Crane NXT - 10-Q quarterly report FY

The effects of adopting the new Standard on net income and diluted earnings per share for the three-month and six-month periods ended June 30, 2002 and 2001 are as follows:

The after-tax cumulative effect adjustment recognized upon adoption of SFAS No. 142 was $28,076 and resulted from a change in the criteria for the measurement of impairment from an undiscounted to a discounted cash flow method. The reporting segments (units) in which the impairment loss was recognized are as follows:

Changes to goodwill and intangible assets during the six-month period ended June 30, 2002, including the effects of adopting the new accounting standard, follow.

Goodwill increased $35.6 million during the six-month period ended June 30, 2002 primarily due to the acquisition of Lasco Composites in May 2002 and adjustments to preliminary purchase price allocations from prior periods.

Intangible assets, totaled $44.4 million, net of accumulated amortization of $28.1 million, at June 30, 2002. Of this amount, $7.5 million represents intangibles with indefinite useful lives, consisting of trade names which are not being amortized under SFAS No. 142. The remaining intangibles relate to customer relationships, patents, and licenses. Amortization expense for intangible assets is expected to be approximately $3.0 million each year between 2003 and 2007.

In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 will be effective for the Company for disposal activities initiated after December 31, 2002. The Company is in the process of evaluating the effect that adopting SFAS 146 will have on its financial statements.

Net income for the second quarter of 2002 was $26.6 million, or $.44 per share, compared with $32.5 million, or $.54 per share, for the second quarter of 2001. Operating profit for the second quarter of 2002 was $43.3 million on sales of $391.6 million compared with $55.2 million on sales of $409.0 million for the second quarter of 2001. Operating profit for the second quarter of 2001 included $4.4 million of goodwill amortization ($.07 per share after tax).

During the second quarter of 2002, the Company completed the transitional impairment test required by SFAS No. 142, “Goodwill and Intangible Assets” and recorded an after-tax charge of $28.1 million or $.47 per share. The adjustment was recorded as of the effective date of adopting SFAS No. 142, which was January 1, 2002.

Order backlog at June 30, 2002 totaled $413 million, $112 million or 21% lower versus June 30, 2001, 11% lower versus December 31, 2001 and 3% lower versus March 31, 2002, continuing to reflect declines in the commercial and general aviation markets and comparison to high prior year coin equipment order levels for the Euro conversion.

Net sales from domestic businesses were 72% of the quarter’s total net sales in 2002 compared with 73% in the same three-month period of 2001. Operating profit from domestic businesses was 80% and 76% of total operating profit for 2002 and 2001, respectively. Operating profit margins for domestic businesses were 12.4% in 2002 compared with 14.0% in 2001. Operating profit margins for non-US businesses were 7.7% in 2002 versus 12.2% in 2001 principally due to lower 2002 results at the Company’s German coin validator business.

On May 24, 2002, the Company acquired the Lasco Composites business from Tomkins Industries, Inc., a subsidiary of Tomkins plc. for a total purchase price of approximately $44 million. Lasco Composites is a manufacturer of fiberglass reinforced plastic panels with annual sales of approximately $40 million.

As expected, the downturn in the aerospace market and the completion of the equipment orders for the Euro conversion resulted in operating profit performance down from the prior year. Market conditions in the chemical processing industry (CPI) and automated merchandising markets remain difficult, although partially offset by strength in the recreational vehicle (RV) market.

Aerospace sales of $82.7 million were $22.0 million, or 21% lower, compared with the second quarter 2001. Operating profit of $19.8 million was $7.7 million, or 28%, lower than the second quarter of 2001 reflecting continued weakness in the aerospace sector. However, operating profit margins remained strong at 24.0% in the second quarter of 2002, reflecting disciplined cost initiatives and excellent results at Interpoint. Interpoint’s results were strong with operating profit double the prior year level as a result of favorable product mix and increased leverage of its lower cost Taiwan facility. Overall, the Group’s commercial aerospace and aftermarket orders remain weak. Aerospace orders in the second quarter of 2002 were 32% below the prior year level.

