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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 1-14962
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CIRCOR INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 04-3477276
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
35 CORPORATE DRIVE, BURLINGTON, MA 01803-4230
(Address of principal executive (Zip Code)
offices)
(Registrant's telephone number, (781) 270-1200
including area code):
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- ---------------------------------------------
COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE
PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 17, 2000, was $196,071,240. As of March 17, 2000, there
were 13,236,877 shares of the Registrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference certain portions of the information from
the Registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 18, 2000.
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PART 1
ITEM 1. BUSINESS
GENERAL
CIRCOR International, Inc. ("CIRCOR") designs, manufactures and distributes
valves and related products and services for use in a wide range of applications
to optimize the efficiency or ensure the safety of fluid-control systems. The
valves and related fluid-control products we manufacture are used in processing
industries; oil and gas production, pipeline construction and maintenance;
aerospace, military and commercial aircraft; pharmaceutical, medical and
analytical equipment; and maritime manufacturing and maintenance. We have used
both internal product development and strategic acquisitions to assemble a
complete array of fluid-control products and technologies that enables us to
address our customers' unique fluid-control application needs. We have two major
product groups: Instrumentation and Fluid Regulation Products and Petrochemical
Products. For the six-month period ended December 31, 1999, we derived 53.8% of
our net revenues from instrumentation and fluid regulation products and 46.2%
from petrochemical products. International business accounted for approximately
29.1% of net revenues for the six-months ended December 31, 1999.
On October 18, 1999, we became a publicly owned company via a tax-free
distribution of our common stock to the shareholders of our former parent, Watts
Industries, Inc. ("Watts"). A description of the spin-off and certain
transactions with Watts is included in Note 3 of the Consolidated Financial
Statements.
INSTRUMENTATION AND FLUID REGULATION PRODUCTS GROUP
The Instrumentation and Fluid Regulation Products Group designs,
manufactures and supplies valves and controls for diverse end-uses including
hydraulic, pneumatic, cryogenic and steam applications. Selected products
include precision valves, compression tube and pipe fittings, control valves and
regulators. The Instrumentation and Fluid Regulation Products Group consists
primarily of the following operations: Aerodyne Controls, Atkomatic Valve,
Circle Seal Controls, Inc., GO Regulator, Inc., Hoke, Inc., Leslie
Controls, Inc., Nicholson Steam Trap, and Spence Engineering Company, Inc. The
Instrumentation and Fluid Regulation Products Group had combined revenues of
approximately $84.2 million for the six-months ended December 31, 1999.
We entered the instrumentation valve market in October 1990 with the
acquisition of Circle Seal based in Corona, California. Circle Seal designs and
manufactures a broad range of valve products, including check valves, relief
valves, solenoid valves, motor operated valves, regulators, plug valves, needle
valves, control systems and manifolded valve solutions. Circle Seal specializes
in providing custom solutions for applications requiring precise performance,
quality and reliability. From its initial focus on the aerospace and military
markets, Circle Seal has diversified into many other industrial markets where
performance, quality and reliability attributes are most valued, such as
medical, food processing, ultra high purity and fluid power.
Since acquiring Circle Seal, we have acquired eight complementary
instrumentation and fluid regulation businesses, including Aerodyne
(December 1997), Atkomatic (March 1998), Hoke (July 1998) and GO Regulator
(April 1999). Aerodyne, based in Ronkonkoma, New York, manufactures
high-precision valve components for the medical, analytical, military and
aerospace markets. Aerodyne also provides advanced technologies and control
systems capabilities to other companies in the Instrumentation and Fluid
Regulation Products Group. Atkomatic, formerly based in Indianapolis, Indiana,
makes heavy-duty process solenoid valves for clean air, gases, liquids, steam,
corrosive fluids and cryogenic fluids. In July 1998, we combined the Atkomatic
product line with Circle Seal's administrative, manufacturing and distribution
facilities in Corona, California. GO Regulator of San Dimas, California, offers
a complete line of pneumatic pressure regulators for instrumentation, analytical
and process applications, in addition to an
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emerging product line of regulators for the ultra high purity market,
specialized cylinder valves and customized valves.
We significantly expanded the breadth of our instrumentation valve product
line with the acquisition of Hoke in July 1998. Our largest acquisition to date,
Hoke brought its leading line of Gyrolok-Registered Trademark- compression tube
fittings as well as instrumentation ball valves, plug valves, metering valves
and needle valves. Circle Seal and Hoke serve several common markets and their
products are cross-marketed through their respective distribution channels.
Furthermore, Hoke significantly expanded Circle Seal's geographic marketing and
distribution capabilities outside of the U.S.
We have had a long-standing presence in the steam industry, starting with
the acquisition of Spence Engineering in 1984. Our steam product offering grew
substantially with the acquisitions of Leslie Controls of Tampa, Florida and
Nicholson Steam Trap of Wilkes Barre, Pennsylvania in 1989. Management believes
that we have a very strong franchise in steam valve products, with both Leslie
Controls and Spence Engineering having been in the steam pressure reduction
business for over 75 years. Our steam valve products are used in municipal and
institutional heating and air-conditioning applications, as well as in power
plants, industrial processing and commercial and military maritime applications.
PETROCHEMICAL PRODUCTS GROUP
The Petrochemical Products Group designs, manufactures and supplies flanged
and threaded floating and trunnion ball valves, needle valves, check valves,
butterfly valves and large forged steel ball valves, gate valves, pipeline
closures and strainers for use in oil, gas and chemical processing and
industrial applications. We believe that the Petrochemical Products Group is one
of the top three producers of ball valves for the oil and gas market worldwide.
