth in 2015, and we expect further acceleration in core growth during 2017. Adjusted segment margins also improved substantially, with the full year above 18%. We will provide more details on the underlying growth trends at our Investor Day event in early March, but at Payment we are seeing continued growth in several emerging markets.

We have also been very pleasantly surprised by strengthening demand in the developed markets, driven largely by concerns over rising wage rates and a more intense focus on productivity for retail and banking applications. We remain the technology leader in this space, with the most advanced cash acceptance and validation solutions for a wide variety of end-market applications. While we provide cashless and electronic payment solutions as well, there is a lot of cash to be made in cash management over the long term, and we will provide some additional insights into the state of cash usage across the world at Investor Day.

The merchandising business is also seeing strong growth with continued customer adoption of our retail self-service equipment, validating our vision of Internet-enabled and fully connected machines with digital media and advertising capabilities, and associated data analytics, to improve the profitability of our customers. Last quarter I mentioned a large payment solutions opportunity that we were pursuing. I am pleased to report that we did win this business, along with our OEM partner, a large project for an important retail customer for applications in developed markets.

There is still some uncertainty over the full project scope and timing, but this project is one of the contributors to our forecast for further acceleration of core growth in 2017 for this segment. We are unable to provide more specific details because of this customer's confidentiality requirements at this time, but we started shipping at the end of the fourth quarter and we have mobilized our supply chain to support our customer's requirements.

At Aerospace and Electronics, we completed delivery on the Space Fence program during the fourth quarter. We executed incredibly well on this extremely challenging program in 2016, ramping up to the highest volumes ever for our Microwave business, and then winding down to normal levels during the fourth quarter. For the full year, Aerospace and Electronics delivered 8% core sales growth, and segment margins for the full year came in above 20%, in line with our guidance at the beginning of the year, despite heavily negative mix and continued elevated levels of engineering expense.

We remain confident in our strong multi-year growth outlook, but core sales will decline in 2017 given the rolloff of the Space Fence program, and challenging modernization and upgrade comparisons. Despite lower sales, we expect substantial margin expansion this year, driven by less negative mix and the winding down of development work on several large engineering programs. Beyond 2017, we are well positioned on the right growth platforms for the future, including the Airbus A320neo, the Boeing 737 MAX, the Embraer E2, the Comac C919, and the Lockheed F35.

On last quarter's call, in addition to the payment opportunity, I discussed incurring substantial incremental engineering expense during the third quarter in pursuit of a large commercial aviation opportunity. On this topic, there is good news and bad news. For those of you with an investment horizon shorter than five years, you may be happy to hear that we did not win this business. This program would have required tens of millions in unfunded engineering work over several years before we started to see revenue 4 to 6 years from now. And as you know, at Crane we expense all engineering costs as they are incurred rather than capitalizing.

For those of you with longer investment horizons, like ourselves, we are obviously disappointed that we did not win this business. It would have secured us substantial incremental content from one of the highest volume aircraft platforms. I can't thank my team enough for the dedication and passion they exhibited over the last year in pursuit of this business.

While we are in fact disappointed, the message I would like you to take away from this is that we are aggressively pursuing growth at Aerospace and Electronics, and throughout the rest of Crane. We are targeting bigger, bolder projects, and we are willing to invest to do so. We spent a few million dollars in pursuit of this opportunity, a very calculated risk.

In this particular case, while we were not awarded the program, the process allowed us to get much closer to a very important customer who now has a more intimate understanding of our full capabilities. As a result, we believe that our performance in this competition put us in a better position for future opportunities, and shareholders should have confidence that at Crane we continue to drive for long-term, sustainable value creation and not just the next quarter's numbers.

Last quarter I also mentioned two additional large microwave opportunities. We are still pursuing these projects and we will provide an update when we have a final decision. These projects would be a nice follow-on microwave orders to our strong Space Fence execution.

Moving to Engineered Materials, we had another very good year, with margins again in the 19% range. Underlying demand remains strong and we expect 2017 to look similar to last year.

In summary, 2016 was a year characterized by solid execution in uneven end markets, but we are confident that we are well positioned for the current year and well into the future. For 2017 guidance, we expect EPS in the range of $4.30 to $4.55 per share, reflecting 5% EPS growth at the mid-point, compared to our adjusted 2016 EPS of $4.23. I will now turn the call over to Rich Maue who will take you through the businesses, and provide some additional financial information and guidance details.

Thank you, Max. Overall, we turned in a strong performance in the fourth quarter, beating our internal objectives across all segments, no one disappointed. But before I review our business results in detail, I would like to discuss our fourth-quarter asbestos provision. I encourage all of you to thoroughly read and review the Form 8-K that we filed last night that includes the details of the fourth-quarter provision and other related disclosures.