Engineered Materials sales of $74.6 million were $6.3 million, or 8%, lower compared to the second quarter of 2001. On a comparable basis, sales were down 3%, before acquisitions and the divesture of the plumbing business in Canada. Second quarter 2002 sales include $3.9 million of incremental sales from the May 2002 acquisition of Lasco Composites and $2.3 million for Resistoflex GmbH, acquired in July 2001. Segment operating profit decreased $.5 million, or 3%, to $13.0 million in the current quarter compared with the second quarter of 2001, while margins improved to 17.4% compared to 16.6% versus the prior year quarter. The sales and margin improvement continues to be driven by Kemlite on the strength of the RV market. Resistoflex more than offset these favorable impacts as a result of the weakness in the chemical process industry. Included in second quarter 2002 results were $.8 million in costs as a result of Resistoflex’s decision to consolidate its Bay City, MI facility into its Marion, NC facility. Resistoflex expects to incur an additional $1 million of costs in the second half of the year associated with this consolidation.

Merchandising Systems sales of $41.2 million were $12.9 million or 24% lower versus the second quarter of 2001. Segment operating profit was $2.0 million or 71% lower than the prior year, reflecting the decline in operating profits at NRI as a result of completion of equipment orders for the Euro conversion in 2001. Operating profit margins were 4.9% in the second quarter of 2002 compared with 13.1% in the second quarter of 2001 as a result of lower volume. Crane Merchandising Systems’ operating margins improved on a 3% decline in shipments, as the company continued to improve its cost position. NRI continues to resize its business and operated at a slight operating loss, on a 64% decline in sales versus the second quarter of 2001.

Fluid Handling sales of $176.4 million increased $35.6 million, or 25%, for the quarter compared with the second quarter of 2001. Xomox, acquired in 2001, had sales of $34 million in the current quarter. Operating profit of $13.7 million was even with the second quarter of 2001. Operating profit margins declined to 7.8% versus 9.7% in the prior year quarter from lower valve margins. Valve sales totaled $120.7 million, an increase of $33.7 million, entirely due to the Xomox acquisition. Valve margins overall were 8.1% in the current quarter versus 11.3% in the prior year. The margin decline resulted from a sharp decline in the higher margin nuclear and commercial valve services revenue, as a result of a smaller number of site outages in the current quarter impacting operating results by $2 million. Valve margins continued to be negatively impacted by the weak chemical process industry which affected Xomox and Crane Process Flow Technologies results. Sales in our short-cycle pump business were down 4%, while operating profits increased 5% and margins improved to 9.9% in the current quarter compared to 9.1% in the second quarter of 2001. Crane Supply continues to execute its maintenance and repair market strategy with sales increases of 13% versus the second quarter of 2001 and margin improvement to 7.7% from 6.6% versus the same prior period.

Controls sales of $16.8 million decreased $12.6 million, or 43%, and operating profit declined $.3 million for the second quarter of 2002 compared with the second quarter of 2001. On a comparable basis, excluding prior year sales of Ferguson (now a joint venture recorded under miscellaneous-net income) and Powers Process Controls (sold September 2001), sales decreased $1.0 million or 6% and operating profit decreased $.5 million. Stable results at Barksdale were offset by very weak shipments at Azonix/Dynalco, which is heavily dependent on the oil and gas industry.

Corporate expenses were higher by $2.8 million for the second quarter of 2002 compared with the second quarter 2001 primarily due to the 2001 cancellation of performance-based restricted stock which failed to vest.

Crane’s financial position remains strong. Net debt to capital was 27.5% at June 30, 2002 compared with 28.9% at March 31, 2002 and 30.3% at December 31, 2001. Crane generated $58.0 million in cash flow from operating activities and received an additional $3.5 million from asset sales in the second quarter of 2002. During the second quarter of 2002, the Company re-deployed these resources on the $44 million acquisition of Lasco, $6 million in capital equipment spending, payment of a $6 million dividend to shareholders and by further reducing borrowings.

Year-to-date, operating profit was $80.1 million on sales of $763.2 million, compared with $92.5 million on sales of $788.3 million for the same period of 2001. Operating profit for the first half of 2001 included a $6.1 million non-cash special charge ($.07 per share after tax) as previously reported and $8.8 million ($.14 per share after tax) for goodwill amortization. During the second quarter of 2002, the Company completed the transitional impairment test required by SFAS No. 142, “Goodwill and Intangible Assets” and recorded an after-tax charge of $28.1 million or $.47 per share. The adjustment was recorded as of the effective date of adopting SFAS No. 142, which was January 1, 2002. Year-to-date income before cumulative effect of a change in accounting principle was $47.4 million, or $.79 per share, compared with $52.7 million, or $.87 per share, for the same period of 2001. Net income was $19.3 million, or $.32 per share, compared with $52.7 million, or $.87 per share, for the same six month period of 2001.

