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Article by DailyStocks_admin    (08-04-08 09:20 AM)

The Daily Magic Formula Stock for 08/03/2008 is Crane Co. According to the Magic Formula Investing Web Site, the ebit yield is 13% and the EBIT ROIC is 25-50 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

We are a diversified manufacturer of highly engineered industrial products. Comprised of five segments – Aerospace & Electronics, Engineered Materials, Merchandising Systems, Fluid Handling and Controls – our businesses give us a substantial presence in focused niche markets, producing high returns and excess cash flow.

Since our founding in 1855, when R.T. Crane resolved “to conduct my business in the strictest honesty and fairness; to avoid all deception and trickery; to deal fairly with both customers and competitors; to be liberal and just toward employees, and to put my whole mind upon the business,” we have been committed to the highest standards of business conduct.

Our strategy is to grow the earnings of niche businesses with leading market shares, acquire companies that offer strategic fits with existing businesses, aggressively pursue operational and strategic linkages among our businesses, build a performance culture that stresses continuous improvement and a committed management team whose interests are directly aligned with those of the shareholders and maintain a focused, efficient corporate structure.

We use a comprehensive set of business processes and operational excellence tools that we call the Crane Business System to drive continuous improvement throughout our businesses. Beginning with a core value of integrity, the Crane Business System incorporates Voice of the Customer teachings, value stream analysis linking customers and suppliers with our production cells, prescriptive and uniform visual management techniques and a broad range of operational excellence tools into a disciplined strategy deployment process that drives superior financial results by focusing on continuously improving safety, quality, delivery and cost.

We employ approximately 12,000 people in North America, South America, Europe, the Middle East, Asia and Australia.

Business Segments

Beginning with the fourth quarter of 2006, we included the Wireless Monitoring Systems and Crane Environmental businesses, which were previously included in the Aerospace & Electronics and the Fluid Handling segments, respectively, in the Controls segment. See Part II, Item 8, Note 14, “Segment Information,” to the Consolidated Financial Statements for information about sales, operating profit and assets employed by each business segment.

Aerospace & Electronics

The Aerospace & Electronics segment has two groups, the Aerospace Group and the Electronics Group. The Aerospace Group’s products are organized into the following solution sets which are designed, manufactured and sold under their respective brand names: Landing Systems (Hydro-Aire), Sensing and Utility Systems (Eldec), Fluid Management (Lear Romec), Aircraft Electrical Power (Eldec) and Cabin (P.L. Porter). The Electronics Group products are organized into the following solution sets: Power (Eldec, Keltec, Interpoint), Microwave Systems (Signal Technology, Olektron), Electronic Manufacturing Services (General Technology) and Microelectronics (Interpoint).

The Landing Systems product line includes aircraft brake control and anti-skid systems, including electro-hydraulic servo valves and manifolds, embedded software and rugged electronic controls, hydraulic control valves, landing gear sensors and fuel pumps as original equipment to the commercial transport, business, regional, general aviation, military and government aerospace, repair and overhaul markets. This product line also includes similar systems for the retrofit of aircraft with improved systems as well as replacement parts for systems installed as original equipment by aircraft manufacturers. All of these products are largely proprietary to us and, to some extent, are custom designed to the requirements and specifications of the aircraft manufacturer or program contractor. These systems and replacement parts are sold directly to aircraft manufacturers, airlines, governments and aircraft maintenance and overhaul companies. Manufacturing for Hydro-Aire and P.L. Porter products is located in Burbank, California.

The Sensing and Utility Systems product line includes custom position indication and control systems, proximity sensors, pressure sensors, true mass fuel flow meters and power conversion systems for the commercial business, regional and general aviation, military, repair and overhaul and electronics markets. These products are custom designed for specific aircraft to meet technically demanding requirements of the aerospace industry. Our Sensing and Utility Systems products are manufactured at facilities in Lynwood, Washington; Daventry, Northants, England and Bron, France.

The Fluid Management product line includes lubrication and fuel pumps for aircraft and radar cooling systems for the commercial and military aerospace industries. It also includes fuel boost and transfer pumps for commuter and business aircraft. Our Fluid Management solutions are manufactured at a facility located in Elyria, Ohio.

The Aircraft Electrical Power product line includes standard and custom miniature (hybrid) DC-to-DC power converters and other products for the aerospace industry.

Our Cabin Systems product line includes motion control products for airline seating. We hold leading positions in both electromechanical actuation and hydraulic/mechanical actuation for aircraft seating, selling directly to seat manufacturers and to the airlines.

Our Power Solutions product line includes standard and custom power converters and custom miniature (hybrid) electronic circuits for applications across various markets including commercial, space and military aerospace and fiber optics. Facilities are located in Redmond and Lynwood, Washington; Ft. Walton Beach, Florida; Daventry, England and Kaohsiung, Taiwan.

The Microwave Systems markets product line includes power management products and sophisticated electronic radio frequency components and subsystems. These products are used primarily in defense electronics applications that include radars, electronic warfare suites, communications systems and data links. We supply many U.S. Department of Defense prime contractors and foreign allied defense organizations with products that enable missile seekers and guidance systems, aircraft sensors for tactical and intelligence applications, surveillance and reconnaissance missions, communications and self-protect capabilities for naval vessels, sensors and communications capability on unmanned aerial systems and applications for mounted and dismounted land combat troops. Facilities are located in Beverly, Massachusetts and Chandler, Arizona.

The Electronic Manufacturing Services Solution product line includes customized-contract manufacturing services and products focused on military and defense applications. Services include the assembly and testing of printed circuit boards, electromechanical devices, customized integrated systems, cables and wire harnesses. Our Electronic Manufacturing Services Solutions are manufactured at a facility in Albuquerque, New Mexico.

Our Microelectronics product line, headquartered in Redmond, Washington, designs, manufactures and sells custom miniature (hybrid) electronic circuits for applications in commercial, space and military aerospace, fiber optics and medical technology industries.

The Aerospace & Electronics segment employs approximately 3,200 people and had assets of $467 million at December 31, 2007. The order backlog totaled $392.8 million and $396.8 million at December 31, 2007 and 2006, respectively.

Engineered Materials

The Engineered Materials segment is largely comprised of the Crane Composites fiberglass-reinforced plastic (“frp”) panel business. The segment also includes the Polyflon business.

Crane Composites manufactures frp panels for the transportation industry, in refrigerated and dry-van truck trailers, recreational vehicles, industrial markets and the commercial construction industry for food processing, fast-food restaurants and supermarket applications, as well as institutions where fire-rated materials with low-smoke generation and minimum toxicity are required. Crane Composites sells the majority of its products directly to truck trailer and recreational vehicle manufacturers and uses distributors and retailers to serve the commercial construction market. Crane Composites’ manufacturing facilities are located in Channahon and Joliet, Illinois; Jonesboro, Arkansas; Grand Junction, Tennessee; Florence and Henderson, Kentucky; Goshen, Indiana; and Alton, Hampshire, United Kingdom.

Noble Composites, Inc. (“Noble”) was acquired in September 2006 and during 2007 has been integrated into Crane Composites. Noble specializes in the manufacture and sale of premium, high-gloss finished composite panels used by recreational vehicle manufacturers. Noble’s manufacturing facility is located in Goshen, Indiana. In September 2007, we acquired the composite panel business of Owens Corning, which produces, among other products, high gloss frp panels used by manufacturers of recreational vehicles. The acquired business is being integrated into the Noble Composites business.