As a reminder, we update our asbestos liability estimate as facts and circumstances dictate. With such updates largely driven by our experience in the tort system, previous updates to our liability estimate were in the fourth quarter of 2011 and in the third quarter of 2007. By way of background, when we update the liability estimate, the full liability adjustment flows through our income statement at that time, net of the expected insurance recovery and associated deferred tax benefit. There is no associated cash flow impact at that time. In future periods, our asbestos liability on our balance sheet, along with the associated insurance receivable and deferred tax asset accounts, are reduced as cash payments are made for both defense and indemnity payments that we make as cases resolve.

The provision incurred in the fourth quarter of 2016, net of insurance and tax, was $125 million, or $2.13 per share. The after-tax net balance sheet liability is now $359 million, and it covers costs related to currently pending claims and future claims projected to be filed against the Company through the generally accepted endpoint of such claims in 2059. By way of comparison, after the 2011 update, the after-tax net liability estimate was $434 million, covering then-current pending claims and claims expected to be filed through 2021. Let me repeat: By way of comparison, after the 2011 update, the after-tax net liability estimate was $434 million covering then currently pending claims and claims expected to be filed through 2021.

The updated liability estimate reflects a number of factors, the most important of which is the recent stabilization of asbestos claims activity and related settlement costs. For 2017, we expect after-insurance, after-tax cash outflows of approximately $36 million with annual cash outflows stable to gradually declining thereafter. All that said, due to uncertainties in the tort system, as well as uncertainties inherent in the estimation process, future reviews may result in additional adjustments to our asbestos liability estimate.

Now moving on to our business results, with core sales up 2.5%, margins at 14.8%, demand levels trending as expected, and delivering free cash flow in the quarter of $137 million, we feel good as we enter 2017. Unless I otherwise mention, my comments about our business unit performance this morning will be comparing the fourth quarter of 2016 to 2015, excluding special items, as outlined in our press release, slide presentation, and the accompanying non-GAAP tables. After my comments on our segments, I will provide some additional details on our 2017 outlook.

Starting with Fluid Handling, fourth-quarter sales of $240 million declined 7%, reflecting a core sales decline of 4%, and a 3.5% impact from unfavorable foreign exchange. Operating profit in Fluid Handling declined 7% to $28 million, and operating margins were 11.6%, flat compared to the prior year despite the decline in sales, and consistent with our expectations. And on a full-year basis, margins reached 12%, in line with the guidance we provided at the beginning of the year.

Fluid Handling backlog was $228 million at the end of 2016 compared to $267 million at the end of 2015. After adjusting for foreign exchange, the backlog declined 11% compared to the prior year, but only 3% sequentially. Excluding foreign exchange, orders were down slightly at 1% compared to the third quarter of 2016, reflecting our previously expressed stabilization in our primary end markets.

Looking to 2017, we expect a modest 2% core sales decline at Fluid Handling, together with an approximate 4% impact from unfavorable foreign exchange. Notwithstanding the sales decline, we are providing 2017 segment margin guidance of 12%, flat with 2016, reflecting benefits from repositioning actions we took in 2014 and 2015, along with continued strong productivity gains.

Moving now to Payment and Merchandising Technologies, sales of $195 million increased 12% versus the prior year. Core sales improved an impressive 16%, partially offset by unfavorable foreign exchange of 4%. The core growth in Q4 was driven by both our Payment Innovations and Merchandising businesses.

Segment operating profit of $38 million increased 29% from last year, with operating margins up 260 basis points to 19.7%. The margin improvement was driven by MEI integration synergies, along with the higher volumes, and productivity benefits at both the Payment and Merchandising businesses.

In 2017, we see more of the same. We expect approximately 11% core sales growth, partially offset by 5% of unfavorable foreign currency translation and a 1% negative impact from the completion of a transition services agreement related to the MEI acquisition. This core growth performance follows 6% in 2015 and 8.5% last year. Our 11% core growth forecast is our best estimate today and we believe it is a balanced view.

We are confident in the underlying demand trends for this business, across both Payment and Merchandising. But this is a short-cycle business with limited visibility. Even the large project that Max referred to has a fair amount of uncertainty related to full scope and delivery expectations from our customer. And we expect margins in this segment to increase to 20.5%, up 230 basis points from 18.2% in the full year of 2016, driven primarily by volume and productivity. This expected improvement follows an approximate 750-basis-point improvement in the Payment and Merchandising Technology segment since 2013.

Aerospace and Electronic sales declined 2% to $187 million, driven by weak business jet activity, soft defense power markets, and tough comparisons from military modernization and upgrade programs. Segment operating margins were 21%, and while down from a particularly strong margin quarter last year, was in fact as expected, driven primarily by negative mix and the lower volumes. On a full-year basis, margins at just over 20% were consistent with the guidance that we provided at the beginning of the year.

