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Crane Co. (NYSE:CR)

Q3 2011 Earnings Call

October 25, 2011 10:00 am ET

Executives

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

Eric C. Fast – President and Chief Executive Officer

Andrew L. Krawitt – Principal Financial Officer, Vice President and Treasurer

Richard A. Maue – Principal Accounting Officer, Vice President and Controller

Analysts

Ajay Kejriwal – FBR Capital Markets & Co.

Robert Barry – UBS AG

Matt Summerville – Key Banc Capital Mkts./McDonald

Bill Warmington – Raymond James & Associates

Wendy B. Caplan – Sun Trust Robinson Humphrey

Operator

Thank you for standing by, and welcome to the Crane Company Third Quarter 2011 Earnings Release Teleconference. At this time, all participants are in a listen-only mode. There will be a presentation followed by question-and-answer session. (Operator Instructions) Please be advised that this conference is being recorded today October 25, 2011.

I’d now like to hand the conference over to our speaker for today, Mr. Koch. Please go ahead, sir.

Richard E. Koch

Thank you, operator. Good morning, everyone. Welcome to Crane’s third quarter 2011 earnings release conference call. I’m Dick Koch, Director of Investor Relations. On our call this morning, we have Eric Fast, our President and CEO; Andrew Krawitt, our Principal Financial Officer; and Richard Maue, our Principal Accounting Officer.

We will start off our call with a few prepared remarks, after which we will respond to questions. Just a reminder, the comments we make on this call may include some forward-looking statements. We refer you to the cautionary language at the bottom of our earnings release, and also in our Annual Report, 10-K and subsequent filings pertaining to forward-looking statements.

Also, during the call, we’ll be using some non-GAAP numbers, which are reconciled to comparable GAAP numbers at the end of the table at the end of our press release, which is available on our website, www.craneco.com, in the Investor Relations section. Before turning the microphone to Eric, I’d like to invite you to attend our Annual Investor Day Conference on Thursday, February 16, in New York City. Please mark you calendars.

Now, let me turn the call over to Eric.

Eric C. Fast

Thank you, Dick. I’m pleased with our third quarter as we continue to show a significantly improved result. Sales grew 18% in the quarter, led by core sales increase of 11%. We’ve registered double digit core growth in each quarter thus far in 2011, driven by recovering end markets and solid execution. Operating profit increased 31% in the quarter, and operating margin was 12.5%, continuing the journey to the 13% margin we have said, we could achieve when core sales return to $2.6 billion.

Our earnings per share increased 27% versus the third quarter of 2010. Sales, operating margins and earnings for the quarter improved both on a year-over-year and sequential basis. We continue to have a successful year in 2011, and results have been encouraging. In April, we raised our full year earnings guidance based on higher core growth expectations. We again raised earnings guidance in July based on better than expected results, and reflecting our confidence in the company’s future, we also announced a 13% increase in the quarterly dividend.

We are raising the lower end of our 2011 EPS guidance by a nickel to a range of $3.35 to $3.45. Sales in 2011 are expected to increase in a range of 15% to 16%, the higher end of our guidance, reflecting a 9% to 10% core growth, 3% from favorable foreign exchange translation, and 3% from acquisitions.

Our free cash flow guidance remains a range of $140 million to $160 million. Although, our current business trends are not signaling a severe downturn, we recognize that there are clear indications of slower global economic growth in 2012. It is important to understand that Crane Co. is positioned better than it was when the world changed in late 2008. Similar to the end of 2008, we have ample liquidity, a strategy of maintaining our customer facing activities and the ability to execute acquisitions.

Over the past three years, our actions and accomplishments have made us an even stronger company, including a business portfolio strengthened through acquisitions, significant reductions in our cost base and a broader geographic reach, particularly in emerging markets.

In Aerospace and Electronics, we have completed several very large development programs including the brake control system for the 787, reducing our risk and positioning us to benefit from increased revenues associated with the new platforms.