The Petrochemical Products Group consists primarily of the following operations:
Contromatics Industrial Products, Eagle Check Valve, KF Industries, Inc.,
Pibiviesse S.p.A., Suzhou KF Valve Co., Ltd., SSI Equipment Inc. and Telford
Valve and Specialties. The Petrochemical Products Group had combined revenues of
approximately $72.2 million for the six-months ended December 31, 1999.
We entered the petrochemical products market in 1978 with the formation of
the industrial products division and its development of the floating ball valve
for industrial and chemical processing applications. With the acquisition of KF
Industries in July 1988, we expanded our product offerings to floating and
trunnion-supported ball valves and needle valves. KF Industries gave us entry
into the oil and gas transmission, distribution and exploration markets. In
1989, we acquired Eagle Check Valve, which added check valves to our product
line. Pibiviesse S.p.A., based in Nerviano, Italy, was acquired in
November 1994. Pibiviesse manufactures ball valves for the petrochemical market,
including a complete range of trunnion-mounted ball valves. Pibiviesse's
manufacturing capabilities include up through 60" diameter valves, including
Class 2500 pressure ratings to meet demanding international oil and gas pipeline
and production requirements. In March 1998, Telford Valve was added to KF
Industries. Telford Valve had been one of KF Industries' largest distributors
and, with its acquisition, KF Industries increased its presence in Canada as
well as introduced Telford Valve's products (check valves, pipeline closures,
and specialty gate valves for use in industrial and oil and gas applications)
through KF Industries' worldwide representative network. Telford Valve has also
assumed the Canadian sales activities for other Petrochemical Products Group
divisions to strengthen our overall presence in Canada. In January 1999, SSI
Equipment was acquired and added a wide variety of strainers to the KF
Industries product line. During 1999, the industrial product division of Watts
was consolidated into the KF Industries facility in Oklahoma City, Oklahoma. The
industrial products division consists of carbon steel and stainless steel ball
valves, butterfly valves and pneumatic actuators that are used in a variety of
industrial, pulp and paper and chemical processing applications.
We also own 60% of Suzhou KF Valve Company, Ltd., ("SKVC") a joint venture
located in Suzhou, Peoples Republic of China. Suzhou KF Valve manufactures
carbon and stainless steel ball valves sizes 2"
3
through 12" for our operations and SUFA, our joint venture partner, which is a
valve company publicly-traded on the China Exchange. We sell products
manufactured by SKVC to customers worldwide for oil and gas applications and
outside the People's Republic of China for all industrial applications. SUFA has
exclusive rights to sell SKVC products for all industrial (i.e., non-oil and
gas) applications within the People's Republic of China.
INDUSTRY BACKGROUND / MARKET OVERVIEW
OIL AND GAS AND PETROCHEMICAL MARKETS. The oil and gas and petrochemical
markets include domestic and international oil and gas exploration, production,
pipeline construction and maintenance, chemical processing and general
industrial applications. Both KF Industries and Pibiviesse have positioned
themselves favorably within the industry with major oil companies and major
distributors of valve products. Also, on the project side of the business, where
KF Industries and Pibiviesse deal directly with engineering firms who specify
product purchases, many companies have specified KF Industries and Pibiviesse
products in many applications.
The oil and gas market has historically been subject to cyclicality
depending upon supply and demand of crude oil and its derivatives as well as
natural gas. When oil and gas prices decrease, expenditures on maintenance and
repair decline rapidly and outlays for exploration and in-field drilling
projects decrease and, accordingly, demand for valve products is reduced. When
oil and gas prices rise, maintenance and repair activity normally increases and
we benefit from increased demand for valve products.
PROCESS AND POWER MARKETS. The industrial process markets use steam and
other fluids for a variety of applications, including heating of facilities,
production of hot water, heat tracing of external piping, heating of industrial
processes, cleaning by laundries, food processing, cooking, sterilization,
vulcanization, pulp making, textiles and other processes found across a wide
range of industries.
The power industry uses steam and other fluid-control products in the
production of electric power. While some steam applications have been eliminated
by the introduction of certain alternative methods, such as combined cycle units
and portable peaking units, the use of steam in the generation of electrical
power continues to prevail.
AEROSPACE AND MILITARY MARKETS. The aerospace and military markets we serve
include applications used on military combat and transport aircraft,
helicopters, missiles, tracked vehicles and ships. Our products are also used on
commercial aircraft, smaller commuter and business aircraft, and space launch
vehicles, space shuttles and satellites. Our products are also sold into the
support infrastructure for these markets, from laboratory equipment to ground
support maintenance equipment. The products supplied are used in hydraulic
systems, fuel systems, water systems and air systems. These products are
typically custom-designed for specific applications to optimize performance,
reliability, quality and minimum weight/volume.
HVAC AND MARITIME MARKETS. The heating, air conditioning and ventilation
market utilizes valves and control systems, primarily in steam-related
applications. Although certain new commercial applications are converting to hot
water heating, most metropolitan areas, universities and commercial institutions
are heated by a central steam loop.
Steam control products are also used in the maritime market, which includes
U.S. Navy and commercial shipping. Leslie Controls sells steam regulators, water
regulators, and electric actuated shut-off valves to this market. Leslie
Controls has focused its sales efforts towards growth of its international
business, where steam use is more prevalent, especially in emerging markets.
PHARMACEUTICAL, MEDICAL AND ANALYTICAL INSTRUMENTATION MARKETS. The
pharmaceutical industry uses products manufactured by our Instrumentation and
Fluid Regulation Products Group in research &
4
development, analytical instrumentation, steam generation, pilot plant and
process measurement applications. We believe that automation and control of
process and increased efficiency requirements in the pharmaceutical industry
will continue to drive the demand for these products.
