Form 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2007
Commission file number 1-1657
CRANE CO.
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State of Incorporation: Delaware |
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I.R.S. Employer Identification No. 13-1952290 |
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Principal executive office: 100 First Stamford Place, Stamford, CT 06902 |
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Registrants telephone number, including area code (203) 363-7300
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Name of each exchange on which registered |
Common Stock, par value $1.00 |
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New York Stock Exchange |
Preferred Share Purchase Rights |
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
5.50% Senior Notes due September 2013
6.55%
Senior Notes due November 2036
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act
Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act
Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K.
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Indicate by check mark whether the registrant is
a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer, non-accelerated filer, and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer x |
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Accelerated filer ¨ |
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Non-accelerated filer ¨ |
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Smaller reporting company ¨ |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ¨
No x
Based on the closing stock price of $45.45 on June 29, 2007, the last
business day of the registrants most recently completed second fiscal quarter, the aggregate market value of the voting common equity held by nonaffiliates of the registrant was $2,238,693,472.
The number of shares outstanding of the registrants common stock, par value $1.00, was 60,419,142 at January 31, 2008.
DOCUMENTS INCORPORATED BY REFERENCE
Portions
of the proxy statement for the annual shareholders meeting to be held on April 21, 2008
are incorporated by reference into Part
III of this Form 10-K.
Crane Co.
Form 10-K
For The Year Ended December 31, 2007
Index
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PART I / ITEM 1
Forward-Looking Information
This Annual Report on Form 10-K contains information about us, some of
which includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements other than historical information or statements about our current condition.
You can identify forward-looking statements by the use of terms such as believes, contemplates, expects, may, will, could, should, would, or
anticipates, other similar phrases, or the negatives of these terms.
We have based the forward-looking statements relating to
our operations on our current expectations, estimates and projections about us and the markets we serve. We caution you that these statements are not guarantees of future performance and involve risks and uncertainties. In addition, we have based
many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Accordingly, our actual outcomes and results may differ materially from what we have expressed or forecast in the forward-looking
statements. Any differences could result from a variety of factors, including the following:
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Fluctuations in domestic and international business cycles generally and in end markets for our products such as aerospace, defense electronics,
transportation, petroleum refining and petrochemical processing; |
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Competitive pressures, including the need for technology improvement, successful new product development and introduction, continued cost
reductions, and any inability to pass increased costs of raw materials to customers; |
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Our ongoing need to attract and retain highly qualified personnel and key management; |
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Our ability to successfully value and integrate acquisition candidates; |
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Decline in demand for our products and services; |
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Economic instability, currency fluctuation and other risks of doing business outside of the United States; |
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Delays in launching or supplying new products or an inability to achieve new product sales objectives; |
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Increased price competition from larger competitors, particularly in our Fluid Handling segment; |
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The ability of the U.S. government to terminate our contracts; |
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Adverse effects on our business and results of operations, as a whole, as a result of further increases in asbestos claims or the cost of defending
and settling such claims. |
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Adverse effects on our results of operations as a result of further increases in environmental remediation costs and related claims.
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Part I
Reference herein to Crane, we, us, and, our refer to Crane
Co. and its subsidiaries unless the context specifically states or implies otherwise. Amounts in the following discussion are presented in millions, except employee, share and per share data, or unless otherwise stated.
Item 1. Business.
We are a diversified manufacturer of highly engineered industrial products. Comprised of
five segments Aerospace & Electronics, Engineered Materials, Merchandising Systems, Fluid Handling and Controls our businesses give us a substantial presence in focused niche markets, producing high returns and excess cash flow.
Since our founding in 1855, when R.T. Crane resolved to conduct my business in the strictest honesty and fairness; to avoid all
deception and trickery; to deal fairly with both customers and competitors; to be liberal and just toward employees, and to put my whole mind upon the business, we have been committed to the highest standards of business conduct.
Our strategy is to grow the earnings of niche businesses with leading market shares, acquire companies that offer strategic fits with existing
businesses, aggressively pursue operational and strategic linkages among our businesses, build a performance culture that stresses continuous improvement and a committed management team whose interests are directly aligned with those of the
shareholders and maintain a focused, efficient corporate structure.
We use a comprehensive set of business processes and operational
excellence tools that we call the Crane Business System to drive continuous improvement throughout our businesses. Beginning with a core value of integrity, the Crane Business System incorporates Voice of the Customer teachings, value stream
analysis linking customers and suppliers with our production cells, prescriptive and uniform visual management techniques and a broad range of operational excellence tools into a disciplined strategy deployment process that drives superior financial
results by focusing on continuously improving safety, quality, delivery and cost.
We employ approximately 12,000 people in North America,
South America, Europe, the Middle East, Asia and Australia.
Business Segments
Beginning with the fourth quarter of 2006, we included the Wireless Monitoring Systems and Crane Environmental businesses, which were previously included in the Aerospace & Electronics and the
Fluid Handling segments, respectively, in the Controls segment. See Part II, Item 8, Note 14, Segment Information, to the Consolidated Financial Statements for information about sales, operating profit and assets employed by each
business segment.
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PART I / ITEM 1
Aerospace & Electronics
The Aerospace & Electronics segment has two groups, the
Aerospace Group and the Electronics Group. The Aerospace Groups products are organized into the following solution sets which are designed, manufactured and sold under their respective brand names: Landing Systems (Hydro-Aire), Sensing and
Utility Systems (Eldec), Fluid Management (Lear Romec), Aircraft Electrical Power (Eldec) and Cabin (P.L. Porter). The Electronics Group products are organized into the following solution sets: Power (Eldec, Keltec, Interpoint), Microwave Systems
(Signal Technology, Olektron), Electronic Manufacturing Services (General Technology) and Microelectronics (Interpoint).
The Landing
Systems product line includes aircraft brake control and anti-skid systems, including electro-hydraulic servo valves and manifolds, embedded software and rugged electronic controls, hydraulic control valves, landing gear sensors and fuel pumps as
original equipment to the commercial transport, business, regional, general aviation, military and government aerospace, repair and overhaul markets. This product line also includes similar systems for the retrofit of aircraft with improved systems
as well as replacement parts for systems installed as original equipment by aircraft manufacturers. All of these products are largely proprietary to us and, to some extent, are custom designed to the requirements and specifications of the aircraft
manufacturer or program contractor. These systems and replacement parts are sold directly to aircraft manufacturers, airlines, governments and aircraft maintenance and overhaul companies. Manufacturing for Hydro-Aire and P.L. Porter products is
located in Burbank, California.
The Sensing and Utility Systems product line includes custom position indication and control systems,
proximity sensors, pressure sensors, true mass fuel flow meters and power conversion systems for the commercial business, regional and general aviation, military, repair and overhaul and electronics markets. These products are custom designed for
specific aircraft to meet technically demanding requirements of the aerospace industry. Our Sensing and Utility Systems products are manufactured at facilities in Lynwood, Washington; Daventry, Northants, England and Bron, France.
The Fluid Management product line includes lubrication and fuel pumps for aircraft and radar cooling systems for the commercial and military aerospace
industries. It also includes fuel boost and transfer pumps for commuter and business aircraft. Our Fluid Management solutions are manufactured at a facility located in Elyria, Ohio.
The Aircraft Electrical Power product line includes standard and custom miniature (hybrid) DC-to-DC power converters and other products for the aerospace industry.
Our Cabin Systems product line includes motion control products for airline seating. We hold leading positions in both electromechanical actuation and
hydraulic/mechanical actuation for aircraft seating, selling directly to seat manufacturers and to the airlines.
Our Power Solutions
product line includes standard and custom power converters and custom miniature (hybrid) electronic circuits for applications across various markets including commercial, space and military aerospace and fiber optics. Facilities are located in
Redmond and Lynwood, Washington; Ft. Walton Beach, Florida; Daventry, England and Kaohsiung, Taiwan.
The Microwave Systems markets product line
includes power management products and sophisticated electronic radio frequency components and subsystems. These products are used primarily in defense electronics applications that include radars, electronic warfare suites, communications systems
and data links. We supply many U.S. Department of Defense prime contractors and foreign allied defense organizations with products that enable missile seekers and guidance systems, aircraft sensors for tactical and intelligence applications,
surveillance and reconnaissance missions, communications and self-protect capabilities for naval vessels, sensors and communications capability on unmanned aerial systems and applications for mounted and dismounted land combat troops. Facilities are
located in Beverly, Massachusetts and Chandler, Arizona.
The Electronic Manufacturing Services Solution product line includes
customized-contract manufacturing services and products focused on military and defense applications. Services include the assembly and testing of printed circuit boards, electromechanical devices, customized integrated systems, cables and wire
harnesses. Our Electronic Manufacturing Services Solutions are manufactured at a facility in Albuquerque, New Mexico.
Our Microelectronics
product line, headquartered in Redmond, Washington, designs, manufactures and sells custom miniature (hybrid) electronic circuits for applications in commercial, space and military aerospace, fiber optics and medical technology industries.
The Aerospace & Electronics segment employs approximately 3,200 people and had assets of $467 million at December 31, 2007.
The order backlog totaled $392.8 million and $396.8 million at December 31, 2007 and 2006, respectively.
Engineered Materials
The Engineered Materials segment is largely comprised of the Crane Composites fiberglass-reinforced plastic (frp) panel business. The segment
also includes the Polyflon business.
Crane Composites manufactures frp panels for the transportation industry, in refrigerated and dry-van
truck trailers, recreational vehicles, industrial markets and the commercial construction industry for food processing, fast-food restaurants and supermarket applications, as well as institutions where fire-rated materials with low-smoke generation
and minimum toxicity are required. Crane Composites sells the majority of its products directly to truck trailer and recreational vehicle manufacturers and uses distributors and retailers to serve the commercial construction market. Crane
Composites manufacturing facilities are located in Channahon and Joliet, Illinois; Jonesboro, Arkansas; Grand Junction, Tennessee; Florence and Henderson, Kentucky; Goshen, Indiana; and Alton, Hampshire, United Kingdom.
Noble Composites, Inc. (Noble) was acquired in September 2006 and during 2007 has been integrated into Crane Composites. Noble specializes in
the manufacture and sale of premium, high-gloss finished composite panels used by recreational vehicle manufacturers. Nobles manufacturing facility is located in Goshen, Indiana. In September 2007, we acquired the composite panel business of
Owens Corning, which produces, among other products, high gloss frp panels used by manufacturers of recreational vehicles. The acquired business is being integrated into the Noble Composites business.
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PART I / ITEM 1
Polyflon is a manufacturer of small specialty components, primarily as substrate materials for antennas. Polyflon is located in Norwalk,
Connecticut.
The Engineered Materials segment employs approximately 1,020 people and had assets of $305 million at December 31, 2007.
The order backlog totaled $14.8 million and $13.2 million at December 31, 2007 and 2006, respectively.
Merchandising Systems
The Merchandising Systems segment is divided into two groups, Vending Solutions and Payment Solutions, both of which were significantly expanded in 2006
with our investment of over $200 million for the acquisitions of four complementary businesses.
Vending Solutions includes Dixie-Narco and
Automatic Products (two businesses we acquired in 2006), National Vendors, GPL, Stentorfield and Streamware. These businesses create customer value through innovation, reliability, durability and reduced cost of ownership. Our products are sold to
vending operators and food and beverage companies throughout the world. Vending Solutions has leading positions in both the direct and indirect distribution channels. Streamware provides vending management software to help customers operate their
businesses more profitably, become more competitive and free cash for continued business investment. Major production facilities for Vending Solutions are located in St. Louis, Missouri; Williston, South Carolina and Chippenham, England.
Payment Solutions includes National Rejectors (NRI), which makes coin changers and validators, and two businesses acquired in 2006,
Telequip Corporation (Telequip) and CashCode Co. Inc. (Cash Code). With the acquisition of these two businesses, Crane is a full-line supplier of high technology payment systems products well positioned for growth in all
market segments and geographies. NRI is headquartered in Buxetehude, Germany; Cash Code is in Concord, Ontario, Canada and Kiev, Ukraine and Telequip is located in Salem, New Hampshire.
The Merchandising Systems segment employs approximately 2,000 people and had assets of $349 million at December 31, 2007. Order backlog totaled $34.1 million and $33.2 million at December 31,
2007 and 2006, respectively.
Fluid Handling
The Fluid Handling segment consists of the Crane Valve Group (Valve Group), Crane Pumps & Systems and Crane Supply. In 2007, the Valve Group aligned its business units as follows: Chemical/Pharmaceutical, Energy,
Crane Group UK and Services. This alignment will provide greater focus on the chemical, pharmaceutical, oil, gas and power and, to a lesser extent, nuclear, building services and utilities end markets.
The Valve Group, with manufacturing facilities in the United States as well as operations in: Australia, Belgium, Canada, China, England, Finland, France,
Germany, Hungary, India, Indonesia, Italy, Japan, Korea, Mexico, the Netherlands, Northern Ireland, Singapore, Spain, Sweden, Taiwan, United Arab Emirates and Wales, sells a wide variety of industrial and commercial valves, corrosion-resistant
plastic-lined pipe, pipe fittings, couplings, connectors and actuators and provides valve testing, parts and services for the
chemical processing, pharmaceutical, oil and gas, power, nuclear, mining, waste management, general industrial and commercial construction
industries. Products are sold under the trade names Crane, Saunders, Jenkins, Pacific, Xomox, DEPA, ELRO, REVO, Flowseal, Centerline, Stockham, Wask, Viking Johnson, Hattersley and Duochek.
Crane Pumps & Systems manufactures pumps under the trade names Deming, Weinman, Burks, Barnes, and Sellers. Pumps are sold to a broad customer
base that includes chemical and hydrocarbon processing, automotive, municipal, industrial and commercial wastewater, power generation, commercial heating, ventilation and air-conditioning industries and original equipment manufacturers. Crane
Pumps & Systems has facilities in Piqua, Ohio; Bramalea, Ontario, Canada and Zhejiang, China.
Crane Supply, a distributor of
plumbing supplies, valves and piping maintains 33 distribution facilities throughout Canada.
During the fourth quarter of 2007, we
announced and commenced implementation of a restructuring program designed to further enhance operating margins in the Fluid Handling segment. The planned actions include ceasing the manufacture of malleable iron and bronze fittings at our foundry
operating facilities in the UK and Canada, respectively, and exiting both facilities and transferring production to China (the Foundry Restructuring). The Foundry Restructuring is expected to be substantially completed by the end of
2008. The program primarily includes workforce reduction expenses and facility exit costs, all of which are expected to be cash costs. We expect to incur total pre-tax charges, upon program completion, of approximately $14 million. Included in this
amount, in December 2007, we recognized workforce reduction charges of approximately $9 million. Also in December 2007, pursuant to this program, we sold our foundry facility in the UK, generating a pre-tax gain of approximately $28 million.
The Fluid Handling segment employs approximately 5,000 people and had assets of $869 million at December 31, 2007. Order backlog
totaled $242.6 million and $210.5 million at December 31, 2007 and 2006, respectively.
Controls
The Controls segment consists of the Barksdale, Azonix, Dynalco, Crane Environmental and Crane Wireless Monitoring Solutions businesses.
Barksdale manufactures ride-leveling, air-suspension control valves for heavy trucks and trailers, as well as pressure, temperature and level sensors used
in a range of industrial machinery and equipment. It has manufacturing and marketing facilities in Los Angeles, California and Reichelsheim, Germany.
Azonix produces ultra-rugged computers, mobile rugged displays, measurement and control systems and intelligent data acquisition products and has a manufacturing facility in Billerica, Massachusetts and, with the acquisition of the
mobile rugged business of Kontron AG, an engineering facility in Fremont, California.
Dynalco is a manufacturer of engine compressors
monitoring and diagnostic systems and has facilities in Ft. Lauderdale, Florida and Houston, Texas.
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PART I / ITEM 1
Crane Environmental is a supplier of specialized water purification solutions for the worlds industrial and commercial markets. Crane
Environmentals worldwide applications include government, pulp and paper, steel, oil, gas, petrochemical, power generation, wastewater treatment, carwash, bottling, beverage and agriculture. Products are sold under the trade names Cochrane and
Environmental Products. Crane Environmental has facilities in Venice, Florida and Trooper, Pennsylvania.
Crane Wireless Monitoring
Solutions designs wireless sensor networks and covert radio products for the military and intelligence markets as well as for oil and gas, commercial and industrial markets. Crane Wireless Monitoring Solutions is located in Plano, Texas.
The Controls segment employs approximately 600 people and had assets of $84 million at December 31, 2007. Order backlog totaled $35.3 million and
$23.0 million at December 31, 2007 and 2006, respectively.
Acquisitions
We have completed 15 acquisitions since the beginning of 2003.
During 2007, we completed
two acquisitions at total cost of approximately $65 million. Goodwill for the 2007 acquisitions amounted to approximately $29 million.
In
September 2007, we acquired the composite panel business of Owens Corning, which produces, among other products, high gloss fiberglass reinforced plastic panels used in the manufacture of recreational vehicles. The purchase price was $38 million in
cash. The acquired business had $40 million of sales in 2006 and is being integrated into the Noble Composites business within our Engineered Materials segment.
In August 2007, we acquired the Mobile Rugged Business of Kontron America, Inc., which produces computers, electronics and flat panel displays for harsh environment applications. The purchase price was $26.6 million. The
acquired business had sales of approximately $25 million in 2006 and is being integrated into the Azonix business within our Controls segment.
During 2006, we completed five acquisitions at a total cost of approximately $283 million. Goodwill for the 2006 acquisitions amounted to approximately $148 million.
In January 2006, we acquired substantially all of the assets of Cash Code, a manufacturer of banknote validators, storage and recycling devices for use in a variety of niche applications in vending,
gaming, retail and transportation industries, for approximately $86 million in cash. Cash Code had sales of approximately $48 million in 2005. Cash Code is located in Concord, Ontario, Canada and Kiev, Ukraine, serving a global marketplace with 75%
of its sales outside the United States, of which the majority are in Europe and Russia. Cash Code was integrated into our Merchandising Systems segment.
In June 2006, we acquired all of the outstanding capital stock of Telequip for a cash purchase price of approximately $45 million. Telequip, with headquarters in Salem, New Hampshire, has been manufacturing coin dispensing solutions
since 1974. Telequip provides embedded and free-standing coin dispensing solutions principally focused on applications in supermarkets, convenience
stores, quick-service restaurants and self-checkout and kiosk equipment markets. Telequips coin dispensers have a particularly strong
position in automated self-checkout markets. Telequip had total annual sales of approximately $20 million in 2006. Telequip was integrated into our Merchandising Systems segment.
In June 2006, we acquired certain assets of Automatic Products International (AP), a privately held manufacturer of vending equipment. In September 2006, additional assets of AP were
acquired and a second payment made for a total purchase price of approximately $30 million. The acquisition included APs extensive distribution network, product line designs and trade names, manufacturing equipment, aftermarket parts business,
inventory and other related assets. The purchase did not include APs manufacturing facility located in St. Paul, Minnesota. AP equipment production has been consolidated into the Merchandising Systems facility in St. Louis, Missouri. AP had
total annual sales of approximately $40 million in 2006.
In September 2006, we acquired all the outstanding capital stock of Noble for a
cash purchase price of approximately $72 million. Noble, located in Goshen, Indiana, was a privately held company specializing in the manufacture and sale of premium, high-gloss finished composite panels for use by recreational vehicle
manufacturers. Noble had annual sales of $37 million in 2005. Noble was integrated into our Engineered Materials segment.
In
October 2006, we acquired all of the outstanding capital stock of Dixie-Narco Inc. (Dixie-Narco) for a purchase price of approximately $46 million in cash. Dixie-Narco is the largest can/bottle merchandising equipment manufacturer
in the world. Primary customers are the major soft drink companies; in addition, equipment is marketed to global vending operators. Dixie-Narco had total annual sales of approximately $155 million in 2006. Dixie-Narco was integrated into our
Merchandising Systems segment.
During 2005, we completed two acquisitions at a total cost of $9 million. Goodwill for the 2005 acquisitions
amounted to approximately $5 million.
During 2004, we completed two acquisitions at a total cost of $50 million. Goodwill for the 2004
acquisitions amounted to approximately $37 million. In January 2004, we acquired Porter for a purchase price of $44 million. Porter is a leading manufacturer of motion control products for airline seating and was integrated into the Burbank,
California Aerospace facility. Porter holds leading positions in both electromechanical actuation and hydraulic/mechanical actuation for aircraft seating, selling directly to seat manufacturers and to the airlines. Electrically powered seat
actuation systems provide motive power and control features required by premium class passengers on competitive international routes. Porter products not only provide passenger comfort with seat back and foot rest adjustment, but also control
advanced features such as lumbar support and in-seat massage. In addition to seats installed in new aircraft, airlines refurbish and replace seating several times during an aircrafts life along with maintenance and repair requirements.
Porters 2003 annual sales were approximately $32 million. The operations were integrated into our Aerospace & Electronics segment. Also in January 2004, we acquired the Hattersley valve brand and business together with certain related
intellectual property and assets from Hattersley Newman Hender, Ltd., a subsidiary of Tomkins plc, for a purchase price of $6 million.
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PART I / ITEM 1
Hattersley branded products include an array of valves for commercial, industrial and institutional construction projects. This business has
been integrated into Crane Ltd., which is part of our Fluid Handling segment.
During 2003, we completed four acquisitions at a total cost
of $169 million. Goodwill for these acquisitions amounted to $118 million. In May 2003, we acquired STC for a total purchase price of $138 million (net of STC cash acquired). STC, with 2002 annual sales of approximately $87 million, is a leading
manufacturer of highly engineered state-of-the-art power management products and electronic radio frequency and microwave frequency components and subsystems for the defense, space and military communications markets. STC supplies many U.S.
Department of Defense prime contractors and foreign allied defense organizations with products designed into systems for missile, radar, aircraft, electronic warfare, intelligence and communication applications. The operations were integrated with
our Aerospace & Electronics segment. In June 2003, we purchased certain pipe coupling and fittings businesses from Etex Group S.A. (Etex), for a purchase price of $29 million. The 2002 annual sales for these businesses were
approximately $60 million. These businesses provide pipe jointing and repair solutions to the water, gas and industrial markets worldwide. Products include grooved pipe systems, pipeline couplings and transition fittings and pipeline equipment. The
businesses were integrated into our subsidiary, Crane Ltd., a leading provider of pipe fittings, valves and related products to the building services, HVAC (heating, ventilating and air conditioning) and industrial markets in the United Kingdom and
Europe, a part of our Fluid Handling segment. We also acquired two other entities in 2003 at a total purchase price of approximately $2 million.
