-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Viw0Zz34LX0SWVy+294iYapsocKrYlH6YODX60XT4aD73JsXo1/EBCEcub6+PVtD kSkDdct9iDYGGw3QByHSqA== 0000950130-99-001203.txt : 19990305 0000950130-99-001203.hdr.sgml : 19990305 ACCESSION NUMBER: 0000950130-99-001203 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990304 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CRANE CO /DE/ CENTRAL INDEX KEY: 0000025445 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-LUMBER, PLYWOOD, MILLWORK & WOOD PANELS [5031] IRS NUMBER: 131952290 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 033-22904 FILM NUMBER: 99557121 BUSINESS ADDRESS: STREET 1: 1000 FIRST STAMFORD PLACE CITY: STAMFORD STATE: CT ZIP: 06902 BUSINESS PHONE: 2033637300 MAIL ADDRESS: STREET 1: 1000 FURST STAMFORD PLACE CITY: STAMFORD STATE: CT ZIP: 06902 10-K405 1 FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 (x) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 ----------------- OR ( ) 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 (I.R.S. Employer incorporation or organization) 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 ------------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ----------------------- ------------------------ Common Stock, par value $1.00 New York Stock Exchange Preferred Share Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: 7 1/4% senior notes due June, 1999 8 1/2% senior notes due March, 2004 6 3/4% senior notes due October, 2006 (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ______ ----- Indicate by check mark if the disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (x ) Based on the average stock price of $27.53 on January 29, 1999 the aggregate market value of the voting stock held by nonaffiliates of the registrant was $1,540,307,167. The number of shares outstanding of the registrant's common stock, $1.00 par value was 68,452,529 at January 29, 1999. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- Portions of the annual report to shareholders for the year ended December 31, 1998 and portions of the proxy statement for the annual shareholders meeting to be held on April 5, 1999 are incorporated by reference into Parts I, II, III and IV of this Form 10-K Annual Report. PART I Item 1. Business -------- Crane Co. ("Crane" or the "Company") is a diversified manufacturer of engineered industrial products and the largest American distributor of doors, windows and millwork. Founded in 1855, Crane employs over 12,500 people in North America, Europe, Asia and Australia. STRATEGY The company's strategy is to grow the earnings of niche businesses with high market share, build an aggressive and committed management team whose interests are directly aligned to those of the shareholders, and maintain a focused, efficient corporate structure. ACQUISITIONS In the past five years, the company has completed 19 acquisitions. During 1998 the company completed six acquisitions at a total cost of $224 million. In May, the company acquired Environmental Products USA, Inc. This business manufactures membrane-based water treatment systems for industrial, commercial and institutional markets. Also in May, the company acquired Number One Supply, a building products distribution business based in Baltimore, MD and Raleigh, NC. In July, the company acquired Consolidated Lumber Company, a wholesale distributor of lumber and millwork products in the greater Kansas City, MO area. Number One Supply and Consolidated Lumber were integrated into the company's Huttig Sash & Door Company ("Huttig") subsidiary. In August, the company acquired Sequentia Holdings, Inc., a manufacturer of fiberglass-reinforced plastic panels for the construction and building products markets. Sequentia complements the company's Kemlite subsidiary, which provides fiberglass- reinforced plastic panels for the transportation and recreational vehicle markets. In September, the company acquired Liberty Technologies, Inc. which develops, manufactures, markets and sells valve, motor, engine and compressor condition monitoring products and related services to the nuclear power generation and industrial process markets worldwide. Liberty complements the company's nuclear valve business which provides valves, valve diagnostic equipment and related services to the nuclear power industry, and its Dynalco Controls business, which provides sensors, instrumentation, control products and automation systems for use in industrial engine applications. Also in September, the company acquired the Plastic-Lined Piping Products ("PLPP") division of The Dow Chemical Company. PLPP was integrated with the company's Resistoflex division, which supplies lined pipe and valves to the chemical process and industrial markets. During 1997, the company completed five acquisitions at a total cost of $82 million, including assumed debt. In March, the company acquired the transportation products business of Sequentia, Incorporated. This business, which produces fiberglass-reinforced plastic panels for the truck body, trailer and container market, has been integrated with the company's Kemlite subsidiary. Also in March, the company acquired Polyvend Inc., a manufacturer of snack and food vending machines. Polyvend was completely integrated into Crane's National Vendors division significantly expanding its sales distribution channels. In April, the company acquired the Nuclear Valve Business of ITI MOVATS from Westinghouse. MOVATS is a leading supplier of valve diagnostic equipment and valve services to the commercial nuclear power industry. In July, through its Huttig subsidiary, the company acquired MALLCO Lumber & Building Materials Inc., a leading wholesale distributor of lumber, doors and engineered wood products serving Arizona and the surrounding region. In December the company acquired certain operations and product lines of Stockham Valves & Fittings, Inc. The acquired product lines and related manufacturing operations have been integrated into the company's engineered valve business and its commercial bronze and iron valve business. 2 PART I Item 1. Business (continued) -------- During 1996, the company acquired two companies. In mid-October, the company acquired Interpoint Corporation in a tax-free merger in which the company issued 1,094,312 shares of Crane common stock and assumed $26 million in debt. Interpoint is a leader in the design and manufacture of standard and custom miniature DC-to-DC power converters with applications in aerospace and medical technology industries. In late October the company acquired Grenson Electronics Ltd. of Daventry, England. Grenson Electronics produces low voltage power conversion electronics for aerospace, defense and industrial markets. During 1995, the company completed three acquisitions at a total cost of $9.4 million. In February the company, through its Barksdale Control Products GmbH subsidiary, acquired Unimess GmbH, a German-based manufacturer of solid state pressure switches and transducers, level switches and indicating systems, and flow measurement and control components for specialized instrumentation. In the fourth quarter, the company, through its Crane Pumps & Systems subsidiary, acquired Process Systems, Inc. based in Michigan. Process Systems is a manufacturer of vertical turbine pumps and accessories for industrial applications. In November 1995, the company acquired Kessel PTE Ltd., a fluoropolymer plastic lined pipe manufacturer with facilities in Singapore and Thailand. The company completed three acquisitions in 1994 at a total cost of $240 million. The company, through its Huttig subsidiary, acquired a molding and millwork manufacturing operation in Prineville, Oregon in May 1994. In April, 1994, the company purchased Mark Controls Corporation, a manufacturer of automatic and manually operated valves, and specialized instruments and controls, for commercial and industrial customers. The company acquired ELDEC Corporation in March 1994. ELDEC's products are used worldwide on all major commercial and business aircraft and include: position indication and control systems, proximity switches and components, true mass fuel flowmeters, and power conversion components and systems. DIVESTITURES In the past five years, the company has divested six businesses. In 1998, the company sold two foundry operations acquired as part of the Stockham Valves and Fittings Inc. transaction. Accu-Cast, Inc. in Chattanooga, TN and the Aliceville Foundry in Aliceville, AL were sold for a total of $4.3 million. In 1997, the company sold its Valve Systems and Controls division for $7.5 million in cash and $1.5 million in preferred stock. In March of 1996, the company sold Empire Foundry. In December 1994, Huttig sold its window manufacturing business for $2.4 million. The transaction excluded real estate and receivables. In July 1994, the company sold Modulinc, the fiber optic channel product line of ELDEC. LONG-TERM FINANCING In September 1998 the company sold $100,000,000 of 6 3/4% notes that will mature on October 1, 2006. During June 1994 the company sold $150,000,000 of 7 1/4% notes that will mature on June 15, 1999. During April 1992 the company sold $100,000,000 8 1/2% notes that will mature on March 15, 2004. BUSINESS SEGMENTS See pages 20 and 21 of the Annual Report to Shareholders for year ended December 31, 1998 for sales, operating profit and assets employed of each business segment. 3 PART I Item 1. Business (continued) -------- FLUID HANDLING The Fluid Handling segment consists of valve, pump and water treatment businesses. The Crane Valve business with seven manufacturing facilities in North America, as well as operations in the United Kingdom, Australia, Norway, China and Indonesia, sells a wide variety of commodity and special purpose valves and fluid control products for the chemical and hydrocarbon processing, power generation, marine, general industrial and commercial construction industries. Products are sold under the Crane, Jenkins, Pacific, Westad, Flowseal, Center Line, Stockham, Triangle and Duo-Check brands. The 1998 acquisition of Liberty Technologies, Inc. which manufactures condition monitoring products and related services to the nuclear power generation market worldwide complements the company's nuclear valve business which provides valves, valve diagnostic equipment and related services to the nuclear power industry. Crane Pumps has eight manufacturing facilities in the United States. Pumps are manufactured under the Deming, Weinman, Chempump, Burks, Chem/Meter, Barnes, Sellers and Process Systems brand names. Pumps are sold to a broad customer base, which includes chemical and hydrocarbon process industries, automotive, municipal, industrial and commercial wastewater, power generation, commercial heating, ventilation and air-conditioning industries and original equipment manufacturers. The water treatment business has manufacturing facilities in Pennsylvania and Florida and serves the water and wastewater treatment market. Its products are sold under the Cochrane and Environmental Products names. This group employs over 3,400 people and had assets of $355.5 million at December 31, 1998. Fluid Handling order backlog totaled $79.3 million. Products in this group are sold directly to end users through Crane's sales organization and through independent distributors and manufacturers representatives. AEROSPACE The Aerospace segment consists of ELDEC, Hydro-Aire, Lear Romec and Interpoint. The group employs 2,500 people and had assets of $296.7 million at year- end. The order backlog totaled $281.2 million at December 31, 1998. ELDEC designs, manufactures and markets custom position indication and control systems, proximity sensors, pressure sensors, true mass fuel flowmeters and power conversion systems for the commercial, business and military aerospace industries, and military marine and telecommunications markets. These products are custom designed for specific aircraft to meet technically demanding requirements of the aerospace and telecommunication industry. ELDEC has two international facilities one in England and one in France. ELDEC also has a 47% equity investment in Powec A/S, a Norwegian manufacturer of power conditioning products and systems for the commercial wireless telecommunications market, whose products are complementary to the products and complex power systems engineering capabilities at ELDEC. 4 PART I (continued) Item 1. Business (continued) -------- Hydro-Aire designs, manufactures and sells aircraft brake control and anti- skid systems, including electro-hydraulic servo valves and manifolds, embedded software and rugged electronic controls, hydraulic control valves, landing gear sensors and fuel pumps as original equipment for the commercial transport, business and commuter, military, government and general aviation aerospace markets. In addition, Hydro-Aire designs and manufactures systems similar to those above for the retrofit of aircraft with improved systems and manufactures replacement parts for systems installed as original equipment by the aircraft manufacturer. All of these products are largely proprietary to Hydro-Aire and, to some extent, are custom designed to the requirements and specifications of the aircraft manufacturer or program contractor. These systems and replacement parts are sold directly to airlines, governments, and aircraft maintenance and overhaul companies. Lear Romec designs, manufactures and sells lubrication and fuel pumps for aircraft, aircraft engines and radar cooling systems for the commercial and military aerospace industries. Lear Romec has a leading share of the non- captive market for turbine engine lube and scavenge oil pumps. Lear Romec also manufactures fuel boost and transfer pumps for commuter and business aircraft. Interpoint designs, manufactures and sells standard and custom miniature (hybrid) DC-to-DC power converters and custom miniature (hybrid) electronic circuits for applications in commercial, space and military aerospace industries and in the medical technology industry. ENGINEERED MATERIALS The Engineered Materials segment consists of five businesses: Kemlite, CorTec, Resistoflex, Polyflon and Crane Plumbing. This group had assets of $263.6 million at December 31, 1998 and employed 1,600 people. Order backlog at year-end 1998 was $24.1 million. Kemlite manufactures fiberglass-reinforced plastic panels for use principally by the transportation industry in refrigeration and dry van truck trailers and recreational vehicles. Kemlite products are also sold to the commercial construction industry for food processing, fast food restaurant and supermarket applications, to institutions where fire rated materials with low smoke generation and minimum toxicity are required and to residential construction. Kemlite sells its products directly to the truck trailer and recreational vehicle manufacturers. Sequentia manufacturers fiberglass- reinforced plastic panels for the construction and building products markets. Kemlite uses distributors to serve its commercial construction market and some segments of the recreational vehicle market. Sequentia's Grand Junction, Tennessee and Houston, Texas plants were added to Kemlite's plants in Joliet, Illinois and Jonesboro, Arkansas. CorTec manufactures fiberglass-reinforced laminated panels serving the truck and truck trailer segment of the transportation industry. CorTec markets its products directly to the truck and truck trailer manufacturers. 5 PART I (continued) Item 1. Business (continued) -------- Resistoflex is engaged in the design, manufacture and sale of corrosion- resistant, plastic-lined steel pipes, fittings, tanks, valves, expansion joints and hose used primarily by the pharmaceutical, chemical processing, pulp and paper, ultra pure water and waste management industries. It also manufactures high-performance, separable fittings for operating pressures to 8,000 PSI used primarily in the aerospace industry. Resistoflex sells its industrial products through distributors who provide stocking and fabrication services to industrial users in the United States. Its aerospace products are sold directly to the aerospace industry. Resistoflex also manufactures plastic-lined pipe products at its Singapore plant serving the Asian chemical processing and the Asian pharmaceutical industries. In September 1998, the company acquired the Plastic- Lined Piping Products ("PLPP") division of The Dow Chemical Company. Manufacturing will continue at the acquired Bay City, Michigan plant. Polyflon manufactures microwave laminates, high voltage RF capacitors, radomes and circuit processing for the wireless communication, magnetic resonance imaging, microwave and radar system manufacturers. Crane Plumbing manufactures plumbing fixtures in Canada. Its products are sold through distributors in Canada and it has a large share of the Canadian plumbing fixtures market. CRANE CONTROLS This segment includes five businesses: Barksdale, Powers Process Controls, Dynalco Controls, Azonix, and Ferguson. The companies in this segment design, manufacture and market industrial and commercial products that control flows and processes in various industries including the petroleum, chemical, construction, food and beverage, power generation industries and transportation. Crane Controls had assets of $127.7 million at December 31, 1998, and employs 900 people. On December 31, 1998, Crane Controls had a backlog of $28.3 million. Barksdale manufactures solid state and electromechanical pressure switches and transducers, level switches and continuous level indicators, temperature switches, and directional control valves that serve a broad range of commercial and industrial applications. It has manufacturing and marketing facilities in the United States and Germany. Powers Process Controls designs, manufactures and markets water mixing and thermal shock protection shower systems, commercial and residential plumbing brass, correctional water controllers, process controllers and instrumentation , process control valves and temperature regulators for industrial applications and the commercial and institutional construction industry. Dynalco Controls designs and manufactures rotational speed sensors, temperature and pressure instruments and monitors for rugged environments, microprocessor based engine and mechanism controls. Dynalco's products are used worldwide by industries in a variety of applications, including stationary natural gas engines, power generation, oil and gas production and transmissions, and agriculture equipment. Azonix manufactures operator interfaces and measurement and control systems for hazardous and harsh applications, intelligent data acquisition products, high-precision thermometers and calibrators for the oil and gas, petrochemical, chemical, pharmaceutical and metal processing industries. 6 PART I (continued) Item 1. Business (continued) -------- CRANE CONTROLS (continued) Ferguson designs and manufactures in the United States and through Ferguson Machine Co. S.A. in Europe, precision index and transfer systems for use on and with machines that perform automatic forming, assembly, metal cutting, testing and inspection operations. Products include mechanical and electronic index drives, pick-and-place robots, in line transfer machines, rotary tables, press feeds and custom cams. The products in this segment are sold directly to end users, and engineering contractors through the company's own sales forces and cooperatively with sales representatives, stocking specialists and industrial distributors. MERCHANDISING SYSTEMS The Merchandising Systems segment has two operating units: National Vendors, the industry leader in the design and manufacture of a complete line of vending merchandisers for the food/service vending market; and NRI, which manufactures electronic coin validators in Buxtehude, Germany for the automated merchandising and gambling/amusement markets in Europe. National Vendors products include electronic vending merchandisers for refrigerated and frozen foods, hot and cold beverages, snack foods, single cup individually brewed hot drinks and combination vendors/merchandisers, designed to vend both snack foods and hot/cold drinks, or snacks and refrigerated/frozen foods in one machine. National Vendors manufactures its products in a 463,000 sq. ft. state of the art facility in Bridgeton, Missouri. National Vendors' products are marketed to customers in the United States and Europe by company sales and marketing personnel as well as distributors, and in other international markets through independent distributors. Merchandising Systems employs 1,150 people and had assets of $117.9 million at year-end 1998. Order backlog totaled $22.1 million at December 31, 1998. WHOLESALE DISTRIBUTION The company distributes millwork products through its wholly owned subsidiary, Huttig Sash & Door Company ("Huttig"). These products include doors, windows, moldings and related building products. Huttig assembles certain of these products to customer specification prior to distribution. Its principal customers are building material dealers, building contractors and home remodelers that service the new construction and remodeling markets. Wholesale operations are conducted nationally through forty-six distribution centers throughout the United States, in both major and medium-sized cities. Huttig's sales are made on both a direct shipment and out-of-warehouse basis entirely through its own sales force. Huttig also manufactures specialty molding and millwork products at its Prineville, Oregon facility. The majority of the molding products are sold to third parties but Huttig is the largest customer. In 1996, Huttig closed its manufacturing plant in Montana, where it produced certain of the above products and other finished lumber. Crane Supply, a distributor of plumbing supplies, valves and piping in Canada, maintains thirty-five branches throughout Canada and distributes Crane manufactured products in that country. Crane Supply also distributes products that are both complementary to and competitive with Crane's own manufactured products. Wholesale Distribution employs 2,800 people and had assets of $233.1 million at year end 1998. 7 PART I (continued) Item 1. Business (continued) -------- OTHER The other segment consists of Crane Defense Systems, which is engaged in the development and manufacture of specialized handling systems, elevators, winches, ground support equipment, cranes and associated electronics. These products are sold directly to the government, defense contractors and commercial shipbuilders. COMPETITIVE CONDITIONS The company's lines of business are conducted under actively competitive conditions in each of the geographic and product areas they serve. Because of the diversity of the classes of products manufactured and sold, they do not compete with the same companies in all geographic or product areas. Accordingly, it is not possible to estimate the precise number of competitors or to identify the principal methods of competition. Although reliable statistics are not available, the company believes that it is an important supplier to a number of market niches and geographic areas. The company's products have primary application in the industrial, construction, aerospace, automated merchandising, transportation, and fluid handling industries. As such, they are dependent upon numerous unpredictable factors, including changes in market demand, general economic conditions, residential and commercial building starts, and capital spending. Because these products are also sold in a wide variety of markets and applications, the company does not believe it can reliably quantify or predict the possible effects upon its business resulting from such changes. Seasonality is a factor in Huttig and the Canadian operations. The company's engineering and product development activities are directed primarily toward improvement of existing products and adaptation of existing products to particular customer requirements. While the company owns numerous patents and licenses, none are of such importance that termination would materially affect its business. Product development and engineering costs totaled approximately $72,400,000 in 1998, $56,800,000 in 1997, and $52,000,000 in 1995. Included in these amounts were approximately $15,800,000, $9,500,000 and $10,300,000 received by the company in 1998, 1997 and 1996, respectively, for customer sponsored research and development. The company is not dependent on any single customer nor are there any issues at this time regarding available raw materials for inventory. Costs of compliance with federal, state and local laws and regulations involving the discharge of materials into the environment or otherwise relating to the protection of the environment are not expected to have a material effect upon the company's capital expenditures, earnings or competitive position. 8 PART I (continued) Item 1. Business (continued) -------- Forward Looking Statements -------------------------- Throughout the Annual Report to Shareholders, particularly in the Letter to Shareholders and Management's Discussion and Analysis of Operations, the company makes numerous statements about expectations of future performance and market trends, and statements about plans and objectives and other matters, which because they are not historical fact may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, the company and its representatives may from time to time make written or oral forward-looking statements, including statements contained in the company's filings with the Securities and Exchange Commission and in its reports to shareholders, which can be identified by the use of forward-looking terminology such as "believes", "contemplates", "expects", "may", "will", "could", "should", "would" or "anticipates" or the negative thereof or comparable terminology. All forward-looking statements speak only as of the date on which such statements are made and involve risk and uncertainties that exist in the company's operations and business environment and are not guarantees of future performance. The company assumes no obligation to update any of these forward- looking statements, whether as a result of new information or future events. As a responsibility to our investors, the company will make reasonable efforts at timely disclosure of future facts and circumstances which may affect such statements. Because the company wishes to take advantage of the "safe harbor" provision of the Private Securities Litigation Reform Act of 1995, readers are cautioned to consider the following important risk factors that could affect the company's businesses and cause actual results to differ materially from those projected. General A substantial portion of the sales of the company's business segments are concentrated in industries which are cyclical in nature. Because of the cyclical nature of these businesses, their results are subject to fluctuations in domestic and international economies, as well as to currency fluctuations and unforeseen inflationary pressures. Reductions in the business levels of these industries would impact negatively on the sales and profitability of the affected business segments. While the company is a principal competitor in most of its markets, all of its markets are highly competitive. The company's competitors in many of its business segments can be expected in the future to improve technologies, reduce costs and develop and introduce new products, and the ability of the company's business segments to achieve similar advances will be important to their competitive positions. Competitive pressures, including those discussed above, could cause one or more of the company's business segments to lose market share or could result in significant price erosion, either of which would have an adverse effect on the company's results of operations. The company's acquisition program entails the potential risks inherent in assessing the value, strengths, weaknesses, contingent or other liabilities and potential profitability of acquisition candidates and in integrating the operations of acquired companies. There can be no assurance that suitable acquisition opportunities will be available in the future, that the company will continue to acquire businesses or that any business acquired will be integrated successfully or prove profitable. 9 PART I (continued) Item 1. Business (continued) -------- Forward Looking Statements (continued) - --------------------------- The company has substantial operations and sales outside the United States. Such operations and transactions entail the risks associated with conducting business internationally, including the risk of currency fluctuations, slower payment of invoices, adverse trade regulations and possible social and economic instability. While the full impact of this economic instability cannot be predicted, it could have a material adverse effect on the company's revenues and profitability. Certain of the company's business segments are dependent upon highly qualified personnel, and the company generally is dependent upon the continued efforts of key management employees. Particularly in light of the current tight labor market, the company's prospects would be adversely affected by an inability to retain its key personnel. New factors emerge from time to time, and it is not possible for management to predict all of such factors. Further, management cannot assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Fluid Handling Results for the Fluid Handling segment could be affected in the event of unanticipated difficulties in assimilating newly acquired valve businesses into existing operations. In addition, Crane's companies could face increased price competition from larger competitors. Asia's economic turmoil could reduce sales and profits, particularly if major projects for which Crane companies are suppliers or bidders are cancelled or delayed, or if the companies' ability to source product from international sources is impeded. Aerospace A significant fall-off in demand for air travel or a decline in airline profitability generally could result in reduced aircraft orders, and could also cause the airlines to scale back their purchases of repair parts from Crane companies. The companies could also be impacted if major aircraft manufacturers encountered production problems, or if pricing pressure from aircraft customers caused the manufacturers to press their suppliers to lower prices. Sales and profits could face erosion if pricing pressure from competitors increased, if planned new products were delayed, if finding new aerospace-qualified suppliers grew more difficult, or if required technical personnel became harder to hire and retain. Aerospace segment results could be below expectations if Asia's economic problems lead to a decline in aircraft orders, particularly since the new, long-range Boeing aircraft favored for many Asian routes contain a higher value of Crane-supplied equipment than other aircraft from Boeing and other manufacturers. Engineered Materials In the Engineered Materials segment, sales and profits could fall if there were a decline in demand for truck trailers, recreational vehicles or building products, for which Crane companies produce fiberglass-reinforced panels. Profits could be squeezed as well by unanticipated increases in resin and fiberglass material costs, by unforeseen fluctuations in the Canadian dollar, and by any inability on the part of Crane's companies to maintain their position in product cost and functionality against competing materials. 10 PART I (continued) Item 1. Business (continued) -------- Forward Looking Statements (continued) - --------------------------- Merchandising Systems Results at Crane's U.S.-based vending machine business could be reduced by delays in launching or supplying new products or an inability to achieve new product sales objectives. Results at Crane's Germany-based coin validation machine business could be affected by changes in demand stemming from the advent of the Euro, the planned new European currency, as well as by unforeseen fluctuations in the value of the Deutschemark versus the U.S. dollar. Controls A number of factors could affect the Controls segment's results. Lower sales and earnings could result if Crane's companies can not maintain their cost competitiveness, encounter delays in introducing new products, or fail to achieve their new product sales objectives. Results could decline because of an unanticipated decline in demand for Crane products from the industrial machinery, oil and gas, and heavy equipment industries, or from unforeseen product obsolescence. Wholesale Distribution Sales in the Wholesale Distribution segment are significantly affected by the strength of the domestic housing market, and a decline in housing starts could have a negative impact on results. Decisions by some major suppliers to change their distribution channels, bypassing Crane's wholesale distribution network, could also diminish sales and profits. At Crane's Canadian wholesale distribution operation, reported results in U.S. dollar terms could be eroded by an unanticipated weakening of Canada's currency. Impact of the Year 2000 The "Year 2000" issue concerns the potential exposures related to the automated generation of business and financial misinformation resulting from the application of computer programs which have been written using two digits, rather than four, to define the applicable year of business transactions. Suppliers, customers and creditors of the company also face Year 2000 issues. A failure to successfully address the Year 2000 issue could have a material adverse effect on the company's business or results of operations. The discussion of the Impact of the Year 2000 contained on Pages 33 and 34 of the company's 1998 Annual Report under Management's Discussion and Analysis of Operations is incorporated herein by reference. 11 PART I (continued) Item 2. Properties ---------- TOTAL MANUFACTURING FACILITIES NUMBER AREA - ------------------------------ ------ ---- Fluid Handling United States 17 1,431,000 sq. ft. Canada 2 140,000 sq. ft. International 10 1,261,000 sq. ft. Aerospace United States 6 653,000 sq. ft. International 4 47,000 sq. ft. Engineered Materials United States 10 1,235,000 sq. ft. Canada 3 601,000 sq. ft. International 1 10,000 sq. ft. Crane Controls United States 7 412,000 sq. ft. International 2 63,000 sq. ft. Merchandising Systems United States 1 463,000 sq. ft. Other International 1 77,000 sq. ft. Wholesale Distribution 1 577,000 sq. ft. Other 1 113,000 sq. ft.