In Fluid Handling, we have effectively executed internal mergers, rationalized costs and dramatically changed how we approach the market. We now have an expanded global sales force focused on key verticals in selling bundled solutions to customers worldwide. In our shorter cycle businesses of engineer materials and merchandising systems, we have substantially reduced our fixed cost base through plant consolidation. Since 2008, we have closed 3 engineer materials facilities reducing the number of manufacturing sites from 8 to 5; and consolidated two large North American vending operations into a single location.

Our later, long cycle businesses, in aerospace, electronics and fluid handling continue to provide strong sales and earnings growth and are on track to deliver significantly improved results over what we anticipated at the beginning of this year. We remain optimistic about the prospects for commercial aerospace, given large OEM backlogs. They help your airline industry in more moderate oil prices.

Fluid handling backlog again increased sequentially, and we feel that both of these segments are well positioned going into the fourth quarter, and into 2012. We now expect the Aerospace Group sales to be above $400 million in 2011, and we continue to expect Fluid Handling operating margins to exceed 13% for the year.

Given that the economic environment, it’s highly uncertain, visibility is extremely limited for our short cycle engineer materials and merchandising systems businesses. Raw material costs although abating, in some cases remain elevated when compared to historical level. These two segments are generally tracking to the Investor Day guidance that we provided back in February. While we remain alert to signs of the slowdown, our strategy today is to stay on [offense] and focus on profitable growth.

The maturation of the Crane Business System combined with solid management team is enabling us to execute well and win in the marketplace. We continue to invest in our future to effectively leverage our existing facilities through new product development, more efficient machining operations, our upgraded ERP systems, and a continuing emphasis on engineering, sales and marketing. At the same time, we continue to drive productivity across the company while carefully controlling costs.

Andrew will now take you through business and provide some additional financial information.

Andrew L. Krawitt

Thank you, Eric. I’ll turn now to segment comments, which compare to third quarter of 2011 to 2010.

Aerospace and Electronics sales increased 20% to $172 million while operating profit increased 40% to $36 million. Operating margin increased to 20.7% in the third quarter from 17.7% in the prior year. Backlog was $410 million at the end of the quarter lower than $431 million at the end of 2010, but above the September 2010 level of $402 million. Since the backlog decline from year-end is largely due to timing differences between orders and sales, we remain confidant about order trends and the momentum in the business as we look forward.

Sales in the Aerospace Group increased $21 million, or 25% to $106 million during the quarter. OEM sales increased 22% reflecting broad-based growth across large commercial transports, regional and business jets. Aftermarket sales increased 29% reflecting higher spares and repair and overhaul revenues, as well as modernization and upgrade sales, primarily for the C130 Carbon Brake Control upgrade.

Excluding modernization and upgrade, our more traditional aftermarket sales increased 16% compared to the third quarter of 2010, a rate similar to what we experienced in the second quarter of 2011. Both commercial and defense related activity contributed to the aftermarket sales increase. The OEM aftermarket mix was 59% to 41% in the third quarter of 2011. Starting with a more favorable than the 60%, 40% mix in the third quarter of 2010, but slightly less favorable than the 57% to 43% mix in the second quarter of 2011.

Operating profit in the Aerospace Group increased by approximately $8 million, reflecting good leverage of the higher sales. In the third quarter of 2011, Aerospace engineering spending was $11 million, with seventh straight quarter of investment at this level, and consistent with our targeted development spending range of 10% to 12% of Aerospace Group sales.

Current market conditions in Aerospace industry remain positive, with the International Air Transport Association recently projecting that passenger traffic will increase 5.9% in 2011, up from a previous estimate of 4.4%. Passenger load factors are at historically higher levels with only a small portion of in-production aircraft parts.

Airline industry profitability has improved in 2011, and oil prices have moderated. Offsetting this in part is lower than expected industry’s freight activity in 2011, which IATA now expects to increase only slightly above 2010 levels. In addition, concerns regarding slowing global economic growth could negatively impact results. Given the current environment, as well as higher than expected third quarter sales, we are now forecasting that 2011 Aerospace Group sales will comfortably exceed $400 million versus our guidance in February of $365 million.