The medical devices market consists of the following categories: surgical
and medical instruments, orthopedic devices and surgical supplies, diagnostic
reagents, electro-medical equipment, x-ray equipment and dental equipment. The
Instrumentation and Fluid Regulation Products Group markets its products to
original equipment manufacturers of surgical and medical instruments.
The analytical instrumentation market includes laboratory instruments and
measuring and controlling instruments. The key drivers in the laboratory
instrumentation and analytical instrumentation market are industrial capital
investment spending in research and development and plant equipment.
Non-industrial construction spending and government spending on research and
development and defense are secondary drivers.
Laboratory instruments requiring valves and fittings include gas
chromatographs, mass spectrometers and liquid chromatographs. This represents a
significant original equipment manufacturers' market for valves, fittings and
other products from the Instrumentation and Fluid Regulation Products Group.
Process control instruments requiring valves and fittings include process
analytical instruments and differential pressure transmitters. These categories
not only require valves and fittings in or attached to the instrument, but also
often require extensive sampling extraction systems installed by the
manufacturer, system integrators or site contractors. The primary economic
driver of process control instruments is spending on nondurable goods, plant and
equipment, including chemicals, pulp and paper, electric and gas utilities, and
petroleum refining.
BUSINESS OBJECTIVES AND STRATEGIES
Our objective is to create a diversified, international fluid-control
company. Our key strategies will be to:
- Continue to build market positions through acquisitions;
- Capitalize on integration opportunities;
- Expand product offerings through internal product development;
- Diversify into a variety of fluid-control industries and markets; and
- Expand our geographic coverage.
5
PRODUCTS
The following table lists the principal products and markets served by each
of the major companies within our two groups. Within a majority of our product
lines, we believe that we have the broadest product offerings in terms of the
distinct designs, sizes and configurations of our valves.
INSTRUMENTATION AND FLUID REGULATION PRODUCTS GROUP
COMPANY PRINCIPAL PRODUCTS PRIMARY MARKETS SERVED
- ------- ----------------------------- -----------------------------
Circle Seal.................. Motor operated valves; check General industrial;
valves; relief valves; semiconductors; medical;
pneumatic valves; solenoid pharmaceutical; cryogenics;
valves; regulators aerospace; military
Hoke......................... Compression tube fittings; General industrial;
pipe fittings; instrument analytical instrumentation;
ball and needle valves; compressed natural
cylinders and cylinder gas/natural gas vehicles;
valves; actuators petrochemical; oil and gas
Leslie Controls.............. Regulators; steam control General industrial and power;
valves; actuators; maritime; chemical processing
steam-water heaters
Spence Engineering/ Nicholson
Steam Trap................. Pilot operated and direct Heating, ventilation and air
steam regulators; steam conditioning; general
control valves; safety and industrial
relief valves; steam traps
PETROCHEMICAL PRODUCTS GROUP
COMPANY PRINCIPAL PRODUCTS PRIMARY MARKETS SERVED
- ------- ----------------------------- -----------------------------
KF Industries................ Threaded and flanged-end Oil and gas exploration,
floating ball valves; production, refining and
butterfly valves; gate transmission; general
valves; actuators; pipeline industrial; maritime;
closures; trunnion-supported chemical processing
ball valves; needle valves;
check valves; strainers
Pibiviesse................... Forged steel ball valves Oil and gas exploration,
production and transmission
SALES AND DISTRIBUTION
Products are sold to distributors and end-users primarily through
independent commissioned representatives and secondarily through a direct sales
force. Our representative network offers a technically trained sales force with
strong relationships to key markets without fixed costs to us. Our
representatives also have established distributors and resellers who stock those
products that have more predictable demand and usage patterns.
We believe that our multifaceted sales and distribution channels are a
competitive strength, providing access to all markets. We also believe that we
have good relationships with our representatives and distributors and continue
to implement marketing programs to enhance these relationships. Ongoing
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distribution-enhancement programs include maximizing shelf stock delivery and
turns, reducing assemble-to-order lead times, new product introductions and
competitive pricing.
KF Industries has a strong distribution and consigned warehouse network,
making it the preferred choice for many of the larger and independent supply
stores. We also sell products directly to certain large original equipment
manufacturers, contractors and end-users. Such accounts require custom
specification engineering support and other individualized services that we can
best offer directly.
MANUFACTURING
We have fully integrated and highly automated manufacturing capabilities
including machining operations and assembly. Our machining operations feature
computer-controlled machine tools, high-speed chucking machines and automatic
screw machines for machining brass, iron and steel components. Management
believes that fully integrated manufacturing capabilities are essential in the
valve industry in order to control product quality, to be responsive to
customers' custom design requirements and to ensure timely delivery. Product
quality and performance are a priority for our customers, especially since many
of the product applications involve caustic or volatile chemicals and, in many
cases, involve processes that require precise control of fluids. We have
implemented or are currently implementing integrated enterprise-wide software
systems at all of our major locations to make operations more efficient and to
improve communications with suppliers and customers.
We are committed to maintaining our manufacturing equipment at a level
consistent with current technology in order to maintain high levels of quality
and manufacturing efficiencies. As part of this commitment, we have spent a
total of $4,557,000, $9,499,000 and $6,115,000 on capital expenditures for the
six-month period ended December 31, 1999 and for the fiscal years ended
June 30, 1999 and 1998, respectively. Depreciation and amortization for such
periods were $7,076,000, $12,762,000 and $7,844,000, respectively.
Management believes that its current facilities will meet near-term
production requirements without the need for additional facilities.
