Document vVwxQ18D8k0enQqZ0Gvw2z8B8

Crane Co.1978 Annual Report CRTX 0405 Crane Co. 1978 Annual Report Contents 1 Financial highlights 2 Letter to shareholders 4 Financial statements 9 Financial review 14 Analysis of summary of operations . 18 Review of operations Operations United States Crane-U.S.A. New York, New York R. L. Biller, Senior Vice Presi dent & General Manager Hydro-Aire Division Burbank, California B. J. Barnes, Vice President & General Manager Cavalier Corporation Chattanooga, Tennessee W. W. Williams, President CF&I Steel Corporation Pueblo, Colorado R. J. Slater, President Huttig Sash & Door Company St. Louis, Missouri S. P. Weils, President Canada Crane Canada Limited Montreal, Canada G. A. Kelly, President International Crane Australia Pty. Limited St. Mary's, Sydney, Australia P. J. Farrell, Managing Director Crane Ltd. London, England Leslie V. Chater, Chairman J. M. Fraser, Managing Director Crane-Deming de Mexico S.A. Monterrey, Mexico Luis Obeso, General Manager Crane Nederland N.V. Deventer, The Netherlands G. J. deHorn, Managing Director Annual Meeting The Crane Co. 1979 annual meeting will be held Monday, April 23,1979, in the Lecture Room, Morgan Guar anty Trust Company of New York, 2nd Floor, 299 Park Avenue, New York City, at 10 A.M. Form10-K Copies of Form 10-K for the year 1978, which are to be filed with the Securi ties and Exchange Commission, are available without charge to each shareholder of the Company upon written request made to the Secretary, 300 Park Avenue, New York, N.Y. 10022. CRTX 0406 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................................................. `The year 1977 included net income from non-recurring transactions of $28,389,000, or $2.72 per share. "Net income per common share would amount to 53.36 ($6.05 in 1977) assuming conversion of subordinated debentures.tAdjusted for 2% stock dividend in February, 1978. 1978 $1,227,449,000 $ 35,355,000 $ 3.51 1.40 $ 221,448,000 $ 881,325,000 2.4 $ 335,565,000 34.01 9,866,891 1977 Si,133,822,000 5 66,171,000' S 6.39* 1.271 S 239,833,000 S 875.209,000 2.4 S 326,152,000 31.921 10.017,199 ! 5 10 Y////A 1074 SI 50- 1 00- 3 51 65 1 40 535- 34 1)1 1.16 1 27 94 31 92 JO- 27 07 24 08 25- JO Id jo. 15 10 5- 1978 (101974 1975 1976 1977 1978 O 1074 1976 197' i<r:t ! CRTX 0407 Crane Co.'s sales for 1978 were $1,227,449,000, compared with $1,133,822,000 for 1977. Net income amounted to $35,355,000, compared with $37,782,000 from operations in 1977, excluding a non-recurring net gain of $28,389,000. Net income per share in 1978 was $3.51. In 1977 net income was $3.67, excluding $2.72 per share from non-recurring transactions. Depreciation for 1978 was $51,189,000, com pared with $44,192,000 in 1977. The company's financial accelerated depreciation method is the maximum allowed for income tax reporting and recognizes, to some extent, the current high rate of inflation. Crane's lower 1978 results reflect the effects of continuing startup costs in connection with CF&I Steel Corporation's rail mill expansion and modernization program, the 111-day coal strike, and unusually severe weather experienced dur ing the first quarter. The new CF&I facilities, scheduled to be fully operational in the second half of 1979, will increase the company's rail-making capacity by 50 percent. CF&I will soon have the most ad vanced facility of its type in North America, capable of rolling standard rails up to 25 meters long, more than twice the length rolled by any other company in the United States. Huttig Sash & Door Company achieved record results for the third consecutive year and Crane building products operations performed well as housing starts passed the two-million level in 1978. Both Crane Canada and International Op erations showed improved results despite lag ging capital spending, inflationary pressures, and losses incurred in terminating certain in ternational operations. As part of its plant improvement program, Crane invested $57 million in modernization and air and water pollution control in 1978. This reduction in capital expenditures from $98 mil lion in 1977 reflects the culmination of rn.aj.or projects to improve facilities begun several years ago, primarily at CF&I Steel Corporation. A cash dividend of $1.40 per share was paid to shareholders in 1978, compared with $1.27. as adjusted, paid in 1977. A 2 percent stock divi dend was paid in February 1979, the eleventh year that such a stock dividend has been paid. During the past year, Crane took several steps designed to strengthen its position in basic in dustries. Less efficient company-owned whole saling branch operations were replaced by in dependent distributors, and international invest ments were reduced with the termination of two unprofitable European operations. Most importantly, Crane made a substantial investment in 1978 in Medusa Corporation, a major producer of cement and aggregates. Medusa, like CF&I Steel Corporation, controls a major portion of its own raw materials sources. Since last year, Crane has acquired approxi mately 95 percent of Medusa's common stock. The company purchased 600,100 shares on the New York Stock Exchange and 700,000 shares in a cash tender offer at $50 per share. Crane CRTX 0408 2 acquired the balance of its Medusa shares in January,1979 through an exchange offer of $10 in cash and $40 principal amount of Crane lOVi percent Subordinated Sinking Fund Debentures, due February 1,1994. The total cost of the Medusa acquisition was $147,055,000, of which $78,574,000 was cash and $68,481,000 principal amount of subordi nated debentures. The average cost per share after allowance for original issue discount was $47.17. The acquisition was accomplished with out any dilution of common shareholders' equity. Crane and the Federal Trade Commission have entered into a Hold Separate Agreement permitting Crane to acquire Medusa without litigation with the FTC. Crane has agreed not to influence or seek working control of Medusa until the Medusa annual meeting, March 27, 1979, at which time Crane will take control of the company. We believe Medusa, as a natural resource company, should provide an additional hedge against the inflationary forces in the economy. For the year 1978 Medusa reported sales of $287,517,000 and net income of $15,623,000. A brief summary of the company's operations and financial statements are on pages 16 and 17. R. F. Eson, Chairman of Huttig Sash & Door Company, a subsidiary, retired at the end of 1978 after 40 years of outstanding service. At the January meeting, the Crane Board of Directors elected R. S. Evans Executive Vice President of the company. On behalf of the Board of Directors, we again express our thanks to Crane's employees, sup pliers, customers and shareholders for their con tinuing support. Respectfully submitted, D. C. Fabiani, President / . ^4. T. M. Evans, Chairman February 21,1979 ... D. C. Fabiani, President T. M. Evans, Chairman CRTX 0409 3 FOR YEARS ENDED DECEM3ER 11 Net Sales . . .............................. Operating Costs and Expenses: Cost of sales................................... Selling, general and administrative Depreciation................................... 1978 $1,227,449,118 999,751,793 108,845,415 __ 51,188,976 ~ 1/159,786,184 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...................................................... 67,662,934 (25,186,280) 5,782,013 2,203,251 (17,201,016) 50,461,918 15,106,504 $ 35,355,414 $3.51 3.36 1977 $1,133,822,269 916,846,784 105,665,342 44,191,500 1,066,703,626 67,118,643 (18,698.083) 3,932,461 26,441,871 11,676,249 78,794,892 12,623,727 $ 66,171,165 $6.39 6.05 FOR YEARS ENDED DECEMBER 31 Balance at Beginning of Year.................................. .......................................... Net Income............................................................................................................ Dividends: Preferred shares--$3.75 per share............................................................... Common shares: Cash--$1.40 per share ($1.27 in 1977)...................................................... Stock--2%, market value of 200,301 shares (200,580 in 1977) . . . Excess of Cost Over Par Value of Reacquired Shares--Net: 305 preferred (282 in 1977) and 462,400 common (381,100 in 1977) reacquired, less 21,978 issued under stock options (37,965 in 1977)...................................................... Balance at End of Year........................................................................................ 1978 $231,049,733 35,355,414 266,405,147 88,241 14,043,605 5,081,636 10,268,400 29,481,882 $236,923,265 1977 $192,561,537 66,171,165 258,732,702 90.054 13,166,871 5,628,275 8,797,769 27,682,969 S231.049.733 CRTX0410 4 for 'iears ended December n 1978 Balance at Beginning of Year....................................................................................$ 32,494,625 Excess of debentures converted over par value of 89,813 common shares issued (128,857 in 1977)....................................... 649,229 Excess of market value over par value of common shares issued as a 2% stock dividend........................................................... . 