CXT

Business Context and Reporting Period

This summary covers the Form 10-Q filed by Crane Co. for the quarterly period ended September 30, 2001. The company operates in five primary segments: Engineered Materials, Merchandising, Aerospace, Fluid Handling, and Crane Controls. The reporting period includes significant corporate actions, including the formation of a joint venture with Emerson Electric Co., the sale of non-core businesses (Powers Process Controls and Crane Plumbing Canada), and several strategic acquisitions totaling approximately $201 million in the first nine months of 2001.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 17% year-over-year for the quarter ($426.2M vs. $363.1M) and 7% for the nine-month period ($1.21B vs. $1.13B). This growth was driven primarily by acquisitions in the Fluid Handling segment and strong performance in Aerospace.
• Profitability: Operating profit rose 25% in the quarter to $46.9 million. However, for the nine-month period, operating profit was slightly lower than the prior year ($139.4M vs. $140.6M), largely due to a $12.5 million non-cash special charge related to CEO retirement costs and a loss on the disposal of the Canadian plumbing business.
• Segment Performance:
  • Aerospace: Sales up 20% and operating profit up 33% in the quarter, though management noted severe impacts from the September 11th events on commercial aerospace.
  • Fluid Handling: Sales surged 47% in the quarter due to acquisitions (Xomox, Alfa Laval) and improved market conditions.
  • Engineered Materials: Sales declined 7% due to weak transportation and chemical processing markets.
• Balance Sheet: Long-term debt increased significantly to $352.3 million from $252.8 million in the prior year, reflecting financing for acquisitions. Cash and cash equivalents grew to $20.9 million from $2.6 million.

Guidance, Outlook, and Risks

• September 11th Impact: Management expects a severe downturn in the Aerospace segment, with operating results projected to be down approximately 40% in the fourth quarter compared to the third quarter, including $2.0 million in severance costs. Engineered Materials earnings are also expected to decline 25% in the fourth quarter due to reduced order rates in transportation and petrochemical markets.
• Acquisition Integration: The company is integrating recent acquisitions, including the Xomox valve business and the Industrial Flow Group of Alfa Laval. These are expected to drive future growth in the Fluid Handling segment.
• Joint Venture: A new joint venture, Industrial Motion Control Holdings, LLC, was formed with Emerson Electric Co. involving the Ferguson and Commercial Cam units. Crane contributed $12 million in cash.
• Accounting Changes: The company is assessing the impact of new FASB standards (SFAS 141, 142, 143, 144), particularly SFAS 142 which will discontinue goodwill amortization effective January 1, 2002.
• Liquidity: The company maintains a current ratio of 2.2 and has $333.3 million in unused credit lines. Net debt represents 34.8% of capital.

Investor Verification Checklist

• Acquisition Goodwill: Verify the final allocation of the $90 million preliminary goodwill recorded for 2001 acquisitions and potential future impairment risks under SFAS 142.
• Aerospace Exposure: Assess the magnitude of order cancellations and deferred revenue in the Aerospace segment following the September 11th attacks.
• Disposal Losses: Confirm the final accounting treatment and tax implications of the $8.5 million loss on the sale of the Canadian Crane Plumbing business.
• Debt Servicing: Review the interest rate exposure on the increased long-term debt ($352.3M), noting that $139 million is at variable rates.
• Fourth Quarter Guidance: Monitor the realization of the projected 40% drop in Aerospace earnings and 25% drop in Engineered Materials earnings for Q4 2001.