Divestitures
In December 2007, together with our partner, Emerson Electric Co., we sold the Industrial Motion Control, LLC
(IMC) joint venture, generating proceeds to us of $33 million. Our investment in IMC was approximately $29 million and we recorded dividend income in 2007, 2006 and 2005 of $5.3 million, $5.6 million and $6.0 million,
respectively.
In April 2006, we completed the sale of the outstanding capital stock of Westad Industri A/S, a small specialty valve
business located in Norway. This business had $25 million in sales in 2005. Westad was included in our Fluid Handling segment. In May 2006, we completed the sale of substantially all of the assets of Resistoflex-Aerospace, a manufacturer of
high-performance hose and high-pressure fittings located in Jacksonville, FL. This business had sales of $16 million in 2005. Resistoflex-Aerospace was included in the Aerospace & Electronics segment. In December 2004, we sold the Victaulic
trademark and UK-based business assets for $15 million in an all cash transaction. The Victaulic trademark and business assets were acquired in connection with the acquisition of certain valve and fittings product lines from Etex S.A. in June 2003.
In March 2003, we sold the assets of our Chempump unit to Teikoku USA, Inc. Chempump manufactured canned motor pumps primarily for use in the chemical processing industry.
Competitive Conditions
Our lines of business are conducted under highly competitive conditions in each of the geographic and product areas they serve. Because of the
diversity of the classes of products manufactured and sold, they do not compete with the same companies in all geographic or product areas. Accordingly, it is not possible to estimate the precise number of competitors or to identify our competitive
position, although we believe that we are a principal competitor in most of our markets. Our principal method of competition is production of quality products at competitive prices in a timely and efficient manner.
Our products have primary application in the aerospace, defense electronics, recreational vehicle, transportation, automated merchandising, petrochemical,
chemical and power generation industries. As such, they are dependent upon numerous unpredictable factors, including changes in market demand, general economic conditions and capital spending. Because these products are also sold in a wide variety
of markets and applications, we do not believe we can reliably quantify or predict the possible effects upon our business resulting from such changes.
Our engineering and product development activities are directed primarily toward improvement of existing products and adaptation of existing products to particular customer requirements as well as the development of new products.
While we own numerous patents, trademarks, copyrights, trade secrets and licenses to intellectual property, none are of such importance that termination would materially affect our business. From time to time, however, we do engage in litigation to
protect our intellectual property.
Research and development costs are expensed when incurred. These costs were approximately $106.8
million, $69.7 million and $53.1 million in 2007, 2006 and 2005, respectively, incurred primarily by the Aerospace & Electronics segment. Funds received from customer-sponsored research and development projects were approximately $8.4
million, $8.8 million and $7.0 million in 2007, 2006 and 2005 respectively, and were recorded in net sales.
We are not dependent on any
single customer.
Raw Materials
Our
manufacturing operations employ a wide variety of raw materials, including steel, copper, cast iron, electronic components, aluminum, plastics and other petroleum-based products. We purchase raw materials from a large number of independent sources
around the world. Although market forces during the past two years have caused significant increases in the costs of steel and petroleum-based products, there have been no raw materials shortages that have had a material adverse impact on our
business and we believe that we will generally be able to obtain adequate supplies of major raw material requirements or reasonable substitutes at reasonable, though escalating, costs.
Seasonal Nature of Business
Our business does not exhibit significant seasonality; however, our sales
are typically lower in the first quarter.
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PART I / ITEM 1
Government Contracts
We have agreements relating to the sale of products to government entities,
primarily involving products in our Aerospace & Electronics business segment and our Fluid Handling business segment. As a result, we are subject to various statutes and regulations that apply to companies doing business with the government. The
laws and regulations governing government contracts differ from those governing private contracts. For example, many government contracts require disclosure of cost and pricing data and impose certain sourcing conditions that are not applicable to
private contracts. Our failure to comply with these laws could result in suspension of these contracts, criminal or civil sanctions, administrative penalties or suspension or debarment from government contracting or subcontracting for a period of
time. For example, as previously disclosed, we sold certain valves made by our Fluid Handling segment to private customers that ultimately were delivered to U.S. military agencies which did not conform to certain contractual specifications relating
to the place of manufacture and the origin of component parts. Subsequent to a U.S. Government investigation, in July 2007, we executed a settlement agreement with the Department of Justice providing for, among other things, the payment of $7.5
million to the United States. For a further discussion of risks related to compliance with government contracting requirements, please refer to Item 1A. Risk Factors.
See Part I, Item 3 Legal Proceedings regarding certain costs of compliance with federal, state and local laws and regulations involving the discharge of materials into the environment
or otherwise relating to the protection of the environment.
Financing
In September 2007, we entered into a five-year, $300 million Amended and Restated Credit Agreement (the facility), which is due to expire September 26, 2012. This facility amends and
restates the five-year $450 million revolving credit agreement entered into on January 21, 2005, which included a $150 million term loan component that was terminated by us in May 2005. The facility allows us to borrow, repay, or to the extent
permitted by the agreement, prepay and re-borrow at any time prior to the stated maturity date, and the loan proceeds may be used for general corporate purposes including financing for acquisitions. The original facility was amended and restated to
capitalize on favorable bank market conditions and to extend the maturity of the facility. In addition, the amended and restated facility provides us with reduced annual fees and interest rates as well as less restrictive financial and operating
covenants. The facility was not used throughout 2007, 2006 and 2005. The agreement contains a leverage ratio covenant requiring a ratio of total debt to total capitalization of less than or equal to 65%. At December 31, 2007, our ratio was 31%.
In November 2006, we issued notes having an aggregate principal amount of $200 million. The notes are unsecured, senior obligations that
mature on November 15, 2036 and bear interest at 6.55% per annum, payable semi-annually on May 15 and November 15 of each year. The notes have no sinking fund requirement but may be redeemed, in whole or part, at our option. If
there is a change in control, and if as a consequence, the notes are rated below investment grade by both Moodys and Standard & Poors, then holders of the Notes may require us to repurchase them, in whole or in part, for 101% of
the principal amount plus accrued and unpaid interest.
In September 2003, we issued $200 million of
5.50% notes that mature on September 15, 2013. The notes are unsecured, senior obligations with interest payable semi-annually on March 15 and September 15 of each year. The notes have no sinking fund requirement but may be redeemed,
in whole or in part, at our option.
We had notes outstanding in an aggregate principal amount of $100 million, issued in 1998, that were
paid and retired at maturity on October 1, 2006.
Available Information
Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, are available free of charge on our website at
www.craneco.com as soon as reasonably practicable after such reports are filed with the Securities and Exchange Commission.
8
PART I / ITEM 1
Executive Officers of the Registrant
|
|
|
|
|
|
|
|
|
Name |
|
Position |
|
Business Experience During Past Five Years |
|
Age |
|
Executive Officer Since |
|
|
|
|
|
Eric C. Fast |
|
President and Chief Executive Officer |
|
President and Chief Executive Officer and a Director of the Company since April 2001. President and Chief Operating Officer from September 1999 to April 2001. |
|
58 |
|
1999 |
|
|
|
|
|
David E. Bender |
|
Group President,
Electronics |
|
Group President, Electronics of Crane Aerospace & Electronics segment of the Company since December 2005. Vice President, Operations, Aerojet General Corporation, a division
of GenCorp, from 2004 to 2005. Executive Vice President GDX Automotive, a division of GenCorp, from 2003 to 2004. Vice President, Operations, Aerojet General Corporation, a division of GenCorp, from 2001 to 2003. |
|
48 |
|
2007 |
|
|
|
|
|
Thomas J. Craney |
|
Group President,
Composites |
|
Group President, Composites of the Engineered Materials segment of the Company since May 2007. Owens Corning from 1979 to 2007; Vice President of Sales, North American Building
Materials from 2005 to 2007 and Vice President, General Manager, Commercial and Industrial Insulation business from 2000 to 2005. |
|
52 |
|
2007 |
|
|
|
|
|
Augustus I. duPont |
|
Vice President, General Counsel and Secretary |
|
Vice President, General Counsel and Secretary of the Company since 1996. |
|
56 |
|
1996 |
|
|
|
|
|
Bradley L. Ellis |
|
Group President, Crane Merchandising Systems |
|
Group President, Crane Merchandising Systems segment of the Company since December 2003. Vice President, Operational Excellence of the Company from 2000 to December
2003. |
|
39 |
|
2000 |
|
|
|
|
|
Elise M. Kopczick |
|
Vice President, Human Resources |
|
Vice President, Human Resources of the Company since January 2001. Previously, President of the Companys Lear Romec division from August 1999 to January
2001. |
|
54 |
|
2001 |
|
|
|
|
|
Andrew L. Krawitt |
|
Vice President, Treasurer |
|
Vice President and Treasurer of the Company since September 2006. From 1998 to 2006 with PepsiCo, most recently Director, Financial Planning & Analysis from May 2005 to
September 2006; Region Finance Director, Frito-Lay Division from January 2003 to May 2005; Director, Financial Strategy, Pepsi-Cola Division from January 2001 to January 2003. |
|
42 |
|
2006 |
|
|
|
|
|
Max H. Mitchell |
|
Group President, Fluid Handling |
|
Group President, Fluid Handling segment of the Company since April 2005. Vice President, Operational Excellence of the Company from March 2004 to April 2005. From 2001 to 2004,
Senior Vice President of Global Operations for the Pentair Tool Group. |
|
44 |
|
2004 |
|
|
|
|
|
Richard A. Maue |
|
Vice President, Controller |
|
Vice President, Controller and Chief Accounting Officer of the Company since August 2007. Vice President, Controller and Chief Accounting Officer of Paxar Corporation from July
2005 to June 2007. Director, Internal Audit Practice at Protiviti, Inc. from June 2003 to July 2005. Senior Vice President and Chief Financial Officer and Corporate Secretary of Andrea Electronics Corporation from November 1999 to June
2003. |
|
37 |
|
2007 |
|
|
|
|
|
Thomas M. Noonan |
|
Vice President, Taxes |
|
Vice President, Taxes of the Company since November 2001. Vice President, Controller and Chief Tax Officer of the Company from April 2000 to November 2001. Vice President,
Taxes of the Company from September 1999 to April 2000. |
|
53 |
|
1999 |
9
PART I / ITEM 1
|
|
|
|
|
|
|
|
|
Name |
|
Position |
|
Business Experience During Past Five Years |
|
Age |
|
Executive Officer Since |
|
|
|
|
|
Anthony D. Pantaleoni |
|
Vice President, Environment, Health and Safety |
|
Vice President, Environment, Health and Safety of the Company since 1989. |
|
53 |
|
1989 |
|
|
|
|
|
Thomas J. Perlitz |
|
Vice President, Operational Excellence |
|
Vice President, Operational Excellence of the Company since September 2005. From 1995 to 2005 with subsidiaries of Danaher Corp. (manufacturer of instrumentation, tools and
components), most recently Vice President, Global Marketing and Engineering-Imaging of KaVo Dental, Lake Zurick, IL (dental imaging products) from August 2004 to August 2005; Director of Worldwide Service, Fluke Corporation, Everett, WA (electronic
and electrical test tools) from February 2002 to August 2004; and Business Unit Manager, Fluke Corporation from July 2000 to February 2002. |
|
39 |
|
2005 |
|
|
|
|
|
Curtis P. Robb |
|
Vice President, Business Development and Strategic Planning |
|
Vice President, Business Development and Strategic Planning of the Company since June 2005. From 2003 to 2005, founder and Managing Director of Robb Associates, LLP (financial
advisory services). From 1995 to 2002, Managing Director, Mergers and Acquisitions at HSBC (investment banking) and a predecessor company. |
|
53 |
|
2005 |
|
|
|
|
|
C. Douglas Spitler |
|
Group President, Controls |
|
Group President, Controls segment of the Company since April 2004. Interim President, Crane Electronics Group, October 2004 to December 2005. CEO, Connector Service Corporation,
2002-2004. (Connector Service Corporation filed a petition for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Northern District of Illinois on September 24, 2003.) From 1992 to 2001, various general management and financial management
positions with Invensys plc and predecessor company, Siebe plc. |
|
57 |
|
2007 |
|
|
|
|
|
Gregory A. Ward |
|
Group President, Aerospace |
|
Group President, Aerospace of Crane Aerospace & Electronics segment of the Company since December 2002. From 1999 to 2002, President of the Hydro-Aire operation of Crane
Aerospace & Electronics. |
|
57 |
|
2007 |
10
PART I / ITEM 1A
Item 1A. Risk Factors.
The following is a description of what we consider the key challenges and risks
confronting our business. This discussion should be considered in conjunction with the discussion under the caption Forward-Looking Information preceding Part I, and with the discussion of the business included in Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations. These risks comprise the material risks of which we are aware; however, these risks and uncertainties may not be the only ones we face.
Additional risks and uncertainties not presently known to us or that we currently deem to be immaterial also may adversely affect our business or financial performance. If any of the events or developments described below or elsewhere in this Annual
Report on Form 10-K, or in any documents that we subsequently file publicly were to occur, it could have a material adverse effect on our business, financial condition or results of operations.
Risks Relating to Our Business
We are subject to
numerous lawsuits for asbestos-related personal injury, and costs associated with these lawsuits may adversely affect our results of operations, cash flow and financial position.
We are subject to numerous lawsuits for asbestos-related personal injury. Estimation of our ultimate exposure for asbestos-related claims is subject to significant uncertainties, as there are multiple
variables that can affect the timing, severity and quantity of claims. Our estimate of the future expense of these claims is derived from assumptions with respect to future claims, settlement and defense costs which are based on experience during
the last few years and which may not prove reliable as predictors. A significant upward or downward trend in the number of claims filed, depending on the nature of the alleged injury, the jurisdiction where filed and the quality of the product
identification, or a significant upward or downward trend in the costs of defending claims, could change the estimated liability, as would any substantial adverse verdict at trial or on appeal. A legislative solution or a revised structured
settlement transaction could also change the estimated liability. These uncertainties may result in our incurring future charges or increases to income to adjust the carrying value of recorded liabilities and assets, particularly if the number of
claims and settlements and defense costs escalates or if legislation or another alternative solution is implemented; however, we are currently unable to predict such future events. The resolution of these claims may take many years, and the effect
on results of operations, cash flow and financial position in any given period from a revision to these estimates could be material.
As of
December 31, 2007, we were one of a number of defendants in cases involving approximately 81,000 pending claims filed in various state and federal courts that allege injury or death as a result of exposure to asbestos. See Note 10 of the Notes
to our Consolidated Financial Statements for additional information on:
|
|
Our historical settlement and defense costs for asbestos claims; |
|
|
The liability we have recorded in our financial statements for pending and reasonably anticipated asbestos claims through 2017;
|
|
|
The asset we have recorded in our financial statements related to our estimated insurance coverage for asbestos claims; and
|
|
|
Uncertainties related to our net asbestos liability. |
We have recorded a liability for pending and reasonably anticipated asbestos claims through 2017, and while it is probable that we will incur additional liabilities for asbestos claims after 2017,
which additional liabilities may be significant, we cannot reasonably estimate the amount of such additional liabilities at this time. In the third quarter 2007, we updated and extended the estimate of our asbestos liability and recorded an
additional pre-tax provision of approximately $390 million, which includes a corresponding insurance receivable.
Our operations expose us
to the risk of environmental liabilities, costs, litigation and violations that could adversely affect our financial condition, results of operations, cash flow and reputation.
Certain of our operations are subject to environmental laws and regulations in the jurisdictions in which they operate, which impose limitations on the discharge of pollutants into the ground, air and
water and establish standards for the generation, treatment, use, storage and disposal of solid and hazardous wastes. We must also comply with various health and safety regulations in the United States and abroad in connection with our operations.
We cannot assure you that we have been or will be at all times in substantial compliance with environmental and health and safety laws. Failure to comply with any of these laws could result in civil and criminal, monetary and non-monetary penalties
and damage to our reputation. In addition, we cannot provide assurance that our costs related to remedial efforts or alleged environmental damage associated with past or current waste disposal practices or other hazardous materials handling
practices will not exceed our estimates or adversely affect our financial condition, results of operations and cash flow. For example, during the 2007 fourth quarter, we recorded a $19 million charge related to an increase in our expected liability
at our Goodyear, Arizona Superfund site.
Our businesses are subject to extensive governmental regulation; failure to comply with those
regulations could adversely affect our financial condition, results of operations, cash flow and reputation.
Primarily in our Aerospace
& Electronics and Fluid Handling segments, we are required to comply with various export control laws, which may affect our transactions with certain customers. In certain circumstances, export control and economic sanctions regulations may
prohibit the export of certain products, services and technologies, and in other circumstances we may be required to obtain an export license before exporting the controlled item. We are also subject to investigation and audit for compliance with
the requirements governing government contracts, including requirements related to procurement integrity, export control, employment practices, the accuracy of records and the recording of costs. A failure to comply with these requirements might
result in suspension of these contracts and suspension or debarment from government contracting or subcontracting. In addition, failure to comply with any of these regulations could result in civil and criminal, monetary and non-monetary penalties,
disruptions to our business, limitations on our ability export products and services, and damage to our reputation. For example, in the 2007 third quarter, we recorded a $7.6 million charge related to a civil false claims proceeding by the U.S.
Government. See the Civil False Claims Settlement section under Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations.
11
PART I / ITEM 1A
Demand for our products is uncertain and subject to factors beyond our control, which could result in unanticipated events significantly impacting our results of operations.
A substantial portion of our sales is concentrated in industries that are cyclical in nature or subject to market conditions which may cause
customers demand for our products to be volatile. These industries often are subject to fluctuations in domestic and international economies as well as to currency fluctuations and unforeseen inflationary pressures. Reductions in the business
levels of these industries would reduce the sales and profitability of the affected business segments. In our Aerospace & Electronics segment, for example, a significant decline in demand for air travel, or a decline in airline profitability
generally, could result in reduced orders for aircraft and could also cause airlines to reduce their purchases of repair parts from our businesses. Our aerospace businesses could also be impacted if major aircraft manufacturers, such as Boeing
(which represented approximately 13% of the segments revenue in 2007) encountered production problems, or if pricing pressure from aircraft customers caused the manufacturers to press their suppliers to lower prices. In our Engineered
Materials segment, sales and profits could fall if there were a decline in demand for truck trailers, recreational vehicles, or industrial or building products. Results in our Controls segment could decline because of an unanticipated decline in
demand for the businesses products from the oil and gas or heavy truck markets, or from unforeseen product obsolescence. Results at our Merchandising Systems business have been and will continue to be affected by employment levels, office
occupancy rates and factors affecting vending operator profitability such as fuel, confection and borrowing costs.
We may be unable to
successfully develop and introduce new products, which would limit our ability to grow and maintain our competitive position and adversely affect our financial condition, results of operations and cash flow.
Our growth depends, in part, on continued sales of existing products, as well as the successful development and introduction of new products, which face
the uncertainty of customer acceptance and reaction from competitors. In our Aerospace & Electronics segment, for example, if we are unable to successfully develop, fund and deliver new products for major programs such as the Boeing 787 and the
Airbus A400M, our operating results would be adversely impacted. Also, any delay in the development or launch of a new product could result in our not being the first to market, which could compromise our competitive position. Further, the
development and introduction of new products may require us to make investments in specialized personnel and capital expenditures, increase marketing efforts and reallocate resources away from other uses. We also may need to modify our systems and
strategy in light of new products that we develop. If we are unable to develop and introduce new products in a cost-effective manner or otherwise manage effectively the operations related to new products, our results of operations and financial
condition could be adversely impacted.
The prices of our raw materials may increase, which may adversely affect our profitability.
The costs of certain raw materials that are critical to our profitability are volatile. This volatility can have a significant impact on our profitability. In our Engineered Materials segment, for
example, profits could be adversely affected by unanticipated increases in resin and fiberglass material costs and by inability on the part of the businesses to maintain their position in product cost and functionality against competing materials.
The costs in our Fluid Handling and Merchandising Systems segments similarly are affected by fluctuations in the price of metals such as steel. While we have taken initiatives aimed at securing an adequate supply of raw materials at prices which are
favorable to us, if the prices of critical raw materials increase, our operating costs could be negatively affected.
Our ability to obtain
parts and raw materials from our suppliers is uncertain, and any disruptions or delays in our supply chain could negatively affect our results of operations.
Our operations require significant amounts of important parts and raw materials. We are engaged in a continuous, company-wide effort to concentrate our purchases of parts and raw materials on fewer suppliers, and to obtain
parts from suppliers in low-cost countries where possible. As this effort progresses, we are exposed to an increased risk of disruptions to our supply chain, which could have a significant effect on our operating results. In addition, if we are
unable to procure these parts or raw materials, our operations may be disrupted, or we could experience a delay or halt in certain of our manufacturing operations.
We may be unable to identify or to complete acquisitions, or to successfully integrate the businesses we acquire.
We have evaluated, and expect to continue to evaluate, a wide array of potential strategic transactions. Our acquisition program attempts to address the potential risks inherent in assessing the value, strengths, weaknesses,
contingent or other liabilities, systems of internal controls and potential profitability of acquisition candidates, as well as other challenges such as retaining the employees and integrating the operations of the businesses we acquire. Integrating
acquired operations involves significant risks and uncertainties, including:
|
|
Maintenance of uniform standards, controls, policies and procedures; |
|
|
Distraction of managements attention from normal business operations during the integration process; |
|
|
Expenses associated with the integration efforts; and |
|
|
Unidentified issues not discovered in the due diligence process, including legal contingencies. |
There can be no assurance that suitable acquisition opportunities will be available in the future, that we will continue to acquire businesses or that any
business acquired will be integrated successfully or prove profitable, which could adversely impact our growth rate. Our ability to achieve our growth goals depends in part upon our ability to identify and successfully acquire and integrate
companies and businesses at appropriate prices and realize anticipated cost savings. In addition, changes in accounting or regulatory requirements could also adversely impact our ability to consummate acquisitions.
12
PART I / ITEM 1A
We face significant competition which may adversely impact our results of operations and financial position in the future.
While we are a principal competitor in most of our markets, all of our markets are highly competitive. Our competitors in many of our business segments
can be expected in the future to improve technologies, reduce costs and develop and introduce new products, and the ability of our business segments to achieve similar advances will be important to our competitive positions. Competitive pressures,
including those discussed above, could cause one or more of our business segments to lose market share or could result in significant price erosion, either of which could have an adverse effect on our results of operations.
We conduct a substantial portion of our business outside the United States and face risks inherent in non-domestic operations.