For 2012, the IATA is projecting that both passenger and cargo markets will grow approximately 4%, higher build rates for large commercial aircrafts should positively impact our Q2 results, and we will continue to leverage our recently expanded global sales force. In addition, we expect the benefit from sales of new products that we have developed over the past several years, including the brake control system for the Boeing 787, and the landing gear control unit for the Airbus A320.

Electronics Group sales in the third quarter increased $8 million, or 14% to $66 million, led by increases in Power Solutions and Microelectronics sales. Demand from the commercial aviation market drove improved results in Power Solutions, while higher sales to medical device customers benefited Microelectronics.

Electronic operating profit increased approximately $2 million compared to the third quarter of 2010, with operating margins remaining in the mid-teens. We expect our 2011 Electronics sales will increase at least 10% compared to 2010, which is slightly better than our Investor Day guidance.

Looking forward into 2012, we recognize that defense-related orders could be canceled or delayed due to ongoing budget negotiations. However, it is important to remember that the defense portion of our Electronics business is concentrated on intelligence, surveillance and reconnaissance or ISR, a market that we expect to continue to grow despite reductions in overall government spending.

In addition, the commercial portion of our Electronics business, which primarily drives demand from the commercial aviation market, comprises about one-third of Electronics Group sales.

Engineered Materials sales declined 3% in the third quarter. Demand for our RV related applications decreased 12% as several RV OEMs slowed manufacturing. RV dealers continue to manage their inventory levels down reflecting concerns about the economy. Transportation and building products related sales in the third quarter increased 9% and 5% respectively.

Operating margins were 11.1% compared to 14.5% in the third quarter of 2010. And operating profit declined to $5.9 million from $8 million. Although we implemented price increases in the first half of the year, that improved our price-cost relationship in the third quarter, the pricing environment remains very competitive. Raw material costs such as resins have remained higher than expected and continue to impact our margins.

Overall, in 2011 for engineered materials, we projected increase in sales and profit in the same general range as our Investor Day guidance, but results were a bit lower than this guidance given recent economic trends. RV dealer inventories appear to be in balance at generally reduced levels, and we do not expect a repeat of the inventory restocking that occurred in the fourth quarter of 2010. Demand from transportation related customers has slowed somewhat, and we forecasted building product sales will remain lackluster until non-residential building starts showing meaningful improvement.

We are continuing our efforts to expand our content to existing customers and find new applications in existing as well as new markets such as ocean-going containers, decorative interior wall panels, and walls and floors for more fuel efficient step down.

In addition, we are driving productivity initiatives to reduce gap and improve yields helping us to mitigate our operating margin decline in the phase of slowing seasonal and cyclical end-market demand.

Merchandising System sales of $99 million, increased $22 million or 28% primarily reflecting $14 million of sales associated with the December 2010 acquisition of Money Controls as well as sales growth in both our payment solutions and vending businesses.

Segment operating profit of $10.8 million increased from $6.3 million in the prior year due to higher core sales and continued improvements in operating efficiency, operating margins improved to 11% from 8.1%. We’re clearly seeing the benefits of the Crane business system leading through in our operations in Williston, South Carolina where we successfully consolidated our North American vending machine manufacturing operations nearly two years ago. In addition, we are continuing our new product development activities including online vending and vending machines that will be confined with the Americans with Disabilities Act.

The integration of Money Controls into our global payment solutions business continues to progress well, and we’re on track to achieve our planned synergies. Money Controls was profitable in the third quarter, and we continue to believe that it will be slightly accretive to our full year 2011 earnings. For the full year, the Merchandising Systems segment is tracking to the guidance we provided at Investor Day with sales and operating profit both expected to increase over 2010 level.