QUALITY CONTROL
Products representing a majority of our sales have been approved by
applicable industry standards agencies in the United States and European
markets. We have consistently advocated the development and enforcement of
performance and safety standards and are currently planning new investments and
implementing additional procedures as part of our commitment to meet these
standards. We maintain quality control and testing procedures at each of our
manufacturing facilities in order to produce products in compliance with code
requirements. Additionally, all of our major manufacturing subsidiaries have
acquired ISO 9000, 9001 or 9002 certification from the International
Organization for Standardization and, for those in the Petrochemical Products
Group, American Petroleum Institute certification.
Our products are designed, manufactured and tested to meet the requirements
of various government or industry regulatory bodies. The primary industry
standards that our Instrumentation and Fluid Regulation Products Group meet are
those of Underwriters Laboratory Inc., American National Standards Institute,
American Society of Mechanical Engineers, U.S. Military Standards, the American
Gas Association and the Department of Transportation. The primary industry
standards that our Petrochemical Products Group meet are those of the American
National Standards Institute, American Society of Mechanical Engineers, the
American Petroleum Institute and Factory Mutual.
PRODUCT DEVELOPMENT
We continue to develop new and innovative products to enhance our market
positions. Our product development capabilities include the ability to design
and manufacture custom applications to meet high
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tolerance or close precision requirements. For example, KF Industries has
fire-safe testing capabilities, Circle Seal has the ability to meet all the
testing specifications of the aerospace industry and Pibiviesse can meet the
tolerance requirements of sub-sea and cryogenic environments. These testing and
manufacturing capabilities have enabled us to develop customer-specified
applications, unique characteristics of which have been subsequently utilized in
broader product offerings. Research and development expenditures by the Company
during the six-month period ended December 31, 1999 were $3,160,000 and during
fiscal years 1999 and 1998 were $6,094,000 and $5,479,000, respectively.
RAW MATERIALS
The raw materials used most often in our production processes are stainless
steel, carbon steel, cast iron, and brass. We purchase these materials from
numerous suppliers nationally and internationally, and have not historically
experienced significant difficulties in obtaining these commodities in
quantities sufficient for our operations. However, these materials are subject
to price fluctuations which may adversely affect our results of operations.
Historically, increases in the prices of raw materials have been partially
offset by increased sales prices, an active materials management program and the
diversity of materials used in our production processes.
COMPETITION
The domestic and international markets for fluid-control products are highly
competitive. Some of our competitors have substantially greater financial,
marketing, personnel and other resources than us. We consider product quality
and performance, price, distribution capabilities and breadth of product
offerings to be the primary competitive factors in these markets. Management
believes that new product development and product engineering are also important
to our success and that our position in the industry is attributable, in
significant part, to our ability to develop innovative products quickly and to
adapt and enhance existing products.
The primary competitors of our Instrumentation and Fluid Regulation Products
Group include: Swagelok, Parker Hannifin Corporation, Spirax-Sarco Engineering
plc, Hoffman Specialty (a subsidiary of ITT Industries, Inc.), Keystone and
Kunkle Industries, Inc. (a subsidiary of Tyco International, Inc.), Fisher
Controls Corp. (a subsidiary of Emerson Electric Co.), Armstrong
International, Inc., Jordon Valve (a division of Richards Industries),
Masoneilan North America (a division of Halliburton Company), Flowseal (a
division of Crane Co.), Flowserve Corporation and Copes-Vulcan, Inc. The primary
competitors of our Petrochemical Products Group include: Grove Valve and
Regulator Co. (a division of the Halliburton Company), Cooper Cameron
Corporation, Apollo (a division of Conbraco Industries, Inc.), Jamesbury, Inc.
(a division of Neles Control Group which is part of the Rauma Corporation),
Worcester Controls Corp. (a subsidiary of Invensys plc), Kitz Corp. of America,
Velan Valve Corp., Balon Corp. and Flow Control Technologies.
TRADEMARKS & PATENTS
We own patents that are scheduled to expire between 2004 and 2016 and
trademarks that can be renewed as long as we continue to use them. We do not
believe that the vitality and competitiveness of our business as a whole depends
on any one or more patents or trademarks. We also own certain licenses such as
software licenses, but we do not believe that our business as a whole depends on
any one or more licenses.
CUSTOMERS, CYCLICALITY AND SEASONALITY
For the year ended December 31, 1999, no single customer accounted for more
than 10% of revenues for either the Instrumentation and Fluid Regulation
Products Group or the Petrochemical Products Group.
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We have experienced and expect to continue to experience fluctuations in
revenues and operating results due to economic and business cycles. Our
business, specifically the petrochemical business, is cyclical in nature as the
worldwide demand for oil and gas fluctuates. When the worldwide demand for oil
and gas is depressed, the demand for our products used in those markets is
reduced. Future changes in demand for petrochemical products could have a
material effect on our business, financial condition and results of operations.
Similarly, although not to the same extent as the petrochemical markets, the
aerospace, military and maritime markets have historically experienced cyclical
fluctuations in demand which could also have a material effect on our business,
financial condition and results of operations.
We do not believe that our business is subject to seasonal fluctuations of a
material nature.
BACKLOG
Backlog was $60,539,000 at March 17, 2000, compared to $57,755,000 at
March 31, 1999. The increase in backlog is primarily due to modest growth in
specific industrial business sections within North America such as medical and
pharmaceutical instrumentation, alternative fuels and food processing
industries. The North American petrochemical market edged upward as higher oil
and gas prices translated into additional plant maintenance spending and modest
expansion of existing production capacity. This was offset by the European
petrochemical market, as project activity has been slower to recover.
