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Crane Co. 1977 Annual Report Fluid and Pollution Control Steel . Building Products Aerospace and Aircraft Products CRTX 0377 OQit? &>> ^7 AttfUrjl RijiUTM ii sxaSjiS- ! r i pi&gp&iMar Ii - nka^aQSgSEl u> SfcianawSMte' v> :^r^\v-3f o*X3r3a=C0 l owkte vj(jj= ';. \ 3v.Ttfc<5g? '? . ;<uir.fr.T-4 iSTil!0>-JpSlCE sjirni si^m r iJI&.Ijjitu .$5liin*1`! >1 Tti>i* c'.ii'o^iTtyi)iJ!j3 'fysf* v*!s> "{'] i'i) A';jJVji*. 'R?* 'f>>& C {_?/ - ' >!I5ui OM . < rtj jjJiMv HJ-;< rtj' irp !!//' v;v)(i; :h'4. i/Mt <tir Ilii. n'/?IBl3fe iVCifeilv .`tfffe'CoNJBr *5Mfe jy'*V/ is'!*)*- AygiEfey ?{2,yvp* ?i V . ,". Ifoaaifa5& vnftsi&j . rsn^&iV Cr4y, 'AlivV 'Si? Vs#* ;i i sjfifa, Vi--~ itex.it fell* *1 C-feirpfSll J/fcjifififilt . 0 J '%ti<im:Vfe %EgSi- `fefe n< i AfetoifeV , 5w8&A`3SB}%'f*t/ titiTffe*i i*_ ? t.>jnaO Afelr.feh':-* CpV.k.rtt i.),Titers nr^ritii Cihinrfn I M m&.fy&M&'W&irV'iW . ' tf{kwsr<wg|&':t?1g.tj^ n\.:*UiT4!l?jei>Vif :Ii> f s >.t SS&Ygfe/U t ?.>4> .i tl ^(-'lk.r f *lgir>_t*f ;* ! jfe*. jtefti*/-?in -i. t.Qy.?, Aiga*ji.io t< ? jSijri-cajiiiJrjiv ? r V/qlfci jJyay.-fajv I4?5>'.i5glfn!:j&, tpTaiijanjjiTy *ii 4 figmSi^y, - tilCeitei. i&ilZhU&khlu-izir I rSfe *> fe V ~|S J'tqUrdifM.f.T I'/femfe'Vtij1 ''-> <ir ' , cfc&^jfj&ylfetv hi*g:o;%:irfv ^ l Pniai>. cpililrli hflirKIgar t r:'rin l f, A y^tty l ftfar)i CRTX 0378 Financial Highlights Sales.................................................................................................... Net Income....................................................................................... Per Common Share: Primary earnings*................................................................. : . Cash dividends.............................................................................. Net Working Capital......................................................................... Total Assets...................................................................................... Current Ratio...................................................................................... Common Shareholders' Equity........................................................ Per share........................................................................................... Common Shares Outstanding at Year-end....................................... `Net income per common share would amount to $6.17 ($4.31 in 1976) assuming conversion of subordinated debentures. tAdjusted for 2% stock dividend in February, 1977. 1977 $1,133,822,000 $ 66,171,000 $ 6.52 1.30 $ 240,795,000 $ 836,895,000 2.4 $ 326,152,000 32.56 10,017,199 1976 $1,087,606,000 $ 47,959,000 $ 4.61 + 1.18+ $ 217,731,000 $ 760,561,000 2.3 $ 282,456,000 27.61 + 10)030,897 Net Income per Sharet Cash Dividend per Sharet Shareholders' Equity per Sharet 1 CRTX 0379 To the Shareholders: Sales for 1977 were $1,133,822,000, the second highest in the company's history, compared with $1,087,606,000 for 1976. Net income, including non-recurring items, amounted to $66,171,000 compared with $47,959,000 for the prior year. Net income per share in 1977 was $6.52 and net income from operations, excluding $2.78 from non-recurring transactions, was $3.74 per common share. Crane's 1977 earn ings were reported using the accelerated de preciation method while 1976 earnings were reported using the straight-line method. The effect of this change was to reduce 1977 net income by $2,769,000 or 27 cents per share. Depreciation for 1977 was $44,192,000 com pared with $36,380,000 in 1976. Net income per share in 1976 amounted to $4.61 and net income from operations, excluding 78 cents from non-recurring trans actions, was $3.83 per common share. If accelerated depreciation had been used, total net income would have been reduced by $2,370,000 or 23 cents per share from the amount reported. The 1977 adoption of accelerated depre ciation is a continuation of Crane's policy of reporting financial results as realistically as possible. The accelerated method of reporting depreciation gives a closer assess ment of the earnings level necessary to allow replacement of plant, property and equip ment in today's inflationary economic envi ronment. In addition, recent criticism of corporate profitability levels heightens the need for such an assessment. Crane has consistently utilized conserva tive accounting methods whenever possible. The company was one of the pioneers in using the LIFO method of inventory valua tion, adopting it in 1940. As a result, Crane had a LIFO reserve in excess of $67 million at December 31,1977. Crane's concern over the impact of infla tion on reported corporate earnings is fur ther reflected in the company's accelerated pension funding policy. In 1974 Crane began amortizing past service pension costs on a ten year basis, the minimum time allowed under federal tax law, rather than the twenty to forty year periods used by many steel companies. Current service and interest costs are funded annually. Based upon latest esti mates, the company's unfunded pension liability at 1977 year-end, before future income tax credits, was $107 million com-' ' pared with $120 million the prior year. Early in 1977 Crane reported two non recurring transactions. First, an after-tax gain of $41,570,000 resulted from the Atlantic Richfield/Anaconda merger; second, an after-tax provision of $13,181,000 was pro vided principally for unfunded pension lia bilities relating to operations phased out or relocated. These transactions increased 1977 net income by $28,389,000 or $2.78 per share. In 1976 there were two non-recurring transactions, which increased net income by $8,148,000 or 78 cents per common share. Crane Domestic operations and CF&I Steel Corporation were adversely affected by the inability to recover steadily rising production costs through price increases and by the im pact of foreign competition on certain tradi tional markets. Huttig Sash & Door Com pany, however, performed at record levels. With residential construction as its primary CRTX 0380 market, Huttig benefited from the increased pace of new housing starts and remodeling activity during 1977. Crane Canada and International Operations did not meet the prior year's performance levels, largely due to high inflation rates, low capital investment and generally depressed economic activity. Plant modernization programs reported a year ago were essentially on schedule during 1977. Crane invested more than $93 million in modernization and environmental im provement projects last year, principally on expansion of the rail mill and development of a second metallurgical coal mine for the company's steelmaking facility. Start-up costs at the new coal mine and the expan sion of the rail mill were charged to income in accordance with the company's past practice. Midway through the year Crane nego tiated a new seven year $35 million term loan, which is repayable from August 1980 through May 1984 in equal quarterly installments. The total cash dividend of $1.30 per share paid to shareholders in 1977 compared with $1.18, as adjusted, paid in 1976. This was the seventh consecutive annual cash dividend increase. A 2 percent stock dividend was paid in February 1978, the tenth year that such a stock dividend has been paid. In December 1977 Crane acquired the assets of Cavalier Corporation of Chatta nooga, Tennessee. Cavalier, which is being operated as a subsidiary of Crane, manu factures a complete line of refrigerated, coin operated vending machines for soft drinks. These machines are marketed to franchised bottlers throughout the U.S. and Canada for use in supermarkets, service stations and other high traffic locations. Early this year in order to strengthen the management structure of the company. Crane's Board of Directors elected R. L. Biller and R. S. Evans seniorvice presidents. On behalf of the Board of Directors, we wish again to express our thanks to Crane's employees, customers, suppliers and share holders for their continuing support. Respectfully submitted, D. C. Fabiani, President r. T. M. Evans, Chairman February 21,1978 D. C. Fabiani, President T. M. Evans, Chairman 3 CRTX 0381 J Consolidated Statement of Income FOR YEARS ENDED DECEMBER 31 CRANE CO. AND SUBSIDIARIES Net Sales.......................................................................... ................. Operating Costs and Expenses: Cost of sales................................................................. Selling, general and administrative.............................. Depreciation................................................................. ................. ................. Operating Profit............................................................. ................. Other Income (Deductions): Interest-net................................................................. Dividend income on investments.............................. Miscellaneous--net*.................................................... ................. ................. Income Before Income Taxes........................................... ................. Provision for Income Taxes ............................................ ................. Net Income..................................................................... ................. Net income per common share: Average shares outstanding* ......... ................. Assuming conversion of debentures..................... ................. 1977 $1,133,822,269 916,846,784 105,665,342 1,066,703,626 67,118,643 3,932,461 26,441,871 11,676,249 78,794,892 12,623,727 $ 66,171,165 $6.52 6.17 1976 $1,087,605,797 866,531,69S 104,098,743 36,380,436 1,007,010,874 80,594,923 (18,764,292) 2,609,300 12,338,161 (3,816,811) 76,778,112 28,819,335 $ 47,958,777 $4.61 4.31 tChanged from straight-line to accelerated depreciation, which increased depreciation by $5,538,000 in 1977. The year 1977 included the following non-recurring transactions: (a) A cash dividend of $24,721,000, a realized gain of $4,541,000 on 260,115 Atlantic Richfield common shares sold and an unrealized gain of $22,968,000 on 1,800,000 Atlantic Richfield common shares for a total gain of $52,230,000 as a result of the Atlantic Richfield/Anaconda merger. (b) A provision of $26,291,000 principally for un funded pension liabilities for operations being phased out or relocated. (c) The net income from these transactions was $28,389,000, or $2.78 per share. The year 1976 included the following non-recurring transactions: (a) A gain of $19,960,000 from the sale of one steam coal property. (b) A provision of $1,122,000 for surplus and inactive building and equipment and a provision of $5,100,000 for termination expenditures and operating losses of an international plant. (c) The net income from these transactions was $8,148,000, or 78 cents per share. CRTX 0382 Consolidated Statement of Capital Surplus FOR YEARS ENDED DECEMBER 31 Balance at Beginning of Year,................................... Excess of subordinated debentures converted over par value of 128,857 common shares issued (495,898 in 1976)........................................... Excess of market value over par value of common shares issued as a 2% stock dividend .... Balance at End of Year........................................... CRANE CO. AND SUBSIDIARIES 1977 $ 27,201,643 918,332 4,374,650 $ 32,494,625 1976 $ 18,711,733 3,783,335 4,706,575 S 27,201,643 Consolidated Statement of Earned Surplus FOR YEARS ENDED DECEMBER 31 , Balance at Beginning of Year Net Income..................... Dividends: Preferred shares--$3.75 per share . Common shares: Cash-$1.30 per share ($1.18 in 1976) Stock--2%, market value of 200,580 shares (203,220 in 1976).............................. 1977 $192,561,537 66,171,165 258,732,702 90,054 13,166,871 5,628,275 1976 5181,442,574 47,958,777 229,401,351 90,575 12,224,986 5,976,700 Excess of Cost Over Par Value of Reacquired Shares--Net: 282 preferred (146 in 1976) and 381,100 common (755,900 in 1976) reacquired, less 37,965 issued under stock options (48,655 in 1976)........................................... Balance at End of Year 8,797,769 27,682,969 _____ 18,5n7,553 36,839,814 $231,049,733 $192,561.537 See Financial Review. 5 CRTX 0383 Consolidated Balance Sheet AT DECEMBER 31 ASSETS Current Assets: Cash.................................................... Short-term investments, at lower of cost or market.......................... Accounts receivable, less allowances of $2,924,635 ($2,665,872 in 1976) . . Inventories, less LIFO reserves of $67,334,697 ($61,022,801 in 1976), at lower of cost or market: Finished goods.......................... Work in process.......................... Raw materials and supplies . . . Prepaid expenses...................... Total current assets . 1977 1976 $ 35,513,764 88,521,494 141,958,357 $ 36,193,742 78,440,074 129,243,861 73,756,830 42,030,379 28,913,367 144,700,576 2,203,230 412,897,421 77,359,437 38,331,439 18,661,468 134,352,344 2,545,492 380,775,513 Investments and Other Assets: Investments (see page 10).................................. Unamortized debt discount on 8% debentures.............................. Outlying lands.................................................................................. Miscellaneous.................................................................................. . 74,736,349 9,002,664 1,232,300 1,548,623 86,519,936 71,576,716 11,375,050 1,232,364 2,310,892 86,495,022 Property, Plant and Equipment at Cost: Land.................................................................................................... Buildings and improvements............................................................. Machinery and equipment................................................................. Less accumulated depreciation........................................................ Capitalized 1977 Leases--Net................................................................. 20,768,952 135,364,592 522,395,983 678,529,527 345,669,510 332,860,017 4,617,496 $836,894,870 20,384,729 130,368,796 479,213,975 629,967,500 336,677,394 293,290,106 $760,560,641 CRTX 0384 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt . . Loans payable to banks.......................... Accounts payable................................... Accrued payrolls, taxes and other liabilities U.S. and foreign taxes on income . . . Total current liabilities . . . Long-Term Debt (see page 9)...................... Capitalized 1977 Lease Obligations . . . Deferred Income Taxes.............................. Reserves and Other Liabilities................. Minority Interest in Subsidiaries Shareholders' Equity: Preference stock of a subsidiary, 51/2%........................................... Cumulative preferred shares, 33A%, par value $100 (redeemable): Authorized--43,389 shares (47,159 in 1976); outstanding--23,761 shares (24,043 in 1976) after deducting 19,628 shares in treasury (23,116 in 1976)........................................................ Serial preferred shares, par value $5: Authorized--600,000 shares. Common shareholders' equity: Common shares, par value $6.25: Authorized--20,000,000 shares-; outstanding--10,017,199 shares (10,030,897 in 1976) after deducting 4,566,694 shares in treasury (4,18S,594 in 1976) . . Capital surplus.............................................................................. Earned surplus-$103,173,875 ($73,241,372 in 1976) is not restricted under a long-term debt indenture . . . . Total common shareholders' equity.............................. Total shareholders' equity ............................................ CRANE CO. AND SUBSIDIARIES 1977 1976 $ 18,535,380 12,812,935 69,910,625 66,619,878 4,223,108 172,101,926 270,744,441 4,551,196 31,437,834 16,907,367 10,704,155 1,920,000 $ 17,692,397 18,040,916 69.093,557 55,038,089 3,179,443 163,044,402 260,866,023 - 32,720,214 6,968.782 10,400,634 1,700,000 2,376,100 2,404,300 62,607,493 32,494,625 231,049,733 326,151,851 330,447,951 $836,894,870 62,693,106 27,201,643 192,561,537 282,456,236 286,560,586 $760,560,641 See Financial Review. 7 CRTX 0385 Consolidated Statement of Changes in Financial Position craneco. and subsidiaries FOR YEARS ENDED DECEMBER 31 1977 1976 Source of Funds: Operations: Net income .................................................................... . Depreciation......................................................................... . $ 66,171,165 44,191,500 $ 47,958,777 36,380,436 Amortization of debt discount ................................................ . 2,372,386 3,352,778 Other, net............................................................ .... . 3,074,588 6,296,522 Unrealized non-recurring credits--net................................... . (8,515,000) -- 107,294,639 93,988,513 Increase in long-term debt........................................................ Capitalized 1977 lease obligations........................................... Conversion of debt to common stock....................................... Disposals of property, plant and equipment.............................. Decrease in long-term investments........................................... Increase (decrease) in reserves and other.................................. . . . . . . 35,000,000 4,551,196 1,725,000 9,428,880 18,466,716 2,147,471 178,613,902 55,600,396 -- 6,903,600 8,557,899 -- (892,020) 164,158,388 Application of Funds: Additions to property, plant and equipment.............................. Capitalized 1977 leases............................................................ Increase in long-term investments........................................... Reduction in long-term debt.................................................... Reacquisition of shares, less options exercised.......................... Cash dividends......................................................................... . . . . . . 93,190,291 4,617,496 8,611,349 25,121,582 10,751,875 13,256,925 155,549,518 - . 