CR-2012.9.30-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark One:
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2012
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from              to             
Commission File Number: 1-1657 
CRANE CO.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
13-1952290
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
100 First Stamford Place, Stamford, CT
 
06902
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: 203-363-7300
(Not Applicable)
(Former name, former address and former fiscal year, if changed since last report)
 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.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non –accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(check one):
 
 
 
 
 
 
Large accelerated filer
 
x
  
Accelerated filer
 
o
Non-accelerated filer
 
o (Do not check if a smaller reporting company)
  
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
The number of shares outstanding of the issuer’s classes of common stock, as of October 30, 2012
Common stock, $1.00 Par Value – 56,924,908 shares

1


PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CRANE CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Net sales
$
645,981

 
$
647,088

 
$
1,949,280

 
$
1,880,565

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of sales
426,148

 
428,524

 
1,291,865

 
1,235,288

Selling, general and administrative
133,089

 
138,274

 
408,250

 
414,701

Restructuring charges
160

 

 
14,907

 

Operating profit from continuing operations
86,584

 
80,290

 
234,258

 
230,576

Other income (expense):
 
 
 
 
 
 
 
Interest income
443

 
442

 
1,292

 
1,121

Interest expense
(6,618
)
 
(6,474
)
 
(20,114
)
 
(19,525
)
Miscellaneous - net
(6
)
 
(73
)
 
(704
)
 
3,262

 
(6,181
)
 
(6,105
)
 
(19,526
)
 
(15,142
)
Income from Continuing Operations Before Income Taxes
80,403

 
74,185

 
214,732

 
215,434

Provision for Income Taxes
23,997

 
22,966

 
64,515

 
66,936

Income from Continuing Operations
56,406

 
51,219

 
150,217

 
148,498

Discontinued Operations:
 
 
 
 
 
 
 
Income from Discontinued Operations, net of tax

 
1,187

 
2,456

 
2,823

Gain from Sales of Discontinued Operations, net of tax
901

 

 
19,177

 

Discontinued Operations, net of tax
901

 
1,187

 
21,633

 
2,823

Net income before allocation to noncontrolling interests
57,307

 
52,406

 
171,850

 
151,321

Less: Noncontrolling interest in subsidiaries’ earnings
182

 
(134
)
 
501

 
(123
)
Net income attributable to common shareholders
$
57,125

 
$
52,540

 
$
171,349

 
$
151,444

Earnings per share - basic: (a)
 
 
 
 
 
 
 
Income from continuing operations attributable to common shareholders
$
0.99

 
$
0.88

 
$
2.61

 
$
2.55

Discontinued operations, net of tax
0.02

 
0.02

 
0.38

 
0.05

Net income attributable to common shareholders
$
1.00

 
$
0.91

 
$
2.98

 
$
2.60

Earnings per share - diluted: (a)
 
 
 
 
 
 
 
Income from continuing operations attributable to common shareholders
$
0.97

 
$
0.87

 
$
2.56

 
$
2.50

Discontinued operations, net of tax
0.02

 
0.02

 
0.37

 
0.05

Net income attributable to common shareholders
$
0.99

 
$
0.89

 
$
2.93

 
$
2.55

Average basic shares outstanding
57,123

 
58,048

 
57,565

 
58,202

Average diluted shares outstanding
57,873

 
59,058

 
58,435

 
59,330

Dividends per share
$
0.28

 
$
0.26

 
$
0.80

 
$
0.72

 
(a)
EPS amounts may not add due to rounding
See notes to Condensed Consolidated Financial Statements

Page2


CRANE CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Net income before allocation to noncontrolling interests
$
57,307

 
$
52,406

 
$
171,850

 
$
151,321

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Currency translation adjustment
(733
)
 
(53,124
)
 
914

 
(11,240
)
Changes in pension and postretirement plan assets and benefit obligation, net of tax benefit
3,012

 
1,175

 
9,870

 
3,528

Other comprehensive income (loss)
2,279

 
(51,949
)
 
10,784

 
(7,712
)
Comprehensive income before allocation to noncontrolling interests
59,586

 
457

 
182,634

 
143,609

Less: Noncontrolling interests in comprehensive income (loss)
(174
)
 
(217
)
 
84

 
5

Comprehensive income attributable to common shareholders
$
59,760

 
$
674

 
$
182,550

 
$
143,604

See Notes to Condensed Consolidated Financial Statements.

Page3


CRANE CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
 
 
September 30,
2012
 
December 31,
2011
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
280,536

 
$
245,089

Accounts receivable, net
403,688

 
349,250

Current insurance receivable - asbestos
16,345

 
16,345

Inventories, net:
 
 
 
Finished goods
121,905

 
105,442

Finished parts and subassemblies
35,688

 
35,100

Work in process
66,265

 
74,608

Raw materials
142,987

 
145,539

Inventories, net
366,845

 
360,689

Current deferred tax asset
47,690

 
46,664

Other current assets
17,373

 
14,195

Total current assets
1,132,477

 
1,032,232

Property, plant and equipment:
 
 
 
Cost
802,711

 
802,057

Less: accumulated depreciation
531,327

 
517,911

Property, plant and equipment, net
271,384

 
284,146

Long-term insurance receivable - asbestos
199,264

 
208,952

Long-term deferred tax assets
236,083

 
265,849

Other assets
91,523

 
85,301

Intangible assets, net
129,328

 
146,227

Goodwill
812,453

 
820,824

Total assets
$
2,872,512

 
$
2,843,531

See Notes to Condensed Consolidated Financial Statements.

Page4


CRANE CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
 
 
September 30,
2012
 
December 31,
2011
Liabilities and equity
 
 
 
Current liabilities:
 
 
 
Short-term borrowings
$
1,114

 
$
1,112

Accounts payable
173,328

 
194,158

Current asbestos liability
100,943

 
100,943

Accrued liabilities
217,261

 
226,717

U.S. and foreign taxes on income
28,618

 
10,165

Total current liabilities
521,264

 
533,095

Long-term debt
399,048

 
398,914

Accrued pension and postretirement benefits
180,368

 
178,382

Long-term deferred tax liability
42,545

 
41,668

Long-term asbestos liability
722,962

 
792,701

Other liabilities
73,573

 
76,715

Total liabilities
1,939,760

 
2,021,475

Commitments and contingencies (Note 9)
 
 
 
Equity:
 
 
 
Preferred shares, par value $.01; 5,000,000 shares authorized

 

Common stock, par value $1.00; 200,000,000 shares authorized, 72,426,139 shares issued
72,426

 
72,426

Capital surplus
199,661

 
189,294

Retained earnings
1,221,304

 
1,095,953

Accumulated other comprehensive loss
(82,311
)
 
(93,512
)
Treasury stock
(486,915
)
 
(450,608
)
Total shareholders’ equity
924,165

 
813,553

Noncontrolling interests
8,587

 
8,503

Total equity
932,752

 
822,056

Total liabilities and equity
$
2,872,512

 
$
2,843,531

Common stock issued
72,426,139

 
72,426,139

Less: Common stock held in treasury
(15,508,331
)
 
(14,811,885
)
Common stock outstanding
56,917,808

 
57,614,254

See Notes to Condensed Consolidated Financial Statements.

Page5


CRANE CO. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
 
Nine Months Ended
 
September 30, 2012
 
2012
 
2011
Operating activities:
 
 
 
Net income attributable to common shareholders
$
171,349

 
$
151,444

Noncontrolling interests in subsidiaries’ earnings
501

 
(123
)
Net income before allocation to noncontrolling interests
171,850

 
151,321

Gain on divestitures
(29,445
)
 
(4,258
)
Restructuring - Non Cash
2,777

 

Depreciation and amortization
43,122

 
47,208

Stock-based compensation expense
12,860

 
11,132

Defined benefit plans and postretirement expense
14,769

 
5,403

Deferred income taxes
24,417

 
21,739

Cash used for working capital
(79,322
)
 
(76,912
)
Defined benefit plans and postretirement contributions
(4,463
)
 
(17,054
)
Environmental payments, net of reimbursements
(11,256
)
 
(8,735
)
Payments for asbestos-related fees and costs, net of insurance recoveries
(60,051
)
 
(59,233
)
Other
(6,005
)
 
(5,617
)
Total provided by operating activities
79,253

 
64,994

Investing activities:
 
 
 
Capital expenditures
(19,944
)
 
(27,703
)
Proceeds from disposition of capital assets
2,254

 
4,720

Payment for acquisition, net of cash acquired

 
(35,594
)
Proceeds from divestitures
53,599

 
1,000

Total provided by (used for) investing activities
35,909

 
(57,577
)
Financing activities:
 
 
 
Equity:
 
 
 
Dividends paid
(45,998
)
 
(41,957
)
Reacquisition of shares on open market
(49,991
)
 
(49,999
)
Stock options exercised - net of shares reacquired
8,426

 
19,937

Excess tax benefit from stock-based compensation
3,233

 
5,706

Debt:
 
 
 
Net decrease in short-term debt

 
(1,336
)
Total used for financing activities
(84,330
)
 
(67,649
)
Effect of exchange rates on cash and cash equivalents
4,615

 
(1,526
)
Increase (decrease) in cash and cash equivalents
35,447

 
(61,758
)
Cash and cash equivalents at beginning of period
245,089

 
272,941

Cash and cash equivalents at end of period
$
280,536

 
$
211,183

Detail of cash used for working capital:
 
 
 
Accounts receivable
$
(65,061
)
 
$
(73,631
)
Inventories
(6,205
)
 
(40,692
)
Other current assets
(3,799
)
 
(2,949
)
Accounts payable
(20,891
)
 
20,884

Accrued liabilities
(8,122
)
 
(5,621
)
U.S. and foreign taxes on income
24,756

 
25,097

Total
$
(79,322
)
 
$
(76,912
)
Supplemental disclosure of cash flow information:
 
 
 
Interest paid
$
19,405

 
$
18,903

Income taxes paid
$
23,700

 
$
15,914

See Notes to Condensed Consolidated Financial Statements.

Page6



Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and the instructions to Form 10-Q and, therefore, reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. These interim condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
Recent Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board (“FASB”) issued amended guidance to simplify how entities test indefinite-lived intangible assets for impairment. The amendments permit an entity to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired and whether it is necessary to perform the quantitative impairment test for indefinite-lived intangible assets required under current accounting standards. The amendments are effective for annual and interim impairment tests of indefinite-lived intangible assets performed for fiscal years beginning after September 15, 2012 with early adoption permitted. The Company does not expect the amended guidance to have a material impact on its consolidated financial position, results of operations, cash flows and disclosures when adopted.
In December 2011, the FASB issued amended guidance on the disclosure requirements on the offsetting of financial assets and liabilities. The amended disclosures will enable financial statement users to compare balance sheets prepared under accepted accounting principles generally accepted in the United States (“U.S. GAAP”) and International Financial Reporting Standards (“IFRS”), which are subject to different offsetting models. The disclosures will be limited to financial instruments and derivatives instruments that are either offset in accordance with the U.S. GAAP offsetting guidance or subject to enforceable master netting arrangements or similar agreements. The amendments will be applied retrospectively for interim and annual periods beginning on or after January 1, 2013. The Company is currently evaluating the impact of the amended guidance on its disclosures. 