EMPLOYEES
As of December 31, 1999, our worldwide operations directly employed
approximately 1,700 people, in addition to 79 employees in the Suzhou joint
venture. We have approximately 75 employees in the United States and Canada who
are covered by collective bargaining agreements. We also have approximately 80
employees in Italy covered by union regulations. We believe that our employee
relations are good.
GOVERNMENT REGULATION
As a result of their manufacturing and assembly operations, our businesses
are subject to federal, state, local and foreign laws as well as other legal
requirements relating to the generation, storage, transport and disposal of
materials. These laws include, without limitation, the Resource Conservation and
Recovery Act, the Clean Air Act, the Clean Water Act and the Comprehensive
Environmental Response, Compensation and Liability Act.
We do not currently anticipate any materially adverse impact on our results
of operations, financial condition or competitive position as a result of
compliance with federal, state, local and foreign environmental laws or other
legal requirements. However, risk of environmental liability and charges
associated with maintaining compliance with environmental laws is inherent in
the nature of our manufacturing operations and there is no assurance that
material liabilities or charges could not arise. During the six-month and
twelve-month periods ended December 31, 1999 and June 30, 1999, we capitalized
approximately $45,000 and $273,000, respectively, related to environmental and
safety control facilities and expect to capitalize approximately $351,000 during
the year 2000. We also incurred and expensed $154,000 and $235,000 of other
related charges for the respective six and twelve month periods and expect to
incur approximately $194,000 during 2000.
ITEM 2. PROPERTIES
We maintain 15 major facilities worldwide, including facilities located in
the United States, Canada, Europe and the People's Republic of China. Many of
these facilities contain sales offices or warehouses from which we ship finished
goods to customers, distributors and commissioned representative organizations.
Our executive office is located in Burlington, Massachusetts. Certain of our
facilities are subject to mortgages and collateral assignments under loan
agreements with long-term lenders. The Instrumentation and Fluid Regulation
Products Group has facilities located in North America and Europe. The
9
Petrochemical Products Group has facilities in North America, Europe and the
People's Republic of China.
In general, we believe that our properties, including machinery, tools and
equipment, are in good condition, well maintained, and are adequate and suitable
for their intended uses. We believe that the manufacturing facilities are
currently operating at normal capacity. This utilization is subject to change as
a result of increases or decreases in revenues.
ITEM 3. LEGAL PROCEEDINGS
We, like other worldwide manufacturing companies, are subject to a variety
of potential liabilities connected with our business operations, including
potential liabilities and expenses associated with possible product defects or
failures and compliance with environmental laws. We maintain $5.0 million in
aggregate product liability insurance and $75.0 million of coverage available
under an excess umbrella liability insurance policy. We believe this coverage to
be generally in accordance with industry practices. Nonetheless, such insurance
coverage may not be adequate to protect us fully against substantial damage
claims which may arise from product defects and failures or from environmental
liability.
Leslie Controls and Spence Engineering Company, both subsidiaries of CIRCOR,
are third-party defendants in over 300 civil product liability actions filed
against ship owner defendants in the U.S. District Court, Northern District of
Ohio (Cleveland) between the 1980s and 1996. These cases are part of tens of
thousands of maritime asbestos cases filed in this court against multiple
defendants. The ship owner defendants' third-party claims in the Leslie and
Spence cases typically involve 20-30 third-party defendants. The claims against
Leslie and Spence assert that the packing in metal pumps and the gaskets in
metal valves supplied by Leslie and Spence contained asbestos which contributed
to the asbestos exposure of plaintiffs who worked on the defendants' ships. To
date, two cases involving Leslie only have settled in a way that required a
payment from Leslie. One case settled in 1995 with a $2,000 payment from Leslie;
another settled in 1989 with a $500 payment from Leslie. These thousands of
cases are subject to court ordered moratoriums on answers and motion practice,
and the very small percentage of these cases that have come to trial since 1996
have not involved Leslie or Spence.
Leslie and its insurers previously had been in dispute over payment of
approximately $560,000 in legal fees incurred to defend these cases through 1994
and approximately $300,000 in legal fees incurred from 1995 through the present
time. The dispute resulted from a gap in Leslie's insurance coverage from 1965
to 1973. During the fall of 1999, Leslie and its insurers entered into an
agreement pursuant to which Leslie has agreed to be responsible for 41% of all
legal fees and settlement costs incurred from 1995 forward.
We have established total reserves of $1.7 million for all of the claims
discussed above and we do not believe it is reasonably likely that a range of
loss could occur in excess of the amounts accrued. We have not recorded any
probable third-party recoveries of our own on these claims.
We are currently a party to or otherwise involved in various administrative
or legal proceedings under federal, state or local environmental laws or
regulations involving a number of sites, in some cases as a participant in a
group of potentially responsible parties, referred to as PRPs. Two of these
sites, the Sharkey and Combe Landfills in New Jersey, are listed on the National
Priorities List. With respect to the Sharkey Landfill, we have been allocated
0.75% of the remediation costs, an amount which is not material to us. With
respect to the Combe Landfill, we have settled the Federal Government's claim
for an amount which is immaterial and anticipate settling with the State of New
Jersey for an amount not greater than that paid to the Federal Government.
Moreover, our insurers have covered defense and settlement costs to date with
respect to the Sharkey and Combe Landfills. In addition we are involved as a PRP
with respect to the Solvent Recovery Service of New England site and the Old
Southington landfill site, both in Connecticut. These sites are on the National
Priorities List but, with respect to both sites, we have the right to
indemnification from third parties. Based on currently available information, we
believe that our share of clean-up costs at these sites will not be material.
10
On July 22, 1998, Watts Investment Company, a subsidiary of our former
parent, Watts Industries, Inc., acquired Hoke, Inc. On October 18, 1999, the
spin-off date, the ownership of Hoke, Inc. was transferred to CIRCOR.