82,530,214 -- 14,471,457 36,863,002 23,323,337 12,315,561 169,503,571 Net Source (Application) of Funds............................................... . $ 23,064,384 S (5,345,183) Increase (Decrease) in Components of Working Capital: Current assets: Cash and short-term investments........................................... Accounts receivable................................................................ Inventories.............................................................................. Prepaid expenses..................................................................... . . . . Current liabilities: Current maturities of long-term debt.................................. Loans payable to banks............................................................ Accounts payable................................................................ Accrued payrolls, taxes and other liabilities.......................... U.S. and foreign taxes on income........................................... . . . . . Increase (Decrease) in Working Capital....................................... . $ 9,401,442 12,714,496 10,348,232 (342,262) 32,121,908 5 5,605,929 2,534,370 (22,285,889) 598,814 (13,546,776) 842,983 (5,227,981) 817,068 11,581,789 1,043,665 9,057,524 $ 23,064,384 4,557,506 6,476,111 3,567,200 (3,763.412) (19,038,998) (8,201,593) S (5,345,183) See Financial Review. CRTX 0386 Details of Long-Term Debt AT DECEMBER 31 Crane Co.: 6V2 % Sinking fund debentures due 1992, $2,000,000 due annually after deducting $4,572,000 in treasury in 1977 .............................. 8% Bank term loan due 1980, $1,875,000 due quarterly, fluctuating with minimum commercial lending rate...................... 8% Bank term loan due 1984, $2,187,500duequarterly, commencing August 31, 1980, fluctuating with minimum commercial lending rate................................................................. Subordinated debentures: 8% Sinking fund debentures due 1985, $8,241,000 due annually, after deducting $2,747,000 in treasury in 1977 .............................. 7% Sinking fund debentures due 1993,5% due annually, after deducting $4,282,000 in treasury in 1977 .............................. 7% Debentures due 1994, after deducting $3,818,000 in treasury in 1977 .............................................................................. 5% Convertible debentures due 1993, convertible at $12.50 per share (114,216 common shares reserved in 1977).......................... 5% Convertible debentures due 1994, convertible at $14.37 per share (436,583 common shares reserved in 1977).......................... CF&I Steel Corporation: 8% First mortgage and collateral trust bonds, sinking fund series due 1983, $1,000,000 due quarterly.................................. 8% Bank term loan due 1985, $2,500,000 due quarterly commencing August 1,1981, fluctuating with minimum commercial lending rate.......................... ,.................................... 8% Mortgage note due 1983, $71,429 due annually.......................... Huttig Sash & Door Company: 7V2% Loan payable due 1980, $43,953 due quarterly..................... Crane Canada Limited: 53/4% Sinking fund debentures (collateralized by a general claim on property and assets), due 1985, $403,000 due annually . . - International Operations: Crane Ltd. (England): 63A% Bank term loan, fluctuating with bank rate, due 1981, $960,000 due annually in 1980 and 1981.................................. 73/8% Bank term loan, fluctuating with bank rate, due 1982 . . . 53/4% Unsecured loan stockdue1982 .................................. .... Other............................................................................................... CRANE CO. AND SUBSIDIARIES 1977 1976 $ 25,428,000 13,125,000 $ 27,663,000 20,625,000 35,000,000 73,553,000 48,288,000 57,682,600 12,183,400 48,259,000 1,427,700 6,273,700 125,826,400 199,379,400 65,922,600 13,563,400 48,259,000 2j283,200 7,143,200 137,171,400 185,459,400 21,000,000 40,000,000 357,142 61,357,142 307,672 25,000,000 40,000,000 428,571 65,428,571 483,485 4,831,200 5,662,800 1,920,000 480,000 1,062,204 1,406,823 4,869,027 $270,744,441 1,360.000 -- 1,006,861 1,464,906 3,831,767 $260,866,023 CRTX 0387 Financial Review and accounting policies Consolidation The consolidated financial statements include all subsidiaries, and accounts carried in foreign curren cies have been translated at the appropriate rates. Subsidiaries operating outside the United States and Canada represented 8 percent of shareholders' equity in 1977, down from 10 percent in 1976. Long-Term Investments Long-Term Investments are valued, in the aggregate, at the lower of cost or market. In early 1977 the company exchanged 4,120,230 common shares of The Anaconda Company (cost $71,577,000) for 2,060,115 Atlantic Richfield common shares in a tax-free exchange. As required by Account ing Principles Board Opinion No. 29, the company assigned a market value of $47.50 to each Atlantic Richfield share retained (see page 4, "Consolidated Statement of Income"). Overall, 560,115 Atlantic Rich field common shares were sold during 1977. Details of Long-Term Investments are as follows: Atlantic Richfield Company 1,500,000 common shares Asarco, Inc., 564,000 common shares Deferred income taxes on unrealized gain--net 1977 1976 (in thousands) $71,250 $71,577 8,611 -- (5,125) -- $74,736 $71,577 Depreciation The basis of charging depreciation for buildings, plant and equipment acquisitions was stepped up to the accelerated method from the straight-line method during 1977 in order to provide a better matching of costs and revenues in an inflationary environment. The effect of this change in depreciation methods is set forth on page 4, "Consolidated Statement of Income." The new method of computing depreciation elimi nates a substantial reporting difference between financial and income tax basis. Pensions Current service and interest costs are funded annu ally and prior service costs are funded on a 10-year basis. Pension plans in the United States are in compli ance with the Employee Retirement Income Security Act of 1974. Pension costs charged against operating income were $30,743,000 in 1977, compared with $34,549,000 in 1976. An additional charge of $21,070,000 was incurred in 1977 as a provision for unfunded pension liabilities for operations being phased out or relocated. Based upon latest estimates as of December 31,1977 vested benefits exceeded pension plan assets and balance sheet accruals by $107,000,000 ($120,000,000 at December31,1976) before future income tax credits. Miscellaneous--Net Non-recurring transactions--net Gain on investments--net Gain (loss) on disposal of capital assets--net Minority interest Loss on foreign exchange adjustments Loss on repurchase of debentures Other Components 1977 1926.. (in thousands) $25,939 513,738 4,924 668 (1,605) (1,116) (1,166) (470) (64) $26,442 1,880 (1,680) (1,514) (675) (79) $12,338 Long- and Short-Term Financing Long-term debt was increased during 1977 by a $35,000,000 unsecured six and one half year bank term loan and was reduced during 1977 by $25,122,000, compared with $36,863,000 during 1976. The 1977 decrease included $1,725,000 of debentures con verted, compared with $6,904,000 in 1976. At December 31,1977, the principal amounts of long-term debt repayments required for the next five years were $18,535,000 in 1978, $20,706,000 in 1979, $25,426,000 in 1980, $29,713,000 in 1981, and $34,655,000 in 1982. At year end there were $100,000,000 of unused short-term credit lines available with domestic and foreign banks, and such lines are subject to annual review. CRTX 0388 CRANE CO. AND SUBSIDIARIES Covenants contained in instruments under which the company has outstanding indebtedness: (i) require the company to maintain consolidated working capital of at least 5185,000,000; (ii) require the company to maintain consolidated tangible net worth of at least 5225,000,000; (iii) restrict payment of cash dividends; and (iv) restrict issuance of additional senior funded debt to 59,000,000 as of December 31,1977. Reserves and Other Liabilities Pension and wage benefits Retainage on purchase contracts Miscellaneous Components 1977 1976 (in thousands) $11,271 $ 2,530 2,802 1,798 2,834 2,641 $16,907 $ 6,969 Income Taxes United States income taxes have not been provided on undistributed earnings of foreign subsidiaries, since foreign tax credits available on any portion of these earnings not required for indefinite reinvestment are such that no significant tax would be payable upon distribution. A reconciliation of consolidated income before income taxes to the provision for income taxes (federal, state and foreign) is as follows: 1977 1976 Income before income taxes Non-recurring transactions--net (in thousands) $78,795 $76,778 (25,939) (13,738) Less permanent tax adjustments: Depletion Original issue bond discount Nontaxable net capital gains Nontaxable domestic dividends Foreign exchange adjustments Other 52,856 3,759 720 840 3,699 (1,166) 626 8,478 Taxable income for accounting purposes 44,378 Tax @ 50% (composite rate) 22,189 Less