3,829,755 Balance at End of Year..............................................................................................$ 36,973,609 1977 S 27.201,643 918,332 4,374,650 S 32.494,625 FOR YEARS ENDED DECEMBER 31 1978 Source of Funds: Operations: - Net income....................................................................................................... 5 35,355,414 Depreciation............................................................................................................ 51,188,976 Amortization of debt discount.......................................................................... 2,082,257 Other, net................................................................................................................. 2,254,712 Unrealized non-recurring credits--net............................................................... _ 90,881,359 Increase in long-term debt and capital leases................................................. Conversion of debt to common stock..................................................................... Disposals of property, plant and equipment...................................................... Decrease'in long-term investments......................................................................... Increase (decrease) in reserves and other........................................................... 44,899,431 1,213,400 5,883,953 32,361,349 (9,706,692) 165,532,800 Application of Funds: Additions to property, plant and equipment and capital leases................... Unexpended proceeds from an Industrial Revenue Bond............................. Increase in long-term investments.................................................................... Reduction in long-term debt.............................................................................. Reacquisition of shares, less options exercised............................................ Cash dividends....................................................................................................... 57,403,054 6,255,408 61,180,342 31,959,312 12,987,865 14,131,846 183,917,827 Net Source (Application) of Funds......................................................................... $ (18,385,027) 1977* S 66,1/1,165 44,191,500 2,372,386 3.074.588 t'8.515.000' 107.294.639 39,551,196 1,725.000 9,428.880 18.466,716 1,184,668 177,651.099 97,807,/ 87 8,611,349 25,121,582 10,751,875 13,256.925 155,549,518 $ 22,101.581 Increase (Decrease) in Components of Working Capital: Current assets: Cash and short-term investments............................................................... $ (24,008,030) Accounts receivable............................................................................................. (5,594,022) Inventories............................................................................................................ Prepaid expenses............................................................................................. 1,810,676 312,440 (27,478,936) Current liabilities: Current maturities of long-termdebt................................................................. (6,701,215) Loans payable to banks................................................................................... (5,711,708) Accounts payable............................................................................................. 3,989,285 Accrued payrolls, taxes and other liabilities................................................. (2,524,913) U.S. and foreign taxes onincome...................................................................... 1,854,642 (9,093,90?) Increase (Decrease) in Working Capital $(18,385,027) $ 9,401,442 12,714.496 10,348,232 f342,262> 32,121,903 842,983 (5,227.981) 817,068 12,544,592 1,043.665 10,020,327 $ 22,101.581 `Restated to include all capital leases 5 See Financial Review CRTX0411 AT DECEMBER 31 Assets 1978 Current Assets: Cash................................................................................................................. Short-term investments, atlower of cost or market............................... Accounts receivable, less allowances of $2,786,165 ($2,924,635 in 1977)................................................................................... Inventories, at lower of cost, principally last-in, first-out, or market. LIFO reserves amounted to $74,369,923 ($67,334,697 in 1977): Finished goods................................................................................... Work in process.............................................................................. . Raw materials and supplies........................................................... Prepaid expenses............................................................................................. Total currentassets.................................................................. $ 51,702,431 48,324,797 136,364,33S 74,197,648 45,075,142 27,238,462 146,511,252 2,515,670 385,418,485 1977* 5 35,513,764 88,521,494 141,958,357 73,756,830 42,030,379 28,913,367 144,700,576 2,203,230 412,897,421 Investments and Other Assets: ' Investments....................................................................................................... Unamortized debt discount......................................................................... Construction fund........................................................................................ Outlying lands.................................................................................................. Miscellaneous.................................................................................................. 104,597,342 6,920,407 6,255,408 1,228,425 783,256 119,784,838 Property, Plant and Equipment and Capital Leases at Cost: Land................................................................................................................. Buildings and improvements.................................................................... Machinery and equipment......................................................................... Less accumulated depreciation................................................................ 21,692,903 166,343,598 575,164,290 763,200,791 387,078,758 376,122,033 $881,325,356 74,736,349 9,002,664 1,232.300 1,548,623 86,519,936 20,768,952 154,920,741 555,849,821 731,539,514 355,747,606 375,791,908 S875,209.265 CRTX0412 6 C-*?`\Nc CO jnd Suns d:jr'es Liabilities and Shareholders' Equity 1978 1977* 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 8)......................... Capital Leases: Industrial revenue bonds.............................. Other................................................................ Deferred Income Taxes--Depreciation Reserves and Other Liabilities . . . $ 11,834,165 7,101,227 73,899,910 65,057,768 6,077,750 163,970,820 273,035,129 42,957,900 9,594,319 52,552,219 23,529,444 28,340,701 $ 18,535,380 12,812,935 69,910,625 67,582,681 4,223,108 173,064,729 270,744,441 31,864,858 10,037,930 41,902,788 24.353,670 34,695,686 Shareholders' Equity: Preference stock of a subsidiary, 5V2 %...................................................... Cumulative preferred shares, 33/%, par value $100 (redeemable): Authorized--39,402 shares (43,389 in 1977); outstanding--23,456 shares (23,761 in 1977) after deducting 15,946 shares in treasury (19,628 in 1977)............................................................... 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--9.866,891 shares (10,017,199 in 1977) after deducting 5,029,094 shares in treasury (4,566,694 in 1977) . . . Capital surplus............................................................................................. Earned surplus-$100,828,824 ($103,173,875 in 1977) is not restricted under a long-term debt indenture........................ Total common shareholders' equity.................................. Total shareholders' equity...................................................... 1,986,500 2,345,600 61,668,069 36,973,609 236,923,265 335,564,943 339,897,043 1,920,000 2,376,100 62,607,493 32,494,625 231.049 733 326.151.851 330.447.951 'Restated to include all capital leases. $881,325,356 $875,209,265 See Financial Review CRTX 0413 7 AT DECEMBER 31 Crane Co.: 6>/2 % Sinking fund debentures due 1992, $2,000,000 due annually, after deducting $5,474,000 in treasury in 1978 .............................. 12% Bank term loan due 1984, $2,187,500 due quarterly, commencing August 31,1980, fluctuating with minimum commercial lending rate................................................. . . . . 113A % Bank term loan due 1985, $1,500,000 due quarterly, commencing March 31,1981, fluctuating with minimum commercial lending rate..................................................................... Bank term loan due 1980, prepaid in 1978 ....................................... Subordinated debentures: 8% Sinking fund debentures due 1985, $8,241,000 due annually, after deducting $2,097,000 in treasury in 1978 .............................. 