OE and aftermarket sales declined 2% each, and the OE to aftermarket mix was 71% to 29%, comparable to last year. Aerospace and Electronics backlog was $353 million at the end of 2016 compared to $436 million at the end of 2015, reflecting completion of Space Fence shipments during 2016, along with timing of certain other orders.

In 2017, we expect an approximate 5% decline in core sales at Aerospace and Electronics, primarily reflecting the completion of the Space Fence program, along with some difficult comparisons for modernization and upgrade programs. However, we do expect a 5% increase in operating profit, and a 210-basis-point improvement in operating margins to 22.2%. The primary drivers of the margin improvement are improved mix post Space Fence, and lower engineering expense as large development programs wind down.

Engineered Material sales increased 6% to $60 million, and operating margins improved 60 basis points to 17.4%, driven by higher volumes and productivity. We expect similar performance for this business in 2017, with core sales up 1% and segment margins consistent with 2016 at 19%.

Turning now to more detail on our guidance for 2017, as Max mentioned, we are introducing 2017 EPS guidance of $4.30 to $4.55, up 5% at the mid-point compared to 2016 adjusted EPS. Our guidance assumes total 2017 sales of approximately $2.7 billion, down 2% compared to 2016. This sales outlook includes an approximate 3% negative impact from foreign exchange, 0.5 percentage point impact from divestitures, and core growth in a range of flat to up 2%.

Operating margins are forecast to improve to 15.7%, up 120 basis points compared to adjusted operating margins in 2016. The operating margin improvement includes a slight increase in corporate expense to $58 million in 2017, due to timing, with total corporate expense at approximately 2% of sales. For your reference, we have included a page in our materials posted on our website this morning where we provide a business segment view of both sales and operating margins.

Unfavorable foreign exchange, including both translation and transactional impacts, is expected to reduce operating profit by approximately $13 million, or $0.15 per share. In addition, in 2017 we expect to revert to a more normal tax rate of approximately 31%, with diluted shares of 60 million. The higher tax rate and share count contribute to a $0.10 EPS headwind in 2017.

Our free cash flow in 2016 was extremely strong, and above our expectations, at $267 million. While we are very proud of this performance, particularly with respect to working capital, a portion of the strength in the fourth quarter was timing related. For 2017, we expect free cash flow in a range of $220 million to $250 million, down 12% at the mid-point compared to 2016. While lower than what we delivered last year, taking our 2016 and 2017 results in aggregate demonstrates a substantial improvement in cash generation relative to net income over those periods.

Overall, we are pleased with our 2016 performance, and we are planning for an even better year in 2017. We hope to see all of you at our March 2 Investor Day in New York City, where we look forward to providing an informative discussion of our businesses and an update on current market conditions. Operator, we are now ready to take questions.

Thank you.

(Operator Instructions)

Our first question comes from the line of Ken Herbert with Canaccord. Your line is open, please go ahead.

Hi, good morning.

Morning, Ken.

Max and Rich, great fourth quarter. I just wanted to dig a little bit into the Payment and Merchandising Technology segment. You started out 2016 and I think you were guiding to about 5% core growth and 16.5% or so margins and you've clearly delivered a much better number than that.

And you highlighted some of the items in terms of mix and volume and synergies but can you provide any more detail on maybe what happened over the course of the year that led to the significant upside? And anything that may have been unexpected or where you were getting better drop through that might help us think about 2017 for the segment?

Yes, I think overall we saw a solid performance and growth across both segments from a core growth perspective. In terms of the margin performance across both, it is a combination of the synergies that we expected to see coupled with the growth that was incremental to what we thought at the beginning of the year in the Payment space and continued strong productivity and making further progress in our Merchandising segment, as it relates to our initiatives to drive digitally connected machines and therefore sell-through opportunities for our operators.

As we think about 2017, in particular in our Payment space, we see the trends in that segment or that portion of the segment being a continued positive momentum, in particular in the retail and developed market space as we leverage productivity initiatives on behalf of retailers and in the banking sector.

Okay. But there was nothing that particularly stuck out as a surprise across 2016 in that particular segment?

I think we just saw general strength across the segment and across multiple channels. It was just good performance, Ken.

The only other thing I would add is that we did start to ship in the fourth quarter so we did see some --

Fourth quarter. The uptick from the large project.

From the large projects, we saw little bit of upside there, Ken.

Okay. And then if I could on the free cash flow guide, can you quantify what was pulled into the fourth quarter from 2017? And specifically opportunities maybe on working capital in 2017, where we could perhaps see some upside?

Yes, I think the way I would start off here is, it is tough to look and I wouldn't recommend looking at a one or two year period in isolation in terms of analyzing free cash flow. I understand your question. We had record performance here in 2016, both from an absolute dollars perspective and a metric perspective.