Net sales and assets related to our operations outside the United States were 37.8% and 33.3% in 2007, and 37.0% and 31.4% in 2006, respectively, of our
consolidated amounts. These operations and transactions are subject to the risks associated with conducting business internationally, including the risks of currency fluctuations, slower payment of invoices, adverse trade regulations and possible
social, economic and political instability in the countries and regions in which we operate.
We are dependent on key personnel, and we may
not be able to retain our key personnel or hire and retain additional personnel needed for us to sustain and grow our business as planned.
Certain of our business segments and corporate offices are dependent upon highly qualified personnel, and we generally are dependent upon the continued efforts of key management employees. We may have difficulty retaining such
personnel or locating and hiring additional qualified personnel. The loss of the services of any of our key personnel, many of whom are not party to employment agreements with us, or our failure to attract and retain other qualified and experienced
personnel on acceptable terms could impair our ability to successfully sustain and grow our business, which could impact our results of operations in a materially adverse manner.
If our internal controls are found to be ineffective, our financial results or our stock price may be adversely affected.
Our most recent evaluation resulted in our conclusion that as of December 31, 2007, in compliance with Section 404 of the Sarbanes-Oxley Act of 2002, our internal control over financial
reporting was effective. We believe that we currently have adequate internal control procedures in place for future periods; however, if our internal control over financial reporting is found to be ineffective, investors may lose confidence in the
reliability of our financial statements, which may adversely affect our financial results or our stock price.
Specific Risks Relating to Our
Business Segments
Aerospace & Electronics
A significant decrease in demand for air travel or a decline in airline profitability generally could result in reduced aircraft orders and could also cause the airlines to scale back on more of their purchases of repair
parts from our businesses. Our businesses could also be impacted if major aircraft manufacturers, such as Boeing (which represented approximately 13% of the segments revenue in 2007 and 2006), encounter production problems, or if pricing
pressure from aircraft customers causes the manufacturers
to press their suppliers to lower prices. Sales and profits could face erosion if pricing pressure from the competitors increased, if planned
new products were delayed, if finding new aerospace-qualified suppliers grew more difficult, or if required technical personnel became harder to hire and retain. Our Aerospace & Electronics segment results could be below expectations if the
U.S. economy slows, which could cause customers to delay or cancel spare parts or aircraft orders.
A portion of this segments
business is conducted under U.S. government contracts and subcontracts. These contracts are either competitively bid or sole source contracts. Competitively bid contracts are awarded after a formal bid and proposal competition among suppliers. Sole
source contracts are awarded when a single contractor is deemed to have an expertise or technology that is superior to that of competing contractors. A reduction in Congressional appropriations that affect defense spending or the ability of the U.S.
government to terminate our contracts could impact the performance of this business.
Engineered Materials
In our Engineered Materials segment, sales and profits could fall if there were a decline in demand for truck trailers, recreational vehicles
(RVs), industrial or building products for which our businesses produce fiberglass-reinforced panels. We experienced a sharp decline in RV orders about midway through the third quarter of 2006 as the RV industry sharply curtailed
production in response to a fall-off in demand from their customers. This unfavorable trend continued through 2007. The industry generally attributes this downturn to higher gas prices and interest rates and an inventory reduction on dealer lots.
While the short term is uncertain, in the longer term the demographic fundamentals continue to be positive for the growth of RV sales. Profits could also be adversely affected by unanticipated increases in resin and fiberglass material costs, by the
loss of a principal supplier or by any inability on the part of the businesses to maintain their product cost and functionality advantages when compared to competing materials.
We are defending two separate lawsuits brought by customers alleging failure of our fiberglass-reinforced plastic material in RV sidewalls manufactured by such customers. The aggregate damages sought
in these two lawsuits are approximately $13 million in direct costs allegedly incurred by the plaintiffs, as well as other consequential losses allegedly suffered. One of these lawsuits is currently in trial, and is expected to conclude by the end
of February 2008. The other is nearing completion of fact and expert discovery and a trial on that lawsuit is expected to take place in late 2008. We continue to believe that we have valid defenses to the claims raised in both of these lawsuits. We
have given notice of these lawsuits to our insurance carriers and will seek coverage for any liability in accordance with the applicable policies.
13
PART I / ITEM 1B
We are also defending a series of five separate lawsuits, which have now been consolidated, revolving around a fire that occurred in May, 2003 at a chicken processing plant located near Atlanta,
Georgia that destroyed the plant. The aggregate damages demanded by the plaintiff are in excess of $50 million. These lawsuits contend that certain fiberglass-reinforced plastic material manufactured by us that was installed inside the plant was
unsafe in that it acted as an accelerant, causing the fire to spread rapidly, resulting in the total loss of the plant and property. The suits are in the early stages of pre-trial discovery and we believe that we have valid defenses to the
underlying claims raised in these lawsuits. We have given notice of these lawsuits to our insurance carriers, and will seek coverage for any resulting losses. Based on our review of coverage, however, we have determined that we are facing a
potential $25 million gap in insurance coverage, for the layer of insurance which would have provided protection for losses above $25 million but below $50 million. We have initiated certain actions aimed at closing the gap in insurance coverage. If
the plaintiffs in these lawsuits were to prevail at trial and be awarded the full extent of their claimed damages, and the gap in coverage was not closed, the resulting liability could have a material adverse effect on our results of operations and
cash flows in the periods affected.
Merchandising Systems
Results at our businesses could be reduced by unfavorable economic conditions, including inflation and continued increases in fuel costs, delays in launching or supplying new products or an inability
to achieve new product sales objectives, as well unfavorable changes in gaming regulations. Results at our foreign locations have been and will continue to be affected by fluctuations in the value of the Euro, other European currencies and the
Canadian dollar versus the U.S. dollar.
We made four acquisitions in our Merchandising Systems segment in 2006, two of which are in vending
machine manufacturing and two of which manufacture payment systems. The results of this segment could be adversely affected if unexpected problems are experienced in the integration of these businesses. In addition, one of the acquired vending
machine manufacturers is currently experiencing operating losses, and we anticipate that it will take a number of months to implement the necessary changes to business practices of the acquired company in order to return it to profitability.
Fluid Handling
Our
businesses could face increased price competition from larger competitors. Slowing of the economy or major markets could reduce sales and profits, particularly if projects for which these businesses are suppliers or bidders are cancelled or delayed.
Furthermore, as we continue to outsource from international sources, particularly China and other low-cost countries, the risk of supply chain issues increases. At our foreign operations, reported results in U.S. dollar terms could be eroded by an
unanticipated weakening of currency of the respective operations.
Controls
A number of factors could affect our Controls segments results. Lower sales
and earnings could result if our businesses cannot maintain their cost competitiveness, encounter delays in introducing new products or fail to achieve their new product sales objectives. Results could decline because of an unanticipated decline in
demand for the businesses products from the industrial machinery, oil and gas or heavy equipment industries, or from unforeseen product obsolescence.
Item 1B. Unresolved Staff Comments.
None
14
PART I / ITEM 2
Item 2. Properties.
|
|
|
|
|
|
Total Manufacturing Facilities |
|
Number |
|
|
Area (sq.ft.) |
Aerospace & Electronics |
|
|
|
|
|
United States |
|
8 |
|
|
831,000 |
International |
|
3 |
|
|
74,000 |
Engineered Materials |
|
|
|
|
|
United States |
|
10 |
|
|
988,000 |
International |
|
1 |
|
|
31,000 |
Merchandising Systems |
|
|
|
|
|
United States |
|
7 |
|
|
1,163,000 |
International |
|
4 |
|
|
179,000 |
Fluid Handling |
|
|
|
|
|
United States |
|
9 |
|
|
876,000 |
International |
|
19 |
|
|
2,800,000 |
Controls |
|
|
|
|
|
United States |
|
6 |
|
|
232,000 |
International |
|
1 |
|
|
27,000 |
|
|
|
|
|
|
|
|
|
Leased Manufacturing Facilities |
|
Lease Expiring Through |
|
|
Number |
|
|
Area (sq.ft.) |
United States |
|
2012 |
|
|
17 |
|
|
828,000 |
International |
|
2014 |
|
|
13 |
|
|
1,330,000 |
Other Facilities
Aerospace & Electronics
operates four leased service centers, three in the United States and one outside the United States. This segment also operates two leased distribution centers outside the United States.
Engineered Materials operates eight distribution centers; five in the United States, of which four are leased, and three outside the United States, which are all leased. This segment also operates one
leased service center in the United States.
Merchandising Systems operates four service centers; three in the United States, of which two
are leased, and one outside the United States which is leased. This segment also operates 13 distribution centers; five in the United States, of which four are leased, and eight outside the United States, of which seven are leased.
Fluid Handling operates 31 service centers; eight in the United States, of which six are leased, and 23 outside the United States, of which 19 are leased.
This segment also operates 42 distribution centers; two in the United States, of which one is leased, and 40 outside the United States, of which 28 are leased.
Controls
operates three leased service centers in the United States.
In our opinion, these properties have been well maintained, are in sound
operating condition and contain all necessary equipment and facilities for their intended purposes.
Item 3. Legal Proceedings.
Discussion of legal matters is incorporated by reference to Part II, Item 8,
Note 10, Commitments and Contingencies, in the Notes to the Consolidated Financial Statements.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security
holders during the fourth quarter of 2007.
15
PART II / ITEM 5
Part II
Item 5. Market for the Registrants Common Equity and Related Stockholder Matters.
Our common stock is
traded on the New York Stock Exchange (NYSE) under the symbol CR. The following are the high and low sale prices as reported on the NYSE Composite Tape and the quarterly dividends declared per share for each quarter of 2007 and 2006.
MARKET AND DIVIDEND INFORMATION CRANE CO. COMMON SHARES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New York Stock Exchange Composite Price per Share |
|
|
Dividends per Share |
|
Quarter |
|
2007 High |
|
|
2007 Low |
|
|
2006 High |
|
|
2006 Low |
|
|
2007 |
|
|
2006 |
|
First |
|
$ |
40.84 |
|
|
$ |
36.87 |
|
|
$ |
41.27 |
|
|
$ |
34.61 |
|
|
$ |
0.150 |
|
|
$ |
0.125 |
|
Second |
|
|
45.29 |
|
|
|
41.56 |
|
|
|
45.75 |
|
|
|
36.50 |
|
|
|
0.150 |
|
|
|
0.125 |
|
Third |
|
|
48.82 |
|
|
|
40.68 |
|
|
|
42.78 |
|
|
|
36.50 |
|
|
|
0.180 |
|
|
|
0.150 |
|
Fourth |
|
|
48.41 |
|
|
|
43.49 |
|
|
|
43.85 |
|
|
|
35.40 |
|
|
|
0.180 |
|
|
|
0.150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.660 |
|
|
$ |
0.550 |
|
On December 31, 2007 there were approximately 3,525 holders of record of Crane Co. common stock. |
|
The following table summarizes our share repurchases during the year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of shares purchased |
|
|
Average Price paid per share |
|
|
Total Number of shares purchased as part of publicly announced plans or
programs |
|
|
Maximum number (or approximate dollar value) of shares that may yet be
purchased under the plans or programs |
|
January 1 - 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
February 1 - 28 |
|
498,900 |
|
|
$ |
39.37 |
|
|
|
|
|
|
|
March 1 - 31 |
|
521,970 |
|
|
$ |
39.00 |
|
|
|
|
|
|
|
Total January 1 - March 31, 2007 |
|
1,020,870 |
|
|
$ |
39.18 |
|
|
|
|
|
|
|
April 1 - 30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
May 1 - 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
June 1 - 30 |
|
226,260 |
|
|
$ |
44.20 |
|
|
|
|
|
|
|
Total April 1 - June 30, 2007 |
|
226,260 |
|
|
$ |
44.20 |
|
|
|
|
|
|
|
July 1 - 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
August 1 - 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
September 1 - 30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total July 1 - September 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1 - 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1 - 30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
December 1 - 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total October 1 - December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total January 1 - December 31, 2007 |
|
1,247,130 |
|
|
$ |
40.09 |
|
|
|
|
|
|
|
The table above only includes the open-market repurchases of our common stock in 2007. We also
routinely receive shares of our common stock as payment for stock option exercises and the withholding taxes due on stock option exercises and restricted stock awards from stock-based compensation program participants.
16
PART II / ITEM 6
Item 6. Selected Financial Data.
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
(in thousands, except per share data) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Net sales |
|
$ |
2,619,171 |
|
|
$ |
2,256,889 |
|
|
$ |
2,061,249 |
|
|
$ |
1,890,335 |
|
|
$ |
1,635,991 |
|
Operating profit (loss) (a) |
|
|
(107,656 |
) |
|
|
247,936 |
|
|
|
213,622 |
|
|
|
(161,490 |
) |
|
|
169,012 |
|
Interest expense |
|
|
(27,404 |
) |
|
|
(23,015 |
) |
|
|
(22,416 |
) |
|
|
(23,161 |
) |
|
|
(20,010 |
) |
Income (loss) before taxes |
|
|
(118,895 |
) |
|
|
239,334 |
|
|
|
196,523 |
|
|
|
(168,170 |
) |
|
|
151,164 |
|
Provision (benefit) for income taxes (b) |
|
|
(56,553 |
) |
|
|
73,447 |
|
|
|
60,486 |
|
|
|
(62,749 |
) |
|
|
46,861 |
|
Net income (loss) (c) |
|
|
(62,342 |
) |
|
|
165,887 |
|
|
|
136,037 |
|
|
|
(105,421 |
) |
|
|
104,303 |
|
Net income (loss) per diluted share |
|
|
(1.04 |
) |
|
|
2.67 |
|
|
|
2.25 |
|
|
|
(1.78 |
) |
|
|
1.75 |
|
Cash dividends per common share |
|
|
0.66 |
|
|
|
0.55 |
|
|
|
0.45 |
|
|
|
0.40 |
|
|
|
0.40 |
|
Total assets (d) |
|
|
2,877,292 |
|
|
|
2,436,846 |
|
|
|
2,145,199 |
|
|
|
2,118,697 |
|
|
|
1,814,558 |
|
Long-term debt (d) |
|
|
398,301 |
|
|
|
398,122 |
|
|
|
298,961 |
|
|
|
298,781 |
|
|
|
298,643 |
|
(a) |
Includes 1) asbestos provisions of $390,150 and $307,794 in 2007 and 2004, respectively, 2) environmental provisions of $18,912 and $40,000 in 2007 and 2004, respectively, 3)
foundry restructuring gain, net, of $19,083 in 2007, 4) governmental settlement of $7,600 in 2007 and 5) an environmental reimbursement of $4,900 in 2006. |
(b) |
Includes the tax effect of items cited in notes ( a ) and ( c ) as well as a $10,400 tax provision for the potential repatriation of approximately $194,000 of foreign cash.
|
(c) |
Includes the effect of items cited in note ( a ) and a gain on sale of a joint venture of $4,144 in 2007. |
(d) |
We previously classified deferred financing costs as a reduction of Long-term debt. Commencing June 2007, we began classifying such costs in Other assets. For the years
ended December 31, 2006, 2005, 2004, and 2003 we revised the consolidated financial statements to correct this error by restating $6,362, $5,713, $2,189, and $2,782, respectively, of such deferred financing costs from Long-term debt to Other
assets. There was no effect on operating income as a result of this restatement. |
17
PART II / ITEM 7
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
We are a
diversified manufacturer of highly engineered industrial products. Our business consists of five segments: Aerospace & Electronics, Engineered Materials, Merchandising Systems, Fluid Handling and Controls. Our primary markets are aerospace,
defense electronics, recreational vehicle, transportation, automated merchandising, chemical, pharmaceutical, oil, gas and power, nuclear, building services and utilities.
During 2007, we completed two acquisitions at a total cost of approximately $65 million. In September 2007, we acquired the composite panel business of Owens Corning, which produces, among other
products, high gloss fiberglass reinforced plastic panels used in the manufacture of recreational vehicles. In August 2007, we acquired the Mobile Rugged Business of Kontron America, Inc., which produces computers, electronics and flat panel
displays for harsh environment applications.
In December 2007, together with our partner, Emerson Electric Co., we sold the Industrial
Motion Control, LLC (IMC) joint venture, generating proceeds to us of $33 million. Our investment in IMC was approximately $29 million and we recorded dividend income in 2007, 2006 and 2005 of $5.3 million, $5.6 million and $6.0 million,
respectively.
Items Affecting Comparability of Reported Results
The comparability of our operating results for the years ended December 31, 2007, 2006 and 2005 is affected by the following significant items:
Asbestos Charge
With the assistance of outside experts, during the third quarter of 2007,
we updated and extended our estimate of our asbestos liability, including the costs of settlement or indemnity payments and defense costs relating to currently pending claims and future claims projected to be filed against us through 2017. Our
previous estimate was for asbestos claims filed through 2011. As a result of this updated estimate, we recorded an additional pre-tax provision of $390.2 million during the third quarter of 2007 (this amount includes a corresponding insurance
receivable). Our decision to take this action was based on several factors, including:
|
|
the number of asbestos claims being filed against us has moderated substantially over the past several years, and in our opinion, the outlook for
asbestos claims expected to be filed and resolved in the forecast period should be reasonably stable; |
|
|
the stable outlook for future claims is particularly true for mesothelioma claims, which although constituting only 11% of our asbestos claims
account for approximately 85% of our aggregate settlement and defense costs over the past five years; |
|
|
federal legislation that would significantly change the nature of asbestos litigation failed to pass in 2006, and in our opinion, the prospects for
such legislation at the federal level are remote; |
|
|
there have been significant actions taken by certain state legislatures and courts over the past several years that have reduced the number and
types of claims that can proceed to trial, which has been a significant factor in stabilizing the asbestos claim activity; and |
|
|
we have now entered into coverage-in-place agreements with a majority of our excess insurers, which enables us to project a more stable relationship
between settlement and defense costs paid by us and reimbursements from our insurers. |
Taking all of these factors into
account, we believe that we can reasonably estimate the asbestos liability for pending claims and future claims to be filed through 2017. While it is probable that we will incur additional charges for asbestos liabilities and defense costs in excess
of the amounts currently provided, we do not believe that any such amount can be reasonably estimated beyond 2017. Accordingly, no accrual has been recorded for any costs which may be incurred for claims made subsequent to 2017. The liability was
$1,027 million as of December 31, 2007.
Environmental Charge
For environmental matters, we record a liability for estimated remediation costs when it is probable that we will be responsible for such costs and they can be reasonably estimated. Generally, third
party specialists assist in the estimation of remediation costs. The environmental remediation liability at December 31, 2007 is substantially all for the former manufacturing site in Goodyear, Arizona (the Site) discussed below.
The Site was operated by UniDynamics/Phoenix, Inc. (UPI), which became an indirect subsidiary of ours in 1985 when we acquired
UPIs parent company, UniDynamics Corporation. UPI manufactured explosive and pyrotechnic compounds, including components for critical military programs, for the U.S. government at the Site from 1962 to 1993, under contracts with the Department
of Defense and other government agencies and certain of their prime contractors. No manufacturing operations have been conducted at the Site since 1994. The Site was placed on the National Priorities List in 1983, and is now part of the
Phoenix-Goodyear Airport North Superfund site. In 1990, the U.S. Environmental Protection Agency (EPA) issued administrative orders requiring UPI to design and carry out certain remedial actions, which UPI has done. Groundwater
extraction and treatment systems have been in operation at the Site since 1994. A soil vapor extraction system was in operation from 1994 to 1998, was restarted in 2004, and is currently in operation. On July 26, 2006, we entered into a consent
decree with the EPA with respect to the Site providing for, among other things, a work plan for further investigation and remediation activities at the Site. We recorded a liability in 2004 for estimated costs through 2014 after reaching substantial
agreement on the scope of work with the EPA. At the end of September 2007, the liability totaled $15.4 million. During the fourth quarter of 2007, we and our technical advisors determined that changing groundwater flow rates and contaminant plume
direction at the Site required additional extraction systems as well as modifications and upgrades of the existing systems. In consultation with our technical advisors, we prepared a forecast of the expenditures required for these new and upgraded
systems as well as the costs of operation over the forecast period through 2014. Taking these additional costs into consideration, our estimated liability for the costs of such activities through 2014 was $41.5 million as of December 31, 2007,
which is included in accrued liabilities and other liabilities in our consolidated balance sheet.
18
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On July 31, 2006, we entered into a consent decree with the U.S. Department of Justice (DOJ) on behalf of the Department of Defense and the Department of Energy pursuant to which, among other things, the U.S.
Government reimburses us for 21 percent of qualifying costs of investigation and remediation activities at the Site. As of December 31, 2007, we have recorded a receivable of $7.8 million for the expected reimbursements from the U.S. Government
in respect of the aggregate liability as at that date.
Foundry Restructuring
During the fourth quarter of 2007, our Fluid Handling segment commenced implementation of a restructuring program designed to further enhance operating margins. The planned actions include ceasing the
manufacture of malleable iron and bronze fittings at foundry operating facilities in the UK and Canada, respectively, and exiting both facilities and transferring production to China (the Foundry Restructuring). The Foundry Restructuring
is expected to be substantially completed by the end of 2008. The program primarily includes workforce reduction expenses and facility exit costs, all of which are expected to be cash costs. We expect to incur total pre-tax charges, upon program
completion, of approximately $14 million. Included in this amount, in December 2007, we recognized workforce reduction charges of approximately $9 million. Also in December 2007, pursuant to this program, we sold our foundry facility in the UK,
generating a pre-tax gain of approximately $28 million. We are leasing back part of the property for up to two years until the ongoing manufacturing and office activities are transferred.
Civil False Claims Settlement
During the
third quarter of 2007, we recorded a $7.6 million charge related to a civil false claims proceeding by the U.S. Government.
We were
engaged in discussions with attorneys from the Civil Division of the Department of Justice (DOJ) for over a year regarding allegations that certain valves sold by our Crane Valves North America unit (CVNA) to private
customers that ultimately were delivered to U.S. military agencies did not conform to contractual specifications relating to the place of manufacture and the origin of component parts. The DOJs allegations originated with a qui tam
complaint filed under seal by a former CVNA employee. The DOJ ultimately intervened in that case, and on March 31, 2007, filed a complaint against us in the United States District Court for the Southern District of Texas seeking unspecified
damages for violations of the False Claims Act, and other common law claims. The complaint alleged that CVNA failed to notify the correct U.S. military agency when our manufacturing location for Mil-Spec valves listed on the Qualified Products List
was moved from Long Beach, California to Conroe, Texas in 2003. As a result, the complaint alleged that the valves manufactured in Texas were not properly listed on the Qualified Product List as required by the contract specifications.