Leased Leases Manufacturing Expiring Facilities Number Area Through ------------- ------ ---- ------- United States 12 560,000 sq. ft. 2006 Canada 1 13,000 sq. ft. 2000 Other International 7 99,000 sq. ft. 2013
Other Facilities ---------------- Fluid Handling operates six valve service centers in the United States, of which four are owned, and four distribution centers in the United States. This segment operates internationally five distribution and three service centers. Crane Controls operates one distribution center internationally. Merchandising Systems operates eight distribution centers in the United States and seven internationally. Engineered Materials operates eight distribution centers in the United States, of which one is owned, and three internationally. This segment operates three service centers internationally. Wholesale Distribution has forty-eight Huttig branch warehouses in the United States, of which twenty-one are owned. The Canadian wholesale operation maintains thirty-five distribution branch warehouses in Canada, of which twelve are owned. In the opinion of management, these properties have been well maintained, are in sound operating condition, and contain all necessary equipment and facilities for their intended purposes. 12 PART I (continued) Item 3. Legal Proceedings Neither the company, nor any subsidiary of the company has become a party to, nor has any of their property become the subject of, any material legal proceedings, other than ordinary routine litigation incidental to their businesses. The following proceedings are not considered by the company to be material to its business or financial condition and are reported herein because of the requirements of the Securities and Exchange Commission with respect to the descriptions of administrative or judicial proceedings by governmental authorities arising under federal, state or local provisions regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. On July 12, 1985 the company received written notice from the United States Environmental Protection Agency (the "EPA") that the EPA believes the company may be a potentially responsible party ("PRP") under the Federal Comprehensive Environmental Response Compensation and Liability Act of 1980 ("CERCLA") to pay for investigation and corrective measures which may be required to be taken at the Roebling Steel Company site in Florence Township, Burlington County, New Jersey (the "Site") of which its former subsidiary, CF&I Steel Corporation ("CF&I") was a past owner and operator prior to the enactment of CERCLA. The stated ground for the EPA's position was the EPA's belief that the company had owned and/or operated the Site. The company had advised the EPA that such was not the case and does not believe that it is responsible for any testing or clean-up at the Site based on current facts. The EPA has identified sources and areas of contamination at the Roebling Site which must be examined for potential environmental damage. The EPA has disclosed that two surface clean-ups have been performed at a cost in excess of $19 million. IN July 1996, the EPA completed a third Focused Feasibility Study which defined the nature of the contaminants and evaluated appropriate remedial alternatives, and the EPA estimated the cost of its preferred clean-up alternative at $38 million. On November 7, 1990 CF&I filed a petition for reorganization and protection under Chapter 11 of the United States Bankruptcy Code. In the bankruptcy proceeding of CF&I, the EPA was allowed an unsecured claim against CF&I for $27.1 million related to the EPA's environmental investigations and remediation at the Roebling Site. In June 1996 the company received a Section 104 request issued by the EPA under CERCLA seeking information about the company's (and CF&I's) connection to the Roebling Site. On August 26, 1996, the company filed its response to the Section 104 Request and, to date, has received no further communications from the EPA concerning the Roebling Site. Based on the facts and circumstances summarized above, the company does not believe it is responsible for any portion of the Roebling Site clean-up. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of 1998. 13 PART I (continued) EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the registrant are as follows:
Officer Name Position Business Experience Age Since - ---- -------- ------------------- --- ------- Robert S. Evans Chairman and Chief Chairman and Chief 54 1974 Executive Officer Executive Officer of the company since 1984 and previously President of the company L. Hill Clark President and President and Chief Operating 54 1994 Chief Operating Officer, previously Executive Vice Officer President of the company, President of Lear Romec, and previously held various positions within Allied Signal Inc., a diversified manufacturing company Augustus I. duPont Vice President, Vice President and General 47 1996 General Counsel Counsel and Secretary of and Secretary the company, previously Vice President, General Counsel and Secretary of Reeves Industries, Inc.,* a manufacturer of apparel textiles and industrial coated fabrics, from May 1994 to December 1995; Vice President, General Counsel and Secretary of Sprague Technologies, Inc., a manufacturer of electronic components, from May 1987 to December 1993 Bradley L. Ellis Vice President- Vice President-Chief 30 1997 Chief information Information Officer of the Officer company, previously with the Business systems consulting group of Arthur Andersen LLP. Anthony D. Pantaleoni Vice President Vice President - Environment, 44 1989 Environment, Health & Safety of the company Health & Safety John R. Packard (1) Vice President Vice President - Human 44 1999 Human Resources Resources of the company, Previously Human Resources Director for Fortune Brands, Inc. David S. Smith Vice President- Vice President - Finance 41 1991 Finance and and Chief Financial Officer Chief Financial of the company, previously Officer Vice President - Corporate Development of the company
(1) Effective January 25, 1999 14 PART I (continued) EXECUTIVE OFFICERS OF THE REGISTRANT(continued)
Officer Name Position Business Experience Age Since - ---- -------- ------------------- --- ------ Michael L. Raithel Controller Controller of the company 51 1985 Gil A. Dickoff Treasurer Treasurer of the company, 37 1992 previously Assistant Treasurer of the company
Certain Proceedings - ------------------- * Reeves Industries, Inc., a corporation which Mr.duPont served as Vice President, General Counsel and Secretary from May 1994 to December 1995, filed a petition and Plan of Reorganization for a consensual debt restructuring under Chapter 11 of the United States Bankruptcy Code on November 21, 1997. PART II Item 5. Market for the registrant's common stock and related stockholder matters. The information required by Items 5 is hereby incorporated by reference to Pages 35 through 37 of the 1998 Annual Report to Shareholders. Item 6. Selected Financial Data. The information required by Items 6 is hereby incorporated by reference to Pages 35 of the 1998 Annual Report to Shareholders. Item 7. Management's Discussion and Analysis of financial condition and results of operations. The information required by Items 7 is hereby incorporated by reference to Pages 23 through 34 of the 1998 Annual Report to Shareholders. Item 7A. Quantitative and Qualitative disclosures about market risks. The company's cash flows and earnings are subject to fluctuations from changes in interest rates and foreign currency exchange rates. The company manages its exposures to these markets risks through internally established policies and procedures and, when deemed appropriate, through the use of interest rate swap agreements and forward exchange contracts. Long term debt outstanding of $359,877 at December 31,1998 was generally at fixed rates of interest ranging from 6 3/4% to 8 1/2%. At December 31,1998 no interest rate swap agreements were outstanding and the amounts outstanding for forward exchange contracts were not material. The company does not enter into derivatives or other financial instruments for trading or speculative purposes. Item 8. Financial Statements and supplementary data. The information required by Items 8 is hereby incorporated by reference to Pages 9 through 35 of the 1998 Annual Report to Shareholders. Item 9. Changes in and Disagreements with accountants on Accounting and Financial Disclosure None PART III Item 10. Directors and Executive Officers of the Registrant The information required by Item 10 is incorporated by reference to the definitive proxy statement dated February 23, 1999, which the company has filed with the Commission pursuant to Regulation l4A except that such information with respect to Executive Officers of the Registrant is included, pursuant to Instruction 3, paragraph (b) of Item 401 of Regulation S-K, under Part I. 15 PART III (continued) Item 11. Executive Compensation The information required by Item 11 is incorporated by reference to the definitive proxy statement dated February 23, 1999, which the company has filed with the Commission pursuant to Regulation l4A. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by Item 12 is incorporated by reference to the definitive proxy statement dated February 23, 1999, which the company has filed with the Commission pursuant to Regulation 14A. Item 13. Certain Relationships and Related Transactions The information required by Item 13 is incorporated by reference to the definitive proxy statement dated February 23, 1999, which the company has filed with the Commission pursuant to Regulation 14A. PART IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K (a)(1) The consolidated balance sheets of Crane Co. and subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of income, changes in common shareholders' equity and cash flows for the years ended December 31, 1998, 1997 and 1996 and the report thereon of Deloitte & Touche LLP dated January 20, 1999 appearing on Pages 9 through 22 of Crane Co.'s 1998 Annual Report to Shareholders which will be furnished with the company's proxy statement as required by Regulation 14A, Rule 14a-3(c), are incorporated herein by reference (2) Financial statement schedules for which provision is made in the applicable regulation of the Securities and Exchange Commission have been omitted because they are not required under related instructions or are inapplicable, or the information is shown in the financial statements and related notes. (3) Exhibits: Exhibit 10: Material Contracts: The Crane Co. Stock Option Plan, as amended through April 20,1998 Exhibit 11: Computation of net income per share. Exhibit 13 Annual Report to shareholders for the year ended December 31, 1998. Exhibit 21: Subsidiaries of the Registrant. Exhibit 23: Independent auditors' consent. (b) Reports on Form 8-K: Form 8-K filed 12/15/98 regarding reaffirming offer to shareholders of Coltec Industries Inc. 16 PART IV (continued) Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (continued) (c) Exhibits to Form 10-K: (3) There is incorporated by reference herein: (a) The company's Certificate of Incorporation contained in Exhibit D (Certificate of Designation) to the company's Annual Report on Form 10-K for the fiscal year ended December 31, 1987. (b) The company's By-laws contained in Exhibit A to the company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. (4) Instruments Defining the Rights of Security Holders, including Indentures: (a) There is incorporated by reference herein: (1) Preferred Share Purchase Rights Agreement contained in Exhibit 1 to the company's Report on Form 8-K filed with the Commission on July 6, 1998. (b) There is incorporated by reference herein: 1) Indenture dated as of April 1,1991 between the Registrant and the Bank of New York contained in Exhibit 4.1 to the company's report on Form 8-K filed with the Commission on September 16, 1998. (10) Material Contracts: (iii)Compensatory Plans There is incorporated by reference herein: (a) The Crane Co. Restricted Stock Award Plan as amended through May 6, 1996, contained in Exhibit A to the company's Form 10-Q for the quarter ended March 31, 1996. (b) The forms of Employment/Severance Agreement between the company and certain executive officers (form I) and (form II) which provide for the continuation of certain employee benefits upon a change of control as contained in Exhibit C of the company's annual report on Form 10-K for the fiscal year ended December 31, 1994. (c) The E.V.A. incentive compensation plan contained in Exhibit B to the company's annual report on Form 10-K for the fiscal year December 31, 1994. (d) The Crane Co. Non-Employee Directors Restricted Stock Award Plan as amended through May 10, 1993 contained in Exhibit B to the company's annual report on Form 10-K for the fiscal year ended December 31, 1993. (e) The indemnification agreements entered into with each director and executive officer of the company, the form of which is contained in Exhibit C to the company's definitive proxy statement filed with the Commission in connection with the company's April 27, 1987 Annual Meeting. (f) The Crane Co. Retirement Plan for Non-Employee Directors contained in Exhibit E to the company's Annual Report on Form 10-K for the fiscal year ended December 31, 1988. 17 PART IV (continued) (g) The Crane Co. 1998 Stock Option Plan contained in Exhibit 4.1 to the company's Registration Statement No. 333-50489 on Form S-8 filed with the Commission on April 20, 1998. (h) The Crane Co. 1998 Restricted Stock Award Plan contained in Exhibit 4.1 to the company's Registration Statement No. 333- 50487 on Form S-8 filed with the Commission on April 20, 1998. (i) The Crane Co. 1998 Non-Employee Director Restricted Stock Award Plan contained in Exhibit 4.1 to the company's Registration Statement No. 333-50495 on Form S-8 filed with the Commission on April 20, 1998. All other exhibits are omitted because they are not applicable or the required information is shown elsewhere in this Annual Report on Form 10-K. 18 SIGNATURES Pursuant to the requirements of Section l3 or l5(d) of the Securities Exchange Act of l934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CRANE CO. ------------------- (Registrant) By /s/ D. S. Smith ------------------------- D. S. Smith Vice President-Finance and Chief Financial Officer Date 2/22/99 ------- Pursuant to the requirements of the Securities Exchange Act of l934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. OFFICERS /s/ R. S. Evans ------------------------- R. S. Evans Chairman, Chief Executive Officer and Director Date 2/22/99 ------- /s/ D. S. Smith /s/ M. L. Raithel ------------------------------- ------------------------------ D. S. Smith M. L. Raithel Vice President-Finance and Controller Chief Financial Officer Principal Accounting Officer Date 2/22/99 Date 2/22/99 ------- ------- DIRECTORS /s/ E. T. Bigelow, Jr. /s/ R.S. Forte ------------------------------ ---------------- E. T. Bigelow, Jr. R.S. Forte Date 2/22/99 Date 2/22/99 ------- ------- /s/ D.R. Gardner /s/ D. C. Minton - ------------------------------ ----------------- -------------------------- D.R. Gardner W.E. Lipner D. C. Minton Date 2/22/99 Date 2/22/99 ------- ------- /s/ C.J. Queenan, Jr. /s/ J.L.L.Tullis - --------------------------- ---------------------- --------------- C.J. Queenan, Jr. J.L.L.Tullis B. Yavitz Date 2/22/99 Date 2/22/99 ------- ------- 19 EX-10 2 STOCK OPTION PLAN Exhibit 10 THE CRANE CO. STOCK OPTION PLAN (as of 4/20/98) 1. Full power and authority to construe, interpret and administer this Plan shall be vested in the Organization and Compensation Committee of the Board of Directors of Crane Co. ("Committee"), which shall consist of not less than three nonemployee Directors appointed by the Board of Directors; provided, however, if any member of the Committee does not meet the qualifications for an "outside director" established from time to time by Section 162(m) of the Internal Revenue Code and any proposed or future regulations thereunder ("Section 162(m)"), the remaining members of the Committee (but not less than two) shall administer the Plan. No member of the Committee shall be eligible to receive stock options. Decisions of the Committee shall be final, conclusive and binding upon all parties including the Company, the shareholders and the employees. 2. The stock which may be issued and sold under this Plan will be common shares of Crane Co., a Delaware corporation (herein called the "Company"), of a total number not exceeding 500,000 shares (hereinafter the "stock," "Common Shares," "Common Stock" or "shares") together with an additional 750,000 Common Shares of the Company authorized by the 1987 Amendment to this Plan, together with an additional 1,000,000 common shares authorized by the 1991 Amendment to this Plan, together with an additional 1,000,000 common shares authorized by the 1995 amendments to this Plan which may be either authorized and unissued shares or issued shares reacquired by the Company. The Committee may in its discretion, from time to time, grant options to purchase stock to persons who are key employees of the Company or any subsidiary in which the Company owns directly or indirectly a majority of the voting stock. The term "key employees" shall mean officers as well as other employees (including officers and other employees who are also directors of the Company or of any subsidiary) determined to be such by the Committee in its discretion upon the recommendation of management, but shall not include any employee who, after the grant of such option, owns more than 10% of the combined voting power of all classes of stock of the Company or any subsidiary. The maximum number of shares for which options may be granted under the Plan to any single individual in any year shall not exceed 200,000 shares. Options under the Plan may be incentive stock options ("Incentive Stock Options") within the meaning of Section 422 of the Internal Revenue Code of 1986 as the same may be amended from time to time (the "Code"), or nonqualified stock options. Except as provided in paragraph 5, any shares subjected to an option under the Plan which, for any reason, expire or are terminated without having been exercised, shall continue to be available for future options under the Plan. Options granted hereunder shall be evidenced by agreements in such form as the Committee shall approve, which agreements shall comply with and be subject to the terms and conditions of this Plan. 3. The price per share of options granted hereunder shall in no instance be less than 100% of the fair market value of the stock on the date options are granted. Fair market value as of any day shall, for all purposes in this Plan, be determined by the average of the high and low prices of the stock on the New York Stock Exchange-Consolidated Trading on that day, or if no sale of stock has been recorded on such day, then on the next preceding day on which a sale was so made ("Fair Market Value"). In the event that there is an increase in the number of issued common shares of the Company by reason of stock dividends or stock split-ups, the total number of shares which may be optioned and the number of shares remaining subject to purchase under each outstanding option shall be increased and the price per share in such outstanding options shall be decreased, in proportion to such increase in issued shares. Conversely, in case the issued common shares of the Company shall be combined into a smaller number of shares, the total number of shares which may be optioned and the number of shares remaining subject to purchase under each outstanding option shall be decreased and the price per share in such outstanding options shall be increased, in proportion to such decrease in issued shares. In the event of any merger, consolidation, reorganization or liquidation in part or in whole, the Committee may make such adjustment in the shares which may be optioned and the shares previously optioned and the price thereof as the Committee in its reasonable discretion, deems appropriate. In 20 the event of an exchange of shares, or other securities of the Company convertible into common shares, for the stock or securities of another corporation, the Committee may, in the exercise of its discretion, equitably substitute such new stock or securities for a portion or all of the option shares. 4. Each option granted under this Plan shall be exercisable in whole or in part (in lots of ten shares or any multiple thereof) from time to time beginning from the date the option is granted, subject to the provision that an option may not be exercised by the optionee, except as provided in paragraphs 7 and 9 hereof, (a) more than three months after the termination of his employment by the Company or a subsidiary, or (b) more than ten years from the date the option is granted, whichever period is shorter, or (c) prior to the expiration of one year from the date the option is granted, and provided further that options may not be exercised in excess of 50% of the total shares optioned to him during the second year after the date of grant, 75% during the third year, and 100% thereafter. The purchase price of the shares purchased upon the exercise of an Option shall be paid in full at the time of exercise in cash or in whole or in part with Common Shares. The value of each share delivered in payment of all or part of the purchase price upon the exercise of an Option shall be the Fair Market Value of a Common Share on the date the Option is exercised. 5. The Committee, upon such terms and conditions as it shall deem appropriate, may (but shall not be obligated to) authorize on behalf of the Company the acceptance of the surrender of the right to exercise an Option or a portion thereof (but only to the extent and in the amounts that such Option shall then be exercisable) and the payment by the Company therefor of an amount equal to the excess of the Fair Market Value on the date of surrender of the Shares covered by such Option or portion thereof over the option price of such Shares. Such payment shall be made in Common Shares (valued at such Fair Market Value), or in cash, or partly in cash and partly in Common Shares, as the Committee shall determine. The Common Shares covered by any Option or portion thereof, as to which the right to exercise shall have been so surrendered, shall not again be available for the purposes of the Plan. 6. Each option granted under the plan to an employee shall not be transferable by him otherwise than by will or the laws of descent and distribution, and shall be exercisable, during his lifetime, only by him. Notwithstanding the foregoing, from and after April 20, 1998 non-qualified stock options may be transferred, without payment of consideration, to immediate family members of the optionee or to trusts or partnerships for the benefit of such family members. 7. If an optionee shall retire or if he shall cease to be employed by the Company or by a subsidiary by reason of permanent disability or after a change in control as defined in paragraph 8 hereof, such optionee may exercise such Option in whole or in part, and/or the Committee may authorize the acceptance of the surrender of the right to exercise such Option or any portion thereof as provided in paragraph 5 hereof, at any time within three months after such retirement, termination by reason of permanent disability, or termination after a change in control, but not after the expiration of the term of the Option. 8. For purposes of this Plan, the term "change in control" shall mean (i) the first purchase of shares pursuant to a tender offer or exchange (other than a tender offer or exchange by the Company) for all or part of the Company's Common Stock or any securities convertible into such Common Stock, (ii) the receipt by the Company of a Schedule 13D or other advice indicating that a person is the "beneficial owner" (as that term is defined in Rule 13d-3 under the Securities Exchange Act of 1934) of 20% or more of the Company's Common Stock calculated as provided in paragraph (d) of said Rule 13d-3, (iii) the date of approval by stockholders of the Company of an agreement providing for any consolidation or merger of the Company in which the Company will not be the continuing or surviving corporation or pursuant to which shares of Common Stock of the Company would be converted into cash, securities or other property, other than a merger of the Company in which the holders of Common Stock of the Company immediately prior to the merger would have the same proportion of ownership of common stock of the surviving corporation immediately after the merger, (iv) the date of the approval by stockholders of the Company of any sale, lease, exchange or other transfer (in one 21 transaction or a series of related transactions) of all or substantially all the assets of the Company or (v) the adoption of any plan or proposal for the liquidation (but not a partial liquidation) or dissolution of the Company. 9. If an optionee shall die while employed by the Company or by a subsidiary or within three months of the cessation or termination of such employment, all options theretofore granted to him may be exercised in whole or in part, and/or the Committee may authorize the acceptance of the surrender of the right to exercise such option or any portion thereof as provided in Paragraph 5 hereof, by the estate of such optionee (or by a person who shall have acquired the right to exercise such option by bequest or inheritance), at any time within one year after the death of such optionee but only to the extent the optionee was entitled to exercise the option on the date of his death, and not after the expiration of the term of the option. 10. Neither the adoption of the Plan by the Board nor the submission of the Plan to the stockholders of the Company for approval shall be construed as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, and such arrangements may be either applicable generally or only in specific cases. 11. Incentive Stock Options shall be subject to the following provisions: (i) With respect to each Incentive Stock Option granted prior to February 1, 1987, to the extent required by Section 422 of the Code and the rules and regulations of the Internal Revenue Service (a) each such option (x) shall not be exercisable or surrenderable by the employee to whom it was granted while there is outstanding any other Incentive Stock Option (including any option or portion thereof that the Committee elects to treat as an Incentive Stock Option) that was previously granted to such employee by the Company or a subsidiary (determined at the time of granting of such option) or a predecessor of any of such corporations and (y) shall be surrenderable only when the Fair Market Value of the Common Stock which may be purchased upon exercise of the Incentive Stock Option exceeds the option price (an Incentive Stock Option shall be treated as outstanding for the purpose of clause (x) above until it is exercised or surrendered in full or has expired by reason of lapse of time); (b) The aggregate Fair Market Value (determined as of the time each Incentive Stock Option is granted) of the Common Stock for which any employee may be granted Incentive Stock Options in any calendar year (under all plans of the Company and its subsidiaries which provide for the granting of Incentive Stock Options) shall not exceed $100,000 plus any unused limit carryover to such year, determined in accordance with Section 422 of the Code. (ii) Incentive stock options granted after the effective date of the 1987 amendment to the 1984 plan ("1987 Incentive Options") may be granted without limitation as to amount or market value provided however that the aggregate Fair Market Value of shares of Common Stock with respect to which options are exercisable for the first time during any calendar year as determined as of the date of grant may not exceed $100,000. Any material variations or ambiguities between this Plan and said Code and the rules and regulations shall be resolved in favor of the latter. (iii) If Section 422 of the Code is amended or the rules and regulations thereunder are changed, the Committee may, subject to the provisions of Paragraph 13, revise the terms of the Incentive Stock Options previously granted or thereafter granted to comply with or to the extent permitted by such amendments or changes. Provided, however, it is intended that this Plan fulfills and shall fulfill at all times, the requirements of Section 422A of the Internal Revenue Code of 1986, or subsequent amendments thereto and the rules and regulations promulgated thereunder, as the same relate to Incentive Stock Options. 12. The obligation of the Company to sell and deliver shares under the options shall be subject to, as deemed necessary or appropriate by counsel for the Company, (i) all applicable laws, rules and regulations and such approvals by any governmental agencies as may be required, including, without limitation, the effectiveness of a registration statement under the Securities Act of 1933, and (ii) the condition that such shares shall have been duly listed on such stock exchanges as the Company's Common Shares are then listed. 22 13. The Plan may be abandoned or terminated at any time by the Board of Directors except with respect to any options then outstanding under the Plan, and any option granted under this Plan may be terminated at any time by the optionee. The Board of Directors may make such changes in and additions to the Plan as it may deem proper and in the best interest of the Company, provided, however, that no such action shall impair any option theretofore granted under the Plan, and provided further that (1) the total number of shares for which options may be granted under this Plan shall not be increased, and (2) the minimum purchase price shall not be changed. Notwithstanding the foregoing, the Board of Directors may amend or revise this Plan to comply with applicable laws or governmental regulations. In no event shall any option be granted under the Plan after May 1, 1999. 14. Anything in this Plan to the contrary notwithstanding, it is expressly agreed and understood that if any one or more provisions of the Plan shall be illegal or invalid such illegality or invalidity shall not invalidate the Plan or any other provisions thereof, but the Plan shall be effective in all respects as though the illegal or invalid provisions had not been included. 15. This Plan, as amended by the 1995 amendment thereto, shall be subject to ratification and approval by the Company's shareholders, not later than at the next annual meeting of shareholders, by the affirmative vote of the holders of a majority of the Company's stock outstanding and entitled to vote. 16. The Company shall have the right to require an Optionee to pay to the Company the cash amount of any taxes which the Company is required to withhold upon the exercise of an option granted hereunder, provided that anything contained herein to the contrary notwithstanding, the Committee may, in accordance with such rules as it may adopt, accept Common Stock received in connection with the exercise of the option being taxed or otherwise previously acquired in satisfaction of any withholding requirements or up to the entire tax liability arising from the exercise of such option. 23 EX-11 3 COMPUTATION OF NET INCOME PER SHARE CRANE CO. AND SUBSIDIARIES Exhibit 11 to FORM 10-K Annual Report for the Year Ended December 31, 1998 Computation of Net Income Per Share* (In Thousands Except Per Share Data)