Polyflon is a manufacturer of small specialty components, primarily as substrate materials for antennas. Polyflon is located in Norwalk, Connecticut.

The Engineered Materials segment employs approximately 1,020 people and had assets of $305 million at December 31, 2007. The order backlog totaled $14.8 million and $13.2 million at December 31, 2007 and 2006, respectively.

Merchandising Systems

The Merchandising Systems segment is divided into two groups, Vending Solutions and Payment Solutions, both of which were significantly expanded in 2006 with our investment of over $200 million for the acquisitions of four complementary businesses.

Vending Solutions includes Dixie-Narco and Automatic Products (two businesses we acquired in 2006), National Vendors, GPL, Stentorfield and Streamware. These businesses create customer value through innovation, reliability, durability and reduced cost of ownership. Our products are sold to vending operators and food and beverage companies throughout the world. Vending Solutions has leading positions in both the direct and indirect distribution channels. Streamware provides vending management software to help customers operate their businesses more profitably, become more competitive and free cash for continued business investment. Major production facilities for Vending Solutions are located in St. Louis, Missouri; Williston, South Carolina and Chippenham, England.

Payment Solutions includes National Rejectors (“NRI”), which makes coin changers and validators, and two businesses acquired in 2006, Telequip Corporation (“Telequip”) and CashCode Co. Inc. (“Cash Code”). With the acquisition of these two businesses, Crane is a full-line supplier of high technology payment systems products well positioned for growth in all market segments and geographies. NRI is headquartered in Buxetehude, Germany; Cash Code is in Concord, Ontario, Canada and Kiev, Ukraine and Telequip is located in Salem, New Hampshire.

The Merchandising Systems segment employs approximately 2,000 people and had assets of $349 million at December 31, 2007. Order backlog totaled $34.1 million and $33.2 million at December 31, 2007 and 2006, respectively.

Fluid Handling

The Fluid Handling segment consists of the Crane Valve Group (“Valve Group”), Crane Pumps & Systems and Crane Supply. In 2007, the Valve Group aligned its business units as follows: Chemical/Pharmaceutical, Energy, Crane Group UK and Services. This alignment will provide greater focus on the chemical, pharmaceutical, oil, gas and power and, to a lesser extent, nuclear, building services and utilities end markets.

The Valve Group, with manufacturing facilities in the United States as well as operations in: Australia, Belgium, Canada, China, England, Finland, France, Germany, Hungary, India, Indonesia, Italy, Japan, Korea, Mexico, the Netherlands, Northern Ireland, Singapore, Spain, Sweden, Taiwan, United Arab Emirates and Wales, sells a wide variety of industrial and commercial valves, corrosion-resistant plastic-lined pipe, pipe fittings, couplings, connectors and actuators and provides valve testing, parts and services for the chemical processing, pharmaceutical, oil and gas, power, nuclear, mining, waste management, general industrial and commercial construction industries. Products are sold under the trade names Crane, Saunders, Jenkins, Pacific, Xomox, DEPA, ELRO, REVO, Flowseal, Centerline, Stockham, Wask, Viking Johnson, Hattersley and Duochek.

Crane Pumps & Systems manufactures pumps under the trade names Deming, Weinman, Burks, Barnes, and Sellers. Pumps are sold to a broad customer base that includes chemical and hydrocarbon processing, automotive, municipal, industrial and commercial wastewater, power generation, commercial heating, ventilation and air-conditioning industries and original equipment manufacturers. Crane Pumps & Systems has facilities in Piqua, Ohio; Bramalea, Ontario, Canada and Zhejiang, China.

Crane Supply, a distributor of plumbing supplies, valves and piping maintains 33 distribution facilities throughout Canada.

During the fourth quarter of 2007, we announced and commenced implementation of a restructuring program designed to further enhance operating margins in the Fluid Handling segment. The planned actions include ceasing the manufacture of malleable iron and bronze fittings at our foundry operating facilities in the UK and Canada, respectively, and exiting both facilities and transferring production to China (the “Foundry Restructuring”). The Foundry Restructuring is expected to be substantially completed by the end of 2008. The program primarily includes workforce reduction expenses and facility exit costs, all of which are expected to be cash costs. We expect to incur total pre-tax charges, upon program completion, of approximately $14 million. Included in this amount, in December 2007, we recognized workforce reduction charges of approximately $9 million. Also in December 2007, pursuant to this program, we sold our foundry facility in the UK, generating a pre-tax gain of approximately $28 million.

The Fluid Handling segment employs approximately 5,000 people and had assets of $869 million at December 31, 2007. Order backlog totaled $242.6 million and $210.5 million at December 31, 2007 and 2006, respectively.

Controls

The Controls segment consists of the Barksdale, Azonix, Dynalco, Crane Environmental and Crane Wireless Monitoring Solutions businesses.

Barksdale manufactures ride-leveling, air-suspension control valves for heavy trucks and trailers, as well as pressure, temperature and level sensors used in a range of industrial machinery and equipment. It has manufacturing and marketing facilities in Los Angeles, California and Reichelsheim, Germany.

Azonix produces ultra-rugged computers, mobile rugged displays, measurement and control systems and intelligent data acquisition products and has a manufacturing facility in Billerica, Massachusetts and, with the acquisition of the mobile rugged business of Kontron AG, an engineering facility in Fremont, California.

Dynalco is a manufacturer of engine compressors monitoring and diagnostic systems and has facilities in Ft. Lauderdale, Florida and Houston, Texas.

Crane Environmental is a 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. Products are sold under the trade names Cochrane and Environmental Products. Crane Environmental has facilities in Venice, Florida and Trooper, Pennsylvania.

Crane Wireless Monitoring Solutions designs wireless sensor networks and covert radio products for the military and intelligence markets as well as for oil and gas, commercial and industrial markets. Crane Wireless Monitoring Solutions is located in Plano, Texas.

The Controls segment employs approximately 600 people and had assets of $84 million at December 31, 2007. Order backlog totaled $35.3 million and $23.0 million at December 31, 2007 and 2006, respectively.

Acquisitions

We have completed 15 acquisitions since the beginning of 2003.

During 2007, we completed two acquisitions at total cost of approximately $65 million. Goodwill for the 2007 acquisitions amounted to approximately $29 million.

In September 2007, we acquired the composite panel business of Owens Corning, which produces, among other products, high gloss fiberglass reinforced plastic panels used in the manufacture of recreational vehicles. The purchase price was $38 million in cash. The acquired business had $40 million of sales in 2006 and is being integrated into the Noble Composites business within our Engineered Materials segment.

In August 2007, we acquired the Mobile Rugged Business of Kontron America, Inc., which produces computers, electronics and flat panel displays for harsh environment applications. The purchase price was $26.6 million. The acquired business had sales of approximately $25 million in 2006 and is being integrated into the Azonix business within our Controls segment.

During 2006, we completed five acquisitions at a total cost of approximately $283 million. Goodwill for the 2006 acquisitions amounted to approximately $148 million.

In January 2006, we acquired substantially all of the assets of Cash Code, a manufacturer of banknote validators, storage and recycling devices for use in a variety of niche applications in vending, gaming, retail and transportation industries, for approximately $86 million in cash. Cash Code had sales of approximately $48 million in 2005. Cash Code is located in Concord, Ontario, Canada and Kiev, Ukraine, serving a global marketplace with 75% of its sales outside the United States, of which the majority are in Europe and Russia. Cash Code was integrated into our Merchandising Systems segment.