investment tax credit realized 7,115 $15,074 63,040 3,942 840 127 2,216 (1,514) (117) 5,494 57,546 28,773 5,026 $23,747 The foregoing provision includes foreign taxes of 52.803.000 and 55,423,000, and state taxes of 52.002.000 and 52,062,000, in 1977 and 1976, respectively. The provision for income taxes is composed of the following: 1977 1976 Tax effect of timing differences: Depreciation Other (in thousands) $- $ 2,370 2,503 2,719 Deferred income taxes Current income taxes 2,503 12,571 5,089 18,658 $15,074 $23,747 Income taxes on non-recurring transactions were a credit of $2,450,000 for 1977 and a charge of 55,072,000 for 1976. Leases The company leases a portion of its warehouse buildings, several manufacturing facilities (primarily through industrial revenue bonds) and certain of its vehicles and equipment under capital and operating leases running from one to thirty years. Certain leases may be renewed for periods of from three to twenty- five years and provide for an option to purchase or for reduced annual payments of minimal amounts. In accordance with Financial Accounting Standards Board Statement No. 13--"Accounting for Leases"-- the company has included capital leases entered into subsequent to December 31,1976 in its financial state ments as "Capitalized 1977 Leases" and "Capitalized 1977 Lease Obligations." Beginning in 1978 all capital leases, regardless of when entered into, will be included in the financial statements. If these capital leases had been capitalized in the financial statements in 1977 the additional amounts reflected would have been as follows: December 31, 1977 1976 (in thousands) Current $ 1,606 S 1,372 Noncurrent 36,431 38,030 Total capitalized $38,057 $39.602 Net income for the years ended December 31,1977 and 1976 would not have been significantly affected if these leases had been capitalized. 11 CRTX 0389 Financial Review and accounting policies (continued) CRANE CO. AND SUBSIDIARIES Leases capitalized in 1977 by major classes were as follows: December 31, 1977 Buildings and improvements Machinery and equipment (in thousands) $2,241 2,416 Less amortization 4,657 40 $4,617 Stock Options A summary of option transactions follows: Number of Price shares per share Outstanding January 1,1977 2% Stock dividend Options granted Options expired Options exercised 125,107 $ 7.95-36.03 2,354 - - 24,000 27.00-31.75 (1,952) 14.51-23.08 (37,965) 7.95-23.08 Outstanding December 31,1977 111,544 $ 8.10-36.03 Future minimum payments, by year and in the At December 31,1977 options for 64,853 shares aggregate, under capitalized 1977 leases, non-capital- were exercisable and 61,631 shares were available for ized capital leases and operating leases with initial or grant. In 1976 options for 40,392 shares were granted remaining terms of one year or more consisted of the following at December 31,1977: and options for 48,655 shares were exercised. Shares and per share statistics have been adjusted for the 2 Capital- Non- Minimum noncancel- percent stock dividend. The plan is not a compensa tory plan which would require charges to income. ized capitalized Oper- able ~ 1978 1979 1980 1981 1982 1983 & beyond Total minimum lease payment 1977 leases $ 407 468 579 579 579 6,688 9,300 capital ating sublease leases leases rentals (in thousands) $ 3,950 $ 5,938 $1,155 3,956 4,735 915 3,952 3,698 775 3,889 2,944 3,855 2,187 692 543 43,130 9,061 743 62,732 $28,563 $4,823 Net $ 9,140 8,244 7,454 6,720 6,078 58,136 $95,772 Amounts repre senting interest (4,650) (24,675) Present value of net minimum Estimated Replacement Cost Information In compliance with the rules of the Securities & Exchange Commission, the company has estimated the cost of replacing its plant and equipment as of December 31,1977, together with estimated depre ciation based on replacement cost for the year then ended. The company's Annual Report on Form 10-K (a copy of which is available upon request) contains unaudited estimates with respect to replacement cost. The replacement cost estimates in the company's Form 10-K are not necessarily indicative of either the amounts for which the assets could be sold or the company's intent to replace such assets, nor are they lease payment $4,650 $38,057 representative of costs that might be incurred in a Rental expense was as follows for all leases not capitalized: 1977 1976 (in thousands) Rentals on non-capitalized capital leases: Minimum $ 3,991 $ 4,048 Contingent --1 Sublease income (603) (554) 3,388 3,495 Rentals on operating leases: Minimum Contingent Sublease income 13,318 972 (788) 11,529 1,000 (800) 13,502 11,729 $16,890 $15,224 future period, nor do they reflect any cost savings from improved equipment. The company principally uses the LIFO method for inventory valuation so that substantially all inventory profits caused by inflation have been eliminated from net income. Analysis by Segment of Business An analysis by segment of sales, operating profit and assets appears on page 15. Additional segment infor mation regarding capital expenditures and depre ciation appears on page 16. . Segment description by products and industries served is given on pages 17 through 24. CRTX 0390 I Quarterly Results for the Year (Unaudited) (IN THOUSANDS) Quarter 1977t 1st 2nd 3rd 4th Sales $ 270,053 297,349 294,037 272,383 $1,133,822 Gross Profit $ 40,838 46,862 44,592 41,229 $173,521 1976 1st 2nd 3rd 4th $ 270,048 ' 285,217 271,559 260,782 $1,087,606 $ 47,732 47,969 43,611 46,165 $185,477 Net Income $37,132* 10,218 9,530 9,291 $66,171 $11,960 18,520* 8,113 9,366 $47,959 crane co. and subsidiaries Net Income Per Common Share Primary Fully Diluted $3.63 * 1.00 .95 .94 $6.52 $3.42* .95 .91 .89 $6.17 $1.14 1.77* .78 .92 $4.61** $1.05 1.65* .74 .87 $4.31** Market and Dividend Information--Common Shares Quarter 1st 2nd 3rd 4th New York Stock Exchange Price Per Share 1977 1976 High Low High Low $33 % 36 343/8 28% $26% 30% 27% 25 $39% 37V2 39% 29% $23% 30% 26% 23% Dividends Per Share 1977 1976** $ .30 .30 .35 .35 $1.30 $ .29 .30 .29 .30 $1.18 tFirst three quarters restated for change in depreciation method. The full-year effect of this change increased depreciation by $5,538,000 and decreased net income by $2,769,000, or 27 cents per share. Includes non-recurring transactions. "Adjusted for 2% stock dividend in February, 1977. Report of Independent Auditors To the Shareholders of Crane Co. We have examined the consolidated balance sheet of Crane Co. and subsidiaries as of December 31,1977 and 1976, and the related consolidated statements of income, earned surplus, capital surplus and changes in financial position for the years then ended. Our exam inations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. We did not examine the financial state ments of CF&I Steel Corporation, a consolidated sub sidiary, which statements were examined by other independent certified public accountants whose reports thereon have been furnished to us. Total assets and net sales of CF&I Steel Corporation constituted approximately 45% and 39%, respectively, of the related consolidated totals in 1977 (47% and 38% in 13 1976). Our opinion expressed herein, insofar as it is related to the amounts included for the foregoing subsidiary, is based solely upon the reports of the other independent certified public accountants. In our opinion, based upon our examinations and the aforementioned reports of other independent certified public accountants, the financial statements referred to above present fairly the consolidated finan cial position of Crane Co. and subsidiaries at December 31,1977 and 1976, and the consolidated results of their operations and changes in financial position for the years then ended, in conformity with generally accepted accounting principles consistently applied during the period except for the change, with which we concur, in the method of computing depreciation as described under "Depreciation" in the Financial Review. New York, N.Y. ^ January 23,1978 <*=^A***r CRTX 0391 Analysis of Summary of Operations CRANE CO. AND SUBSIDIARIES Sales Consolidated sales for 1977 were $1,133,822,000, 4.2 percent higher than 1976. Crane Domestic sales were 1.1 percent below the 1976 level, reflecting a flat demand for industrial products. CF&I Steel Corpora tion sales increased 7.0 percent, attributable to im proved price realization on rails, steel pipe and wire products. This was partially offset by lower rail ton nage due to the modernization program. Huttig Sash & Door Company sales were 30.3 percent higher than 1976, reflecting the increased level of residential con struction during 1977. Crane Canada sales for 1977 decreased 10.4 percent due to the generally depressed economic state of its marketing area. International Operations sales increased 1.8 percent during 1977, which was attributable to improved price realization. This improvement, however, was substantially offset by lower unit shipments. Consolidated sales for 1976 decreased 2.8 percent from 1975. Crane Domestic sales were 8.3 percent less than