7% Sinking fund debentures due 1993, 5% due annually, after deducting $3,774,000 in treasury in 1978 .............................. 7% Debentures due 1994, after deducting $3,818,000 in treasury in 1978 .................................................................................... 5% Convertible debentures due 1993, convertible at $12.50 per share (72,160 common shares reserved in 1978)............................. 5% Convertible debentures due 1994, convertible at $14.37 per share (388,727 common shares reserved in 1978)......................... CF&I Steel Corporation: 8% First mortgage and collateral trust bonds, sinking fund series due 1983, $1,000,000 due quarterly............................................ 12% 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: 7Vz% Loan payable due 1980, $43,953 due quarterly.................... Cavalier Corporation: 12'A % Bank term loan due 1983, $250,000 due quarterly, fluctuating with minimum commercial lending rate................... Crane Canada Limited: 53A% Sinking fund debentures (collateralized by a general claim on property and assets), due 1985, $372,000 due annually . . . International Operations: Crane Ltd. (England): 13V2% Bank term loan, fluctuating with bank rate, $1,020,000 due 1980 and 1981...................................................... 13'%% Bank term loan, fluctuating with bank rate, due 1982 . . 53A% Unsecured loan stock due 1982 ............................................ Other............................................................................................................ 8 CR O' j ' I ar 1978 1977 $ 22,526,000 $ 25,428,000 35,000,000 35,000,000 30,000,000 87,526,000 13,125,000 73,553,000 49,442,140 11,867,400 48,259,000 902,000 5,586,000 ' 116.056.540 203.582.540 ' 57,682,600 12,183,400 48,259,000 17427,700 6,273,700 125,826,400 199,379,400 17,000,000 40,000,000 285,713 57,285,713 131,860 21,000,000 40,000,000 357,142 61,357,142 307,672 3,500,000 - 4,089,800 4,831,200 2,040,000 510,000 613,389 1,281,827 4,445,216 $273,035,129 1,920,000 480,000 1,062,204 1,406,823 4,869,027 $270,744,441 CRTX0414 Consolidation The consolidated financial statements include all sub sidiaries; foreign currencies have been translated at the appropriate rates. Subsidiaries operating outside the United States and Canada represented 6 percent of share holders' equity in 1978, down from 8 percent in 1977. Investments and Other Assets Long-Term Investments are valued, in the aggregate, at the lower of cost or market. At December 31,1978, Crane held 1,300,100 shares, 43 percent of the outstanding common shares of Medusa Corporation. In January, 1979, Crane purchased, pursuant to a tender offer, 1,712,000 Medusa Corporation common shares in exchange for $10 cash and $40 principal amount of Crane Co. 10Va % Subordinated Sinking Fund Deben tures due February 1,1994 for each common share of Medusa tendered. (See page 12 "Subsequent Event" for further details of this transaction.) On December 11,1978, Crane and the staff of the Federal Trade Commission ("FTC") reached agreement upon the terms of a Hold Separate Agreement and upon the substantive terms of a Consent Order to be submitted to the FTC for approval. The Hold Separate Agreement permitted Crane to consummate its tender offer without litigation with the FTC and required Crane not to influence or seek to influence in any way Medusa's management or the conduct of Medusa's business, vote its shares of Medusa common stock or seek representation on the Medusa Board until the earlier of the Annual Meeting of Medusa, which is presently scheduled for late March, or final approval or rejection of the proposed Consent Order. As a result of this Consent Order the company has not recognized the equity method of accounting for its invest ment in Medusa. Accordingly, only cash dividends received of $1,189,000 have been included in "Other Income." In early 1977, the company exchanged 4,120,230 com mon shares of The Anaconda Company (cost $71,577,000) for 2,060,115 Atlantic Richfield common shares in a taxfree exchange and received a $24,721,000 cash dividend. As required by Accounting Principles Board Opinion No. 29, the company assigned a market value of $47.50 to each Atlantic Richfield share retained. Overall, 560,115 Atlantic Richfield common shares were sold during 1977. In late 1978, 200,000 shares of Atlantic Richfield were sold and 300,000 shares were reclassified as short-term investments. Details of Long-Term Investments are as follows: 1978 1977 Atlantic Richfield Company--1,000,000 common shares (1,500,000 in 1977) ex cluding 300,000 common shares in 1978 included with short-term investments Medusa Corporation--1,300,100 common shares Asarco, Inc.--564,000 common shares Deferred income taxes on unrealized gain-net (in thousands) $ 47,500 $71,250 61,180 - 8,611 (4,083) (5,125) $104,597 S74.736 The "Construction Fund" at December 31,1978 of $6,255,408 represents the unexpended proceeds from an Industrial Revenue Bond which are held in escrow pend ing completion of an emission control plant. Property, Plant and Equipment and CapitalT-feases The basis of charging depreciation for buildings, plant and equipment acquisitions was stepped up to the ac celerated method from the straight-line method during 1977 in order to provide a better matching of costs and revenues in an inflationary environment. This method of computing depreciation eliminates a substantial reporting difference between financial and income tax basis. The company leases a portion of its warehouse build ings, 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 renew ed for periods of from three to twenty-five years and provide for an option to purchase or for reduced annual rental payments of minimal amounts. The company's financial statements were restated dur ing the first quarter of 1978 to reflect the accounting for certain leases entered into prior to January 1,1977, as capital leases by recording assets and liabilities for leased property, plant and equipment in accordance with FAb8 Statement No. 13, "Accounting for Leases." The effect of this change is to increase property, plant and equipment (less allowances for depreciation) and capital lease obli gations by $38.3 million. The capitalization of leases had no material effect on previously reported earnings. CRTX0415 9 Property, plant and equipment includes the following amounts for capitalized leases at December 31,1978 and 1977: December 31, 1978 1977 Buildings and improvements Machinery and equipment (in thousands) $20,857 $19,556 38,498 33,454 Less accumulated amortization 59,355 11,936 53,010 10,078 $47,419 $42,932 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 unfunded pension liabilities for operations being phased out or relocated. (c) The pre-tax income from these transactions was $25,939,000 and the net income was $28,389,000, or $2.72 per share. Pensions Current service and interest costs are funded annually and prior service costs are funded on a 10 percent basis. Pension plans in the United States are in compliance with the Employee Retirement Income Security Act of 1974. Pension costs charged against operating income were $34,691,000 in 1978, compared with $30,743,000 in 1977. An additional charge of $21,070,000 was incurred in 1977 as a provision for unfunded pension liabilities for opera tions being phased out or relocated. Based upon latest estimates as of December 31,1978, vested benefits exceeded pension plan assets and balance sheet accruals by $106,000,000 ($107,000,000 at December 31,1977) before future income tax credits. Miscellaneous-Net Gain on investments--net Termination of certain operations Gain on disposal of capital assets--net Minority interest Loss on foreign exchange adjustments Loss on repurchase of debentures Other Non-recurring transactions--net Components 1978 1977 (in thousands) $8,079 $ 4,924 (5,243) (2,200) 969 595 (701) (1,116) (659) (1,166) (168) (470) (74) (64) 2,203 -- 503 25,939 $2,203 $26,442 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 Long- and Short-Term Financing Long-term debt was increased by a $30,000,000 unse cured seven-year bank term loan during 1978 and a $4,250,000 unsecured bank term loan of a subsidiary and was decreased by $31,959,000 due to sinking fund require ments and optional redemptions ($25,122,000 during 1977). ..... At December 31,1978, the principal amounts of long term debt repayments required for the next five years were $11,834,000 in 1979, $19,253,000 in 1980, $35,022,000 in 1981, $41,598,000 in 1982 and $42,093,000 in 1983. At year-end there were $102,000,000 of unused short term credit lines available with domestic and foreign banks, and such lines are subject to annual review. Covenants contained in a long-term debt indenture require the company to: (i) maintain consolidated working capital of at least $185,000,000 and consolidated tangible net worth of at least $250,000,000; (ii) restrict paymentof cash dividends; and (iii) restrict issuance of additional senior funded debt to $1,700,000 as of December 31,1978. Reserves and Other Liabilities Deferred income taxes--other Minority interest in subsidiaries Pension and wage