Fluid Handling sales increased 19% to $304 million in the third quarter, with a core sales increase of 11%, a favorable foreign currency impact of 6%, and the W. T. Armatur acquisition contributing 2%. This marks the fourth consecutive quarter that core sales have increased on a year-over-year basis, continuing the gradual recovery in Fluid Handling, which began in late 2010. We saw a notable sales and order strength in our late, long cycle Energy and ChemPharma businesses as momentum continues to build.

Backlog remains solid at $329 million, and is 21% higher than at the end of 2010. Although, we know that the third quarter level includes about $5 million from the WTA acquisition. As we have pointed our previously, we feel that our backlog is properly priced, reflecting our disciplined pricing methodology.

We are seeing improvement in both MRO and project-related business, and quote activity remains strong. The favorable trends we saw in the second quarter are continuing, and many of our customers are releasing funds for projects that were previously on hold. Spending by chemical companies and refineries is strong due to higher plant operating rates, catch-up maintenance, debottlenecking projects and better industry profits.

North American power market customers are engaging in significant refurbishment activities, our Asian power markets are also continuing their recovery. Fluid Handling operating profit of $41 million was 23% higher than the prior year, primarily reflecting the higher sales, and operating margins was 13.5%, 50 basis points higher than last year's third quarter. The relationship between customer pricing and input costs was somewhat favorable during the third quarter, reflecting the implementation of selective price increases over the past year.

Operating leverage for overall Fluid Handling in the third quarter was lower than we would normally expect as a considerable portion of the sales increase was derived from foreign exchange. In addition, inventory step-up effects and transaction costs associated with the WTA acquisition totalled approximately $1.2 million during the quarter.

In July, we announced that Crane had acquired WTA, a manufacturer of highly engineered valves with zero fugitive emission used in severe service applications. WTA, which had 2010 sales of approximately $21 million, is expected to be slightly dilutive to earnings in 2011.

The addition of WTA’s [third year] growth out complements our existing product offerings of low fugitive emission valve technology and aligns directly with our objectives of providing comprehensive solutions for demand in chemical and petrochemical applications.

For Fluid Handling, we remain confident about sales going forward driven by later, longer cycle, process valves businesses. For the full year of 2011, we continue to expect Fluid Handling will exceed our February Investor Day guidance for both sales and operating profits with an operating margins in excess of 13%.

Turning now to more detail on our total company results and forecasts. We again experienced input cost pressure in the quarter, but in aggregate our increase in selling prices effectively offset this impact. Commodity prices generally have declined over the past few months, yet several key commodity prices remain elevated versus historical levels.

Foreign currency translation positively impacted EPS by approximately $0.03 in the quarter. As a reminder, the operating profit impact of foreign currency translation for Crane tends to be about 10% to 15% of the revenue impact.

On a year-to-date basis, foreign currency translation has positively benefited EPS by approximately $0.08. During recent currency movements, we now expect only a small benefit from foreign currency in the fourth quarter.

Third quarter corporate costs were higher than the prior year, driven by higher compensation costs associated with our improved earnings forecast, higher medical expenses, and also some professional fees related to normal cash consulting that we incurred in the quarter. Some of the increase was timing related. Our current full-year forecast for corporate expense is about $58 million, which implies a sequential reduction to about $14 million in the fourth quarter.

Our tax rate in the third quarter of 2011 was 31%, compared to 28.3% in the third quarter of 2010, as the tax rate in the prior year benefited from the closure of certain tax audits. We continue to expect our 2011 full year tax rate to be approximately 31%, or perhaps just a bit lower. Please remember that our EPS guidance range of $3.35 to $3.45 includes a $0.05 share gain we recorded in miscellaneous income in the first quarter, primarily related to the sale of real estate.

Overall, free cash flow was positive $40 million in the third quarter of 2011, compared to negative $10 million in the third quarter of 2010. The prior year period included a $25 million discretionary pension contribution as well as an increase in working capital to support a higher sales level. As Eric mentioned earlier, we are maintaining our free cash flow guidance in a range of $140 million to $150 million for the full year, recognizing that this implies a very strong cash flow for the balance of the year.