in 1975 due to depressed demand for capital goods and building products. CF&I Steel Corporation sales for 1976 were 3.5 percent lower than in 1975, primarily because of reduced shipments of steel pipe. Huttig Sash & Door Company sales increased 44.5 percent in 1976 over 1975, again reflecting the strong conditions in the residential housing markets. Crane Canada sales declined 4.0 percent in 1976 compared with 1975. International Operations sales declined 17.4 percent in 1976 from the 1975 level due to slowdowns in the economies these operations serve. Operating Profit Consolidated operating profit in 1977 decreased 16.7 percent from 1976 levels. Crane Domestic's operating profit in 1977 decreased 30.9 percent from 1976 due to a 1.1 percent decline in sales and the inability to offset higher operating costs with price in creases. In addition, certain of the traditional markets, particularly valves, were significantly affected by for eign competition. CF&I Steel Corporation experienced a 16.1 percent decline in operating profit compared with the prior year. This decline was primarily caused by the additional depreciation resulting from an ac counting change to the use of the accelerated method for financial reporting purposes. Huttig Sash & Door Company's operating profit increased 39.3 percent over 1976 results, reflecting the significant increase in sales volume. Crane Canada's operating profit de clined 34.4 percent from 1976, due to the decline in sales volume and change in product mix. During 1977 the International operating profit declined by 20.6 percent. The decline was the result of an economic slowdown together with rising costs of labor and materials. Consolidated operating profit in 1976 decreased 35.9 percent from 1975 results, which was primarily attributable to the failure to recover higher operating costs through price increases. CF&I Steel Corporation experienced the sharpest decline in operating profit in 1976,56.3 percent below the 1975 level. The decline was attributable to higher employment, maintenance and other costs, which were not offset by price increases. Depreciation Depreciation expense increased 21.5 percent during 1977 as compared to 1976. This increase was caused by a change from the straight-line method to the accelerated method and the higher level of capital expenditures particularly at CF&I Steel Corporation. Other Income (Deductions) Interest expense in 1977 increased 3.9 percent from 1976, largely due to an increase in the prime lending rate. During 1976 interest expense increased by 42.7 percent, as a result of the issuance in late 1975 and early 1976 of $82,404,600 principal amount of 8 per cent subordinated debentures given in exchange for 4,120,230 common shares of The Anaconda Company. Miscellaneous--net in 1977 and 1976 included non recurring transactions resulting in gains of $25,939,000 and $13,738,000 respectively. See page 4, "Consol idated Statement of Income," for details. Income Taxes Income taxes for 1977 were at an effective tax rate of 16.0 percent compared with 37.5 percent for 1976. The decrease was attributable primarily to the sig nificant increase in non-recurring transactions, which included dividends and capital gains not subject to maximum income tax rates, and to higher investment tax credits. The effective tax rate for 1976 was lower than 1975 due to non-recurring capital gains and higher investment tax credits. CRTX 0392 Five Year Summary of Operations (IN THOUSANDS) CRANE CO. AND SUBSIDIARIES 1977 1976 1975 1974 1973 Net Sales................................................ Depreciation....................................... Operating Profit....................................... Interest Expense . . . . -................. Income Before Income Taxes................. Income Taxes........................................... Net Income........................................... Net Income per Common Share: Average Shares Outstanding .... Assuming Conversion of Debentures . Dividends per Common Share: Cash.................................................... Stock.................................................... . $1,133,822 . 44,192 . 67,119 . 23,574 . 78,795 . (12,624) . $ 66,171 . $6.52 . 6.17 . 1.30 . 2% $1,087,606 36,380 80,595 22,699 76,778 (28,819) $ 47,959 $4.61 4.31 1.18 2% $1,119,494 35,784 ' 125,738 15,905 114,202 (50,594) $ 63,608 $6.05 5.36 .96 2% $1,144,031 34,880 120,885 18,933 97,354 (41,221) $ 56,133 $5.21 4.14 .66 2% $947,093 30,163 50,973 19,406 32,558 (11,981) $ 20,577 $1.85 1.47 .44 2% Analysis by Segment of Sales, Operating Profit and Assets (IN THOUSANDS) Net Sales: Crane Domestic................. CF&I Steel Corporation - . Huttig Sash & Door Company Crane Canada Limited . . . International Operations. Total Net Sales .... 1977 Amount % 1976 Amount % 1975 Amount % 1974 Amount 1973 Amount _% S 322,187 441,869 151,628 135,383 82,755 $1,133,822 29 $ 325,897 39 413,054 13 116,328 12 151,030 7 81,297 100 $1,087,606 30 $ 355,341 38 427,900 11 80,495 14 157,386 7 98,372 100 $1,119,494 32 $ 377,312 38 438,721 7 89,762 14 155,869 9 82,367 33 $319,423 38 342,814 8 93,904 14 115,190 7 75,762 34 36 10 12 8 100 $1,144,031 100 $947,093 100 Operating Profit: Crane Domestic................. CF&I Steel Corporation . . Huttig Sash & Door Company Crane Canada Limited . . . International Operations. . Corporate.......................... Total Operating Profit. . $21,869* 29 24,855* 34 15,133 20 5,540 8 6,766 9 74,163 100 (7,044) $67,119* $31,648 29,611 10,861 8,448 8,520 89,088 36 33 12 9 10 100 (8,493) $80,595 $ 38,081 67,788 5,110 15,995 7,841 134,815 28 50 4 12 6 100 (9,077) $125,738 $ 28,532 22 75,261 59 7,253 6 13,437 11 3,025 2 127,508 100 (6,623) $120,885 $ 9,433 17 27,016 48 9,062 16 6,452 11 4,551 8 56,514 ioo (5,541) $50,973 Assets: Crane Domestic................. CF&I Steel Corporation . . Huttig Sash & Door Company Crane Canada Limited . . International Operations. . Corporate.......................... Total Assets...................... $124,902 19 374,242 57 44,650 7 52,929 8 60,651 9 657,374 100 179,521 $836,895 $116,731 353,309 36,135 61,033 60,345 627,553 18 56 6 10 10 100 133,008 $760,561 $124,369 308,814 29,360 62,859 69,680 21 52 5 10 12 595,082 100 127,119 $722,201 $138,122 23 $138,831 25 287,567 49 284,996 50 25,507 4 27,349 5 63,697 11 50,942 9 74,391 13 61.033 11 589,284 100 563,151 100 18,663 $607,947 24,115 $587,266 Changed from straight-line to accelerated depreciation, which increased depreciation by $862,000 and $4,676,000 respectively, a total of $5,538,000 in 1977. 15 CRTX 0393 Capital Expenditures and Depreciation by Segment (IN THOUSANDS) CRANE CO. AND SUBSIDIARIES Capital Expenditures: Crane Domestic...................... CF&l Steel Corporation . . . Huttig Sash & Door Company . Crane Canada Limited .... International Operations. . . Total Capital Expenditures . . . . 1977 1976 $ 9,154 73,685 4,290 2,440 3,621 $93,190 $ 7,066 71,143 869 1,137 2,315 $82,530 Depreciation: Crane Domestic..................... CF&l Steel Corporation . . . Huttig Sash & Door Company . Crane Canada Limited.... International Operations. . . . Total Depreciation . . . . . . . . . 1977 1976 $ 6,355 33,317 612 1,531 2,377 $44,192 $ 5,400 26,336 526 1,586 2,532 S36.380 Cash Flow Net income, excluding non-recurring transactions, plus depreciation. (IN MILLIONS) SI10 Depreciation Cash Flow Debt to Equity Relationship (IN MILLIONS) Shareholders'Equity Long-Term Debt 16 CRTX 0394 I Crane fittings are used on the Trans-Alaska Pipeline. Steel valves and Crane Teledyne operators are installed in the power house at one of the country's busiest airports. 17 Crane Domestic Crane's Domestic operations provide capital goods markets with a broad range of industrial products. Fluid and pollution control products--valves, fittings, pumps and water conditioning and waste treatment systems--serve petroleum, chemical, power, pulp and paper, and municipal markets. Plumbing and related building products serve resi dential, commercial and industrial construction markets. Aircraft systems and accessories serve commercial transport, general aviation, and military aerospace markets. Fluid and Pollution Control Products The long awaited upturn in capital spending failed to materialize in 1977 as basic industries continued to defer sizeable investments in new plant and equip ment. The slow pace of economic growth has left ex cessive capacity in Crane's major fluid and pollution control markets--the petroleum, chemical, power, and pulp and paper industries. Slack demand in Crane's industrial valve markets during 1977 resulted in sales and earnings below 1976 levels. However, sales of pump products exceeded year-earlier results, while water treatment and pollu tion control equipment performed well. Throughout 1977 and into 1978 Crane has focused upon market segments which continue active, such as energy con servation and pollution abatement. The company also has acted to tighten operations by phasing down high cost facilities, improving productivity