benefits Retainage on long-term contracts Miscellaneous Components 1978 1977 (in thousands) $13,658 $ 7,084 10,024 10,704 2,353 11,271 382 2,302 1,924 2,835 S28.341 534,696 CRTX 0416 10 Income Taxes United States income taxes have not been provided on undistributed earnings of foreign subsidiaries, since for eign 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: Income before income taxes Nori-recurring transactions--net Less permanent tax adjustments: Depletion Original issue bond discount Nontaxable net capital gains Nontaxable domestic dividends Foreign exchange adjustments Other Taxable income for accounting purposes Tax @50% (composite rate) Less investment tax credit realized 1978 1977 (in thousands) $50,462 $78,795 -- (25,939) 50,462 52,856 3,290 720 370 4,914 (272) 776 9,798 40,664 20,332 5,225 $15,107 3,759 720 840 3,699 (1,166) 626 8,478 44,378 22,189 7,115 $15,074 The foregoing provision includes foreign taxes of $4,568,000 and $2,803,000, and state taxes of $1,673,000 and $2,002,000, in 1978 and 1977, respectively. The provision for income taxes is com posed of the following: Deferred income taxes Current income taxes 1978 1977 (in thousands) $ 2,020 $ 2,503 13,087 12,571 $15,107 $15,074 Income taxes on non-recurring transactions were a credit of $2,450,000 for 1977. Leases Future minimum payments, by year, and in the aggre gate, under capitalized leases and operating leases with initial or remaining terms of one year or more consisted of the following at December 31,1978: Capital leases 1979 1980 1981 1982 1983 1984 & beyond $ 5,352 5,446 5,388 5,352 5,212 65,934 Total minimum lease payments 92,684 Amounts representing interest (38,286) Present value of net minimum lease payments $54,398 Portion: Current Long-Term 5 1,846 52,552 554,398 Minimum non- cancellable Operating sublease leases rentals Net (in thousands) $ 6,000 $1,761 $ 9,591 5,025 1,514 8,957 4,028 1,366 8,050 3,146 1,183 7,315 2,425 970 6,667 7,662 433 73,163 $28,286 $7,227 $113,743 Rental expense was as follows for all leases not capitalized: Rentals on operating leases: Minimum Contingent Sublease income 1978 1977 (in thousands) $12,719 764 (587) $12,896 513,318 972 (788) 513,502 Stock Options A summary of option transactions follows: Outstanding January 1,1978 2% Stock dividend Options granted Options expired Options exercised Outstanding December 31,1978 Number of Pr:ce shares per share 111,544 S 7.95-35.34 2,169 -- -- 30,500 24.25-29.32 (982) 28.42-34.33 (21,978) 7.95-28.42 121,253 S 8.78-35.34 CRTX 0417 11 At December 31,1978 options for 70,436 shares were exercisable and 33,305 shares were available for grant. In 1977, options for 24,480 shares were granted and options for 37,965 shares were exercised. Shares and per share statistics have been adjusted for the 2 percent stock divi dend. The plan is not a compensatory plan which would require charges to income. Estimated Replacement Cost Information In compliance with the rules of theSecurities & Exchange Commission, the company has estimated the cost of re placing its plant and equipment as of December 31,1978, together with estimated depreciation based on replace ment 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 representative of costs that might be incurred in a future period, nor do they re flect any cost savings from improved equipment. The company principally uses the LIFO method for in ventory 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 as sets plus additional segment information regarding capital expenditures and depreciation appears on page 15. Segment description by products and industries served is given on pages 18 through 24. Subsequent Event On January 26,1979 the Crane Co. Exchange Offer for any and all Medusa Corporation common shares was ter minated. As of the close of business on that date Crane Co. purchased 1,712,000 shares for a cash consideration of $17,120,000 and $68,481,000 in 10V: % Subordinated Sink ing Fund Debentures due February 1,1994 with a level sinking fund. This increased the total Medusa common shares owned to 3,012,100 fora total investment of $142,090,000, which represents 95 percent of the out standing common shares of Medusa Corporation-See financial information regarding Medusa on pages 16 and 17. (IN THOUSANDS) Quarter 1978 1st 2nd 3rd 4th Sales $ 287,880 322,655 311,299 305,615 $1,227,449 Gross Profit $ 37,583 47,055 44,614 49,172 $178,424 1977 1st 2nd 3rd 4th $ 270,053 297,349 294,037 272,383 $1,133,822 $ 40,838 46,862 44,592 41,229 $173,521 ' * Includes non-recurring transactions. ** Adjusted for 2% stock dividend in February, 1978. 12 Net Income $ 5,145 11,417 8,492 10,301 535,355 $37,132* 10,218 9,530 9,291 $66,171 CRANE CO. and Subsidiaries Net Income Per Common Share Primary Fully Diluted $ .50 1.13 .85 1.03 $3.51 $ .48 1.08 .81 .99 $3.56 $3.56* .98 .93 .92 $6.39** $3.35* .94 .89 .87 $6.05" CRTX0418 To the Shareholders of Crane Co. We have examined the consolidated balance sheet of Crane Co. and subsidiaries as of December 31,1978 and 1977, and the related consolidated statements of income, earned surplus, capital surplus and changes in financial position for the years then ended. Our examinations 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 statements of certain consolidated subsidiaries, which statements were examined by other independent certified public accountants whose reports thereon have been furnished to us. Total assets and net sales of such subsidiaries constituted approximately 47% and 41%, respectively, of the related consolidated totals in 1978 (45% and 39% in 1977). Our opinion expressed herein, insofar as it is related to the amounts included for such subsidiaries, 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 financial position of Crane Co. and subsidiaries at December 31,1978 and 1977, and the consolidated results of their operations and changes in financial position for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis. New York, N.Y. January 22,1979 Quarter 1st 2nd 3rd 4th New York Stock Exchange Price Per Share 1978 1977 High Low High Low S28% 31% 37 34% $241/2 26% 26% 23 $33'A 36 34% 28% $26% 30% 27Vs 25 * Adjusted for 2% stock dividend in February, 1978. CRANE CO.'Jnd Subs.diaries Dividends Per Share ' 1978 1977* $ .35 .35 .35 .35 $1.40 $ .29 .30 .34 .34 $1.27 (IN THOUSANDS) 1978 1977 Net Sales................................................................$1,227,449 $1,133,822 Depreciation............................................................. 51,189 44,192 Operating Profit........................................................ 67,663 67,119 Interest Expense................................................... 29,802 23,574 Income Before Income Taxes............................... 50,462 78,795 Income Taxes............................................................ (15,107) (12,624) Net Income...........................................................$ 35,355 $ 66,171 Net Income per Common Share: Average Shares Outstanding........................ Assuming Conversion of Debentures . . Dividends per Common Share: Cash.................................................................... Stock................................................................ $3.51 3.36 1-40 2% $6.39 6.05 1.27 2% CRANE CO. and Subsidiaries 1976 $1,087,606 36,380 80,595 22,699 76,778 (28,819) $ 47,959 $4.52 4.23 1.16 2% 1975 $1,119,494 35,784 125,738 15,905 114,202 (50,594) $ 63,608 $5.93 5.26 .94 2% 1974 $1,144,031 34,880 120,885 18.933 97,354 (41,221; $ 56.133 S5.10 4.07 .65 2% CRTX 0419 13 Sales Consolidated sales for 1978 were Si ,227,449,000,8.3 percent higher than 1977. Crane Domestic sales were 10.3 percent above the 1977 level, mainly due to the addition of the vending machine product line in 1978 and higher aero space and building products demand. CF&I Steel Corpora tion sales increased 7.5 percent in 1978 due to additional shipments of wire and rolled products, reflecting improved market conditions together with moderately higher selling prices on all products. This was partially-offset by lower rail tonnage due to the modernization program. Huttig Sash & Door Company sales were 20.0 percent higher than in 1977, reflecting substantially higher sales at its Florida branches and higher price realization. Crane Canada sales in local currency were about the same as last year, inter national Operations sales increase of 8.4 percent over a year ago vyas attributable to improved price realization. , Certain international operations were terminated in 1978 and their sales are included for only ten months. Consolidated sales for 1977 were 51,133,822,000,4.2 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 Corporation sales in creased 7.0 percent, attributable to improved price realiza tion on rails, steel pipe and wire products. This was partially offset by lower rail tonnage due to the moderni zation program. Huttig Sash & Door Company sales were 30.3 percent higher than 1976, reflecting the increased level of residential construction during 1977. Crane Canada sales for 1977 decreased 10.4 percent due to the generally depressed economic state of its marketing area. International