The fourth quarter is a seasonally strong cash flow period for the company, and we expect to generate significant cash through working capital reduction. Capital spending for the third quarter of 2011 was $9 million, an increase over the $5 million spent in the third quarter of 2010. Our capital expenditure guidance for 2011 remains at $40 million compared to $21 million in 2010.

We did not repurchase any shares of our common stock during the third quarter of 2011, and our policy is not to preannounce purchases, but to report them at the close of the applicable quarter. On a year-to-date basis, we have repurchased approximately 1,056,000 shares for about $50 million. Our balance sheet remained strong, and we ended the quarter with $211 million in cash, we also have access to our $300 million revolving credit facility, half of our long-term debt of $400 million is due in 2013, and the other half is due in 2036.

Now back to you that you, Dick?

Richard A. Maue

Thank Eric and Andrew. This marks the end of our prepared comments. Operator, we’re now ready to take questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions) Your first question comes from the line of Deane Dray.

Unidentified Analyst

Hi, good morning. James filling in for Deane.

Eric C. Fast

Good morning, James.

Unidentified Analyst

Hi, just wanted to ask, is there any way you might be able to quantify the braking systems that you have going into these 787 platform, what we just learn is that, roughly 60 of those planes are expecting to be made next year, and then Boeing is calling out about 10 planes per month in 2013, so I was wondering if you might be able to quantify your dollar sale to each plane?

Eric C. Fast

James, as we kind of talk about in the past, as a matter of time, we don’t breakout the ship set content for particular aircraft. But what I will say is that, the 787, is another plane in the portfolio of airplanes that we have as a company. And to the extent that we have sales associated with the 787, they will be good for us, but you shouldn’t think of this as a step change in our algorithm associated with the 787.

Unidentified Analyst

Okay. Fair enough, thank you. And just in fluids, seems like it’s recovering very, very well, which verticals within that business still haven’t recovered yet, and that we could look forward to?

Eric C. Fast

Well James, as we’ve indicated, many of the end markets are showing market improvement. To the extent that some of the end markets are still yet to recover, I’d point to U.S. commercial construction is still a bit lackluster, and also we have a pipe, valve and fitting distributor in Canada, and we are seeing some slowing in the bidding activity up there as well.

But on the positive side, and again we mentioned this in our remarks, energy markets and the related demand are really rebounding quite significantly since the end of 2010. Refiners are releasing capital expenditures due to higher crack spreads and increased profitability. We’re seeing increased refurbishment activity in the North American market, the Asian power market is continuing its recovery. Our overall chemical plants are really undertaking a significant number of debottlenecking projects and we feel good about worldwide demand.

Unidentified Analyst

Okay. Terrific, that's all I have. Thank you.

Operator

Your next question comes from Ajay Kejriwal.

Ajay Kejriwal – FBR Capital Markets & Co.

Thanks. This is Ben on for Ajay. I just wanted to follow up on Fluid segment, I know some of the European competitors have come out and mentioned a slowing in order. I just wanted to see if you guys are seeing any impacts from these austerity measures in Europe, any slowing in that geography?

Eric C. Fast

No. Our business, the signs look good, and we’re quite confident in our backlog.

Ajay Kejriwal – FBR Capital Markets & Co.

Okay. Thanks. And then, maybe just timing in on engineering materials, you guys mentioned RV down 12%, it looks like transportation came off pretty significantly as well. What’s kind of the outlook and trajectory for that business?

Eric C. Fast

Ben, you mentioned that transportation came off in terms of the growth rate relative to prior quarters, because we were still up in the quarter.

Ajay Kejriwal – FBR Capital Markets & Co.

Right, right, right. If positive for the quarter, but it look like deceleration from prior quarters?