Basic 1998 1997 1996 1995 1994 - ----- -------- -------- -------- -------- -------- Net Income $138,438 $112,771 $92,110 $76,337 $55,933 ======== ======== ======= ======= ======= Net income per share $ 2.02 $ 1.64 $ 1.35 $ 1.12 $ .83 ======== ======== ======= ======= ======= Weighted Average number of basic shares 68,555 68,565 68,034 68,096 67,500 Diluted ------- Net Income $138,438 $112,771 $92,110 $76,337 $55,933 Net income per share $ 2.00 $ 1.63 $ 1.34 $ 1.11 $ .82 ======== ======== ======= ======= ======= Weighted average number of Basic shares 68,555 68,565 68,034 68,096 67,500 Add: Adjustment to basic shares for dilutive stock options 813 819 566 384 201 Shares reserved for conversion of debentures - - - - 203 -------- -------- ------- ------- ------- Total weighted average number of shares 69,368 69,384 68,600 68,480 67,904 ======== ======== ======= ======= =======
*All share and per share data have been retroactively restated to reflect the three-for-two splits of common stock effected in the form of a 50% stock dividend in 1998 and 1996. 24 EX-13 4 ANNUAL REPORT EXHIBIT 13 Crane Co. 1998 ================================================================================ Annual Report ================================================================================ Our Credo o We strive for a dominant presence in niche markets. o We generate solid rates of return on invested capital and high levels of cash flow. o We use our cash effectively to grow and strengthen our existing businesses, and to acquire new businesses. o We acquire businesses that fit with our existing businesses and strengthen our position in niche markets. o We maintain an incentive compensation plan specifically designed to align the interests of management and shareholders. o We do this with one goal in mind: To build shareholder value. - --------------------------- Table of Contents Financial Highlights 1 Letter to Shareholders 2 Crane at a Glance 6 Consolidated Financial Statements 9 Notes to Consolidated Financial Statements 13 Management's Responsibility for Financial Reporting 22 Independent Auditors` Report 22 Management's Discussion and Analysis of Operations 23 Directors and Officers 36 Shareholder Information 37 - --------------------------- ================================================================================ Financial Highlights
($ and shares in thousands except per share data) 1998 1997 % Change ========================================================================================================== Summary of Operations Net Sales $2,268,505 $2,036,831 11.4% EBITDA(a) 303,918 255,054 19.2% Operating Profit 238,932 196,601 21.5% Income Before Taxes 214,641 175,837 22.1% Net Income 138,438 112,771 22.8% Cash Flow(b) 199,896 168,171 18.9% ----------------------------------------------------------------------------------- Per Share Data Basic Net Income $ 2.02 $ 1.64 23.2% Cash Flow 2.92 2.45 19.2% Diluted Net Income 2.00 1.63 22.7% Cash Flow 2.88 2.42 19.0% Dividends .37 .33 Average Basic Shares 68,555 68,565 Average Diluted Shares 69,368 69,384 ----------------------------------------------------------------------------------- Financial Position at December 31, Assets $1,454,674 $1,185,893 22.7% Net Debt 394,369 284,966 38.4% Shareholders' Equity 643,234 532,544 20.8% Market Value of Equity(c) 2,067,206 1,975,376 4.6% Market Capitalization(c) 2,461,575 2,260,342 8.9% ----------------------------------------------------------------------------------- Key Statistics Sales per Employee $ 185 $ 184 Operating Profit as a % of Sales 10.5% 9.7% Net Income as a % of Sales 6.1% 5.5% Return on Average Assets 10.4% 9.9% Return on Average Shareholders' Equity 23.8% 22.8% Net Debt to Capital 38.0% 34.9% - ----------------------------------------------------------------------------------------------------------
(a) EBITDA is earnings before interest, taxes, depreciation and amortization. (b) Cash flow is net income plus depreciation and amortization. (c) Market value of equity is number of shares of common stock outstanding times closing stock price. Market capitalization is market value of equity plus net debt. Diluted EPS [GRAPHIC] EBITDA (in millions) [GRAPHIC] Net Income (in millions) [GRAPHIC] ================================================================================ Crane Co. 1998 Annual Report 1 ================================================================================ Chairman's Letter to Shareholders I am pleased to report that Crane Co. turned in another outstanding performance in 1998, setting sales, earnings and cash flow records for the sixth consecutive year, with earnings growth exceeding 20% for the fourth straight year. All six of our business segments reported increased sales, with solid contributions from 1997 and 1998 acquisitions. Four segments had higher earnings and the gains -- particularly in aerospace -- were more than enough to establish a new profit record. Margins also improved. Sales, Earnings Rise Our sales exceeded the $2 billion mark for the second year, rising 11% to $2.3 billion. Net earnings climbed faster, reaching $138.4 million, a 23% increase over 1997's $112.8 million. Net earnings per share, adjusted for our 3-for-2 stock split in 1998, were $2.00, diluted, a gain of nearly 23% over the 1997 figure of $1.63. Strong Acquisition Program A vigorous and continuing acquisition program is a cornerstone of our growth strategy, and 1998 was an excellent year. Our acquisition effort is underpinned by -- and in turn reinforces -- our profitability, growing cash flow and strong balance sheet. Our standards are high: we look for sound, complementary businesses that can be bought at realistic prices. While we sometimes purchase stand-alone businesses, most often we make add-on acquisitions, strengthening or expanding our existing businesses by adding complementary businesses, product lines or brands. In 1998, we made six add-on acquisitions -- all complementary to our existing businesses -- at a cost of $224 million. This brings our acquisition investment since 1992 to 24 companies and $725 million, including the five acquired in 1997 at a cost of $82 million. More than half of our 1998 investment, $125 million, went for Kemlite's purchase of Sequentia Holdings, also a manufacturer of fiberglass reinforced plastic panels, whose focus is construction and building products applications. Kemlite, which had acquired Sequentia's transportation product lines in 1997, is the leader in transportation and recreational vehicle markets, and is now the market leader in building products as well, adding balance to the business and permitting a variety of manufacturing, purchasing, technical and management synergies. Also in our Engineered Materials segment, Resistoflex acquired Dow Chemical's Plastic-Lined Piping Products division, becoming the global market leader for a broader line of fluoropolymer and thermoplastic-lined piping systems for chemical processing, high purity, defense and water treatment applications. Again, there will be a number of opportunities for manufacturing, marketing and technical synergies. These are great examples of the types of acquisitions on which Crane is focused. In the Fluid Handling segment, we acquired Liberty Technologies, whose nuclear valve monitoring products and repair capabilities were added to Crane Nuclear (our Nuclear Valve business). Liberty's motor, engine and compressor monitoring products were added to Dynalco Controls. Also in Fluid Handling, we acquired Environmental Products, a maker of packaged, membrane-based water purification systems expanding our Cochrane unit's offerings to the water treatment industry. In Wholesale Distribution, Huttig Building Products, our largest single business, was expanded by the acquisition of Consolidated Lumber of ================================================================================ 2 Crane Co. 1998 Annual Report ================================================================================ Kansas City and Number One Supply of Baltimore, adding both geographic reach and enhanced marketing focus on large builders and other end user, "one-step" customers. Overall, these acquisitions added slightly to earnings and significantly to sales in 1998 and will make larger contributions in the future. We are continuing our energetic pursuit of attractive acquisition candidates. Cash Flows (Net income plus depreciation and amortization) (in millions) [GRAPHIC] A Growth Company Although Crane is viewed by some as a cyclical company, the combination of diversification, continuing acquisitions and constant attention to strengthening the performance of our approximately 30 operating businesses has given us many of the characteristics of a growth company. Chief among these is vigorous, continuing earnings growth. Because our businesses operate in so many different industries, market niches and regions, their differing cycles tend to smooth our earnings growth patterns. Acquisitions typically enhance growth in the year they are bought and in the following years. We expect to maintain the double-digit earnings growth we have enjoyed since 1992. Running More Efficiently In our businesses, there are no simple ways to improve performance. The climate we operate in is both global and increasingly competitive, requiring us to search unceasingly for ways to improve our products, distribution and cost structure and, indeed, all our manufacturing and business processes. We constantly invest in new equipment and systems -- $54.3 million in 1998, compared with $40.6 million in 1997. That is only part of the story, of course. Margin and profit improvements tend to come in small increments that add up over time. Typically they result from the focus and skill of the people in our operating companies, which we encourage in various ways. As noted in previous reports, executive compensation is geared to our Economic Value Added (EVA) program, which rewards real achievements, not just progress toward arbitrary goals. We are also making gains through our Six Sigma program, described in last year's report. Virtually all of our companies now have one or more trained "black belts," who are focusing on improving manufacturing or business processes and training their colleagues to do the same. Such efforts, coupled with volume growth at most of our businesses, increased our overall operating profit margin from 9.7% to 10.5%, a significant gain with a direct and positive impact on our bottom line. Progress in All Segments More detail on our business performance is elsewhere in this Annual Report. I encourage you to read it closely, but will comment briefly here. All six of Crane's business segments made progress during 1998. Most notable was Aerospace, three of whose four companies had handsome profit gains, fueled largely by continued strong demand from Boeing and other aircraft equipment OEMs. Hydro-Aire, ELDEC and Interpoint showed impressive growth in sales and profits. Margins and profits declined modestly on higher sales at Lear Romec but were still very strong. The Engineered Materials segment also performed well overall. Our companies improved their strong positions in the markets for fiberglass reinforced transportation and building products, with Kemlite and CorTec increasing both sales and profits and Kemlite's 1998 Sequentia acquisition making a solid profit contribution. Profits were flat at Resistoflex, on higher sales, and at Polyflon, on lower sales. Crane Plumbing, struggling in weak Canadian markets, ran at a small loss on lower sales. In our Merchandising Systems segment, National Vendors' sales and earnings rose in the U.S., assisted by its 1997 Polyvend acquisition, and ================================================================================ Crane Co. 1998 Annual Report 3 ================================================================================ in the United Kingdom and Germany. Germany-based National Rejectors improved margins and earnings on slightly lower sales. In Wholesale Distribution, profits improved as Huttig enhanced margins slightly and made sales and earnings gains with the help of 1997 and 1998 acquisitions. Crane Supply had slightly lower sales and earnings, but maintained margins. Our Fluid Handling businesses had mixed results, with a solid increase in sales but slightly lower profits. Sales and earnings increases in engineered valves were offset by a loss in commercial valves, largely the result of miscues in absorbing our 1997 Stockham acquisition, higher legal costs, and restructuring expenses in the U.K. Our pump businesses had flat results. Crane Controls reported flat sales and slightly lower earnings as a result of weak export markets and increasing price competition. All but one of our five businesses had lower earnings, although all remained solidly profitable. Crane's Financial Strength Crane ended 1998 in excellent financial condition, and we have ample ability to invest in our businesses and make further acquisitions. Although our long-term debt rose from $260.7 million in 1997 to $359.1 million, our debt-to-capitalization ratio at year-end remained a moderate 38%, compared with 34.9% at the end of 1997. We have ready access to credit on favorable terms, but our best source of funding, of course, is the cash that our businesses generate. Our businesses are profitable, increasingly so, as our 1998 margin increase attests. Cash flow, our first priority, set a new record of $2.88 per diluted share versus $2.42 in 1997. Our earnings before interest, taxes, depreciation and amortization (EBITDA) advanced from $255.1 million to $303.9 million. We invested $11.3 million in repurchasing 402,000 shares of Crane stock on the open market during the year, at an average cost of $28.22 per share. We have always been willing to repurchase shares when the market price, compared to our prospects, recommends we do so. On August 17, 1998, we announced a three-for-two stock split and a 20% increase in our quarterly dividend. A Bright Outlook Predicting worldwide business and economic conditions a year out is a dicey exercise, but our companies are well prepared to adjust as circumstances change. Accordingly, we expect another good year for Crane in 1999, with the help of a full year's results from our 1998 acquisitions. Continued strength in the domestic economy and the growth expected in Europe should help all our businesses. Russia and Brazil are major question marks and commercial air transport orders may have peaked, but there are signs of recovery in Asia, the semiconductor industry and even the oil patch. Meanwhile, we are working hard to fix our problems in the commercial valve business, and believe that our global approach, already successful in our engineered valve businesses, will succeed there as well. In all our businesses, we constantly strive to become more efficient, reduce costs and improve margins, thereby strengthening our ability to compete. Thus Crane is well positioned to continue its profitable growth, an enviable circumstance that is the result of careful planning, initiative, dedication and extremely hard work by a great many people throughout this company. I wish to express my gratitude to them, on behalf of the shareholders, and to thank our customers and suppliers for their loyalty and good will. I also want to thank our shareholders for their continuing support, which we hope will continue to be merited and well rewarded. Sincerely, /s/ R. S. Evans R. S. Evans Chairman and Chief Executive Officer February 12, 1999 ================================================================================ 4 Crane Co. 1998 Annual Report ================================================================================ 1998 Review Crane's more than thirty businesses report their results in six segments: o Fluid Handling o Aerospace o Engineered Materials o Controls o Merchandising Systems o Wholesale Distribution In the pages that follow, we discuss these results, along with the events, trends, market dynamics and management initiatives that influenced them. ---------- CRANE(R) ---------- ================================================================================ Crane Co. 1998 Annual Report 5 ================================================================================ Crane at a Glance
- --------------------------------------------------------------------------------------------------------------------------------- Fluid Handling Business Unit Products Markets Served - --------------------------------------------------------------------------------------------------------------------------------- (dollars in millions) 1998 Crane Valves Gate, globe, check and ball valves Hydrocarbon processing: refining, - -------------------------- Long Beach, CA made from bronze, cast iron, steel, petrochemical, oil and gas produc- North America stainless steel, titanium and tion and distribution and chemical Sales $454.7 Crane special corrosion-resistant alloys processing Operating Profit 27.9 Pacific Operating Margins 6.1% Flowseal Wedge plug, non-lubricated plug Power generation including nuclear - -------------------------- Jenkins valves applications Center Line Stockham HF acid valves Industrial, municipal, commercial Triangle and institutional construction, Duo-Check Dual disc wafer check valves water and sewage, building and engineering services Crane Nuclear, Inc. High performance and resilient Kennesaw, GA seat butterfly valves Pulp and paper Crane Ltd. Cryogenic valves Commercial heating, ventilation Ipswich, U.K. and air conditioning (HVAC) Valve diagnostics, repair, Crane Australia Pty., Ltd. contract maintenance and Marine, cryogenic applications Sydney, Australia "in-line" services Stockham Valves, Ltd. Pipe fittings Belfast, N. Ireland Wigan, U.K. Stockham Australia Pty., Ltd. Thomastown, Australia Westad Industri A/S Geithus, Norway ----------------------------------------------------------------------------------------------------- Crane Pumps & Systems, Inc. Submersible wastewater and Municipal, industrial and com- Piqua, OH dewatering centrifugal, self- mercial water and wastewater, Barnes Pumps priming centrifugal, regenerative specialty industrial markets, Burks Pumps turbine, horizontal and vertical original equipment manufacturers Deming Pump turbine, sealed and sealless end (OEM), power and construction, Weinman suction and in-line centrifugal, government contracts, commer- Chempump split case, air operated cial HVAC, chemical processing, Chem/Meter diaphragm, metering pumps and pharmaceutical, pulp and paper, Process Systems pumping systems and hydrocarbon processing Sellers Rotary tank cleaners, steam injectors ----------------------------------------------------------------------------------------------------- Cochrane Inc. Water and wastewater treatment Power/steam generation, potable King of Prussia, PA units and systems water, industrial/commercial feed- water/ water recycle =====================================================================================================
================================================================================ 6 Crane Co. 1998 Annual Report
- ---------------------------------------------------------------------------------------------------------------------------------- Aerospace Business Unit Products Markets Served - ---------------------------------------------------------------------------------------------------------------------------------- (dollars in millions) 1998 ELDEC Corporation Position indication and control Commercial, business and military - -------------------------- Lynnwood, WA systems, proximity sensors, pre- aerospace, defense, electronics, and Sales $394.5 ssure sensors, mass fuel flowme- telecommunications Operating Profit 118.2 ters, power conversion systems Operating Margins 30.0% and equipment - -------------------------- ------------------------------------------------------------------------------------------------------ Hydro-Aire, Inc. Aircraft brake control and anti- Commercial transport, business Burbank, CA skid systems, including electro- and commuter, general aviation, hydraulic servo valves and mani- military and government aero- folds, embedded software and space, repair and overhaul redundant, rugged electronic controls, hydraulic control valves and landing gear sensors, fuel pumps ------------------------------------------------------------------------------------------------------ Lear Romec Lubrication and fuel pumps for Commercial and military aero- Elyria, OH aircraft, aircraft engines and space, defense industry radar cooling systems ------------------------------------------------------------------------------------------------------ Interpoint Standard and custom miniature Commercial, space and military Redmond, WA (hybrid) DC-to-DC power con- aerospace, defense industry, medical verters and custom miniature industries including implantable (hybrid) electronic circuits medical devices and industrial markets ================================================================================================================================== Engineered Materials - -------------------------- Kemlite Company, Inc. Fiberglass-reinforced plastic (frp) Recreational vehicle, truck (dollars in millions) 1998 Joliet, IL panels used as sidewalls and trailer and commercial and - -------------------------- roofs for recreational vehicles, residential construction Sales $279.0 interior wall liners and roofs Operating Profit 39.7 Sequentia, Inc. for truck trailers, and wall and Operating Margins 14.2% Strongsville, OH ceiling systems for commercial - -------------------------- and residential construction ------------------------------------------------------------------------------------------------------ CorTec Washington Court House, OH Fiberglass-reinforced laminated Trucks and truck trailers, special- composite panels for purpose trailers, marine house- transportation, construction and boats and general construction marine applications ------------------------------------------------------------------------------------------------------ Resistoflex Corrosion resistant plastic-lined Pharmaceutical, chemical Marion, NC pipe, fittings, tanks, valves, processing, pulp and paper, ultra expansion joints and hose pure water, waste management Plastic-Lined Piping Products assemblies, high performance industries, military and aerospace Warren, MI aerospace fittings for operating contractors pressures to 8,000 psi ------------------------------------------------------------------------------------------------------ Crane Plumbing Plumbing and sanitary fixtures Residential, industrial, commercial Montreal, Quebec and institutional construction and renovation markets in Canada ------------------------------------------------------------------------------------------------------ Polyflon Microwave laminates, circuit Wireless communications, Norwalk, CT processing, high voltage RF magnetic resonance imaging, capacitors, radomes microwave and radar system manufacturers ======================================================================================================
================================================================================ Crane Co. 1998 Annual Report 7 ================================================================================ Crane at a Glance