Additionally, Watts Investment Company assigned to us all of its rights under
the Stock Purchase Agreement governing the Hoke acquisition (the "Stock Purchase
Agreement"). We are now the claimant in two separate arbitration proceedings
against the former Hoke stockholders.
Under the terms of the Stock Purchase Agreement, Watts Investment Company
was obligated to prepare a closing date balance sheet and closing net worth
statement, which when compared to the closing net worth as detailed in the Stock
Purchase Agreement, would result in either an upward or downward purchase price
adjustment. Watts Investment Company prepared the closing date balance sheet
that showed that the closing net worth was approximately $9.9 million lower than
the target amount in the Stock Purchase Agreement, and sought a purchase price
adjustment for that amount. The former Hoke stockholders objected to the closing
date balance sheet and closing net worth statement. In early 1999, pursuant to
the terms of the Stock Purchase Agreement, arbitration proceedings began,
between the former Hoke stockholders and us, to determine the closing net worth
of Hoke. We anticipate a final ruling in this dispute from the arbitrator in
April, 2000. Based on the progress of the proceedings to-date, we expect to be
awarded a recovery from the former Hoke stockholders; however, the amount
remains uncertain pending the arbitrator's final ruling.
We are also the claimant in an indemnification claim against the former Hoke
stockholders pursuant to the Stock Purchase Agreement. This claim, made on
December 11, 1998, asserts that the former Hoke stockholders, either
intentionally or unintentionally, made misrepresentations in the Stock Purchase
Agreement regarding Hoke's financial statements and that those
misrepresentations caused Hoke's earnings for 1997 to be inflated, thereby
causing us harm. This claim is being heard in a separate proceeding, with a
different arbitrator, and no hearing has yet been scheduled.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the period of October 18, 1999 to
December 31, 1999 to a vote of security holders through solicitation of proxies
or otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our Common Stock is traded on the New York Stock Exchange under the symbol
"CIR". The following table sets forth, for the periods indicated, the high and
low sale prices per share of the Common Stock on the New York Stock Exchange, as
reported by the New York Stock Exchange. Our Common Stock began trading on the
New York Stock Exchange on October 19, 1999, the day after CIRCOR was spun off
from its former parent, Watts Industries, Inc., and began trading at a price of
$10 7/8.
FISCAL YEAR ENDED DECEMBER 31, 1999 HIGH LOW
- ----------------------------------- ---------- -----------
Quarter ended December 31, 1999............................. $ 11 1/8 $ 8 15/16
We have not paid cash dividends on our Common Stock since our inception as
an independent public company on October 18, 1999. The Board of Directors will
be responsible for determining dividend policies. While we currently intend to
pay cash dividends as a proportion of earnings, payments of dividends will
necessarily depend on our Board of Directors' assessment of earnings, financial
condition, capital requirements and other factors, including restrictions, if
any, imposed by our lenders.
On March 17, 2000, there were 170 holders of record of the Company's Common
Stock. There were approximately 3,300 beneficial shareholders of our Common
Stock as of March 17, 2000.
11
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR FINANCIAL SUMMARY
(IN THOUSANDS EXCEPT, PER SHARE DATA)
SIX-MONTHS ENDED FISCAL YEAR ENDED
DECEMBER 31, JUNE 30,
------------------- -----------------------------------------
1999(1) 1999 1999 1998 1997 1996(2)
-------- -------- -------- -------- -------- --------
Net revenues........................ $156,371 $156,371 $323,077 $288,969 $274,716 $230,473
Gross profit........................ 48,542 48,542 104,726 94,657 88,623 68,675
Operating income (loss)............. 13,785 13,846 29,550 38,191 33,906 (23,469)
Net income (loss)................... 4,650 4,880 12,510 22,425 19,614 (31,609)
Total assets........................ 367,085 367,085 359,043 253,477 212,727 202,956
Long-term debt...................... 122,867 122,867 22,404 12,776 12,891 13,645
Dividends declared per share........ - - n/a n/a n/a n/a
Earnings per share.................. $ 0.35 n/a n/a n/a n/a n/a
- ------------------------------
(1) The pro forma data is derived from the unaudited pro forma financial
information included in note 15 to the consolidated financial statements.
The pro forma data reflects adjustments to reflect the estimated additional
interest expense and general, administrative and other expenses which we
would have incurred as an independent, publicly owned company.
(2) Fiscal 1996 includes an after tax charge of $48,304 related to:
restructuring costs of $3,025; an impairment of long-lived assets of
$38,462; other charges of $3,875 principally for product liability costs,
additional bad debt reserves and environmental remediation costs; and
additional inventory valuation reserves of $2,942.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Annual Report contains certain statements that are "forward-looking
statements" as that term is defined under the Private Securities Litigation
Reform Act of 1995 (the "Act") and releases issued by the Securities and
Exchange Commission. The words "believe," "expect," "anticipate," "intend,"
"estimate" and other expressions which are predictions of or indicate future
events and trends and which do not relate to historical matters identify
forward-looking statements. Forward-looking statements involve known and unknown
risks, uncertainties and other factors, which may cause the actual results,
performance or achievements of the Company to differ materially from anticipated
future results, performance or achievements expressed or implied by such
forward-looking statements. The Company undertakes no obligation to publicly
update or revise any forward-looking statement, whether as a result of new
information, future events or otherwise.
