SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.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, 2004
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| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period fromto
Commission file number 1-1657 CRANE CO. (Exact name of registrant as specified in its charter)
Registrant’s 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 | Name of each exchange on which registered | |
Common Stock, par value $1.00 | New York Stock Exchange | |
Preferred Share Purchase Rights | New York Stock Exchange | |
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Securities registered pursuant to Section 12(g) of the Act:
6¾% Senior Notes due October 2006
5½% Senior Notes due September 2013
(Title of Class)
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. Yesx No¨
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Indicate by check mark if the 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 registrant’s 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.x¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yesx No¨
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Based on the average stocklast sale price of $25.19$31.22 on June 28, 2002,30, 2004, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting stockcommon equity held by nonaffiliates of the registrant was $1,188,687,157.$1,438,515,979.
The number of shares outstanding of the registrant’s common stock, $1.00 par value was 59,400,29659,551,874 at January 31, 2003.February 28, 2005.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual report to shareholders for the year ended December 31, 20022004 and portions of the proxy statement for the annual shareholdersshareholders’ meeting to be held on April 28, 200325, 2005 are incorporated by reference into Parts I, II, III and IV of this Form10-K Annual Report.Form 10-K.
PART I
Item 1. | Business |
Crane Co. (“Crane” or the “Company”) is a diversified manufacturer of engineered industrial products. Founded in 1855, Cranethe Company employs over 9,50010,500 people in North America, South America, Europe, Asia and Australia.
STRATEGY
The Company’s strategy is to grow the earnings of niche businesses with high market share, acquire companies that offer strategic fits with existing businesses, aggressively pursue operational and strategic linkages among our businesses, build an aggressive and committed management team whose interests are directly aligned with those of the shareholdersshareholders’ and maintain a focused, efficient corporate structure. Crane has built a stronger company using established operating themes of leveraging intellectual capital, improving customer focus, striving for operational excellence and strategically linking existing businesses with acquisitions.
ACQUISITIONS
In the past five years, the Company has completed 2021 acquisitions.
During 2004, the Company completed two acquisitions at a total cost of $50 million. Goodwill for the 2004 acquisitions amounted to approximately $37 million. In January 2004, the Company acquired P. L. Porter Co. (“Porter”) for a purchase price of $44 million. Porter is a leading manufacturer of motion control products for airline seating and is located in Woodland Hills, California. 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 power and control features required by premium class passengers on competitive international routes. Porter’s 2003 annual sales were approximately $32 million. The operations were integrated into the Company’s Aerospace & Electronics Segment. Also in January 2004, the Company 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. 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 the Fluid Handling Segment.
During 2003, the Company completed four acquisitions at a total cost of $168.8 million. In May 2003, the Company acquired Signal Technology Corporation (“STC”) for a total purchase price of approximately $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 (“RF”) 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 the Company’s Aerospace & Electronics Segment. In June 2003, the Company purchased certain pipe coupling and fittings businesses from Etex Group S.A. (“Etex”), for a purchase price of approximately $29 million. The 2002 annual sales for these Etex 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 the Company’s subsidiary, Crane Ltd., a leading provider of pipe fittings, valves and related products to the building services, heating, ventilating and air conditioning (“HVAC”) and industrial markets in the United Kingdom and Europe. The Company also acquired two other entities in 2003 at a total purchase price of $1.7 million. Goodwill for the 2003 acquisitions amounted to $118 million.
During 2002, the Company completed seven acquisitions at a total cost of $82.2 million. Goodwill for these acquisitions amounted to $56 million. In January 2002, the Company acquired the patents and other intellectual property of Trinity Airweighs, obtaining a system to measure aircraft weight and center of gravity.
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Also in January 2002, the Company acquired Kavey Water Products which enhanced Crane Environmental’s capability to provide water treatment systems. In May 2002, the Company acquired the Lasco Composites business from Tomkins Industries, Inc. Lasco Composites is a manufacturer of fiberglass reinforced plastic (FRP) panels that further expands the Company’s Kemlite business in the transportation, building products and recreational vehicle markets and will provideprovided an entry into the industrial market. In July 2002, Cranethe Company acquired Corva Corporation, a privately held distributor of valves and actuators. In November 2002, the Company acquired all of the outstanding shares of General Technology Corporation (“GTC”) from an employee stock ownership plan trust for a purchase price of $25 million in cash and assumed debt. General TechnologyGTC provides high-reliability, customized-contract manufacturing services and products focused on military and defense applications. General Technology will beGTC has been integrated with the ElectronicElectronics Group in the Company’s Aerospace & Electronics Segment. Also in November 2002, the Company acquired Qualis Incorporated, a privately held provider of polyester film embossing services, which has been integrated into Kemlite. In November 2002, the Company entered into a joint venture in China furthering its low-cost pump manufacturing capabilities. Preliminary estimates of goodwill for the 2002 acquisitions amounted to $55.6 million.
During 2001, the Company completed six acquisitions at a total cost of $191 million. Goodwill for these acquisitions amounted to $67.9$68 million. In February 2001, the Company acquired Ventech Controls, Inc., a valve repair business providing both shop repair and remanufacture of control valves and instruments. Also in February 2001, the Company acquired the fiberglass reinforced panel business of UK-based Laminated Profiles Ltd. as part of its strategic initiative to penetrate the European transportation and recreational vehicle markets. In April 2001, the Company acquired the Industrial Flow Group of Alfa Laval Holding AB (renamed Crane Process Flow Technologies) which includes the Saunders brand of diaphragm valves manufactured in the UK and India and the DEPA brand of air operated diaphragm pumps manufactured in Germany. Crane Process Flow Technologies focuses on the development, production and distribution of valves, pumps and related components in high value-added applications. In June 2001, the Company acquired the Xomox valve business from Emerson Electric Co. for $145 million. Xomox supplies high-end, application-driven, sleeved-plug valves, lined valves, high performance butterfly valves and actuators to the chemical, pharmaceutical and other process industries. During the third quarter of 2001, the Company acquired the aerospace hose product line of Teleflex Fluid Systems and Resistoflex GmbH. AeroHose,Aerohose, based in Lantana, Florida, is a leading supplier of Teflon®Teflon®-braided, high- pressure hose assemblies utilized in both commercial and military aircraft as well as ground support systems. Resistoflex GmbH, based in Germany, is a leading manufacturer of Teflon®Teflon®-lined, steel-piping products serving chemical and pharmaceutical markets in Europe.