Page7



Note 2 - Segment Results
The Company’s segments are reported on the same basis used internally for evaluating performance and for allocating resources. The Company has five reportable segments: Aerospace & Electronics, Engineered Materials, Merchandising Systems, Fluid Handling and Controls. Furthermore, Corporate consists of corporate office expenses including compensation, benefits, occupancy, depreciation, and other administrative costs. Assets of the reportable segments exclude general corporate assets, which principally consist of cash, deferred tax assets, insurance receivables, certain property, plant and equipment, and certain other assets.
Financial information by reportable segment is set forth below:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
(in thousands)
2012
 
2011
 
2012
 
2011
 
Net sales
 
 
 
 
 
 
 
 
Aerospace & Electronics
$
171,368

 
$
172,216

 
$
525,127

 
$
505,690

 
Engineered Materials
56,956

 
53,101

 
169,603

 
175,034

 
Merchandising Systems
92,489

 
98,815

 
277,741

 
287,703

 
Fluid Handling
303,080

 
299,118

 
903,617

 
845,929

 
Controls
22,088

 
23,838

 
73,192

 
66,209

 
Total
$
645,981

 
$
647,088

 
$
1,949,280

 
$
1,880,565

 
Operating profit (loss) from continuing operations
 
 
 
 
 
 
 
 
Aerospace & Electronics
$
39,833

 
$
35,640

 
$
116,834

 
$
106,839

 
Engineered Materials
7,226

 
5,919

 
21,178

 
25,192

 
Merchandising Systems
9,496

 
10,845

 
23,324

 
22,632

 
Fluid Handling
42,892

 
39,870

 
108,920

 
111,474

 
Controls
2,844

 
3,789

 
10,513

 
8,892

 
Corporate
(15,707
)
 
(15,773
)
 
(46,511
)
 
(44,453
)
 
Total
86,584

 
80,290

 
234,258

 
230,576

 
Interest income
443

 
442

 
1,292

 
1,121

 
Interest expense
(6,618
)
 
(6,474
)
 
(20,114
)
 
(19,525
)
 
Miscellaneous - net
(6
)
 
(73
)
 
(704
)
 
3,262

*
Income from continuing operations before income taxes
$
80,403

 
$
74,185

 
$
214,732

 
$
215,434

 
*  Primarily related to the sale of a building and the divestiture of a small product line in the three months ended March 31, 2011.
 
As of
 
September 30,
 
December 31,
(in thousands)
2012
 
2011
Assets
 
 
 
Aerospace & Electronics
$
509,210

 
$
514,240

Engineered Materials
244,257

 
245,350

Merchandising Systems
431,750

 
408,857

Fluid Handling
971,884

 
909,265

Controls
39,813

 
64,162

Corporate
675,598

 
701,657

Total
$
2,872,512

 
$
2,843,531

 

Page8



 
As of
 
September 30,
 
December 31,
(in thousands)
2012
 
2011
Goodwill
 
 
 
Aerospace & Electronics
$
203,579

 
$
203,516

Engineered Materials
171,526

 
171,489

Merchandising Systems
202,161

 
197,719

Fluid Handling
220,135

 
220,111

Controls
15,052

 
27,990

Total
$
812,453

 
$
820,824

Note 3 - Discontinued Operations
On June 19, 2012, the Company sold Azonix Corporation (“Azonix”), which was formerly part of the Controls segment, to Cooper Industries for $43.4 million, resulting in an after tax gain of $14.5 million, of which $0.9 million million was recorded in the third quarter. As a result, the Condensed Consolidated Statement of Operations presents Azonix as a discontinued operation.
On June 28, 2012, the Company sold certain assets and operations of the Company’s valve service center in Houston, Texas, which was formerly part of the Fluid Handling segment, to Furmanite Corporation for $9.3 million, resulting in an after tax gain of $4.6 million. As a result, the Condensed Consolidated Statement of Operations presents the Company’s valve service center in Houston, Texas as a discontinued operation.
The operating results of the discontinued operations for the three and nine months ended September 30, 2012 were as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(in thousands)
2012
 
2011
 
2012
 
2011
Net Sales
$

 
$
12,368

 
$
25,544

 
$
33,684

Income from discontinued operations before income taxes
$

 
$
1,826

 
$
3,777

 
$
4,343

Provision for income taxes

 
639

 
1,321

 
1,520

Income from discontinued operations, net of income taxes
$

 
$
1,187

 
$
2,456

 
$
2,823

 

Page9


Note 4 - Earnings Per Share
The Company’s basic earnings per share calculations are based on the weighted average number of common shares outstanding during the year. Shares of restricted stock are included in the computation of both basic and diluted earnings per share. Potentially dilutive securities include outstanding stock options, Restricted Share Units, Deferred Stock Units and Performance-based Restricted Share Units. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per common share by application of the treasury method. Diluted earnings per share gives effect to all potentially dilutive common shares outstanding during the year.
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(in thousands, except per share data)
2012
 
2011
 
2012
 
2011
Income from continuing operations
$
56,406

 
$
51,219

 
$
150,217

 
$
148,498

Less: Non-controlling interest in subsidiaries’ earnings
182

 
(134
)
 
501

 
(123
)
Income from continuing operations attributable to common shareholders
56,224

 
51,353

 
149,716

 
148,621

Discontinued operations, net of tax
901

 
1,187

 
21,633

 
2,823

Net income attributable to common shareholders
$
57,125

 
$
52,540

 
$
171,349

 
$
151,444

Average basic shares outstanding
57,123

 
58,048

 
57,565

 
58,202

Effect of dilutive stock options
750

 
1,010

 
870

 
1,128

Average diluted shares outstanding
57,873

 
59,058

 
58,435

 
59,330

Earnings per share - basic: (a)
 
 
 
 
 
 
 
Income from continuing operations attributable to common shareholders
$
0.99

 
$
0.88

 
$
2.61

 
$
2.55

Discontinued operations, net of tax
$
0.02

 
$
0.02

 
$
0.38

 
$
0.05

Net income attributable to common shareholders
$
1.00

 
$
0.91

 
$
2.98

 
$
2.60

Earnings per share - diluted: (a)
 
 
 
 
 
 
 
Income from continuing operations attributable to common shareholders
$
0.97

 
$
0.87

 
$
2.56

 
$
2.50

Discontinued operations, net of tax
$
0.02

 
$
0.02

 
$
0.37

 
$
0.05

Net income attributable to common shareholders
$
0.99

 
$
0.89

 
$
2.93

 
$
2.55

 
(a)
EPS amounts may not add due to rounding
The computation of diluted earnings per share excludes the effect of the potential exercise of stock options when the average market price of the common stock is lower than the exercise price of the related stock options during the period (1.9 million and 1.0 million average options for the third quarter of 2012 and 2011, respectively, and 1.8 million and 0.8 million average options for the first nine months of 2012 and 2011, respectively).
 














Page10


Note 5 - Changes in Equity and Comprehensive Income
A summary of the changes in equity for the nine months ended September 30, 2012 and 2011 is provided below:
 
 
Nine Months Ended September 30,
 
2012
 
2011
(in thousands)
Total
Shareholders’
Equity
 
Noncontrolling
Interests
 
Total Equity
 
Total
Shareholders’
Equity
 
Noncontrolling
Interests
 
Total Equity
Balance, beginning of period
$
813,553

 
$
8,503

 
$
822,056

 
$
984,944

 
$
8,086

 
$
993,030

Dividends
(45,998
)
 

 
(45,998
)
 
(41,957
)
 

 
(41,957
)
Reacquisition on open market
(49,991
)
 

 
(49,991
)
 
(49,999
)
 

 
(49,999
)
Exercise of stock options, net of shares reacquired
7,958

 

 
7,958

 
19,907

 

 
19,907

Stock compensation expense
12,860

 

 
12,860

 
11,132

 

 
11,132

Excess tax benefit from stock based compensation
3,233

 

 
3,233

 
5,706

 

 
5,706

Net income
171,349

 
501

 
171,850

 
151,444

 
(123
)
 
151,321

Other comprehensive income (loss)
11,201

 
(417
)
 
10,784

 
(7,840
)
 
128

 
(7,712
)
Comprehensive income
182,550

 
84

 
182,634

 
143,604

 
5

 
143,609

Balance, end of period
$
924,165

 
$
8,587

 
$
932,752

 
$
1,073,337

 
$
8,091

 
$
1,081,428

The table below provides the accumulated balances for each classification of accumulated other comprehensive loss, as reflected on the Condensed Consolidated Balance Sheets.
 
 
September 30,
2012
 
December 31,
2011
Currency translation adjustment
$
65,824

 
$
64,910

Changes in pension and postretirement plan assets and benefit obligation, net of tax benefit *
(148,135
)
 
(158,422
)
Accumulated other comprehensive loss
$
(82,311
)
 
$
(93,512
)
 
* Net of tax benefit of $71,874 and $76,179 for September 30, 2012 and December 31, 2011, respectively.
Note 6 - Acquisitions
Acquisitions are accounted for in accordance with the guidance for business combinations. Accordingly, the Company makes an initial allocation of the purchase price at the date of acquisition based upon its understanding of the fair value of the acquired assets and assumed liabilities. The Company obtains this information during due diligence and through other sources. In the months after closing, as the Company obtains additional information about these assets and liabilities, including through tangible and intangible asset appraisals, it is able to refine the estimates of fair value and more accurately allocate the purchase price. Only items identified as of the acquisition date are considered for subsequent adjustment. The Company will make appropriate adjustments to the purchase price allocation prior to completion of the measurement period, as required.
In July 2011, the Company completed the acquisition of W.T. Armatur GmbH & Co. KG (“WTA”), a manufacturer of bellows sealed globe valves, as well as certain types of specialty valves, for chemical, fertilizer and thermal oil applications for a purchase price of $37 million in cash and $1 million of assumed debt. WTA’s 2010 sales were approximately $21 million, and WTA has been integrated into the Company’s Fluid Handling segment. In connection with the WTA acquisition, the purchase price and recording of the transaction were based on valuation assessments. The allocation of the aggregate purchase price resulted in current assets of $8 million; property, plant, and equipment of $12 million; identified intangible assets of $9 million, which primarily consist of customer relationships; goodwill of $12 million; and current liabilities of $4 million. The amount allocated to goodwill reflects the benefits the Company expects to realize from the acquisition, as the acquisition is expected to strengthen and broaden the Company’s portfolio by providing valves with zero fugitive emissions used in severe service applications. The goodwill from this acquisition is deductible for tax purposes. The pro forma impact of this acquisition on the Company’s historical results of operations was not material.