We received a letter from the Department of the Navy on February 14, 2007, conveying the Navys concerns about the Qualified Products List
allegations raised by the DOJ. The Department of the Navy advised us that, if true, these allegations could potentially result in us and our subsidiaries and affiliates being suspended and/or debarred from doing business with the U.S. Government.
We cooperated with the Governments investigation of these matters and executed a settlement agreement with the DOJ providing for, among other
things, the payment of $7.5 million to the United States and $125,000 to pay the legal fees of the former employee who filed the qui tam complaint. In addition, we negotiated an administrative agreement with the Department of the Navy for a
term of three years pursuant to which we will implement certain changes to our compliance programs and report to the Navy on a quarterly basis. These agreements were executed and became effective on July 27, 2007. We acknowledged the failure to
notify the Navy and update the Qualified Products List but we denied that this omission violated the False Claims Act. The failure to notify the Navy was unintentional and there was no misconduct by our personnel. We determined to settle this matter
to avoid the risks of costly and protracted legal proceedings.
Repatriation of Foreign Earnings
During the fourth quarter of 2007, we concluded that our capital balances overseas were in excess of our projected future needs outside the U.S. As a
result, we established a $10.4 million deferred tax liability related to the estimated additional U.S. federal and state income taxes due upon the ultimate repatriation of $194 million of such capital balances.
19
PART II / ITEM 7
In the pages that follow, we discuss results, along with the events, trends,
market dynamics and management initiatives that influenced them.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
2007 vs 2006 Favorable / (Unfavorable) Change |
|
|
2006 vs 2005 Favorable / (Unfavorable) Change |
|
(in millions except %) |
|
2007 |
|
|
2006 |
|
|
2005* |
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
Net Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace & Electronics |
|
$ |
629 |
|
|
$ |
566 |
|
|
$ |
537 |
|
|
$ |
63 |
|
|
11 |
|
|
$ |
29 |
|
|
5 |
|
Engineered Materials |
|
|
331 |
|
|
|
309 |
|
|
|
305 |
|
|
|
22 |
|
|
7 |
|
|
|
4 |
|
|
1 |
|
Merchandising Systems |
|
|
388 |
|
|
|
258 |
|
|
|
166 |
|
|
|
130 |
|
|
50 |
|
|
|
92 |
|
|
55 |
|
Fluid Handling |
|
|
1,136 |
|
|
|
1,000 |
|
|
|
937 |
|
|
|
136 |
|
|
14 |
|
|
|
63 |
|
|
7 |
|
Controls |
|
|
135 |
|
|
|
124 |
|
|
|
117 |
|
|
|
11 |
|
|
9 |
|
|
|
7 |
|
|
6 |
|
Elimination |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
Total Net Sales |
|
$ |
2,619 |
|
|
$ |
2,257 |
|
|
$ |
2,061 |
|
|
$ |
362 |
|
|
16 |
|
|
$ |
196 |
|
|
9 |
|
Sales Growth: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core business |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
163 |
|
|
7 |
|
|
$ |
80 |
|
|
4 |
|
Acquisitions/dispostions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134 |
|
|
6 |
|
|
|
96 |
|
|
4 |
|
Foreign Exchange |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65 |
|
|
3 |
|
|
|
20 |
|
|
1 |
|
Total Sales Growth |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
362 |
|
|
16 |
|
|
$ |
196 |
|
|
9 |
|
Operating Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace & Electronics |
|
$ |
86 |
|
|
$ |
99 |
|
|
$ |
85 |
|
|
$ |
(13 |
) |
|
(13 |
) |
|
$ |
14 |
|
|
17 |
|
Engineered Materials |
|
|
58 |
|
|
|
50 |
|
|
|
63 |
|
|
|
8 |
|
|
16 |
|
|
|
(13 |
) |
|
(20 |
) |
Merchandising Systems |
|
|
40 |
|
|
|
18 |
|
|
|
13 |
|
|
|
22 |
|
|
122 |
|
|
|
5 |
|
|
37 |
|
Fluid Handling, before Foundry Restructuring |
|
|
140 |
|
|
|
107 |
|
|
|
76 |
|
|
|
33 |
|
|
31 |
|
|
|
31 |
|
|
41 |
|
Foundry Restructuring |
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
Fluid Handling |
|
|
159 |
|
|
|
107 |
|
|
|
76 |
|
|
|
52 |
|
|
49 |
|
|
|
31 |
|
|
41 |
|
Controls |
|
|
10 |
|
|
|
10 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
2 |
|
|
21 |
|
Elimination |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Operating Profit** |
|
$ |
353 |
|
|
$ |
284 |
|
|
$ |
245 |
|
|
$ |
69 |
|
|
24 |
|
|
$ |
39 |
|
|
16 |
|
Corporate Expense |
|
|
(52 |
) |
|
|
(36 |
) |
|
|
(31 |
) |
|
|
(16 |
) |
|
(44 |
) |
|
|
(5 |
) |
|
(15 |
) |
CorporateAsbestos charge |
|
|
(390 |
) |
|
|
|
|
|
|
|
|
|
|
(390 |
) |
|
|
|
|
|
|
|
|
|
|
CorporateEnvironmental charge |
|
|
(19 |
) |
|
|
|
|
|
|
|
|
|
|
(19 |
) |
|
|
|
|
|
|
|
|
|
|
Total Operating Profit |
|
$ |
(108 |
) |
|
$ |
248 |
|
|
$ |
214 |
|
|
$ |
(356 |
) |
|
(144 |
) |
|
$ |
34 |
|
|
16 |
|
Operating Margin % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace & Electronics |
|
|
13.7 |
% |
|
|
17.5 |
|
|
|
15.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineered Materials |
|
|
17.6 |
|
|
|
16.2 |
|
|
|
20.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandising Systems |
|
|
10.2 |
|
|
|
6.8 |
|
|
|
7.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fluid Handling, before Foundry Restructuring |
|
|
12.3 |
|
|
|
10.7 |
|
|
|
8.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Controls |
|
|
7.3 |
|
|
|
8.1 |
|
|
|
7.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elimination |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Operating Margin %** |
|
|
13.5 |
|
|
|
12.6 |
|
|
|
11.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Margin % |
|
|
(4.1 |
) |
|
|
11.0 |
|
|
|
10.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
Reclassified to include the movement of Wireless Monitoring from our Aerospace & Electronics segment and Environmental from our Fluid Handling segment to our Controls
segment. These changes did not have a significant effect on segment results. (See segment information in Note 14 in Notes to Consolidated Financial Statements.) |
** |
The disclosure of total segment operating profit provides supplemental information to assist management and investors in analyzing our profitability but is considered a
non-GAAP financial measure when presented in any context other than the required reconciliation to operating profit in accordance with Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information. We consider total segment operating profit a useful measure of operating performance which should be considered in addition to, but not a substitute for, other measures reported in accordance with generally accepted
accounting principles. |
20
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2007
Compared with 2006
Sales in 2007 increased $362 million, or 16%, to $2.619 billion compared with $2.257 billion in 2006. The sales increase
was primarily due to core business growth of $163 million (7%) and revenue from net acquisitions and dispositions of $134 million (6%). Sales growth also included $65 million (3%) from favorable foreign exchange. Our Aerospace &
Electronics segment reported a sales increase of $63 million, or 11%. Excluding Resistoflex-Aerospace which was divested in May 2006, segment sales were up 12%. Our Aerospace Group had strong commercial OEM (Original Equipment Manufacturer) sales
and aftermarket revenue. Our Electronics Group experienced a 5% sales increase year over year. In our Engineered Materials segment, demand for fiberglass-reinforced panels from the recreational vehicle and transportation trailer markets declined 9%
due to lower industry demand. The Merchandising Systems segment showed a $130 million revenue increase in 2007 mainly from the four acquisitions made in 2006. Our Fluid Handling segments sales increased $136 million, or 14%, including a net
decline of $10 million related to disposed businesses. Excluding dispositions, this segments sales increased $147 million, or 15%, $97 million (10%) from core growth reflecting the strong conditions in general industrial markets and $50
million (5%) from favorable foreign exchange.
Total segment operating profit was $69 million, or $24% higher, in 2007 when compared to
2006. Total Fluid Handling segment operating profit was $52 million higher, or 49%, in 2007 compared to the prior year. As a percent of sales, total segment operating margins increased to 13.5% in 2007, compared to 12.6% in 2006. The increase over
the prior year was driven primarily by improvement in our Fluid Handling and Merchandising Systems segments. Fluid Handling benefited from:
|
|
successfully leveraging higher sales volume; |
|
|
the net gain of $19 million related to the consolidation of foundry operations; and |
|
|
the favorable impact of changes in foreign exchange rates. |
Merchandising Systems benefited from continued strong global demand for payment solutions products and, to a lesser extent operating efficiencies gained through the integration of the AP and
Dixie-Narco acquisitions and share gains in European vending. Engineered Materials benefited from the full year profit contribution from the September 2006 Noble acquisition and customer price increases. These improvements were partially offset by
unfavorable operating margins in our Aerospace & Electronics segment due primarily to increased engineering expenses related to new products for major programs such as the Boeing 787 and the Airbus A400M.
An operating loss of $108 million resulted in 2007, compared to an operating profit of $248 million in 2006. 2007 operating results included:
|
|
a provision of $390.2 million ($254 million, after-tax) to update and extend our estimate of our asbestos liability; |
|
|
an environmental provision of $19 million ($12.3 million, after-tax) related to our expected liability at our Goodyear, Arizona Superfund Site; and
|
|
|
a $7.6 million provision ($5.4 million, after-tax) relating to the previously disclosed civil false claims proceeding by the U.S. Government.
|
The 2007 net loss was $62.3 million, or $1.04 per share, as compared with net income of $165.9 million, or $2.67 per
share, in 2006. The 2007 net loss included:
|
|
the asbestos charge ($254 million, or $4.22 per share); |
|
|
the environmental provision ($12.3 million, or $0.20 per share); |
|
|
the civil false claims settlement ($5.4 million, or $0.09 per share); and |
|
|
the additional tax provision for undistributed foreign earnings ($10.4 million, or $0.17 per share). |
These amounts were partially offset by the net gain resulting from the foundry restructuring ($18.4 million, or $0.31 per share) and the gain on the sale
of the IMC joint venture ($5.8 million, or $0.10 per share).
2006 Compared with 2005
Sales in 2006 increased $196 million, or 9%, to $2.257 billion compared with $2.061 billion in 2005. The sales increase was primarily due to core business
growth of $80 million (4%) and revenue from net acquisitions and dispositions of $96 million (4%). Sales growth also included $20 million (1%) from favorable foreign exchange. Our Aerospace & Electronics segment reported a sales
increase of $29 million, or 5%. Excluding Resistoflex-Aerospace which was divested in May 2006, segment sales were up 8%. Our Aerospace Group had strong commercial OEM sales and aftermarket revenue. Our Electronics Group experienced flat sales year
over year. In our Engineered Materials segment, demand for fiberglass-reinforced panels from the recreational vehicle and transportation trailer markets was up slightly for the year. Our Merchandising Systems segment showed a $92 million revenue
increase in 2006 mainly from the four acquisitions made during the year. Excluding acquisitions, Vending Solutions revenue declined reflecting the weak vending machine market conditions throughout 2006 which appeared to stabilize at the end of the
year. Our Fluid Handling segments sales increased $63 million, or 7%, including a net decline of $12 million from disposed and acquired businesses. Excluding dispositions and acquisitions, this segments sales increased $75 million, or
8%, $57 million (6%) from core growth and $18 million (2%) from favorable foreign exchange reflecting the strong conditions in general industrial markets.
Total operating profit was $34 million higher, or 16%, in 2006 than in the prior year, largely the result of favorable performance in the Fluid Handling segment and the Aerospace group. All segments except Engineered
Materials showed improvement. Fluid Handling benefited from operational improvements, the leverage on higher sales volume and price increases in 2006. In our Aerospace and Electronics segment, our Electronics Group operating profit was down
slightly, but the Aerospace Group experienced a 25% profit improvement from the strong increase in commercial OEM and aftermarket sales. Our Merchandising Systems segments profit from 2006 acquisitions was somewhat offset by lower volume on
traditional vending products.
21
PART II / ITEM 7
Operating margins improved to 11% in 2006 from 10.4% in 2005. This increase was mostly due to the Fluid Handling segments strong
performance and Aerospace Groups favorable volume and mix. The Aerospace Group mix of OEM/aftermarket was improved year over year reflecting program wins for modernization and upgrade and initial provisioning on new aircraft. These
improvements were somewhat offset by the unfavorable margins at Engineered Materials largely from the cost of 2006 customer assistance payments and, in the Electronics Group, from the costs associated with increased engineering investment and the
mix of lower-margin contracts.
Miscellaneous income was up $6 million pretax in 2006 from 2005 primarily from the $8 million net gain from
the sale of Resistoflex Aerospace and Westad.
Net income was $166 million ($2.67 per diluted share) in 2006, an increase of 22%, as
compared with $136 million ($2.25 per diluted share) in 2005.
Aerospace & Electronics
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
2007 |
|
2006 |
|
2005* |
Net sales |
|
$ |
629 |
|
$ |
566 |
|
$ |
537 |
Operating Profit |
|
|
86 |
|
|
99 |
|
|
85 |
Assets |
|
|
467 |
|
|
469 |
|
|
475 |
Operating Margin |
|
|
13.7% |
|
|
17.5% |
|
|
15.8% |
* |
Reclassified to reflect the movement of the Wireless Monitoring to the Controls segment. |
(See segment information in Note 14 to the Consolidated Financial Statements.)
2007 Compared with 2006. Sales of our Aerospace & Electronics segment increased $63 million, or 11%, in 2007 to $629
million. The sales growth in this segment was primarily attributable to performance in the Aerospace Group. The Aerospace & Electronics segments operating profit decreased $13 million, or 13%, in 2007. The decline in operating profit
was driven by substantially higher engineering expenses in the Aerospace Group, primarily related to the development of new products for major programs such as the Boeing 787 and Airbus A400M. The operating margin for the segment was 13.7% in 2007
compared to 17.5% in 2006.
Aerospace Group sales increased 14% from $369 million in 2006 to $421 million in 2007. Backlog at
December 31, 2007 rose 3% to $241 million from December 31, 2006. The increase in sales and order backlog is attributable to continued strong global demand in the aerospace environment. The commercial market accounted for approximately 83%
of Aerospace Group sales in 2007, while sales to the military market were approximately 17% of the total sales. Sales in 2007 by the Groups five solution sets were as follows: Landing Systems, 28%; Sensing and Utility Systems, 26%; Fluid
Management, 22%; Aircraft Electrical Power, 10%; and Cabin, 14%.
Our Aerospace Groups sales increased in 2007 due to higher OEM
volumes which were up 18% to $259 million from $220 million in 2006 and, to a lesser extent, aftermarket volumes which increased 9% to $162 million in 2007 from $148 million in 2006. Higher sales were fueled by continued strong growth in the
aerospace industry. Sales to OEMs were 62% of the total in 2007, compared to 60% in 2006. The strong 2007 aircraft build rate and stronger cabin OEM demand resulting, in part from schedule slides from 2006, were
contributing factors in overall growth. Successful modernization and upgrade programs and repair and overhaul for the existing aircraft fleet
and higher initial provisioning for new aircraft placed in service resulted in strong aftermarket performance, although at a slower pace than the increase in sales in commercial OEM products.
Our Aerospace Group 2007 operating profit decreased 16% over the prior year as the higher sales volume was more than offset by significantly higher
engineering spending and, to a lesser extent, less favorable aftermarket/OEM mix.
In 2007, engineering expenses of $73 million increased
approximately 70% or $30 million over the prior year. The Aerospace Group continued to invest engineering resources in new technologies and markets with an emphasis on products that improve safety and/or reduce operating costs. The significant
investment in 2007 was primarily related to the development of new products for major OEM programs, including the Boeing 787 and Airbus A400M. In addition, to a lesser extent, continued investments in wireless technologies and AirWeighs
(AirWeighs) contributed to the increase in engineering expenses over the prior year.
Working capital as a percentage of sales
was 22.9% in 2007, compared to 24.4% in 2006. The improvement over the prior year was driven primarily by improved days sales outstanding and days payable outstanding.
Electronics Group sales increased 5% from $197 million in 2006 to $208 million in 2007. Our Electronics Group was favorably impacted by continued defense electronics spending, with major platforms
carrying more mission payloads requiring products with higher power, increased efficiency and smaller packaging. In addition, demand in the medical market continued to increase. Operating profit was approximately the same as the prior year as
the higher sales volumes were offset by higher engineering investment and higher program costs on certain long-term contracts. At December 31, 2007, Electronics Group backlog was down 6% from prior year levels.
Electronics Group sales by market in 2007 were as follows: military/defense, 64%; commercial aerospace, 26%; medical, 7%; and space, 3%. Sales
in 2007 by the Groups solution sets were as follows: Power, 64%; Microwave Systems, 22%; Microelectronics, 9%; and Electronic Manufacturing Services, 5%.
Power Solutions revenue increased in 2007, up 4% from 2006. Operating profit margins in Power Solutions experienced a moderate decline due to increased engineering expenses on commercial aerospace programs as well
as margin erosion resulting from higher program costs on certain long-term contracts. At December 31, 2007, the backlog was down 10% from the prior year.
Microwave Systems Solutions 2007 revenues were approximately 2% higher than 2006. Operating profit increased 28% from 2006, primarily resulting from higher margins realized on microwave component part sales.
Microelectronics Solutions 2007 revenues were approximately 36% higher than 2006, which was substantially due to key customer account
initiatives which, in turn, increased electronic component sales for implantable biomedical devices.
Electronic Manufacturing Services
Solution supports defense customers with engineered and build-to-print electronics manufacturing services. Our Electronic Manufacturing Services
22
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Solutions 2007 sales were down slightly and operating results were generally flat compared to the prior year. Notably, at December 31,
2007, the backlog was up 146% from 2006. This solution set is expected to benefit from an increasing industry trend to outsource circuit card assemblies to experienced defense electronics businesses.
Working capital as a percentage of sales was 26.6% in 2007, compared to 30.6% in 2006. The improvement over the prior year was driven primarily by
improved days in inventory and days sales outstanding.
2006 Compared with 2005
. Sales of the Aerospace & Electronics segment increased $29 million, or 5%, in 2006 to $566 million including a decline of $10 million from the May 2006 sale of
Resistoflex-Aerospace. The sales growth of this segment was entirely from the results of the Aerospace Group. The Aerospace & Electronics operating profit increase was $14 million, or 17%, in 2006. Aerospace Group operating profit increased
significantly on higher volume, favorable OEM/aftermarket mix and productivity improvements, while Electronics operating profit was down largely from reduced contract profitability and higher engineering investments. The operating margin for the
segment was 17.5% in 2006 compared to 15.8% in 2005.
Aerospace Group sales increased 9% from $340 million in 2005 to $369 million in 2006.
Resistoflex-Aerospace sales were $6.0 million during 2006 for the period through the May divestiture compared with $16.0 million in annual revenue in 2005. Aerospace Group sales increased 12% excluding Resistoflex-Aerospace. Backlog at
December 31, 2006 rose 16% (21% excluding Resistoflex Aerospace) to $235 million from December 31, 2005 due to strong program wins in the favorable aerospace environment.
The commercial market accounted for about 83% of Aerospace Group sales in 2006, while sales to the military market were approximately 17% of the total sales. Sales in 2006 by the Groups five
solution sets were as follows: Landing Systems, 30%; Sensing and Utility Systems, 24%; Fluid Management, 25%; Aircraft Electrical Power, 9%; and Cabin, 12%.
The Aerospace Groups sales increased due to higher commercial OEM and aftermarket volumes in 2006. Higher sales of commercial OEM and aftermarket products were fueled by the strong growth in the aerospace industry with
a near-record level of commercial and a record level of business jet aircraft builds in 2006. Sales to OEM were 60% of the total in 2006 compared with 62% in 2005. The strong 2006 aircraft build rate along with our program wins was a significant
factor in this overall growth. Successful modernization and upgrade programs and repair and overhaul for the existing aircraft fleet and higher initial provisioning for new aircraft placed in service resulted in the strong aftermarket performance.
The Aerospace Group 2006 operating profit increased 25% over the prior year from the higher volume and improved aftermarket/OEM mix. In
addition, the Aerospace Group benefited in 2006 from lower costs from site consolidation and higher capacity utilization which was partly offset by a higher investment in engineering.
In 2006, engineering development costs increased approximately 18% over prior-year levels. The Aerospace Group continued to invest engineering resources in new technology and new markets with an
emphasis on products that improve safety and /or reduce operating costs. The Aerospace Group continued to invest
significantly for both short- and long-term growth. This included short-development cycle investment in modernization and upgrade programs
using existing, off-the-shelf products to improve safety and operating costs for in-service aircraft. Long-development cycle investments were for existing products on new aircraft platforms, the upgrade of current customers and displacement of
incumbents on existing aircraft, as well as new products for both in-service aircraft and new aircraft platforms including wireless technologies and AirWeighs. Our wireless SmartStem System introduced in 2005 replaces the existing valve stem in an
aircraft wheel with a radio frequency-equipped valve stem capability for communicating tire pressure, temperature and other stored data wirelessly. The ease of use of the SmartStem System reduces labor costs and helps in keeping tires properly
inflated extending tire life. The AirWeighs system converts landing gear struts into scales that measure an aircrafts weight and determine the center of gravity in seconds, versus the older method that calculates this information using average
passenger weights. Automatically measuring aircraft weight and center of gravity information improves airline operations and enhances aircraft performance and safety.
Improved working capital levels were demonstrated by the Aerospace Groups quicker inventory turns, improved days sales outstanding for receivables and overall lower working capital as a
percentage of sales at 24.4% in 2006 compared with 24.9% in 2005.
In 2006, Electronics Group sales of $197 million were about even with
2005 sales. The Electronics Group was favorably impacted by the strength of the network-centric warfare defense market in replacement and modification programs which helped to overcome revenue reductions in some heritage markets, particularly the
contract manufacturing business (Electronic Manufacturing Services Solutions). Operating profit declined by $1 million from reduced contract profitability and higher engineering investment.
Electronics Group sales by market in 2006 were as follows: military/defense 67%; commercial aerospace 26%; medical 5%; space 2%. Sales in 2006 by the
Groups solution sets were as follows: Power, 65%; Microwave Systems, 22%; Microelectronics, 7%; and Electronic Manufacturing Services, 6%.