Aerospace sales of $165.1 million for the six months ended 2002 were $39.0 million, or 19% lower, compared with the same period in 2001. Operating profit of $35.2 million was $17.5 million, or 33%, lower than the six months ended 2001 and margins declined to 21.3% from 25.8% for the comparable period last year. The segment’s commercial aerospace and aftermarket orders remain weak. Aerospace orders for the six months ended 2002 were 38% below the comparable prior year level. Although Aerospace orders improved 29% in the second quarter 2002 from the weak first quarter 2002 levels, they were 32% below the second quarter of 2001. Shipments exceeded new orders by $31 million in the first half of 2002, as the backlog declined to $219 million as of June 30, 2002 versus $250 million at December 31, 2001 and $226.3 million at March 31, 2002. This business continues to invest in new product development focused on safety and reduced cost of ownership for airlines, while continuing to exercise strict cost control and to size its workforce to current business conditions. Management continues to expect an operating profit decline from the 2001 level of approximately 30% for 2002.

Engineered Materials sales decreased $15.9 million or 10% to $141.7 million for the six months of 2002 compared with the six months of 2001 due to the absence of $19.5 million of sales from the Canadian plumbing business, which was sold in the third quarter of 2001. Segment operating profit increased $.5 million, or 2% to $24.0 million for the six months ended June 30, 2002. Operating profit margins were 16.9% in 2002 compared with 14.9% in 2001 for the six-month period. Kemlite’s sales increased $3.8 million to $113.5 million and operating profit increased $3.4 million for the six months of 2002 compared with the six months of 2001 due to higher volume resulting from the Lasco acquisition and the strong RV market, cost reduction initiatives and the absence of losses from the plumbing business. Offsetting these favorable impacts were reduced profits at Resistoflex reflecting continued weakness in the chemical process industry. Order backlog at June 30, 2002 was $24.0 million, an increase of $4.2 million from March 31, 2002, and an $8.9 million, or 59%, increase from December 31, 2001. Management continues to expect operating results for full year 2002 to remain flat, as improved Kemlite performance is expected to be offset by the weak chemical process market and costs for plant consolidation at Resistoflex.

Merchandising Systems sales of $84.2 million were $27.6 million, or 25%, lower for the six months ended June 30, 2002 compared with the comparable period last year. Segment operating profit was $6.4 million compared to $16.6 million for the prior year, a 61% decline because of sharply lower sales at NRI reflecting the completion of the Euro conversion in 2001. Operating profit margins were 7.6% in the first six months of 2002 compared with 14.8% in the first six months of 2001 as a result of the impact of the lower volume. Crane Merchandising Systems’ operating profit was only 5% below prior year while sales declined by 11% as a result of strong cost containment efforts. NRI was profitable on a year-to-date basis as it continued to resize its business in line with the anticipated lower sales. New orders for coin handling equipment in Europe remain extremely weak, as NRI’s customers continue to work off inventories purchased in 2001 in anticipation of demand for the Euro conversion. Order backlog at June 30, 2002 was $16.9 million which decreased $5.5 million from March 31, 2002 and $14.3 million from December 31, 2001 as a result of the completion of the Euro conversion. Management continues to expect operating results to be 50% to 60% lower for 2002.

Fluid Handling sales of $339.5 million increased $82.4 million, or 32%, for the six months ended June 30, 2002 compared with the same period last year. Operating profit increased $4.4 million to $25.9 million in the first half of 2002 versus $21.5 million in the first half of 2001. Excluding acquisitions, sales and operating profits were down 1% and 10%, respectively. Operating profit margins were 7.6% in the first half of 2002 compared with 8.4% in the comparable prior year period. Crane’s valve business sales totaled $235.1 million, an increase of $85.5 million, due to acquisitions. Excluding acquisitions, valve sales were up 1% as increased shipments to the power and marine markets were partly offset by lower sales in Crane’s short-cycle valve businesses which sell through distribution. Sales in our pump business were down 11%, resulting in a $.8 million decline in operating profit. Crane Supply sales were up 7% from the prior year level with improved margins reflecting management’s continued focus on optimizing product profitability. Order backlog at June 30, 2002 was $135.5 million, a slight decrease of $2.9 million from March 31, 2002 and a $12.3 million decrease from December 31, 2001. Management continues to expect operating results for the full year 2002 to significantly improve, with second half performance stronger than first half as a result of anticipated stronger valve service revenues and margin improvement as a result of cost containment initiatives.