Page11


Note 7 - Goodwill and Intangible Assets
The Company’s business acquisitions have typically resulted in the recognition of goodwill and other intangible assets. The Company follows the provisions under Accounting Standards Codification (“ASC”) Topic 350, “Intangibles – Goodwill and Other” (“ASC 350”) as it relates to the accounting for goodwill in the Condensed Consolidated Financial Statements. These provisions require that the Company, on at least an annual basis, evaluate the fair value of the reporting units to which goodwill is assigned and attributed and compare that fair value to the carrying value of the reporting unit to determine if an impairment has occurred. The Company performs its annual impairment testing during the fourth quarter. Impairment testing takes place more often than annually if events or circumstances indicate a change in status that would indicate a potential impairment. The Company believes that there have been no events or circumstances which would more likely than not reduce the fair value for its reporting units below its carrying value. A reporting unit is an operating segment unless discrete financial information is prepared and reviewed by segment management for businesses one level below that operating segment (a “component”), in which case the component would be the reporting unit. In certain instances, the Company has aggregated components of an operating segment into a single reporting unit based on similar economic characteristics. At September 30, 2012, the Company had eleven reporting units.
When performing its annual impairment assessment, the Company compares the fair value of each of its reporting units to its respective carrying value. Goodwill is considered to be potentially impaired when the net book value of the reporting unit exceeds its estimated fair value. Fair values are established primarily by discounting estimated future cash flows at an estimated cost of capital which varies for each reporting unit and which, as of the Company’s most recent annual impairment assessment, ranged between 8% and 17% (a weighted average of 11%), reflecting the respective inherent business risk of each of the reporting units tested. This methodology for valuing the Company’s reporting units (commonly referred to as the Income Method) has not changed since the adoption of the provisions under ASC 350. The determination of discounted cash flows is based on the businesses’ strategic plans and long-range planning forecasts, which change from year to year. The revenue growth rates included in the forecasts represent best estimates based on current and forecasted market conditions. Profit margin assumptions are projected by each reporting unit based on the current cost structure and anticipated net cost increases/reductions. There are inherent uncertainties related to these assumptions, including changes in market conditions, and management’s judgment in applying them to the analysis of goodwill impairment. In addition to the foregoing, for each reporting unit, market multiples are used to corroborate its discounted cash flow results where fair value is estimated based on earnings multiples determined by available public information of comparable businesses. While the Company believes it has made reasonable estimates and assumptions to calculate the fair value of its reporting units, it is possible a material change could occur. If actual results are not consistent with management’s estimates and assumptions, goodwill and other intangible assets may then be determined to be overstated and a charge would need to be taken against net earnings. Furthermore, in order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test performed during the fourth quarter of 2011, the Company applied a hypothetical, reasonably possible 10% decrease to the fair values of each reporting unit. The effects of this hypothetical 10% decrease would still result in the fair value calculation exceeding the carrying value for each reporting unit.
 




















Page12


Changes to goodwill are as follows:
 
 
Nine Months Ended
 
Year Ended
(in thousands)
September 30,
2012
 
December 31,
2011
Balance at beginning of period
$
820,824

 
$
810,285

Additions

 
10,900

Disposals
(13,966
)
 

Adjustments to purchase price allocations

 
3,932

Currency translation
5,595

 
(4,293
)
Balance at end of period
$
812,453

 
$
820,824


For the nine months ended September 30, 2012, the disposals represent goodwill associated with the Company’s divested businesses. See discussion in Note 3 on discontinued operations for further details. For the year ended December 31, 2011, the additions to goodwill represent the initial purchase price allocation related to WTA, and the adjustments to purchase price allocations pertain to the December 2010 acquisition of Money Controls and the February 2010 acquisition of Merrimac Industries, Inc. (“Merrimac”).
Changes to intangible assets are as follows:
 
 
Nine Months Ended
 
Year Ended
(in thousands)
September 30,
2012
 
December 31,
2011
Balance at beginning of period, net of accumulated amortization
$
146,227

 
$
162,636

Additions

 
5,980

Disposals
(3,789
)
 

Amortization expense
(13,987
)
 
(21,646
)
Currency translation and other
877

 
(743
)
Balance at end of period, net of accumulated amortization
$
129,328

 
$
146,227

For the nine months ended September 30, 2012, the disposals represent intangible assets associated with the Company’s divested businesses. See discussion in Note 3 on discontinued operations for further details. For the year ended December 31, 2011, the additions relate to the December 2010 acquisition of Money Controls and the July 2011 acquisition of WTA.
As of September 30, 2012, the Company had $129.3 million of net intangible assets, of which $30 million were intangibles with indefinite useful lives, consisting of trade names. The Company amortizes the cost of other intangibles over their estimated useful lives unless such lives are deemed indefinite. Intangibles with indefinite useful lives are tested annually for impairment, or when events or changes in circumstances indicate the potential for impairment. If the carrying amount of the intangibles with indefinite useful lives exceeds the fair value, the intangible asset is written down to its fair value. Fair value is calculated using discounted cash flows.








 

Page13


A summary of intangible assets follows:
 
 
Weighted Average
Amortization
 
 
 
 
 
 
 
 
 
 
 
 
 
Period of Finite
 
September 30, 2012
 
December 31, 2011
(in thousands)
Lived Assets
(in years)
 
Gross
Asset
 
Accumulated
Amortization
 
Net
 
Gross
Asset
 
Accumulated
Amortization
 
Net
Intellectual property rights
18.3
 
$
87,931

 
$
47,424

 
$
40,507

 
$
89,619

 
$
46,286

 
$
43,333

Customer relationships and backlog
11.9
 
140,402

 
71,195

 
69,207

 
146,291

 
66,256

 
80,035

Drawings
9.5
 
11,149

 
9,823

 
1,326

 
11,824

 
10,423

 
1,401

Other
14.2
 
50,655

 
32,367

 
18,288

 
52,155

 
30,697

 
21,458

Total
14.2
 
$
290,137

 
$
160,809

 
$
129,328

 
$
299,889

 
$
153,662

 
$
146,227

Amortization expense for these intangible assets is currently estimated to be approximately $4.3 million in total for the remaining quarter in 2012, $17.3 million in 2013, $14.9 million in 2014, $12.9 million in 2015, $12.0 million in 2016 and $37.9 million in 2017 and thereafter.
Note 8 - Accrued Liabilities
Accrued liabilities consist of:
 
 
September 30,
2012
 
December 31,
2011
(in thousands)
 
 
 
Employee related expenses
$
80,337

 
$
97,297

Warranty
14,103

 
16,379

Other
122,821

 
113,041

Total
$
217,261

 
$
226,717

The Company accrues warranty liabilities when it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. Warranty provision is included in cost of sales in the Condensed Consolidated Statements of Operations.
A summary of the warranty liabilities is as follows:
 
 
Nine Months Ended
 
Year Ended
(in thousands)
September 30,
2012
 
December 31,
2011
Balance at beginning of period
$
16,379

 
$
19,198

Expense
5,004

 
6,759

Changes due to acquisitions/divestitures
(498
)
 
11

Payments / deductions
(6,819
)
 
(9,545
)
Currency translation
37

 
(44
)
Balance at end of period
$
14,103

 
$
16,379

 

Note 9 - Commitments and Contingencies
Asbestos Liability
Information Regarding Claims and Costs in the Tort System
As of September 30, 2012, the Company was a defendant in cases filed in numerous state and federal courts alleging injury or death as a result of exposure to asbestos. Activity related to asbestos claims during the periods indicated was as follows:
 

Page14


 
Three Months Ended
 
Nine Months Ended
 
Year Ended
 
September 30,
 
September 30,
 
December 31,
 
2012
 
2011
 
2012
 
2011
 
2011
Beginning claims
57,559

 
56,403

 
58,658

 
64,839

 
64,839

New claims
933

 
1,088

 
2,720

 
2,946

 
3,748

Settlements
(253
)
 
(283
)
 
(800
)
 
(886
)
 
(1,117
)
Dismissals
(1,467
)
 
(849
)
 
(3,983
)
 
(10,539
)
 
(11,059
)
MARDOC claims*
1

 
2,213

 
178

 
2,212

 
2,247

Ending claims
56,773

 
58,572

 
56,773

 
58,572

 
58,658

* As of January 1, 2010, the Company was named in 36,448 maritime actions which had been administratively dismissed by the United States District Court for the Eastern District of Pennsylvania (“MARDOC claims”), and therefore were not included in “Beginning claims”. As of September 30, 2012, pursuant to an ongoing review process initiated by the Court, 26,575 claims were permanently dismissed, and 3,378 claims remain active (and have been added to “Ending claims”). In addition, the Company was named in 8 new maritime actions in 2010 (not included in “Beginning claims”). The Company expects that more of the remaining 6,503 maritime actions will be activated, or permanently dismissed, as the Court’s review process continues.
 
Of the 56,773 pending claims as of September 30, 2012, approximately 19,300 claims were pending in New York, approximately 9,900 claims were pending in Texas, approximately 5,500 claims were pending in Mississippi, and approximately 5,400 claims were pending in Ohio, all jurisdictions in which legislation or judicial orders restrict the types of claims that can proceed to trial on the merits.
Substantially all of the claims the Company resolves are either dismissed or concluded through settlements. To date, the Company has paid two judgments arising from adverse jury verdicts in asbestos matters. The first payment, in the amount of $2.54 million, was made on July 14, 2008, approximately two years after the adverse verdict in the Joseph Norris matter in California, after the Company had exhausted all post-trial and appellate remedies. The second payment, in the amount of $0.02 million, was made in June 2009 after an adverse verdict in the Earl Haupt case in Los Angeles, California on April 21, 2009.
The Company has tried several cases resulting in defense verdicts by the jury or directed verdicts for the defense by the court, one of which, the Patrick O’Neil claim in Los Angeles, was reversed on appeal. In an opinion dated January 12, 2012, the California Supreme Court reversed the decision of the Court of Appeal and instructed the trial court to enter a judgment of nonsuit in favor of the defendants.
On March 14, 2008, the Company received an adverse verdict in the James Baccus claim in Philadelphia, Pennsylvania, with compensatory damages of $2.45 million and additional damages of $11.9 million. The Company’s post-trial motions were denied by order dated January 5, 2009. The case was concluded by settlement in the fourth quarter of 2010 during the pendency of the Company’s appeal to the Superior Court of Pennsylvania.
 
On May 16, 2008, the Company received an adverse verdict in the Chief Brewer claim in Los Angeles, California. The amount of the judgment entered was $0.68 million plus interest and costs. The Company pursued an appeal in this matter, and on August 2, 2012 the California Court of Appeal reversed the judgment and remanded the matter to the trial court for entry of judgment notwithstanding the verdict in favor of the Company on the ground that this claim could not be distinguished factually from the Patrick O'Neil case decided in the Company's favor by the California Supreme Court. 
On February 2, 2009, the Company received an adverse verdict in the Dennis Woodard claim in Los Angeles, California. The jury found that the Company was responsible for one-half of one percent (0.5%) of plaintiffs’ damages of $16.93 million; however, based on California court rules regarding allocation of damages, judgment was entered against the Company in the amount of $1.65 million, plus costs. Following entry of judgment, the Company filed a motion with the trial court requesting judgment in the Company’s favor notwithstanding the jury’s verdict, and on June 30, 2009, the court advised that the Company’s motion was granted and judgment was entered in favor of the Company. The trial court’s ruling was affirmed on appeal by order dated August 25, 2011. The plaintiffs appealed that ruling to the Supreme Court of California, which dismissed the appeal on February 29, 2012; the matter is now finally determined in the Company’s favor.
On March 23, 2010, a Philadelphia County, Pennsylvania, state court jury found the Company responsible for a 1/11th share of a $14.5 million verdict in the James Nelson claim, and for a 1/20th share of a $3.5 million verdict in the Larry Bell claim. On February 23, 2011, the court entered judgment on the verdicts in the amount of $0.2 million against the Company, only, in Bell, and in the amount of $4.0 million, jointly, against the Company and two other defendants in Nelson, with additional interest in the amount of $0.01 million being assessed against the Company, only, in Nelson. All defendants, including the Company, and the plaintiffs took timely appeals of certain aspects of those judgments. The Nelson appeal is pending. The Company resolved the Bell appeal by settlement, which is reflected in the settled claims for 2012.