Power Solutions revenue was strong in 2006, up 13% from 2005. Operating profit margins in Power Solutions declined by 4% because of increased investment in research and development on commercial aerospace programs as well as
margin erosion from higher program costs on certain contracts. The markets for Power products showed good strength in 2006. Commercial aerospace production gained momentum and traditional military/defense customers pursued modernization and upgrade
programs for existing platforms and remained focused on aircraft maintenance as new aircraft acquisitions slipped out into future years. At December 31, 2006, the backlog was up 3% from prior-year levels.
Microwave Systems Solutions 2006 revenues were approximately 8% lower than 2005. The markets for Microwave products showed softness in 2006 as
defense operations and maintenance logistic budgets shifted to fund the war on terrorism. Operating profit declined 8% from 2005 from the impact of the lower volume and higher mix of lower-margin contracts partly offset by emphasis on spending
reductions and improved program performance. At December 31, 2006, the backlog was down 5% as compared to year-end 2005.
23
PART II / ITEM 7
Microelectronics Solutions supports biomedical and commercial customers with unique solutions to their requirements. Microelectronics experienced strong growth in electronics for implantable biomedical
devices in 2006 and is pursing defense microelectronics applications for future growth opportunities as well. Backlog at December 31, 2006 was 20% above prior year levels.
Electronic Manufacturing Services Solutions supports defense customers with engineered and build-to-print electronics manufacturing services. The Electronic Manufacturing Services Solutions set
experienced a decline in revenues in 2006 and had continued operational and business challenges resulting in an operating loss in 2006. Backlog at December 31, 2006 was 25% below prior year levels.
Engineered Materials
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
Net sales |
|
$ |
331 |
|
|
$ |
309 |
|
|
$ |
305 |
|
Operating Profit |
|
|
58 |
|
|
|
50 |
|
|
|
63 |
|
Assets |
|
|
305 |
|
|
|
264 |
|
|
|
189 |
|
Operating Margin |
|
|
17.6% |
|
|
|
16.2% |
|
|
|
20.7% |
|
2007 Compared with 2006. Engineered Materials sales increased by $22 million from $309 million in 2006 to $331 million in 2007. Operating profit increased by $8 million from $50 million in 2006 to $58 million
in 2007. Operating margins were 17.6% in 2007 compared with 16.2% in 2006.
Increased sales from the Noble acquisition and the composite
panel business acquired from Owens Corning, together with the favorable impact of 2006 price increases across all markets, were partially offset by lower volumes in all segment categories. The industry had RV shipments of 353,000* units in
2007, down from 391,000 units in 2006. Building products sales decreased 4% due to softer commercial construction markets. Sales of interior scuff and liner panels for transportation trailers decreased 22% in 2007 compared with 2006 because of
lower trailer build rates. Sales in Latin America and Asia were 23% higher in 2007 compared to 2006, primarily resulting from strong demand for truck bodies and containers along with building products.
The 2007 operating profit increase was primarily attributable to the full year profit contribution from the September 2006 Noble acquisition, the full
year impact of 2006 price increases across all product lines, material cost productivity improvements and lower customer assistance costs associated with RV panel distortion. These increases were offset by lower volumes to our traditional RV and
transportation customers.
Strong working capital management continued to show positive results. Working capital as a percentage of
sales was 4.8% in 2007 as compared with 5.0% in 2006. The improvement over the prior year was driven primarily by improved days sales outstanding.
Polyflon had sales of approximately $3.5 million in 2007 and was profitable.
*As reported by the Recreational Vehicle Industry Association (RVIA) shipment report dated December 2007.
2006 Compared with 2005. Engineered Materials sales increased by $4 million from $305 million in 2005 to $309 million in 2006. Operating profit declined by $13 million from $63 million
in 2005 to $50 million in 2006. Operating margins were 16.2% in 2006 compared with 20.7% in 2005.
Increased sales from the Noble
acquisition and price increases across all markets were partially offset by lower volume, primarily in RV and Europe. The industry had RV shipments of 391,000 units in 2006 which was up slightly from 2005 record levels, but significant weakness was
experienced in the second half of the year. RV shipments were dramatically curtailed late in the third quarter of 2006 as original equipment manufacturers OEMs adjusted their production levels due to lower retail sales.
Building products sales increased 10% due to stronger commercial construction markets along with increased sales of Design Solution decorative panel
products. In 2006, the higher Design Solution sales level reflected the resources added to focus on working with architects and designers leading to increased product acceptance and specification of Crane Composites decorative panels in certain
projects. Sales of interior scuff and liner panels for transportation trailers increased slightly in 2006 compared with 2005. Sales in Latin America and Asia were 15% higher in 2006 than 2005 from strong demand for truck bodies and containers along
with building products.
The 2006 operating profit decline was primarily due to the lower RV volume, customer assistance costs associated
with RV panel distortion and slightly higher material costs partly offset by profit contribution from the September 2006 Noble acquisition and customer price increases across all product lines.
In 2006, product support has been provided to several RV customers experiencing panel distortion. Distortion affects the exterior panels of RVs and has
been caused, in our view, by either a poor gluing process of the fiberglass-reinforced plastic (frp) panels to the substrate material and/or a higher than normal moisture content in the substrate materials, which is typically a
plywood-type material called luan. Crane Composites embarked on a customer assistance program to team with the OEMs to provide solutions to the industry-wide distortion problem. The root causes and actions to address these issues involve teams of
our production people and technical experts along with our customers who are reviewing production methods including adhesive processes, substrate sources and inspection processes.
Strong working capital management continued to show positive results. Working capital as a percentage of sales was 5.0% in 2006 as compared with 5.1% in 2005.
Polyflon had sales of approximately $3 million in 2006 and was profitable.
24
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Merchandising Systems
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
Net sales |
|
$ |
388 |
|
|
$ |
258 |
|
|
$ |
166 |
|
Operating Profit |
|
|
40 |
|
|
|
18 |
|
|
|
13 |
|
Assets |
|
|
349 |
|
|
|
338 |
|
|
|
104 |
|
Operating Margin |
|
|
10.2% |
|
|
|
6.8% |
|
|
|
7.7% |
|
2007 Compared with 2006. Merchandising Systems segment sales of $388 million increased $130
million from 2006 primarily due to the incremental revenue contributed from the 2006 acquisitions and, to a lesser extent, organic volume increases and favorable currency translation. The Vending Solutions Group sales increase was largely due to the
full year incremental revenue from the 2006 Dixie-Narco and AP acquisitions and, to a lesser extent, share gains in the European market. The Payment Solutions Group 2007 revenue increase was attributable to the full year performance of the Cash Code
and Telequip acquisitions, coupled with strong global demand for payment solutions products, particularly in the gaming industry.
Operating
profit of $40 million increased $22 million in 2007 versus 2006 driven largely by successfully leveraging the substantial sales increase in Payment Solutions and, to a lesser extent, improved performance in the Vending Solutions group as we
continued to gain operating efficiencies through the integration of the AP and Dixie-Narco acquisitions.
Working capital as a percentage of
sales was 18.9% in 2007, compared to 18.8% in 2006.
2006 Compared with 2005
. Merchandising Systems segment sales of $258 million
increased $92 million from 2005 mainly due to the incremental revenue from the four acquisitions. Operating profit of $18 million increased $5 million in 2006 as the profits from acquisitions more than offset the impact on earnings from integration
of certain acquisitions and the downturn in the vending market and the related cost of downsizing.
The Vending Solutions sales increase was
mainly due to the incremental revenue from the AP and Dixie-Narco acquisitions. However, the vending market suffered in 2006 as vending operators margins were affected by increased consumable product costs as well as higher fuel costs which caused a
volume decline in the existing business. The market downturn began in the second half of 2005 and appeared to stabilize at the end of 2006. The Vending Solutions Group 2006 operating results included approximately $2 million of severance costs
needed to right-size employment levels given the prolonged market downturn as well as certain operating losses and integration costs from our recently acquired Dixie-Narco and AP businesses.
The Payment Solutions Group 2006 revenue and profit increase was primarily from the Cash Code and Telequip acquisitions, which were both accretive in
2006, while the NRI coin changer and validation business also showed favorable results.
Fluid Handling
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
2007 |
|
|
2006 |
|
|
2005* |
|
Net sales |
|
$ |
1,136 |
|
|
$ |
1,000 |
|
|
$ |
937 |
|
Operating Profit |
|
|
159 |
|
|
|
107 |
|
|
|
76 |
|
Assets |
|
|
869 |
|
|
|
740 |
|
|
|
686 |
|
Operating Margin |
|
|
14.0% |
|
|
|
10.7% |
|
|
|
8.1% |
|
* |
Reclassified to reflect the movement of Environmental to the Controls segment. |
(See segment information in Note 14 to the Consolidated Financial Statements.)
2007 Compared with 2006. Fluid Handling sales of $1.136 billion increased $136 million, or 14%, from $1.0 billion in 2006. The sales increase includes
$97 million, or 10% from growth of core businesses and $49 million, or 5%, from favorable currency translation, slightly offset by a 1% decline resulting from divestitures. Backlog was $243 million at December 31, 2007, up 15% from $211 million
at December 31, 2006.
Operating profit increased 48% in 2007 from $107 million in 2006 to $159 million in 2007. The considerably
improved profitability resulted from successfully leveraging the higher sales volume, the favorable impact of foreign exchange, price increases and operational improvements. In addition, operating profit included the net gain of $19 million related
to the Foundry Restructuring. Operating margin was 14% in 2007 compared with 10.7% in 2006.
Crane Valve Group revenues increased 17% to
$841 million from $720 million in 2006, driven by increased volume (10%), higher pricing (2%) and favorable foreign exchange (6%), partly offset by a decline in revenues due to divestitures (1%). The Valve Group revenue growth was due, in part,
to targeted sales activities within the Energy and Chemical/Pharmaceutical businesses, which included a strategy to offer a broader product portfolio. In addition, the Energy business benefited from higher demand in the power, oil and gas and
bio-fuels markets, in particular, realizing stronger sales to the Middle Eastern market. The Chemical/Pharmaceutical business experienced increasing demand resulting from an expanding global chemical market. Crane Group UK benefited from strong
growth across all targeted markets (building services, water and gas). Valve Services continues to ship product under a contract awarded by a buying consortium of nuclear power plants at the end of 2005, and the business continues to realize sales
from new testing product launches.
Crane Pumps & Systems revenue decreased $8 million, or 8%, to $96 million from $104 million in
2006 reflecting a decline in Military, Pressure Sewer and Aquascape sales.
Crane Supply revenue increased $23 million to $199 million, a
13% increase from $176 million in 2006 due primarily to favorable foreign exchange, as well as higher volume and pricing.
The Fluid
Handling segment continued to show improved capital efficiency with inventory turns at 3.57 at December 31, 2005, 3.78 at December 31, 2006 and 3.81 at December 31, 2007, while working capital as a percentage of sales was 24.4% at
December 31, 2005, 22.7% at December 31, 2006 and 22.3% at December 31, 2007.
25
PART II / ITEM 7
2006 Compared with 2005. Fluid Handling sales of $1 billion
increased $63 million, or 7%, from $937 million in 2005. The sales gain includes $57 million from 6% growth of core businesses and $18 million, or 2%, from favorable currency translation. Additionally, these amounts were partly offset by a net
decline of $12 million, or 1%, from the April 2006 Westad disposition and August 2005 PSI acquisition. Backlog was $211 million at December 31, 2006, up 13% from $187 million at December 31, 2005; excluding Westad, backlog was up 29% in
2006 from $164 million at December 31, 2005. Fluid Handling segment revenue in 2006 was derived as follows: Valve Group, 72%; Crane Pumps & Systems, 10%; Crane Supply, 18%.
Operating profit increased 41% in 2006 from $76 million in 2005 to $107 million in 2006 from leveraging the higher sales and operational improvements. These improvements included increased low-cost
sourcing, facility consolidations and improved pricing discipline. Operating margin was 10.7% in 2006 compared with 8.1% in 2005.
Valve
Group sales increased 7% to $720 million in 2006 from $673 million in 2005. The sales improvement was derived as follows: $53 million from 8% growth of core businesses, $6 million, or 1%, from favorable currency translation, partly offset by a net
decline of $12 million, or 2%, from the Westad disposition and PSI acquisition. The Valve Group revenue growth was due to strong sales for ethanol plant construction and oil and gas applications at Crane Valve North America and chemical and
pharmaceutical programs at Xomox and Resistoflex. In addition, Valve Services benefited from a contract awarded by a buying consortium of nuclear power plants at the end of 2005 and Crane Ltd. experienced a marked increase in export sales. The Valve
Group continued to experience increases in material costs, led by a significant rise in the cost of bronze ingot; however, improved pricing discipline resulted in appropriate sales price increases to minimize this impact.
Crane Pumps & Systems revenue increased to $104 million slightly ahead of 2005.
Crane Supply revenue increased $15 million to $176 million, a 10% increase from $161 million in 2005 largely due to favorable foreign exchange. Sales growth from new construction starts in the
industrial, commercial and institutional markets combined with the growth in the petrochemical market was offset by a softening in the manufacturing sector.
Controls
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
2007 |
|
|
2006 |
|
|
2005* |
|
Net sales |
|
$ |
135 |
|
|
$ |
124 |
|
|
$ |
117 |
|
Operating Profit |
|
|
10 |
|
|
|
10 |
|
|
|
8 |
|
Assets |
|
|
84 |
|
|
|
56 |
|
|
|
56 |
|
Operating Margin |
|
|
7.3% |
|
|
|
8.1% |
|
|
|
7.1% |
|
* |
Reclassified to include the movement of Wireless Monitoring from the Aerospace & Electronics segment and Environmental from the Fluid Handling segment.
|
(See segment information in Note 14 to the Consolidated Financial Statements.)
2007 Compared with 2006. Our Controls segment sales of $135 million increased $11 million, or 9%, in 2007 as compared with 2006. The increase was primarily driven by sales contributed by the MRB acquisition, volume increases in the oil and gas
and transportation markets, as well as price increases. Segment operating profit of $10 million in 2007, was flat compared with 2006, as the effect of the higher sales was more than offset by integration costs and intangible asset amortization
associated with the aforementioned acquisition.
Barksdales 2007 sales increased 4% over the prior year, driven primarily by favorable
foreign exchange and higher selling prices, as the business continued to focus on the oil and gas markets in the U.S. and Canada and transportation markets in Europe and China.
Azonixs sales increased 20% in 2007 from the prior year due to sales contributed by the MRB acquisition, offset by a 5% decline in the base business.
Dynalcos sales increased 12% from the prior year driven by volume and price increases associated with new product introductions in the natural gas
gathering and processing industry, as well as the hydrocarbon processing industry.
Crane Environmentals sales improved 11% over the
prior year due to increased sales of large reverse osmosis systems.
Crane Wireless Monitoring Solutions sales improved 12% over the prior
year, driven largely by an increasing market acceptance of remote monitoring solutions as value propositions are being proven across multiple industries.
For the segment, inventory turns as well as working capital as a percent of sales were generally flat year over year.
2006 Compared with 2005. Our Controls segment sales of $124 million increased $7 million, or 6%, in
2006 as compared with 2005. The increase was primarily driven by volume increases in the oil and gas and transportation markets as well as price increases and initial sales penetration of China and India. Segment operating profit of $10 million
increased $2 million in 2006, or 21%, as compared with 2005, driven principally by the higher sales.
Barksdales 2006 sales increased
12% from the prior year, driven by robust markets in North America and Europe as well as by entry into the Chinese and Indian markets noted above.
Azonixs sales increased 28% in 2006 from the prior year due to the high levels of activity in oil and gas exploration markets.
Dynalcos sales declined during the year as partial market saturation in a major product line coincided with the introduction of new products and services being delayed by longer than expected beta tests by Dynalcos major
new product launch customers.
26
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Crane Environmentals sales improved slightly over prior year on strength in the deaerator market, particularly for the Navy.
Crane Wireless Monitoring Solutions results were about even with the prior year. Most of our revenues are derived from product development funding from the defense microelectronics activity.
For the segment, inventory turns have improved from 6.1 to 6.3 year over year, while working capital as a percent of sales was 14.2% at December 31,
2006 as compared with 15.5% at December 31, 2005.
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
Corporate expense |
|
$ |
(52 |
) |
|
$ |
(36 |
) |
|
$ |
(31 |
) |
Corporate expense Asbestos |
|
|
(390 |
) |
|
|
|
|
|
|
|
|
Corporate expense
Environmental |
|
|
(19 |
) |
|
|
|
|
|
|
|
|
Total Corporate |
|
|
(461 |
) |
|
|
(36 |
) |
|
|
(31 |
) |
Interest income |
|
|
6 |
|
|
|
5 |
|
|
|
2 |
|
Interest expense |
|
|
(27 |
) |
|
|
(23 |
) |
|
|
(22 |
) |
Miscellaneous net |
|
|
10 |
|
|
|
9 |
|
|
|
3 |
|
Effective tax rate |
|
|
47.6% |
|
|
|
30.7% |
|
|
|
30.8% |
|
2007 Compared with 2006. Total Corporate expense increased $425 million in 2007 due to 1) a provision of $390.2 million to update and extend the estimate of our asbestos liability, 2) an environmental provision of
$18.9 million related to our expected liability at our Goodyear, Arizona Superfund Site and 3) a $7.6 million provision, included in corporate expense, relating to the civil false claims proceeding by the U.S. Government.
Interest expense in 2007 was $4
million higher than 2006 reflecting higher average borrowing levels.
Miscellaneous income was $9.9 million in 2007, compared to $9.5 million in 2006. The 2007 amount included a $4.1 million gain from the December 2007 sale of the IMC joint
venture. The 2006 amount included approximately $3.8 million of income resulting from the net gain on the sale of Resistoflex Aerospace and Westad, partially offset by charges related to the sale of unused property resulting from prior facility
consolidation and certain legal costs associated with previous divestitures.
The effective tax rate of 47.6% for 2007 reflected a tax benefit on a pre-tax loss compared to an effective tax rate of 30.7% for 2006, which reflected a tax provision on
pre-tax income. The incremental tax benefits in 2007 were primarily as a result of:
|
|
the asbestos charge recorded in the third quarter of 2007, |
|
|
the environmental charge recorded in the fourth quarter of 2007, |
|
|
lower non-U.S. taxes in 2007, primarily as a result of reductions in statutory tax rates in Canada, Germany and the UK,
|
|
|
a statutory increase in 2007 of the amount of the U.S. federal tax benefit on domestic manufacturing activities, and |
|
|
deferred tax benefits recognized as part of the sale of our foundry facility in the UK and the sale of our 49% interest in the IMC joint venture.
|
These items were partially offset by the establishment of a deferred tax liability related to the estimated additional U.S. federal and state income tax
due upon the ultimate repatriation of approximately $194 million of the previously undistributed earnings of certain of our non-U.S. subsidiaries.
Asbestos and Environmental Charges. See discussion of 2007 asbestos and environmental charges
beginning on the first page of Managements Discussion and Analysis of Financial Condition and Results of Operations.
2006 Compared with 2005. Total corporate expense increased $5 million in 2006 principally from employee-related costs, including
the incremental cost of expensing stock options in 2006. These costs were partly offset by a $5 million recovery from the Department of Justice for certain environmental costs we previously incurred as described in Note 10, Commitments and
Contingencies, in the Notes to the Consolidated Financial Statements.
Interest
expense in 2006 was nearly even with 2005 reflecting slightly higher average borrowing levels offset by a slightly lower average interest rate.
Miscellaneousnet increased $6 million in 2006 when compared with 2005 primarily from the $8 million net gain from the sale of the Resistoflex Aerospace and Westad businesses partly offset by a loss on the sale of unused property from a
prior plant consolidation and certain legal costs associated with previous divestitures. Equity income from the Industrial Motion Control Holdings LLC (IMC) joint venture was approximately the same as 2005.
The effective tax rate of 30.7% in 2006 was comparable to the 2005 effective tax rate of 30.8%.
Outlook
General.
Commercial aircraft production
increased significantly in 2007 with continued growth expected in 2008. Higher business and regional jet production is also expected in 2008. A modest increase in sales is expected in the defense electronics market in 2008. Overall, 2007 demand in
the RV market was down about 10% from 2006 with a further decline anticipated for 2008. A decline in the transportation trailer industry is also expected in 2008 following a 22% decrease in 2007. One of the key market drivers for the automated
merchandising market is factory employment, which remained stable in 2007 with a slight decline anticipated in 2008. Demand from the chemical, pharmaceutical, oil, gas and power, nuclear, building services and utilities and refining markets improved
in 2007, and this trend is anticipated to continue next year for each of these markets.
Aerospace & Electronics.
For 2008, we expect this segment to show a modest increase in sales and a slight improvement in overall segment margins. The continued strong demand for
commercial aircraft from another record year of aircraft build rates, in both the large commercial and business jet markets, coupled with higher levels of aftermarket sales from modernization and upgrade programs and traditional commercial spares
are expected to drive both revenue growth and margin improvement for the Aerospace Group in 2008. However, engineering expenses, primarily related to the continuing development of new products for major OEM programs such as the Boeing 787 and Airbus
A400M, are expected to adversely impact margins throughout 2008, particularly
27
PART II / ITEM 7
in the first half of the year. In the Electronics Group, sales are expected to be up slightly in 2008 with modest improvement in operating
margin resulting from productivity improvements and higher margins on customer contracts.
Engineered Materials.
Our Engineered Materials segment sales are expected to increase in 2008 primarily from the full year impact of the composite panel business acquired in
September 2007. However, declines of approximately 5% to 10% in virtually all markets are anticipated in 2008. Longer term, business fundamentals continue to be positive for these markets due to continued displacement of traditional
materials by frp. Continued execution on the Noble expansion and the integration of the composite panel business that we acquired from Owens Corning is expected to contribute to operating performance in 2008, as well as continued focus on gaining RV
market share through targeted product initiatives. In addition, we anticipate continuing lower levels of customer assistance costs and our pricing strategy is expected to offset anticipated increases in raw materials.
Merchandising Systems.
In 2008, the base
vending industry is forecasting negative growth of 8%. Notwithstanding, strong sales and profit growth are expected from Vending Solutions, driven largely by share gains through targeted customer initiatives and leveraging new product introductions
across the business. In addition, continued emphasis on lean manufacturing and cost reductions are expected to drive improvements as the business completes the integration of the 2006 acquisitions. Payment Solutions is expected to decline slightly
from 2007, resulting primarily from tempered growth expectations in the European and Russian gaming markets.
Fluid Handling.
Demand for most of Fluid Handlings industrial products, which is mainly driven by the chemical and pharmaceutical, oil, gas and power, nuclear,
building services and utilities end markets, remained strong during the last three years. Refineries increased spending in both 2006 and 2007 to keep up with the demand for gasoline. Refineries have been running at full capacity without planned
shutdowns, resulting in a higher project-to-MRO (maintenance, repair and overhaul) mix and a build up of a future shutdown maintenance opportunity. Product demand from alternative fuel markets remains high, partly due to incentives to reduce U.S.
dependence on foreign oil and state legislation to replace certain fuel additives with ethanol.