Controls sales of $32.6 million decreased $26.5 million, or 45%, for the first six months of 2002 compared with the first six months of 2001. The decrease was largely due to the absence of Ferguson, which now as a joint venture is recorded under the equity method of accounting by which Crane’s share of profits is included in the miscellaneous-net line of the income statement, and the absence of Powers Process Controls which was sold in September 2001. Operating profit of $2.0 million for the six months ended June 30, 2002 was flat compared to the comparable period of 2001 primarily due to the exclusion of Ferguson in segment results which operated at a loss in the first half of last year offset by the impact of weak shipments at Azonix/Dynalco due to weakness in the oil and gas industry. Backlog was $17.7 million as of June 30, 2002, down slightly from March 31, 2002 and December 31, 2001. Operating results for 2002 are expected to increase over 2001, reflecting the elimination of $2.1 million of losses in 2002 incurred under the prior Ferguson business model in 2001 and stable 2002 results at the remaining businesses.

Corporate expenses were higher by $4.5 million in 2002 compared with 2001, primarily due to costs associated with asbestos claims and the 2001 cancellation of performance-based restricted stock which failed to vest.

For the six months ended June 30, 2002, the Company generated $85.1 million of cash from operating activities, versus $81.4 million in 2001. Net debt totaled 27.5% of capital at June 30, 2002 compared with 37.7% at June 30, 2001. The current ratio at June 30, 2002 was 2.0 with working capital totaling $267.4 million compared with 2.2 and $337.8 million at June 30, 2001. The Company had unused credit lines of $389.0 million available at June 30, 2002.

The Company’s cash flows and earnings are subject to fluctuations from changes in interest rates and foreign currency exchange rates. The Company manages its exposures to these market risks, as it deems appropriate, through the use of interest-rate swap agreements and forward exchange contracts. Of the $279.4 million in long-term debt outstanding at June 30 2002, $200 million was at fixed rates of interest ranging from 6.75% to 8.50% while $79.4 million was at a weighted average rate of 2.25% from the revolving credit agreement. In February 2002, the Company entered into a two-year interest-rate swap agreement with JPMorgan Chase Bank which converts $100 million of 8.5% fixed rate debt to LIBOR plus 4.985%. The swap agreement terminates on March 15, 2004. At June 30, 2002, the amounts outstanding for forward exchange contracts were not material. As a matter of policy, the Company does not enter into derivatives or other financial instruments for trading or speculative purposes.

The Company’s second quarter earnings per share was slightly better than its guidance of $.40-$.42. However, orders in the first half of the year remained weak with the exception of the recreational vehicle market, which is reflected in Kemlite’s results. Management has not seen any evidence that would suggest improvement in the order environment, particularly in aerospace, for the second half of the year. Earnings guidance was, therefore, tightened to a range of $1.60—$1.65 for the full year 2002 and $.39—$.41 for the third quarter 2002, as a more challenging second half of the year is expected given the difficult operating environment.

Free cash flow (cash from operating activities less dividends and capital expenditures) is expected to total approximately $120 million in 2002. The Company plans to continue its focus on the efficient utilization of capital and remains positioned to take advantage of strategic acquisition opportunities.

As of June 30, 2002, the Company was a defendant (among a number of defendants, typically over 50 and often over 100) in approximately 25,000 actions (16,000 actions as of December 31, 2001) filed in various state and federal courts alleging injury or death as a result of exposure to asbestos, 18,000 of which were filed by one law firm. These filings typically do not identify any products of the Company as a source of asbestos exposure, and based on the Company’s past experience, it is expected that a substantial majority of these cases will be dismissed against the Company for lack of product identification. The gross settlement costs for the Company totaled $760,000 in 2001 and $1.2 million during the first half of 2002. Legal costs incurred in connection with these claims were $2.3 million in 2001 and $1.5 million during the first half of 2002. The liability recorded for asbestos claims constitutes management’s best estimate of defense and settlement costs for pending and reasonably anticipated future claims over the next five years, net of reimbursements (approximately 50 percent) from the Company’s insurers under a cost sharing agreement. The Company cautions, however, that inherent in its estimate of liabilities are expected trends in claim severity, frequency and other factors which may vary as claims are filed and settled or otherwise disposed of. While it is not possible to predict with certainty the ultimate outcome of these lawsuits and contingencies, the Company believes, after discussing pending claims with counsel, that resolution of these matters will not have a material effect on the Company’s financial position or cash flows. However, recognition of costs associated with such outcomes could be material to the Company’s results of operations for a particular quarterly or annual period.

Mr. E. Thayer Bigelow, Jr.

Mr. Jean Gaulin

Mr. Charles J. Queenan, Jr.

There were no reports filed on Form 8-K during the quarter ended June 30, 2002.