sales increased 1.8 percent during1977 due to improved price realization, substantially offset by lower unit shipments. Operating Profit Consolidated operating profit for 1978 remained about the same as a year ago. Crane Domestic showed an in crease of 12.4 percent over 1977, primarily due to higher aerospace and distribution profits and the addition of the vending machine product line. CF&I Steel Corporation experienced a 25.8 percent decline in operating profit, primarily due to higher costs caused by the rail mill startup expense and higher depreciation in 1978 as more assets were employed. Huttig Sash & Door Company's operat ing profit in 1978 increased 24.5 percent over 1977, re flecting a significant increase in sales. Crane Canada's operating profit increased 21.0 percent over 1977. This was primarily attributed to improved margins in the distribu tion business. International operating profit increased 8.0 percent over 1977, primarily due to higher profits in the United Kingdom operations, partially offset by losses at certain operations eliminated in 1978. Consolidated operating profit in 1977 decreased 16.7 CRANE CO. and Stb'i.d.j^eN 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 increases. In addition, certain of the traditional markets, particularly valves, were significantly affected by foreign competition. CF&l Steel Corporation experienced a 16.1 percent decline in operat ing profit compared with the prior year. This decline was primarily caused by the additional depreciation resulting from an accounting 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 declined 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. Depreciation Depreciation expense increased 15.8 percent over 1977, primarily due to the company's continuing capital expen diture program, particularly the expansion and moderniza tion of rail mill facilities at CF&I Steel Corporation's Pueblo plant. Depreciation expense increased 21.5 percent during 1977 as a result of a change from the straight-line method to the accelerated method and the higher level of assets employed, particularly at CF&l Steel Corporation. Other Income (Deductions) Interest expense in 1978 increased 26.4 percent from 1977, largely due to an increase in the prime lending rate and the inclusion of a full year's interest on a $35,000,000 term loan. The increase of 3.9 percent in interest expense in 1977 over 1976 largely reflected the increase in the prime lending rate. Miscellaneous--Net in 1978 includes an increase of 64.1 percent in gains on investments partially offset by termina tion expenses of certain international operations. Miscel laneous-Net in 1977 included non-recurring transactions resulting in a gain of $25,939,000. See page 10, "Miscel laneous-Net," for details. Income Taxes Income taxes for 1978 were at an effective tax rate of 29.9 percent compared with 16.0 percent for 1977. The increase was attributable primarily to more income sub ject to maximum tax rates and less investment tax credits realized. The effective tax rate for 1977 was lower than 1976 due to the significant increase in non-recurring items, which included dividends and capital gains not subject to maximum tax rates and to higher investment tax credits. CRTX 0420 IN THOUSANDS) Net Sales: Crane Domestic.................... CF&I Steel Corporation . . . Huttig Sash & Door Company. Crane Canada Limited . . . International Operations Total Net Sales.................... 1978 1977 1976 1975 1974 Amount % Amount % Amount % Amount % Amount % $ 355,328 29 $ 322,187 29 $ 325,897 30 $ 355,341 32 $ 377,312 33 475,143 39 441,869 39 413,054 38 427,900 38 438,721 38 181,905 15 151,628 13 116,328 11 80,495 7 89,762 8 - 125,387 10 135,383 12 151,030 14 157,386 14 155,369 14 89,686 7 82,755 7 81,297 7 98,372 9 82,367 7 $1,227,449 100 $1,133,822 100 $1,087,606 100 $1,119,494 100 $1,144,031 100 Operating Profit: Crane Domestic................... CF&I Steel Corporation . . . Huttig Sash & Door Company. Crane Canada Limited . . . International Operations . Corporate.................................. Total Operating Profit . . $ 24,585 18,431 18,838 6,701 7,310 75,865 32 24 25 9 10 100 (8,202) S 67,663 $ 21,869* 29 24,855* 34 15,133 5,540 6,766 74,163 20 8 9 100 (7,044) $ 67,119* $ 31,648 36 29,611 33 10,861 12 8,448 9 8,520 10 89,088 100 (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 75,261 7,253 13,437 22 59 6 11 3,025 2 127,508 100 - ,623) SI 20,885 Assets: Crane Domestic................... CF&I Steel Corporation . . . Huttig Sash & Door Company. Crane Canada Limited . . International Operations . . Corporate.................................. Total Assets........................ $142,347 402,900 57,220 51,429 45,805 699,701 20 58 8 7 7 100 181.624 S881.325 $139,551 20 391,442 56 50,960 7 53,084 8 60,651 9 695,688 100 179,521 $375,209 $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 69,680 595,082 21 52 5 10 12 100 127,119 $722,201 5138,122 287,567 25,507 63,697 74,391 589,284 23 49 4 11 13 100 18,663 $607,947 Capital Expenditures: Crane Domestic............................. CF&I Steel Corporation .... Huttig Sash & Door Company - Crane Canada Limited.................... International Operations . . . Total Capital Expenditures . 1978 $ 3,770 45,131 2,334 1,514 4,654 $57,403 1977 $10,751 75,031 5,965 2,440 3,621 $97,808 Depreciation: Crane Domestic............................. CF&I Steel Corporation .... Huttig Sash & Door Company . . Crane Canada Limited................... International Operations . . . Total Depreciation.................... 1978 $ 8,037 37,942 1,181 1,696 2,333 $51,189 1977 S 6,355 33,317 612 1,531 2.377 544,192 "Changed from straight-line to accelerated depreciation, which increased depreciation by $862,000 and S4,676,000, respectively, a total of $5,538,000 in 1977. 15 CRTX 0421 Medusa Corporation and its subsidiaries produce, sell and provide building and construction materials and ser vices, primarily in the eastern half of the United States. The construction materials business includes the production and sale of cement and other products, including aggre gates and asphalt. Construction services include highway safety construction and asphalt paving. Gray portland cement is Medusa's most important product, but the company also manufactures white cement, masonry and other specialty cements. The com pany markets cement in the Great Lakes and Mid-Atlantic states and in northern Florida and Georgia. Because cement is heavy and expensive to transport, Medusa sells most of its product within 200 miles of the plants. Medusa has an annual capacity of approximately 3.8 million tons of cement. Reserves of limestone, located near all plants and essential in production, range from IS to over 50 years. Medusa produces and sells crushed stone, sand and gravel from 68 locations. The nation's fourth largest pro ducer of crushed stone, the company operates 38 stone plants and 15 sand and gravel plants with an annual capacity of 22,000,000 tons. Reserves are owned or leased on a long-term basis and range from 10 to over 50 years. Medusa also operates 17 asphalt plants with a capacity of 2,800 tons per hour. Medusa's James H. Drew Corporation subsidiary, oper ating in Indiana and Missouri, installs guard rails, median barriers, fences, signs, traffic signals and lights for highways. Set forth below are the condensed financial statements of Medusa Corporation as reported to its shareholders. YEAR ENDED DECEMBER 31,1978 MEDLSA CORPOR-MiOS and Subs.dlar es Sales, less discounts................................................................................................................. Other income........................................................................................................................... Gain on sale of a subsidiary.................................................................................................. Costs and expenses: Cost of products sold....................................................................................................... Selling and administrative............................................................................................. Interest................................................................................................................................ Other expenses................................................................................................................. Earnings before income taxes and cumulative effect of change in accounting method....................................................................................................... Income taxes........................................................................................................................... Earnings before cumulative effect of change in accounting method......................... Cumulative effect of change in accounting method...................................................... Net earnings........................................................... ........................................................... $287,517,000 2,454,000 3,048,000 293.019.000 241,435,000 19,356,000 3,497,000 