We expect increased sales and operating
profit in 2008 from continued global market expansion, coupled with operating improvements and efficiencies expected from the benefits of the improved productivity and cost structure of the Valve Group reorganization as well as the continuation of
disciplined pricing, operational excellence and expanded low-cost sourcing at all of the Fluid Handling businesses, such as those expected from the Foundry Restructuring.
Controls.
We expect solid growth in our Controls segment in 2008 due largely to new product
launches as well as increases in shipments to the transportation and military markets, in part, driven by the benefits expected from the acquisition of MRB.
Liquidity
and Capital Resources
Cash and cash equivalents increased $145 million to $238 million at December 31, 2007. Our operating philosophy is
to use cash provided from operating activities to provide value to shareholders by paying dividends and/or repurchasing shares, by reinvesting in existing businesses and by making acquisitions that will complement our portfolio of businesses. We
believe that funds generated by operations and funds available under current or new credit facilities will be sufficient to finance short- and long-term capital requirements, as well as fund cash payments associated with our asbestos and
environmental exposures.
We updated and extended the estimate of our net asbestos liability and recorded an additional provision of
approximately $390 million during the third quarter of 2007. This provision was based on the total liability to cover the estimated cost of asbestos claims currently pending and to be subsequently asserted through 2017. Similarly, during the fourth
quarter of 2007, we updated our estimate of environmental remediation costs projected through 2014 related to our Superfund Site in Goodyear, Arizona, and recorded an additional provision of approximately $19 million. Although these increases did
not have an immediate impact on our liquidity, both provisions represent the incremental estimate of future cash payments associated with such exposures.
Cash provided by operating activities was $233 million in 2007, compared to $182 million in 2006. The increase was primarily from improved operating results, coupled with a net asbestos payment in 2007 of approximately $10 million
compared to $41 million of net asbestos payments in 2006. The net asbestos payment in 2007 included the following:
|
|
Receipt of $31.5 million in January 2007 representing the final payment from Equitas in connection with our agreement to settle insurance coverage
claims against certain underwriters at Lloyds of London (reinsured by Equitas). |
|
|
Receipt of $10.0 million in May 2007 in connection with a settlement agreement between us and Employers Reinsurance Company (ERC)
pursuant to which, among other things, ERCs insurance coverage obligations for asbestos claims under the two historical ERC policies issued to Crane Co. were released. |
The above settlement receipts were substantially offset by indemnity and defense payments made during 2007. Operating working capital needs increased in
2007 in support of our growth, which partially offsets these favorable comparisons to the prior year. Cash payments related to asbestos settlement and defense costs, net of related insurance recoveries, are expected to be approximately $55 million
in 2008.
During 2007, we invested $65 million for acquisitions, spent $47 million in capital expenditures, paid $40 million in dividends
and invested $50 million to repurchase Crane Co. shares. Additionally, cash of $69 million was generated from the sale of our foundry operating facility in the UK and our joint venture company with Emerson Electric Co., Industrial Motion Controls
LLC in the fourth quarter of 2007.
28
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Long-Term Debt and Loans Payable At December 31, 2007, we had total debt of $399 million as compared to $408
million at December 31, 2006. Net debt decreased by $154 million to $115 million at December 31, 2007, primarily reflecting higher cash balances. The net debt to capital percentage was 11.5% at December 31, 2007, down from 22.7% at
December 31, 2006. Prior year amounts have been restated for deferred financing costs.
In September 2007, we entered into a five-year,
$300 million Amended and Restated Credit Agreement (the facility), which is due to expire September 26, 2012. This facility amends and restates the five-year $450 million revolving credit agreement entered into on January 21,
2005, which included a $150 million term loan component that was terminated by us in May 2005. The facility allows us to borrow, repay, or to the extent permitted by the agreement, prepay and re-borrow at any time prior to the stated maturity date,
and the loan proceeds may be used for general corporate purposes including financing for acquisitions. The original facility was amended and restated to capitalize on favorable bank market conditions and to extend the maturity of the facility. In
addition, the amended and restated facility provides us with reduced annual fees and interest rates as well as less restrictive financial and operating covenants. The facility was not used throughout 2007, 2006 and 2005. The agreement contains a
leverage ratio covenant requiring a ratio of total debt to total capitalization of less than or equal to 65%. At December 31, 2007, our ratio was 31%.
In November 2006, we issued notes having an aggregate principal amount of $200 million. The notes are unsecured, senior obligations that mature on November 15, 2036 and bear interest at 6.55% per annum, payable
semi-annually on May 15 and November 15 of each year. The notes have no sinking fund requirement but may be redeemed, in whole or in part, at our option. If there is a change in control, and if as a consequence the notes are rated below
investment grade by both Moodys and Standard & Poors, then holders of the Notes may require us to repurchase them, in whole or in part, for 101% of the principal amount plus accrued and unpaid interest. Debt issuance costs are
deferred and then amortized as a component of interest expense over the term of the notes. Including debt issuance costs, these notes have an effective annualized interest rate of 6.67%.
We had notes outstanding in an aggregate principal amount of $100 million, issued in 1998, that were paid and retired at maturity on October 1, 2006.
We have domestic unsecured, uncommitted money market bid rate credit lines for $220 million which were unused at December 31, 2007.
As of December 31, 2007, we had various local currency credit lines, with maximum available borrowings of $20.3 million, underwritten by banks
primarily in the U.S., Canada, Germany and the United Kingdom. These credit lines are typically available for borrowings up to 364 days and are renewable at the option of the lender. There was $0.5 million outstanding under these facilities at
December 31, 2007.
At December 31, 2007, we had open standby letters of credit of $27.5 million issued pursuant to a Letter of
Credit Reimbursement Agreement, and certain other credit lines, substantially all of which expire in 2008.
We have an effective shelf registration, filed
on Form S-3 in May 2007 with the Securities and Exchange Commission, allowing us to issue, in one or more offerings, an indeterminate amount of either senior or subordinated debt securities.
Credit Ratings As of
December 31, 2007, our senior unsecured debt was rated BBB by Standard & Poors (S&P) and Baa2 by Moodys Investors Service (Moodys). Although prevailing market conditions are somewhat
unsettled, we believe that nonetheless, these ratings afford us adequate access to the public and private markets for debt.
29
PART II / ITEM 7
Contractual
Obligations Under various agreements, we are obligated to make future cash payments in fixed amounts. These include payments under our long-term debt agreements and rent
payments required under operating lease agreements. The following table summarizes our fixed cash obligations as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment due by Period |
|
(in thousands) |
|
Total |
|
|
2008 |
|
|
2009-2010 |
|
|
2011-2012 |
|
|
After 2012 |
|
Long-term debt (1) |
|
$ |
400,100 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
400,100 |
|
Fixed interest payments |
|
|
445,900 |
|
|
|
24,100 |
|
|
|
48,200 |
|
|
|
48,200 |
|
|
|
325,400 |
|
Operating lease payments |
|
|
48,454 |
|
|
|
14,445 |
|
|
|
20,376 |
|
|
|
6,948 |
|
|
|
6,685 |
|
Purchase obligations |
|
|
30,133 |
|
|
|
29,562 |
|
|
|
418 |
|
|
|
150 |
|
|
|
3 |
|
Pension and postretirement benefits (2) |
|
|
374,179 |
|
|
|
32,169 |
|
|
|
67,289 |
|
|
|
70,810 |
|
|
|
203,911 |
|
Total |
|
$ |
1,298,766 |
|
|
$ |
100,276 |
|
|
$ |
136,283 |
|
|
$ |
126,108 |
|
|
$ |
936,099 |
|
(1) |
Excludes original issue discount. |
(2) |
Pension benefits are funded by the respective pension trusts. The postretirement benefit component of the obligation is approximately $2 million per year for which there is no
trust and will be directly funded by us. Pension and postretirement benefits are included through 2016. |
Capital Structure
The following table sets forth our capitalization:
|
|
|
|
|
|
|
|
|
(dollars in thousands) December 31, |
|
2007 |
|
|
2006 |
|
Notes payable and current maturities of long-tem debt |
|
$ |
548 |
|
|
$ |
9,505 |
|
Long-term debt |
|
|
398,301 |
|
|
|
398,122 |
|
Total debt |
|
|
398,849 |
|
|
|
407,627 |
|
Less cash and cash equivalents |
|
|
283,370 |
|
|
|
138,607 |
|
Net Debt* |
|
|
115,479 |
|
|
|
269,020 |
|
Shareholders' equity |
|
|
884,803 |
|
|
|
918,603 |
|
Total capitalization |
|
|
1,000,282 |
|
|
|
1,187,623 |
|
Net debt to shareholders' equity* |
|
|
13.1% |
|
|
|
29.3% |
|
Net debt to total capitalization* |
|
|
11.5% |
|
|
|
22.7% |
|
* |
Net debt, a non-GAAP measure represents total debt less cash equivalents. The presentation of net debt provides useful information about our ability to satisfy our debt
obligation with currently available funds. |
In 2007, shareholders equity decreased $34 million, primarily as a result of
the net loss of $62 million, open-market share repurchases of $50 million, and cash dividends of $40 million, offset by favorable currency impacts of $51 million, changes in pension and postretirement items of $30 million, and $18 million from stock
option exercises.
30
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Off-Balance Sheet Arrangements
We are a party to a contractually committed off-balance sheet chattel paper financing
facility that enables our Crane Merchandising Systems (CMS) business to offer various sales support financing programs to our customers. At December 31, 2007 and 2006, $21 million and $23 million, respectively, was outstanding.
Recourse to Crane Co. for all uncollectible loans made to CMS customers by the banks under this agreement is limited to 20% of the outstanding balance per year.
We do not have any majority-owned subsidiaries that are not included in the consolidated financial statements, nor do we have any interests in or relationships with any special purpose off-balance
sheet financing entities.
Application of Critical Accounting Policies
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. Our significant accounting policies are more fully described in Note 1,
Nature of Operations and Significant Accounting Policies, to the Notes to the Consolidated Financial Statements. Certain accounting policies require us to make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. On an on-going basis, we evaluate our estimates and assumptions, and the effects of revisions are reflected in the
financial statements in the period in which they are determined to be necessary. The accounting policies described below are those that most frequently require us to make estimates and judgments and, therefore, are critical to understanding our
results of operations. We have discussed the development and selection of these accounting estimates and the related disclosures with the Audit Committee of our Board of Directors.
Revenue Recognition Sales revenue is recorded when a product is
shipped, title (risk of loss) passes to the customer and collection of the resulting receivable is reasonably assured. Revenue on long-term, fixed-price contracts is recorded on a percentage of completion basis using units of delivery as the
measurement basis for progress toward completion. Sales under cost-reimbursement-type contracts are recorded as costs are incurred.
Accounts Receivable We continually monitor collections from customers, and in addition to providing
an allowance for uncollectible accounts based upon a customers financial condition, we provide a provision for estimated credit losses when customer accounts exceed 90 days past due. We aggressively pursue collection efforts on these overdue
accounts. The allowance for doubtful accounts at December 31, 2007 and 2006 was approximately $9 million.
Inventories We value inventory at the lower of cost or market and regularly review inventory values on hand and record a
provision for excess and obsolete inventory primarily based on historical performance and our forecast of product demand over the next two years. As actual future demand or market conditions vary from those projected by us, adjustments will be
required.
Valuation of Long-Lived Assets We review the carrying value of long-lived assets for continued appropriateness as circumstances warrant. These reviews are based upon projections of anticipated future undiscounted cash flows. No impairment charges were
necessary for the three years ended December 31, 2007. While we believe these estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect valuations.
Income Taxes We
account for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which requires an asset and liability approach for the financial accounting and reporting of income taxes.
Under this method, deferred income taxes are recognized for the expected future tax consequences of differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. These balances are measured using
the enacted tax rates expected to apply in the year(s) in which these temporary differences are expected to reverse. The effect on deferred income taxes of a change in tax rates is recognized in income in the period when the change is enacted. We
account for uncertain tax positions in accordance with Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes. Accordingly, we report a liability for unrecognized tax benefits
resulting from uncertain tax positions taken or expected to be taken in a tax return.
Goodwill and Other Intangible Assets As of December 31, 2007, we had $785 million of goodwill and intangible assets with indefinite lives. We perform an
annual assessment of the carrying value of goodwill and intangibles with indefinite useful lives, as required. If the carrying value of goodwill or an intangible asset exceeds its fair value, an impairment loss is recognized. A discounted cash flow
model is used to determine the fair value for purposes of testing goodwill and indefinite lived intangible assets for impairment. No impairment charges have been required during 2007, 2006 or 2005.
Contingencies The
categories of claims for which we have estimated our liability, the amount of our liability accruals, and the estimates of our related insurance receivables are critical accounting estimates related to legal proceedings and other contingencies.
Please refer to Note 10, Commitments and Contingencies, of the Notes to the Consolidated Financial Statements.
Pension Plans In the U.S., we sponsor a defined benefit pension plan that covers approximately 48% of all U.S. employees. The
benefits are based on years of service and compensation on a final average pay basis, except for certain hourly employees where benefits are fixed per year of service. This plan is funded with a trustee in respect to past and current service.
Charges to expense are based upon costs computed by an independent actuary. Our funding policy is to contribute, annually, amounts that are allowable for federal or other income tax purposes. These contributions are intended to provide for future
benefits earned to date and those expected to be earned in the future. A number of our non-U.S. subsidiaries sponsor defined benefit pension plans that cover approximately 23% of all non-U.S. employees. The benefits are typically based upon years of
service and compensation. These plans are generally funded with trustees in respect to past and current service. Charges to expense are based upon costs computed by
31
PART II / ITEM 7A
independent actuaries. Our funding policy is to contribute, annually, amounts that are allowable for tax purposes or mandated by local
statutory requirements. These contributions are intended to provide for future benefits earned to date and those expected to be earned in the future.
The net periodic pension cost was $9 million in 2007, $10 million in 2006 and $9 million in 2005. Employer cash contributions were $5 million in 2007, $8 million in 2006 and $6 million in 2005. We expect, based on current actuarial
calculations, to contribute cash of approximately $11 million to our pension plans in 2008. Cash contributions in subsequent years will depend on a number of factors including the investment performance of plan assets.
For the pension plan, holding all other factors constant, an increase/decrease in the expected long-term rate of return of plan assets by 0.25 percentage
points would decrease/increase U.S. 2007 pension expense by approximately $0.7 million for U.S. pension plans and approximately $1.0 million for Non-U.S. pension plans. Also, holding all other factors constant, an increase/decrease in the discount
rate used to measure plan liabilities by 0.25 percentage points would decrease/increase 2007 pension expense by approximately $0.2 million for U.S. pension plans and approximately $0.3 million for Non-U.S. pension plans. See Note 7 to the Notes to
the Consolidated Financial Statements for details of the impact of a one percentage point change in assumed health care trend rates on the postretirement health care benefit expense and obligation.
The following key assumptions were used to calculate the benefit obligation and net periodic cost for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
December 31, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
Benefit Obligations |
|
|
|
|
|
|
|
|
|
U.S. Plans: |
|
|
|
|
|
|
|
|
|
Discount rate |
|
6.25% |
|
|
6.00% |
|
|
6.00% |
|
Rate of compensation increase |
|
4.15% |
|
|
3.65% |
|
|
3.65% |
|
|
|
|
|
Non-U.S. Plans: |
|
|
|
|
|
|
|
|
|
Discount rate |
|
5.82% |
|
|
5.14% |
|
|
4.95% |
|
Rate of compensation increase |
|
3.26% |
|
|
3.30% |
|
|
3.24% |
|
|
|
|
|
Net Periodic Cost |
|
|
|
|
|
|
|
|
|
U.S. Plans: |
|
|
|
|
|
|
|
|
|
Discount rate |
|
6.00% |
|
|
6.00% |
|
|
6.25% |
|
Expected rate of return on plan assets |
|
8.75% |
|
|
8.75% |
|
|
8.75% |
|
Rate of compensation increase |
|
3.65% |
|
|
3.65% |
|
|
3.27% |
|
|
|
|
|
Non-U.S. Plans: |
|
|
|
|
|
|
|
|
|
Discount rate |
|
5.14% |
|
|
4.95% |
|
|
5.48% |
|
Expected rate of return on plan assets |
|
6.78% |
|
|
6.79% |
|
|
6.79% |
|
Rate of compensation increase |
|
3.29% |
|
|
3.24% |
|
|
3.60% |
|
In developing the long-term rate of return assumption, we evaluated input from actuaries and
investment consultants as well as long-term inflation assumptions. Projected returns by such consultants are based on broad equity and bond indices.
The discount rate we used for valuing pension
liabilities is based on a review of high quality corporate bond yields with maturities approximating the remaining life of the projected benefit obligations.
Postretirement Benefits Other than Pensions We and certain of our subsidiaries provide
postretirement health care and life insurance benefits to current and former employees, hired before January 1, 1990, who meet minimum age and years of service requirements. We do not pre-fund these benefits and retain the right to modify or
terminate the plans. We expect, based on current actuarial calculations, to contribute cash of $2.4 million to our postretirement benefit plans in 2008. The weighted average discount rates assumed to determine postretirement benefit obligations were
5.75%, 5.75% and 6.00% for 2007, 2006 and 2005, respectively. The health care cost trend rates assumed were 8.00%, 9.00% and 8.00% for 2008, 2007 and 2006, respectively.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Our cash flows and earnings are subject
to fluctuations from changes in interest rates and foreign currency exchange rates. We manage our exposures to these market risks through internally established policies and procedures and, when deemed appropriate, through the use of interest-rate
swap agreements and forward exchange contracts. We do not enter into derivatives or other financial instruments for trading or speculative purposes.
Total debt outstanding of $399 million at December 31, 2007, was generally at fixed rates of interest ranging from 5.50% to 6.55%.
Following is an analysis of the potential changes in interest rates and currency exchange rates based upon sensitivity analysis that models effects of shifts in rates. These are not forecasts.
|
|
Our year-end portfolio is comprised primarily of fixed-rate debt; therefore, the effect of a market change in interest rates would not be
significant. |
|
|
If, on January 1, 2008, currency exchange rates were to decline 1% against the U.S. dollar and the decline remained in place for 2008, based on
our year-end 2007 portfolio, net income would not be materially impacted. |
32
PART II / ITEM 8
Item 8. Financial Statements and Supplementary Data.
MANAGEMENTS RESPONSIBILITY
FOR FINANCIAL REPORTING
The accompanying consolidated
financial statements of Crane Co. and subsidiaries have been prepared by management in conformity with accounting principles generally accepted in the United States of America and, in the judgment of management, present fairly and consistently the
Companys financial position and results of operations and cash flows. These statements by necessity include amounts that are based on managements best estimates and judgments and give due consideration to materiality.
Management is responsible for establishing and maintaining adequate internal control over financial reporting. The Companys internal control system
was designed to provide reasonable assurance to the Companys management and board of directors regarding the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
Management assessed the effectiveness of the Companys internal control over
financial reporting as of December 31, 2007. In making this assessment, it used the criteria established in Internal ControlIntegrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on our assessment we believe that, as of December 31, 2007, the Companys internal control over financial reporting is effective based on those criteria.
Deloitte & Touche LLP, the independent registered public accounting firm that also audited the Companys consolidated financial statements included in this Annual Report on Form 10-K,
audited the operating effectiveness of internal control over financial reporting as of December 31, 2007, and issued their related attestation report which is included on page 34.
Eric C. Fast
President and Chief Executive Officer and Acting Chief Financial Officer
The Section 302 certifications of the
Companys President and Chief Executive Officer and its Vice President, Finance and Chief Financial Officer have been filed as Exhibit 31 to the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2007.
Furthermore, because the Companys common stock is listed on the New York Stock Exchange, the Companys President and Chief Executive Officer is required to make, and he has made as of May 14, 2007, a CEOs Annual Certification
to the NYSE in accordance with Section 303A.12 of the NYSE Listed Company Manual stating that he was not aware of any violations by the Company of New York Exchange corporate governance listing standards.
33
PART II / ITEM 8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Crane Co.
Stamford, CT
We have audited the accompanying consolidated balance sheets of Crane Co. and subsidiaries (the Company) as of December 31, 2007 and 2006, and the related consolidated statements of operations, cash flows and
shareholders equity for each of the three years in the period ended December 31, 2007. Our audits also included the financial statement schedule listed in the Index at Item 15. We also have audited the Companys internal
control over financial reporting as of December 31, 2007 based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Companys
management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Managements Responsibility for Financial Reporting. Our responsibility is to express an opinion on these financial statements and financial statement schedule and an opinion on the Companys
internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing
such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed by, or under the supervision of, the companys principal executive and principal financial officers, or persons performing similar functions, and
effected by the companys board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material
effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal
control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Crane Co.
and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set
forth therein. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
As discussed in Note 1 to the consolidated
financial statements, the Company adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement No. 109, effective January 1, 2007
and Statement of Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, effective December 31, 2006. As discussed in Note 13 to the consolidated financial
statements, the Company adopted Statement of Financial Accounting Standards No.123 (Revised 2004), Share Based Payment effective January 1, 2006.
Stamford, CT
FEBRUARY 25, 2008
34
PART II / ITEM 8
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For year ended December 31, |
|
(in thousands, except per share data) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
Net sales |
|
$ |
2,619,171 |
|
|
$ |
2,256,889 |
|
|
$ |
2,061,249 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales operations |
|
|
1,776,157 |
|
|
|
1,525,633 |
|
|
|
1,418,662 |
|
Asbestos charge |
|
|
390,150 |
|
|
|
|
|
|
|
|
|
Environmental charge |
|
|
18,912 |
|
|
|
|
|
|
|
|
|
Foundry restructuring |
|
|
(19,083 |
) |
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
560,691 |
|
|
|
483,320 |
|
|
|
428,965 |
|
|
|
|
2,726,827 |
|
|
|
2,008,953 |
|
|
|
1,847,627 |
|
Operating profit (loss) |
|
|
(107,656 |
) |
|
|
247,936 |
|
|
|
213,622 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
6,259 |
|
|
|
4,939 |
|
|
|
2,372 |
|
Interest expense |
|
|
(27,404 |
) |
|
|
(23,015 |
) |
|
|
(22,416 |
) |
Miscellaneous net |
|
|
9,906 |
|
|
|
9,474 |
|
|
|
2,945 |
|
|
|
|
(11,239 |
) |
|
|
(8,602 |
) |
|
|
(17,099 |
) |
Income (loss) before income taxes |
|
|
(118,895 |
) |
|
|
239,334 |
|
|
|
196,523 |
|
Provision (benefit) for income taxes |
|
|
(56,553 |
) |
|
|
73,447 |
|
|
|
60,486 |
|
Net income (loss) |
|
$ |
(62,342 |
) |
|
$ |
165,887 |
|
|
$ |
136,037 |
|
|
|
|
|
Basic net income (loss) per share |
|
$ |
(1.04 |
) |
|
$ |
2.72 |
|
|
$ |
2.27 |
|
Average basic shares outstanding |
|
|
60,037 |
|
|
|
60,906 |
|
|
|
59,816 |
|
|
|
|
|
Diluted net income (loss) per share |
|
$ |
(1.04 |
) |
|
$ |
2.67 |
|
|
$ |
2.25 |
|
Average diluted shares outstanding |
|
|
60,037 |
|
|
|
62,103 |
|
|
|
60,413 |
|
See Notes to Consolidated Financial Statements.