In 2016, we delivered 121% of free cash flow conversion even excluding asbestos and when you include the asbestos payments, 106%. So clearly a record performance. Very proud of the teams in terms of how they managed working capital across all segments. 2017 at the midpoint, frankly, is another very good performance.

Still a step change improvement when you look at that midpoint guidance number compared to the last several years. 2017 is 102% free cash flow conversion, excluding asbestos, and 90% free cash flow conversion when you include asbestos. If you again look at, say, the last several years, even on the 2017 midpoint, it is a step change function improvement.

So again, 2016 had standout performance, some of which will not repeat. We had an outstanding fourth quarter in terms of working capital management. When I look at it compared to what I expected, it was a notable improvement and it was across most businesses.

I wouldn't say we did anything that jeopardizes our 2016 performance, but it is the sustained level of working capital improvement that I would see continuing into 2017 as we think about the guidance midpoint number that we provided.

Okay. Great. Thank you very much. I will pass it back there

Thanks, Ken.

Thank you and our next question comes from the line of Robert Barry with Susquehanna. Your line is open. Please go ahead.

Hey, guys, good morning. So maybe just a follow-up on the earlier question about payment. I guess I am trying to parse here to what extent is this business on a new growth trajectory versus a three to five you outlined a year or so ago versus pig-through-the-python effect here in 2016, 2017 with some of these large projects.

I wouldn't call it the pig-through-the-python. This is consistent, solid demand reading through.

What I would add to that is, even excluding this wonderful opportunity that we are satisfying for our customer, the underlying growth, excluding that opportunity, is in the mid single-digit range for 2017.

We're going to lay out a lot more detail at Investor Day, too, coming up, Rob. Some of the growth drivers, the excitement that we see by region, by country, by end market, some of the solutions. So I think you will be pleased with some of the update we give you at Investor Day.

Got you. So you're calling for 11% in the segment. It sounds like roughly half of that is being contributed by the vending growth. I think that's what you mean by retail self-service and the other half of it by --

So --

The CPI?

Rob, when we talked about retail, we are talking about stores where as you go into any store --

Okay. The self checkout. Right.

Self check out. Yes.

So then, maybe just let me rephrase. The vending upgrade program, how much is that contributing? Or the program that you mentioned that was not named, how long of a duration is it? And how much is it contributing to the 11%?

I think you're asking more about the Payment versus Merchandising overall. Merchandising, as you think about vending, it is not just any kind of one-time order. It is this transformation that's taking place in terms of our new solution that is reading through, driving sales uplift for our customers.

Media enabled, big data, profitabilities. Again, we're going to take you through this at Investor Day in a little bit deeper way. And it's just driving a renewed emphasis on the form -- our business model value. On Payment, we continue to invest in new solutions on a global basis, whether that is gaming, transportation, retail. We are seeing strength in a number of areas. So it is a much broader, sustained picture I'd like to leave you with.

I would add just even in 2016, we had wonderful core growth performance in the segment at 8.5% from a core perspective. When looking at the split between those two businesses, we are seeing just as much if not more momentum on the core growth side in 2016 on the Merchandising Systems side than we did even in Payment, even with the fourth-quarter benefit that we saw on initial shipments of this new program. So we are seeing -- the point is, we are seeing it across both and we will provide more of that detail as we think about 2017 at Investor Day.

Okay. Maybe just last one and then I will let it go. Just to clarify, earlier you said that the underlying was mid-single.

The difference between whatever you were referring to as mid-single and the 11%, is that a temporary benefit? Or do you really think there is a multi-year high single, low double-digit kind of core growth for this segment?

As we look at it, my comment might've been more towards the CPI portion of the business.

The payment business.

The payment business. So we see that as being in that mid-single -- call it 4% to 6% range, as we think going forward on that more sustained business, excluding this opportunity.

Okay. Maybe just a quick one on Fluid. I think you mentioned seeing more MRO potentially in 2017? Are you factoring any of that into the outlook? And just maybe a little bit more specificity on where it is? Is it downstream refinery or where is the MRO? Thank you.

Thanks, Rob.

From an MRO perspective, overall in the process valve portion of our business, you know we see MRO as being generally stable but a little bit of upside. We're seeing it a bit stronger in the Asia Pac region. We're seeing it stronger in China, Middle East. And mainly around Chemical and Power is where I would point to for those particular areas in the MRO portion of the business.

We see Europe being -- still bouncing along the bottom, not as clear from an MRO perspective. And in the US, we expect to continue to see a similar trajectory that we have been communicating on from an MRO point of view.

Thank you.

Thank you. At our next question comes from the line of Matt Summerville with Alembic Global Advisors. Your line is open, please go ahead.