Page15


On August 17, 2011, a New York City state court jury found the Company responsible for a 99% share of a $32 million verdict on the Ronald Dummitt claim. The Company filed post-trial motions seeking to overturn the verdict, to grant a new trial, or to reduce the damages, which the Company argued were excessive under New York appellate case law governing awards for non-economic losses. The Court held oral argument on these motions on October 18, 2011 and issued a written decision on August 21, 2012 confirming the jury's liability findings but reducing the award of damages to $8 million.  Plaintiffs have requested the Court to enter a judgment in the amount of $4.9 million against the Company, taking into account settlement offsets and accrued interest under New York law.  The Company has appealed.
On March 9, 2012, a Philadelphia County, Pennsylvania, state court jury found the Company responsible for a 1/8th share of a $123,000 verdict in the Frank Paasch claim. The Company and plaintiffs filed post-trial motions. On May 31, 2012, on plaintiffs’ motion, the Court entered an order dismissing the claim against the Company, with prejudice, and without any payment.
On August 29, 2012, the Company received an adverse verdict in the William Paulus claim in Los Angeles, California. The jury found that the Company was responsible for ten percent (10%) of plaintiffs' damages of $6.9 million; however, based on California court rules regarding allocation of damages, plaintiffs have requested the Court to enter a judgment in the amount of $0.8 million against the Company.  The Company plans to file post-trial motions requesting judgment in the Company's favor notwithstanding the jury's verdict and an appeal if necessary.
Such judgment amounts are not included in the Company’s incurred costs until all available appeals are exhausted and the final payment amount is determined.
The gross settlement and defense costs incurred (before insurance recoveries and tax effects) for the Company for the nine-month periods ended September 30, 2012 and 2011 totaled $73.5 million and $82.9 million, respectively. In contrast to the recognition of settlement and defense costs, which reflect the current level of activity in the tort system, cash payments and receipts generally lag the tort system activity by several months or more, and may show some fluctuation from quarter to quarter. Cash payments of settlement amounts are not made until all releases and other required documentation are received by the Company, and reimbursements of both settlement amounts and defense costs by insurers may be uneven due to insurer payment practices, transitions from one insurance layer to the next excess layer and the payment terms of certain reimbursement agreements. The Company’s total pre-tax payments for settlement and defense costs, net of funds received from insurers, for the nine-month periods ended September 30, 2012 and 2011 totaled a $60.1 million net payment and $59.2 million net payment, respectively. Detailed below are the comparable amounts for the periods indicated.
 
 
Three Months Ended
 
Nine Months Ended
 
Year Ended
(in millions)
September 30,
 
September 30,
 
December 31,
 
2012
 
2011
 
2012
 
2011
 
2011
Settlement / indemnity costs incurred (1)
$
8.4

 
$
12.0

 
$
29.3

 
$
42.1

 
$
50.2

Defense costs incurred (1)
15.3

 
14.7

 
44.2

 
40.8

 
55.3

Total costs incurred
$
23.8

 
$
26.7

 
$
73.5

 
$
82.9

 
$
105.5

 
 
 
 
 
 
 
 
 
 
Settlement / indemnity payments
$
9.8

 
$
20.2

 
$
27.8

 
$
41.7

 
$
55.0

Defense payments
13.9

 
14.0

 
41.9

 
41.4

 
56.5

Insurance receipts
(2.8
)
 
(10.6
)
 
(9.7
)
 
(23.9
)
 
(32.2
)
Pre-tax cash payments
$
20.8

 
$
23.6

 
$
60.1

 
$
59.2

 
$
79.3

 
(1)
Before insurance recoveries and tax effects.
The amounts shown for settlement and defense costs incurred, and cash payments, are not necessarily indicative of future period amounts, which may be higher or lower than those reported.
Cumulatively through September 30, 2012, the Company has resolved (by settlement or dismissal) approximately 89,000 claims, not including the MARDOC claims referred to above. The related settlement cost incurred by the Company and its insurance carriers is approximately $360 million, for an average settlement cost per resolved claim of approximately $4,000. The average settlement cost per claim resolved during the years ended December 31, 2011, 2010 and 2009 was $4,123, $7,036 and $4,781 respectively. Because claims are sometimes dismissed in large groups, the average cost per resolved claim, as well as the number of open claims, can fluctuate significantly from period to period. In addition to large group dismissals, the nature of the disease and corresponding settlement amounts for each claim resolved will also drive changes from period to period in

Page16


the average settlement cost per claim. Accordingly, the average cost per resolved claim is not considered in the Company’s periodic review of its estimated asbestos liability. For a discussion regarding the four most significant factors affecting the liability estimate, see “Effects on the Condensed Consolidated Financial Statements”.
Effects on the Condensed Consolidated Financial Statements
The Company has retained the firm of Hamilton, Rabinovitz & Associates, Inc. (“HR&A”), a nationally recognized expert in the field, to assist management in estimating the Company’s asbestos liability in the tort system. HR&A reviews information provided by the Company concerning claims filed, settled and dismissed, amounts paid in settlements and relevant claim information such as the nature of the asbestos-related disease asserted by the claimant, the jurisdiction where filed and the time lag from filing to disposition of the claim. The methodology used by HR&A to project future asbestos costs is based largely on the Company’s experience during a base reference period of eleven quarterly periods (consisting of the two full preceding calendar years and three additional quarterly periods to the estimate date) for claims filed, settled and dismissed. The Company’s experience is then compared to the results of previously conducted epidemiological studies estimating the number of individuals likely to develop asbestos-related diseases. Those studies were undertaken in connection with national analyses of the population of workers believed to have been exposed to asbestos. Using that information, HR&A estimates the number of future claims that would be filed against the Company and estimates the aggregate settlement or indemnity costs that would be incurred to resolve both pending and future claims based upon the average settlement costs by disease during the reference period. This methodology has been accepted by numerous courts. After discussions with the Company, HR&A augments its liability estimate for the costs of defending asbestos claims in the tort system using a forecast from the Company which is based upon discussions with its defense counsel. Based on this information, HR&A compiles an estimate of the Company’s asbestos liability for pending and future claims, based on claim experience during the reference period and covering claims expected to be filed through the indicated forecast period. The most significant factors affecting the liability estimate are (1) the number of new mesothelioma claims filed against the Company, (2) the average settlement costs for mesothelioma claims, (3) the percentage of mesothelioma claims dismissed against the Company and (4) the aggregate defense costs incurred by the Company. These factors are interdependent, and no one factor predominates in determining the liability estimate. Although the methodology used by HR&A will also show claims and costs for periods subsequent to the indicated period (up to and including the endpoint of the asbestos studies referred to above), management believes that the level of uncertainty regarding the various factors used in estimating future asbestos costs is too great to provide for reasonable estimation of the number of future claims, the nature of such claims or the cost to resolve them for years beyond the indicated estimate.
In the Company’s view, the forecast period used to provide the best estimate for asbestos claims and related liabilities and costs is a judgment based upon a number of trend factors, including the number and type of claims being filed each year; the jurisdictions where such claims are filed, and the effect of any legislation or judicial orders in such jurisdictions restricting the types of claims that can proceed to trial on the merits; and the likelihood of any comprehensive asbestos legislation at the federal level. In addition, the dynamics of asbestos litigation in the tort system have been significantly affected over the past five to ten years by the substantial number of companies that have filed for bankruptcy protection, thereby staying any asbestos claims against them until the conclusion of such proceedings, and the establishment of a number of post-bankruptcy trusts for asbestos claimants, which are estimated to provide $30 billion for payments to current and future claimants. These trend factors have both positive and negative effects on the dynamics of asbestos litigation in the tort system and the related best estimate of the Company’s asbestos liability, and these effects do not move in a linear fashion but rather change over multi-year periods. Accordingly, the Company’s management continues to monitor these trend factors over time and periodically assesses whether an alternative forecast period is appropriate.
Each quarter, HR&A compiles an update based upon the Company’s experience in claims filed, settled and dismissed during the updated reference period (consisting of the preceding eleven quarterly periods) as well as average settlement costs by disease category (mesothelioma, lung cancer, other cancer, asbestosis and other non-malignant conditions) during that period. In addition to this claims experience, the Company also considers additional quantitative and qualitative factors such as the nature of the aging of pending claims, significant appellate rulings and legislative developments, and their respective effects on expected future settlement values. As part of this process, the Company also takes into account trends in the tort system such as those enumerated above. Management considers all these factors in conjunction with the liability estimate of HR&A and determines whether a change in the estimate is warranted.
Liability Estimate. With the assistance of HR&A, effective as of December 31, 2011, the Company updated and extended its estimate of the 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 the Company through 2021. The Company’s previous estimate was for asbestos claims filed or projected to be filed through 2017. As a result of this updated estimate, the Company recorded an additional liability of $285 million as of December 31, 2011. The Company’s decision to take this action at such date was based on several factors which contribute to the Company’s ability to reasonably estimate this liability for the additional period