and streamlining product lines. In addition to low overall demand, the Valves and Fittings Division experienced keen competition from imports diverted from weak European markets. Sales of quarter-turn valves, however, increased substantially last year, reflecting better penetration of this growing segment of the industry. Such factors as lighter weight, smaller space requirements, and ease of maintenance and operation are causing these valves to replace the more traditional gate and globe valves in many applications. Two new designs were added to Crane's butterfly valve line in 1977, broadening this line to include products engineered to meet both general and spe cialty service applications. Crane's line of standard ball valves has been redesigned, and engineering is now underway on several new valve designs as well as ex tensions of the current standard lines. Crane continued to upgrade valve production facili ties in 1977. The company's original valve plant in Chicago was closed and the profitable product lines transferred to other modern locations with increased production capability. A new bronze casting center be- CRTX 0395 Large Deming turbine pumps provide fire protection on this offshore drilling platform. Cochrane chemist analyzes a customer's waste water problem. Florida's State Capitol Building, designed by Edward Durell Stone Associates, is equipped with Crane plumbing fixtures. Hydro-Aire's computerized braking system is installed on the Space Shuttle. came fully operational during the year, while modern ization of the company's steel casting center will be completed in early 1978. Crane had improved pump sales in 1977. This per formance is attributable largely to greater market penetration through broader product lines and entry into new market areas. With full-line capability in the manufacture of large solids handling pumps. Crane enjoyed higher sales for municipal and industrial sewage applications. During the year, the company also acquired a line of high quality smaller sewage pumps for residential and light commercial use. This addition enables Crane to serve the market from the smallest domestic need to large municipal and industrial fluid waste applications. The Deming line of double suction split-case pumps was broadened with the inclusion of several large sizes. These are specified primarily for industrial and munici pal potable water service as well as for the growing agricultural/irrigation markets. Domestic water systems pumps, although a smaller percentage of Deming's business than the industrTaT' lines, experienced a sharp increase in sales, paral leling the strong activity in home construction and remodeling. Sales of Chempump canned motor pumps for nuclear service continued strong last year, confirming Crane's leadership in this market for critical service pumps. Though chemical process markets weakened, Chempump products have entered several new market areas. Chempump units are handling coal slurry in coal conversion technology, while the smaller, fractional horsepower Dynapump units are in use for solution transfer in solar cooling systems. A new metering pump was successfully introduced last year. This low flow, high pressure, controlled volume pump is in strong demand for precision fluid transfer in medical and industrial research. Cochrane Environmental Systems Division achieved higher earnings in 1977. Sales of water treatment sys tems improved markedly, reflecting increased capital investment for cost saving equipment. Key to this im provement was stepped-up demand for Cochrane's proprietary Ammonex boiler water treatment process. This process, which contributes significant savings in the cost of boiler water treatment, is finding increasing use in power plant applications. Cochrane also antici pates growing demand for its condensate booster recyclingsystem, which offers unique energy conserva tion features for industrial steam boilers. As a further step in the development of specialized fluid and pollution control systems, Cochrane intro duced a line of comprehensive fluid monitoring instru ments in 1977. These instruments utilize ultrasonics to CRTX 0396 i detect and precisely measure pollutant agents present in industrial wastewater. The line complements Cochrane's recently developed Uni-Pac Clarifier, a packaged system which separates the toxic elements in metal-bearing wastewater. Early market reaction to both products has been favorable. With environmental controls demanding an ever greater share of corporate investment dollars and production costs steadily on the rise, the outlook for increased sales of Cochrane's engineered systems is encouraging. Crane Supply Company, Crane's wholly-owned in dustrial distribution network, had a difficult year in 1977. Crane Supply offers industrial markets a full line of standard Crane valves, pumps and fittings plus re lated products of other manufacturers. Industry's slow pace of spending for new plant and equipment cou pled with ready availability of imports in some stan dard products made certain lines extremely competi tive. With a branch network which extends nationwide, Crane Supply is well positioned to benefit from im proved commercial and industrial construction activity when it occurs. Building Products With housing starts at their highest level since the 1973 pre-recession peak, Crane's Plumbing Division experienced improved sales and earnings in 1977. The division's performance also was aided by strong re modeling activity and the introduction of additional products directed to both the new construction and remodeling markets. A line of pulsating showerheads was added last year, and the high-style Classic Brass fixture group was ex panded to include additional decorative finishes and designs. Early in 1978 the division introduced a new, streamlined pedestal lavatory in both solid and dual tone colors. Crane is steadily expanding its line of water economy fixtures for both domestic and com mercial use and has added a series of flow control adaptors and showerheads to its plumbing brassware. In order to reach the rapidly expanding home im provement market more directly, Crane formed the Classic Home Products Division in 1977. Classic Home Products markets Crane plumbing products, related accessories and other home improvement lines to home centers and other retailers that specialize in reaching the remodeling customer. Through Classic, Crane has direct access to the do-it-yourself segment of this growth market, a segment which now accounts for more than half of the over $30 billion in annual home improvement sales. With building activity expected to continue strong again in 1978, the outlook for Crane's building prod ucts is encouraging. If an upswing occurs in multi family and commercial construction as is anticipated, the company should enjoy renewed order strength in its commercial and institutional plumbing fixtures, as well. Aerospace and Aircraft Products The company's Hydro-Aire Division designs and manufactures brake control systems, fuel and hydraulic pumps, controls and other accessories and systems for military, commercial and general aviation aircraft. Both sales and earnings achieved new records in 1977 as all segments of the division's markets were strong. Hydro-Aire's products, designed specifically to im prove aircraft safety and dependability, are found on virtually all commercial transport aircraft and the ma jority of military and general aviation craft. The past year saw a resurgence of domestic airline travel and a corresponding upswing in new equipment orders. This increase coupled with heavy export sales has resulted in an improved commercial market, and consequently, high order levels for Hydro-Aire's automatic braking and skid control systems. The business aircraft sector of the general aviation market is exceptionally strong as new uses emerge for this class of aircraft. Worldwide, the search for energy, geodetic and agricultural research, and the transporta tion needs of developing nations should assure a strong market for years to come. Hydro-Aire anti-skid brake controls are specified on most of these aircraft. During 1977 the new Power Brake/Anti-Skid package was certified for the Cessna Citation II and the Beech AircraftSuper King Air. Also, the highly reliable invermotor fuel boost pump is certified for all Beech, Swearingen and Mitsubishi turboprop aircraft. The first flight of the Space Shuttle, which occurred last year, was significant to Hydro-Aire. This new hybrid air/spacecraft, incorporating Hydro-Aire's auto matic brake controls, will become the key element in the nation's space exploration program during the next decade. It gives the United States the capability of building sophisticated structures in space to house research laboratories and communication networks devoted to scientific advancement. During 1977 Hydro-Aire's manufacturing capabili ties were expanded as the production assembly area was increased by 26,000 square feet. This addition per mitted the consolidation of many related operations to further improve production efficiency. 