2,437,000 266.725.000 26,294,000 9,890,000 16.404,000 (781,000) S 15,623,000 CRTX 0422 16 AT DECEMBER 31,1978 MEDUSA CORPORATION ,ird 5^o>-c.jr.es Assets Current Assets: Cash................................................. ....................................................................................... Marketable securities (at cost, which approximated market).................................. Trade receivables, less allowances of $1,987,000 ........................................................... Inventories............................................................................................................................... Other current assets............................................................................................................ Total current assets................................................................................... Property, plant and equipment: At cost.................................................................................................................................... Less allowance for depreciation and depletion.......................................................... Other assets: Sundry notes, investments and other assets..................................................................... Cost of businesses in excess of net assets acquired, net of amortization . . . . Liabilities and Shareowners' Equity Current Liabilities: Accounts payable, including $6,089,000 of construction Income taxes.......................................................................... Other current liabilities...................................................... Current installments of long-term debt........................ Total current liabilities............................. Long-term debt: Senior debt.......................................................................... Subordinated convertible debt....................................... Deferments: Income taxes......................................................................... Investment credits................................................................ Shareowners' Equity: Preferred shares Common shares Retained earnings $ 2,727,000 16,507,000 32,398,000 22,940,000 2,010,000 76,582,000 280,123,000 142,262,000 137,861,000 6,348,000 5,586,000 11,934,000 $226,377,000 S 18,826,000 4.918.000 11.435.000 1.742.000 36.921.000 29.071.000 7.922.000 36.993.000 9.931.000 5.562.000 15.493.000 1,450,000 50.935.000 84.585.000 136,970,000 $226,377,000 17 CRTX 0423 Domestic operations provide capital goods markets with a broad range of industrial products. Fluid and pollution control products--valves, fittings, pumps and water con ditioning and waste treatment systems--serve petroleum, chemical, power, pulp and paper, and municipal markets. Plumbing and related building products serve residential, commercial and institutional construction markets. Specialty products include aircraft systems and accessories for commercial transport, general aviation and military aerospace markets and refrigerated soft drink vending machines supplied to franchised bottlers. Fluid and Pollution Control Products Operating results for fluid and pollution control prod ucts did not come up to expectations in 1978 as capital spending remained sluggish in most major markets. The Valves & Fittings Division saw little significant increase in demand and continued to receive strong com petition from imports. Toward year-end, however, there were signs of an upturn and reports of longer delivery times for steel valves. There also were indications of a drop in steel valve imports because of the dollar's declining value. Sales of the broadened line of ball and butterfly valves continued to improve. A new butterfly line designed primarily for process industry use was successfully intro duced, and several additional products will be released this year. To capitalize on this growing potential, the marketing organization for quarter-turn valves has been strengthened significantly. During 1978, a new bronze valve line was added for use in commercial and light industrial applications. At the company's bronze casting center in Rogers, Arkansas, the installation of two automated molding lines increased the foundry's capacity. Modernization of the division's steel casting facility at Indian Orchard, Massa chusetts was completed during the year, putting Crane in a good position to capitalize on any upturn in steel valve demand. Upgrading of machining and hydraulic pressing equipment at the St. Louis plant made it possible to handle a broader range of large welding fittings. The Deming line of commercial and industrial pumps was further broadened, and additional models for munici- (Above) Crane gate valves control flow in the piping system at an Eastern steel mill. (Right) Testing a nuclear isolation valve, which opens or closes in less than 1/10 second. (Below) Cochrane Ammonex system cuts boiler water treatment cost at a New York power plant. pal and industrial waste handling will be added during the coming year. Overall, the demand for pumps con tinued strong, with year-end order backlogs at record levels. Increased penetration of the power and wastewater markets contributed substantially to increased bookings. While nuclear business remained level for Chempump canned motor pumps, sales to the chemical process indus tries were up. This was due, in part, to growing emphasis on potential health hazards from toxic chemicals which these leakproof pumps are designed to handle. To main tain its leadership, Chempump established three more centers to service customers' pumps and insure minimum interference with production. At least one additional center will be opened this year. Product development included an expanded line of metering pumps. Results at the Cochrane Environmental Systems Division were below the 1977 level, primarily because of the dearth of orders for power plant applications during 1977. 18 CRTX 0424 1 (Top) Leakproof Dynapump S' handling sulfuric acid re duces maintenance and safetyproblems at a processing plant. (Center) Crane Supply fur nished plumbing fixtures for the new Mobile Infirmary in Alabama. (Left) Microelectronic.components provide greater reli ability in Hydro-Aire systems. However, bookings were stronger in 1978 and the order backlog was much higher at the end of the period than a year earlier. New product lines, particularly fluid monitoring equip ment for municipal and industrial water and wastewater applications, figured in the bookings gain. Other new products introduced within the last several years also were a factor. During the year. Crane acquired the product line of Pro-Tech, Inc., expanding the environmental systems capabilities of the division. Building Products The Plumbing Division performed well in 1978 as housing starts surpassed the two-million unit level and commercial construction was at its highest level since 1974. Home remodeling activity also contributed to these results. New 19 CRTX 0425 products introduced during the year included a complete line of washerless faucets and a countertop lavatory with Crane's exclusive Cush-N-Seal that provides a watertight joint without sealing compounds. The Classic Home Products Division, which was formed in 1977 to serve the rapidly growing do-it-yourself market, introduced a broad line of plumbing fittings featuring the new washerless faucets. Leading merchandisers, including major home center, building supply, hardware and dis count department store chains, now stock and promote the Classic line, and increased market penetration is expected. The Classic line is being expanded to include other items manufactured by the Plumbing DivisioD,and in 1979 the Engineered Products Division will supply sump pumps and cellar drainers to be marketed through the line's retail channels. Specialty Products Hydro Aire designs and manufactures aircraft and aero space control systems and accessories for installation as original equipment on new aircraft. The division also designs and manufactures similar systems or portions of systems for the retrofit of existing aircraft and replacement parts for equipment for sale in the after-market. In 1978 sales of original equipment achieved record levels reflecting sharply increased orders for new jet liners to meet the demands of climbing passenger traffic and to replace aging fleets. The division also gained a greater share of the general aviation business aircraft market as a new power brake anti-skid package was sold to several manufacturers of executive aircraft. A high level of demand for these products is expected in 1979. Sales of retrofit and replacement products were well above last year reflecting the fact that all commercial air lines have large numbers of planes that have been in service for many years. Last year a brake fan for the 747 aircraft and a rotor brake for the Sikorsky S-76 helicopter were developed. Other technologically advanced products now in develop ment will be introduced in years ahead. Cavalier manufactures a complete line of refrigerated, coin-operated soft drink vending machines which it mar kets