Page17


noted. First, the number of mesothelioma claims (which although constituting approximately 8% of the Company’s total pending asbestos claims, have accounted for approximately 90% of the Company’s aggregate settlement and defense costs) being filed against the Company and associated settlement costs have recently stabilized. In the Company’s opinion, the outlook for mesothelioma claims expected to be filed and resolved in the forecast period is reasonably stable. Second, there have been favorable developments in the trend of case law which has been a contributing factor in stabilizing the asbestos claims activity and related settlement costs. Third, 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 claims activity. Fourth, the Company has now entered into coverage-in-place agreements with almost all of its excess insurers, which enables the Company to project a more stable relationship between settlement and defense costs paid by the Company and reimbursements from its insurers. Taking all of these factors into account, the Company believes that it can reasonably estimate the asbestos liability for pending claims and future claims to be filed through 2021. While it is probable that the Company will incur additional charges for asbestos liabilities and defense costs in excess of the amounts currently provided, the Company does not believe that any such amount can be reasonably estimated beyond 2021. Accordingly, no accrual has been recorded for any costs which may be incurred for claims which may be made subsequent to 2021.
Management has made its best estimate of the costs through 2021 based on the analysis by HR&A completed in January 2012. As of September 30, 2012, the Company’s actual experience during the updated reference period for mesothelioma claims filed and dismissed generally approximated the assumptions in the Company’s liability estimate. In addition to this claims experience, the Company considered additional quantitative and qualitative factors such as the nature of the aging of pending claims, significant appellate rulings and legislative developments, and their respective effects on expected future settlement values. Based on this evaluation, the Company determined that no change in the estimate was warranted for the period ended September 30, 2012. A liability of $894 million was recorded as of December 31, 2011 to cover the estimated cost of asbestos claims now pending or subsequently asserted through 2021, of which approximately 80% is attributable to settlement and defense costs for future claims projected to be filed through 2021. The liability is reduced when cash payments are made in respect of settled claims and defense costs. The liability was $824 million as of September 30, 2012. It is not possible to forecast when cash payments related to the asbestos liability will be fully expended; however, it is expected such cash payments will continue for a number of years past 2021, due to the significant proportion of future claims included in the estimated asbestos liability and the lag time between the date a claim is filed and when it is resolved. None of these estimated costs have been discounted to present value due to the inability to reliably forecast the timing of payments. The current portion of the total estimated liability at September 30, 2012 was $101 million and represents the Company’s best estimate of total asbestos costs expected to be paid during the twelve-month period. Such amount is based upon the HR&A model together with the Company’s prior year payment experience for both settlement and defense costs.
Insurance Coverage and Receivables. Prior to 2005, a significant portion of the Company’s settlement and defense costs were paid by its primary insurers. With the exhaustion of that primary coverage, the Company began negotiations with its excess insurers to reimburse the Company for a portion of its settlement and/or defense costs as incurred. To date, the Company has entered into agreements providing for such reimbursements, known as “coverage-in-place”, with eleven of its excess insurer groups. Under such coverage-in-place agreements, an insurer’s policies remain in force and the insurer undertakes to provide coverage for the Company’s present and future asbestos claims on specified terms and conditions that address, among other things, the share of asbestos claims costs to be paid by the insurer, payment terms, claims handling procedures and the expiration of the insurer’s obligations. Similarly, under a variant of coverage-in-place, the Company has entered into an agreement with a group of insurers confirming the aggregate amount of available coverage under the subject policies and setting forth a schedule for future reimbursement payments to the Company based on aggregate indemnity and defense payments made. In addition, with six of its excess insurer groups, the Company entered into policy buyout agreements, settling all asbestos and other coverage obligations for an agreed sum, totaling $79.5 million in aggregate. Reimbursements from insurers for past and ongoing settlement and defense costs allocable to their policies have been made in accordance with these coverage-in-place and other agreements. All of these agreements include provisions for mutual releases, indemnification of the insurer and, for coverage-in-place, claims handling procedures. With the agreements referenced above, the Company has concluded settlements with all but one of its solvent excess insurers whose policies are expected to respond to the aggregate costs included in the updated liability estimate. That insurer, which issued a single applicable policy, has been paying the shares of defense and indemnity costs the Company has allocated to it, subject to a reservation of rights. There are no pending legal proceedings between the Company and any insurer contesting the Company’s asbestos claims under its insurance policies.
In conjunction with developing the aggregate liability estimate referenced above, the Company also developed an estimate of probable insurance recoveries for its asbestos liabilities. In developing this estimate, the Company considered its coverage-in-place and other settlement agreements described above, as well as a number of additional factors. These additional factors include the financial viability of the insurance companies, the method by 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

Page18


interpretation of the effect on coverage of various policy terms and limits and their interrelationships. In addition, the timing and amount of reimbursements will vary because the Company’s insurance coverage for asbestos claims involves multiple insurers, with different policy terms and certain gaps in coverage. 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. Based upon the analysis of policy terms and other factors noted above by the Company’s legal counsel, and incorporating risk mitigation judgments by the Company where policy terms or other factors were not certain, the Company’s insurance consultants compiled a model indicating how the Company’s historical insurance policies would respond to varying levels of asbestos settlement and defense costs and the allocation of such costs between such insurers and the Company. Using the estimated liability as of December 31, 2011 (for claims filed or expected to be filed through 2021), the insurance consultant’s model forecasted that approximately 25% of the liability would be reimbursed by the Company’s insurers. While there are overall limits on the aggregate amount of insurance available to the Company with respect to asbestos claims, those overall limits were not reached by the total estimated liability currently recorded by the Company, and such overall limits did not influence the Company in its determination of the asset amount to record. The proportion of the asbestos liability that is allocated to certain insurance coverage years, however, exceeds the limits of available insurance in those years. The Company allocates to itself the amount of the asbestos liability (for claims filed or expected to be filed through 2021) that is in excess of available insurance coverage allocated to such years. An asset of $225 million was recorded as of December 31, 2011 representing the probable insurance reimbursement for such claims expected through 2021. The asset is reduced as reimbursements and other payments from insurers are received. The asset was $216 million as of September 30, 2012.
The Company reviews the aforementioned estimated reimbursement rate with its insurance consultants on a periodic basis in order to confirm its overall consistency with the Company’s established reserves. The reviews encompass consideration of the performance of the insurers under coverage-in-place agreements and the effect of any additional lump-sum payments under policy buyout agreements. Since December 2011, there have been no developments that have caused the Company to change the estimated 25% rate, although actual insurance reimbursements vary from period to period, and will decline over time, for the reasons cited above.
Uncertainties. 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 past experience 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 substantial adverse verdicts at trial that withstand appeal. A legislative solution, structured settlement transaction, or significant change in relevant case law could also change the estimated liability.
The same factors that affect developing estimates of probable settlement and defense costs for asbestos-related liabilities also affect estimates of the probable insurance reimbursements, as do a number of additional factors. These additional factors include the financial viability of the insurance companies, the method by 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, due to the uncertainties inherent in litigation matters, no assurances can be given regarding the outcome of any litigation, if necessary, to enforce the Company’s rights under its insurance policies or settlement agreements.
Many uncertainties exist surrounding asbestos litigation, and 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 the number of claims and settlement and defense costs change significantly, or if there are significant developments in the trend of case law or court procedures, or if legislation or another alternative solution is implemented; however, the Company is currently unable to estimate such future changes and, accordingly, while it is probable that the Company will incur additional charges for asbestos liabilities and defense costs in excess of the amounts currently provided, the Company does not believe that any such amount can be reasonably determined beyond 2021. Although the resolution of these claims may take many years, the effect on the results of operations, financial position and cash flow in any given period from a revision to these estimates could be material.




Page19


Other Contingencies
Environmental Matters
For environmental matters, the Company records a liability for estimated remediation costs when it is probable that the Company 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 as of September 30, 2012 is substantially related to the former manufacturing site in Goodyear, Arizona (the “Goodyear Site”) discussed below.
The Goodyear Site was operated by UniDynamics/Phoenix, Inc. (“UPI”), which became an indirect subsidiary of the Company in 1985 when the Company 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 Goodyear 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 Goodyear Site since 1994. The Goodyear 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 Goodyear Site since 1994. A soil vapor extraction system was in operation from 1994 to 1998, was restarted in 2004, and is currently in operation. The Company recorded a liability in 2004 for estimated costs to remediate the Goodyear Site. On July 26, 2006, the Company entered into a consent decree with the EPA with respect to the Goodyear Site providing for, among other things, a work plan for further investigation and remediation activities (inclusive of a supplemental remediation investigation and feasibility study). During the fourth quarter of 2007, the Company and its technical advisors determined that changing groundwater flow rates and contaminant plume direction at the Goodyear Site required additional extraction systems as well as modifications and upgrades of the existing systems. In consultation with its technical advisors, the Company 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, the Company estimated its liability for the costs of such activities through 2014 to be $41.5 million as of December 31, 2007. During the fourth quarter of 2008, based on further consultation with the Company’s advisors and the EPA and in response to groundwater monitoring results that reflected a continuing migration in contaminant plume direction during the year, the Company revised its forecast of remedial activities to increase the level of extraction systems and the number of monitoring wells in and around the Goodyear Site, among other things. As of December 31, 2008, the revised liability estimate was $65.2 million which resulted in an additional charge of $24.3 million during the fourth quarter of 2008. During the fourth quarter of 2011, additional remediation activities were determined to be required, in consultation with the Company’s advisors, to further address the migration of the contaminant plume. As a result, the Company recorded a charge of $30.3 million during the fourth quarter of 2011, extending the accrued costs through 2016. The total estimated gross liability was $53.7 million as of September 30, 2012, and as described below, a portion is reimbursable by the U.S. Government. The current portion of the total estimated liability was approximately $16 million and represents the Company’s best estimate, in consultation with its technical advisors, of total remediation costs expected to be paid during the twelve-month period.
 
Estimates of the Company’s environmental liabilities at the Goodyear Site are based on currently available facts, present laws and regulations and current technology available for remediation, and are recorded on an undiscounted basis. These estimates consider the Company’s prior experience in the Goodyear Site investigation and remediation, as well as available data from, and in consultation with, the Company’s environmental specialists. Estimates at the Goodyear Site are subject to significant uncertainties caused primarily by the dynamic nature of the Goodyear Site conditions, the range of remediation alternatives available, together with the corresponding estimates of cleanup methodology and costs, as well as ongoing, required regulatory approvals, primarily from the EPA. Accordingly, it is likely that upon completing the supplemental remediation investigation and feasibility study and reaching a final work plan in or before 2016, an adjustment to the Company’s liability estimate may be necessary to account for the agreed upon additional work as further information and circumstances regarding the Goodyear Site characterization develop. While actual remediation cost therefore may be more than amounts accrued, the Company believes it has established adequate reserves for all probable and reasonably estimable costs.
It is not possible at this point to reasonably estimate the amount of any obligation in excess of the Company’s current accruals through the 2016 forecast period because of the aforementioned uncertainties, in particular, the continued significant changes in the Goodyear Site conditions and additional expectations of remediation activities experienced in recent years.
On July 31, 2006, the Company entered into a consent decree with the U.S. Department of Justice on behalf of the Department of Defense and the Department of Energy pursuant to which, among other things, the U.S. Government reimburses the Company for 21% of qualifying costs of investigation and remediation activities at the Goodyear Site. As of September 30, 2012, the Company has recorded a receivable of $12.7 million for the expected reimbursements from the U.S. Government in respect of the aggregate liability as at that date. The receivable is reduced as reimbursements and other payments from the U.S.