- -------------------------------------------------------------------------------------------------------------------------------- Controls Business Unit Products Markets Served - -------------------------------------------------------------------------------------------------------------------------------- (dollars in millions) 1998 Barksdale, Inc. Solid state and electromechanical Manufacturers of compressors, - -------------------------- Los Angeles, CA pressure switches and transducers, machine tools, trucks, oil and Sales $132.3 level switches and continuous level gas exploration, spa heaters, Operating Profit 8.9 indicators, temperature switches compactors, bailers and heat Operating Margins 6.7% and directional control valves tracing equipment - -------------------------- ---------------------------------------------------------------------------------------------------- Powers Process Controls Thermostatically controlled Light commercial and institutional Skokie, IL shower systems, fluid temperature facilities, chemical processing, food and pressure regulating systems, processing, pharmaceuticals, water process controllers and instrumen- and wastewater treatment tation, process control valves, light commercial plumbing brass ---------------------------------------------------------------------------------------------------- Dynalco Controls Rotational speed sensors, Industrial engine manufacturers Ft. Lauderdale, FL instruments and monitors for and users, oil and gas pipelines, rugged environments, micro- utilities, petrochemical, marine, processor based engine controls, construction and agricultural engine and compressor analyzers, equipment manufacturers machinery controls ---------------------------------------------------------------------------------------------------- Azonix Corporation Operator interfaces and measure- Oil and gas service, petrochem- Billerica, MA ment and control systems for ical, pharmaceutical, primary hazardous and harsh applications, metal processing, compressor intelligent data acquisition prod- manufacturers, rail transport, ucts, high-precision thermometers semiconductor production equip- and calibrators ment, military ship control ---------------------------------------------------------------------------------------------------- Ferguson Mechanical and electronic index Assembly, packaging, processing St. Louis, MO drives, rotary tables, pick-and- and metal working machinery place robots, precision synchronous manufacturers for the automotive, in-line transfer machines, press beverage, food, health care, and feeds, clutches and custom cams electronic industries ================================================================================================================================ Merchandising Systems - -------------------------- National Vendors Electronic vending merchandis- Automated merchandising, office (dollars in millions) 1998 Bridgeton, MO ers for refrigerated and frozen coffee service - -------------------------- foods, hot and cold beverages, Sales $191.9 snack foods, coin and currency Operating Profit 33.5 changers Operating Margins 17.5% - -------------------------- ---------------------------------------------------------------------------------------------------- National Rejectors, Inc. Electronic coin validators and Automated merchandising GmbH (NRI) changers, chip card cashless Buxtehude, Germany payment systems ================================================================================================================================ Wholesale Distribution - -------------------------- Huttig Building Products Distributor of doors, windows, Building supply dealers, home (dollars in millions) 1998 Chesterfield, MO millwork, specialty construction centers, contractors, home - -------------------------- materials and related products builders and home remodelers Sales $816.3 Operating Profit 34.1 ---------------------------------------------------------------------------------------------------- Operating Margins 4.2% - -------------------------- Crane Supply Distributor of pipe, valves, Industrial, municipal, commercial Montreal, Quebec fittings and plumbing and hydronic and institutional construction, heating related products industrial, MRO markets and fabricators ================================================================================================================================ Other - -------------------------- Crane Defense Specialized material handling sys- Military and commercial shipbuild- Conroe, TX tems, elevators, winches, ground ing, offshore oil rigs, commercial support equipment, cranes and and industrial precision fabrication related electronics and hydraulic control systems ====================================================================================================
================================================================================ 8 Crane Co. 1998 Annual Report ================================================================================ Consolidated Statements of Income For Years Ended December 31, (in thousands except per share data) 1998 1997 1996 - -------------------------------------------------------------------------------- Net Sales $ 2,268,505 $ 2,036,831 $ 1,847,732 Operating Costs and Expenses: Cost of sales 1,624,667 1,477,048 1,344,745 Selling, general and administrative 343,448 307,782 287,432 Depreciation and amortization 61,458 55,400 49,402 ----------------------------------------------------------------------------- 2,029,573 1,840,230 1,681,579 - -------------------------------------------------------------------------------- Operating Profit 238,932 196,601 166,153 Other Income (Expense): Interest income 2,774 3,072 2,527 Interest expense (27,819) (23,817) (23,420) Miscellaneous-net 754 (19) (240) ----------------------------------------------------------------------------- (24,291) (20,764) (21,133) - -------------------------------------------------------------------------------- Income Before Taxes 214,641 175,837 145,020 Provision for Income Taxes 76,203 63,066 52,910 - -------------------------------------------------------------------------------- Net Income $ 138,438 $ 112,771 $ 92,110 ================================================================================ Net Income Per Share: Basic $ 2.02 $ 1.64 $ 1.35 Diluted $ 2.00 $ 1.63 $ 1.34 Average diluted shares outstanding 69,368 69,384 68,600 Dividends Per Common Share $ .37 $ .33 $ .33 ================================================================================ See Notes to Consolidated Financial Statements ================================================================================ Crane Co. 1998 Annual Report 9 ================================================================================ Consolidated Balance Sheets
Balance December 31, (in thousands except per share data) 1998 1997 ============================================================================================== Assets Current Assets: Cash and cash equivalents $ 15,909 $ 6,982 Accounts receivable 303,245 272,262 Inventories Finished goods 146,898 113,496 Finished parts and subassemblies 58,644 46,351 Work in process 38,743 51,345 Raw materials 86,059 79,892 ---------------------------------------------------------------------------------------- Total inventories 330,344 291,084 Other current assets 49,468 37,425 ------------------------------------------------------------------------------------------- Total Current Assets 698,966 607,753 Property, Plant and Equipment at Cost: Land 36,964 34,485 Buildings and improvements 171,143 159,811 Machinery and equipment 437,276 388,408 ------------------------------------------------------------------------------------------- Gross Property, Plant and Equipment 645,383 582,704 Less accumulated depreciation 337,816 308,947 ------------------------------------------------------------------------------------------- Net Property, Plant and Equipment 307,567 273,757 Other Assets 32,964 31,913 Intangibles 50,073 51,907 Cost in Excess of Net Assets Acquired 365,104 220,563 - ---------------------------------------------------------------------------------------------- $ 1,454,674 $ 1,185,893 ============================================================================================== Liabilities and Shareholders' Equity Current Liabilities: Current maturities of long-term debt $ 787 $ 992 Loans payable 50,401 30,240 Accounts payable 132,376 122,616 Accrued liabilities 148,938 128,794 U.S. and foreign taxes on income 18,660 13,170 ------------------------------------------------------------------------------------------- Total Current Liabilities 351,162 295,812 Long-Term Debt 359,090 260,716 Other Liabilities 28,235 25,618 Accrued Postretirement Benefits 40,814 41,838 Accrued Pension Liabilities 5,955 6,559 Deferred Income Taxes 26,184 22,806 Preferred Shares, par value $.01; 5,000,000 shares authorized -- -- Common Shareholders' Equity: Common shares, par value $1.00; 80,000,000 shares authorized -- -- Outstanding 68,495,894 shares(68,312,730 in 1997) after deducting 3,930,245 shares in treasury (4,113,658 in 1997) 68,496 68,313 Capital surplus 17,977 20,099 Retained earnings 574,797 460,682 Accumulated other comprehensive income (loss) (18,036) (16,550) ------------------------------------------------------------------------------------------- Total Common Shareholders' Equity 643,234 532,544 - ---------------------------------------------------------------------------------------------- $ 1,454,674 $ 1,185,893 ==============================================================================================
See Notes to Consolidated Financial Statements ================================================================================ 10 Crane Co. 1998 Annual Report ================================================================================ Consolidated Statements of Cash Flows
For Years Ended December 31, (in thousands) 1998 1997 1996 =============================================================================================== Operating Activities: - ----------------------------------------------------------------------------------------------- Net income $ 138,438 $ 112,771 $ 92,110 Depreciation 38,563 36,995 35,122 Amortization 22,895 18,405 14,280 Deferred income taxes 4,178 4,816 3,105 Cash used for operating working capital (5,036) (16,529) (13,783) Other (7,164) (6,684) (8,678) -------------------------------------------------------------------------------------------- Total Provided From Operating Activities 191,874 149,774 122,156 -------------------------------------------------------------------------------------- Investing Activities: Capital expenditures (54,260) (40,642) (50,471) Proceeds from disposition of capital assets 10,503 4,747 11,759 Payments for acquisitions net of cash, and liabilities assumed of $17,397 in 1998, $34,400 in 1997, and $1,126 in 1996 (224,143) (81,665) (2,523) Proceeds from divestitures 4,276 7,453 1,554 - ----------------------------------------------------------------------------------------------- Total Used for Investing Activities (263,624) (110,107) (39,681) -------------------------------------------------------------------------------------- Financing Activities: Equity: Dividends paid (25,199) (22,870) (22,710) Reacquisition of shares - open market (11,329) (20,529) (24,596) Reacquisition of shares - stock incentive program (10,895) (4,448) (2,087) Stock options exercised 9,250 7,382 5,042 ----------------------------------------------------------------------------------------- (38,173) (40,465) (44,351) ----------------------------------------------------------------------------------------- Debt: Proceeds from issuance of long-term debt 143,565 -- -- Repayments of long-term debt (5,692) (3,458) (12,987) Net increase (decrease) in short-term debt (19,928) 1,099 (18,996) ----------------------------------------------------------------------------------------- 117,945 (2,359) (31,983) ----------------------------------------------------------------------------------------- Total Provided from (Used for) Financing Activities 79,772 (42,824) (76,334) -------------------------------------------------------------------------------------- Effect of exchange rate on cash and cash equivalents 905 (1,440) (38) - ----------------------------------------------------------------------------------------------- Increase (Decrease) in Cash and Cash Equivalents 8,927 (4,597) 6,103 Cash and cash equivalents at beginning of year 6,982 11,579 5,476 - ----------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 15,909 $ 6,982 $ 11,579 =============================================================================================== Detail of Cash Used for Operating Working Capital (Net of Effects of Acquisitions): Accounts receivable $ (1,535) $ (25,358) $ (733) Inventories (9,019) 2,476 (2,878) Other current assets (7,872) 2,090 (327) Accounts payable (1,240) 5,702 2,134 Accrued liabilities 7,763 2,683 (8,235) U.S. and foreign taxes on income 6,867 (4,122) (3,744) -------------------------------------------------------------------------------------------- Total $ (5,036) $ (16,529) $ (13,783) -------------------------------------------------------------------------------------- Supplemental Disclosure of Cash Flow Information: Interest paid $ 25,142 $ 22,865 $ 22,790 Income taxes paid $ 59,893 $ 48,825 $ 48,017 --------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements ================================================================================ Crane Co. 1998 Annual Report 11 ================================================================================ Consolidated Statements of Changes in Common Shareholders' Equity
Accumulated Common Other Total Common Shares, at Comprehensive Capital Retained Comprehensive Shareholders' (In thousands except share data) Par Value Income Surplus Earnings Income (Loss) Equity - --------------------------------------------------------------------------------------------------------------------------- Balance January 1, 1996 $67,782 $12,860 $304,096 $(10,009) $374,729 - --------------------------------------------------------------------------------------------------------------------------- Net income $92,110 92,110 92,110 Cash dividends (22,710) (22,710) Issuance of 1,641,468 shares for Interpoint acquisition 1,641 31,175 32,816 Reacquisition of 1,622,642 shares (1,623) (29,945) (31,568) Exercise of stock options, 460,886 shares 461 7,548 8,009 Tax benefit - Exercise of stock options 2,967 2,967 Restricted stock awarded, 229,142 shares - net 229 5,240 (1,794) 3,675 Currency translation adjustment 2,641 2,641 2,641 - --------------------------------------------------------------------------------------------------------------------------- Comprehensive Income 94,751 =========================================================================================================================== Balance December 31, 1996 $68,490 $29,845 $371,702 $(7,368) $462,669 - --------------------------------------------------------------------------------------------------------------------------- Net income 112,771 112,771 112,771 Cash dividends (22,870) (22,870) Reacquisition of 981,455 shares (981) (23,996) (24,977) Exercise of stock options, 652,523 shares 653 6,729 7,382 Tax benefit - Exercise of stock options 3,541 3,541 Restricted stock awarded, 151,873 shares - net 151 3,980 (921) 3,210 Currency translation adjustment (9,182) (9,182) (9,182) - --------------------------------------------------------------------------------------------------------------------------- Comprehensive Income 103,589 =========================================================================================================================== Balance December 31, 1997 $68,313 $20,099 $460,682 $(16,550) $532,544 - --------------------------------------------------------------------------------------------------------------------------- Net income 138,438 138,438 138,438 Cash dividends (25,199) (25,199) Reacquisition of 702,276 shares (702) (21,522) (22,224) Exercise of stock options, 780,902 shares 780 8,470 9,250 Tax benefit - Exercise of stock options 6,638 6,638 Restricted stock awarded, 104,787 shares - net 105 4,292 876 5,273 Currency translation adjustment (1,486) (1,486) (1,486) - --------------------------------------------------------------------------------------------------------------------------- Comprehensive Income 136,952 =========================================================================================================================== Balance December 31, 1998 $68,496 $17,977 $574,797 $(18,036) $643,234 ===========================================================================================================================
See Notes to Consolidated Financial Statements ================================================================================ 12 Crane Co. 1998 Annual Report ================================================================================ Notes To Consolidated Financial Statements Accounting Policies Principles of Consolidation -- The consolidated financial statements include all majority-owned subsidiaries. Investments in affiliates owned 50% or less are accounted for under the equity method. All intercompany items have been eliminated. Certain prior year amounts have been reclassified to conform with the 1998 presentation. All share and per share data have been retroactively restated to reflect the three-for-two splits of common stock effected in the form of a 50% stock dividend in 1998 and 1996. General -- The company's financial statements are prepared in conformity with generally accepted accounting principles. These require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimated.. Revenue Recognition -- Revenues are recorded generally when title passes to the customer. Income Taxes -- Income tax expense is based on reported earnings before income taxes. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes using currently enacted tax rates. Net Income Per Share -- The company's basic earnings per share calculations are based on the weighted average number of common shares outstanding. Diluted earnings per share include all stock options. The company has no stock warrants or convertible securities. (In thousands, except per share data) 1998 1997 1996 - -------------------------------------------------------------------------------- Income available to common shareholders $138,438 $112,771 $92,110 Basic shares outstanding 68,555 68,565 68,034 Effect of dilutive stock options 813 819 566 - -------------------------------------------------------------------------------- Diluted shares outstanding 69,368 69,384 68,600 Earnings per share: Basic $ 2.02 $ 1.64 $ 1.35 Diluted $ 2.00 $ 1.63 $ 1.34 ================================================================================ Cash Equivalents -- Marketable securities with original maturities of three months or less are included in cash equivalents. Accounts Receivable -- Receivables are carried at net realizable value. A summary of the allowance for doubtful accounts, cash discounts, returns and allowances activity at December 31, follows: (In thousands) for years ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------- Balance at beginning of year $ 6,864 $ 6,563 $ 5,436 Provisions 18,022 19,627 18,104 Deductions (17,469) (19,326) (16,977) - ------------------------------------------------------------------------------- Balance at end of year $ 7,417 $ 6,864 $ 6,563 ================================================================================ Inventories -- Inventories are stated at the lower of cost or market principally on the last-in, first-out (LIFO) method of inventory valuation. The reduction of inventory quantities has resulted in a liquidation of LIFO inventories acquired at lower costs prevailing in prior years. Liquidations have reduced cost of sales by $3.7 million in 1998, $4.5 million in 1997, and $4.4 million in 1996. Replacement cost would have been higher by $42.8 million and $46.6 million at December 31, 1998 and 1997, respectively. Property, Plant and Equipment -- Depreciation is provided primarily by the straight-line method over the estimated useful lives of the respective assets which range from three to twenty-five years. Intangibles -- Intangible assets are being amortized on a straight-line basis over their estimated useful lives which range from five to twenty years. The accumulated amortization was $21.8 million and $18.5 million at December 31, 1998 and 1997, respectively. Cost in Excess of Net Assets Acquired -- Cost in excess of net assets acquired is being amortized on a straight-line basis ranging from fifteen to forty years. The accumulated amortization was $50.9 million and $37.4 million at December 31, 1998 and 1997, respectively. Valuation of Long-Lived Assets -- The company periodically evaluates the carrying value of long-lived assets, including goodwill and other intangible assets, when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Stock-Based Compensation Plans -- The company records compensation expense for its stock-based employee compensation plans in accordance with the intrinsic-value method prescribed by APB No. 25, "Accounting for Stock Issued to Employees." Intrinsic value is the amount by which the market price of the underlying stock exceeds the exercise price of the stock option or award on the measurement date, generally the date of grant. Currency Translation -- Assets and liabilities of subsidiaries that prepare financial statements in currencies other than U.S. dollars are translated at the rate of exchange in effect on the balance sheet date; income and expense are translated at the average rates of exchange prevailing during the year. The related translation adjustments are included in accumulated other comprehensive income (loss) in a separate component of shareholders' equity. Financial Instruments -- The company periodically enters into interest rate swap agreements to moderate its exposure to interest rate changes and to lower the overall cost of borrowings. The differential to be paid or received is accrued as interest rates change and is recognized in income over the life of the agreements. No agreements were outstanding at December 31, 1998. In addition, the company periodically uses forward foreign exchange contracts to hedge firm purchase and sales commitments. Gains and losses on such contracts are deferred and recognized as part of the related transactions. Amounts outstanding at December 31, 1998 for such contracts were not material. ================================================================================ Crane Co. 1998 Annual Report 13 Notes To Consolidated Financial Statements (continued) ================================================================================ Recently Issued Accounting Standards -- In June 1998, Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging Activities" was released. The company is required to implement the statement in the first quarter of fiscal 2000. The company has historically made limited use of derivative instruments and financial hedges and believes any impact of the new accounting pronouncement on the financial statements will be immaterial. Research and Development Product development and engineering costs were approximately $72.4 million, $56.8 million and $52.0 million in 1998, 1997, and 1996, respectively. Included in these amounts were approximately $15.8 million, $9.5 million and $10.3 million received in 1998, 1997 and 1996, respectively, for customer-sponsored research and development. Miscellaneous--Net (In thousands) For Years Ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------- Gain on capital assets $ 2,326 $ 509 $3,242 Other (1,572)(a) (528) (3,482)(a) - -------------------------------------------------------------------------------- $ 754 $ (19) $ (240) - -------------------------------------------------------------------------------- (a) Includes $1.0 million in 1998 and $4.0 million in 1996 for legal costs related to a previously discontinued operation. Supplementary Cash Flow Information In a noncash transaction, the company acquired Interpoint in 1996 by issuing stock of $32.8 million and assuming liabilities of $37.9 million. The fair value of assets acquired totaled $32.2 million for an excess purchase price over net assets acquired of $38.5 million. Income Taxes Income before taxes is as follows: (In thousands) For Years Ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------- U.S. operations $197,882 $157,242 $128,666 Non-U.S. operations 16,759 18,595 16,354 - -------------------------------------------------------------------------------- $214,641 $175,837 $145,020 ================================================================================ The provision for income taxes consists of: (In thousands) For Years Ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------- Current: U.S. federal tax $61,992 $47,991 $39,793 State and local tax 4,112 4,943 6,199 Non-U.S. tax 5,921 5,316 3,813 - -------------------------------------------------------------------------------- 72,025 58,250 49,805 - -------------------------------------------------------------------------------- Deferred: U.S. federal tax 2,952 4,143 1,683 State and local tax 350 290 397 Non-U.S. tax 876 383 1,025 - -------------------------------------------------------------------------------- 4,178 4,816 3,105 - -------------------------------------------------------------------------------- Total income taxes $76,203 $63,066 $52,910 ================================================================================ Reconciliation of the statutory U.S. federal rate to effective tax rate is as follows: (In thousands) For Years Ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------- Statutory U.S. federal tax at 35% $ 75,124 $ 61,543 $ 50,757 Increase (reduction) from: Non-U.S. taxes 200 (1,001) (1,065) State and local taxes 2,900 3,401 4,287 Non-deductible goodwill 3,397 2,732 1,992 Foreign Sales Corporation (3,035) (3,021) (2,106) Other (2,383) (588) (955) - -------------------------------------------------------------------------------- Provision for income taxes $ 76,203 $ 63,066 $ 52,910 - -------------------------------------------------------------------------------- Effective tax rate 35.5% 35.9% 36.5% - ------------------------------------------------------------------------------ At December 31, 1998, the company had unremitted earnings of foreign subsidiaries of $103 million. Because these earnings, which reflect full provision for non-U.S. income taxes, are indefinitely reinvested in non-U.S. operations or can be remitted substantially free of additional tax, no provision has been made for taxes that might be payable upon remittance of such earnings. The components of deferred tax assets and liabilities included on the balance sheet at December 31 are as follows: (In thousands) 1998 1997 - -------------------------------------------------------------------------------- Deferred tax assets: Postretirement benefits $15,928 $16,404 Inventory 5,632 4,944 Insurance 11,355 10,530 Environmental 4,037 5,253 Tax loss and credit carryforwards 7,395 3,483 Deferred compensation 8,318 7,083 Other 11,091 4,641 - -------------------------------------------------------------------------------- Total 63,756 52,338 Less valuation allowance on tax loss and credit carryforwards 3,086 3,483 - -------------------------------------------------------------------------------- Total deferred tax assets, net $60,670 $48,855 ================================================================================ Deferred tax liabilities: Depreciation $17,213 $15,767 Difference between book basis and tax basis of assets 13,235 10,152 Intangibles 13,489 14,547 Pension 5,769 4,606 - -------------------------------------------------------------------------------- Total deferred liabilities $49,706 $45,072 ================================================================================ Net deferred asset $10,964 $ 3,783 - -------------------------------------------------------------------------------- Balance sheet classification: Current assets: Other current assets $37,148 $26,589 Long-term liabilities: Deferred income taxes 26,184 22,806 - -------------------------------------------------------------------------------- $10,964 $ 3,783 ================================================================================ ================================================================================ 14 Crane Co. 1998 Annual Report ================================================================================ As of December 31, 1998, the company had net operating loss (NOL) carryforwards and U.S. tax credit carryforwards which will expire, if unused, as follows: Non-U.S. Non-U.S. U.S. U.S U.S. (In thousands) National Municipal State Federal R&D Year of Expiration NOL NOL NOL NOL Credit - -------------------------------------------------------------------------------- 1999-2002 $988 $ - $ - $ 802 $25 After 2002 150 - 2,975 10,376 18 Indefinite 1,854 4,728 46,672 - - - -------------------------------------------------------------------------------- Total $2,992 $4,728 $49,647 $11,178 $43 - -------------------------------------------------------------------------------- Deferred tax asset on tax carryforwards $1,046 $ 415 $ 1,978 $ 3,913 $43 - -------------------------------------------------------------------------------- Of the total $7.4 million deferred tax asset on tax carryforwards, $3.1 million has been offset by the valuation allowance because of the uncertainty of ultimately realizing these future benefits. Accrued Liabilities (In