Eric C. Fast

Right. So we are in conjunction with economic trends, we are seeing certain truck OEM, trailer OEM manufacturers reduce production, and we’re just being cautious about the trends in that area. Obviously, the first half of the year was a very strong production time period for trailer OEMs.

Ajay Kejriwal – FBR Capital Markets & Co.

Okay. Great, thanks.

Operator

Your next question comes from the line of Robert Barry.

Robert Barry – UBS AG

Hi guys, good morning.

Eric C. Fast

Hi, Robert.

Robert Barry – UBS AG

Just wanted to follow-up on the comments in the prepared remarks about the Aerospace backlog, just because we’re two quarters in a row now, sequentially, it's been ticking down?

Eric C. Fast

Okay. Well Rob, as you mentioned, as we indicated we did indicate, let me just step back. We’re not concerned about order trends in Aerospace and Electronics. A number of factors contributed to a lower backlog at the end of the third quarter as compared to year-end of 2010. As you may recall, we booked a large Aerospace M&U order in the fourth quarter of 2010, and we’re benefiting from associated sales in 2011.

In electronics, earlier this year, we removed a project from our electronics backlog related to a program cancellation that may come back at a future date, and we also removed an order from our backlog associated with a contract that more accurately will be booked over several months time period. In addition, there are a couple of orders that we thought we would receive in Q3, but now we expect to receive in Q4, so there is some timing impact. And as we step back, we’re just not concerned about bookings, our backlog is at a healthy level, and we remain confident at our momentum going into 2012.

Robert Barry – UBS AG

You made comments about electronics growing at least 10%, it’s contracting much higher than that, I mean any thoughts on the fourth quarter, I know that it looks like the cost gets a lot upper in the fourth quarter?

Eric C. Fast

I would just say that, our guidance here is that we expect to do a little better than 10% for the full year, and you’re right we’re overlapping different quarters.

Robert Barry – UBS AG

Okay. And then just maybe finally to followup on the fluid, also a question on the backlog, in the commentary it sounds very positive, especially comments about the late project funding getting released, but sequentially if you take out the deal, it looks like the backlog was about flat, I don't know seasonality is a factor or booking versus shipment, any color there would be helpful as well. Thank you.

Andrew L. Krawitt

Well, the backlog was only up slightly sequentially, there are some foreign currency effect that impact our Fluid Handling backlog and from the end of the second quarter to the end of the third quarter it may had a small impact on that. Once again, we feel very confident in our position here and the trends are quite positive. And I’ll even bring it back Rob to when we think about our later longer cycle businesses for both Aerospace and Fluid and Electronics and Fluid Handling, we think we’re positioned for continued sales growth in both of these segments.

Eric C. Fast

Rob, this is Eric, I would add that in Fluid Handling we track by region both our project activity and our MRO activity on a quarter-to-quarter basis and year-over-year, and those all those trends through the third quarter looked very strong with a lot of targeted activity for new orders. So it feels very robust to us.

Robert Barry – UBS AG

Okay. Thank you.

Operator

The next question is from Matt Summerville.

Matt Summerville – Key Banc Capital Mkts./McDonald

Good morning, just one or two followups, Andrew, you had mentioned that Electronics Group you removed a program that have gotten canceled some contracts that or maybe originally thought to be shorter in duration or little longer in duration, some adjustment there, some things are maybe you’re going to be booked in Q3 moving to Q4. Can you tell us is that more on the civilian side of the business, on the miliary side and I guess what’s your kind of degree of certainty that those things kind of end up moving forward.

Andrew L. Krawitt

Well, Matt, it was a little above the orders that we mentioned that came out of backlog were military related, the orders that, a couple of the orders that slipped into Q4 are on the commercial side. I think we’re cognizant that, in today’s environment of government spending, and what's happening in Washington, it’s logical to assume that, certain of these projects slip a little bit, once again though we're confident in our backlog, and feel good about our prospects.

Matt Summerville – Key Banc Capital Mkts./McDonald

If you look at that backlog number, is the relative split between civilian and military in the backlog similar to the relative split that you’re encountering now, civilian versus military in revenue or is there a discernible difference there?

