CXT

Crane Co. 10-Q Summary: Period Ended June 30, 2008

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Crane Co., a diversified manufacturer of highly engineered industrial products, for the period ended June 30, 2008. The company operates through five segments: Aerospace & Electronics, Engineered Materials, Merchandising Systems, Fluid Handling, and Controls. The registrant is a large accelerated filer incorporated in Delaware.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 4.9% in Q2 and 6.5% year-to-date (YTD) compared to 2007. Growth was driven by favorable currency translation (approx. 3.0% in Q2, 3.4% YTD) and acquisitions, partially offset by divestitures.
• Profitability: Operating profit rose 20.2% in Q2 and 15.3% YTD. Margins improved due to strong performance in Fluid Handling and Merchandising Systems.
• Segment Performance:
  • Fluid Handling: Sales up 7.1% (Q2) and 8.4% (YTD); Operating profit up 39.5% (Q2) and 41.5% (YTD) due to strong demand in chemical, pharmaceutical, and energy sectors.
  • Merchandising Systems: Sales up 15.7% (Q2) and 16.1% (YTD); Operating profit up 45.5% (Q2) and 46.1% (YTD) driven by new product introductions (BevMax III).
  • Engineered Materials: Sales declined 16.9% (Q2) and 11.3% (YTD) due to a 25.2% drop in recreational vehicle sales. Operating profit fell 54.7% (Q2) and 41.9% (YTD).
  • Aerospace & Electronics: Sales increased 3.6% (Q2) and 5.1% (YTD), but operating profit dropped 24.2% (Q2) and 24.0% (YTD) due to high engineering expenses for Boeing 787 and Airbus A400M programs.
• Unusual Items: Q2 2008 operating profit included $4.4 million in environmental remediation reimbursements. Q2 2007 included a $7.6 million charge for a U.S. Government settlement.

Guidance, Outlook, and Risks

• Outlook: Management expects continued high engineering expenses in the Aerospace segment through 2008 due to Boeing 787 delays. The Foundry Restructuring program in the Fluid Handling segment is expected to be substantially completed by the end of 2008, with total pre-tax charges of approximately $14 million.
• Asbestos Litigation: A significant contingency exists regarding asbestos claims. As of June 30, 2008, the recorded liability was $988 million, with a corresponding insurance receivable asset of $318 million. There are 81,979 pending claims. Recent adverse verdicts (e.g., James Baccus claim) remain under appeal.
• Environmental Matters: The company faces remediation costs at a former site in Goodyear, Arizona, with a liability of $39.3 million. A consent decree with the EPA is in place, and the company expects reimbursement for 21% of qualifying costs from the U.S. Government.
• Other Litigation: The company is defending lawsuits regarding fiberglass-reinforced plastic material failures, including a consolidated suit involving a 2003 fire with damages demanded in excess of $50 million. A potential $25 million gap in insurance coverage for this specific matter has been identified.

Investor Verification Checklist

• Asbestos Liability Accuracy: Verify the stability of the $988 million liability estimate and the collectability of the $318 million insurance receivable given recent adverse court rulings.
• Aerospace Engineering Costs: Monitor the timeline for Boeing 787 delivery and the potential for further engineering cost increases or recoveries in the Aerospace & Electronics segment.
• Engineered Materials Demand: Assess the recovery trajectory of the recreational vehicle and transportation markets, which are driving the significant decline in this segment.
• Insurance Coverage Gap: Confirm the status of actions taken to close the potential $25 million insurance coverage gap related to the chicken processing plant fire litigation.
• Foundry Restructuring: Track the completion of the UK and Canada foundry closures and the realization of the expected $14 million in pre-tax charges.