thousands) December 31, 1998 1997 - -------------------------------------------------------------------------------- Employee-related expenses $ 72,460 $ 62,950 Insurance 13,965 12,418 Environmental 4,232 5,619 Warranty 11,415 8,282 Professional fees 3,462 5,551 Sales allowances 5,196 3,805 Customer advanced payments 3,911 2,410 Interest 5,421 3,609 Taxes other than income 2,945 3,017 Pensions 3,243 2,795 Other 22,688 18,338 - -------------------------------------------------------------------------------- $148,938 $128,794 - -------------------------------------------------------------------------------- Other Liabilities (In thousands) December 31, 1998 1997 - -------------------------------------------------------------------------------- Environmental $10,105 $11,319 Insurance 7,793 7,215 Minority interest 3,669 3,040 Other 6,668 4,044 - -------------------------------------------------------------------------------- $28,235 $25,618 - -------------------------------------------------------------------------------- Pension and Postretirement Benefits The company and most of its subsidiaries have defined benefit pension plans for their employees. The company also has a defined benefit plan for its directors. The plans generally provide benefit payments using a formula based on length of service and final average compensation, except for some hourly employees for whom the benefits are a fixed amount per year of service. The company's policy is to fund at least the minimum amount required by the applicable governmental regulations. Postretirement healthcare and life insurance benefits are provided for certain domestic and non-U.S. employees hired before January 1, 1990 who meet minimum age and service requirements. The company does not pre-fund these benefits and has the right to modify or terminate the plan. The following table sets forth the amounts recognized in the company's balance sheet at December 31, for company sponsored defined benefit pension and post-retirement benefit plans: Pension Postretirement Benefits Benefits - ------------------------------------------------------------------------------- (in thousands) 1998 1997 1998 1997 - ------------------------------------------------------------------------------- Change in benefit obligation: Benefit obligation at beginning of year $ 296,433 $ 258,304 $ 27,847 $ 29,712 Service cost 11,062 10,293 420 439 Interest cost 18,860 17,186 1,878 1,978 Plan participants' contributions 1,509 1,476 1,720 2,024 Amendments 565 647 -- -- Actuarial (gain) loss 16,386 18,362 383 (1,514) Benefits paid (15,297) (14,827) (4,072) (4,792) Foreign currency exchange rate (gain) loss (1,636) (3,765) -- -- Business combinations 2,550 8,757 -- -- - ------------------------------------------------------------------------------- Benefit obligation at end of year $ 330,432 $ 296,433 $ 28,176 $ 27,847 - ------------------------------------------------------------------------------- Change in plan assets: Fair value of plan assets at beginning of year $ 409,638 $ 347,163 Actual return on plan assets 43,250 70,171 Foreign currency exchange rate gain (loss) (3,062) (6,665) Employer contributions 641 3,079 Plan participants' contributions 1,509 1,476 Benefits paid (15,297) (14,827) Business combinations 2,321 9,241 - ------------------------------------------------------------------------------- Fair value of plan assets at end of year $ 439,000 $ 409,638 - ------------------------------------------------------------------------------- Funded status $ 108,568 $ 113,205 $(28,176) $(27,847) Unrecognized actuarial (gain) loss (91,317) (95,475) (12,638) (13,991) Unrecognized prior service cost 3,145 2,918 -- -- Unrecognized transition (asset)/obligation (4,101) (4,996) -- -- - ------------------------------------------------------------------------------- Prepaid (accrued) benefit cost $ 16,295 $ 15,652 $(40,814) $(41,838) - ------------------------------------------------------------------------------- ================================================================================ Crane Co. 1998 Annual Report 15 Notes To Consolidated Financial Statements (continued) ================================================================================ Pension Postretirement Benefits Benefits - -------------------------------------------------------------------------------- (dollars in thousands) 1998 1997 1998 1997 - -------------------------------------------------------------------------------- Weighted average assumptions as of December 31: Discount rate 6.68% 6.73% 6.75% 7.25% Expected rate of return on plan assets 8.27% 8.31% - - Rate of compensation increase 4.81% 4.86% 4.00% 4.50% - -------------------------------------------------------------------------------- Components of net periodic benefit cost: Service cost $11,062 $10,293 $ 420 $ 439 Interest cost 18,860 17,186 1,878 1,978 Expected rate of return on plan assets (30,833) (26,321) - - Amortization of prior service cost 283 282 - - Recognized net actuarial loss (gain) (2,122) (1,341) (969) (975) - -------------------------------------------------------------------------------- Net periodic benefit cost $(2,750) $ 99 $1,329 $1,442 ================================================================================ The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $5.2 million, $4.9 million and $4.6 million, respectively as of December 31, 1998, and $6.8 million, $6.2 million and $5.7 million, respectively, as of December 31,1997. At December 31, 1998, substantially all plan assets are invested in listed stocks and bonds. These investments include common stock of the company which represents 5% of plan assets. The company participates in several multi-employer pension plans, which provide benefits to certain employees under collective bargaining agreements. Total contributions to these plans were approximately $1.4 million in 1998 and $1.5 million in each of 1997 and 1996. Crane subsidiaries ELDEC Corporation and Interpoint Corporation have a money purchase plan to provide retirement benefits for all eligible employees. The annual contribution is 5% of each eligible participant's gross compensation. The contributions for 1998, 1997 and 1996 were $2.2 million, $1.7 million and $1.4 million, respectively. The company and its subsidiaries sponsor savings and investment plans which are available to eligible employees of the company and its subsidiaries. The company made contributions to the plans of approximately $6.5 million, $5.4 million and $4.7 million in 1998, 1997 and 1996, respectively. For the purpose of estimating the postretirement liability, the cost of covered benefits was assumed to increase 8.5% for 1998, and then to decrease gradually to 4.75% by 2005 and remain at that level thereafter. In 1997, the cost of covered benefits was assumed to increase 9.4%, and then to decrease gradually to 5.0% by 2007 and remain at that level thereafter. 1 Percentage 1 Percentage Point Increase Point Decrease - -------------------------------------------------------------------------------- Effect on total of service and interest cost components $216 $ 187 Effect on postretirement benefit obligation 2,097 1,839 - -------------------------------------------------------------------------------- Short-Term Financing The weighted average interest rate for loans payable, consisting of short-term bank borrowings, at December 31, 1998 and 1997 was 6.4% and 6.3%, respectively. As of December 31, 1998, the company had unused domestic lines of credit totaling $198.0 million and unused foreign lines of credit totaling $35.0 million. These lines of credit are typically available for borrowings up to 364 days and are renewable at the option of the lender. Short-term obligations of $150 million at December 31,1998 were classified as long-term debt since the company had entered into finance agreements that permit it to refinance short-term obligations on a long-term basis. Long-Term Financing (In thousands) December 31, 1998 1997 - ------------------------------------------------------------------------------- Crane Co. Senior debt: 7 1/4% notes due 1999 $ 150,000 $ 150,000 Original issue discount (29) (99) Deferred financing costs (205) (651) - ------------------------------------------------------------------------------- 149,766 149,250 - ------------------------------------------------------------------------------- 8 1/2% notes due 2004 100,000 100,000 Original issue discount (436) (519) Deferred financing costs (358) (426) - ------------------------------------------------------------------------------- 99,206 99,055 - ------------------------------------------------------------------------------- 6 3/4% notes due 2006 100,000 Original issue discount (290) Deferred financing costs (998) - ------------------------------------------------------------------------------- 98,712 - ------------------------------------------------------------------------------- Total Crane Co. 347,684 248,305 - ------------------------------------------------------------------------------- Subsidiaries Industrial revenue bonds 2,105 2,513 Capital lease obligations 1,271 1,512 Various loans 8,817 9,378 - ------------------------------------------------------------------------------- Total Subsidiaries 12,193 13,403 - ------------------------------------------------------------------------------- Total long-term debt 359,877 261,708 Less current portion 787 992 - ------------------------------------------------------------------------------- Long-term debt net of current portion $ 359,090 $ 260,716 ================================================================================ At December 31, 1998, the principal amounts of long-term debt repayments required for the next five years are $.8 million in 1999, $9.2 million in 2000, $.6 million in 2001, $.9 million in 2002, and $150.1 million in 2003. ================================================================================ 16 Crane Co. 1998 Annual Report ================================================================================ At December 31, 1998, the company had a $300 million contractually committed domestic long-term bank credit facility under which the company can borrow, repay, or to the extent permitted by the agreement, prepay loans and reborrow at any time prior to the termination date of November 2003. Proceeds may be used for general corporate purposes or to provide financing for acquisitions. The agreement contains certain covenants, including limitations on indebtedness and liens. No loans were outstanding under this agreement at year end. Under a $300 million shelf registration filed with the Securities and Exchange Commission, $50 million in unissued debt securities remains registered. Fair Value of Financial Instruments The carrying value of investments and short-term debt approximates the fair value. 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 at December 31, 1998 was $376 million compared to a carrying value of $359 million. Leases The company leases certain facilities, vehicles and equipment under capital and operating leases with various terms. Certain leases contain renewal or purchase options. Future minimum payments, by year, and in the aggregate, under leases with initial or remaining terms of one year or more consisted of the following at December 31, 1998: Minimum Capital Operating Sublease (In thousands) Leases Leases Income Net - -------------------------------------------------------------------------------- 1999 $ 218 $13,563 $1,490 $12,291 2000 204 10,462 1,086 9,580 2001 204 8,282 744 7,742 2002 204 6,015 664 5,555 2003 161 3,901 522 3,540 Thereafter 554 4,321 89 4,786 - -------------------------------------------------------------------------------- Total minimum lease payments 1,545 $46,544 $4,595 $43,494 ================================= Interest (274) - ----------------------------------------- Present value $1,271 ========================================= The weighted average interest rate for capital leases is 7.95%. Rental expense for all operating leases was $14.5 million, $14.9 million and $15.6 million for 1998, 1997 and 1996, respectively. The cost of assets capitalized under leases at December 31 is as follows: (In thousands) 1998 1997 - -------------------------------------------------------------------------------- Buildings and improvements $ 5,844 $ 6,336 Machinery and equipment 7,345 7,158 - -------------------------------------------------------------------------------- 13,189 13,494 Less accumulated depreciation 11,520 11,829 - -------------------------------------------------------------------------------- $ 1,669 $ 1,665 ================================================================================ Contingencies The company has established insurance programs to cover product and general liability losses. These programs have deductible amounts of $5 million per claim, $10 million aggregate per policy year before coverage begins, with the exception of aircraft products, and non-U.S. claims, which have first dollar coverage. The company does not deem its deductible exposure to be material. As of December 31, 1998, the company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material effect on the company's financial condition and results of operations. The company continues to be involved in various remediation actions to clean up hazardous wastes as required by federal and state laws. Estimated future environmental remediation cost was $13.0 million at December 31, 1998, which was fully accrued. In certain of these actions, the company is one of several potentially responsible parties ("PRPs"). As a PRP, the company could be liable for all clean up cost despite the involvement of other PRPs. Given the financial stability of the other PRPs, the company believes this is unlikely and the accrual represents management's best estimate, based on current facts and circumstances, with respect to the ultimate liability that will be apportioned to the company. The company spent $2.9 million on environmental costs in 1998, and expects to pay remediation costs of approximately $4 million in 1999. The annual level of future remediation expenditures is difficult to estimate because of the many uncertainties relating to conditions of individual sites as well as uncertainties about the status of environmental laws and regulations and developments in remedial technology. In addition, the company is a minor/de minimis potentially responsible party (PRP) at certain third party environmental remediation sites where remediation obligations are joint and several, and the company, as part of its estimate of potential liability, periodically reviews whether the major PRPs have the ability to fulfill their portion of such remediation obligation. The company is not aware of any significant additional liability that would result from the inability of other PRPs to fulfill their obligation. Overall, the company's liability for ================================================================================ Crane Co. 1998 Annual Report 17 Notes To Consolidated Financial Statements (continued) ================================================================================ the required remedial actions being implemented or engineered is not, individually or in the aggregate, expected to be material. Crane Co. is a defendant in a class action arising out of the contamination of a creek in eastern Ohio by a chemical pesticide sold under the trade name Mirex. This chemical was not manufactured or sold by Crane but was manufactured by another company, also a defendant, at a site adjacent to a Crane facility. The complaint seeks an unliquidated amount of compensatory and punitive damages against Crane, and compensatory and punitive damages against the manufacturer. Crane asserted cross-claims for contamination of its property and for indemnification against any liability to the plaintiffs against the manufacturer and its foreign parent company. In December 1998, the company entered into a settlement agreement with the manufacturer and its foreign parent company pursuant to which, among other things, (i) the other parties agreed to indemnify the company against the class action claims for compensatory damages and other third party claims, (ii) the other parties agreed to remediate the soils and groundwater at the company's facility, and in that connection the company sold the facility to the manufacturer with a leaseback and an option to repurchase the facility when the soil remediation is completed, and (iii) the company and the other parties released their claims against each other. Accordingly, the company believes that these actions are not likely to have a material effect on its results of operations or financial condition. The company's Crane Canada, Inc. subsidiary is the defendant in a class action pending in British Columbia, Canada alleging damages to property from water escaping from toilet tanks manufactured by Crane Canada. Crane Canada has settled past claims for property damage arising from water escaping from cracked toilet tanks on a case by case basis, and has entered into claims handling agreements with a number of property insurers to process such claims pursuant to agreed claim procedures and reimbursement formulas. Although the class certifica tion order has been upheld on appeal, Crane Canada continues to settle property damage claims in accordance with the claims handling agreements and to enter into such agreements with additional insurers. Accordingly, the company believes that the pending legal action will not have a material impact on its liabilities. Based on the historical trends for claims related to cracked toilet tanks and the experience of Crane Canada in resolving such claims, the company believes that pending and reasonably anticipated future claims are not likely to have a material effect on its results of operations or financial condition. As of December 31, 1998, Crane Co. was a defendant (among a number of defendants, typically 15 to 40) in approximately 1,408 actions filed in various state and federal courts alleging injury or death as a result of exposure to asbestos in products allegedly manufactured or sold by the company. Because of the unique factors inherent in each case and the fact that most are in preliminary stages, the company lacks sufficient information upon which judgments can be made as to their validity or ultimate disposition. Based on the information available to the company and its experience in the disposition of lawsuits of this type, the company believes that pending and reasonably anticipated future asbestos actions are not likely to have a material effect on its results of operations or financial condition. Acquisitions, Divestitures and Investments The company reviews potential acquisition candidates with market and technology positions that provide meaningful opportunities in the markets in which it already has a presence, or which afford significant financial reward, and may dispose of operations when consistent with its overall goals and strategies. During 1998 the company completed six acquisitions at a total cost of $224 million. In May, the company acquired Environmental Products USA, Inc. This business manufactures membrane-based water treatment systems for industrial, commercial and institutional markets. Also in May, the company acquired Number One Supply, a building products distribution business based in Baltimore, MD and Raleigh, NC. In July, the company acquired Consolidated Lumber Company, a wholesale distributor of lumber and millwork products in the greater Kansas City, MO area. Number One Supply and Consolidated Lumber were integrated into the company's Huttig Building Products subsidiary. In August, the company acquired Sequentia Holdings, Inc., a manufacturer of fiberglass reinforced plastic panels for the construction and building products markets. Sequentia complements the company's Kemlite subsidiary, which provides fiberglass-reinforced plastic panels for the transportation and recreational vehicle markets. In September, the company acquired Liberty Technologies, Inc. which develops, manufactures, markets and sells valve, motor, engine and compression condition monitoring products and related services to the nuclear power generation and industrial process markets worldwide. Liberty complements the company's nuclear valve business which provides valves, valve diagnostic equipment and related services to the nuclear power industry, and with its Dynalco Controls business, which provides sensors, instrumentation, control products and automation systems for use in industrial engine applications. Also in September, the company acquired the Plastic-Lined Piping Products ("PLPP") division of The Dow Chemical Company. PLPP was integrated with the company's Resistoflex division, which supplies lined pipe and valves to the chemical process and industrial markets. ================================================================================ 18 Crane Co. 1998 Annual Report ================================================================================ In May of 1998, the company sold two foundry operations acquired as part of the Stockham Valves & Fittings, Inc. transaction. Accu-Cast, Inc. in Chattanooga, TN and the Aliceville Foundry in Aliceville, AL were sold for a total of $4.3 million. During 1997, the company completed five acquisitions at a total cost of $82 million. In March, the company acquired the transportation products business of Sequentia, Inc. This business, which produces fiberglass-reinforced plastic panels for the truck body, trailer and container market, has been integrated with the company's Kemlite subsidiary. Also in March, the company acquired Polyvend Inc., a manufacturer of snack and food vending machines. Polyvend was completely integrated into National Vendors modern St. Louis facility by the end of the third quarter of 1997, significantly expanding distribution sales channels. In April, the company acquired the Nuclear Valve business of ITI MOVATS from Westinghouse. MOVATS is a leading supplier of valve diagnostic equipment and valve services to the commercial nuclear power industry. In July, through its Huttig Building Products subsidiary, the company acquired MALLCO Lumber & Building Materials Inc., a leading wholesale distributor of lumber, doors and engineered wood products serving Arizona and the surrounding region. In December the company acquired certain operations and product lines of Stockham Valves & Fittings, Inc. The acquired product lines and related manufacturing operations were integrated into the company's engineered valve and commercial bronze and iron valve businesses. Also in 1997, the company sold its Valve Systems and Controls division for $7.5 million in cash and $1.5 million in preferred stock. During 1996, the company completed two acquisitions. The company acquired Interpoint Corporation in a tax-free merger in which the company assumed $26 million of Interpoint debt and issued 1.6 million shares of Crane common stock for all the outstanding shares of Interpoint. Interpoint designs and manufactures high density power converters with applications in the aerospace and medical technology industries. The company also acquired Grenson Electronics of Daventry, England for a cash payment of $2.7 million. Grenson Electronics produces low voltage power conversion electronics for the aerospace, defense and industrial markets. The company sold Empire Foundry in 1996. All acquisitions were accounted for by the purchase method. The results of operations for all acquisitions have been included in the financial statements from their respective dates of purchase. The following unaudited pro forma financial information presents the combined results of operations of the company and Environmental Products, Number One Supply, Consolidated Lumber, Sequentia, Liberty Technologies and Plastic-Lined Piping Products as if the acquisitions had taken place at the beginning of 1997. The pro forma amounts give effect to certain adjustments including the amortization of goodwill and intangibles, increased interest expense and income tax effects. This pro forma information does not necessarily reflect the results of operations as it would have been if the businesses had been managed by the company during these periods and is not indicative of results that may be obtained in the future. Pro forma 1998 and 1997 results are as follows: net sales of $2.39 and $2.25 billion, net income of $135.2 and $107.7 million and diluted net income per share of $1.95 and $1.55, respectively. Preferred Share Purchase Rights On June 27, 1998, the company adopted a Shareholder Rights Plan to replace the existing Plan which expired on that date. The company distributed one preferred share purchase right for each outstanding share of common stock. The preferred rights were not exercisable when granted and may only become exercisable under certain circumstances involving actual or potential acquisitions of the company's common stock by a person or affiliated persons. Depending upon the circumstances, if the rights become exercisable, the holder may be entitled to purchase shares of the company's Series A Junior Participating Preferred Stock, or shares of common stock of the acquiring person. Preferred shares purchasable upon exercise of the rights will not be redeemable. Each preferred share will be entitled to preferential rights regarding dividend and liquidation payments, voting power, and, in the event of any merger, consolidation or other transaction in which common shares are exchanged, preferential exchange rate. The rights will remain in existence until June 27, 2008, unless they are earlier terminated, exercised or redeemed. The company has authorized five million shares of $.01 par value preferred stock of which 500,000 shares have been designated as Series A Junior Participating Preferred Stock. Stock-Based Compensation Plans The company has three stock-based compensation plans: the Stock Option Plan, the Restricted Stock Award Plan and the Non-Employee Director Restricted Stock Plan. In accounting for its stock-based compensation plans, the company applies the intrinsic value method prescribed by APB No. 25, "Accounting for Stock Issued to Employees." Intrinsic value is the amount by which the market price of the underlying stock exceeds the exercise price of the stock option or award on the measurement date, generally the date of grant. No compensation expense is recognized for the company's stock option plan. Compensation expense recognized for its restricted stock award plans was $7.2 million in 1998, $8.8 million in 1997, and $4.6 million in 1996. The pro forma net income and earnings per share listed below reflect the impact of measuring compensation expense for options granted in 1998, 1997 and 1996 in accordance with the fair-value-based method prescribed by SFAS 123, "Accounting for Stock-Based Compensation. " These amounts may not be representative of future years' amounts as options vest over a three-year period and generally additional awards are made each year. ================================================================================ Crane Co. 1998 Annual Report 19 Notes To Consolidated Financial Statements (continued) ================================================================================ (In thousands except per share data) 1998 1997 1996 - -------------------------------------------------------------------------------- Net income As reported $138,438 $112,771 $92,110 Pro forma 133,071 110,339 90,616 Net income per share Basic As reported 2.02 1.64 1.35 Pro forma 1.94 1.61 1.33 - -------------------------------------------------------------------------------- Diluted As reported 2.00 1.63 1.34 Pro forma 1.92 1.59 1.32 - -------------------------------------------------------------------------------- The weighted average fair value of options granted was $11.01 per share in 1998, $10.33 per share in 1997 and $8.01 per share in 1996. These estimates were based on the Black-Scholes multiple option-pricing model with the following weighted average assumptions: 1998 1997 1996 - ------------------------------------------------------------------------------- Dividend yield .92% 1.48% 1.81% Volatility 24.22% 24.98% 26.89% Risk-free interest rates 5.60% 6.76% 6.53% Expected lives in years 5.29 5.10 4.75 - ------------------------------------------------------------------------------- Options are granted under the Stock Option Plan to officers and other key employees at an exercise price equal to the fair market value of the shares on the date of grant. Options become exercisable at a rate of 50% the first year, 75% the second year and 100% the third year after the date of grant, and expire ten years after the date of grant. A summary of stock option activity follows: Weighted Number of Average (Shares in thousands) Shares Price - -------------------------------------------------------------------------------- 1996 - -------------------------------------------------------------------------------- Options outstanding at beginning of year 3,146 $ 12.06 Granted 722 18.36 Exercised (461) 11.09 Canceled (90) 15.35 Options outstanding at end of year 3,317 13.50 Options exercisable at end of year 2,124 11.75 1997 - -------------------------------------------------------------------------------- Granted 803 22.60 Exercised (653) 11.32 Canceled (144) 19.06 Options outstanding at end of year 3,323 15.91 Options exercisable at end of year 2,130 13.24 1998 - -------------------------------------------------------------------------------- Granted 1,367 36.26 Exercised (781) 11.89 Canceled (26) 25.07 Options outstanding at end of year 3,883 23.80 Options exercisable at end of year 2,014 16.00 - -------------------------------------------------------------------------------- A summary of information regarding stock options outstanding at December 31, 1998 follows: (Shares in thousands) Options Outstanding Options Exercisable - -------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Range of Number of Remaining Exercise Number of Exercise Exercise Prices Shares Life Price Shares Price - -------------------------------------------------------------------------------- $27.79-36.37 1,378 9.30 $36.14 11 $27.79 14.81-28.59 1,342 7.83 20.38 836 19.81 7.82-15.31 1,163 5.23 13.16 1,167 13.16 - -------------------------------------------------------------------------------- The Restricted Stock Award Plan provides for awards of common stock to officers and other key employees, subject to resale restrictions. The restrictions on outstanding awards are scheduled to lapse upon the achievement of certain performance objectives or over time. The company awarded 113,250 shares with a weighted average fair value of $36.37 in 1998. As of December 31, 1998, there were available for future awards a total of $1,500,000 shares. Under the Non-Employee Director Restricted Stock Plan, directors who are not full-time employees of the company receive the portion of their annual retainers which exceeds $15,000 in shares of common stock. The shares are issued each year after the company's annual meeting, are forfeitable if the director ceases to remain a director until the company's next annual meeting, and may not be sold for a period of five years, or until the director leaves the Board. As a group, non-employee directors received 2,280 shares with a weighted average fair value of $36.37 in 1998. Segment Information The Company's reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. The Company has six reportable segments: Fluid Handling, Aerospace, Engineered Materials, Controls, Merchandising Systems and Wholesale Distribution. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company accounts for intersegment sales and transfers as if the sales or transfers were to third parties at current market prices. ================================================================================ 20 Crane Co. 1998 Annual Report ================================================================================ Information by industry segments follows: (In thousands) 1998 1997 1996 - -------------------------------------------------------------------------------- Fluid Handling - -------------------------------------------------------------------------------- Net Sales - Outside $445,355 $386,209 $351,374 Net Sales - Intersegment 9,298 7,942 12,594 Operating Profit 27,908 29,977 25,735 Assets 355,485 322,488 255,093 Capital Expenditures 16,810 6,835 7,888 Depreciation and Amortization 12,520 10,381 10,666 Aerospace - -------------------------------------------------------------------------------- Net Sales - Outside $394,401 $343,900 $246,637 Net Sales - Intersegment 65 -- 37 Operating Profit 118,175 90,055 65,914 Assets 296,668 277,704 251,716 Capital Expenditures 17,515 13,496 8,325 Depreciation and Amortization 12,563 12,785 10,126 Engineered Materials - -------------------------------------------------------------------------------- Net Sales - Outside $275,969 $222,789 $203,592 Net Sales - Intersegment 2,985 2,771 3,606 Operating Profit 39,655 30,093 25,666 Assets 263,576 109,578 102,035 Capital Expenditures 6,094 8,210 4,252 Depreciation and Amortization 9,633 6,178 5,537 Crane Controls - -------------------------------------------------------------------------------- Net Sales - Outside $131,052 $130,284 $128,149 Net Sales - Intersegment 1,265 1,237 1,527 Operating Profit 8,927 11,640 11,256 Assets 127,702 121,432 125,433 Capital Expenditures 4,264 2,538 4,170 Depreciation and Amortization 6,555 6,502 6,495 Merchandising Systems - -------------------------------------------------------------------------------- Net Sales - Outside $191,927 $179,905 $172,847 Net Sales - Intersegment -- -- -- Operating Profit 33,548 31,034 24,810 Assets 117,858 109,190 91,529 Capital Expenditures 2,815 5,089 7,900 Depreciation and Amortization 7,201 6,426 5,664 Wholesale Distribution - -------------------------------------------------------------------------------- Net Sales - Outside $816,305 $760,608 $734,546 Net Sales - Intersegment -- -- 39 Operating Profit 34,088 26,273 29,492 Assets 233,055 186,633 199,622 Capital Expenditures 5,902 4,146 3,368 Depreciation and Amortization 6,128 5,210 6,362 (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------------- Consolidated - ------------------------------------------------------------------------------- Net Sales Other $ 13,496 $ 13,136 $ 10,587 Intersegment Elimination (13,613) (11,950) (17,803) - ------------------------------------------------------------------------------- Total Net Sales $ 2,268,505 $ 2,036,831 $ 1,847,732 =============================================================================== Operating Profit Other $ (424) $ 850 $ 470 Corporate (22,937) (23,425) (17,311) Intersegment Elimination (8) 104 121 - ------------------------------------------------------------------------------- Total Operating Profit $ 238,932 $ 196,601 $ 166,153 =============================================================================== Assets Other $ 13,003 $ 12,266 $ 7,100 Corporate 47,327 46,602 56,327 - ------------------------------------------------------------------------------- Total Assets $ 1,454,674 $ 1,185,893 $ 1,088,855 =============================================================================== Capital Expenditures Other $ 810 $ 245 $ 221 Corporate 50 83 14,347 - ------------------------------------------------------------------------------- Total Capital Expenditures $ 54,260 $ 40,642 $ 50,471 =============================================================================== Depreciation and Amortization Other $ 269 $ 259 $ 325 Corporate 6,589 7,659 4,227 - ------------------------------------------------------------------------------- Total Depreciation and Amortization $ 61,458 $ 55,400 $ 49,402 =============================================================================== Information by geographic segments follows: (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------------- Net Sales United States $ 1,685,037 $ 1,490,186 $ 1,332,844 Canada 194,723 197,039 189,197 Europe 260,607 213,681 200,636 Other International 128,138 135,925 125,055 - ------------------------------------------------------------------------------- Total Net Sales $ 2,268,505 $ 2,036,831 $ 1,847,732 =============================================================================== Operating Profit United States $ 189,771 $ 154,595 $ 129,638 Canada 14,673 15,773 12,477 Europe 37,715 32,016 29,875 Other International 19,710 17,642 11,474 Corporate (22,937) (23,425) (17,311) - ------------------------------------------------------------------------------- Total Operating Profit $ 238,932 $ 196,601 $ 166,153 =============================================================================== Assets United States $ 1,154,054 $ 899,852 $ 812,832 Canada 81,570 83,510 88,912 Europe 151,950 141,011 114,981 Other International 19,773 14,918 15,803 Corporate 47,327 46,602 56,327 - ------------------------------------------------------------------------------- Total Assets $ 1,454,674 $ 1,185,893 $ 1,088,855 =============================================================================== ================================================================================ Crane Co. 1998 Annual Report 21 ================================================================================ Management's Responsibility for Financial Reporting The accompanying consolidated financial statements of Crane Co. and subsidiaries have been prepared by management in conformity with generally accepted accounting principles and, in the judgment of management, present fairly and consistently the company's financial position and results of operations and cash flows. These statements by necessity include amounts that are based on management's best estimates and judgments and give due consideration to materiality. The accounting systems and internal accounting controls of the company are designed to provide reasonable assurance that the financial records are reliable for preparing consolidated financial statements and maintaining accountability for assets and that, in all material respects, assets are safeguarded against loss from unauthorized use or disposition. Qualified personnel throughout the organization maintain and monitor these internal accounting controls on an ongoing basis. In addition, the company's internal audit department systematically reviews the adequacy and effectiveness of the controls and reports thereon. The consolidated financial statements have been audited by Deloitte & Touche LLP, independent auditors, whose report appears on this page. The Audit Committee of the Board of Directors, composed solely of outside directors, meets periodically with management and with the company's internal auditors and independent auditors to review matters relating to the quality of financial reporting and internal accounting control and the nature, extent and results of their audits. The company's internal auditors and independent auditors have free access to the Audit Committee. /s/ R. S. Evans R. S. Evans Chairman and Chief Executive Officer /s/ David Smith D. S. Smith Vice President--Finance and Chief Financial Officer ================================================================================ Independent Auditors' Report [LOGO] To The Shareholders of Crane Co. We have audited the accompanying consolidated balance sheets of Crane Co. and its subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, cash flows and changes in common shareholders' equity for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Crane Co. and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Stamford, Connecticut January 20, 1999 ================================================================================ 22 Crane Co. 1998 Annual Report ================================================================================ Management's Discussion and Analysis of Operations Results of Operations 1998 - -------------------------------------------------------------------------------- Fluid Handling - -------------------------------------------------------------------------------- Fluid Handling Profits Dip Despite Sales Gain (dollars in millions) 1998 1997 - -------------------------------------------------------------------------------- Sales $ 454.7 $ 394.2 Operating Profit 27.9 30.0 Operating Margins 6.1% 7.6% - -------------------------------------------------------------------------------- Sales increased 15% in the Fluid Handling segment in 1998, but operating profits declined by 7%, as markets for many of its products -- valves, pumps and water treatment systems -- worsened as the year progressed. The increase was derived from acquisitions and strong first-half sales for many of the businesses in the group. The gain was smaller than expected as a result of Asia's economic problems and plunging oil prices, which constrained capital goods purchases and intensified price competition worldwide. Losses in commercial valves and profit declines in water treatment systems more than offset solid gains in engineered valves. Order backlog totaled $79 million, down $34 million from the prior year. Valve Businesses Mixed In spite of difficult markets, Crane made important progress in 1998 in organizing its growing valve businesses to compete more profitably in an increasingly global marketplace. In both engineered and commercial valves, Crane's businesses are moving toward common global sourcing, largely from Asia, and the use of common designs to reduce costs and improve efficiency. Most finished products will be assembled locally, maximizing each business's ability to meet customers' needs and preferences. In the engineered valve group, most of the cast steel, butterfly and check valve businesses performed well, with solid sales gains and modest profit increases fueled in part by the addition of the Stockham businesses, acquired in December, 1997. Crane Australia, which makes steel valves for the oil and gas and petrochemical industries, had slightly lower sales and earnings. Crane's manufacturing joint venture in Ningjin, China, had a strong year, increasing shipments 95% over the prior year. Westad, Crane's marine valve manufacturer in Norway, increased its sales and earnings in 1998, but sales are expected to drop sharply in 1999 as a result of the decline in Korean ship building. In Crane's nuclear valve servicing business, which varies with utilities' nuclear plant outages, sales and profits declined as expected after an exceptionally strong 1997. Significant gains are projected for 1999 because of increased market demand and the benefits of the September 1998 acquisition of Liberty Technologies. In commercial valves, difficulties in absorbing Stockham's bronze production led to supply shortages and lost business, contributing to a loss for the year. As part of the global approach, Crane U.K. closed its bronze foundry, shifting its bronze casting business to the Brantford, Ontario facility, which is ramping up its manufacturing operations. Crane U.K., which also produces malleable iron fittings, will open its new electric melting shop in January 1999, improving efficiency while complying with environmental regulations. Crane U.K. is in the process of installing new business systems, and is also right-sizing the business for market conditions and Crane's commercial valve global sourcing strategy. As a result, $3.2 million of restructuring costs were incurred in 1998. Mixed Results at Pump Businesses Sales and earnings were up slightly at Crane Pumps & Systems. Individual brands' results varied as the company's products serve major municipal, military and industrial markets. Barnes commercial pumps and pressure sewer products performed well. Burks Pumps, which serves the original equipment machinery market, was impacted by the reduction in capital spending in the semiconductor industry, and sales of Weinman's HVAC pumps were constrained by depressed high rise construction in the Far East. Deming benefited from a large order for pumps used in hazardous material destruction. Government orders generally were down as military spending continued to decline. Deferral of major project awards in the chemical process and automotive industries affected sales and profits at Chempump and Process Systems, though not their market share. Shift in Water Treatment Business The May 1998 acquisition of Environmental Products USA, a manufacturer of state-of-the-art, membrane-based water treatment systems, helped Cochrane reposition its business away from heavy industrial filtration markets toward light industrial, beverage and other potable water treatment systems. With the acquisition, overall sales rose but profits were off sharply from 1997 as Cochrane's important Asia markets weakened and industry pricing pressures intensified. ================================================================================ Crane Co. 1998 Annual Report 23 ================================================================================ Management's Discussion and Analysis of Operations Outlook Crane's fluid handling businesses expect flat sales and operating profits in 1999, as weak Asian demand, depressed oil prices and widespread pressure on corporate profits may constrain capital purchases and intensify global competition. A strong year is expected for Crane's nuclear services business which should help the engineered valve segment to continue to perform well and a turnaround anticipated in commercial valves should return that sector to profitability. Crane Pumps & Systems is again likely to show solid results. Cochrane will benefit from a full year of its acquisition's results and an improved cost structure, facilitating a solid sales gain and a profit rebound to 1997 levels. - -------------------------------------------------------------------------------- Aerospace - -------------------------------------------------------------------------------- Aerospace Segment Shows Strong Growth (dollars in millions) 1998 1997 - ------------------------------------------------------------------------------- Sales $ 394.5 $ 343.9 Operating Profit 118.2 90.1 Operating Margins 30.0% 26.2% - ------------------------------------------------------------------------------- Crane's aerospace businesses were extremely strong in 1998, increasing their combined operating profits by 31% on a 15% gain in sales. All four businesses in the segment reported higher sales, and three had higher earnings fueled by strong commercial, business and general aviation markets. Order backlog totaled $281 million at year-end, compared to $297 million in 1997. Record Results for Hydro-Aire Hydro-Aire, the world market leader in aircraft anti-skid brake control systems, turned in a record performance, with operating profits up 23% on a 19% increase in sales. Every Boeing airplane uses its high performance brake control systems, and many use its fuel pumps. For instance, the high volume Boeing 737-700 series incorporates many Hydro-Aire products, including brake control units, wheelspeed transducers, anti-skid control valves, jettison pumps and boost pumps. After-market sales of parts and repair and overhaul services also grew substantially. With its brake control systems on all Embraer and many Bombardier aircraft, Hydro-Aire further strengthened its position in regional jets in 1998, winning the brake control systems on the Dornier 528, 728 and 928. It also won the brake control systems for a new Raytheon Beech business jet. A new Enterprise Resource Planning system that went on line in early October should further reduce costs and working capital needs, improving profits as sales are expected to flatten in 1999. Improved focus on the aftermarket and repair and overhaul OEM market will continue to underpin profitability. Strong Performance at ELDEC ELDEC, Crane's largest aerospace business, also set sales and earnings records in 1998, increasing its operating profits by 41% on a sales gain of 15%. Strong OEM sales, particularly to Boeing, fueled the increases. ELDEC is a market leader in proximity sensing systems, battery systems, transformer rectifiers and fuel flowmeters. During 1998, both Rolls Royce and Pratt & Whitney chose ELDEC's new solid state pressure transducers, designed for high accuracy under harsh conditions, for their new aircraft engines. In its power supply business, ELDEC has developed strong relationships with such major aerospace equipment suppliers as the U.K.'s Smiths Industries, positioning the company to provide power supplies for products such as avionics on the planned Eurofighter. After successfully implementing an Enterprise Resource Planning system in 1997, ELDEC improved its internal operations in 1998, increasing its on-time deliveries to customers. Major Profit Gain at Interpoint In its second full year as a Crane company, Interpoint had record results, with operating profits rising 55% on a 10% increase in sales, as the company cut costs while increasing output, reorganized and refocused on growth opportunities in the custom, medical and space markets. Interpoint makes proprietary, high density power converters and microelectronic hybrid devices and is the only Class K, space-qualified supplier of dc-to-dc power converters. Satellites typically use scores of these highly reliable, lightweight devices. In addition, Interpoint has a small but growing share in the expanding markets for medical electronic devices included in products such as pacemakers, defibrillators, heart assist pumps, surgical saws and insulin pumps. With renewed market focus on custom, medical and aerospace applications, and operational improvements reducing product delivery times to its customers, Interpoint should have a strong year. ================================================================================ 24 Crane Co. 1998 Annual Report ================================================================================ Sales Gains for Lear Romec Significant up front engineering investments on recent development programs, critical to sustaining the business, modestly reduced Lear Romec's margins and operating profits, despite a 10% increase in sales. Commercial OEM markets for Lear Romec's lubrication and scavenge pumps and centrifugal fuel pumps were strong, as were general aviation, regional and business jet markets, while military sales were flat. Aftermarket sales, including civilian and military spares and repair and overhaul contracts, increased substantially. Sales of parts manufactured for Hydro-Aire also increased. Continuing cost reductions and productivity improvements, including cell manufacturing, helped Lear Romec compete successfully in price-sensitive markets. Outlook For 1999, Crane's aerospace businesses anticipate continuing -- but smaller -- gains in sales and profits, as production of commercial aircraft peaks, especially at Boeing. Regional, commuter and business aircraft markets should continue to perform well in the near term, but a pickup in production of military aircraft is not expected before 2001. Aftermarket sales will remain a strong underpinning of profitability. Interpoint anticipates improved profits on its electronic products, with flat sales beginning to pick up by year-end. - -------------------------------------------------------------------------------- Engineered Materials - -------------------------------------------------------------------------------- Sales and Profits Accelerate in Engineered Materials (dollars in millions) 1998 1997 - ------------------------------------------------------------------------------- Sales $ 279.0 $ 225.6 Operating Profit 39.7 30.1 Operating Margins 14.2% 13.3% - ------------------------------------------------------------------------------- Operating profit rose 32% on a 24% increase in sales in the Engineered Materials segment, reflecting substantial growth at Kemlite and the acquisition of Sequentia. Strong transportation and building supply markets benefited Kemlite, Sequentia, and CorTec, which all manufacture fiberglass reinforced plastic (frp) materials. Partly offsetting their results were a small loss at Crane Plumbing and modestly lower earnings at Resistoflex. Order backlog was $24 million at year-end compared to $29 million in 1997. Kemlite Improves Volume, Margins, Profits Increasing use of lightweight, thermally efficient frp roofs for refrigerated trucks and trailers and translucent frp roofs in dry van trailers and trucks, along with strong markets for truck and trailer liner panels, recreational vehicle panels and building panels, boosted Kemlite's sales in 1998. The increased volume, coupled with successful cost reduction efforts, led to improved margins and record operating profits. The substitution of translucent frp roofs for aluminum on dry van trailers appeared to plateau, but the use of non-translucent frp roofs on refrigerated trucks and trailers increased. In addition, Korean container manufacturers increased their purchases of Kemlite frp panels in 1998. Crane's $125 million acquisition of Sequentia Holdings in August 1998, significantly expanded Kemlite's penetration of the corrugated, translucent and flat embossed building products markets, particularly in the home center chains. Crane bought Sequentia's transportation product line in early 1997. Kemlite added Sequentia's Grand Junction, Tennessee and Houston, Texas plants to its own plants in Joliet, Illinois and Jonesboro, Arkansas, and will keep Sequentia's Structoglas(R) brand as a separate product line. Kemlite doubled production capacity at Jonesboro by adding a second wide line, and now operates 10 of the 14 frp panel production lines in the U.S. Kemlite is the world's largest producer of frp panels. Kemlite expects to improve margins, particularly at Sequentia, through increased production and savings achieved primarily by volume purchasing of raw materials, along with Six Sigma and other continuing cost reduction programs. Sales and Profits Rise at CorTec CorTec reported a profit gain on increased sales, consistent with strong medium truck and dry van trailer markets. The company made significant progress in commercializing its new, proprietary Encor(R) product, a fiberglass reinforced panel with a core of tough composite foam rather than plywood. Encor(R) sales have grown rapidly since its introduction two years ago, with further gains expected in 1999. More than 5,000 Encor(R) body units will be used for one-way rental trucks to be built during the first half of the year. The company anticipates a flat truck market and a decline in its trailer market segment in 1999. Acquisition Boosts Resistoflex Sales Resistoflex modestly increased sales of its corrosion resistant plastic-lined pipes and fittings, ================================================================================ Crane Co. 1998 Annual Report 25 ================================================================================ Management's Discussion and Analysis of Operations despite lagging demand from the chemical process industry and soft export markets. The September acquisition of Plastic-Lined Piping Products (PLPP), a competitor, for $23 million boosted sales, but overall margins and operating profits were moderately lower. The company's primarily military aerospace fittings business was strong in 1998, with profitability enhanced by new machining centers, but competition for new military contracts intensified. Resistoflex integrated the administration of PLPP at its Marion, North Carolina headquarters in late 1998, with sales and customer service to follow in early 1999. Manufacturing will continue at the acquired Bay City, Michigan plant. Resistoflex anticipates that savings and synergies in marketing, distribution, production and raw materials purchasing will improve margins in 1999. Scheduled for introduction in 1999 is a new PLPP-developed flangeless fluoropolymer piping system that eliminates leaks and emissions from flange connections. Lower Results at Crane Plumbing Marginally profitable in 1997, Crane Plumbing operated at a small loss on an 8% decline in revenues in 1998, prompting a management change. The Montreal-based company makes china, steel and acrylic plumbing fixtures for new construction, repair and renovation, serving residential, industrial, commercial and institutional markets, primarily in Canada. In spite of well received new lavatory products, wholesale