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During 2000, the Company completed two acquisitions at a total cost of $11.9$12 million. Goodwill for these two acquisitions amounted to $8.5$9 million. In March 2000, the Company acquired Streamware Corporation, a privately-held provider of business management software and market analysis tools for the vending and food service industry. In December 2000, the Company acquired the assets of the Valve Repair Division of Groth Corporation. With service centers located in Houston, Texas, the Valve Repair Division provides both shop and field testing and repair services for a broad range of valve types and is an authorized repair facility for many leading valve manufacturers.
In October 1999, the Company acquired Stentorfield, Ltd. a premier designer and manufacturer of hot and cold beverage vending machines, serving the U.K. and European market with a broad line of full-size and tabletop products for the hotel, restaurant, office coffee service and vending industries at a total cost of $33 million. This business was integrated with the Company’s Crane Merchandising Systems business which is the leading North American designer and manufacturer of full-line vending machines, for snack, food and beverage. Goodwill for this acquisition amounted to $24.3 million.
During 1998, the Company completed four acquisitions at a total cost of $178 million. Goodwill for these four acquisitions amounted to $130 million. In May 1998, the Company acquired Environmental Products USA, Inc. This business manufactures membrane-based water treatment systems for industrial, commercial and institutional markets. In August 1998, the Company acquired Sequentia Holdings, Inc., a manufacturer of fiberglass-reinforced plastic panels for the construction and building products markets. Sequentia complements the Company’s Kemlite subsidiary which provides fiberglass-reinforced plastic panels for the transportation and recreational vehicle markets. In September 1998, the Company acquired Liberty Technologies, Inc., a manufacturer of valve, motor, engine and compressor condition monitoring products and related services which has been combined with the Company’s nuclear valve business which provides valves, valve diagnostic equipment and related services to the nuclear power industry and its Dynalco Controls business which provides sensors, instrumentation, control products and automation systems for use in industrial engine applications. Also in September 1998, the Company acquired the Plastic-Lined Piping Products (“PLPP”) Division of The Dow Chemical Company. PLPP was integrated with the Company’s Resistoflex Division, which supplies lined pipe and valves to the chemical process and industrial markets.
DIVESTITURES
In the past five years, the Company has divested nineseven businesses.
In December 2004, the Company sold the Victaulic trademark and UK-based business assets for $15.3 million in an all cash transaction. The Company realized an after-tax gain of $6.5 million, or $.11 per share, on the sale. 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, the Company sold the assets of its Chempump unit to Teikoku USA, Inc. Chempump manufactures canned motor pumps primarily for use in the chemical processing industry. In September 2002, the Company sold its CorTec unit for approximately $3 million. In September 2001, the Company sold Powers Process Controls for its carrying value. In October 2001, the Company sold the Crane Plumbing business in Canada recording an after-tax loss of approximately $8.5 million. Proceeds from the sale of these businesses in 2001 were approximately $20 million. During the
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Item 1. | Business (continued) |
third quarter of 2001, Cranethe Company and Emerson Electric Co. announced the formation of a joint venture involving Emerson’s Commercial Cam unit and Crane’s Ferguson business unit. Crane and Emerson contributed their respective operations into a new company, Industrial Motion Control Holdings, LLC. Crane also contributed $12 million of cash into the venture. The Ferguson/CamcoIndustrial Motion Control Holdings, LLC joint venture is being accounted for on the equity basis and the investment amounted to $21$27 million at year-end 20022004 and is included in other assets in the consolidated balance sheet.
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In May 2000, the Company sold its interest in Powec AS, a Norwegian manufacturer of power supplies for the telecommunications industry. In addition, the Company’s wholly-owned ELDEC Corporation subsidiary sold its related telecommunications power supply product line to the same purchaser. Total consideration for both transactions was $45.6 million.
FINANCING
In April 1999,September 2003, the Company sold Southwest Foundry, acquired as part$200 million of the Stockham Valves and Fittings, Inc. transaction, for $400,000. In December 1999, the Company sold its Crane Defense Systems business for $7.1 million. In 1998, the Company sold two foundry operations acquired as part of the Stockham Valves and Fittings Inc. transaction. Accu-Cast, Inc. and the Aliceville Foundry were sold for a total of $4.3 million.
DISCONTINUED OPERATIONS
On December 16, 1999, the Company distributed all of the shares of its Huttig Building Products (“Huttig”) subsidiary to shareholders of the Company5.50% notes that will mature on the basis of one share of Huttig for every 4.5 shares of Crane Co. common stock. Prior to this spin-off distribution, Huttig repaid an intercompany loan of $68 million to the Company which the Company used to pay down debt. The Wholesale Segment was discontinued when Huttig was spun off.
LONG-TERM FINANCING
September 15, 2013. In September 1998, the Company sold $100,000,000$100 million of 6.75% notes that will mature on October 1, 2006. During April 1992, the Company sold $100,000,000 of 8.5% notes that will mature on March 15, 2004.