Thank you. A question on the Aerospace and Electronics business. If you look at the backlog there, it is down a little over $100 million, if I have my numbers right, from the peak you would have seen, I believe it was either in the second or third quarter of 2015. You mentioned Space Fence, I was wondering if you could help parse that $100 million decline? And what sort of confidence do you have that we are at a bottom -- or that you are at a bottom in that business or maybe you're not. If you could just talk through that, that would be helpful.

Sure. So on a year-over-year basis, backlog is down roughly I think 19% or so, sequentially the decline was about 6%. The majority of the decline was related to Space Fence. The remainder primarily related to timing of commercial OE orders. Our large OE order customers don't always place their orders on a consistent timeline.

And the variability or volatility that we have seen, even during the current year, is not uncommon. So hopefully that helps you. But we feel good as we think about 2017 with the backlog that we have and in the funnel and the order opportunities that we see, both in commercial OEM and the historic Aerospace business but as well as in our Defense Electronics business where we do have some commercial OE opportunities particularly on the space side.

And then just two quick ones on Fluid Handling. Can you talk about whether or not you've seen any change in the pricing environment in that business heading into 2017 versus how you were thinking about it heading into 2016? And then what are you seeing overall in terms of raw material input costs? That question primarily relegated to Fluid but it probably also pertains to Engineered Materials as well. Thank you.

I would say no major change, Matt, in terms of pricing, pricing power or discipline where competitors are it is still the same. I think we feel confident of how our backlog is priced. Not improving, not worsening. And similar for material. We watch closely on input costs right now. We're driving productivity actions but managing well and no significant inflection point at this point.

And I would say that just in terms of the 2017 plan, those elements are reflected in our guidance.

Got it. Thank you.

Thank you. Our next question comes from the line of Brett Linzey with Vertical Research Partners. Your line is open. Please go ahead.

Good morning, all.

Good morning.

I just want to come back to payments and merchandising. You had mentioned electronics, big data, a lot of higher value offerings now within that segment. Just trying to understand what the structural margin entitlement is there?

Obviously, the integration of MEI, it's had some nice cost tailwinds, but you're assuming 40% plus incrementals in the guide this year. I mean is that a good go-forward assumption to reflect the inherent profitability you now see in those business?

Yes. You're talking about the incremental on the sales leverage. In that business -- just a reminder, so we spend significantly from an engineering perspective in this business, even more so than we do in Aerospace and that contributes to fairly strong or very strong ship-profit margins, which are before your gross profit and it helps us leverage down in a pretty strong way.

Our overall segment margin target is 17% to 20%. So we're already at that high end of the range. So as we think about going forward, and depending on what adjacent markets we might enter into, I think we are holding to that 17% to 20% but the leverage on go-forward sales, thinking about 2018, 2019, we would expect it to be at the higher end of our historic 25% communicated leverage rate.

Okay. That helps. And then just shifting to Fluid Handling. It looks like you are taking an appropriately conservative view on the top line given the backlog.

But just in terms of holding the margins for 2017 versus 2016, are you assuming some normal decremental and then restructuring savings bridges that gap or is your more optimistic view on MRO and the positive mix there embedded in your outlook?

Yes. I think when we talk about leverage, we combine a little bit. So we have -- there is the normal volume leverage impact down or up and then you have all of our initiatives around productivity, other cost-saving measures that we might be taking from year to year.

So as we think about the leverage rates in that business and maintaining a 12%, notwithstanding the decline, it is a combination. And so that really powerful or strong favorable deleverage rate, I would call it, given the decline that we are projecting, is a result largely of productivity initiatives that are offsetting what is normally a lower -- a much -- I'm sorry -- a much higher deleverage rate on sales.

So it is all about productivity. It is about cost measures, being careful on what we add as we think about 2017.

And then just in terms of the growth outlook for Fluid, are you able to unbundle what you are assuming for MRO versus projects for the year? At least directionally?

You know at this point, we are seeing a few elements that are a bit of green shoots, but at this point I would go with our historic 2016 mix of MRO and project.

Okay, great. Thanks, guys.

You're welcome.

Thank you. And our next question comes from the line of Nathan Jones with Stifel. Your line is open. Please go ahead.

Good morning, Matt, Rich, Jason.

Hello.

Thank you. I just want to make it so everybody on the phone is very clear here. Does this is asbestos liability adjustment in any way change your expectation of the after-tax cash outlay for Crane?

So overall in terms of what that outlay would be, we see it as stable to declining over time. I think what is important here is, this is a positive development, I think is the takeaway overall on this update.

Given the stability that we have seen in recent periods, the downward trend in indemnity values on our liability, we see this as, frankly, removing a fair amount of uncertainty. I wouldn't say all uncertainty, but it removes quite a bit. So from an overall liability perspective being able to go out to 2059. From a cash flow perspective, this has zero impact today.