to franchised soft drink bottlers throughout the lynited States and Canada for use in supermarkets, service stations and other high-traffic locations. Bupyed by the strong national economy and consequent good demand for soft drinks. Cavalier enjoyed a good year in 1978. Higher sales to major customers and tighter control of production costs also figured in the improved results. Although Coca-Cola bottlers continue to be the major purchasers of the company's vending machines, Cavalier has launched a program to increase its share of this business with bottlers of other soft drinks. Wholesaling Operations Crane Supply, a u holly owned distribution network, serves industrial and building and construction markets with Crane valves, fittings, pumps and plumbing products. It also offers a variety of related products of other manu facturers as required by local market demand. Crane Supply improved its performance in 1978 despite the low level of capital spending in a competitive marketplace. CF&I is the largest vertically integrated steel manufacturer in the West. The company serves the transportation, petroleum, mining, construction and agriculture indus tries and operates mines and quarries that provide most of its own coking coal, iron ore, limestone and dolomite. A common carrier subsidiary. The Colorado & Wyoming Railroad Company, transports raw materials from CF&I mines in Colorado and Wyoming and serves other customers in the region. Operations Markets for CF&I products were generally strong throughout the year. The company continued to benefit from its product mix and strategic access to major oil and gas producing regions, the successful Western rail lines, major mining activity, and the region's farm and ranch and construction industries--all of which are sharing in the Rocky Mountain area's expansion. CF&I shipments of rails and accessories declined during the year because of the 111-day coal strike and startup problems caused by the rail mill expansion and modern ization program. Shipments of Cromorail, CF&l's new high-strength alloy rail, also have been made to several customers for testing and evaluation. In the years ahead, this rail is expected to account for an increasing share of total shipments. The nation's railroads continued their extensive, long term rehabilitation programs to counter the effects of long-deferred track maintenance. Several customers have record track replacement programs scheduled for 1979, and railroads in CF&l's market area are expected to upgrade and expand their lines to tap the West's vast coal reserves as an alternate energy source. With its newly modernized mill in operation, CF&I will be well positioned to capitalize on these markets. The oil industry's demand for casing and tubing accel erated in early 1978 as drilling activity increased to near record levels but softened as the v ear progressed because of rising inventory levels of user stock and a sharp increase in imports. With the increasing demand for energy and the additional emphasis being put on developing domestic sources, this market's long-term prospects remain excellent and CF&I shipments are expected to continue at capacity levels. Mining products sales remained level with those of the previous year as mining industry activity remained de- 9(1 CRTX 0426 pressed. Markets for these products are expected to improve modestly in 1979. The volume of rolled products shipped in 1978 remained at approximately the same level, reflecting continued pressures from imported steel, particularly in the Gulf Coast and West Coast markets. However, there is a grow ing shift in demand toward higher-quality rolled products. Sales of wire products increased significantly during the '.ear in response to strength in the home building and agricultural markets that offset continued heavy compe tition from Canadian and lapanese imports. Facilities CF&I continued its aggressive facilities improvement pro gram during 1978, investing S45,000,000 in major con struction and expansion projects. Approximately one-third of these outlays represented expenditures to improve the company's rail-producing facilities. The three-year, 585,000,000 program to expand and modernize CF&l's rail mill is scheduled for completion by mid-1979. Because the program provides for expansion of the existing facility and construction of the new mill while the plant continues to operate, production has been adversely affected, with higher costs reflected in the installation and start-up of new equipment. When the program is completed, CF&I will have the most modern rail-producing facility in North America. During the year, a new 45-inch blooming mill was installed and brought on stream. Other improvements made in the rail-rolling facility include installation or a new intermediate mill, hot saw and associated equipment. In the final phase of the program, a new 36-inch roughing mill will be installed. When this step is completed, the rail-producing capacity of the Pueblo plant will have been increased 50 percent to 550,000 tons per year. CF&I continued to make improvements and replace outmoded equipment in other areas. This included expan sion of its capability to produce special high-quality bar products, purchase of a new carbide threader for seamless casing, a rotary car dumper for handling raw materials in the receiving area and a new 175-ton hot metal charging crane in the basic oxygen furnace melt shop. The Maxwell coal mine in southern Colorado, opened in late 1977, came into full production last year. This makes the company completely self-sufficient in the high-volatile metallurgical coal required in steelmaking. Leases on coal properties in La Flore County, Oklahoma were approved by the Bureau of Land Management in 1978, making it possible to begin development of a new mine for lowvolatile metallurgical coal. Mining equipment is on order, and outlays for the Bokoshe mine's development are expected to total $13.5 million between 1979 and 1982. when the mine will be fully operational. At the Sunrise mine in southern Wyoming, a major source of iron ore, the beneficiation plant's operation m upgrading ore resulted in improved blast furnace opera tions at the mill. Pueblo's full requirement for molten iron now can be produced by three blast furnaces rather than four as previously required. This has made it possible to have one blast furnace completely relined and in standbv condition while the other three furnaces are operated to maximum lining life. Operations can proceed without interruption, and with extended lining life of each furnace, important cost savings are realized. 21 CRTX 0427 |Y During 1978, reliance on natural gas was reduced with the installation of a mixing station in the coke oven gas distribution system to insure maximum use of this gas as a heating furnace fuel. Expanded fuel oil facilities on the steam generating boilers also reduced their dependence on natural gas. CF&l's 1978 facilities improvement program included expenditures of $8,900,000 for air and water pollution control. The basic oxygen furnace precipitators were re placed with new, advanced equipment to bring the facility into compliance with state and federal poflution control requirements. Equipment also was installed to control emissions during the charging and tapping of the BOF furnaces, making the facility the first in the United States to be thus retrofitted. Several smaller projects also were undertaken to control emissions at the lime plant and in handling raw materials. In addition, a major project scheduled forcompletion by mid-1979 will control the emissions generated when hot coke is pushed from the coke ovens. The Colorado & Wyoming Railway Company expanded its rail car fleet in 1978 with the addition of 60 low-side gondola cars. Further improvements included an expanded computer system, scale and the reballasting, tamping and lining of the main line, Northern Division in Wyoming. CF&I Energy Resources Company, established in 1977 to develop resources of the company and those of others, conducted exploration drilling on CF&I properties in Fremont and Huerfano Counties, Colorado to evaluate reserves of steam coal. Huttig manufactures and distributes miliwork and allied building products, primarily to residential construction markets. Its branches are concentrated in the South, Southeast, Southwest and Midwest, encompassing the nation's fastest growing residential construction areas. Huttig seta new performance record for the third con secutive year in 1978 as single-family home construction continued at a high level despite climbing mortgage interest rates. (Top) The water treatment system in a steel mill under construction in Ontario contains Crane filters, softeners and sedimentation tanks as well as Crane valves. 