In June 2006, we acquired all of the outstanding capital stock of Telequip for a cash purchase price of approximately $45 million. Telequip, with headquarters in Salem, New Hampshire, has been manufacturing coin dispensing solutions since 1974. Telequip provides embedded and free-standing coin dispensing solutions principally focused on applications in supermarkets, convenience
stores, quick-service restaurants and self-checkout and kiosk equipment markets. Telequip’s coin dispensers have a particularly strong position in automated self-checkout markets. Telequip had total annual sales of approximately $20 million in 2006. Telequip was integrated into our Merchandising Systems segment.

In June 2006, we acquired certain assets of Automatic Products International (“AP”), a privately held manufacturer of vending equipment. In September 2006, additional assets of AP were acquired and a second payment made for a total purchase price of approximately $30 million. The acquisition included AP’s extensive distribution network, product line designs and trade names, manufacturing equipment, aftermarket parts business, inventory and other related assets. The purchase did not include AP’s manufacturing facility located in St. Paul, Minnesota. AP equipment production has been consolidated into the Merchandising Systems facility in St. Louis, Missouri. AP had total annual sales of approximately $40 million in 2006.

In September 2006, we acquired all the outstanding capital stock of Noble for a cash purchase price of approximately $72 million. Noble, located in Goshen, Indiana, was a privately held company specializing in the manufacture and sale of premium, high-gloss finished composite panels for use by recreational vehicle manufacturers. Noble had annual sales of $37 million in 2005. Noble was integrated into our Engineered Materials segment.

In October 2006, we acquired all of the outstanding capital stock of Dixie-Narco Inc. (“Dixie-Narco”) for a purchase price of approximately $46 million in cash. Dixie-Narco is the largest can/bottle merchandising equipment manufacturer in the world. Primary customers are the major soft drink companies; in addition, equipment is marketed to global vending operators. Dixie-Narco had total annual sales of approximately $155 million in 2006. Dixie-Narco was integrated into our Merchandising Systems segment.

During 2005, we completed two acquisitions at a total cost of $9 million. Goodwill for the 2005 acquisitions amounted to approximately $5 million.

During 2004, we completed two acquisitions at a total cost of $50 million. Goodwill for the 2004 acquisitions amounted to approximately $37 million. In January 2004, we acquired Porter for a purchase price of $44 million. Porter is a leading manufacturer of motion control products for airline seating and was integrated into the Burbank, California Aerospace facility. Porter holds leading positions in both electromechanical actuation and hydraulic/mechanical actuation for aircraft seating, selling directly to seat manufacturers and to the airlines. Electrically powered seat actuation systems provide motive power and control features required by premium class passengers on competitive international routes. Porter products not only provide passenger comfort with seat back and foot rest adjustment, but also control advanced features such as lumbar support and in-seat massage. In addition to seats installed in new aircraft, airlines refurbish and replace seating several times during an aircraft’s life along with maintenance and repair requirements. Porter’s 2003 annual sales were approximately $32 million. The operations were integrated into our Aerospace & Electronics segment. Also in January 2004, we acquired the Hattersley valve brand and business together with certain related intellectual property and assets from Hattersley Newman Hender, Ltd., a subsidiary of Tomkins plc, for a purchase price of $6 million.

Hattersley branded products include an array of valves for commercial, industrial and institutional construction projects. This business has been integrated into Crane Ltd., which is part of our Fluid Handling segment.

During 2003, we completed four acquisitions at a total cost of $169 million. Goodwill for these acquisitions amounted to $118 million. In May 2003, we acquired STC for a total purchase price of $138 million (net of STC cash acquired). STC, with 2002 annual sales of approximately $87 million, is a leading manufacturer of highly engineered state-of-the-art power management products and electronic radio frequency and microwave frequency components and subsystems for the defense, space and military communications markets. STC supplies many U.S. Department of Defense prime contractors and foreign allied defense organizations with products designed into systems for missile, radar, aircraft, electronic warfare, intelligence and communication applications. The operations were integrated with our Aerospace & Electronics segment. In June 2003, we purchased certain pipe coupling and fittings businesses from Etex Group S.A. (“Etex”), for a purchase price of $29 million. The 2002 annual sales for these businesses were approximately $60 million. These businesses provide pipe jointing and repair solutions to the water, gas and industrial markets worldwide. Products include grooved pipe systems, pipeline couplings and transition fittings and pipeline equipment. The businesses were integrated into our subsidiary, Crane Ltd., a leading provider of pipe fittings, valves and related products to the building services, HVAC (heating, ventilating and air conditioning) and industrial markets in the United Kingdom and Europe, a part of our Fluid Handling segment. We also acquired two other entities in 2003 at a total purchase price of approximately $2 million.

Divestitures

In December 2007, together with our partner, Emerson Electric Co., we sold the Industrial Motion Control, LLC (“IMC”) joint venture, generating proceeds to us of $33 million. Our investment in IMC was approximately $29 million and we recorded dividend income in 2007, 2006 and 2005 of $5.3 million, $5.6 million and $6.0 million, respectively.

In April 2006, we completed the sale of the outstanding capital stock of Westad Industri A/S, a small specialty valve business located in Norway. This business had $25 million in sales in 2005. Westad was included in our Fluid Handling segment. In May 2006, we completed the sale of substantially all of the assets of Resistoflex-Aerospace, a manufacturer of high-performance hose and high-pressure fittings located in Jacksonville, FL. This business had sales of $16 million in 2005. Resistoflex-Aerospace was included in the Aerospace & Electronics segment. In December 2004, we sold the Victaulic trademark and UK-based business assets for $15 million in an all cash transaction. The Victaulic trademark and business assets were acquired in connection with the acquisition of certain valve and fittings product lines from Etex S.A. in June 2003. In March 2003, we sold the assets of our Chempump unit to Teikoku USA, Inc. Chempump manufactured canned motor pumps primarily for use in the chemical processing industry.

Competitive Conditions

Our lines of business are conducted under highly competitive conditions in each of the geographic and product areas they serve. Because of the diversity of the classes of products manufactured and sold, they do not compete with the same companies in all geographic or product areas. Accordingly, it is not possible to estimate the precise number of competitors or to identify our competitive position, although we believe that we are a principal competitor in most of our markets. Our principal method of competition is production of quality products at competitive prices in a timely and efficient manner.

Our products have primary application in the aerospace, defense electronics, recreational vehicle, transportation, automated merchandising, petrochemical, chemical and power generation industries. As such, they are dependent upon numerous unpredictable factors, including changes in market demand, general economic conditions and capital spending. Because these products are also sold in a wide variety of markets and applications, we do not believe we can reliably quantify or predict the possible effects upon our business resulting from such changes.

Our engineering and product development activities are directed primarily toward improvement of existing products and adaptation of existing products to particular customer requirements as well as the development of new products. While we own numerous patents, trademarks, copyrights, trade secrets and licenses to intellectual property, none are of such importance that termination would materially affect our business. From time to time, however, we do engage in litigation to protect our intellectual property.

Research and development costs are expensed when incurred. These costs were approximately $106.8 million, $69.7 million and $53.1 million in 2007, 2006 and 2005, respectively, incurred primarily by the Aerospace & Electronics segment. Funds received from customer-sponsored research and development projects were approximately $8.4 million, $8.8 million and $7.0 million in 2007, 2006 and 2005 respectively, and were recorded in net sales.