35
PART II / ITEM 8
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, |
|
(in thousands, except per share data) |
|
2007 |
|
|
2006 |
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
283,370 |
|
|
$ |
138,607 |
|
Current insurance receivable asbestos |
|
|
33,600 |
|
|
|
52,500 |
|
Accounts receivable, net |
|
|
345,176 |
|
|
|
330,146 |
|
Inventories, net |
|
|
327,719 |
|
|
|
313,259 |
|
Current deferred tax assets |
|
|
34,414 |
|
|
|
32,895 |
|
Other current assets |
|
|
13,343 |
|
|
|
13,002 |
|
Total current assets |
|
|
1,037,622 |
|
|
|
880,409 |
|
Property, plant and equipment, net |
|
|
289,683 |
|
|
|
289,555 |
|
Insurance receivable asbestos |
|
|
306,557 |
|
|
|
170,400 |
|
Long-term deferred tax assets |
|
|
220,370 |
|
|
|
171,164 |
|
Other assets |
|
|
128,360 |
|
|
|
97,838 |
|
Intangible assets, net |
|
|
128,150 |
|
|
|
122,744 |
|
Goodwill |
|
|
766,550 |
|
|
|
704,736 |
|
|
|
$ |
2,877,292 |
|
|
$ |
2,436,846 |
|
Liabilities and shareholders equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Notes payable and current maturities of long-term debt |
|
$ |
548 |
|
|
$ |
9,505 |
|
Accounts payable |
|
|
177,978 |
|
|
|
161,270 |
|
Current asbestos liability |
|
|
84,000 |
|
|
|
70,000 |
|
Accrued liabilities |
|
|
230,295 |
|
|
|
196,723 |
|
U.S. and foreign taxes on income |
|
|
731 |
|
|
|
24,428 |
|
Total current liabilities |
|
|
493,552 |
|
|
|
461,926 |
|
Long-term debt |
|
|
398,301 |
|
|
|
398,122 |
|
Accrued pension and postretirement benefits |
|
|
52,233 |
|
|
|
59,996 |
|
Long-term deferred tax liability |
|
|
31,880 |
|
|
|
89,595 |
|
Long-term asbestos liability |
|
|
942,776 |
|
|
|
459,567 |
|
Other liabilities |
|
|
65,353 |
|
|
|
41,004 |
|
Minority interest |
|
|
8,394 |
|
|
|
8,033 |
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Preferred shares, par value $.01; 5,000,000 shares authorized |
|
|
|
|
|
|
|
|
Common shares, par value $1.00; 200,000,000 shares authorized; 72,426,139 shares issued; 60,161,351 shares outstanding
(60,472,618 in 2006) |
|
|
72,426 |
|
|
|
72,426 |
|
Capital surplus |
|
|
148,513 |
|
|
|
134,798 |
|
Retained earnings |
|
|
845,864 |
|
|
|
946,077 |
|
Accumulated other comprehensive income |
|
|
154,077 |
|
|
|
73,175 |
|
Treasury stock; 12,264,788 treasury shares (11,953,521 in 2006) |
|
|
(336,077 |
) |
|
|
(307,873 |
) |
Total shareholders equity |
|
|
884,803 |
|
|
|
918,603 |
|
|
|
$ |
2,877,292 |
|
|
$ |
2,436,846 |
|
See Notes to Consolidated Financial Statements.
36
PART II / ITEM 8
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For year ended December 31, |
|
(in thousands) |
|
2007 |
|
|
2006 |
|
|
2005 |
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(62,342 |
) |
|
$ |
165,887 |
|
|
$ |
136,037 |
|
Asbestos charge |
|
|
390,150 |
|
|
|
|
|
|
|
|
|
Environmental charge |
|
|
18,912 |
|
|
|
|
|
|
|
|
|
Gain on sale of facility foundry restructuring |
|
|
(27,838 |
) |
|
|
|
|
|
|
|
|
Gain on sale of joint venture |
|
|
(4,144 |
) |
|
|
|
|
|
|
|
|
Loss/(Gain) on divestitures |
|
|
975 |
|
|
|
(8,478 |
) |
|
|
|
|
Income from joint venture |
|
|
(5,322 |
) |
|
|
(5,641 |
) |
|
|
(5,965 |
) |
Depreciation and amortization |
|
|
61,310 |
|
|
|
54,285 |
|
|
|
48,011 |
|
Stock-based compensation expense |
|
|
15,247 |
|
|
|
14,883 |
|
|
|
7,704 |
|
Deferred income taxes |
|
|
(112,641 |
) |
|
|
5,049 |
|
|
|
23,905 |
|
Cash (used for) provided from operating working capital |
|
|
(7,322 |
) |
|
|
(835 |
) |
|
|
5,032 |
|
Payments for asbestos-related fees and costs, net of insurance recoveries |
|
|
(10,198 |
) |
|
|
(40,563 |
) |
|
|
(45,338 |
) |
Refund (payment) associated with terminated Master Settlement Agreement |
|
|
|
|
|
|
|
|
|
|
9,925 |
|
Other |
|
|
(23,954 |
) |
|
|
(2,892 |
) |
|
|
2,234 |
|
TOTAL PROVIDED FROM OPERATING ACTIVITIES |
|
|
232,833 |
|
|
|
181,695 |
|
|
|
181,545 |
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(47,169 |
) |
|
|
(27,171 |
) |
|
|
(27,164 |
) |
Proceeds from sale of equity investment |
|
|
32,996 |
|
|
|
|
|
|
|
|
|
Proceeds from disposition of capital assets |
|
|
48,437 |
|
|
|
5,103 |
|
|
|
6,339 |
|
Payments for acquisitions, net of cash and liabilities assumed of $16,829 in 2007, $33,219 in 2006 and $388 in
2005 |
|
|
(65,498 |
) |
|
|
(282,637 |
) |
|
|
(8,823 |
) |
Proceed from divestitures |
|
|
2,005 |
|
|
|
26,088 |
|
|
|
|
|
TOTAL USED FOR INVESTING ACTIVITIES |
|
|
(29,229 |
) |
|
|
(278,617 |
) |
|
|
(29,648 |
) |
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid |
|
|
(39,651 |
) |
|
|
(33,596 |
) |
|
|
(26,962 |
) |
Reacquisition of shares on open market |
|
|
(50,001 |
) |
|
|
(59,998 |
) |
|
|
|
|
Stock options exercised net of shares reacquired |
|
|
15,057 |
|
|
|
22,870 |
|
|
|
18,624 |
|
Excess tax benefit exercise of stock options |
|
|
6,978 |
|
|
|
7,688 |
|
|
|
|
|
Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of long-term debt |
|
|
|
|
|
|
(211,323 |
) |
|
|
(4,734 |
) |
Net increase (decrease) in short-term debt |
|
|
(8,992 |
) |
|
|
9,228 |
|
|
|
(109 |
) |
Issuance of long-term debt |
|
|
|
|
|
|
307,700 |
|
|
|
|
|
TOTAL PROVIDED FROM (USED FOR) FINANCING ACTIVITIES |
|
|
(76,609 |
) |
|
|
42,569 |
|
|
|
(13,181 |
) |
Effect of exchange rate on cash and cash equivalents |
|
|
17,768 |
|
|
|
12,568 |
|
|
|
(9,051 |
) |
(Decrease) increase in cash and cash equivalents |
|
|
144,763 |
|
|
|
(41,785 |
) |
|
|
129,665 |
|
Cash and cash equivalents at beginning of year |
|
|
138,607 |
|
|
|
180,392 |
|
|
|
50,727 |
|
Cash and cash equivalents at end of year |
|
$ |
283,370 |
|
|
$ |
138,607 |
|
|
$ |
180,392 |
|
Detail of cash (used for) provided from operating working capital (Net of effects of acquisitions): |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
2,069 |
|
|
$ |
(18,746 |
) |
|
$ |
9,828 |
|
Inventories |
|
|
(767 |
) |
|
|
786 |
|
|
|
5,090 |
|
Other current assets |
|
|
529 |
|
|
|
1,526 |
|
|
|
(1,759 |
) |
Accounts payable |
|
|
7,430 |
|
|
|
(846 |
) |
|
|
(8,024 |
) |
Accrued liabilities |
|
|
9,121 |
|
|
|
15,600 |
|
|
|
(253 |
) |
U.S. and foreign taxes on income |
|
|
(25,704 |
) |
|
|
845 |
|
|
|
150 |
|
TOTAL |
|
$ |
(7,322 |
) |
|
$ |
(835 |
) |
|
$ |
5,032 |
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
27,315 |
|
|
$ |
23,177 |
|
|
$ |
22,597 |
|
Income taxes paid |
|
|
68,949 |
|
|
|
35,604 |
|
|
|
34,150 |
|
See Notes to Consolidated Financial Statements.
37
PART II / ITEM 8
Consolidated Statements of Changes in Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data) |
|
Preferred Shares |
|
|
Common Shares Issued at Par Value |
|
|
Capital Surplus |
|
|
Retained Earnings |
|
|
Comprehensive Income (Loss) |
|
|
Accumulated Other Comprehensive (Loss) Income |
|
|
Treasury Stock |
|
|
Total Shareholders Equity |
|
BALANCE JANUARY 1, 2005 |
|
|
|
|
$ |
72,426 |
|
|
$ |
111,434 |
|
|
$ |
706,505 |
|
|
|
|
|
|
$ |
80,246 |
|
|
$ |
(306,917 |
) |
|
$ |
663,694 |
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
136,037 |
|
|
|
136,037 |
|
|
|
|
|
|
|
|
|
|
|
136,037 |
|
Cash dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,962 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,962 |
) |
Exercise of stock options, net of shares reacquired, 975,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,507 |
|
|
|
21,507 |
|
Tax benefit stock options and restricted stock |
|
|
|
|
|
|
|
|
|
3,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,354 |
|
Restricted stock awarded, 229,550 shares, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,383 |
) |
|
|
|
|
|
|
|
|
|
|
6,203 |
|
|
|
4,820 |
|
Minimum pension liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,046 |
) |
|
|
(8,046 |
) |
|
|
|
|
|
|
(8,046 |
) |
Currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(41,110 |
) |
|
|
(41,110 |
) |
|
|
|
|
|
|
(41,110 |
) |
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE DECEMBER 31, 2005 |
|
|
|
|
|
72,426 |
|
|
|
114,788 |
|
|
|
814,197 |
|
|
|
|
|
|
|
31,090 |
|
|
|
(279,207 |
) |
|
|
753,294 |
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
165,887 |
|
|
|
165,887 |
|
|
|
|
|
|
|
|
|
|
|
165,887 |
|
Cash dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,596 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,596 |
) |
Reacquisition on open market 1,553,270 shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(59,998 |
) |
|
|
(59,998 |
) |
Exercise of stock options, net of shares reacquired, 1,469,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,906 |
|
|
|
25,906 |
|
Stock option amortization |
|
|
|
|
|
|
|
|
|
6,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,831 |
|
Tax benefit stock options and restricted stock |
|
|
|
|
|
|
|
|
|
13,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,179 |
|
Restricted stock awarded, 148,722 shares, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
(411 |
) |
|
|
|
|
|
|
|
|
|
|
5,426 |
|
|
|
5,015 |
|
Minimum pension liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,638 |
|
|
|
8,638 |
|
|
|
|
|
|
|
8,638 |
|
Adjustment to initially apply FASB Statement No. 158, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,336 |
) |
|
|
|
|
|
|
(10,336 |
) |
Currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,783 |
|
|
|
43,783 |
|
|
|
|
|
|
|
43,783 |
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
218,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE DECEMBER 31, 2006 |
|
|
|
|
|
72,426 |
|
|
|
134,798 |
|
|
|
946,077 |
|
|
|
|
|
|
|
73,175 |
|
|
|
(307,873 |
) |
|
|
918,603 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
(62,342 |
) |
|
|
(62,342 |
) |
|
|
|
|
|
|
|
|
|
|
(62,342 |
) |
Cash dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,642 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,642 |
) |
Reacquisition on open market 1,247,130 shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,001 |
) |
|
|
(50,001 |
) |
Exercise of stock options, net of shares reacquired, 845,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,211 |
|
|
|
18,211 |
|
Stock option amortization |
|
|
|
|
|
|
|
|
|
6,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,737 |
|
Tax benefit stock options and restricted stock |
|
|
|
|
|
|
|
|
|
6,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,978 |
|
Restricted stock awarded, 90,365 shares, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,771 |
|
|
|
|
|
|
|
|
|
|
|
3,586 |
|
|
|
5,357 |
|
Changes in pension and postretirement plan assets and benefit obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,027 |
|
|
|
30,027 |
|
|
|
|
|
|
|
30,027 |
|
Currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,875 |
|
|
|
50,875 |
|
|
|
|
|
|
|
50,875 |
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE DECEMBER 31, 2007 |
|
|
|
|
$ |
72,426 |
|
|
$ |
148,513 |
|
|
$ |
845,864 |
|
|
|
|
|
|
$ |
154,077 |
|
|
$ |
(336,077 |
) |
|
$ |
884,803 |
|
See Notes to Consolidated Financial Statements.
38
PART II / ITEM 8
Notes to Consolidated
Financial Statements
Note 1 Nature of Operations and Significant Accounting Policies
Nature of Operations Crane Co. (the Company) is a diversified manufacturer of highly engineered industrial products.
The Companys business consists of five reporting segments: Aerospace & Electronics, Engineered Materials, Merchandising
Systems, Fluid Handling and Controls.
The Aerospace & Electronics segment consists of two groups: the Aerospace Group and the
Electronics Group. Aerospace products include pressure, fuel flow and position sensors and subsystems; electrical power components and subsystems; brake control systems; coolant, lube and fuel pumps; and seat actuation. Electronics products include
high-reliability power supplies and custom microelectronics for aerospace, defense, medical and other applications; power management products, electronic radio frequency and microwave frequency components and subsystems for the defense, space and
military communications markets; and customized contract manufacturing services and products for military and defense applications.
The
Engineered Materials segment consists of Crane Composites and Polyflon. Crane Composites, representing almost the entire segment, manufactures fiberglass reinforced plastic panels for the truck trailer and recreational vehicle markets, industrial
markets and the commercial construction industry. Polyflon is a manufacturer of specialty components, primarily substrate materials for antennas.
The Merchandising Systems segment consists of two groups: Vending Solutions and Payment Solutions. Vending Solutions products include food, snack and beverage vending machines and vending machine software. Payment Solutions products
include coin changers and validators, coin dispensers and bill validators.
The Fluid Handling segment manufactures and sells various types
of industrial and commercial valves and actuators; provides valve testing, parts and services; manufactures and sells pumps and water purification solutions; distributes pipe, pipe fittings, couplings and connectors; and designs, manufactures and
sells corrosion-resistant plastic-lined pipes and fittings.
The Controls segment produces ride-leveling, air-suspension control valves for
heavy trucks and trailers; pressure, temperature and level sensors; ultra-rugged computers, measurement and control systems and intelligent data acquisition products. Controls products also include engine compressor monitoring and diagnostic
systems, water treatment equipment, wireless sensor networks and covert radio products primarily for the military and intelligence markets.
The relative size of these segments in relation to the total Company (both net sales and total assets) can be seen in Note 14, Segment Information.
Basis of Presentation The consolidated financial statements include
all controlled subsidiaries. Investments in affiliates over which the Company exercises significant influence but which it
does not control (generally 20% to 50% ownership) are accounted for under the equity method. All intercompany items have been eliminated.
Deferred financing costs of $5.4 million and $6.4 million as of December 31, 2007 and 2006, respectively, are properly presented as
deferred charges within Other assets in the accompanying consolidated balance sheets. In financial statements issued prior to June 2007, such amounts were incorrectly classified as a reduction of debt. This correction has no effect on operating
results or cash flows.
Use of Estimates The Companys financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. These require management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results may differ from those estimated. Estimates and assumptions are
reviewed periodically, and the effects of revisions are reflected in the financial statements in the period in which they are determined to be necessary. Estimates are used when accounting for such items as asset valuations, allowance for doubtful
accounts, depreciation and amortization, impairment assessments, employee benefits, taxes, asbestos liability and related insurance receivable, environmental liability and contingencies.
Currency Translation Assets and liabilities of subsidiaries that
prepare financial statements in currencies other than the U.S. dollar are translated at the rate of exchange in effect on the balance sheet date; results of operations are translated at the average rates of exchange prevailing during the year. The
related translation adjustments are included in accumulated other comprehensive income (loss) in a separate component of shareholders equity.
Revenue Recognition Sales revenue is recorded when a product is shipped, title (risk of loss) passes
to the customer and collection of the resulting receivable is reasonably assured. Revenue on long-term, fixed-price contracts is recorded on a percentage of completion basis using units of delivery as the measurement basis for progress toward
completion. Sales under cost-reimbursement-type contracts are recorded as costs are incurred.
Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, which requires an asset and liability approach for the financial accounting and reporting of income taxes. Under this method, deferred income taxes are recognized for the expected future tax consequences of differences between the tax
bases of assets and liabilities and their reported amounts in the financial statements. These balances are measured using the enacted tax rates expected to apply in the year(s) in which these temporary differences are expected to reverse. The effect
on deferred income taxes of a change in tax rates is recognized in income in the period when the change is enacted. The Company accounts for uncertain tax positions in accordance with Financial Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in Income Taxes. Accordingly, the Company reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return.
39
PART II / ITEM 8
Net Income (Loss) Per Share The Companys basic earnings per share calculations are based on the weighted average number of common shares outstanding during the year. Diluted earnings per share gives affect to all potential dilutive common
shares outstanding during the year. For the year ended December 31, 2007, 1,093,000 shares attributable to the potential exercise of outstanding options were excluded from the calculation of diluted earnings per share because the effect was
anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data) For year ended December 31, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
Net income (loss) |
|
$ |
(62,342 |
) |
|
$ |
165,887 |
|
|
$ |
136,037 |
|
Average basic shares outstanding |
|
|
60,037 |
|
|
|
60,906 |
|
|
|
59,816 |
|
Effect of dilutive stock options |
|
|
|
|
|
|
1,197 |
|
|
|
597 |
|
Average diluted shares outstanding |
|
|
60,037 |
|
|
|
62,103 |
|
|
|
60,413 |
|
Basic net income (loss) per share |
|
$ |
(1.04 |
) |
|
$ |
2.72 |
|
|
$ |
2.27 |
|
Diluted net income (loss) per share |
|
$ |
(1.04 |
) |
|
$ |
2.67 |
|
|
$ |
2.25 |
|
Cash and Cash Equivalents Cash and cash equivalents include highly liquid investments with original maturities of three months or less that are readily convertible to cash and are not subject to significant risk
from fluctuations in interest rates. As a result, the carrying amount of cash and cash equivalents approximates fair value.
Accounts Receivable Receivables are carried at net realizable value.
A summary of the allowance for doubtful accounts follows:
|
|
|
|
|
|
|
(in thousands) December 31, |
|
2007 |
|
2006 |
|
2005 |
Balance at beginning of year |
|
$9,192 |
|
$5,852 |
|
$7,736 |
Provisions |
|
5,975 |
|
11,335 |
|
11,138 |
Deductions |
|
(6,179) |
|
(7,995) |
|
(13,022) |
Balance at end of year |
|
$8,988 |
|
$9,192 |
|
$5,852 |
Concentrations of credit risk with respect to accounts receivable are limited due to the large
number of customers and relatively small account balances within the majority of the Companys customer base, and their dispersion across different businesses. The Company periodically evaluates the financial strength of its customers and
believes that its credit risk exposure is limited.
Inventories Inventories consist of the following:
|
|
|
|
|
|
|
|
|
(in thousands) December 31, |
|
2007 |
|
|
2006 |
|
Finished goods |
|
$ |
109,337 |
|
|
$ |
109,856 |
|
Finished parts and subassemblies |
|
|
39,108 |
|
|
|
39,644 |
|
Work in process |
|
|
51,923 |
|
|
|
53,707 |
|
Raw materials |
|
|
127,351 |
|
|
|
110,052 |
|
Total inventories |
|
$ |
327,719 |
|
|
$ |
313,259 |
|
Inventories are stated at the lower of cost or market. Cost at domestic locations is principally
determined on the last-in, first-out (LIFO) method of inventory valuation. Liquidations have reduced cost of sales by $0.2 million and $0.4 million for the years ended
December 31, 2007 and 2006, respectively. Replacement cost would have been higher by $13.5 million and $13.4 million at
December 31, 2007 and 2006, respectively.
Property, Plant and Equipment,
net Property, plant and equipment, net consist of the
following:
|
|
|
|
|
|
|
|
|
(in thousands) December 31, |
|
2007 |
|
|
2006 |
|
Land |
|
$ |
61,605 |
|
|
$ |
59,851 |
|
Buildings and improvements |
|
|
172,248 |
|
|
|
163,417 |
|
Machinery and equipment |
|
|
516,115 |
|
|
|
553,519 |
|
Gross property, plant and equipment |
|
|
749,968 |
|
|
|
776,787 |
|
Less: accumulated depreciation |
|
|
460,285 |
|
|
|
487,232 |
|
Property, plant and equipment, net |
|
$ |
289,683 |
|
|
$ |
289,555 |
|
Property, plant and equipment are stated at cost. Depreciation is calculated by the straight-line
method over the estimated useful lives of the respective assets, which range from ten to twenty-five years for buildings and improvements and three to ten years for machinery and equipment.