demand dipped on a nationwide decline in housing starts, particularly in Quebec and in British Columbia. Retail sales, however, rose 21%, as Crane gained major home centers and hardware chains as customers. The company expects a modest sales gain and a return to profitability in 1999 as it expands its retail efforts in the northeastern U.S. Profits Flat at Polyflon Polyflon, which provides proprietary materials and circuit processing services to the microwave industry, had level profits on slightly lower sales, as a better business mix strengthened margins. Outlook Despite some risk in truck and trailer markets in 1999, the Engineered Materials segment should enjoy solid sales gains, largely from full-year results of the Sequentia and PLPP acquisitions. Margins and profits should improve on higher volumes, purchasing economies and further cost reductions. - -------------------------------------------------------------------------------- Controls - -------------------------------------------------------------------------------- Profits Dip in Controls Segment (dollars in millions) 1998 1997 - ------------------------------------------------------------------------------- Sales $ 132.3 $ 131.5 Operating Profit 8.9 11.6 Operating Margins 6.7% 8.9% - ------------------------------------------------------------------------------- Sales increased marginally in the Controls segment in 1998, but operating profits fell by 23% as Crane's businesses faced weak export markets and stiffening price competition. Order backlog totaled $28 million at year-end, compared to $32 million in 1997. Barksdale Reports Profit Decline Barksdale continued to win acceptance in domestic and European markets for its unique air suspension valves, but operating profits dropped on flat sales. In oil and gas markets, traditionally Barksdale's most profitable, demand fell sharply as oil prices sank. The costs of implementing an Enterprise Resource Planning system offset positive initial results from Six Sigma cost reduction projects, which, like the Enterprise Resource Planning system, should improve margins in 1999. Ferguson Profits Lower Ferguson's domestic and European businesses felt the ripple effect of lagging machinery exports to Asia, Latin America and Eastern Europe which led to softening of capital equipment markets in the U.S. and Europe. Overall sales and operating profits declined, as did bookings, except in automotive assembly equipment. Ferguson supplies machinery manufacturers with products and devices ranging from indexers and pick-and-place robots to rotary tables and custom cams. A fall-off in sales of large indexers, typically used in large installations, stemmed from both the Asian downturn and the long General Motors strike. Lower overall volume and a less favorable product mix resulted, reducing margins and operating profits. Sales and Profits Dip at Powers Process Controls A moderate decline in sales and bookings and a larger drop in operating profits marked 1998 for Powers Process Controls. Shipments of Powers' core products -- water-mixing and thermal shock protection shower systems, water and process controls, valves and temperature regulators -- slipped in the face of stiffening price competition and newer technology. Powers' Canadian plumbing brass operation encountered supply chain ================================================================================ 26 Crane Co. 1998 Annual Report ================================================================================ problems in the second half of the year, reducing sales and profits, and regaining lost business will be the goal in 1999. Overall commercial and industrial bookings are expected to remain flat in 1999 amid increasing competition, but cost reductions should improve margins and profitability. Acquisition and Market Gains Boost Dynalco Profits Acquisition of a new product line and strong sales to agricultural equipment OEMs increased Dynalco's volume, while improved margins led to a solid gain in profits. Dynalco acquired Liberty Technologies' Beta line of engine and compressor analyzers in September, when the rest of Liberty was acquired by Crane Nuclear. These products serve essentially the same markets as Dynalco's speed, temperature and pressure sensors and controls for rugged environments. For 1999, a full year of Beta sales should produce substantially higher sales, with profit gains from increased volume, process improvements and continued expense reductions. Harsh Environment Products Boost Azonix Sales Azonix Corporation, whose man-machine interface (MMI) products for hazardous environments are already dominant in domestic oil and gas exploration, increased sales by expanding into focused harsh environment applications. Operating profits were level with strong 1997 results, largely because of a lower-margin product mix. Sales of higher-margin measurement and control products also gained in 1998, but overall bookings fell, primarily reflecting the oil industry downturn. For 1999, Azonix expects modestly improved results on the strength of increased MMI sales, new products, cost reductions and a gradual pickup in the oil industry. Outlook Crane's controls businesses project modest sales gains and profit increases in 1999, particularly if oil and gas markets begin to rebound. Any significant recovery in troubled Asian and Latin American markets that benefits capital equipment manufacturers could further improve results in the segment. - -------------------------------------------------------------------------------- Merchandising Systems - -------------------------------------------------------------------------------- Solid Sales and Profit Growth in Merchandising Systems (dollars in millions) 1998 1997 - ------------------------------------------------------------------------------- Sales $ 191.9 $ 179.9 Operating Profit 33.5 31.0 Operating Margins 17.5% 17.3% - ------------------------------------------------------------------------------- The Merchandising Systems segment turned in a solid overall performance in 1998, with increased sales and operating profits that reflected both energetic sales efforts and successful cost-cutting. National Vendors, the larger of the segment's two businesses, reported moderate sales gains and maintained its strong margins and profits, while the other business, National Rejectors, improved its margins and profits on slightly lower sales. Order backlog totaled $22 million at December 31, 1998, up 20% over 1997. National Vendors Extends Its Reach, Improves Results National Vendors moved ahead briskly on several fronts in 1998, achieving increased sales and higher profits domestically and in Europe. National Vendors' UMC unit in the U.K. had its best year ever and the company's German operation also improved its performance, as corporate downsizing and cost-cutting resulted in substitution of vending machines for employee cafeterias. Focusing on the future, National Vendors also began selling in China, a promising market, and strengthened its Latin American operations by establishing three distributors in Mexico and expanding its operations in Chile and Colombia. National Vendors reduced from 58 to 26 the number of distributors for its "GPL" brand of machines, intended as a lower-cost solution for smaller operators. The network now includes only one GPL distributor in most major metropolitan markets in order to avoid overlaps with other GPL distributors or with National Vendors' direct sales. The use of exclusivity is aimed at sharpening the distributor's focus on GPL products. Internationally, GPL sales expanded in Canada and the U.K., contributing to record National Vendors shipments in both countries. ================================================================================ Crane Co. 1998 Annual Report 27 ================================================================================ Management's Discussion and Analysis of Operations National Rejectors Prepares for the Euro National Rejectors' shipments of coin validation machines were down modestly from 1997. Weakness in the amusement industry and stiffer competition in the U.K. and Spain, two major markets, offset continuing strong sales of validators for outdoor cigarette machines in Germany. Cost reductions, product redesign and productivity improvements strengthened NRI's margins, resulting in a solid gain in profits. In the past two years, NRI has upgraded many of Germany's estimated 800,000 mechanical outdoor cigarette machines with new electronic validators that can be programmed to accept Euro coins when those are introduced in 2002. However, many more cigarette machines, and several hundred thousand other vending machines, remain to be refitted, promising strong sales of NRI products in Germany and Europe in coming years. NRI derives some 57% of its revenue from Germany and 40% from other European markets, including Spain and the U.K., where its German-made validators compete with locally made products. NRI also sells to other international markets, supplying validators for Canada's lottery machines, for example, and validators and coin-changers for South American markets. The growing demand for NRI's new four-tube changer will positively affect sales to the vending industry in 1999. Continuing Six Sigma process cost reduction projects are expected to generate ongoing margin improvements. Outlook The Merchandising Systems segment anticipates gains in sales and operating profits in 1999. National Vendors expects to increase its penetration of European, U.S. and Latin American markets with its Millenia-styled products, while expanding its GPL line in those markets as well. NRI also anticipates higher sales throughout Europe, despite rising competition, on the strength of its product mix for the cigarette, telephone, ticketing, amusement and vending markets, and the operators' compelling need to upgrade their machines to accept multiple versions of the Euro from 15 mints. At both National Vendors and NRI, margins and operating earnings should continue to improve. - -------------------------------------------------------------------------------- Wholesale Distribution - -------------------------------------------------------------------------------- Wholesale Distribution (dollars in millions) 1998 1997 - ------------------------------------------------------------------------------- Sales $ 816.3 $ 760.6 Operating Profit 34.1 26.3 Operating Margins 4.2% 3.5% - ------------------------------------------------------------------------------- Crane's Wholesale Distribution segment recorded higher operating profits on a solid sales increase driven primarily by acquisitions. Huttig Building Products, Crane's largest business, had a strong profit gain that reflected acquisition results, same-store increases and process improvements. Huttig Expands Reach, Boosts Profits Huttig's sales benefited substantially from strong housing markets and from the full-year results of its 1997 acquisition of MALLCO Lumber in Phoenix and its mid-1998 acquisitions of Consolidated Lumber of Kansas City and Number One Supply, based in Baltimore and Raleigh. The 1998 acquisitions advanced Huttig's multi-channel strategy for further expanding its nationwide penetration as one of the nation's largest distributors of lumber and millwork. Number One Supply specializes in installed sales for large contractors, an approach Huttig plans to introduce in selected markets. Consolidated Lumber is a one-step wholesaler of lumber and millwork products with a strong position among single-family home builders in the Kansas City vicinity. Huttig continued to consolidate its traditional two-step wholesale distribution operations to improve efficiency and profitability. In the Midwest, the Oklahoma City and Des Moines branches are being closed, their territories each divided among two other branches, with a single general manager for each of the two expanded districts. In the South, branches in Roanoke, Virginia and Orangeburg, South Carolina were closed, with territories divided among Fredericksburg, Charlotte and Macon. In California, the Benicia branch was closed in December, with Sacramento retaining its sales. The Louisville and Lexington branches were combined into a single Kentucky territory, with Louisville serving the one-step market in the area and Lexington distributing on a two-step basis statewide. ================================================================================ 28 Crane Co. 1998 Annual Report ================================================================================ Housing starts have been strong nationally and in Huttig's markets during 1998, fueled by low interest rates and a vigorous economy, but activity will decline if the economy begins to slow down. Declining raw material prices for lumber and millwork reduced sales at Huttig's 45 branches and at its Prineville wood moulding manufacturing operation. Despite the possibility of a somewhat weaker market, Huttig expects an increase in volume, driven primarily by full-year sales from the 1998 acquisitions, and increased penetration in other markets. Operating profits increased strongly in 1998, largely because of full-year results from the MALLCO acquisition and an immediate profit contribution from Consolidated Lumber. In 1999, margins and profits should benefit from a full year of earnings from Consolidated Lumber and Number One Supply, along with savings from branch consolidations and other cost reductions. Improved Sales and Profits at Crane Supply Canadian-based Crane Supply sales and operating profits were down slightly in U.S. dollar terms but it was able to maintain its operating margins at 6.2% of sales. In Canadian dollars, Crane Supply achieved modestly higher profits on a solid sales increase that reflected share gains in generally flat Canadian markets. The company, Canada's leading distributor of pipe, valves and fittings, sells to mechanical contractors, industrial plants, fabricators and EPC (engineering procurement and construction) companies through 34 locations across the country. Crane Supply began operations in British Columbia in 1997 and plans to expand in markets where it has existing contracts in the pulp and paper, mining or petroleum industries. The western region had the strongest gain in sales and second strongest in profits during 1998, despite the weakening in British Columbia's resource-based economy caused by slack sales to Asia. The central region also gained in sales and profits, but the eastern region declined in both measures. More efficient use of working capital was a prime focus for Crane Supply in 1998, and with the help of Six Sigma process improvement projects, the company increased inventory turns significantly. The company continued to emphasize the industrial market, and particularly valve sales, achieving sales growth of 12%. Crane Supply does not expect sales to be affected immediately by a projected slowdown in institutional construction starts, and will focus its National Business Solutions program on growing the industrial market. Although markets in British Columbia and Alberta are expected to be soft in 1999, the Ontario and Quebec markets should compensate for this shortfall and the Atlantic market should benefit from investment in large offshore oil and gas projects. Operating profits should grow on the strength of further cost reductions and market share gains. Outlook A projected decline in housing starts in the U.S. and weakness in some parts of Canada's economy, including institutional construction, will limit volume growth on the part of Crane's distribution businesses in 1999. However, the accretive effects of acquisitions, start-up operations in new markets for both companies, and a sharp, ongoing focus on cost reductions and productivity improvements should improve operating profits at both Huttig and Crane Supply. Sales Gain, Profits Dip at Crane Defense Systems Crane Defense Systems, primarily a defense contractor that designs and builds heavy shipboard equipment, such as cranes, elevators, hangar doors and torpedo handling systems, had higher sales but lower operating profits in 1998. Profits were impacted by one-time MIS costs, higher spending stemming from delayed contract awards, and high proposal expenses incurred in competing for contracts on the first of the Navy's new landing craft. Increased sales and profits are expected in 1999. ================================================================================ 1998 Annual Report 29 blank page ================================================================================ Management's Discussion and Analysis of Operations Results of Operations 1997 Fluid Handling Fluid Handling operating profit increased 16% in 1997 on an 8% gain in sales. The sales and earnings gains were derived principally from strong results at Crane Pumps & Systems and from the Crane Valve Group's April 1 acquisition of Movats, a provider of valve diagnostic products and services to the nuclear power industry. Operating profits of $30.0 million were $4.3 million above the 1996 level. Sales were $394.2 million, an increase of $30.2 million. Overall operating margins improved to 7.6% of sales in 1997 from 7.1% in 1996. The backlog of $113 million was $24 million over 1996. At Crane Valves significant margin improvements in cast steel and butterfly valves and the continued ramp-up of the valve manufacturing joint venture in China contributed to the profit gains, as did increased sales of hydrofluoric acid valves. In the United Kingdom, Crane Ltd.'s domestic valve sales were depressed by consolidation among major customers, partially offset by new business. Export sales were hurt by the strength of the British pound and a lack of new orders from certain existing customers in Europe and the Middle East. Margins and operating profits also declined, in part because of costs associated with the company's continuing re-engineering program. Crane Australia enjoyed strong gains in sales and operating profits in 1997, primarily because of increased exports to Southeast Asia. Gains in market share in Indonesia and Malaysia and higher sales of cast steel valves more than offset a softening of the Australian market and declines in sales of forged steel, alloy and cast iron valves. Indonesia's currency devaluation reduced Crane's manufacturing operation there to break-even status. Westad reported higher sales but operating profits declined, reflecting the cost of ramping up for increased volume, as well as a less-favorable product mix and higher warranty expenses. Orders for high-value titanium valves for special industrial applications and a series of contracts from shipbuilders for LNG valves increased Westad's sales, as did the overall strength of the marine market. Crane Pumps & Systems translated a small sales gain into a second year of record profits as a result of a more favorable product mix, price increases and higher margins derived from outsourcing and continuous improvement activities. While total bookings increased modestly, total backlog enjoyed substantial growth. Chempump had lower sales and earnings in 1997 after a record year in 1996. The sales decline reflected an industry shift from standard pumps to more customer-specific engineered pumps, which require longer lead times. However, bookings and backlog increased in 1997, primarily in engineered pumps. Cochrane, Inc. had flat earnings in 1997 on slightly higher sales. Cochrane reported significant gains in bookings and backlog. Aerospace Aerospace segment operating profits improved 37% on a 39% increase in sales. The strength of the commercial air transport industry in 1997 was the driving force in this performance, along with a full year's results from Interpoint, acquired in October, 1996. Segment sales were $343.9 million, up from $246.7 in 1996, while operating profits rose from $65.9 million to $90.1 million. Operating profit margins declined slightly to 26.2% as 1997 results included Interpoint for the whole year. Interpoint's margins are historically lower than the other Aerospace businesses. The backlog increased to $297.4 million, up $28.5 million from 1996. ELDEC, the segment's largest business, reported strong growth in sales and operating profits, maintaining its solid margins despite investing heavily in R & D and implementing a new Enterprise Resource Planning system. Total bookings and year-end backlog were well above 1996. ELDEC won orders for its proximity sensing systems or power systems on almost all of the new aircraft launched during 1997. The company won proximity sensing systems business on the Raytheon Hawker Horizon business jet, the Boeing MD-10 upgrade for Federal Express, and the Canadair RJ-700, a new 70-seat regional jet, as well as a battery system for the MD-95. The company has also completed development of a new battery system that is now being installed in all new generation Boeing 737 and 747 aircraft. ELDEC's sales of power conversion products for avionics systems dipped in 1997 as several military programs ended. Hydro-Aire posted strong commercial OEM sales driven primarily by sales of braking systems for Boeing aircraft, including the latest derivatives in Boeing's 737 series, which continue to gain market share. Aftermarket sales showed strong growth, as did sales of repair and overhaul services. Military sales, mainly braking systems for the C-17 and Lockheed C-130J transports, also increased. Strength in the business and commuter jet market where Hydro-Aire has a strong market position and demand for Hydro-Aire offerings of centrifugal pumps also contributed to the improved results. Lear Romec achieved a solid profit gain on essentially flat sales. Bookings gained 10% despite a sharp drop in government spares orders after a strong 1996. Increased marketing and support efforts boosted sales in the repair and overhaul business, and higher sales of pumps for Hawk missile systems and initial provisioning sales to airlines increased after market sales. Sales of engineering services also gained but overall OEM unit sales declined because of lower military sales. ================================================================================ 30 Crane Co. 1998 Annual Report Lear Romec improved its overall margins by aggressively cutting costs and by improving its production efficiency with automated equipment and cell manufacturing techniques. The company is also applying engineering and manufacturing resources to support Hydro-Aire's line of high performance centrifugal fuel pumps. Interpoint had strong sales and earnings gains in its first full year as a Crane company. Operating profits were affected by integration costs, a new wage structure, and the expense of implementing new systems for materials requirements planning and cost accounting. Bookings and year-end backlog increased significantly. Engineered Materials The Engineered Materials segment achieved 17% higher profits in 1997 on a 9% increase in sales. Strong sales and earnings gains at Kemlite, the segment's largest business, and improved profitability at Crane Plumbing were the principal elements in this result. Operating profit margins improved to 13.3% of sales compared to 12.4% in 1996. Backlog increased to $29 million at December 31, 1997 compared to $23 million in 1996. Stronger market conditions helped three of Kemlite's four market segments to increase sales and earnings. In the transportation segment, Kemlite's market-leading fiberglass-reinforced plastic liner panels (frp) and translucent roof panels for truck trailers and trucks turned in a 28% increase in sales. More than half of the increase stemmed from the March acquisition of a competitor's transportation product line which helped increase Kemlite's market share. Kemlite also benefited from the continuing trend toward substitution of translucent fiberglass-reinforced plastic for aluminum in truck and trailer roof applications. In addition, a 20% increase in the dry van truck trailer market boosted roof panel sales. Kemlite's sales of frp panels for sidewalls and roofs on motorhomes and recreational trailers increased by 10%, largely because of OEMs' shift away from aluminum. International sales rose by 25% on increased sales to several large accounts, and in international markets generally, the company's business continued to expand. The widespread growth of fast food franchising increased opportunities for Kemlite's building products and growing truck/trailer markets proved receptive to frp liner and roof panels. Cor Tec reported a 7% sales gain but start-up costs on a new product resulted in flat earnings. Shipments into Canada more than doubled and panel sales to truck body manufacturers also increased sharply. Demand for longer trailer panels fell by 10%, reflecting lower frp production at Cor Tec's largest customer. Resistoflex reported flat earnings on lower sales in 1997, as a fall-off in project business in economically troubled Southeast Asia squeezed the company's fledgling operations there and domestic markets for the company's plastic-lined pipe and fittings were soft. Its aerospace business, primarily domestic military sales, increased significantly, however, and overall margins improved, making possible an earnings performance level with 1996 results. Crane Plumbing improved its profitability on a 6% sales increase, essentially breaking even after a loss in 1996. A slowdown in commercial construction, coupled with a shift in demand towards lower priced residential bathware products, led to a net decline in prices in 1997. The company showed an improvement in earnings over 1996 as a result of a turnaround of the Acrylics operation and the automation of a number of operations at its Steelware facility. Polyflon increased its sales, sharply raising margins and operating profits. Controls The Controls Segment had a modest increase in operating profits in 1997 on a small sales increase. The five companies in the segment reported combined sales of $131.5 million, up 1%, and operating earnings of $11.6 million, a gain of 3% that reflected slightly improved operating margins. Barksdale increased its penetration of the market for truck and bus ride leveling systems and expanded its presence in the U.S. "oil patch," but operating profits were flat despite a 6% sales gain. Backlog and bookings rose in 1997. Sales and profits declined in 1997 at Ferguson. Despite product margin gains, profits slipped as a result of reduced project business in 1997, the cost of closing its Detroit manufacturing plant and other reorganization expenses. Year-end backlog in the U.S. rose 11%. Ferguson's European operation in Brussels increased profits through margin improvements and new sales and marketing efforts. Powers Process Controls had lower sales and earnings, primarily because of weak commercial markets in Canada and increased expenses that offset gains in the company's commercial non-residential plumbing business in the U.S. Azonix turned in an especially strong performance in 1997, aided by an expanding oil exploration industry. Profits more than doubled on a 33% sales increase. Strong engineering capabilities have enabled Azonix to attain a leadership position with man machine interface (MMI) products in the oil and gas exploration industries. The company's rugged MMI products, specifically designed for hazardous or harsh environments, were the largest gainer for Azonix in 1997. Dynalco Controls had higher sales and bookings in 1997, both setting new records. A less favorable product mix resulted in slightly lower margins and operating profits. ================================================================================ Crane Co. 1998 Annual Report 31 ================================================================================ Management's Discussion and Analysis of Operations Sales of Dynalco's instruments and controls to equipment OEMs were strong, offsetting a small decline in the agricultural OEM sector that reflected a cyclical dip in agricultural equipment sales. Merchandising Systems The Merchandising Systems segment reported a 25% increase in profits for 1997 on the strength of a modest sales gain and a strong increase in margins. Sales were $179.9 million, up 4% from 1996 