We are not dependent on any single customer.

Raw Materials

Our manufacturing operations employ a wide variety of raw materials, including steel, copper, cast iron, electronic components, aluminum, plastics and other petroleum-based products. We purchase raw materials from a large number of independent sources around the world. Although market forces during the past two years have caused significant increases in the costs of steel and petroleum-based products, there have been no raw materials shortages that have had a material adverse impact on our business and we believe that we will generally be able to obtain adequate supplies of major raw material requirements or reasonable substitutes at reasonable, though escalating, costs.

MANAGEMENT DISCUSSION FROM LATEST 10K

We are a diversified manufacturer of highly engineered industrial products. Our business consists of five segments: Aerospace & Electronics, Engineered Materials, Merchandising Systems, Fluid Handling and Controls. Our primary markets are aerospace, defense electronics, recreational vehicle, transportation, automated merchandising, chemical, pharmaceutical, oil, gas and power, nuclear, building services and utilities.

During 2007, we completed two acquisitions at a total cost of approximately $65 million. In September 2007, we acquired the composite panel business of Owens Corning, which produces, among other products, high gloss fiberglass reinforced plastic panels used in the manufacture of recreational vehicles. In August 2007, we acquired the Mobile Rugged Business of Kontron America, Inc., which produces computers, electronics and flat panel displays for harsh environment applications.

In December 2007, together with our partner, Emerson Electric Co., we sold the Industrial Motion Control, LLC (“IMC”) joint venture, generating proceeds to us of $33 million. Our investment in IMC was approximately $29 million and we recorded dividend income in 2007, 2006 and 2005 of $5.3 million, $5.6 million and $6.0 million, respectively.

Items Affecting Comparability of Reported Results

The comparability of our operating results for the years ended December 31, 2007, 2006 and 2005 is affected by the following significant items:

Asbestos Charge

With the assistance of outside experts, during the third quarter of 2007, we updated and extended our estimate of our asbestos liability, including the costs of settlement or indemnity payments and defense costs relating to currently pending claims and future claims projected to be filed against us through 2017. Our previous estimate was for asbestos claims filed through 2011. As a result of this updated estimate, we recorded an additional pre-tax provision of $390.2 million during the third quarter of 2007 (this amount includes a corresponding insurance receivable). Our decision to take this action was based on several factors, including:


•

the number of asbestos claims being filed against us has moderated substantially over the past several years, and in our opinion, the outlook for asbestos claims expected to be filed and resolved in the forecast period should be reasonably stable;


•

the stable outlook for future claims is particularly true for mesothelioma claims, which although constituting only 11% of our asbestos claims account for approximately 85% of our aggregate settlement and defense costs over the past five years;


•

federal legislation that would significantly change the nature of asbestos litigation failed to pass in 2006, and in our opinion, the prospects for such legislation at the federal level are remote;


•

there have been significant actions taken by certain state legislatures and courts over the past several years that have reduced the number and types of claims that can proceed to trial, which has been a significant factor in stabilizing the asbestos claim activity; and •

we have now entered into coverage-in-place agreements with a majority of our excess insurers, which enables us to project a more stable relationship between settlement and defense costs paid by us and reimbursements from our insurers.

Taking all of these factors into account, we believe that we can reasonably estimate the asbestos liability for pending claims and future claims to be filed through 2017. While it is probable that we will incur additional charges for asbestos liabilities and defense costs in excess of the amounts currently provided, we do not believe that any such amount can be reasonably estimated beyond 2017. Accordingly, no accrual has been recorded for any costs which may be incurred for claims made subsequent to 2017. The liability was $1,027 million as of December 31, 2007.

Environmental Charge

For environmental matters, we record a liability for estimated remediation costs when it is probable that we will be responsible for such costs and they can be reasonably estimated. Generally, third party specialists assist in the estimation of remediation costs. The environmental remediation liability at December 31, 2007 is substantially all for the former manufacturing site in Goodyear, Arizona (the “Site”) discussed below.

The Site was operated by UniDynamics/Phoenix, Inc. (“UPI”), which became an indirect subsidiary of ours in 1985 when we acquired UPI’s parent company, UniDynamics Corporation. UPI manufactured explosive and pyrotechnic compounds, including components for critical military programs, for the U.S. government at the Site from 1962 to 1993, under contracts with the Department of Defense and other government agencies and certain of their prime contractors. No manufacturing operations have been conducted at the Site since 1994. The Site was placed on the National Priorities List in 1983, and is now part of the Phoenix-Goodyear Airport North Superfund site. In 1990, the U.S. Environmental Protection Agency (“EPA”) issued administrative orders requiring UPI to design and carry out certain remedial actions, which UPI has done. Groundwater extraction and treatment systems have been in operation at the Site since 1994. A soil vapor extraction system was in operation from 1994 to 1998, was restarted in 2004, and is currently in operation. On July 26, 2006, we entered into a consent decree with the EPA with respect to the Site providing for, among other things, a work plan for further investigation and remediation activities at the Site. We recorded a liability in 2004 for estimated costs through 2014 after reaching substantial agreement on the scope of work with the EPA. At the end of September 2007, the liability totaled $15.4 million. During the fourth quarter of 2007, we and our technical advisors determined that changing groundwater flow rates and contaminant plume direction at the Site required additional extraction systems as well as modifications and upgrades of the existing systems. In consultation with our technical advisors, we prepared a forecast of the expenditures required for these new and upgraded systems as well as the costs of operation over the forecast period through 2014. Taking these additional costs into consideration, our estimated liability for the costs of such activities through 2014 was $41.5 million as of December 31, 2007, which is included in accrued liabilities and other liabilities in our consolidated balance sheet.

On July 31, 2006, we entered into a consent decree with the U.S. Department of Justice (“DOJ”) on behalf of the Department of Defense and the Department of Energy pursuant to which, among other things, the U.S. Government reimburses us for 21 percent of qualifying costs of investigation and remediation activities at the Site. As of December 31, 2007, we have recorded a receivable of $7.8 million for the expected reimbursements from the U.S. Government in respect of the aggregate liability as at that date.

Foundry Restructuring

During the fourth quarter of 2007, our Fluid Handling segment commenced implementation of a restructuring program designed to further enhance operating margins. The planned actions include ceasing the manufacture of malleable iron and bronze fittings at foundry operating facilities in the UK and Canada, respectively, and exiting both facilities and transferring production to China (the “Foundry Restructuring”). The Foundry Restructuring is expected to be substantially completed by the end of 2008. The program primarily includes workforce reduction expenses and facility exit costs, all of which are expected to be cash costs. We expect to incur total pre-tax charges, upon program completion, of approximately $14 million. Included in this amount, in December 2007, we recognized workforce reduction charges of approximately $9 million. Also in December 2007, pursuant to this program, we sold our foundry facility in the UK, generating a pre-tax gain of approximately $28 million. We are leasing back part of the property for up to two years until the ongoing manufacturing and office activities are transferred.

Civil False Claims Settlement

During the third quarter of 2007, we recorded a $7.6 million charge related to a civil false claims proceeding by the U.S. Government.