Page20


Government are received.
The Company has been identified as a potentially responsible party (“PRP”) with respect to environmental contamination at the Crab Orchard National Wildlife Refuge Superfund Site (the “Crab Orchard Site”). The Crab Orchard Site is located near Marion, Illinois, and consists of approximately 55,000 acres. Beginning in 1941, the United States used the Crab Orchard Site for the production of ordnance and other related products for use in World War II. In 1947, the Crab Orchard Site was transferred to the United States Fish and Wildlife Service (“FWS”), and about half of the Crab Orchard Site was leased to a variety of industrial tenants whose activities (which continue to this day) included manufacturing ordnance and explosives. A predecessor to the Company formerly leased portions of the Crab Orchard Site, and conducted manufacturing operations at the Crab Orchard Site from 1952 until 1964. General Dynamics Ordnance and Tactical Systems, Inc. (“GD-OTS”) is in the process of conducting a remedial investigation and feasibility study for the Additional and Uncharacterized Sites Operable Unit (“AUS-OU”) at the Crab Orchard Site, pursuant to an Administrative Order on Consent between GD-OTS and the U.S. Fish and Wildlife Service, the EPA and the Illinois Environmental Protection Agency. The Company is not a party to that agreement, and has not been asked by any agency of the United States Government to participate in any investigative or remedial activity relative to the Crab Orchard Site. The Company has been informed that GD-OTS completed a Phase I remedial investigation in 2008, and a Phase II remedial investigation in 2010. Additionally, FWS completed its human health and baseline ecological risk assessments in 2010, and submitted a revised human health risk assessment in December 2011. The draft remedial investigation, and revised human health risk assessment and baseline ecological risk reports are currently under review by FWS and GD-OTS respectively. A revised draft remedial investigation report was submitted in late December 2011, and GD-OTS is awaiting comments from FWS. Pending receipt of FWS’s review comments, it is unclear when a final remedial investigation report will be submitted. Work on interim deliverables for the feasibility study is underway, but outstanding issues with respect to the remedial investigation make it unlikely that a draft feasibility study will be submitted until, at the earliest 2013. GD-OTS has asked the Company to participate in a voluntary cost allocation exercise with respect to the costs it has incurred in performing the AUS-OU remedial investigation and feasibility study, but the Company, along with a number of other PRPs that were contacted, declined citing the absence of certain necessary parties as well as an underdeveloped environmental record. In light of the ongoing investigative activities, and the apparent willingness of the US government to consider participation in an allocation proceeding, it is possible that an allocation proceeding may go forward beginning after submission of the final remedial investigation report in late 2012. The Company does not believe it likely that any determination of the allocable share of the various PRPs, including the U.S. Government, will be completed before late 2013. Although a loss is probable, it is not possible at this time to reasonably estimate the amount of any obligation for remediation of the Crab Orchard Site because the extent of the environmental impact, allocation among PRPs, remediation alternatives, and concurrence of regulatory authorities have not yet advanced to the stage where a reasonable estimate can be made. The Company has notified its insurers of this potential liability and will seek coverage under its insurance policies.

On a related matter, the United States has brought suit against GD-OTS and Schlumberger Technology Corporation (“Schlumberger”), seeking to recover response costs that the United States has allegedly incurred in connection with alleged environmental contamination at a portion of the Crab Orchard Site known as “Site 36,” which is within the Site's Miscellaneous Areas Operable Unit. This area, reported to be the wastewater treatment plant formerly serving the Crab Orchard Site, is not a part of the AUS-OU, as discussed above. On June 1, 2012, GD-OTS and Schlumberger filed a third-party complaint against the Company and seven other third-party defendants, seeking to shift a portion of any costs that GD-OTS and Schlumberger are held liable to pay to other entities formerly conducting activities at the Site. GD-OTS and Schlumberger have also counterclaimed against the United States, seeking to compel the United States to bear a share of the response costs the United States allegedly has incurred. We are informed that the United States, GD-OTS and Schlumberger have resolved in principle their claims against each other and are in the process of agreeing upon the terms of a consent decree. Pending the submission of a consent decree, the court has stayed GD-OTS' and Schlumberger's claims against the third-party defendants, including the Company. It is unclear when any determination of the allocable share of the various PRPs, including the U.S. Government, will be completed. Nor is it possible at this time to reasonably estimate the amount of any obligation that the Company may have with respect to “Site 36.” The Company has notified its insurers of this potential liability
Other Proceedings
On January 8, 2010, a lawsuit related to the acquisition of Merrimac was filed in the Superior Court of the State of New Jersey. The action, brought by a purported stockholder of Merrimac, names Merrimac, each of Merrimac's directors, and Crane Co. as defendants, and alleges, among other things, breaches of fiduciary duties by the Merrimac directors, aided and abetted by Crane Co., that resulted in the payment to Merrimac stockholders of an allegedly unfair price of $16.00 per share in the acquisition and unjust enrichment of Merrimac's directors. The complaint seeks certification as a class of all Merrimac stockholders, except the defendants and their affiliates, and unspecified damages. Simultaneously with the filing of the complaint, the plaintiff filed a motion that sought to enjoin the transaction from proceeding. After a hearing on January 14,

Page21


2010, the court denied the plaintiff's motion. All defendants thereafter filed motions seeking dismissal of the complaint on various grounds. After a hearing on March 19, 2010, the court denied the defendants' motions to dismiss and ordered the case to proceed to pretrial discovery. All defendants have filed their answers and deny any liability. The Court certified the class, and the parties engaged in pre-trial discovery. Fact discovery closed in July 2012, and expert discovery, including the exchange of expert reports and depositions of expert witnesses, will close on November 30, 2012. Summary judgment motions are due to be submitted on or before January 15, 2013. The Company believes that it has valid defenses to the underlying claims raised in the complaint. The Company has given notice of this lawsuit to Merrimac's and the Company's insurance carriers and will seek coverage for any resulting loss. As of September 30, 2012, no loss amount has been accrued in connection with this lawsuit because a loss is not considered probable, nor can an amount be reasonably estimated.
The Company was defending a series of five consolidated lawsuits revolving around a fire that occurred in May 2003 at a chicken processing plant located near Atlanta, Georgia that destroyed the plant. The aggregate damages demanded by the plaintiff, consisting largely of an estimate of lost profits, were in excess of $260 million. The lawsuits alleged that certain fiberglass-reinforced plastic material manufactured by the Company that was installed inside the plant was unsafe in that it acted as an accelerant, causing the fire to spread rapidly, resulting in the total loss of the plant and property. The case was tried to jury, and at the conclusion of the seven-week trial, the jury found the Company not liable for any of the claims or damages alleged by the plaintiff. The plaintiff did not file an appeal, and the time to file an appeal has lapsed.
Pursuant to recently enacted regulations in New Jersey, the Company performed certain tests of the indoor air quality of approximately 40 homes in a residential area surrounding a former manufacturing facility in Roseland, New Jersey, to determine if any contaminants (volatile organic compound vapors from groundwater) from the facility were present in those homes. The Company installed vapor mitigation equipment in three homes where contaminants were found. On April 15, 2011, those three homeowners, and the tenants in one of those homes, filed separate suits against the Company seeking unspecified compensatory and punitive damages for their lost property value and nuisance. In addition, a homeowner in the testing area, whose home tested negative for the presence of contaminants, filed a class action suit against the Company on behalf of himself and 141 other homeowners in the surrounding area, claiming damages in the nature of loss of value on their homes due to their proximity to the facility. It is not possible at this time to reasonably estimate the amount of a loss and therefore, no loss amount has been accrued for the claims because among other things, the extent of the environmental impact, consideration of other factors affecting value have not yet advanced to the stage where a reasonable estimate can be made.
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 impact on its financial condition or liquidity, although the resolution in any reporting period of one or more of these matters could have a significant impact on the Company's results of operations and cash flows for that period.
Other Commitments
The Company entered into a 7 year operating lease for an airplane in the first quarter of 2007 which includes a maximum residual value guarantee of $14.1 million by the Company if the fair value of the airplane is less than $22.1 million. This commitment is secured by the leased airplane and the residual value guarantee liability is $3.9 million as of September 30, 2012.

Page22


Note 10 - Pension and Other Postretirement Benefit Plans
The components of net periodic cost are as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
Pension Benefits
 
Other
Postretirement
Benefits
 
Pension Benefits
 
Other
Postretirement
Benefits
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
Service cost
$
3,131

 
$
2,951

 
$
29

 
$
28

 
$
10,121

 
$
8,852

 
$
87

 
$
85

Interest cost
9,525

 
9,555

 
127

 
156

 
28,193

 
28,666

 
381

 
441

Expected return on plan assets
(12,832
)
 
(12,585
)
 

 

 
(38,492
)
 
(37,757
)
 

 

Amortization of prior service cost
102

 
105

 
(59
)
 
(127
)
 
302

 
314

 
(177
)
 
(177
)
Amortization of net loss (gain)
4,794

 
1,685

 
(21
)
 
43

 
14,417

 
5,054

 
(63
)
 
(75
)
Net periodic cost
$
4,720

 
$
1,711

 
$
76

 
$
100

 
$
14,541

 
$
5,129

 
$
228

 
$
274

The Company expects, based on current actuarial calculations, to contribute approximately $5 million to its defined benefit plans and $1 million to its other postretirement benefit plans in 2012, of which $3.3 million and $1.2 million have been contributed during the first nine months of 2012, respectively. The Company contributed $47.5 million to its defined benefit plans and $1.4 million to its other postretirement benefit plans in 2011. Cash contributions for subsequent years will depend on a number of factors, including the impact of the Pension Protection Act signed into law in 2006, changes in minimum funding requirements, long-term interest rates, the investment performance of plan assets and changes in employee census data affecting the Company’s projected benefit obligations.

Note 11 - Income Taxes

Effective Tax Rates

The Company's effective tax rates attributable to income from continuing operations are as follows:
 
2012
2011
Three months ended September 30,
29.9%
31.0%
Nine months ended September 30,
30.1%
31.1%

The Company's effective tax rates attributable to income from continuing operations for the three and nine months ended September 30, 2012 are lower than those for the comparable prior year periods primarily due to:

Lower taxes on non-U.S. earnings in 2012, partially offset by
The statutory expiration of the U.S. federal credit for increasing research activities as of December 31, 2011.

The Company's effective tax rates attributable to income from continuing operations for the three and nine months ended September 30, 2012 are lower than the statutory U.S. federal tax rate of 35% primarily as a result of income earned in jurisdictions with tax rates lower than the statutory U.S. federal tax rate and the U.S. federal tax benefit for domestic manufacturing activities. These items are partially offset by net U.S. state taxes, and certain expenses that are statutorily non-deductible for income tax purposes.

Unrecognized Tax Benefits

During the three and nine months ended September 30, 2012, the Company's gross unrecognized tax benefits increased by $5.3 million and $6.5 million, respectively, primarily as a result of tax positions taken in both the current and prior periods. During the three and nine months ended September 30, 2012, the total amount of unrecognized tax benefits that, if recognized, would affect the Company's effective tax rate increased by $5.1 million and $6.3 million, respectively.


Page23


The Company recognizes interest related to uncertain tax positions in its income tax expense. During the three and nine months ended September 30, 2012, the total amount of interest (income) / expense related to unrecognized tax benefits recognized in the Company's consolidated statement of operations was $(0.1) million and $0.1 million, respectively. At both September 30, 2012 and December 31, 2011, the total amount of accrued interest expense related to unrecognized tax benefits recorded in the Company's consolidated balance sheet was $0.6 million.

As of September 30, 2012, it is reasonably possible that the Company's unrecognized tax benefits will decrease by $1.3 million during the next twelve months due to a combination of tax positions expected to be taken and the expiration of various statutes of limitations on assessment.

Income Tax Examinations

The Company's income tax returns are subject to examination by the U.S. federal, U.S. state and local, and non-U.S. tax authorities. The U.S. Internal Revenue Service has completed its examinations of the Company's consolidated U.S. federal income tax returns through 2008. The Company's consolidated U.S. federal income tax returns for the years 2009 through 2011, together with those of acquired subsidiaries, remain open to examination.