This is about updating our liability of what's on out balance sheet and extending that all the way out to 2059. To provide some additional context, and I think this is perhaps where you are headed as well, back in 20 -- and this is why I repeated it on the call, back in 20 -- in the third quarter of 2007, we had an after-tax charge of $250 million, which covered us for just over 10 years.

In 2011, we booked a smaller number, $157 million, which covered us 10 years. And this year we booked a charge of $125 million which is covering, at this point, 43 years. So I think that is a really positive thing that folks need to understand. But from a cash flow perspective, that should have a natural read-through for all of you in terms of what that means. And in the near term, we are looking at this as stable to declining thereafter.

Thank you for asking the question, Nathan, too. Because for those that are tracking this long-term, we have never produced or manufactured but we could go on at length about the abuses in the justice system and legal system for those individuals that are really sick and injured and those that get pulled into this asbestos litigation.

We've been fighting it and no one has fought it like Crane. And part of that fighting has been defense costs that have driven these trends down. We feel very good about what we have done strategically over the years and we think that this latest true up on the charges is a positive -- as Rich said, a positive indicator of the hard work that we have driven.

Okay, thanks. The next question for me is on the balance sheet. You know you're talking about $235 million at the midpoint of free cash flow. You only need about $36 million after-tax for asbestos.

The MEI integration should be largely complete by now. You've got very little net debt on the balance sheet.

We would say Crane is currently under levered. Can you talk about the appetite, the pipeline for M&A and your propensity to undertake some more share repurchase in 2017?

Go ahead.

Sure, let me start. I think what is important, and I understand your point on a straight up review of our leverage rate, and I would just remind everybody that there are certain other elements that the rating agencies look at. Right? They look at pension. They look at leases.

They look at the asbestos liability and where we sit today is probably close to 2.9 times. So towards the high end of our Moody's acceptable leverage rate of about 3, which is a very important metric for us. We are committed to maintaining our investment grade.

That is an element just to keep in mind as it relates to, at least domestically here, what is a constraint for us.

Having said that, our appetite is, we are ravenous. (Laugher) I'm very hungry. We are hunting. We have knife and fork in hand. But I don't want to get food poisoning.

We are not going to be gluttons. I am amazed at, quite honestly, at some of the stupid pricing that I continue to see out there. Our pipeline is very full. It's very active.

And I continue to be stunned at some of the valuations that are out there. We are going to continue to remain disciplined but we are very active here. But we are going to remain disciplined, Nathan.

(Multiple speakers) pricing keeps you out of the market in the short term?

You know, I think out is a strong word. I wouldn't say out.

Again, it's the discipline side and --

Okay. If I could just slip one more in on the Fluid Handling business. You talked about some chemical and refining activity in the US. Are you seeing that more on the new project side in terms of some of these projects that we've been waiting to see move forward? Or are you seeing any increased MRI activity?

I will give you a little bit. We'll give you a little bit more. There is no major inflection point here. This is just degrees up off a bottom and what we are seeing. And this is why we are projecting flat orders as we move forward. It's just too early to call.

We're saying we're in a trough but it is just too early to see where the strength is going to come. How fast, how much. America's -- quite honestly, America's MRO, we expected more than we have seen. We think some of that is timing.

Projects, we've seen a solid trend over the last five months. But again, it is minor increments in terms of trend. Europe is MR flat. Projects continue to fall off a bit. We are really seeing some increased activity, minor but increased activity in Asia Pac, China, Middle East. That includes our project funnel, a little bit of an uptick. So those are some early signs.

But in the big course is Americas, Europe. Europe, very little movement. Americas, some strength in refining that we are actually seeing. Chemical, we continue to look at -- if you look at the capacity additions just planned in the Gulf Coast still that's moved to the right and the latest -- some of the data I have seen, 9.5 billion pounds, the capacity coming online.

2018, 2019, shifted to the right. It is still all planned The derivative plants are planned. This should -- all indicators are -- should be solid for us. It is not a matter of when. It's -- I'm sorry, it's not a matter of if, it is a matter of when. How much, how fast.

Just remind investors, this was a -- [move daily] was a business in 2014 at $1.26 billion delivered $197 million in OP and this year we're guiding to $112 million. I'm not suggesting were going to be able to get back to peak levels within Fluid Handling, but in that period, since 2014, we've continued to invest. We've invested in new product. We've invested to grow. And when that volume comes back, we're going to leverage.

If we were to get back to that peak, that's $85 million of OP. That's a $1 in EPS. Just to frame up some of the potential that we think are long-term trends in Fluid Handling. Sorry, I got a little a long-winded answer but hopefully that gives you a little more color of 2017. Some of our estimates and then how we think about 2018 and beyond.