We were engaged in discussions with attorneys from the Civil Division of the Department of Justice (“DOJ”) for over a year regarding allegations that certain valves sold by our Crane Valves North America unit (“CVNA”) to private customers that ultimately were delivered to U.S. military agencies did not conform to contractual specifications relating to the place of manufacture and the origin of component parts. The DOJ’s allegations originated with a qui tam complaint filed under seal by a former CVNA employee. The DOJ ultimately intervened in that case, and on March 31, 2007, filed a complaint against us in the United States District Court for the Southern District of Texas seeking unspecified damages for violations of the False Claims Act, and other common law claims. The complaint alleged that CVNA failed to notify the correct U.S. military agency when our manufacturing location for Mil-Spec valves listed on the Qualified Products List was moved from Long Beach, California to Conroe, Texas in 2003. As a result, the complaint alleged that the valves manufactured in Texas were not properly listed on the Qualified Product List as required by the contract specifications.

We received a letter from the Department of the Navy on February 14, 2007, conveying the Navy’s concerns about the Qualified Products List allegations raised by the DOJ. The Department of the Navy advised us that, if true, these allegations could potentially result in us and our subsidiaries and affiliates being suspended and/or debarred from doing business with the U.S. Government. We cooperated with the Government’s investigation of these matters and executed a settlement agreement with the DOJ providing for, among other things, the payment of $7.5 million to the United States and $125,000 to pay the legal fees of the former employee who filed the qui tam complaint. In addition, we negotiated an administrative agreement with the Department of the Navy for a term of three years pursuant to which we will implement certain changes to our compliance programs and report to the Navy on a quarterly basis. These agreements were executed and became effective on July 27, 2007. We acknowledged the failure to notify the Navy and update the Qualified Products List but we denied that this omission violated the False Claims Act. The failure to notify the Navy was unintentional and there was no misconduct by our personnel. We determined to settle this matter to avoid the risks of costly and protracted legal proceedings.

Repatriation of Foreign Earnings

During the fourth quarter of 2007, we concluded that our capital balances overseas were in excess of our projected future needs outside the U.S. As a result, we established a $10.4 million deferred tax liability related to the estimated additional U.S. federal and state income taxes due upon the ultimate repatriation of $194 million of such capital balances.


2007 Compared with 2006

Sales in 2007 increased $362 million, or 16%, to $2.619 billion compared with $2.257 billion in 2006. The sales increase was primarily due to core business growth of $163 million (7%) and revenue from net acquisitions and dispositions of $134 million (6%). Sales growth also included $65 million (3%) from favorable foreign exchange. Our Aerospace & Electronics segment reported a sales increase of $63 million, or 11%. Excluding Resistoflex-Aerospace which was divested in May 2006, segment sales were up 12%. Our Aerospace Group had strong commercial OEM (Original Equipment Manufacturer) sales and aftermarket revenue. Our Electronics Group experienced a 5% sales increase year over year. In our Engineered Materials segment, demand for fiberglass-reinforced panels from the recreational vehicle and transportation trailer markets declined 9% due to lower industry demand. The Merchandising Systems segment showed a $130 million revenue increase in 2007 mainly from the four acquisitions made in 2006. Our Fluid Handling segment’s sales increased $136 million, or 14%, including a net decline of $10 million related to disposed businesses. Excluding dispositions, this segment’s sales increased $147 million, or 15%, $97 million (10%) from core growth reflecting the strong conditions in general industrial markets and $50 million (5%) from favorable foreign exchange.

Total segment operating profit was $69 million, or $24% higher, in 2007 when compared to 2006. Total Fluid Handling segment operating profit was $52 million higher, or 49%, in 2007 compared to the prior year. As a percent of sales, total segment operating margins increased to 13.5% in 2007, compared to 12.6% in 2006. The increase over the prior year was driven primarily by improvement in our Fluid Handling and Merchandising Systems segments. Fluid Handling benefited from:


•

successfully leveraging higher sales volume;


•

price increases;


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the net gain of $19 million related to the consolidation of foundry operations; and


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the favorable impact of changes in foreign exchange rates.

Merchandising Systems benefited from continued strong global demand for payment solutions products and, to a lesser extent operating efficiencies gained through the integration of the AP and Dixie-Narco acquisitions and share gains in European vending. Engineered Materials benefited from the full year profit contribution from the September 2006 Noble acquisition and customer price increases. These improvements were partially offset by unfavorable operating margins in our Aerospace & Electronics segment due primarily to increased engineering expenses related to new products for major programs such as the Boeing 787 and the Airbus A400M.

An operating loss of $108 million resulted in 2007, compared to an operating profit of $248 million in 2006. 2007 operating results included:


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a provision of $390.2 million ($254 million, after-tax) to update and extend our estimate of our asbestos liability;


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an environmental provision of $19 million ($12.3 million, after-tax) related to our expected liability at our Goodyear, Arizona Superfund Site; and •

a $7.6 million provision ($5.4 million, after-tax) relating to the previously disclosed civil false claims proceeding by the U.S. Government.

The 2007 net loss was $62.3 million, or $1.04 per share, as compared with net income of $165.9 million, or $2.67 per share, in 2006. The 2007 net loss included:


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the asbestos charge ($254 million, or $4.22 per share);


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the environmental provision ($12.3 million, or $0.20 per share);


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the civil false claims settlement ($5.4 million, or $0.09 per share); and


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the additional tax provision for undistributed foreign earnings ($10.4 million, or $0.17 per share).

These amounts were partially offset by the net gain resulting from the foundry restructuring ($18.4 million, or $0.31 per share) and the gain on the sale of the IMC joint venture ($5.8 million, or $0.10 per share).

2006 Compared with 2005

Sales in 2006 increased $196 million, or 9%, to $2.257 billion compared with $2.061 billion in 2005. The sales increase was primarily due to core business growth of $80 million (4%) and revenue from net acquisitions and dispositions of $96 million (4%). Sales growth also included $20 million (1%) from favorable foreign exchange. Our Aerospace & Electronics segment reported a sales increase of $29 million, or 5%. Excluding Resistoflex-Aerospace which was divested in May 2006, segment sales were up 8%. Our Aerospace Group had strong commercial OEM sales and aftermarket revenue. Our Electronics Group experienced flat sales year over year. In our Engineered Materials segment, demand for fiberglass-reinforced panels from the recreational vehicle and transportation trailer markets was up slightly for the year. Our Merchandising Systems segment showed a $92 million revenue increase in 2006 mainly from the four acquisitions made during the year. Excluding acquisitions, Vending Solutions revenue declined reflecting the weak vending machine market conditions throughout 2006 which appeared to stabilize at the end of the year. Our Fluid Handling segment’s sales increased $63 million, or 7%, including a net decline of $12 million from disposed and acquired businesses. Excluding dispositions and acquisitions, this segment’s sales increased $75 million, or 8%, $57 million (6%) from core growth and $18 million (2%) from favorable foreign exchange reflecting the strong conditions in general industrial markets.

Total operating profit was $34 million higher, or 16%, in 2006 than in the prior year, largely the result of favorable performance in the Fluid Handling segment and the Aerospace group. All segments except Engineered Materials showed improvement. Fluid Handling benefited from operational improvements, the leverage on higher sales volume and price increases in 2006. In our Aerospace and Electronics segment, our Electronics Group operating profit was down slightly, but the Aerospace Group experienced a 25% profit improvement from the strong increase in commercial OEM and aftermarket sales. Our Merchandising Systems segment’s profit from 2006 acquisitions was somewhat offset by lower volume on traditional vending products.