Eric C. Fast

I don’t have the exact answer for that Matt. I would say that…

Andrew L. Krawitt

Why don’t we get back to him?

Eric C. Fast

We can follow up.

Matt Summerville – Key Banc Capital Mkts./McDonald

Okay. And then, just one follow-up on fluid, I mean everything you said is pretty encouraging from what you’re seeing from a quoting, bidding, just overall activity standpoint. I guess should we take away from that, this backlog in a way has peaked yet that this backlog is likely to continue to move higher, maybe not necessarily every quarter over every quarter, but that number is still moving north from here?

Eric C. Fast

We’re sitting here, now we’re talking about, how long is the late, long cycle businesses going to last right, Matt? And all that I could say to that is that, as we sit here today, it feels very particularly in our process, valves, energy, chemical, power globally, as we sit here today it feels very strong, both in terms of projects that have been, people have been working on for the last year or year and half are being let and started and awarded, as well as for the MRO activity for the debottlenecking, the efficiency related work in the plants due to the higher utilization.

So as we sit here today, it feels very solid to us. And I remind you that our businesses, I think our execution in our business is clearly better than it was a year ago and continuing to improve from the internal mergers and the effective utilization as that global sales force particularly in the emerging markets.

Matt Summerville – Key Banc Capital Mkts./McDonald

And then with regards to the Merchandising Systems segment, I have to go back several quarters to see kind of an 11% or better operating margin in this business, even sequentially, and I will call it slightly higher revenue you saw a pretty nice improvement in operating profitability, is that being driven by synergies of Money Controls that being driven by efficiencies through this single factory higher volume or maybe it’s a combination and I guess I’m trying to get a feel for sustainability of these levels?

Andrew L. Krawitt

I think you’ve hit it on the head it’s a combination of those things. And we look to continue to achieve, increase profitability through our operational excellence efforts, as well as synergies associated with Money Controls. Obviously, a portion of that equation is related to volume and we don’t want to lose sight of that, but we have made tremendous progress in terms of our operational improvements within vending.

Eric C. Fast

So Matt, this is Eric. I would say we consistently said long term that the Payment Systems businesses are high growth, high margin business. Generally, it’s going to be, it should be in the mid-teens. It won’t always be there, but should be in the mid-teens.

I’ve also said consistently that if we can get a little bit of revenue, which we started to see some in the third quarter, in our North American Vending business where we’ve got substantially reduced our costs through the plant consolidation that we can start to move our Vending margins towards 10%. It’s just kind of a placeholder and an interim step. And we’re confident on both of those. I like the progress that we made in the third quarter in Vending and long-term for Payment Systems, if that’s the right way to look at that business.

Matt Summerville – Key Banc Capital Mkts./McDonald

Thanks guys. Appreciate the color.

Operator

(Operator Instructions) Your next question is from the line of Bill Warmington.

Bill Warmington – Raymond James & Associates

Yes. If I should go about your merchandising assistant, you show that 20% top line growth, what percent of that was organic? In other words, if you back out the Money Controls revenue, how is the business without that in terms of top line growth?

Andrew L. Krawitt

Excluding Money Controls, the merchandise, we mentioned this on our remarks though, our Money Controls, hold on, I guess, is up 9%.

Bill Warmington – Raymond James & Associates

Okay. And one last question in terms of tax rate for 2012, can we expect a similar tax rate as 2011?

Andrew L. Krawitt

We’ll provide guidance for 2012 on that measure at our Investor Day conference in February.

Bill Warmington – Raymond James & Associates

Thanks a million.

Eric C. Fast

Okay, thank you.

Andrew L. Krawitt

Thank you, Bill.

Operator

Your next question is from the line of Wendy Caplan.