The future operating results and performance trends of the Company may be
affected by a number of factors, including, without limitation, the following:
(i) loss of market share through competition; (ii) competitive pricing
pressures; (iii) ability to develop and market new products; (iv) changes in the
instrumentation, fluid regulation and petrochemical markets; (v) changes in
demand for the Company's products; (vi) fluctuations in manufacturing yields;
(vii) insufficient or excess manufacturing capacity; (viii) the amount of
product booked and shipped within a quarter; (ix) changes in product mix;
(x) fluctuating economic conditions in markets where the Company's products are
manufactured or sold; interest rate and foreign exchange rate fluctuations;
(xi) ability to integrate manufacturing and other operating entities;
(xii) changes in commodity prices including stainless steel, cast iron and
carbon steel; and (xiii) integrations of future acquisitions. In addition to the
foregoing, the Company's actual future results could differ materially from
those projected in the forward-looking statements as a result of the risk
factors set forth in the Company's various filings with the Securities and
Exchange Commission and of changes in general economic conditions, changes in
interest rates and/or exchange rates and changes in the assumptions used in
making such forward-looking statements.
12
On October 18, 1999, we completed the spin-off from our former parent, Watts
Industries, Inc., and began to operate as an independent public company.
Additionally, we announced that we would change our fiscal year from
June 30(th) to December 31(st). The following discussion is based upon the
six-month period ending December 31, 1999. Additionally, comparisons to prior
year periods pertain to the pro forma results of these operations under Watts
which later were transferred to CIRCOR in connection with the spin-off.
The following discussion is based upon and should be read in conjunction
with our Consolidated Financial Statements and the related footnotes set forth
in this report.
RESULTS OF OPERATIONS FOR THE SIX-MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THE
SIX-MONTHS ENDED DECEMBER 31, 1998
The following tables set forth the percentage of net revenues and the yearly
percentage change in certain financial data for the six-months ended
December 31, 1999 and 1998:
AS A PERCENTAGE OF NET
REVENUES
SIX-MONTHS ENDED
DECEMBER 31, YEAR-TO-YEAR
----------------------- PERCENTAGE INCREASE
1999 1998 (DECREASE)
---------- ---------- -------------------
Net revenues............................................ 100.0% 100.0 % (5.8)%
Cost of revenues........................................ 69.0% 68.5 % (5.1)%
------- -------
Gross profit............................................ 31.0% 31.5 % (7.4)%
Selling, general and administrative expenses............ 22.2% 22.2 % (5.7)%
------- -------
Operating income........................................ 8.8% 9.3 % (11.1)%
Other (income) expense:
Interest (income) expense, net.......................... 2.9% 2.6 % 2.5 %
Other (income) expense, net............................. 0.3% (0.3)% NMF
------- -------
Income before income taxes.............................. 5.6% 7.0 % (24.2)%
Provisions for income taxes............................. 2.5% 2.9 % (17.8)%
------- -------
Net income.............................................. 3.1% 4.1 % (28.7)%
======= =======
NMF: Not meaningful
Net revenues for the six-months ended December 31, 1999 decreased by
$9.7 million, or 5.8%, from $166.1 million to $156.4 million compared to the
same period last year. The decrease in net revenues is attributable to the
following factors:
(DOLLARS IN
THOUSANDS)
---------------
Acquisitions................................................ $ 4,996 3.0 %
Operations.................................................. (12,459) (7.5)%
Foreign exchange............................................ (2,252) (1.3)%
-------- ----
Total..................................................... $ (9,715) (5.8)%
======== ====
The decrease in net revenues from operations and foreign exchange was
partially offset by the inclusion of revenues of acquired businesses including
SSI Equipment, Inc., a Canadian manufacturer of strainers for industrial and
petrochemical applications and GO Regulator, Inc., a producer of regulators for
the instrumentation market located in San Dimas, California, which were acquired
since September 30, 1998. The decrease in net revenues from operations is
primarily attributable to reduced unit shipments of valves that serve both
domestic and international oil and gas applications. Revenues of these products
have
13
been adversely affected by the reduced demand for products used in the
petrochemical industry, caused by reduced energy prices during calendar year
1998, which continued until the second-half of 1999 when prices began to
increase. Historically, when energy prices have increased for a sustained period
of time, maintenance programs in the petrochemical industry become more active
followed by increased capital spending on more extensive facility projects.
During the latter part of 1999, we began to experience increasing activity in
maintenance programs but continued to experience lackluster business in the
facility project programs.
The impact of foreign exchange was due primarily to the strength of the
dollar to the Euro. International business accounted for approximately 29% of
net revenues during the current and prior year six-month periods.
We monitor our revenue in two segments: Instrumentation and Fluid Regulation
Products and Petrochemical Products. The Instrumentation and Fluid Regulation
Products segment accounted for approximately 53.8% of net revenues during the
six-month period compared to 51.6% for the comparable period of last fiscal
year. The Petrochemical Products segment accounted for approximately 46.2% of
net revenues during the quarter compared to 48.4% for the comparable period of
last fiscal year.
Revenues in these segments for the six-months ended December 31, 1999 and
1998, respectively, were as follows:
SIX-MONTHS ENDED DECEMBER 31,
------------------------------
1999 1998 CHANGE
-------- -------- --------
(IN THOUSANDS)
Instrumentation & Fluid Regulation............. $ 84,148 $ 85,622 $(1,474)
Petrochemical.................................. 72,223 80,464 (8,241)
-------- -------- -------
Total........................................ $156,371 $166,086 $(9,715)
======== ======== =======
Net revenues in the Instrumentation and Fluid Regulation segment for the
six-months ended December 31, 1999 decreased slightly due to softness in capital
spending for instrumentation products partially offset by the acquisition of GO
Regulator, Inc. The decrease in net revenues in the Petrochemical segment
reflected weakness in both domestic and international oil and gas markets
partially offset by the acquisition of SSI Equipment, Inc.