Operating margins improved to 11% in 2006 from 10.4% in 2005. This increase was mostly due to the Fluid Handling segment’s strong performance and Aerospace Group’s favorable volume and mix. The Aerospace Group mix of OEM/aftermarket was improved year over year reflecting program wins for modernization and upgrade and initial provisioning on new aircraft. These improvements were somewhat offset by the unfavorable margins at Engineered Materials largely from the cost of 2006 customer assistance payments and, in the Electronics Group, from the costs associated with increased engineering investment and the mix of lower-margin contracts.

Miscellaneous income was up $6 million pretax in 2006 from 2005 primarily from the $8 million net gain from the sale of Resistoflex Aerospace and Westad.

Net income was $166 million ($2.67 per diluted share) in 2006, an increase of 22%, as compared with $136 million ($2.25 per diluted share) in 2005.

2007 Compared with 2006. Sales of our Aerospace & Electronics segment increased $63 million, or 11%, in 2007 to $629 million. The sales growth in this segment was primarily attributable to performance in the Aerospace Group. The Aerospace & Electronics segment’s operating profit decreased $13 million, or 13%, in 2007. The decline in operating profit was driven by substantially higher engineering expenses in the Aerospace Group, primarily related to the development of new products for major programs such as the Boeing 787 and Airbus A400M. The operating margin for the segment was 13.7% in 2007 compared to 17.5% in 2006.

Aerospace Group sales increased 14% from $369 million in 2006 to $421 million in 2007. Backlog at December 31, 2007 rose 3% to $241 million from December 31, 2006. The increase in sales and order backlog is attributable to continued strong global demand in the aerospace environment. The commercial market accounted for approximately 83% of Aerospace Group sales in 2007, while sales to the military market were approximately 17% of the total sales. Sales in 2007 by the Group’s five solution sets were as follows: Landing Systems, 28%; Sensing and Utility Systems, 26%; Fluid Management, 22%; Aircraft Electrical Power, 10%; and Cabin, 14%.

Our Aerospace Group’s sales increased in 2007 due to higher OEM volumes which were up 18% to $259 million from $220 million in 2006 and, to a lesser extent, aftermarket volumes which increased 9% to $162 million in 2007 from $148 million in 2006. Higher sales were fueled by continued strong growth in the aerospace industry. Sales to OEMs were 62% of the total in 2007, compared to 60% in 2006. The strong 2007 aircraft build rate and stronger cabin OEM demand resulting, in part from schedule slides from 2006, were contributing factors in overall growth. Successful modernization and upgrade programs and repair and overhaul for the existing aircraft fleet and higher initial provisioning for new aircraft placed in service resulted in strong aftermarket performance, although at a slower pace than the increase in sales in commercial OEM products.

Our Aerospace Group 2007 operating profit decreased 16% over the prior year as the higher sales volume was more than offset by significantly higher engineering spending and, to a lesser extent, less favorable aftermarket/OEM mix.

In 2007, engineering expenses of $73 million increased approximately 70% or $30 million over the prior year. The Aerospace Group continued to invest engineering resources in new technologies and markets with an emphasis on products that improve safety and/or reduce operating costs. The significant investment in 2007 was primarily related to the development of new products for major OEM programs, including the Boeing 787 and Airbus A400M. In addition, to a lesser extent, continued investments in wireless technologies and AirWeighs™ (“AirWeighs”) contributed to the increase in engineering expenses over the prior year.

Working capital as a percentage of sales was 22.9% in 2007, compared to 24.4% in 2006. The improvement over the prior year was driven primarily by improved days sales outstanding and days payable outstanding.

Electronics Group sales increased 5% from $197 million in 2006 to $208 million in 2007. Our Electronics Group was favorably impacted by continued defense electronics spending, with major platforms carrying more mission payloads requiring products with higher power, increased efficiency and smaller packaging. In addition, demand in the medical market continued to increase. Operating profit was approximately the same as the prior year as the higher sales volumes were offset by higher engineering investment and higher program costs on certain long-term contracts. At December 31, 2007, Electronics Group backlog was down 6% from prior year levels.

Electronics Group sales by market in 2007 were as follows: military/defense, 64%; commercial aerospace, 26%; medical, 7%; and space, 3%. Sales in 2007 by the Group’s solution sets were as follows: Power, 64%; Microwave Systems, 22%; Microelectronics, 9%; and Electronic Manufacturing Services, 5%.

Power Solution’s revenue increased in 2007, up 4% from 2006. Operating profit margins in Power Solutions experienced a moderate decline due to increased engineering expenses on commercial aerospace programs as well as margin erosion resulting from higher program costs on certain long-term contracts. At December 31, 2007, the backlog was down 10% from the prior year.

Microwave Systems Solution’s 2007 revenues were approximately 2% higher than 2006. Operating profit increased 28% from 2006, primarily resulting from higher margins realized on microwave component part sales.

Microelectronics Solution’s 2007 revenues were approximately 36% higher than 2006, which was substantially due to key customer account initiatives which, in turn, increased electronic component sales for implantable biomedical devices.

Electronic Manufacturing Services Solution supports defense customers with engineered and build-to-print electronics manufacturing services. Our Electronic Manufacturing Services

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results from Operations

First quarter of 2008 compared with first quarter of 2007

First quarter 2008 sales increased $50.7 million, or 8%, over the first quarter of 2007. Core business sales for the first quarter contributed approximately 3% growth, or $16.9 million. Acquired businesses (the composite panel business of Owens Corning and the Mobile Rugged business of Kontron America, Inc.) contributed 1% growth, or $10.3 million. The impact of currency translation on sales increased reported sales by approximately 4%, or $23.5 million, as the U.S. dollar was weaker against other major currencies in the first quarter of 2008 compared to the first quarter of 2007. Net sales related to operations outside the U.S. for the three-month periods were 39.2% and 36.3% of total net sales for the quarters ended March 31, 2008 and 2007, respectively.

Operating profit margins were 11.1% in the first quarter 2008 compared to 10.9% in the comparable period of 2007. The increase over the prior year period was largely attributable to improved performance in our Fluid Handling and Merchandising Systems businesses, partially offset by weaker performance in our Engineered Materials and Aerospace & Electronics segments.

Other income (expense) in the first quarter of 2007 included approximately $1.0 million of equity joint venture income related to the Industrial Motions Control Holding LLC (“IMC”) joint venture that was sold in the fourth quarter of 2007.

Our effective tax rate was 32.3% for the three months ended March 31, 2008 compared to 32.5% for the three months ended March 31, 2007. The tax rate was lower primarily due to lower enacted statutory tax rates in 2008 in certain non-U.S. taxing jurisdictions and lower state taxes in 2008. These items were partially offset by the statutory expiration of the U.S. federal research tax credit as of December 31, 2007.

Order backlog at March 31, 2008 totaled $768.7 million, 6% higher than the backlog of $726.8 million at March 31, 2007 and 7% higher than $719.6 million at December 31, 2007.