In February 2002, the Company entered into a two-year interest-rate swap agreement with JPMorgan Chase Bank which converted $100 million of 8.5% fixed rate debt to LIBOR plus 4.985%. In October 2002, the Company closed this position. The gain of $2.2 million, included in the carrying value of debt, is being amortized as a reduction of interest expense over the remaining life of the Company’s outstanding 8.5% Notes due March 15, 2004.
BUSINESS SEGMENTS
See page 3860 of the Annual Report to Shareholders for the year ended December 31, 2002,2004, for sales, operating profit and assets employed by each business segment. At the end of 2002, the Company changed its organizational structure relating to Resistoflex, the most significant component of which is now managed in the Fluid Handling Segment. The remaining component is included in the Aerospace Segment.
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AEROSPACE & ELECTRONICS
The Aerospace & Electronics Segment consists of ELDEC, Hydro-Aire/has two business groups: Aerospace and Electronics. The Aerospace Group products are currently manufactured under the brand names Eldec, Hydro-Aire, Lear Romec, P.L. Porter and Resistoflex-Aerospace. The Aerospace Group’s products are organized into the following solution sets: Landing Systems Solutions, Sensing and Controls Solutions, Fluid Management Solutions, Aircraft Electrical Power Solutions, and Cabin Solutions. The Electronics Group products are currently manufactured under the brand names Interpoint, General Technology, CorporationSTC Microwave Systems, Keltec, Olektron, Eldec and Advanced Integrated Systems Division (“GTC”AISD”). The Electronic Group’s products are organized into the following solution sets: Power Solutions, Microwave Systems Solutions, Electronic Manufacturing Solution and Resistoflex-Aerospace.Microelectronics Solutions/AISD.
ELDEC
Eldec designs, manufactures and markets custom position indication and control systems, proximity sensors, pressure sensors, true mass fuel flowmeters and power conversion systems for the commercial transport, business, regional, 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. ELDECEldec has facilities in Redmond, Washington, England and France.
Hydro-Aire designs, manufactures and sells 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. In addition, Hydro-Aire designs and manufactures systems similar to those above for the retrofit of aircraft with improved systems and manufactures replacement parts for systems installed as original equipment by aircraft manufacturers. All of these products are largely proprietary to Hydro-Aire 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.
Lear Romec designs, manufactures and sells lubrication and fuel pumps for aircraft and radar cooling systems for the commercial and military aerospace industries. Lear Romec has a leading share of the non-captive market for turbine engine lube and scavenge oil pumps. Lear Romec also manufactures fuel boost and transfer pumps for commuter and business aircraft. Hydro-Aire has facilities in California and Kansas while Lear Romec has a facility in Ohio.
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Porter is a leading manufacturer of motion control products for airline seating and is located in Woodland Hills, California. Porter holds leading positions in both electromechanical actuation and hydraulic/mechanical actuation for aircraft seating, selling directly to seat manufacturers and to the airlines. The Porter facility is scheduled to be consolidated into the Hydro-Aire Burbank, California facility in 2005.
Resistoflex-Aerospace manufactures high-performance, separable fittings for operating pressures up to 8,000 pounds per square inch used primarily in the aerospace industry. Its products are sold directly to the aerospace industry. Resistoflex-Aerospace has a facility in Florida.
Interpoint designs, manufactures and sells standard and custom miniature (hybrid) DC-to-DC power converters and custom miniature (hybrid) electronic circuits for applications in commercial, space and military aerospace, fiber optic and medical technology industries. Interpoint has facilities in Redmond,the state of Washington domestically and Taiwan.
STC designs, manufactures and markets power management products and sophisticated electronic radio frequency (“ RF”) components and subsystems. Its products are used in broadband wireless equipment, digital cellular/PCS wireless infrastructure equipment and defense electronics. 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. STC’s commercial customers integrate its products into wireless systems, which are then sold to wireless service providers globally and enable the transmission and reception of data signals in wireless systems worldwide. Applications for its commercial products include point-to-point transport, point-to-multipoint access, cellular backhaul and digital cellular/PCS base stations. STC has facilities in Florida, Massachusetts, Arizona and Texas. The California facility was closed in December 2003.
GTC provides high-reliability, customized-contract manufacturing services and products focused on military and defense applications. GTC services include the assembly and testing of printed circuit boards, electromechanical devices, customized integrated systems, cables and wire harnesses. GTC has a facility in New Mexico.
Resistoflex-Aerospace manufactures high-performance, separable fittings for operating pressures to 8,000 PSI used primarily in the aerospace industry. Its products are sold directly to the aerospace industry.
The segmentAerospace & Electronic Segment employs 2,1002,850 people and had assets of $261.6$480.3 million at year-end.December 31, 2004. The order backlog totaled $217.6$341.5 million and $254.6$277.2 million at December 31, 20022004 and 2001,2003, respectively.
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ENGINEERED MATERIALS
The Engineered Materials Segment consists of Kemlite and Polyflon.
Kemlite 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 restaurantrestaurants and supermarket applications, as well as institutions where fire-rated materials with low-smoke generation and minimum toxicity are required, and for residential construction. Kemlite sells its products directly to truck trailer and recreational vehicle manufacturers and uses distributors to serve the commercial construction market and some segments of the recreational vehicle market. Kemlite’s manufacturing facilities are located in Illinois, Arkansas, Tennessee, Texas, Kentucky and Kentucky. In May 2002, the Company acquired Lasco Composites, expanding Kemlite’s product offerings in the transportation, building products and recreational vehicle markets and provided an entry into the industrial market.United Kingdom.