19 CRTX 0397 I CF&I Steel Corporation CF&I serves the transportation, petroleum, mining, construction and agricultural industries, primarily in the western United States. A vertically integrated steel manufacturer, CF&I supplies most of its own coking coal, iron ore, limestone and dolomite from company- operated mines and quarries. A common carrier sub sidiary, The Colorado & Wyoming Railway Company, transports raw materials from CF&I mines in Colorado and Wyoming in addition to serving other customers in the region. ' Operations Pressured by escalating operating costs, slack capital goods markets and steep import competition, the steel industry as a whole experienced one of its most diffi cult periods last year. In the face of these severe busi ness conditions, CF&I performed well in 1977 even though operating results did not match the prior year. The company's creditable performance, despite major industry problems, is largely attributable to in creased productivity resulting from the large scale facility modernization program at CF&l's Pueblo plant in recent years. Important, as well, are the company's product mix and geographic location. One of the few integrated steel facilities in the West, CF&I enjoys strategic access to important oil and gas producing regions, the independent and successful western rail lines, major mining activity, the farm and ranch sector, and a construction industry attendant upon western expansion. It is to these markets that CF&l's product lines are targeted. Sales of oil country casing and tubing rose sharply as domestic drilling activity increased during 1977, and improved demand for tubular goods has continued into 1978. Oil industry projections indicate a 15 per cent increase in exploration spending during1978, with a larger portion of this investment going into domestic drilling. With the heightened need for new domestic petroleum sources, this market should con tinue to expand over the long term. Demand for rails and accessories softened as the year progressed due to delays by major railroads in their replacement programs. Last year the western roads, which derive a high percentage of revenue from basic commodity haulage, suffered from special fac tors such as low grain traffic, a prolonged iron ore strike and the coal strike. The outlook for CF&l's rail products is encouraging for 1978 and beyond, however, as the railroads return to high levels of track construction and maintenance. The efficiency of rail transportation becomes increas ingly important as energy costs continue to rise. West ern coal development is heavily dependent upon rail transportation, and the vast coal reserves in CF&l's market area are virtually certain to be in demand as the nation moves toward greater energy self-sufficiency. With CF&l's rail mill modernization nearing comple tion, early this year the company will offer longer length rail and a new high strength alloy rail, which are expected to increase market penetration. Mining products experienced a sharp sales increase during 1977 despite labor contract problems in the copper, taconite and coal industries. With improved mining activity anticipated for 1978, these products are expected to continue to perform well. Sales of some wire products were favorably influ enced by a high level of home building and govern ment spending on water projects during 1977. However, wire rod and nail markets eroded dramatic ally as a result of import pricing pressures. Although CF&I has been affected by the large influx of steel imports to a lesser extent than many of the major com panies, foreign competition remains a serious problem for the industry. Measures are needed to re-establish ' equal competitive opportunities in an open market en vironment for both foreign and domestic producers. Demand for structural products mirrored the con tinued slow pace of capital expenditures for plant and equipment last year. An increase in heavy construction activity in 1978, if it occurs, would have a positive im pact on shipments of rolled products. Facilities CF&I continued to pursue its aggressive plant im provement program during 1977 as capital expendi tures totaled $73,685,000. Of this sum, $6,910,000 was invested in environmental quality improvements at various CF&I facilities. Approximately 50 percent of the company's capital expenditures went into expansion and modernization of the rail mill facilities. The first phase of this three year project became operational in August. Included in the program's initial phase were cooling boxes, roller straightener, and automated end finishing and drilling equipment. Anew rolling mill and rail rolling equipment will go into production during 1978. CF&I now has the capability of producing rails up to 25 meters in length, more than twice the prior standard length. Upon completion of the program in early 1979, CF&I will have the most modern rail producing facility in North America. Improvements were implemented in other pro duction areas last year. Billet conditioning capacity, which will increase production capability of high grade oil country goods, was added to the seamless tube mill. In March a new coupling shop went into opera CRTX 0398 tion, which reduces the need to purchase couplings from outside suppliers. New nail and barbed wire machines of substantially improved design and higher throughput also were installed in 1977. Facilities cur rently are being installed to enable CF&I to produce high quality specialty bar products. These products command higher prices in the marketplace. CF&I continues to focus upon development of its raw material supplies. The new Maxwell coal mine, located in southern Colorado, became operational in early 1977 and final development was completed be fore year-end. With the opening of this mine, the company became completely self-sufficient in supply ing the high volatile metallurgical coal required for steelmaking. In order to attain self-sufficiency in low volatile metallurgical coal supplies, CF&I has initiated plans to develop a mine in eastern Oklahoma, which will be the company's third coal mine. The Colorado & Wyoming Railway Company has expanded its rail car fleet by acquiring 40 new rapid discharge hopper cars to transport coal from the Max well and Allen mines in a unit train system. Further improvements in raw materia! supplies include a new auto shredder atone of the company's scrap metal processing operations and the start-up of an iron ore beneficiation plant at the Sunrise Mine in Wyoming. By refining the ore quality at the mining site, the bene ficiation plant reduces shipping costs to Pueblo and improves the efficiency of blast furnace operations. During 1977 CF&l's environmental improvement program focused on upgrading air quality control equipment. Four major emission control projects are now underway. At the basic oxygen furnace a new electrostatic precipitator is being installed, and facili ties are being added to control fumes emitted during charging and tapping of the furnace. Improved facili ties also are under construction for controlling emis sions which escape as coke is pushed from oven to quench car, and upgraded air quality control facilities are being added at the sinter plant. late in 1977 CF&l formed a new subsidiary, CF&I Energy Resources Company, in order to further develop resources of its own as well as those of others. With its 350,000 outlying acres in the Rocky Mountain area, CF&I has substantial reserves of sub-bituminous steam coal. Drawing on this raw supply plus its years of experience in mining coal, CF&I will explore and develop coal resources throughout the area for sale to energy consuming industries. CF&I casing is unloaded at a drilling site near Hobbs, New Mexico. The new roller straightener in the rail mill handles rails up to 25 meters in length. Air quality improvement included a new baghouse cleaning system at the Pueblo lime plant. 