The first quarter 2008 sales increase of $10.1 million reflected a sales increase of $11.1 million in the Aerospace Group and a decrease of $1.0 million in the Electronics Group. The segment’s operating profit decreased $5.0 million, or 23.8%, in the first quarter of 2008 when compared to the period in the prior year. The decline in operating profit was driven by substantially higher engineering expense in the Aerospace Group, which was $24 million in the first quarter of 2008, compared to $14 million in the first quarter of 2007. This increase in engineering expense is related to the development of new products, primarily for the Boeing 787 and Airbus A400M programs. We expect a higher level of engineering expense through 2008 resulting, in part, from the delay in the delivery of the Boeing 787 aircraft and corresponding software and hardware testing and modifications, as well as design changes related to the interface of subsystems with other suppliers. Tighter expense controls and potential claim reimbursements are expected to partially offset the unfavorable impact of the continued development expenses on this program.

Aerospace Group sales of $101.5 million increased $11.1 million, or 12%, from $90.4 million in the prior year period. This increase is attributable to continued strong demand in the aerospace industry. Operating profit declined by $5.0 million in the first quarter of 2008, compared to the first quarter of 2007 which was due to the aforementioned $10.0 million increase in engineering expenses, partially offset by higher original equipment manufacturer and aftermarket sales volume. In addition, the first quarter of 2007 included a $1.1 million unfavorable impact related to a pump connector recall.

Electronics Group sales of $57.1 million decreased $1.0 million, or 2%, due primarily to lower sales in our Power Solutions business. Operating profit remained approximately equal to the first quarter of 2007.

The Aerospace & Electronics segment backlog was $407.4 million at March 31, 2008, compared with $405.8 million at March 31, 2007 and $392.8 million at December 31, 2007.

First quarter 2008 sales decreased $5.0 million, or 5.7%, reflecting substantially lower volumes when compared to the prior year period. Core business sales were down $13.7 million, or 16%, related to lower volumes to our traditional recreational vehicle and transportation and building products customers, partially offset by $8.7 million of sales related to the September 2007 acquisition of the composite panel business of Owens Corning. Operating profit in 2008 decreased 27.3%, resulting from the lower core business sales, higher raw material costs, and costs associated with the integration of the composite panel business acquisition.

First quarter 2008 sales increased $16.1 million, or 16.5%, including $10.9 million (11.2%) of core sales, representing growth in both the Vending and Payment Solutions product lines, and favorable foreign currency translation of $5.2 million (5.3%). The Vending Solutions sales increase, representing the majority of the increase, was led by the successful introduction of the BevMax III glass front vender. Operating profit for the segment improved by $4.5 million over the first quarter of 2007, or 46.9%, due primarily to the successful leverage gained from the comparable quarter sales increase, as well as the absence of integration expenses and related production inefficiencies associated with the Vending Solutions group’s 2006 acquisitions.

The Merchandising Systems segment backlog was $42.5 million at March 31, 2007, compared with $33.2 million at March 31, 2007 and $34.1 million at December 31, 2007.

First quarter 2008 sales increased $25.5 million, or 9.7%, including $11.7 million (4%) of core sales and favorable foreign currency translation of $17.2 million (7%), offset by sales from divested businesses of $3.4 million (1%). Segment operating profit increased $13.6 million, or 43.7%, over the 2007 first quarter. The operating profit increase was broad-based across all major business units in the segment, reflecting continued strong global demand in the chemical, pharmaceutical and energy industries, coupled with throughput efficiencies and pricing discipline. We expect that operating margins during the balance of 2008 will be slightly lower due to spending associated with continued growth initiatives, such as costs associated with the previously announced closure of two foundries, expansion plans in China, new product development efforts and increasing our nuclear valve capacity.

The Fluid Handling segment backlog was $268.3 million at March 31, 2008, compared with $237.1 million at March 31, 2007 and $242.6 million at December 31, 2007.

The first quarter 2008 sales increase of $3.9 million reflects $4.9 million of sales related to the August 2007 acquisition of the Mobile Rugged Business division of Kontron America, Inc. Core segment sales and operating profit were impacted by delays in customer projects and by the remaining integration costs associated with the Mobile Rugged Business acquisition.

The Controls segment backlog was $34.5 million at March 31, 2008, compared with $33.2 million at March 31, 2007 and $35.3 million at December 31, 2007.

Liquidity and Capital Resources

Operating Activities

Cash provided by operating activities, a key source of our liquidity, was $44.1 million for the first quarter of 2008, an increase of $7.2 million, or 20%, as compared to the first quarter of 2007. This increase was due to earnings growth and lower tax payments during the current year first quarter; in addition, in the first quarter of 2007, we used $11.0 million of proceeds from the sale of its corporate aircraft as the initial payment on an operating lease for a used, but newer aircraft replacement. These favorable changes were partially offset by $2.1 million of net asbestos payments in the first quarter of 2008, compared to $21.2 million of net asbestos receipts in the period last year (reflecting the receipt of $31.5 million in previously escrowed funds from Equitas Limited), as well as the impact of increased operating working capital requirements, which used approximately $4.2 million more cash in the first quarter of 2008 compared to the first quarter of 2007.

Investing Activities

Cash flows relating to investing activities consist primarily of cash used for acquisitions (there were no acquisitions during the first quarter of 2008 or 2007) and capital expenditures and cash flows from divestitures of businesses or assets. Cash used in investing activities was $8.0 million in the first quarter of 2008, compared to approximately $4.1 million of net cash provided by investing activities in the comparable period of 2007. Our investing activities in the first quarter of 2007 included the sale of our corporate aircraft, which generated $11.0 million of proceeds. Capital expenditures of $9.1 million for the first quarter of 2008 increased approximately $2.1 million from the first quarter of 2007. Capital expenditures are made primarily for increasing capacity, replacing equipment, supporting new product development and improving information systems.

Financing Activities

Financing cash flows consist primarily of proceeds from the issuance of debt and common stock, and financing uses of cash consist primarily of repayments of indebtedness, repurchases of common stock and payments of dividends to shareholders. Cash used in financing activities was $38.1 million during the first quarter of 2008, compared to $47.0 million used during the first quarter of 2007. The decrease in cash used in financing activities was primarily due to an increase in short term debt during the first quarter of 2008 and, to a lesser extent, net proceeds received from employee stock option exercises.

CONF CALL

Richard E. Koch - Director of Investor Relations and Corporate Communications

Thank you, operator. Good morning everyone. Welcome to Crane's second quarter 2008 earnings release conference call. I'm Dick Koch, Director of Investor Relations. On our call this morning we have Eric Fast, our President and CEO; and Tim MacCarrick, our new Vice President and CFO. We will start our call off with a few prepared remarks after, which we will respond to questions.

Just as a reminder, the comments we make on this call may include some forward-looking statements. We would refer you to the cautionary language at the bottom of our earnings release and also in our annual report, 10-K and subsequent filings pertaining to forward-looking statements.

Also during the call, we will be using some non-GAAP numbers, which are reconciled to the comparable GAAP numbers in the table at the end of our press release, which is available on our website at www.craneco.com in the Investor Relations section.

Now let me turn the call over to Eric.

Eric C. Fast - President and Chief Executive Officer

Thank you, Dick. Before discussing our earnings, I would like to welcome and introduce you to our new Vice President for Finance and CFO, Tim MacCarrick. As you saw in our separate press release yesterday Tim joins us from Xerox. His 20 years of service there has given him a broad operating finance background with solid international experience. Today is his first day at Crane, and we welcome him to the team.

Timothy J. MacCarrick - Vice President, Finance and Chief Financial Officer

Thanks Eric. It's so great to be here.