Polyflon manufactures microwave laminates, high-voltage RF capacitors, radomes and circuit processingis a manufacturer of small specialty components, primarily substitute materials for wireless communication, magnetic resonance imaging, microwave and radar system manufacturers.antennas. Polyflon is located in Connecticut.
The segmentEngineered Materials Segment employs 850868 people and had assets of $191.0$188.2 million at year-end.December 31, 2004. The order backlog totaled $11.2$16.4 million and $8.0$11.8 million at December 31, 20022004 and 2001,2003, respectively.
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MERCHANDISING SYSTEMS
The Merchandising Systems Segment has two operating units:consists of Crane Merchandising Systems (“CMS”) and National Rejectors, Inc. GmbH (“NRI”).
CMS products include electronic vending merchandisers for refrigerated and frozen foods, hot and cold beverages, snack foods, single cup individually brewed hot drinks and combination vendors/merchandisers designed to vend both snack foods and hot/cold drinks or snacks and refrigerated/frozen foods in one machine. CMS has manufacturing facilities in Bridgeton, Missouri and England. CMS products are marketed to customers in the United States and Europe by Company sales and marketing personnel as well as distributors and, in other international markets, through independent distributors. CMS launched new features, new products and updated technology in 2002, including its new guaranteed delivery system called SureVend. CMS also includes Streamware Corporation, a leading provider of business management software and market analysis tools for the vending and food service industry. Streamware’s VendMAX is a fully-integrated software/hardware solution that offers operators cash accountability, inventory control and improved merchandising capabilities. CMS has manufacturing facilities in the state of Missouri domestically and England.
NRI manufactures electronic coin validators in Buxtehude, Germany for the automated merchandising and gambling/amusement markets in Europe. NRI is among the relatively few makers of coin validators that supply European countries with validators programmed for the new euro coins that went into circulation at the start of 2002. NRI has facilities in Germany, Spain and France.
The segmentMerchandising Systems Segment employs 1,100911 people and had assets of $114.6 million at year-end. Order backlog totaled $12.9 million and $31.1$121.7 million at December 31, 20022004. Order backlog totaled $12.0 million and 2001,$10.3 million at December 31, 2004 and 2003, respectively.
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FLUID HANDLING
The Fluid Handling Segment consists of the Valve Group, Crane Valves, Crane Valves-U.K.Ltd., Valve Services,Resistoflex-Industrial, Crane Pumps & Systems, Crane Environmental,Supply and Crane Supply businesses and Resistoflex-Industrial Products.Environmental. The Crane Valves businesses,Valve Group, with eight manufacturing facilities in North Americathe United States as well as operations in, the United Kingdom,Canada, England, France, Ireland, Germany, Australia, Norway, India, Hungary, China, Indonesia, Mexico, Japan, Belgium, Korea, Taiwan, Finland, the Netherlands and Mexico sellSwitzerland, sells a wide variety of commodity and special purpose valves and fluid control products for the chemical and hydrocarbon processing, petrochemical, pharmaceutical, power generation, marine, general industrial and commercial construction industries. Products are sold under the trade names Crane, Saunders, Jenkins, Pacific, Xomox, DEPA, ELRO, REVO, Westad, Flowseal, Centerline, Stockham Triangle and Duocheck. The Company’s Valve Service business, with three manufacturing facilities in North America, providesDuo-Chek.
Crane Ltd. manufactures pipe fittings, gate, globe and check valves, valve diagnostic equipmentball and related services to the nuclear power, chemicalbutterfly valves and hydrocarbon processingstatic and power generation industries.
automatic balancing valves. Crane Pumps & SystemsLtd. has seven manufacturing facilities in the United States. Pumps are manufactured under the trade names Deming, Weinman, Chempump, Burks, Chem/Meter, Barnes, SellersKingdom and Process Systems. Pumps are sold to a broad customer base which 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 Environmental has a manufacturing facility in Florida and serves the water and wastewater treatment market. Its products are sold under the trade names Cochrane and Environmental Products.China.
Crane Supply, a distributor of plumbing supplies, valves and piping in Canada, maintains thirty-seven branches throughout Canada.
Resistoflex-Industrial Products (“Resistoflex”) is engaged in the design, manufacture and sale of corrosion-resistant, plastic-lined steel pipes, fittings, tanks, valves, expansion joints and hose used primarily by the pharmaceutical, chemical processing, pulp and paper, ultra pure water and waste management industries. ResistoflexResistoflex-Industrial sells its industrial products through distributors who provide stocking and fabrication services to industrial users in the United States. ResistoflexResistoflex-Industrial Products also manufactures plastic-lined pipe products at its Singapore plant serving the Asian chemical processing and pharmaceutical industries. Resistoflex-Industrial has facilities in the state of North Carolina domestically, Singapore, Germany and China.
Products
Crane Pumps & Systems has seven manufacturing facilities, five of which are in this segmentthe United States. Pumps are manufactured under the trade names Deming, Weinman, Burks, Chem/Meter, Barnes, Sellers and Process Systems. Pumps are sold directly to end users through Crane’s sales organizationa broad customer base that includes chemical and through independent distributorshydrocarbon processing, automotive, municipal, industrial and manufacturers representatives.commercial wastewater, power generation, commercial heating, ventilation and air-conditioning industries and original equipment manufacturers. Crane Pumps & Systems has facilities in Ohio, Michigan, Indiana, Canada and China.
Crane Supply, a distributor of plumbing supplies, valves and piping in Canada, maintains 34 distribution facilities throughout Canada.
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Crane Environmental is a leading supplier of specialized water purification solutions for the world’s industrial and commercial markets. Crane Environmental’s worldwide applications include government, pulp and paper, steel, oil, gas, petrochemical, power generation, wastewater treatment, carwash, bottling, beverage and agriculture. Its products are sold under the trade names Cochrane and Environmental Products. Crane Environmental has facilities in Florida and Pennsylvania.