Goodwill and Intangible Assets The Company reviews goodwill and intangibles with indefinite lives for impairment annually or whenever an event occurs or circumstances change that would reduce fair value below carrying value, in accordance with the
requirements of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). If the carrying value of goodwill or an intangible asset exceeds its fair value, an impairment loss is
recognized. A discounted cash flow model is used to determine the fair value of the Companys reporting units for purposes of testing for impairment. Based on this model, no impairment charges were necessary in the three year period ended
December 31, 2007.
Changes to goodwill, are as follows:
|
|
|
|
|
|
|
|
|
(in thousands) December 31, |
|
2007 |
|
|
2006 |
|
Balance at beginning of year |
|
$ |
704,736 |
|
|
$ |
568,355 |
|
Additions |
|
|
46,406 |
|
|
|
130,965 |
|
Divestitures |
|
|
(634 |
) |
|
|
(5,370 |
) |
Translation and other adjustments |
|
|
16,042 |
|
|
|
10,786 |
|
Balance at end of year |
|
$ |
766,550 |
|
|
$ |
704,736 |
|
Goodwill increased $29 million during the year ended December 31, 2007 due to the acquisitions
of the composite panel business of Owens Corning in September 2007 and the Mobile Rugged business of Kontron America, Inc. in August 2007. Adjustments related to the finalization of purchase price allocations associated with the 2006 acquisitions
amounted to an additional $17 million in goodwill during the year ended December 31, 2007. Goodwill increased $131 million during the year ended December 31, 2006 due to the acquisitions of CashCode Co. Inc. in January 2006, Telequip in
June 2006, Noble Composites, Inc. in September 2006, Dixie-Narco Inc. in October 2006 and certain assets of Automatic Products International in June and September 2006. Goodwill decreased $5 million during the year ended December 31, 2006 due
to the sale of Westad Industri AS in April 2006 and the sale of Resistoflex-Aerospace in May 2006.
40
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Changes to intangible assets, are as follows:
|
|
|
|
|
|
|
|
|
(in thousands) December 31, |
|
2007 |
|
|
2006 |
|
Balance at beginning of year, net of accumulated amortization |
|
$ |
122,744 |
|
|
$ |
60,735 |
|
Additions |
|
|
19,409 |
|
|
|
76,191 |
|
Translation and other adjustments |
|
|
3,886 |
|
|
|
(296 |
) |
Amortization expense |
|
|
(17,889 |
) |
|
|
(13,886 |
) |
Balance at end of year, net of accumulated amortization |
|
$ |
128,150 |
|
|
$ |
122,744 |
|
A summary of the intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
(in thousands) December 31, |
|
Gross Asset |
|
|
Accumulated Amortization |
|
|
Gross Asset |
|
|
Accumulated Amortization |
|
Intellectual rights |
|
$ |
92,286 |
|
|
$ |
43,720 |
|
|
$ |
88,004 |
|
|
$ |
40,530 |
|
Customer relation- ships and backlog |
|
|
85,204 |
|
|
|
17,448 |
|
|
|
79,204 |
|
|
|
14,362 |
|
Drawings |
|
|
10,825 |
|
|
|
9,681 |
|
|
|
10,825 |
|
|
|
9,199 |
|
Other |
|
|
23,784 |
|
|
|
13,100 |
|
|
|
11,662 |
|
|
|
2,860 |
|
|
|
$ |
212,099 |
|
|
$ |
83,949 |
|
|
$ |
189,695 |
|
|
$ |
66,951 |
|
Amortization expense for these intangible assets is expected to be approximately $16.9 million in
2008, $15.8 million in 2009, $14.5 million in 2010, $13.5 million in 2011, and $9.5 million in 2012.
Of the $128.2 million of net
intangible assets at December 31, 2007, $18.9 million of intangibles with indefinite useful lives, consisting of trade names, are not being amortized under SFAS 142.
Amortizable intangibles of $19.4 million were acquired in 2007. These assets have a weighted average life of 11 years.
Valuation of Long-Lived Assets The Company periodically evaluates
the carrying value of long-lived assets when events and circumstances indicate that the carrying amount may not be recoverable. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such
asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined
primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved.
Financial Instruments The Company does not hold or issue derivative financial instruments for trading or speculative purposes. The Company periodically
uses forward foreign exchange contracts as economic hedges of anticipated transactions and firm purchase and sale commitments. These contracts are generally marked to market on a current basis and the respective gains and losses are recognized in
other income (expense). The Company also periodically enters into interest-rate swap agreements to moderate its exposure to interest rate changes. Interest-rate swaps are agreements to exchange fixed and variable rate payments based on the notional
principal amounts. The changes in the fair value of these derivatives are recognized in other comprehensive income for qualifying cash flow hedges.
Recently Issued Accounting Standards
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes.
FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted the requirements of FIN 48 effective January 1, 2007. See Note 3, Income Taxes, for a further discussion of, and
disclosures related to, FIN 48.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (SFAS 157). SFAS 157 defines fair value, provides a framework for measuring fair value, and requires additional disclosure about fair value measurements. In accordance with SFAS 157, the definition of fair value
retains the exchange price notion, and exchange price is defined as the price in an orderly transaction between market participants to sell an asset or transfer a liability. If there is a principal market for the asset or liability, the fair value
measurement should reflect that price, whether that price is directly observable or otherwise used in a valuation technique. Depending on the asset or liability being valued, the inputs used to determine fair value can range from objective inputs
such as prices based on market data independent from the entity, to subjective inputs such as the entitys own assumptions about the estimates that market participants would use. The Statement applies to other accounting pronouncements that
require or permit fair value measurements. With respect to financial assets and liabilities, SFAS 157 will be effective for fiscal years beginning after November 15, 2007. For all other affected assets and liabilities, such as intangibles, SFAS
157 will be effective for fiscal years beginning after November 15, 2008. The Company is currently evaluating the provisions of SFAS 157 to determine the potential impact, if any, the adoption will have on the Companys financial
statements when it is adopted beginning in the first quarter of 2008.
In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115, (SFAS 159). This Standard allows entities the option to measure
financial instruments at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having
to apply complex hedge accounting provisions. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company does not believe SFAS 159 will have a material effect on its consolidated financial statements when adopted in
the first quarter of 2008.
41
PART II / ITEM 8
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS No. 141(R) establishes principles and requirements for how an acquirer recognizes and measures in
its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree and recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase. SFAS
No. 141(R) also sets forth the disclosures required to be made in the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is effective for fiscal years beginning after
December 15, 2008. The effects of the adoption of this standard in 2009 will be prospective and affect any acquisitions made subsequent thereto.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51. SFAS No. 160 establishes accounting and reporting standards that
require that the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parents equity;
the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; and changes in a parents ownership interest while the
parent retains its controlling financial interest in its subsidiary be accounted for consistently. SFAS No. 160 also requires that any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value when a
subsidiary is deconsolidated. SFAS No. 160 also sets forth the disclosure requirements to identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal
years beginning after December 15, 2008. The Company has not yet determined the anticipated effect, if any, of the adoption of this standard in 2009.
Note 2 Miscellaneous Net
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) For year ended December 31, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
Gains on sales of assets |
|
$ |
4,410 |
|
|
$ |
6,576 |
|
|
$ |
13 |
|
Equity joint venture income* |
|
|
5,322 |
|
|
|
5,641 |
|
|
|
5,965 |
|
Other |
|
|
174 |
|
|
|
(2,743 |
) |
|
|
(3,033 |
) |
|
|
$ |
9,906 |
|
|
$ |
9,474 |
|
|
$ |
2,945 |
|
* |
Income from Industrial Motion Control Holdings LLC (IMC) joint venture. The Company sold its investment in this joint venture on December 18, 2007 for net
proceeds of $33 million. The resulting gain of $4.1 million is included in Gain on sale of assets. The Companys investment in this joint venture was $29 million at December 31, 2006, and is included in Other
assets. |
Note 3 Income Taxes
(Loss) income before taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) For year ended December 31, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
U.S. operations |
|
$ |
(286,826 |
) |
|
$ |
150,354 |
|
|
$ |
145,292 |
|
Non-U.S. operations |
|
|
167,931 |
|
|
|
88,980 |
|
|
|
51,231 |
|
|
|
$ |
(118,895 |
) |
|
$ |
239,334 |
|
|
$ |
196,523 |
|
The provision (benefit) for income taxes consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) For year ended December 31, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal tax |
|
$ |
28,020 |
|
|
$ |
37,164 |
|
|
$ |
17,745 |
|
State and local tax |
|
|
(77 |
) |
|
|
5,265 |
|
|
|
1,531 |
|
Non-U.S. tax |
|
|
42,356 |
|
|
|
25,969 |
|
|
|
17,305 |
|
|
|
|
70,299 |
|
|
|
68,398 |
|
|
|
36,581 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal tax |
|
|
(124,684 |
) |
|
|
2,901 |
|
|
|
23,630 |
|
State and local tax |
|
|
(96 |
) |
|
|
1,347 |
|
|
|
279 |
|
Non-U.S. tax |
|
|
(2,072 |
) |
|
|
801 |
|
|
|
(4 |
) |
|
|
|
(126,852 |
) |
|
|
5,049 |
|
|
|
23,905 |
|
Provision (benefit) for income taxes |
|
$ |
(56,553 |
) |
|
$ |
73,447 |
|
|
$ |
60,486 |
|
The reconciliation of the statutory U.S. federal rate to the effective tax rate, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) For year ended December 31, |
|
2007 |
|
|
2006 |
|
|
2005 |
|
Statutory U.S. federal tax at 35% |
|
$ |
(41,613 |
) |
|
$ |
83,767 |
|
|
$ |
68,783 |
|
Increase (reduction) from: |
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. taxes |
|
|
(20,019 |
) |
|
|
(4,776 |
) |
|
|
(809 |
) |
State and local tax, net of federal benefit |
|
|
(15,575 |
) |
|
|
4,003 |
|
|
|
3,169 |
|
Valuation allowance on state deferred tax assets |
|
|
15,463 |
|
|
|
295 |
|
|
|
(1,993 |
) |
Federal benefit on export sales |
|
|
(249 |
) |
|
|
(2,946 |
) |
|
|
(2,862 |
) |
U.S. domestic manufacturing deduction |
|
|
(2,107 |
) |
|
|
|
|
|
|
|
|
Foreign dividend, net of credits |
|
|
5,040 |
|
|
|
(1,923 |
) |
|
|
(4,200 |
) |
Deferred taxes on earnings of non-U.S. subsidiaries |
|
|
10,400 |
|
|
|
|
|
|
|
|
|
Research and development tax credit |
|
|
(3,512 |
) |
|
|
(4,429 |
) |
|
|
(2,887 |
) |
Other |
|
|
(4,381 |
) |
|
|
(544 |
) |
|
|
1,285 |
|
Provision (benefit) for income taxes |
|
$ |
(56,553 |
) |
|
$ |
73,447 |
|
|
$ |
60,486 |
|
Effective tax rate |
|
|
47.6% |
|
|
|
30.7% |
|
|
|
30.8% |
|
42
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Prior to 2007, the Company had not recorded deferred income taxes on the undistributed earnings of its non-U.S. subsidiaries because of managements
intent to indefinitely reinvest such earnings outside the U.S. In the fourth quarter of 2007, management concluded that it no longer plans to indefinitely reinvest all of its non-U.S. subsidiaries earnings outside of the U.S. due to capital
overseas in excess of current and projected future needs. As a result, the Company recorded a deferred tax liability of $10.4 million during the fourth quarter of 2007 to reflect the additional U.S. federal and state income tax due upon the ultimate
repatriation of approximately $194.2 million of the previously undistributed earnings of its non-U.S. subsidiaries.
Deferred taxes have not
been provided on the remainder of the non-U.S. subsidiaries undistributed earnings of approximately $29.5 million since these earnings have been, and under current plans will continue to be, indefinitely reinvested outside the U.S. If these
earnings were distributed in the form of dividends or otherwise, the Company would be subject to U.S. income taxes and foreign withholding taxes. It is not practical to estimate the amount of taxes that would be payable upon remittance of these
earnings.
Tax benefits of $7.0 million in 2007, $13.2 million in 2006 and $3.4 million in 2005 associated with the exercise of employee
stock options and other employee stock programs were allocated to shareholders equity.
The components of deferred tax assets and
liabilities included on the balance sheet are as follows:
|
|
|
|
|
|
|
|
|
(in thousands) December 31, |
|
2007 |
|
|
2006 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Asbestos-related liabilities |
|
$ |
270,380 |
|
|
$ |
124,768 |
|
Tax loss and credit carryforwards |
|
|
29,073 |
|
|
|
26,709 |
|
Environmental |
|
|
10,084 |
|
|
|
6,920 |
|
Inventories |
|
|
14,971 |
|
|
|
15,133 |
|
Postretirement benefits |
|
|
7,119 |
|
|
|
7,622 |
|
Accrued bonus and stock-based compensation |
|
|
14,151 |
|
|
|
9,463 |
|
Insurance |
|
|
3,864 |
|
|
|
5,461 |
|
Warranty |
|
|
5,748 |
|
|
|
8,451 |
|
Compensated absences |
|
|
6,920 |
|
|
|
6,851 |
|
Allowance for doubtful accounts |
|
|
2,574 |
|
|
|
2,897 |
|
Other |
|
|
9,266 |
|
|
|
5,023 |
|
Total |
|
|
374,150 |
|
|
|
219,298 |
|
Less: valuation allowance on non-U.S. and state deferred tax assets, tax loss and credit carryforwards |
|
|
57,535 |
|
|
|
41,027 |
|
Total deferred tax assets, net |
|
|
316,615 |
|
|
|
178,271 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
(34,408 |
) |
|
|
(37,585 |
) |
Intangibles |
|
|
(33,346 |
) |
|
|
(26,549 |
) |
Pension |
|
|
(16,080 |
) |
|
|
(2,164 |
) |
Unremitted foreign earnings |
|
|
(10,400 |
) |
|
|
|
|
Total deferred tax liabilities |
|
|
(94,234 |
) |
|
|
(66,298 |
) |
Net deferred tax asset |
|
$ |
222,381 |
|
|
$ |
111,973 |
|
Balance sheet classification: |
|
|
|
|
|
|
|
|
Current deferred tax assets |
|
$ |
34,414 |
|
|
$ |
32,895 |
|
Long-term deferred tax assets |
|
|
220,370 |
|
|
|
171,164 |
|
Accrued liabilities |
|
|
(523 |
) |
|
|
(2,491 |
) |
Long-term deferred tax liability |
|
|
(31,880 |
) |
|
|
(89,595 |
) |
Net deferred tax asset |
|
$ |
222,381 |
|
|
$ |
111,973 |
|
As of December 31, 2007, the Company had tax loss and credit carryforwards that will expire, if unused, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) Year of expiration Tax Loss/Credit |
|
U.S State Credits |
|
|
U.S. State Tax Losses |
|
|
Non-U.S. Credits |
|
|
Non-U.S. Tax Losses |
|
|
Total |
2008-2011 |
|
$ |
1,582 |
|
|
$ |
27,079 |
|
|
$ |
|
|
|
$ |
2,202 |
|
|
|
|
After 2011 |
|
|
2,555 |
|
|
|
168,062 |
|
|
|
|
|
|
|
15,394 |
|
|
|
|
Indefinite |
|
|
3,750 |
|
|
|
|
|
|
|
78 |
|
|
|
42,729 |
|
|
|
|
Total |
|
$ |
7,887 |
|
|
$ |
195,141 |
|
|
$ |
78 |
|
|
$ |
60,325 |
|
|
|
|
Deferred tax asset on tax carryforward |
|
$ |
5,127 |
|
|
$ |
9,005 |
|
|
$ |
78 |
|
|
$ |
14,863 |
|
|
$ |
29,073 |
Of the total $29.1 million deferred tax asset for tax loss and credit carryforwards at
December 31, 2007, $25.4 million has been offset by a valuation allowance because of the uncertainty of ultimately realizing these future tax benefits. In addition, the Company considers it unlikely that a portion of the tax benefit related to
various non-U.S. and state deferred tax assets will be realized. Accordingly, a $32.1 million valuation allowance has been established against these non-U.S. and state deferred tax assets. As a result, the Companys total valuation allowance at
December 31, 2007 is approximately $57.5 million.
As discussed in Note 1, Nature of Operations and Significant Accounting Policies,
the Company adopted the provisions of FIN 48 as of January 1, 2007. The Company did not recognize a change in its liability for unrecognized tax benefits as a result of its adoption of FIN 48. In accordance with paragraph 19 of FIN 48, the
Company includes both accrued interest related to unrecognized tax benefits and statutory income tax penalties in its provision (benefit) for income taxes.
A reconciliation of the total amounts of the Companys unrecognized tax benefits, excluding interest and penalties, as of January 1, 2007 and December 31, 2007 is as follows:
|
|
|
|
|
(in thousands) |
|
|
|
Balance of liability as of January 1, 2007 |
|
$ |
5,132 |
|
Increase as a result of tax positions taken prior to 2007 |
|
|
579 |
|
Decrease as a result of tax positions taken prior to 2007 |
|
|
(1,986 |
) |
Increase as a result of tax positions taken during 2007 |
|
|
1,353 |
|
Decrease as a result of settlements with taxing authorities |
|
|
(358 |
) |
Reduction as a result of a lapse of the statute of limitations |
|
|
(318 |
) |
Balance of liability as of December 31, 2007 |
|
$ |
4,402 |
|
As of December 31, 2007, the total amount of unrecognized tax benefits that, if recognized,
would affect the Companys effective tax rate was approximately $4.3 million. The difference between this amount and the amount reflected in the tabular reconciliation above relates to (1) the deferred U.S. federal income tax benefit on
unrecognized tax benefits related to U.S. state income taxes, (2) interest expense, net of deferred federal, state and/or non-U.S. tax benefits, and (3) unrecognized tax benefits established in purchase accounting.
43
PART II / ITEM 8
During the year ended December 31, 2007, the Company recognized approximately $0.1 million of interest income related to unrecognized tax benefits in its consolidated statement of operations. At
December 31, 2007, the Company recognized approximately $0.5 million of interest expense related to unrecognized tax benefits in its consolidated balance sheet.
The Company regularly assesses the potential outcomes of both ongoing examinations and future examinations for the current and prior years in order to ensure the Companys provision for income
taxes is adequate. The Company believes that adequate accruals have been provided for all open years.
The Companys income tax returns
are subject to examination by the Internal Revenue Service (IRS) as well as other state and international taxing authorities. In May 2007, the IRS completed its examination of the Companys 2005 federal income tax return. Only the
Companys 2006 federal tax return, which was filed in September 2007, has not yet been examined by the IRS.
With few exceptions, the
Company is no longer subject to U.S. state and local or non-U.S. income tax examinations by taxing authorities for years before 2003. At this time, the Company is currently under audit by various state and non-U.S. taxing authorities. As of
December 31, 2007, it is reasonably possible that the Companys unrecognized tax benefits will decrease by approximately $0.3 million during the next twelve months as a result of the closure of the aforementioned audits as well as the
expiration of state statutes of limitation on the assessment and collection of income taxes.
Note 4 Accrued Liabilities
|
|
|
|
|
|
|
|
(in thousands) December 31, |
|
2007 |
|
|
2006 |
Employee-related expenses |
|
$ |
94,044 |
|
|
$ |
82,310 |
Warranty |
|
|
32,218 |
|
|
|
20,294 |
Other |
|
|
104,033 |
|
|
|
94,119 |
|
|
$ |
230,295 |
|
|
$ |
196,723 |
The Company accrues warranty liabilities when it is probable that an asset has been impaired or a
liability has been incurred and the amount of the loss can be reasonably estimated.
A summary of the warranty liabilities is as follows:
|
|
|
|
|
|
|
|
|
(in thousands) For year ended December 31, |
|
2007 |
|
|
2006 |
|
Balance at beginning of year |
|
$ |
20,294 |
|
|
$ |
15,495 |
|
Additions |
|
|
17,896 |
|
|
|
16,730 |
|
Less: payments / deductions |
|
|
(5,972 |
) |
|
|
(11,931 |
) |
Balance at end of year |
|
$ |
32,218 |
|
|
$ |
20,294 |
|
Note 5 Other Liabilities
|
|
|
|
|
|
|
|
(in thousands) December 31, |
|
2007 |
|
|
2006 |
Environmental |
|
$ |
35,576 |
|
|
$ |
16,218 |
Other |
|
|
29,777 |
|
|
|
24,786 |
|
|
$ |
65,353 |
|
|
$ |
41,004 |
Note 6 Research and Development
Research and development costs are expensed when incurred. These costs were approximately $106.8 million, $69.7 million and $53.1 million in 2007, 2006 and 2005, respectively. Funds received from
customer-sponsored research and development projects were approximately $8.4 million, $8.8 million and $7.0 million received in 2007, 2006 and 2005, respectively, and were recorded in net sales.
Note 7 Pension and Postretirement Benefits
In
the U.S., the Company sponsors a defined benefit pension plan that covers approximately 48% of all U.S. employees. The benefits are based on years of service and compensation on a final average pay basis, except for certain hourly employees where
benefits are fixed per year of service. This plan is funded with a trustee in respect of past and current service. Charges to expense are based upon costs computed by an independent actuary. The Companys funding policy is to contribute
annually amounts that are allowable for federal or other income tax purposes. These contributions are intended to provide for future benefits earned to date and those expected to be earned in the future. A number of the Companys non-U.S.
subsidiaries sponsor defined benefit pension plans that cover approximately 23% of all non-U.S. employees. The benefits are typically based upon years of service and compensation. These plans are funded with trustees in respect of past and current
service. Charges to expense are based upon costs computed by independent actuaries. The Companys funding policy is to contribute annually amounts that are allowable for tax purposes or mandated by local statutory requirements. These
contributions are intended to provide for future benefits earned to date and those expected to be earned in the future.
Non-union employees
hired after December 31, 2005 will no longer be eligible for participation in the Companys domestic defined benefit pension plan or the ELDEC and Interpoint money purchase plan. Instead, qualifying employees will receive an additional 2%
Company contribution to their 401(K) plan accounts. Certain of the Companys non-U.S. defined benefit pension plans were also amended whereby eligibility for new participants will cease.
Postretirement health care and life insurance benefits are provided for certain employees hired before January 1, 1990, who meet minimum age and
service requirements. The Company does not pre-fund these benefits and has the right to modify or terminate the plan.
44
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
A summary of benefit obligations, fair value of plan assets and funded status is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) December 31, |
|
Pension Benefits |
|
|
Postretirement Benefits |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year |
|
$ |
624,309 |
|
|
$ |
579,212 |
|
|
$ |
18,370 |
|
|
$ |
20,618 |
|
Service cost |
|
|