Wendy B. Caplan – Sun Trust Robinson Humphrey

You mentioned, let’s talk a little bit again about the short cycle businesses, Engineer Materials and Merchandising Systems are obviously the consolidation of the facilities that for vending has helped a lot. Can you talk about some of the productivity initiatives that you sighted for specifically I guess for Engineer Materials that you are looking to affect going forward?

Eric C. Fast

Wendy, I mean, we as part of the algorithm for that business, we are constantly looking for ways to improve productivity. One of the things we looked at, we look at it’s called (comp base yield), it’s a process business where we look to constantly reduce the amount of scrap and waste that’s associated with that process.

So we put a lot of work into reducing that, and given the relatively high cost of resin, it can be very effective to do so. So that’s one sort of example, but it’s embedded in our culture and part of our focus on cost is around productivity efforts.

Wendy B. Caplan – Sun Trust Robinson Humphrey

And I guess my question was, should we expect anything larger in terms of any kind of headcount or any kind of restructuring, I know you typically run that through the P&L, but is there anything larger that we should expect?

Eric C. Fast

So we are not contemplating restructuring activities, Wendy, I think as you know in a normal course of business, we do analyze the impact of closing facilities as part of our efforts to drive productivity. But we really feel that the actions we took and have taken since 2008 have positioned us well to adapt to changes in demand.

Andrew L. Krawitt

On the headcount side, Wendy, this is a booking ship business, but we have a lot of flexibility to reduce the crew size and the crew teams as we go from 2 shifts to 1.5 shits or one shift, we have a lot of flexibility with respect to the direct labor there.

Wendy B. Caplan – Sun Trust Robinson Humphrey

Okay, thank you Eric. Thanks, Andrew.

Eric C. Fast

Thank you.

Andrew L. Krawitt

Thank you.

Operator

Your next question is from the line of [Jeffrey Spike].

Unidentified Analyst

I got on late, so I may have missed this, but could you just spend a little time on capital allocation, you stepped up and bought the stock earlier in the year and in the third quarter balance sheet, it's looks like it’s in great shape, plus may be a little color commentary on what the M&A pipeline might look like and what we should expect going in the next year?

Eric C. Fast

Okay Jeff. Our message the way we think about capital allocation, and we think we have a very balanced capital allocation approach. The first look for internal opportunities to make capital expenditures to drive growth, a huge or a very large portion of our strategy is to grow through acquisition, and we continually look for businesses to acquire businesses that strengthen our existing businesses, and as we mentioned earlier this year we raised our dividend 15% or 13%. We believe that strong dividend we attracted relative to our peers. From a share repurchase perspective, we did mention on the call that we didn't do anything in the third quarter, but we have repurchased about $50 million year-to-date, and we do not preannounce those purchases.

So and thinking about this balance capital allocation approach, we’re quite focused now is looking for those acquisitions that will strengthen our existing businesses and I’d say that would be the first and foremost kind of priority for use of our cash.

Unidentified Analyst

Could you speak to the richness of the current acquisition pipeline and where valuations are relative to your comfort zone?

Eric C. Fast

There are terms out there and there has been activity as we’ve all read about in the press as well. I think clearly prices are back to pre-2008 levels, prior to the equities out there, strategic, they’re well armed as well. And so prices have come up a little bit. We don’t have anything that eminent, but we remain active looking and things can change quickly.

Unidentified Analyst

And I’m sorry if you’ve touched this earlier, where do you stand particularly in Fluid on kind of the price cost dynamic in a particular maybe pricing and backlog as we look forward?

Eric C. Fast

We mentioned in our remarks, Jeff, that in the quarter, we were able to offset import cost increases with our customer price increases and we tend not to talk about the pricing that’s in our backlog.

Andrew L. Krawitt

Other than that we’re very comfortable that we’ve got a properly-priced backlog.

Unidentified Analyst

Okay, terrific. Thank you.

Operator

And no further questions at this time, please continue.

Eric C. Fast

Thank you very much for joining us today and for your continuing interest in Crane. Thank you.

Operator

That does conclude our conference call for today. Thank you for participating. You may all disconnect.

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