sales. Operating profits rose to $31.0 million, up $6.2 million from the prior year. Operating profit margins improved to 17.3% compared to 14.4% in 1996. Backlog of $19 million was up slightly from the prior year. National Vendors continued as the market leader in 1997, posting a 9% sales gain attributable primarily to the March, 1997 acquisition of Polyvend, Inc., a manufacturer of lower-priced vending equipment sold through distributors to smaller operators. Operating income increased by 20%. Margins improved on a more favorable product mix and manufacturing cost improvement. National Rejectors, Inc., GmbH sharply improved margins in 1997. Generally good market conditions in Europe, coupled with accelerating demand for NRI's battery-operated validator for outdoor cigarette machines, particularly in Germany, drove NRI's improved results. The company's branches in France, Spain and the U.K. were profitable in local currency terms. Margins benefited from continuing improvements in design and manufacturing processes, reduced raw material costs and a small price increase. Wholesale Distribution Wholesale Distribution, Crane's largest segment measured by sales, reported increased sales but lower earnings for 1997. Sales of $760.6 million were up 3.5% for the year but operating profits fell by just under 11% to $26.3 million. Huttig Building Products had 1997 sales of $625.5 million, a gain of $30.4 million that essentially resulted from the June, 1997 acquisition of MALLCO Lumber Co., a Phoenix lumber and millwork dealer. MALLCO's sales added $32.3 million to the total. Operating profits declined 10%. Distribution sales increased slightly in 1997, excluding MALLCO, even though housing starts declined throughout most of the country, and fell 1.1% in the markets served by Huttig. Solid housing gains in California and Florida and modest improvement in the Northeast contributed to the improved results. Other areas, particularly in the Midwest, but also in the Northwest, Central and Southern regions, experienced generally softer housing markets. In some areas, Huttig branches attempted to regain lost volume by pursuing a one-step approach, shipping to contractors instead of to dealers. Huttig's international sales also declined as a result of the strength of the dollar versus the Japanese yen. Sales, margins and operating profits fell significantly at Prineville because of higher lumber prices throughout 1997, resulting in lower profits for Huttig as a whole. The 1996 closure of another manufacturing unit, Missoula White Pine & Sash, improved overall manufacturing profits. Crane Supply had essentially flat sales of the pipe, valves, fittings and plumbing fixtures it distributes in Canadian markets, as operating profits dipped slightly on lower margins. Strong growth in the industrial sector boosted sales sharply in the Atlantic region and increased oil and gas activity in Alberta was the main ingredient in a solid gain in that province. The company improved its profitability in underperforming markets outside central Canada in 1997 and found ways to cut inventories to reduce working capital needs. It also established electronic data interchange links with many of its best customers, speeding order handling. In October, the third company in the segment, Valve Systems and Controls, was sold for $7.5 million in cash and $1.5 million in convertible preferred stock. Valve Systems reported a small loss on sales of nearly $25 million through September 30. In 1996, it had modest profits on sales of $27 million. Crane Defense Systems combined a 24% sales increase with improved margins in 1997 to generate a gain in operating profit. Liquidity and Capital Resources Cash Flow Operating activities in 1998 generated $192 million in cash flow, allowing the company to invest $224 million expanding its core businesses by making six acquisitions, invest $54 million in capital equipment and return $47 million to shareholders through dividends and share repurchases. This represents the fifth consecutive year that Crane has generated cash in excess of $100 million from operations. Net cash used for investing activities increased compared to the prior year, mainly because of the six acquisitions made in 1998. Capital expenditures in 1998 totaled $54 million and primarily funded manufacturing and business process system projects. The company expects to invest approximately $55 million per year on similar capital projects over the next two years with capital expenditures dropping to $40 million in 2001. These projects are designed to reduce business process and manufacturing cycle times, increasing the company's ability to respond to customer needs. In 1999, Crane plans to continue to seek acquisition opportunities that complement existing businesses, have leading positions in niche markets and can generate cash returns greater than the cost of capital. Net cash used for financing activities in 1998 includes $22 million for the repurchase of more than 700,000 shares of Crane common stock and $25 million for the payment of dividends. Debt repayments totaled $26 million. ================================================================================ 32 Crane Co. 1998 Annual Report ================================================================================ Capital Structure The following table sets forth the company's capitalization: (Dollars in thousands) December 31, 1998 1997 - ------------------------------------------------------------------------------- Short-term debt $ 51,188 $ 31,232 Long-term debt 359,090 260,716 - ------------------------------------------------------------------------------- Total debt 410,278 291,948 Less cash 15,909 6,982 - ------------------------------------------------------------------------------- Total net debt 394,369 284,966 Shareholders' equity 643,234 532,544 - ------------------------------------------------------------------------------- Total capitalization $1,037,603 $817,510 % of net debt to shareholders' equity 61.3% 53.5% % of net debt to total capitalization 38.0% 34.9% - ------------------------------------------------------------------------------- At December 31, 1998, the company had unused lines of credit in support of short-term borrowings of $231.9 million. Domestic lines of credit, which were uncommitted and unsecured, totaled $205.0 million. Foreign lines of credit totaled $78.3 million, of which $41.5 million was contractually committed and $36.8 million was uncommitted. All available short-term lines of credit are for borrowings up to 364 days and are renewable at the option of the lender. At December 31, 1998, the company had a $300 million contractually committed multi-currency long-term bank credit facility under which the company can borrow, repay, or to the extent permitted by the agreement, prepay loans and reborrow at any time prior to the termination date of November 2003. Proceeds may be used for general corporate purposes or to provide financing for acquisitions. The agreement contains certain covenants, including limitations on indebtedness and liens. No loans were outstanding under this agreement at year end. Under a $300 million shelf registration filed with the Securities and Exchange Commission, $50 million in unissued debt securities remains registered. Crane is a party to a contractually committed off-balance sheet chattel paper financing facility which enables its National Vendors operation to offer various sales support financing programs to its customers. Recourse to Crane for all uncollectible loans made to National Vendors' customers by the banks under this agreement is limited. In addition, the company's U.K. subsidiary was also party to a contractually committed long-term line of credit in the U.K. This facility permits borrowing up to $8.3 million, all of which was outstanding at December 31, 1998. As of December 31, 1998, the company's senior unsecured debt was rated BBB+ by Standard and Poor's and Baa1 by Moody's Investors Service. The company believes it has adequate access to both public and private credit markets to meet all of its operating and strategic objectives. Environmental The company continues to be involved in various remediation actions to clean up hazardous wastes as required by federal and state laws. Estimated future environmental remediation cost was $13.0 million at December 31, 1998, which was fully accrued. In certain of these actions, the company is one of several potentially responsible parties ("PRPs"). As a PRP, the company could be liable for all clean up cost despite the involvement of other PRPs. Given the financial stability of the other PRPs, the company believes this is unlikely and the accrual represents management's best estimate, based on current facts and circumstances, with respect to the ultimate liability that will be apportioned to the company. The company spent $2.9 million on environmental costs in 1998, and expects to pay remediation costs of approximately $3.5 million in 1999. The annual level of future remediation expenditures is difficult to estimate because of the many uncertainties relating to conditions of individual sites as well as uncertainties about the status of environmental laws and regulations and developments in remedial technology. In addition, the company is a minor/de minimis potentially responsible party (PRP) at certain third party environmental remediation sites where remediation obligations are joint and several, and the company, as part of its estimate of potential liability, periodically reviews whether the major PRPs have the ability to fulfill their portion of such remediation obligation. The company is not aware of any significant additional liability that would result from the inability of other PRPs to fulfill their obligation. Overall, the company's liability for the required remedial actions being implemented or engineered is not, individually or in the aggregate, expected to be material. Impact of the Year 2000 The Year 2000 Issue relates to most computer software programs using two digits, rather than four, to define the applicable year for dates. Any of the company's information technology (IT) and non-information technology (non-IT) systems and its products may recognize a date using "00" as the year 1900, rather than the year 2000. This could result in system failures or miscalculations, causing disruptions in operations, including the inability to process transactions and engage in similar normal business activities within the company and with third parties. Crane has implemented a Year 2000 program for its IT and non-IT systems and its products consisting of four phases: 1) awareness, formation, planning and management, 2) inventory, analysis, compliance testing, prioritization and planning, 3) implementation and validation, and 4) Year 2000 compliance. The company's senior management and Board of Directors receive regular updates on the status of the company's Year 2000 program. ================================================================================ Crane Co. 1998 Annual Report 33 ================================================================================ Management's Discussion and Analysis of Operations In addition, the company has contacted significant vendors and customers in order to determine the risks to the company from a third party's failure to remediate its own Year 2000 issues. While information obtained from these contacts will be used to mitigate these risks, there can be no assurance that any third party systems or products will be Year 2000 compliant on a timely basis or that non-compliance by such third parties will not have a material adverse effect on the company. The company's Year 2000 program was initiated in 1997. Virtually all mission-critical systems, including IT and non-IT systems, are in the implementation phase or are compliant. Non mission-critical systems are in various phases of the program. It is expected that all mission-critical systems will be implemented, tested and validated by September of 1999. Year 2000 costs incurred to date are approximately $16.8 million, of which $4.8 million was expensed and $12.0 was capitalized. Estimated future costs to complete the Year 2000 program are $11.3 million, of which $5.6 million will be expensed as incurred and the remaining $5.7 million will be capitalized. These costs have been, and will continue to be, funded from normal operating cash flows of the business. No other information technology projects have been or are being delayed by this program. The company believes that completed and planned modifications and conversions of its software and hardware systems, its products and its efforts to verify the readiness and compliance of material third parties will allow it to meet its Year 2000 compliance schedule. However, the success of the Year 2000 compliance program is based on the availability of a variety of technical experts, expected successful software modifications being performed by third parties, timely delivery of new software and hardware systems, and other factors. A deficiency with respect to any of these factors could cause a failure in the company's Year 2000 program, in whole or in part. The failure to correct a material Year 2000 program could result in an interruption in, or a failure of, certain normal business activities or operations, which could have a material adverse effect on the company's results of operations, liquidity or financial condition. Due to the inherent uncertainty in the Year 2000 problem, particularly in regard to third party vendor and customer Year 2000 readiness, the company is unable to determine at this time whether the consequences of any Year 2000 disruptions or failures will have a material adverse effect on the company's results of operations, liquidity or financial condition. However, based on current information, the most reasonably likely worst case scenario would involve the temporary disruption of the company's ability to fulfill customer orders and no material adverse effect on the company's financial condition is expected from this specific scenario. Risk Factors Throughout this Annual Report to shareholders, particularly in the Chairman's Letter to Shareholders on pages 2-4 and in the sections of Management's Discussion and Analysis of Operation on pages 23-34 the company makes numerous statements about expectations of future performance and market trends, and statements about plans and objectives and other matters, which because they are not historical fact may constitute "forward looking statements" within the meaning of the Private Securities and Litigation Reform Act of 1995. Similar forward looking statements are made periodically in reports to the Securities and Exchange Commission, press releases, reports, and documents and in written and oral presentations to investors, shareholders, analysts and others, regarding future results or expected developments. Because the company wishes to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, readers are cautioned to consider, among others, the risk factors which will be described in the company's Form 10-K for the period ended December 31, 1998 to be filed with the Securities and Exchange Commission before March 31, 1999, when evaluating such forward looking statements about future results or developments. Copies of the company's Form 10-K can be obtained after it is filed by writing to the company at the address on the back cover, from the Securities and Exchange Commission, or through the Internet at the company's web site at http:/www.shareholder.com/crane. ================================================================================ 34 Crane Co. 1998 Annual Report ================================================================================ Five Year Summary of Selected Financial Data
(In thousands except per share data) Years Ended December 31, 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------- Net Sales $2,268,505 $2,036,831 $1,847,732 $1,782,310 $1,653,466 Depreciation and Amortization 61,458 55,400 49,402 48,765 44,691 Operating Profit 238,932 196,601 166,153 142,948 109,889 Interest Expense 27,819 23,817 23,420 26,913 24,171 Income Before Taxes 214,641 175,837 145,020 121,468 91,227 Provision for Income Taxes 76,203 63,066 52,910 45,131 35,294 - ----------------------------------------------------------------------------------------------- Income from Operations $ 138,438 $ 112,771 $ 92,110 $ 76,337 $ 55,933 - ----------------------------------------------------------------------------------------------- Diluted Net Income Per Common Share $ 2.00 $ 1.63 $ 1.34 $ 1.11 $ .82 Cash Dividends Per Common Share .37 .33 .33 .33 .33 Assets 1,454,674 1,185,893 1,088,855 998,411 1,008,045 Long-Term Debt 359,090 260,716 267,795 281,093 331,289 - -----------------------------------------------------------------------------------------------
Quarterly Results for the Year
(In thousands except per share data) Quarter Year Years Ended December 31, First Second Third Fourth - ------------------------------------------------------------------------------------- 1998 Net Sales $526,817 $563,399 $595,438 $582,851 $2,268,505 Cost of Sales 379,989 403,838 426,946 413,894 1,624,667 Depreciation and Amortization (a) 11,292 11,285 13,014 14,003 49,594 - ------------------------------------------------------------------------------------- Gross Profit $135,536 $148,276 $155,478 $154,954 $ 594,244 Net Income 29,899 36,557 36,775 35,207 138,438 Diluted Net Income Per Share .43 .53 .53 .51 2.00 - ------------------------------------------------------------------------------------- 1997 Net Sales $467,333 $518,763 $534,818 $515,917 $2,036,831 Cost of Sales 338,614 376,298 391,503 371,300 1,477,715 Depreciation and Amortization (a) 10,113 10,515 10,502 10,713 41,843 - ------------------------------------------------------------------------------------- Gross Profit $118,606 $131,950 $132,813 $133,904 $ 517,273 Net Income 22,645 29,222 31,400 29,504 112,771 Diluted Net Income Per Share .33 .42 .45 .43 1.63 - -------------------------------------------------------------------------------------
(a) amount included in cost of sales. Market and Dividend Information-Crane Co. Common Shares New York Stock Exchange Composite Price Per Share Dividends Per Share - -------------------------------------------------------------------------------- 1998 1997 1998 1997 Quarter High Low High Low - -------------------------------------------------------------------------------- First $35 1/2 $26 3/4 $22 15/16 $18 5/16 $.0825 $.0825 Second 37 9/16 31 28 15/16 20 7/16 .0825 .0825 Third 35 43/64 23 5/16 31 1/2 27 3/8 .1000 .0825 Fourth 32 3/4 21 3/4 31 5/16 26 9/16 .1000 .0825 - -------------------------------------------------------------------------------- $ .3650 $.3300 - -------------------------------------------------------------------------------- The company effected a three-for-two split of its common stock on September 14, 1998 and December 12, 1996. All per share data prior to the splits have been restated On December 31, 1998 there were approximately 5,300 holders of record of Crane Co. common stock. ================================================================================ Crane Co. 1998 Annual Report 35 ================================================================================ Corporate Information Directors E. Thayer Bigelow, Jr. (1,2) Senior Advisor, Time Warner, Inc. Media and Entertainment Robert S. Evans (1) Chairman and Chief Executive Officer of the Company Richard S. Forte (2) President, Dawson Forte Cashmere Company Importer Dorsey R. Gardner (2,3) President, Kelso Management Company, Inc. Investment Management William E. Lipner Chairman, President and Chief Executive Officer NFO Worldwide, Inc. Marketing Information / Research Services Worldwide Dwight C. Minton (1,3) Chairman, Church & Dwight Co., Inc. Manufacturer of Consumer and Specialty Products Charles J. Queenan, Jr. (2) Senior Counsel, Kirkpatrick & Lockhart LLP Attorneys at Law James L. L. Tullis (3) Chairman, Tullis-Dickerson & Co. Venture Capital to Health Care Industry Boris Yavitz (1,3) Dean Emeritus, Columbia University Graduate School of Business Corporate Officers Robert S. Evans Chairman and Chief Executive Officer L. Hill Clark President and Chief Operating Officer Gil A. Dickoff Treasurer Augustus I. duPont Vice President, General Counsel and Secretary Bradley L. Ellis Vice President, Chief Information Officer John R. Packard Vice President, Human Resources Anthony D. Pantaleoni Vice President, Environment, Health and Safety Michael L. Raithel Controller David S. Smith Vice President, Finance and Chief Financial Officer (1) Member of the Executive Committee (2) Member of the Audit Committee (3) Member of the Organization and Compensation Committee ================================================================================ 36 Crane Co. 1998 Annual Report ================================================================================ Shareholder Information Crane Co. Shareholder Direct(R) Copies of Crane Co.'s report on Form 10-K for 1998 as filed with the Securities and Exchange Commission as well as other financial reports and news from Crane Co. are available by calling 1-888-CRANE-CR (1-888-272-6327), 24 hours a day, 7 days a week. Visit Crane Co. on the Internet at http://www.shareholder.com/crane. Annual Meeting The Crane Co. annual meeting of shareholders will be held at 10:00 A.M. on Monday, April 5, 1999 at the Westin Stamford Hotel, One First Stamford Place, Stamford, CT 06902. Stock Listing Crane Co. common stock is traded on the New York Stock Exchange, listed under the symbol "CR". Auditors Deloitte & Touche LLP Stamford Harbor Park Stamford, CT 06902 Equal Employment Opportunity Policy Crane Co. is an equal opportunity employer. It is the policy of the company to recruit, hire, promote and transfer to all job classifications without regard to race, color, religion, sex, age, disability or national origin. Environment, Health & Safety Policy Crane Co. is committed to protecting the environment and will strive to protect the biosphere by taking responsibility to prevent serious or irreversible environmental degradation through efficient operations and activities. Crane Co. recognizes environmental management among its highest priorities throughout the corporation, and has established policies and programs which are integral and essential elements of the business plan of each of the business units. Additionally, Crane Co. has established the position of Vice President-Environment, Health and Safety, which is responsible for assuring compliance, measuring environmental performance and conducting regular environmental audits in order to provide appropriate information to the Crane Co. management team and to regulatory authorities. Stock Transfer Agent and Registrar of Stock First Chicago Trust Company, a division of EquiServe Customer Service: 1-201-324-1225 Non-Postal Deliveries 525 Washington Blvd. Jersey City, NJ 07310 Dividend Reinvestment & Optional Payments P.O. Box 13531 Newark, NJ 07188-0001 General Correspondence & Changes of Address P.O. Box 2500 Jersey City, NJ 07303-2500 Transfer of Stock Certificates P.O. Box 2506 Jersey City, NJ 07303-2506 Bond Trustee and Disbursing Agent The Bank of New York Corporate Trust Department: 1-800-438-5473 101 Barclay Street - 7 East New York, NY 10286 Dividend Reinvestment and Stock Purchase Plan Crane offers shareholders the opportunity to participate in a Dividend Reinvestment and Stock Purchase Plan. The plan provides two convenient methods for increasing your investment in Crane Co. common shares, without paying fees and commissions. Dividend Reinvestment: for all or part of your dividends on Crane common shares; and Voluntary Cash Payments: of any amount from $10 to a maximum of $5,000 a month. Under terms of the Plan, First Chicago Trust Company, a division of EquiServe will act as agent for shareholders interested in purchasing additional Crane common shares automatically, on a regular basis. The details of this plan and its benefits to you as a Crane shareholder are described in a brochure available by writing to: First Chicago Trust Company, a division of EquiServe Dividend Reinvestment Plan Crane Co. P.O. Box 2598 Jersey City, NJ 07303-2598 Design: Robert Webster Inc ================================================================================ Crane Co. 1998 Annual Report 37 - ---------- CRANE(R) - ---------- Crane Co. Executive Offices 100 First Stamford Place Stamford, CT 06902 (203)363-7300 EX-21 5 SUBSIDIARIES OF THE REGISTRANT CRANE CO. Exhibit 21 to FORM 10-K Annual Report for the Year Ended December 31, 1998 Subsidiaries of Registrant The following is a list of active subsidiaries of the registrant and their jurisdictions of incorporation. Except as noted, all of these subsidiaries are wholly owned, directly or indirectly, and all are included in the consolidated financial statements. The names of several other subsidiaries have been omitted as they would not, if considered in the aggregate as a single subsidiary, constitute a significant subsidiary. Cochrane, Inc Delaware Crane Australia Pty., Ltd. Australia P.T. Crane Indonesia (51%) Indonesia Crane GmbH Germany National Rejectors, Inc. GmbH Germany NRI Iberica, S.A. Spain Crane International Holdings, Inc. Delaware Crane Canada, Inc. Canada Crane Capital Corporation, LLC Delaware Crane Center-Line Valve Co. Delaware Crane Ningjin Valve Co., Ltd. (70%) China Crane FSC Corporation Barbados Crane Ltd. England Crane Europe Ltd. Scotland Grenson Electronics Ltd. England Stockham Valve Ltd. England UMC Industries Ltd. England Crane Pumps & Systems, Inc. Delaware Barnes Pumps, Inc. Ohio Barnes Pumps Canada, Inc. Ontario Dyrotech Industries, Inc. Delaware ELDEC Corporation Washington ELDEC France S.A.R.L. France Huttig Sash & Door Company Delaware CIPCO Inc. Illinois Rondel's, Inc. Washington Ferguson Machine Co. S.A. Belgium Hydro-Aire, Inc. California Interpoint Corporation Washington Interpoint GmbH Germany Interpoint S.A.R.L. France Interpoint Taiwan Corporation Republic of China Interpoint U.K. Ltd. England (continued) 25 Subsidiaries of Registrant (continued) Kemlite Company, Inc. Delaware Sequentia Incorporated Ohio Mark Controls Corporation Delaware Azonix Corporation Massachusetts Azonix S.A.R.L. France Barksdale, Inc. Delaware Barksdale Control Products GmbH Germany Dynalco Controls Corporation Delaware Mark Controls Norway A/S Norway Westad Industri A/S Norway Powers Process Controls, Ltd. Ontario Resistoflex (Asia) Pte., Ltd. Singapore Kessel (Thailand) Pte., Ltd. (49%) Thailand Resistoflex Sdn. Bhd. Malaysia UniDynamics/Phoenix, Inc. Delaware UniDynamics/St. Louis, Inc. Delaware Crane Nuclear, Inc. Delaware Stockham Valve Australia Pty., Ltd. Australia 26 EX-23 6 INDEPENDENT AUDITORS CONSENT EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-50489 on Form S-8, Registration Statement No. 333-50487 on Form S-8 and Registration Statement No. 333-50495 on Form S-8, Registration Statement No. 33-53709 on Form S-3, Registration Statement No. 33-36735 on FormS-8, Post- Effective Amendment No. 1 to Registration Statement No. 33-59389 on Form S- 8, Post-Effective Amendment No. 1 to Registration Statement No. 33-59475 on Form S-8 and Registration Statement No. 333-16555 on Form S-8 of our report dated January 20, 1999, appearing in and incorporated by reference in this Annual Report on Form 10-K of Crane Co. for the year ended December 31, 1998. DELOITTE & TOUCHE LLP Stamford, Connecticut February 26, 1999 27 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CRANE CO.'S CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1998, CRANE'S CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR 1998 AND THE RELATED NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS, THAT ARE CONTAINED IN CRANE'S 1998 ANNUAL REPORT ON FORM 10-K. THE SCHEDULE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1998 DEC-31-1998 15,909 0 303,245 0 330,344 698,966 645,383 337,816 1,454,674 351,162 359,090 0 0 68,496 574,738 1,454,674 2,268,505 2,268,505 1,674,261 2,029,573 754 0 25,045 214,641 76,203 138,438 0 0 0 138,438 2.02 2.00
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