The segmentFluid Handling Segment employs 5,0005,373 people and had assets of $599.5 million at year-end. Order backlog totaled $130.2 million and $150.7$734.9 million at December 31, 20022004. Order backlog totaled $183.2 million and 2001,$140.2 million at December 31, 2004 and 2003, respectively.
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CONTROLS
The Controls Segment consists of Barksdale and Azonix/Dynalco. TheThese companies in this segment design, manufacture and market industrial and commercial products that control flows and processes in various industries including transportation, petroleum, chemical, construction, food and beverage and power generation.
Barksdale manufactures solid state and electromechanical pressure switches and transducers, level switches and continuous level indicators, temperature switches and directional control valves that serve a broad range of commercial and industrial applications. It has manufacturing and marketing facilities in Los Angeles,the state of California domestically and Reichelsheim, Germany.
Azonix/Dynalco designs and manufactures rotational speed sensors, temperature and pressure instruments and monitors for rugged environments, and microprocessor-based engine and mechanism controls. Azonix/Dynalco’s products are used worldwide in a variety of applications for various industries including transportation, power generation, oil, gas, petrochemical, chemical, pharmaceutical, agriculture and metal processing. It also manufactures operator interfaces and measurement and control systems for hazardous and harsh applications, intelligent data acquisition products, high-precision thermometers and calibrators. Azonix/Dynalco has manufacturing and service facilities in Massachusetts, Florida and Texas.
The products in this segment are sold directly to end users and engineering contractors through the Company’s own sales force and cooperatively with sales representatives, stocking specialists and industrial distributors.
The segmentControls Segment employs 400422 people and had assets of $52.5 million at year-end. Order backlog totaled $13.8 million and $18.4$49.9 million at December 31, 20022004. Order backlog totaled $13.7 million and 2001,$12.2 million at December 31, 2004 and 2003, respectively.
COMPETITIVE CONDITIONS
The Company’s lines of business are conducted under activelyhighly 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 the Company’s competitive position, although the Company believes that it is a principal methodscompetitor in most of competition.its markets. The Company’s principal method of competition is production of quality products at competitive prices in a timely and efficient manner.
The Company’s products have primary application in the aerospace, electronics, hydrocarbon processing, petrochemical, chemical, power generation, automated merchandising, recreational vehicle and transportation 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, the Company does not believe it can reliably quantify or predict the possible effects upon its business resulting from such changes.
Seasonality is a factor in the Canadian operations. Net sales in Canada and assets related to Canadian operations were 10.8% and 4.4% in 2002 and 11.6% and 4.7% in 2001, of the Company’s respective consolidated amounts.
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The Company’s engineering and product development activities are directed primarily toward improvement of existing products and adaptation of existing products to particular customer requirements.requirements as well as the development of new products. While the Company owns numerous patents and licenses, none are of such importance that termination would materially affect its business. Research and development costs are expensed when incurred. These costs were approximately $52.4 million in 2004, $46.8 million in 2003, and $46.0 million in 2002, $50.9 million in 2001, and $48.3 million in 2000, incurred mostly by the Aerospace segment.& Electronics Segment. Funds received from customer-sponsored research and development projects were approximately $6.2 million, $3.1 million, and $5.1 million $4.7 millionin 2004, 2003 and $6.7 million received in 2002, 2001 and 2000, respectively, and were recorded in net sales. Aerospace engineering costs were controlled in 2002 reflecting the downturn in the aerospace market.
The Company is not dependent on any single customer nor are there any issues at this time regarding available raw materials for inventory.inventory that would be material to its operations.
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 are not expected to have a material effect upon the Company’s capital expenditures, earnings or competitive position.
PRE-APPROVAL OF FEES TO INDEPENDENT AUDITORAVAILABLE INFORMATION
At its January 27, 2003 meeting, the Audit Committee of the Board of Directors pre-approved a budget of specific fees to be paid to the Company’s independent auditors, Deloitte & Touche, during 2003. The total amount pre-approved was $3.2 million, with $1.7 million representing audit and audit-related fees, $1.3 million representing fees for tax services, and the balance representing other services.
AVAILABLE INFORMATION
Copies of Crane’sthe Company’s 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 Crane’sthe Company’s website at www.craneco.com as soon as reasonably practicable after such reports are filed with the Securities and Exchange Commission.
FORWARD LOOKING STATEMENTS
Throughout this Annual Report on Form 10-K and the Annual Report to Shareholders, particularly in the President’s Letter to Shareholders and Management’s Discussion and Analysis of Operations, the Company makes numerous statements about expectations of future performance and market trends and statements about plans and objectives and other matters which because they are not historical fact, may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.
In addition, the Company and its representatives may, from time to time, make written or oral forward-looking statements including statements contained in the Company’s filings with the Securities and Exchange Commission and in its reports to shareholders which can be identified by the use of forward-looking terminology such as “believes”, “contemplates”, “expects”, “may”, “will”, “could”, “should”, “would” or “anticipates” or the negative thereof or comparable terminology.
All forward-looking statements speak only as of the date on which such statements are made and involve risk and uncertainties that exist in the Company’s operations and business environment and are not guarantees of future performance. The Company assumes no obligation to update any of these forward-looking statements, whether as a result of new information or future events. As a responsibility to our investors, the Company will make reasonable efforts at timely disclosure of future facts and circumstances which may affect such statements.
Because the Company wishes to take advantage of the “safe harbor” provision of the Private Securities Litigation Reform Act of 1995, readers are cautioned to consider the following important risk factors that could affect the Company’s businesses and cause actual results to differ materially from those projected.