No worries. That's great color. Thanks very much.

Thanks, Nathan.

Nathan, just to follow-up on the prior questions on capital deployment I would, as Max mentioned, higher valuations. We're still very much in the game. It is the priority for us relative to other capital deployment initiatives.

Okay. Thanks, Rich.

Our next question comes from Shannon O'Callaghan with UBS. Your line is open please go ahead.

Good morning, guys.

Morning.

Hey, Rich, maybe to pick up on that one. So acquisitions, is that -- that sounded pretty strong relative to dividends and buyback. Can you just fill out that thought a little bit?

Yes. I think it almost speaks for itself. But in terms of where we are focusing our time, understanding where the market is pricing today in terms of a risk on environment. Taking those two things into consideration, coupled with the fact that where our cash resides today and where our metric is from a rating agency perspective.

To the extent that something happens from a tax law change point of view, it gives us a little bit more flexibility. But at this point given those elements, the priority in our effort is around M&A as opposed to share buyback, at least in the next six months or so.

Okay. And then, Max, I understand, too early to call on some of this Fluid stuff and not baking it into the guidance. But if things were to get better, if Fluid were to turn out to be positive for you in 2017, what are the areas that you think have the most propensity to be able to turn early if things were to get better?

In terms of end markets, Shannon?

End markets or projects that you saw deferred that you know are there that could be acted on sooner? Or anything that, in your more optimistic scenario, you think are the particular end market or geography or project that might happen sooner.

Yes, I don't want to sound overly bullish so don't take this the wrong way. It is still depressed and unstable but power and refining we think are going to come back. Slightly. That would be the lead. I think chemicals still going take some time.

I would say the same. Refining in the US. Power more globally.

Okay. And just last one you. You guys went through a lot. But just in terms of the timing of when you guys do these asbestos update, was there something in the general environment out there in terms of what is going on with asbestos that made now the right time to do this update? Or was it very Crane specific to your own claims experience?

Is very specific in facts and circumstances, for sure. We look at, as you might imagine, a number of different things when we are reviewing this liability. You know we don't do it alone as well. We have a number of external experts that help us with this that look at this across the industry.

I would say the difference this time compared to 2011 is just really around the underlying trends in indemnity and defense costs along with some of the changes in the tort system that have stabilized to a degree that we were able to estimate our liability beyond a 10-year period and why now, as well. It is a number of factors but it really gets to the stability in what we have seen over the recent years.

The other thing I would point to is that as of December 31, we are at the lower end of what is left in terms of recorded as a liability. I think it is about five years remaining. You know it's a confluence of factors and I would say those are the most significant.

Okay, great. Thanks, guys.

You're welcome.

Thank you. And our next question comes from the line of Kristine Liwag with Bank of America Merrill Lynch. Your line is open, please go ahead.

Hi, good morning, guys. When we look at the manufacturing footprint of Crane, I think it's about 51% of your square footage is outside the US and then at the same time about 40% of sales are outside the US. And I understand it may be too early to fully understand this fact of a border-adjusted tax, but on a high level can you provide us a 30,000 foot view of how we should think about the flow of trade? And then also on a net basis, would a border-adjustment tax be positive or negative for you?

Are you speaking in general or specifically to Mexico, Kristine? How are you thinking about?

General. Mexico. And then also maybe a follow on to that is right. Shifting your manufacturing to low-cost countries has been a significant driver of you reducing your cost structure. So should something like this come into effect, what do you envision -- what are the available avenues for you going forward?

Let me answer it generally, to your point about the 30,000 foot view. We have manufacturing in many developed countries, US, Europe as well as Eastern Europe, low-cost countries, China. I am proud of our global footprint. I am proud of our global positioning.

I would not say that we have moved all manufacturing to low-cost countries. We still have a significant number of locations here in the US, and Germany, UK, so forth, which are high-cost regions. But we have no plans to move.

We are effective. We continue to deploy [premium] business system. We're very, very efficient. We're lean. We drive it every day in our factories and service and value read through locally. As we look at taxes overall, I think it is still too early. We're going to react. I think we are flexible enough and diverse enough that I don't see it as high risk for Crane. I think we're going to be able to react when something occurs.

If it was specific to Mexico, the largest facility we have is part of payment that produces bill validators that get shipped globally. We will address at the time. I see it as lower risk in terms of the total impact. I think we can -- right today we already ship to those global locations direct. We would address the tax at the time like everyone else, if it were to come and be able to address it.

So I think we all just wait and see. There's a tremendous amount of uncertainty that I think we are all seeing, but I think Crane is well-positioned to address it. I don't see it as a high risk. I don't know, Rich, if you had anything else to add?