21 CRTX 0399 Huttig Sash & Door Company Huttig manufactures and distributes miliwork and allied building products primarily to residential con struction markets. Huttig's branches are concentrated in the South, Southeast, Southwest and Midwesfp among the fastest growing residential construction areas in the country. Huttig achieved record results in 1977 for the second consecutive year. The surge in residential construction activity, which continued throughout the year, meant strong and con sistent demand for Huttig products. The 1977 housing market also reflected increased remodeling activity, another growing sector for Huttig. A major factor in the escalation of home improvement activity in the past several years has been the emergence of the do-it- yourself market. With steeply rising labor costs, greater consumer awareness and the availability of detailed instructional data, homeowners are investing in self- installed improvements. Huttig products are ideally- . suited to this self-sufficient market sector. Higher utility costs have reinforced the importance of energy saving home improvements, and Huttig experienced a marked upswing in sales of these prod ucts in 1977. Metal entrance door systems and insu lated glass window units were especially strong. Huttig is expanding production capability of these and re lated energy saving products. In 1977 the company ` established a third separate glazing facility for wood windows, and this year will expand the original facility, which became operational in 1976. Additional energy saving products, tailored for the remodeling market, will be added at these glazing operations. Last year Huttig completed a new larger facility at Rockford, Illinois and expanded operations at Rock Island, Illinois. Construction has begun on facilities for a new branch in Champaign, Illinois and on a new building at the Des Moines, Iowa location. These are scheduled for completion in 1978. Each of these mid western regions continues to offer fine growth oppor tunities for Huttig's business. Last fall new branch operations were opened in North Carolina and Ten nessee to strengthen penetration of southern markets. Insulated window units are manufactured at Huttig's Charlotte facility. Crane Canada furnished valves and plumbing fixtures for the Place du Portage project in Hull. Cochrane cation hydrogen exchange vessels and demineral izers being installed at an Ontario refinery. Completed water Although 1978 housing starts are expected to fall below the 1977 level, home building activity should continue brisk and remodeling markets, led by the do-it-yourself customer, should strengthen further. These factors, coupled with Huttig's strategic geo graphic concentration in the South and Midwest, treatment system will handle 3,600 gallons per minute. make the outlook for 1978 quite favorable. CRTX 0400 Crane Canada Crane Canada Limited manufactures and distributes valves, pumps, plumbing fixtures and fittings for the construction industry, as well as fluid and pollution control and water conditioning equipment for basic industrial applications. Primary Canadian markets parallel those in the United States. The pervasive slow-down in Canadian economic activity in 1977 had an adverse effect on Crane Canada's sales and earnings. Capital spending markets account for the majority of the company's business. Such factors as government wage and price controls, an unsettled political environment, the declining value of the Canadian dollar and a continuing high level of inflation had a depressing effect on business invest ment in new plant and equipment. Manufacturing Operations Crane Canada's manufacturing operations per formed reasonably well in 1977 although results were below the prior year. Despite an unfavorable business climate, the company maintained a firm market share in its major product areas. ' Sales of bronze and iron valves for commercial, gov ernment and institutional construction markets ap proximated year-earlier levels, while waterworks product sales held up well in the face of keen domestic and import competition. In the past several years Crane Canada has focused on these municipal and in dustrial wastewater markets, areas which should offer better-than-average growth potential when capital investment again picks up. Demand for plumbing products in 1977 remained level with 1976 even though Canadian housing starts were below the record number of the prior year. As one of the country's largest plumbing manufac turers, Crane Canada holds a strong market position which should result in continued good performance of these products. Distribution Operations Crane Supply Division, which distributes the com pany's products and related items of other manu facturers, was severely affected by the low level of economic activity. Lack of demand, particularly in industrial markets, resulted in decreased sales volume and a consequent squeeze on profit margins. For the current year commercial and industrial construction are expected to strengthen only marginally, while the government, in its efforts to control inflation, will con tinue to restrain spending for public facilities. With distribution branches located in key industrial areas of Canada, however. Crane Supply should participate in renewed business activity once it occurs. One area of industrial construction which is ex pected to improve during 1978 and beyond is energy related building. Twenty major power generation projects are planned for Canada before the end of 1980, with work beginning on several large nuclear facilities this year. The Alaska Highway Pipeline proj ect, scheduled to commence in 1979, offers additional market potential. Such activity in the energy related sector--a major market for a wide range of Crane Canada's products--should have a positive effect on both manufacturing and distribution operations. Crane International One of the largest valve and fittings manufacturers in Europe, with operations in the United Kingdom, France, Spain and The Netherlands, Crane is a leading supplier to petroleum, petrochemical, chemical, power and marine markets. An Australian valve plant serves that country, while a pump facility in Mexico sells to industrial and agricultural markets in Latin America. The pace of the world economy was disappointing in 1977. Plagued by continuing high inflation, rising labor costs and, in some cases, tight credit and price restraints, private industry deferred investment in new plant and equipment while governments, as well, held back on projects. This lack of capital investment de pressed the overall performance of Crane's interna tional operations, although several sectors showed improvement. (n the United Kingdom, Crane Ltd. achieved higher earnings in 1977. Crane Ltd. manufactures valves, pumps, fittings and castings for construction engineer ing, mechanical services and petrochemical applica tions both domestically and overseas. Although these markets generally were not strong in 1977, the com pany bettered its performance largely because of increased productivity and greater market penetration. Plant improvements were concentrated upon labor saving equipment, particularly at the malleable iron foundry and machining facilities. Crane Ltd. is gaining a larger share of export mar kets despite keen competition in these sectors. During 1977 the company extended its pump and malleable fittings markets in the Middle East and developed export business for steel castings in Europe and North America. With increased investment by Middle East and African countries, demand in these regions is expected to grow at a faster pace than in the more mature economies. CRTX0401 Crane Nederland N.V. manufactures valves, pipe fittings and central heating products for residential, commercial and light industrial construction. The com pany experienced a good year in 1977 as profit margins improved despite a lower level of sales. Last year Crane Nederland introduced a new residential boiler line, which was well received in the marketplace, and improved manufacturing efficiency at its production facilities. Such factors indicate a favorable outlook for Crane Nederland even though domestic construction markets are notexpected to strengthen notably in 1978. Crane's industrial valve operations in Spain and France were depressed in 1977. In Spain Crane-FISA, S.A. suffered deterioration of its domestic markets. An inflation rate exceeding 25 percent, tight credit and general economic uncertainty following the change in government brought business investment in Spain to a virtual standstill last year. In view of these conditions, it is difficult to foresee any improvement in 1978. Because of the decline in worldwide demand for standard cast steel valves, Crane S.A., located in France, concentrated on developing markets for its high pressure valves. This has led to a situation of dependence on project work, particularly in petro chemical and power markets, and the transition to more specialized markets proved difficult. Crane S.A. should benefit from better penetration of these spe cialized markets in 1978. At this writing France is on the eve of a national election, the outcome of which will affect basic economic policy. It is, therefore, im possible to assess the near term business environment. Crane Australia Pty. Limited performed well in 1977 despite the continued slow rate of capital investment in Australia. The company continues to maintain a strong position in refining and chemical processing markets, areas which should expand during the next several years. Crane-Deming de Mexico S.A., which manufactures pumps for industrial and agricultural applications, enjoyed higher sales and profitability in 1977. The company has increased its sales of pumps to agricul tural/irrigation markets, sectors which exhibit firm growth potential. The development of Mexico's oil and gas resources, now underway, offers additional mar ket opportunities for 1978 and beyond. 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