General
General
A substantial portion of the sales of the Company’s business segments are concentrated in industries which are cyclical in nature. Because of the cyclical nature of these businesses, their results are subject to fluctuations in domestic and international economies as well as to currency fluctuations and unforeseen
9
PART I
Forward Looking Statements (continued)
inflationary pressures. Reductions in the business levels of these industries would negatively impact the sales and profitability of the affected business segments.
8
PART I
Forward Looking Statements (continued)
While the Company is a principal competitor in most of its markets, all of its markets are highly competitive. The Company’s competitors in many of its business segments can be expected in the future to improve technologies, reduce costs and develop and introduce new products, and the ability of the Company’s business segments to achieve similar advances will be important to their competitive positions. Competitive pressures, including those discussed above, could cause one or more of the Company’s business segments to lose market share or could result in significant price erosion, either of which could have an adverse effect on the Company’s results of operations.
The Company’s acquisition program entails the potential risks inherent in assessing the value, strengths, weaknesses, contingent or other liabilities and potential profitability of acquisition candidates and in integrating the operations of acquired companies. There can be no assurance that suitable acquisition opportunities will be available in the future, that the Company will continue to acquire businesses or that any business acquired will be integrated successfully or prove profitable.
Net sales and assets related to operations outside the United States were 46.4% and 27.7% in 2004, 44.4% and 29.6% in 2003, and 42.7% and 30.6%, respectively, in 2002, and 41.3% and 29.9%, respectively, in 2001, of the Company’s respective consolidated amounts. Such operations and transactions entail the risks associated with conducting business internationally, including the risk of currency fluctuations, slower payment of invoices, adverse trade regulations and possible social, economic and political instability. While the full impact of this economic instability cannot be predicted, it could have a material adverse effect on the Company’s revenue and profitability.
Certain of the Company’s business segments are dependent upon highly qualified personnel, and the Company generally is dependent upon the continued efforts of key management employees.
New factors emerge from time to time, and it is not possible for management to predict all of such factors. Further, management cannot assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Aerospace
Asbestos Litigation
An additional
Estimation of the Company’s 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. The Company cautions that its estimated liability is based on assumptions with respect to future claims, settlement and defense costs based on recent experience during the last few years that 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. A legislative solution or a revised structured settlement transaction could also change the estimated liability. These uncertainties may result in the Company incurring future charges or increases to income to adjust the carrying value of recorded liabilities and assets, particularly if escalation in the number of claims and settlement and defense costs continues or if legislation or another alternative solution is implemented; however, the Company is currently unable to estimate such future changes. Although the resolution of these claims may take many years, the effect on results of operations, cash flow and financial position in any given period from a revision to these estimates could be material.
For more information with respect to the Company’s risks associated with its asbestos liability, see Item 3 Legal Proceedings.
Aerospace & Electronics
A significant fall off 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
9
PART I
Forward Looking Statements (continued)
repair parts from Crane companies.the Company’s businesses. The companiesbusinesses could also be impacted if major aircraft manufacturers, such as Boeing (which represented approximately 15%10% and 20%11% of the segment’s revenue in 20022004 and 2001,2003, respectively) encountered production problems, or if pricing pressure from aircraft customers caused the manufacturers to press their suppliers to lower prices. Sales and profits could face erosion if pricing pressure from 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. The Aerospace Segment& Electronics segment results could be below expectations if further slowing ofeconomic recovery begins to slow down or reverse, which could cause the U. S. economy causesU.S. customers to delay or cancel spare parts or aircraft orders.
10
PART I
Forward Looking Statements (continued)
During the third quarter of 2002, the Company’s Hydro-Aire unit identified a wire chafing situation on a few of itsrelating to fuel pumps used on certain Boeing aircraft, and the Company recorded a $4 million charge to reimburse the airlines for the precautionary inspectionestimated costs of approximately 35,000 pumps on approximately 3,000 aircraft. These inspections are proceeding as planned. Subsequently, severalinspecting and repairing such pumps. Several additional pumps, infrom this same set of 35,000 pumps, have also beenwere returned with a mechanical overheating issue. The Company is working closely withissue, which was subsequently determined by Boeing and the Federal Aviation Administration (“FAA”) to understand the root cause of the latter issue.require an aircraft systems level solution not chargeable to Hydro-Aire. In both instances,connection with these issues, the FAA issued an Emergency Airworthiness Directive (“AD”) to instruct airline carriers to comply with a near term precautionary step of carrying additional jet fuel to keep fuel pumps submerged at all times, until the pumps arewere inspected, to mitigate ignition risk and to ensure air safety. Inspections have been completed on all affected pumps. Several airline carriers have petitioned Hydro-Aire for reimbursement for additional costs, such as the cost of carrying additional jet fuel. The Company has disclaimed responsibility for these costs under applicable contract terms, but the Company is continuing its efforts to resolve these issues in good faith on a mutually acceptable basis.terms.
Engineered Materials
In the Engineered Materials Segment, sales and profits could fall if there were a decline in demand for truck trailers, recreational vehicles, industrial or building products for which Crane’s companiesthe Company’s businesses produce fiberglass-reinforced panels. Profits could be adversely affected as well by unanticipated increases in resin and fiberglass material costs or the loss of a principal supplier and by any inability on the part of Crane’s companiesthe businesses to maintain their position in product cost and functionality against competing materials.
Merchandising Systems
Results at the Company’s U.S.-based vending machine business could be reduced by delays in launching or supplying new products or an inability to achieve new product sales objectives. Results at the Company’s German-based coin validation machine business have been and will continue to be affected by changes in demand stemming from the advent of the euro, the new European currency, as well as by unforeseen fluctuations in the value of the euro or other European currencies versus the U.S. dollar.