Just broadly speaking, I think our manufacturing footprint, as it stands today, is very well thought out in terms of more developed manufacturing opportunities being supported by lower-cost suppliers that we own today. So that spans across mainly the Fluid Handling segment. As it relates to Mexico, just to reiterate what Max said, complete uncertainty at this time.

That said, within that particular -- we have one primary manufacturing facility across all the manufacturing facilities that we have across the globe. And even in that, relative to that one, which is in our payment space, we have several manufacturing facilities in our payment business. Again, one of which is in Mexico that serves the global population.

So to reiterate, we do not see it as being a significant factor at this time, but there is a lot to be played out here in terms that what it is that's actually being proposed, which is quite confusing at this point.

Maybe a follow on to that, with the manufacturing in Mexico. Is that feeding demand that's slated for the US or is that feeding demand for outside the US?

Both.

Great. Thank you.

You're welcome.

Our next question comes from the line of Jim Foung with Gabelli & Company. Your line is open. Please go ahead.

Hi. Good morning. Maybe you could just talk a little bit about the Aerospace and Electronics segment? Maybe if you could just talk a little bit about other opportunities that might be present there, particularly with the customer that you work closely with in this project?

We are looking at other opportunities in other solutions -- technical solutions that we have on aircraft. We talked before, Jimmy, about it's not just about new programs, it's about technology insertions. So, in some cases displacing incumbents and we continue to chase a number of opportunities there.

From an A&E standpoint, from a defense standpoint, we continue to watch the present direction on defense spending. And we see that as a potential opportunity for us as we move forward. We are tracking a couple of large microwave programs that we talked about and we're going to lay out in some detail here on Investor Day a longer-term growth profile for A&E moving forward. We want to give a little more insight here in March.

Okay. And then just regarding the two large microwave opportunities. When do you think you might hear a decision on those?

We hope within the next few months.

Okay. That would be pretty positive. And then just flash us back on this payment opportunity that you won? Is that a one-year opportunity or is it multi-years? And is it fair to say that about half of your projected 11% growth is from this project opportunity for 2017?

I think I mentioned in my prepared remarks that there is some uncertainty regarding that. We would expect -- so from that 11%, what I had mentioned is, for the payment space the underlying growth is still in that mid single-digit range, excluding that to make sure that people understand that the base business is growing outside of the opportunity that we see here with that one opportunity.

It is a very good possibility that we do see some of this ship in 2018. But at this point and this early in the year, we are not ready to make a -- not ready to commit to that.

Okay. Great. That's what I have. Thank you.

Thanks, Jimmy.

Thank you.

(Operator Instructions)

Our next question comes from the line of Ryan Connors with Boenning & Scattergood. Your line is open. Please go ahead.

Thanks for taking my question. I wanted to follow-up on the earlier question regarding the impact of the Trump administration. And obviously he has also made some pretty high profile comments on the Aerospace sector about the F-35 program and Air Force One and he's forced some of your customers to come out pretty vocally and discuss the impact of that on the industry and margins and so forth.

I know it's a big-picture question that's probably impossible to answer definitively right now, but can you give us your early read and perspective on how the shift there could impact folks like yourselves up the supply chain?

Well, Ryan, it continues to be a major emphasis for our customers and for us, which is cost savings and providing value-added solutions that are win-win. And believe me, there's the pressure. It didn't take President Trump to drive our major customers to get ongoing significant cost reduction discussions going. It's whether you talk about the F-35 specifically or whether you talk about our commercial aircraft customers, it has been and continues to be a high level of focus.

We continue to offer a number of solutions for cost reductions and we are managing it as we have in the past. So quite honestly, I think we will wait and see how things continue to play out. But believe me, the customer base continues to push very, very hard on cost savings. And we come forward with win-win solutions to provide as much as we can.

Ryan, the other thing I would is that, speaking specifically to F-35, we reiterated in the past that we are on a number of different platforms. We're not reliant on any one or two. The F-18 would be an alternate program, for example, if investment was to be stalled on the F-35 because of ongoing negotiations. We do participate in both those programs. So just by way of example, we are very diversified across the platforms that we participate.

Got it. That's helpful perspective. Thanks for your time.

Thanks, Ryan.

Thank you. And I am showing no further questions at this time, and I would like to turn the conference back over to Max Mitchell for any closing remarks.

Thank you, Operator. I look forward to seeing many of you at our March 2 Investor Day event. We expect it to be an informative session. We will discuss in detail how our differentiated solutions position us for success. Recently, I came across a quote from the late, great John Glenn who said, as I hurdled through space, one thought kept crossing my mind. Every part of this rocket was supplied by the lowest bidder.

At Crane, we avoid being the lowest bidder and still win by providing our customers the highly engineered and technologically differentiated solutions that they require. It's not just about price. It's about value that we bring to them. Thank you for your interest today in Crane and have a great day. Bye now.

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