With few exceptions, the Company is no longer subject to U.S. state and local or non-U.S. income tax examinations for years before 2007. As of September 30, 2012, the Company and its subsidiaries are under examination in various jurisdictions, including Germany (2002 through 2009) and California (2007 and 2008). In addition, the Company is currently appealing an assessment in Canada (2007 through 2009).

The Company believes that adequate accruals have been provided for all jurisdictions' open years.
Note 12 - Long-Term Debt and Notes Payable
The following table summarizes the Company’s debt as of September 30, 2012 and December 31, 2011:
 
(in thousands)
September 30,
2012
 
December 31,
2011
Long-term debt consists of:
 
 
 
5.50% notes due 2013 (a)
$
199,862

 
$
199,753

6.55% notes due 2036
199,186

 
199,161

Total long-term debt
$
399,048

 
$
398,914

Short-term borrowings
$
1,114

 
$
1,112

 

(a) As of September 30, 2012, the Company classified the notes which mature in 2013 as long-term debt due to the Company's intent to refinance on a long-term basis and the ability to utilize the existing 5-year $300 million Amended and Restated Credit Agreement.


Note 13 - Derivative Instruments and Hedging Activities
The Company is exposed to certain risks related to its ongoing business operations, including market risks related to fluctuation in currency exchange. The Company uses foreign exchange contracts to manage the risk of certain cross-currency business relationships to minimize the impact of currency exchange fluctuations on the Company’s earnings and cash flows. The Company does not hold or issue derivative financial instruments for trading or speculative purposes. As of September 30, 2012, the foreign exchange contracts designated as hedging instruments did not have a material impact on the Company’s statement of operations, balance sheet or cash flows. Foreign exchange contracts not designated as hedging instruments which primarily pertain to foreign exchange fluctuation risk of intercompany positions, had a notional value of $188 million and $155 million as of September 30, 2012 and December 31, 2011, respectively. The settlement of derivative contracts for the nine months ended September 30, 2012 and 2011 resulted in a net cash outflow of $13.0 million and a net cash inflow of $3.3 million, respectively, and is reported with “Total provided by operating activities” on the Condensed Consolidated Statements of Cash Flows.
Note 14 - Fair Value Measurements
Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are to be considered from the perspective of a market participant that holds the asset or owes the liability. The standards also establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when

Page24


measuring fair value.
The standards describe three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices in active markets for identical or similar assets and liabilities.
Level 2: Quoted prices for identical or similar assets and liabilities in markets that are not active or observable inputs other than quoted prices in active markets for identical or similar assets and liabilities. Level 2 assets and liabilities include over-the-counter derivatives, principally forward foreign exchange contracts, whose value is determined using pricing models with inputs that are generally based on published foreign exchange rates and exchange traded prices, adjusted for other specific inputs that are primarily observable in the market or can be derived principally from or corroborated by observable market data.
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
The following table summarizes assets and liabilities measured at fair value on a recurring basis at the dates indicated:
 
 
September 30, 2012
 
December 31, 2011
 
Quoted
Prices in
Active
Markets for
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
 
 
Quoted
Prices in
Active
Markets for
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
 
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total Fair
Value
 
Level 1
 
Level 2
 
Level 3
 
Total Fair
Value
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives - foreign exchange contracts
$

 
$
211

 
$

 
$
211

 
$

 
$
290

 
$

 
$
290

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives - foreign exchange contracts
$

 
$
400

 
$

 
$
400

 
$

 
$
6,060

 
$

 
$
6,060

Valuation Technique - The Company’s derivative assets and liabilities include foreign exchange contract derivatives that are measured at fair value using internal models based on observable market inputs such as forward rates and interest rates. Based on these inputs, the derivatives are classified within Level 2 of the valuation hierarchy.
The carrying value of the Company’s financial assets and liabilities, including cash and cash equivalents, accounts receivable, accounts payable and short-term loans payable approximate fair value, without being discounted, due to the short periods during which these amounts are outstanding. Long-term debt rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value for debt issues that are not quoted on an exchange. The estimated fair value of long-term debt is measured using Level 2 inputs and was $425.2 million and $419.0 million at September 30, 2012 and December 31, 2011, respectively.
Note 15 - Restructuring
The Company recorded pre-tax restructuring charges of $14.7 million in the second quarter of 2012, including $13.8 million associated with repositioning actions designed to improve profitability largely beginning in 2013, primarily in the European portion of the Fluid Handling segment and a 0.9 million, net charge, related to the completion of previous restructuring actions. Related to these actions, in the third quarter of 2012, the Company recorded $0.2 million of additional restructuring charges as well as $1.2 million related to the write-down of inventory resulting from the closure of product lines which is included in cost of sales.
The restructuring charges associated with the repositioning actions included severance and other costs related to the planned closure of two small European plants, the transfer of certain manufacturing operations from higher cost to lower cost Company facilities and other staff reduction actions. The following table summarizes the accrual balances related to the restructuring charges:
 

Page25


(in millions)
June 30, 2012
 
Expense
 
Utilization
 
September 30, 2012
Severance
$
11.6

 
$

 
$
(2.5
)
 
$
9.1

Other
0.1

 
0.2

 
(0.1
)
 
0.2

 
$
11.7

 
$
0.2

 
$
(2.6
)
 
$
9.3

 
The Company expects the 2012 actions to result in workforce reductions of approximately 200 employees, or about 2% of the Company’s global workforce. The Company expects to incur additional restructuring and related charges of approximately $4 million during the fourth quarter of 2012 to complete these actions. The Company expects pre-tax cash payments of approximately $5 million in 2012 and an additional $10 million in 2013 pertaining to the restructuring charges, which the Company will fund with cash generated from operations.

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Part I – Financial Information
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains information about Crane Co., some of which includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements other than historical information or statements about our current condition. You can identify forward-looking statements by the use of terms such as “believes,” “contemplates,” “expects,” “may,” “could,” “should,” “would,” or “anticipates,” other similar phrases, or the negatives of these terms.
Reference herein to “Crane”, “we”, “us”, and, “our” refer to Crane Co. and its subsidiaries unless the context specifically states or implies otherwise. References to “core business” or “core sales” in this report include sales from acquired businesses starting from and after the first anniversary of the acquisition, but exclude currency effects. Amounts in the following discussion are presented in millions, except employee, share and per share data, or unless otherwise stated.
We have based the forward-looking statements relating to our operations on our current expectations, estimates and projections about us and the markets we serve. We caution you that these statements are not guarantees of future performance and involve risks and uncertainties. In addition, we have based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. There are a number of other factors that could cause actual results or outcomes to differ materially from those addressed in the forward-looking statements. The factors that we currently believe to be material are detailed in Part II, Item 1A of this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 filed with the Securities and Exchange Commission and are incorporated by reference herein.
Overview
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, non-residential construction, recreational vehicle (“RV”), transportation, automated merchandising, chemical, pharmaceutical, oil, gas, power, nuclear, building services and utilities.
Our strategy is to grow the earnings and cash flows of niche businesses with leading market shares, acquire businesses that fit strategically with existing businesses, aggressively pursue operational and strategic linkages among our businesses, build a performance culture focused on productivity and continuous improvement, continue to attract and retain a committed management team whose interests are directly aligned with those of our shareholders and maintain a focused, efficient corporate structure.
Outlook – Continuing Operations
Our sales depend heavily on industries that are cyclical in nature, or are subject to market conditions which may cause customer demand for our products to be volatile. These industries are subject to fluctuations in domestic and international economies as well as to currency fluctuations, inflationary pressures, and commodity costs.
The global economy remains uncertain due, in part, to persistent high unemployment in the U.S. and Europe, a weak U.S. and European housing market, government budget reduction plans, concerns over the European sovereign debt crisis and slowing economies in China and India. Although a slower global economy is likely, we believe we are positioned to achieve profitable growth in 2012 through a combination of limited market growth and gains in market share, albeit at a reduced, year-over-year rate compared to 2011. As a result of our cautious outlook on the global economy, we expect sales in 2012 from continuing operations to increase 4%.
 
In response to weak European economic conditions as well as opportunities to enhance our cost structure in certain businesses, through the third quarter of 2012, we have recorded $14.9 million of pre-tax restructuring charges and $1.2 million of related charges associated with repositioning actions designed to improve profitability, primarily in the European portion of the Fluid Handling segment and, to a lesser extent, in our Engineered Materials and Merchandising Systems segments. We expect to record an additional $4 million of pre-tax charges in the fourth quarter related to these initiatives. We expect pre-tax cash payments of approximately $5 million for 2012 and an additional $10 million in 2013 pertaining to the restructuring charges, which we will fund with cash generated from operations. We expect approximately $12 million in annualized pre-tax savings associated with these initiatives to commence in 2013.


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Aerospace & Electronics
For the remainder of 2012, we believe market conditions in the aerospace industry will remain generally positive and, accordingly, we expect to achieve higher full-year sales and profits than 2011 in our Aerospace Group. We continue to expect that OEM sales will benefit from higher build rates for large commercial aircraft, new products and an expanded global sales force, but we remain cautious about aftermarket sales. We continue to forecast reasonably stable results for the balance of 2012 for our Electronics Group despite concerns about defense spending, as we continue to expect growth in our commercial business, which comprises about 39% of Electronics sales, to offset a slight decline in defense related sales.
Engineered Materials
In our Engineered Materials segment, we continue to see challenging end market conditions, particularly in Europe, and in response, we recorded year-to-date restructuring and related charges of $2.8 million in connection with closing a small facility in England. We expect to incur an additional $1 million of charges related to these actions in the fourth quarter. Although year to date sales are favorable compared to the prior year period, given current economic conditions, we are cautious about RV-related demand, and we expect commercial construction activity to remain weak. We continue to expect a modest decline in sales volume and lower operating profit for the full year 2012.
Merchandising Systems
For the full year 2012, we continue to expect relatively flat sales for our Merchandising Systems segment, reflecting modest core growth offset by unfavorable foreign exchange translation. In Payment Solutions, we expect core sales to increase modestly due to a gradual improvement in market demand for new products. In Vending Solutions, we expect sales to remain close to 2011 levels, reflecting continued economic uncertainty. As part of our repositioning actions, we are consolidating the manufacturing of certain products and optimizing engineering resources within our Payment Solutions business. In connection with these initiatives, restructuring charges of $0.7 million were recorded in the first nine months of 2012 and $1.6 million was related to previous restructuring actions. Full year operating profit in 2012 is expected to improve, led by productivity initiatives across the segment.
Fluid Handling
For 2012, in our Fluid Handling segment, we continue to expect sales growth over 2011 levels primarily led by recovery in our Energy and ChemPharma business units, which are benefiting from exposure to their late cycle end markets and strong sales growth from our Canadian distribution business. We expect an unfavorable impact from foreign exchange translation. While we expect maintenance, repair & overhaul (“MRO”) as well as project businesses to be improved over 2011, activity has recently slowed. Market conditions in Europe remain depressed, particularly for certain short cycle portions of the Fluid Handling segment, reflecting economic uncertainty. In addition, demand from global markets has softened, with some customers delaying delivery dates. In response to these weaker end market conditions and opportunities to reduce cost at certain European facilities, we recorded $11.6 million of pre-tax restructuring and related charges through the third quarter related to the transfer of certain manufacturing operations from higher cost to lower cost Company facilities and other staff reduction actions. We expect to incur an additional $3 million of charges related to these actions in the fourth quarter. We expect only a modest improvement in operating profit from continuing operations over 2011.
  