Fluid Handling
The Company’s businesses could face increased price competition from larger competitors. Slowing or reversal of the U.S. economic recovery could reduce sales and profits, particularly if projects for which these businesses are suppliers or bidders are cancelled or delayed. Furthermore, as the Company continues to outsource from international sources, particularly low-cost countries, the risk of supply chain issues increases. At the Company’s foreign operations, reported results in U.S. dollar terms could be eroded by an unanticipated weakening of currency of the respective operations.
10
PART I
Forward Looking Statements (continued)
Controls
A number of factors could affect the Controls Segment’s results. Lower sales and earnings could result if the Company’s 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 2. | Properties |
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Aerospace & Electronics | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
United States | 12 | 1,095,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
International | 3 | 74,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Engineered Materials | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
United States | 8 | 558,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
International | 1 | 31,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Merchandising Systems | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 1 | 463,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
International | 2 | 138,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fluid Handling | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 15 | 1,625,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
International | 24 | 3,168,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Controls | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 4 | 181,000 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Of the 84,977 pending claims as of December 31, 2004, approximately 25,000 claims were pending in New York, approximately 33,000 claims were pending in Mississippi and approximately 3,000 claims were pending in Ohio, jurisdictions in which recent legislation or judicial orders restrict the types of claims that can proceed to trial on the merits. The gross settlement and defense costs in the tort system (before insurance recoveries and tax effects) for the Company in the years ended December 31, 2004 and 2003 totaled $40.9 million and $21.1 million, respectively. The Company’s total pre-tax cash payments for such settlement and defense costs net of the Company’s cost sharing arrangement with insurers in the years ended December 31, 2004 and 2003 amounted to $20.2 million and $7.9 million, respectively. Detailed below are the comparable amounts for the periods indicated.
The foregoing amounts do not include costs incurred by the Company relating to the comprehensive asbestos settlement announced on October 21, 2004. During the year ended December 31, 2004, the Company incurred costs of $11.5 million (before tax effects) for fees and expenses of attorneys, financial advisors and other special advisors for services relating to the comprehensive asbestos settlement. Total pre-tax cash payments for such fees and expenses through December 31, 2004 13
PART I
payable over time in the tort system. A liability of $649.7 million has been recorded to cover the estimated cost of asbestos claims now pending or subsequently asserted through 2011, of which approximately 60% is attributable to settlement and defense costs for future claims projected to be filed through 2011. An asset of $257.2 million has been recorded representing the probable insurance reimbursement for such claims. Under the tort system, the Company incurs not only settlement costs but substantial legal defense costs, and the Company’s best estimate of settlement and defense costs for both pending and future claims through 2011 (including certain related fees and expenses) amounted to $649.7 million at December 31, 2004. This compares to the MSA-based liability estimate of $565.9 million ($578 million at September 30, 2004) which represents the cost of the one-time settlement of all asbestos claims against the Company. The $83.8 million higher liability estimate under the tort system includes the added cost to defend claims against the Company. However, the higher insurance recovery rate in the tort system (40%), as compared with the MSA (30%), is expected to provide the Company with greater insurance recoveries of approximately $97.8 million. Thus, the net estimated cost after anticipated insurance recoveries was reduced by $14 million, which increased net income by $9.1 million, or $0.15 per share, in the fourth quarter of 2004. The principal factors affecting the liability estimates under the tort system versus the MSA are (i) the tort system estimate includes defense costs while the MSA estimate did not, (ii) under generally accepted accounting principles, the tort system estimate is presented in nominal dollars while the MSA estimate is discounted to present value, (iii) insurance recoveries under the tort system are estimated at 40% of settlement and defense costs, while the MSA estimate reduced anticipated insurance recoveries to 30% in the context of the proposed comprehensive asbestos settlement, and (iv) the tort system estimate covers the period through 2011, while the MSA estimate was a full and final settlement of the liability. A significant portion of the Company’s settlement and defense costs have been paid by its primary insurers and one umbrella insurer up to the agreed available limits of the applicable policies. The Company has substantial excess coverage policies that are also expected to respond to asbestos claims as settlements and other payments exhaust the underlying policies, but there is no cost sharing or allocation agreement yet in place with the excess insurers. The same factors that affect developing estimates of probable settlement and defense costs for asbestos-related liabilities also affect estimates of the probable insurance payment, as do a number of additional factors. These additional factors include the financial viability of the insurance companies, the method in which losses will be allocated to the various insurance policies and the years covered by those policies, how settlement and defense costs will be covered by the insurance policies and interpretation of the effect on coverage of various policy terms and limits and their interrelationships. In addition to consulting with legal counsel on these insurance matters, the Company retained insurance consultants to assist management in the estimation of probable insurance recoveries based upon the aggregate liability estimate described above and assuming the continued viability of all solvent insurance carriers. After considering the foregoing factors and consulting with legal counsel and such insurance consultants, the Company determined its probable insurance reimbursement rate to be 40% under the tort system, as contrasted with 30% under the MSA. This insurance receivable is included in other assets. On January 21, 2005, five of the Company’s insurers within two corporate insurer groups filed suit in Connecticut state court seeking injunctive relief against the Company and declaratory relief against the Company and dozens of the Company’s other insurers. The suit sought declaratory relief that (i) the plaintiff insurers are not obligated to pay any portion of the Company’s proposed global settlement or, at a minimum, that the plaintiff insurers are not obligated to pay any portion thereof that is unreasonable or alternatively (ii) the proposed global settlement is unreasonable in amount and therefore an improper basis on which to determine the coverage obligations that they may have to the Company. The suit also sought temporary and permanent injunctive relief restraining the Company from participating in any further settlement discussions with representatives of asbestos plaintiffs or agreeing to any settlement unless the Company permits the plaintiff insurers to both participate in such discussions and have a meaningful opportunity to consider whether to consent to any proposed settlement, or unless the Company elected to waive coverage under the insurers’ policies. The suit 15 PART I