'Bottom) Huttig branch office and warehouse in Louisville, Kentucky. Construction activity was strong in the Southeast, particularly in Florida where four strategically located distribution warehouses serve all sections of that state's booming housing industry. The year's gains reflect Huttig's concentration of operations in the thriving Sunbelt states. Rising utility costs have forced homeowners to be more energy conscious. Sales of insulating entrance door sys tems and Huttig insulated glass window units rose one- third over the 1977 level. Home remodeling, including the strong do-it-yourself market, also contributed to Huttig's outstanding performance. In early 1978, the company opened new branch opera tions in Champaign, Illinois, in Kernersville, North Carolina and in the Tri-Cities area of Johnson City, Bristol and Kingsport, Tennessee. The Des Moines, Iowa and Lexington, Kentucky operations moved into new larger facilities, enabling Huttig to expand its markets and offer CRTX 0428 22 Crane plumbing fixtures were chosen for the new Bank of Canada complex in Ottawa. better service to the customers in those areas. The Charlotte Glazing Division doubled its size and produc tion capacity during 1978 because of the increase in demand for Huttig Arma-Seal Insulator window units. Although 1979 residential construction is expected to decline from the two million starts of 1977 and 1978, it should remain at a comparatively high level assuming some decline in mortgage rates. The five-year forecast for residential construction is encouraging but, as in the past, will depend heavily upon the availability of home mort gage funds. Huttig plans to continue expanding existing facilities and opening new ones to improve its sales and services. Crane Canada Limited manufactures and distributes valves, industrial pumps and plumbing fixtures for the construction industry, and water and waste treatment equipment for basic industrial applications. Primary Canadian markets parallel those of the United States. The prolonged weakness of the Canadian economy continued to have an adverse effect on Crane Canada's operations. However, 1978 performance showed an im provement over the prior year despite the declining value of the Canadian dollar, high inflation and unemployment rates, and political uncertainties that lowered business confidence and reduced capital spending. Fluid and Pollution Control Valve sales lagged slightly because of slow markets due to cuts in government spending, supply problems and import competition. A generally flat economy in Canada and low construction levels are forecast for 1979, and overcapacity in the petroleum refining industry is expected to worsen. Nevertheless, the valve and industrial division forecasts stronger sales to the important pulp and paper industry that is updating its processes to meet export demand. Over the next several years, the proposed cross-Canada pipeline to Alaska and investment in the nation's thermal power stations are expected to boost steel valve sales. The markets for water treatment products and pumps were down sharply in 1978 due to widespread cutbacks by industrial and governmental customers. Stronger demand is expected in 1979. Building Products The 1978 decline in Canada's housing industrv, the prime market for plumbing fixtures and related products, limited sales. Little improvement is expected in 1979. Plans are being developed, however, to use presently idle capacity to capitalize on overseas markets that have opened as a result of the Canadian dollar's devaluation. Domestically, new and redesigned products in residential lines, including the new acrylic sunken bathtub for the custom-made market, are expected to be well received. CRTX 0429 23 Wholesaling Operations Crane Supply Division, which distributes the company's products and other manufacturers' related items, had a better year in 1978. While the residential market is ex pected to remain static, construction in western Canada's petrochemical industry should continue at 1978's high level, particularly with the impending startup of the Alaska pipeline and development of heavy crude extrac tion projects. The improved demand for forest products and such major projects as a planned copper smelter and expanded zinc plant in northern Ontario are expected to generate stronger demand through 1979. Crane centrifugal pumps and valves are used in the heating system in this U.K. headquarters and laboratory complex. Through its European operations. Crane supplies valves, fittings and pumps to international chemical, petroleum, power and other industrial markets. The company also manufactures valves in Australia and pumps in Mexico. Many of the economic problems that influenced results in the United States were encountered worldwide in 1978. Inflationary pressures, price controls and tight money, often coupled with an uncertain political climate, held back capital spending. Despite this, the performance of several operations was ahead of the prior year. In the United Kingdom, Crane Ltd. showed a significant improvement in operating results. Though demand was static in the construction, mechanical services and petro chemical industries to which Crane sells, gains were achieved through greater market penetration. The com pany expanded its export sales, including major contracts to supply malleable fittings to Iraq, bronze valves to the Philippines, and pumps to Yugoslavia. In 1979, growth of the United Kingdom's economy is again expected to be limited, and Crane Ltd. will continue to look to exports of its products to achieve further gains. Crane Nederland N.V. had a good year. The company manufactures valves and pipe fittings as well as central heating products for residential, commercial and light industrial construction, where it has the largest share of the domestic market. In spite of the slow domestic economy and the fact that the relative strength of the Dutch currency limits exports, the outlook for 1979 is promising. The order intake that began to improve in late 1978 is expected to continue rising and. with new products in its line, Crane Nederland is expected to achieve better results. Crane Australia Pty. Limited continued to perform well, although the market for cast steel valves remained highly competitive. The Australian economy improved during 1978 and is expected to remain strong in 1979. This should be reflected in Crane Australia's performance. Crane-Deming de Mexico, S.A., which manufactures pumps for industrial and agricultural markets, had a very good year in 1978. Its success was supported by the nation's political stability and reducing rate of inflation. During the year, the company introduced new pumps for industrial applications. Further broadening of the indus trial line is planned for 1979. A good agricultural irrigation market and Mexico's developing oil and gas industries offer strong growth potential for Crane. CRTX 0430 24 Directors . Langdon P. Cook* President, Langdon P. Cook & Co., Incorporated, Municipal Bond Dealers William H. Donaldson Dean of the School of Organization and Management and William S. Beinecke Professor of Management Studies, Yale University Thomas M. Evans Chairman of the Company; Chairman of the Executive Committee, H. K. Porter Company, Inc., Manufacturing; President, Evans & Co., Incorporated, Investments Dante C. Fabiani President of the Company Otto Fuerbringer* Magazine Editor and Consultant John D. Garrison ' Partner, Lord, Day & Lord, Attorneys at Law Bruce A. Gimbel Director, National Aviation & Technology Corporation, Investments Lewis A. Lapham Director, Bankers Trust New York Corporation and other companies John C. Sawhill* President and Professor of Economics, New York University Samuel R. Sutphin Director, Norfolk & Western Railway Company, Scott Paper Company, Indiana Bell Telephone Company, Indiana National Corporation and other companies Member of the Audit Committee Officers Thomas M. Evans Chairman Dante C. Fabiani President Roberts. Evans Executive Vice President Rudolph L. Biller Senior Vice President & General Manager--Crane-U.S.A. B. Jack Barnes Vice President & General Manager-- Hydro-Aire Division William R. T. Crolius Vice President--Government Relations William C. Dackis Vice President & Assistant to the President Anthony K. Dickinson Vice President & General Manager Plumbing Division Robert R. Foster Vice President & General Manager- Crane Supply Company John C. Klein Vice President & General Manager- Engineered Products Division James F. O'Brien, Jr. Vice President--Finance William H. Roberts Vice President & General Manager- Valves & Fittings Division Mark R. Weil Vice President--Facilities & Real Estate Jonathan C. Henshaw Treasurer Paul R. Hundt Secretary & General Counsel R. Kenneth Whitley Controller Stock Listings Crane Co. common stock is traded on the New York and Pacific Stock Exchanges. Stock Transfer Agents Morgan Guaranty Trust Company of New York New York, New York 10015 Registrars of Stock The Chase Manhattan Bank, N.A. New York, New York 10015 Bond Trustees and Disbursing Agents' ` Citibank, N.A. New York, New York 10015 Bank of America National Trust and Savings Association Los Angeles, California 90054 Auditors Ernst & Ernst New York, New York 10022 Executive Offices Crane Co., 300 Park Avenue New York, New York 10022 Telephone; (212) 980-3600 Equal Employment Opportunity Policy Crane Co. is an equal opportunity employer. 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