Eric C. Fast - President and Chief Executive Officer

Last night we reported second quarter of 2008 net income of $59 million or $0.97 per share, compared with net income of $45.7 million or $0.75 per share in the second quarter of '07. After adjusting for non-recurring items on a non-GAAP basis, our second quarter EPS was $0.93 compared, to $0.84 in 2007 up 11%.

Let me now highlight several key items for the second quarter. We've increased the quarterly dividend by 11%, reflecting confidence in our businesses and strong financial position. Fluid Handling had record second quarter sales and operating profits, core sales increased 4% in the quarter to a record $301 million.

Operating profit increased 39%.Operating margin reached 15.5% compared to 11.9% last year. Merchandising Systems operating profit increased 46% with strong improvement in both Vending and Payment Solutions. The stronger than anticipated performance in Fluid Handling and Merchandising Systems more than offset the anticipated higher engineering spending in aerospace, in unfavorable end markets for engineered materials, which deteriorated sharply during the second quarter particularly for the recreational vehicle and transportation market.

We maintained our EPS guidance for the year of $3.45 to $3.60 on a GAAP basis, which includes a $0.97 in the second quarter, but in the face of an uncertain economy, we expect to be near the low end of the range. I would note the second quarter results included $0.05 per share of recoveries for cost previously incurred relating to environmental remediation. Free cash flow will be at or above our $170 million guidance.

Turning now to specific segments comments; Aerospace and electronics. Aerospace Group sales of $108 million increased $12 million or 12.5% from $96 million in the prior year period. OEM and after market sales were higher than last year with OEM sales growing 19% and after market sales growing 2% on a comparable basis. The OEM after market mix was 65%, 35% compared to last year's second quarter of 62%, 38%.

Operating profit in aerospace declined by $3.5 million reflecting the $9.6 million increase in engineering expense, due to the heavy investments in the 787 and A400M and a higher OEM mix offset part [ph] by negotiated cost recovery of $5.6 million for prior engineering work done for an aerospace customer.

Absent the heavy investment in new programs for future growth, operating margins were consistent with our long-term goal of 20%. I point this out to you... I point this out so that you will understand that excluding our heavy investment in these two new programs, Aerospace Group is performing well and in line with our long-term expectation.

Our aerospace engineering spending in the second quarter of 2008 was $26 million compared, to the first quarter of 2008 of $24 million and $16 million in the second quarter of 2007.

This increase in engineering spend all of which is expense is because of the 787 and A400M program and will continue through the balance of the year at a run-rate... at the run-rate of the second quarter or slightly higher.

Crane, GE and Boeing engineers are working side-by-side to continue development of the brake control software. Boeing told the press at the Farnborough Airshow that they are confident that the quote will meet stringent certification requirements, and expect that first flight will occur on schedule in the fourth quarter. We share Boeing's confidence that this software will be completed on schedule for our first flight.

We expect to partially offset our high engineering spending this year with potential additional negotiated cost recoveries. Recoveries arise when changes of scope occur, that is when the customer changes his design which impacts design cost or schedule and resources.

The cost of the change of scope is identified in a claim that is submitted to the customer by the supplier. By their very nature claim recoveries are discrete items and could be hard to predict because they are a result of negotiation.

Electronics Group sales of $58 million, decreased $6 million or 10% primarily due to lower sales in power and microwave solutions due primarily to avoid flip outs and funding delays on current programs. While Electronics Group operating profit declined $2 million compared to the second quarter of 2007. Operating margins remained above10%.

Engineered materials; in the second quarter, engineered materials core sales decreased $21.5 million or 25% reflecting substantially lower volumes to the company's traditional recreational vehicle and transportation customers, partially offset by $6.7 million of sales related to the composite panel business we acquired from Owens Corning last August. This is a significantly greater decline in core sales than the 16% we experienced in the first quarter of 2008.

In the second quarter of 2008, excluding the sales of the acquired business, we saw a 43% decline in sales to our recreational vehicle customers. This was greater than the deterioration in RV industry's retail sales, because there have been significant inventory liquidations at the OEM and retail level.

We experienced a 28% decline in our sales to transportation related customers, consistent with reduced trailer build rates and a 6% decline in our building products customers.

A number of RV manufactures took extended vacation shutdowns in June and July, reduced their work forces consistent with lower industry demand, closed plants and/or ceased operations entirely.

The sharp downturn in RV market, particularly laid in the second quarter, surprised many industry experts. What we've seen is clearly worse than what we expected, and is the major factor in our decision to be more cautionary about our total corporate earnings to guidance for the year.

Operating profit declined 55%, as a result of lower volume with price increases offsetting higher material cost. Since the beginning of the year, our headcount is now been reduced by 24% and disciplined expense controls are in place.

We view the disruptions in the marketplace as opportunities to support our customers when market share and actively develop new product.

We had a record second quarter for Merchandising Systems; sales increased 16% with improvements in Vending and Payments Solutions lead by a solid demand for the glass front BevMax III and strong demand for coring and build validation and our coin dispensing products. Operating profit increased $5.4 million or 46%, reflecting effective leverage of a higher sales and throughput efficiencies.

Global demand for Payments Systems remained strong with increased market penetration, broad base acceptance to new product offerings and delays in any potential adverse regulatory changes in overseas markets. Orders from the major borrowers for the BevMax III machine were seasonally strong in the second quarter in part reflecting the significant efforts to dramatically perform... improve the performance of this new machine.

As we move through the second quarter, we saw more pronounced effects of high gas and food costs on the North American vending industry and their impact will become more evident as move into the seasonally slower second half of the year, as is normal in the industry. Reflecting those market issues, headcount in our North American vending business has been reduced by over 16% as compared to January 2008. New product introductions in the second half should help mitigate these conditions.

At this point I feel Merchandising Systems is on a pace to post record earnings this year, and should exceed the guidance we provided at our February Investor Day. Fluid Handling, which represents about 43% of Crane's total sales turned in a record second quarter with sales increasing 7%, operating profit growing 39% with a profit margin of 15.5%.

The operating profit increase was broad based across all major units in this segment reflecting continued global demand and pricing discipline. We have continued to see broad based demands from the chemical and pharmaceutical industries and to a lesser extend energy.

As noted on our prior conference call, we expected operating margins to decline somewhat from 15.5% in the first quarter. This guidance was too conservative, because everyone of our major Fluid Handling businesses had favorable operating profit margin comparisons to the second quarter of last year.

We remain committed to the concept of profitable growth with strong discipline on pricing. Raw material escalation issues continue to affect the entire industry and could potentially pressure margins going forward. Our foundry restructuring efforts are on schedule with the Ipswich, England foundry closed in June and the Brantford, Canada facility on schedule. These are important steps to increase our low cost country sourcing and improve profitability in 2009.

I would echo my Merchandising Systems comments as I look at the strong year that Fluid Handling is experiencing. They are also on pace to post record earnings this year and will clearly exceed the guidance we provided at our February Investor Day.

While we bought back 958,000 shares of stock for $40 million in the first quarter to mitigate dilution for the year, we did not repurchase any stock in the second quarter which was consistent with our prior comment. As you all know, our policy is not to pre-announce stock repurchases, and we may re-enter the market if conditions warrant.

The second quarter reported tax rate was 29.8% compared, to 31.3% in the second quarter of 2007. We anticipate the 2008 annual cash rate will approximate 30% with some variability of course in the quarter. This guidance assumes the restatement of the R&D tax credit, retroactive to January 1st. We continue to have a strong balance sheet, and ended the quarter with $322 million in cash.

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