sought additional declaratory relief on a number of issues relating to the Company’s rights under the insurance policies issued by the plaintiff insurers and the allocation of damages among the policies issued by the plaintiff and defendant insurers. The plaintiffs also sought expedited discovery on, among other things, the Company’s proposed global settlement. At a hearing on February 22, 2005, the Company (i) contested the application for temporary injunctive relief and expedited discovery, (ii) moved to dismiss the count of the complaint seeking permanent injunctive relief on the grounds that the count was moot insofar as it addressed the proposed global settlement terminated on January 24, 2005 and not appropriate for determination insofar as it sought relief regarding any future negotiations with representatives of asbestos claimants and (iii) moved to dismiss counts of the complaint seeking declaratory relief with respect to the proposed global settlement as moot. At the hearing, the court denied the plaintiff insurers’ application for temporary injunctive relief and expedited discovery. In denying temporary injunctive relief, the court stated that the plaintiffs could not show irreparable injury and that the plaintiff insurers would have an adequate remedy at law. In light of the court’s ruling and the Company’s motions to dismiss, the insurer plaintiffs sought and received leave to amend their complaint within 30-45 days from the date of the hearing to remove certain declaratory relief counts and to remove or restate the remaining allegations. Estimation of the Company’s 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. The Company cautions that its estimated liability is based on assumptions with respect to future claims, settlement and defense costs based on recent experience Since many uncertainties exist surrounding asbestos litigation, the Company will continue to evaluate its estimated asbestos-related liability and corresponding estimated insurance reimbursement as well as the underlying assumptions and process used to derive these amounts. These uncertainties may result in the Company incurring future charges or increases to income to adjust the carrying value of recorded liabilities and assets, particularly if escalation in the number of claims and settlement and defense costs continues or if legislation or another alternative solution is implemented; however, the Company is currently unable to estimate such future changes. Although the resolution of these claims may
PART I
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. Since 1994 the on-site groundwater treatment facility and soil vapor extraction system have removed approximately 36,000 pounds of trichloroethylene (“TCE”) from the soil and groundwater at the Site. In September 2004, after extensive negotiations regarding the scope of work to be undertaken at the Site after discovery of additional TCE contamination and the detection of perchlorate during routine testing, the Company reached an agreement in principle with the EPA on a work plan for further investigation and remediation activities at the Site. This agreement is expected to be incorporated into a consent decree between the Company and the EPA in the near future. The Company recorded a before-tax charge of $40 million in the third quarter 2004 for the estimated costs through 2014 of further environmental investigation and remediation at the Site, based on this agreement in principle with the EPA. The investigation, monitoring and remediation activities undertaken by the Company at the Site have cost over $25 million since 1985. In November 2003, the Company and UPI brought suit under Section 113 of the Comprehensive Environmental Response, Compensation and Liability Act against the federal government and several of its agencies for contribution and indemnification for these costs. As investigation and clean-up activities at the Site are expected to continue for a number of years, the Company’s action against the government also seeks contribution with respect to future costs. Although the Company has been in discussions with the government concerning these claims, the government to date has not agreed to commit to paying any contribution to clean-up costs at the Site. In 2003, the EPA submitted to the Company a claim for approximately $2.8 million in past costs allegedly incurred at the Site, and the Company has requested and is reviewing the EPA’s supporting documentation of these costs. In January 2005, the EPA advised the Company that a formal demand for an additional $4.1 million in EPA past costs should be expected by the Company. On July 8, 2004, the Environment & Natural Resources Division of the U.S. Department of Justice filed a lawsuit against the Company and UPI seeking reimbursement of the $2.8 million in alleged costs. The government’s action also seeks an injunction requiring UPI to comply with the terms of two earlier administrative orders; entry of a declaratory judgment regarding the Company’s and UPI’s liabilities; and both civil penalties and punitive damages. On February 22, 2005 the Company’s action and the government’s action were consolidated into one case in U.S. District Court in Phoenix, Arizona. The Company has instructed its attorneys to continue to vigorously pursue the Company’s claim against the government, and to defend the counter-suit by the Department of Justice, with the objective of reaching a fair and reasonable allocation of liability for past and future costs in the context of a prudent and scientifically sound plan for the further investigation and clean-up of the Site. The Company does not believe that the ultimate liability for costs to be incurred in connection with the Site will have a material effect on the Company’s financial condition or cash flows; however, there can be no assurance that such costs will not have a material adverse effect on the Company’s results of operations in any given period. A number of other lawsuits, claims and proceedings have been or may be asserted against the Company relating to the conduct of its business, including those pertaining to product liability, patent infringement, commercial, employment, employee benefits, environmental and stockholder matters. While the outcome of litigation cannot be predicted with certainty, and some of these other lawsuits, claims or proceedings may be determined adversely to the Company, the Company does not believe that the disposition of any such other pending matters is likely to have a material adverse effect on its financial condition or liquidity, although the resolution in any reporting period of one or more of these matters could have a material adverse effect on the Company’s results of operations for that period. 17 PART I
No matters were submitted to a vote of security holders during the fourth quarter of 2004. EXECUTIVE OFFICERS OF THE REGISTRANT
18 EXECUTIVE OFFICERS OF THE REGISTRANT (Continued)
PART II
The information required by Item 5(a) and 5(b) is hereby incorporated by reference to pages 72 and 75 of the 2004 Annual Report to Shareholders. The information required by Item 5(c) is not applicable as the Company did not repurchase any shares during the fourth quarter of 2004.
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