Controls
In our Controls segment, we continue to expect higher sales and operating profit from continuing operations in 2012, compared to 2011, driven by the stronger performance in the first half of 2012.

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Results from Continuing Operations – Three Month Periods Ended September 30
All comparisons below refer to the third quarter 2012 versus the third quarter 2011, unless otherwise specified.
Third quarter of 2012 compared with third quarter of 2011
 
 
Third Quarter
 
Change
(dollars in millions)
2012
 
2011
 
$
 
%
Net sales
$
646.0

 
$
647.1

 
$
(1.1
)
 
(0.2
)%
Operating profit from continuing operations
86.6

 
80.3

 
6.3

 
7.8
 %
Restructuring and related charges*
1.4

 

 
1.4

 
NM

Operating margin from continuing operations
13.4
%
 
12.4
%
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Interest income
0.4

 
0.4

 

 
0.2
 %
Interest expense
(6.6
)
 
(6.5
)
 
(0.1
)
 
2.2
 %
Miscellaneous - net

 
(0.1
)
 
0.1

 
(91.8
)%
 
(6.2
)
 
(6.1
)
 
(0.1
)
 
1.2
 %
Income from continuing operations before income taxes
80.4

 
74.2

 
6.2

 
8.4
 %
Provision for income taxes
24.0

 
23.0

 
1.0

 
4.5
 %
Income from continuing operations
56.4

 
51.2

 
5.2

 
10.2
 %
 
* Restructuring and related charges are included in operating profit and operating margin.
Third quarter 2012 sales decreased $1.1 million compared to the third quarter of 2011. The impact of currency translation decreased reported sales by approximately $14.5 million, or 2.2%, as the U.S. dollar strengthened against other major currencies in the third quarter of 2012 compared to the third quarter of 2011. Core business sales for the third quarter increased approximately $13.4 million, or 2.1%. Net sales related to operations outside the U.S. were 41.2% and 42.7% of total net sales for the quarters ended September 30, 2012 and 2011, respectively.
Operating profit from continuing operations was $86.6 million in the third quarter 2012 compared to $80.3 million in the same period of 2011. The increase in operating profit reflected improved performances in our Aerospace & Electronics, Fluid Handling and Engineered Materials segments, partially offset by declines in our Merchandising Systems and Controls segments. Operating profit margins were 13.4% in the third quarter of 2012, compared to 12.4% in the comparable period in 2011. Operating profit in the third quarter of 2012 included restructuring and related charges of $1.4 million associated with repositioning actions designed to improve profitability beginning in 2013.
Our effective tax rate is affected by a number of items, both recurring and discrete, including the amount of income we earn in different jurisdictions and their respective statutory tax rates, changes in the valuation of our deferred tax assets and liabilities, changes in tax laws, regulations and accounting principles, the continued availability of statutory tax credits and deductions, the continued reinvestment of our overseas earnings, and examinations initiated by tax authorities around the world.

Our effective tax rate attributable to income from continuing operations was 29.9% in the third quarter of 2012 compared to 31.0% in the third quarter of 2011 as a result of lower taxes on non-U.S. earnings in 2012, partially offset by the statutory expiration of the U.S. federal credit for increasing research activities as of December 31, 2011.


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Results from Discontinued Operations – Three Month Periods Ended September 30
 
 
Three Months Ended
September 30,
(dollars in millions)
2012
 
2011
Income from Continuing Operations
$
56.4

 
$
51.2

Discontinued Operations:
 
 
 
Income from Discontinued Operations, net of tax

 
1.2

Gain from Sales of Discontinued Operations, net of tax
0.9

 

Discontinued Operations, net of tax
0.9

 
1.2

Net income before allocation to noncontrolling interests
$
57.3

 
$
52.4

For the three months ended September 30, 2012 and 2011, we reported two divested businesses as discontinued operations on our Condensed Consolidated Statement of Operations. On June 19, 2012, we sold Azonix Corporation (“Azonix”), which was formerly part of the Controls segment, to Cooper Industries for $43.4 million, resulting in an after tax gain of $14.5 million, of which $0.9 million was recorded in the third quarter. On June 28, 2012, we sold certain assets and operations of the Company’s valve service center in Houston, Texas, which was formerly part of the Fluid Handling segment, to Furmanite Corporation for $9.3 million, resulting in an after tax gain of $4.6 million.
Segment Results of Continuing Operations Three Month Periods Ended September 30
The following information should be read in conjunction with our condensed consolidated financial statements and related notes. The segment results exclude the operating results of discontinued operations for all periods presented.
Aerospace & Electronics
 
 
Third Quarter
 
Change
(dollars in millions)
2012
 
2011
 
 
 
 
Sales
$
171.4

 
$
172.2

 
$
(0.8
)
 
(0.5
)%
Operating profit
$
39.8

 
$
35.6

 
$
4.2

 
11.8
 %
Operating margin
23.2
%
 
20.7
%
 
 
 
 
The third quarter 2012 sales decrease of $0.8 million reflected sales decreases of $0.1 million and $0.7 million in the Aerospace Group and Electronics Group, respectively. The segment’s operating profit increased $4.2 million, or 11.8%, in the third quarter of 2012 when compared to the same period in the prior year, driven by operating profit and margin improvement in the Aerospace Group which more than offset a slight decrease in operating profit in the Electronics Group.
Aerospace Group sales of $106.4 million were essentially flat compared to the prior year period. Original equipment manufacturers ("OEM") product sales were approximately equal to the prior year, reflecting an increase in sales to large aircraft manufacturers and business jet OEMs offset by a decline in sales to regional aircraft manufacturers. The aftermarket sales were also flat compared to the prior year reflecting a decline in spares revenue which offset higher sales associated with modernization and upgrade programs, and an increase in our repair and overhaul business. During the third quarter of 2012, sales to OEMs and sales to aftermarket customers were 59.0% and 41.0%, respectively, of total sales, compared to 58.8% and 41.2%, respectively, in the same period last year. Aerospace operating profit increased by $5.0 million in the third quarter of 2012, compared to the third quarter of 2011, due to improved mix within our OEM business, strong productivity gains and lower engineering spending, in part, due to the timing of certain development programs.
Electronics Group sales of $65.0 million decreased $0.7 million, or 1.1%, from $65.7 million in the prior year period reflecting lower Power Solution sales, partially offset by increases in Microwave and Microelectronic sales. Operating profit decreased $0.8 million compared to the third quarter of 2011.




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Engineered Materials
 
 
Third Quarter
 
Change
(dollars in millions)
2012
 
2011
 
 
 
 
Sales
$
57.0

 
$
53.1

 
$
3.9

 
7.3
%
Operating profit
$
7.2

 
$
5.9

 
$
1.3

 
22.1
%
Restructuring and related charges*
$
1.1

 
$

 
 
 
 
Operating margin
12.7
%
 
11.1
%
 
 
 
 
* Restructuring and related charges are included in operating profit and operating margin.
 
Third quarter 2012 sales of $57.0 million increased $3.9 million, or 7.3%, reflecting higher sales to our recreation vehicle ("RV") customers, partially offset by lower sales to our international and transportation-related customers. We experienced a 26.6% sales increase to our traditional RV manufacturers reflecting an increase in demand for our RV related applications as RV OEM build rates remained strong in the third quarter. Sales to our international customers declined 20.7%. Sales to our building product customers were flat, reflecting continued soft commercial construction markets. Transportation-related sales declined 6.2%, reflecting difficult market and competitive conditions. Operating profit in the third quarter of 2012 increased $1.3 million, or 22.1%, primarily as a result of the higher sales and effective cost controls. Operating profit in the third quarter of 2012 included restructuring and related charges of $1.1 million ($0.9 million was related to the write-down of inventory resulting from the closure of a product line which is included in cost of sales). Our restructuring and related actions include the closure of a small manufacturing facility in the United Kingdom, which had total sales of $8 million in 2011.
Merchandising Systems
 
 
Third Quarter
 
Change
(dollars in millions)
2012
 
2011
 
 
 
 
Sales
$
92.5

 
$
98.8

 
$
(6.3
)
 
(6.4
)%
Operating profit
$
9.5

 
$
10.8

 
$
(1.3
)
 
(12.4
)%
Operating margin
10.3
%
 
11.0
%
 
 
 
 
 
Third quarter 2012 sales decreased $6.3 million, or 6.4%, reflecting a core sales decrease of $4.0 million, or 4.0% and unfavorable foreign currency translation of $2.3 million, or 2.4%. Sales were lower primarily in our Vending Solutions business, and to a lesser extent in our Payment Solutions business as the impact of unfavorable foreign exchange more than offset higher core sales. Sales decreased in our Vending Solutions business, primarily related to our bottler customers and in our Payment Solutions business resulting from unfavorable foreign currency translation. Operating profit in the third quarter of 2012 decreased $1.3 million, or 12.4%, reflecting the impact of the lower sales in Vending and Payment Solutions.
 
 
Fluid Handling
 
 
Third Quarter
 
Change
(dollars in millions)
2012
 
2011
 
 
 
 
Sales
$
303.1

 
$
299.1

 
$
4.0

 
1.3
%
Operating profit
$
42.9

 
$
39.9

 
$
3.0

 
7.6
%
Restructuring and related charges*
$
0.2

 
$

 
 
 
 
Operating margin
14.2
%
 
13.3
%
 
 
 
 
* Restructuring and related charges are included in operating profit and operating margin.

Third quarter 2012 sales increased $4.0 million, or 1.3%, including an increase in core sales of $15.3 million, or 5.1%, partially offset by unfavorable foreign currency exchange of $11.3 million, or 3.8%. The core sales performance primarily reflected sales growth in our Crane Supply business, as well as our later, long cycle ChemPharma business. Operating profit in the third

Page31


quarter of 2012 increased $3.0 million, or 7.6%, reflecting better project execution, price increases and improved productivity.
Controls
 
 
Third Quarter
 
Change
(dollars in millions)
2012
 
2011
 
 
 
 
Sales
$
22.1

 
$
23.8

 
$
(1.8
)
 
(7.3
)%
Operating profit
$
2.8

 
$
3.8

 
$
(0.9
)
 
(24.9
)%
Operating margin
12.9
%
 
15.9
%
 
 
 
 
The third quarter 2012 sales decrease of $1.8 million, or 7.3%, reflected lower sales volume. Operating profit decreased $0.9 million, or 24.9%, reflecting deleverage of the lower sales volume.

Page32


Results from Continuing Operations – Nine Month Periods ended September 30

All comparisons below refer to the first nine months of 2012 versus the first nine months of 2011, unless otherwise specified.
Year-to-date period ended September 30, 2012 compared to year-to-date period ended September 30, 2011
 
 
Year-to-Date
 
Change
(dollars in millions)
2012