Gross profit for the six-months ended December 31, 1999 decreased by nearly
$3.9 million, or 7.4% from $52.4 million to $48.5 million compared to the same
period last year. Gross margin decreased from 31.5% to 31.0%. Gross profit was
adversely affected by start-up costs of the new factory in Spartanburg, South
Carolina and relocation costs associated with the closure of Hoke's Cresskill,
New Jersey plant. In addition, gross profit was adversely affected by
competitive pricing pressures, especially in the petrochemical markets. Lower
energy prices experienced prior to the second-half of the year reduced demand
for petrochemical products, thereby decreasing unit pricing. The reduced demand
also lowered manufacturing levels creating unfavorable overhead absorption of
fixed manufacturing costs, thereby decreasing gross margins during the six-month
period.
Selling, general and administrative expenses decreased $2.1 million to
$34.7 million for the six-months ended December 31, 1999 compared to the same
period last year. We reduced selling, general and administrative expenses as
revenues decreased and the savings were partially offset by certain costs
associated with our transition to an independent public company.
14
Operating income by segment for the six-months ended December 31, 1999 and
1998 was as follows:
SIX-MONTHS ENDED DECEMBER 31,
------------------------------
1999 1998 CHANGE
-------- -------- --------
(IN THOUSANDS)
Instrumentation & Fluid Regulation............... $10,253 $ 9,618 $ 635
Petrochemical.................................... 6,332 8,771 (2,439)
Corporate........................................ (2,739) (2,808) 69
------- ------- -------
Total.......................................... $13,846 $15,581 $(1,735)
======= ======= =======
The increase in operating income in the Instrumentation and Fluid Regulation
Products segment is attributable to benefits derived from improved operating
efficiencies and favorable product mix partially offset by the start-up cost of
the Spartanburg, South Carolina plant and plant relocation costs. The decrease
in the operating income in the Petrochemical Products segment is primarily
attributable to decreased orders for petrochemical facility projects as the
result of lower world market prices for crude oil.
The increase in other net non-operating expenses consisted primarily of
realized and unrealized foreign exchange net losses caused primarily by the
strengthening of the U.S. dollar against the Euro.
The effective tax rate for the six-month period was 44.8% compared to 41.4%
for comparable prior year period. Initiatives to reduce our effective tax rate
are expected to be implemented pending receipt of a favorable supplemental
ruling by the Internal Revenue Service. The tax rate for the six-months ended
December 31, 1999 reflects the benefits primarily derived from our former parent
company's implementation of tax planning strategies.
Net income decreased $2.0 million to nearly $4.9 million, for the six-month
period, compared to last year's of $6.8 million. This decrease is primarily
attributable to the factors discussed above.
RESULTS OF OPERATIONS FOR THE TWELVE-MONTHS ENDED JUNE 30, 1999 COMPARED TO THE
TWELVE-MONTHS ENDED JUNE 30, 1998
The following tables set forth the percentage of net revenues and the yearly
percentage change in certain financial data for the fiscal years ended June 30,
1999 and 1998:
AS A PERCENTAGE OF NET
REVENUES
TWELVE-MONTHS ENDED
JUNE 30, YEAR TO YEAR
------------------------- PERCENTAGE INCREASE
1999 1998 (DECREASE)
-------- -------- -------------------
Net revenues............................................. 100.0 % 100.0 % 11.8 %
Cost of revenues......................................... 67.6 % 67.2 % 12.4 %
----- -----
Gross profit............................................. 32.4 % 32.8 % 10.6 %
Selling, general and administrative expenses............. 23.3 % 19.6 % 33.1 %
----- -----
Operating income......................................... 9.1 % 13.2 % (22.6)%
Other (income) expense:
Interest (income) expense, net........................... 2.7 % 1.2 % 153.8 %
Other (income) expense, net.............................. (0.1)% (0.1)% (25.2)%
----- -----
Income before income taxes............................... 6.5 % 12.1 % (40.1)%
Provisions for income taxes.............................. 2.6 % 4.3 % (32.9)%
----- -----
Net income............................................... 3.9 % 7.8 % (44.2)%
===== =====
15
Net revenues for the twelve-months ended June 30, 1999 increased by
$34.1 million, or 11.8%, from $289.0 million to $323.1 million compared to the
fiscal year ended June 30, 1998. The increase in net revenues is attributable to
the following factors:
(DOLLARS IN
THOUSANDS)
-------------------
Acquisitions.............................................. $79,171 27.4 %
Operations................................................ (45,552) (15.8)%
Foreign exchange.......................................... 489 0.2 %
------- -----
Total................................................... $34,108 11.8 %
======= =====
The growth in revenues is primarily attributable to recently acquired
companies. Hoke, Inc., which was acquired during July 1998, is part of the
Instrumentation and Fluid Regulation Products Group. Telford Valve and
Specialties acquired in March 1998, is part of the Petrochemical Products Group.
The decrease in revenues from operations is primarily attributable to decreases
in unit shipments of both domestic and international oil and gas valves.
Revenues of these products have been adversely affected by the reduced demand
for our products used in petrochemical facility projects and maintenance
programs which has been caused by reduced energy prices during last fiscal year.
International business accounted for approximately 41.4% of net revenues in
fiscal year 1999 compared to 31.9% in fiscal year 1998. We monitor our revenues
in two market segments: Instrumentation and Fluid Regulation Products Group and
the Petrochemical Products Group. The Instrumentation and Fluid Regulation
Products Group accounted for approximately 54.3% of net revenues in fiscal year
1999 compared to 38.2% in fiscal year 1998. The Petrochemical Products Group
accounted for approximately 45.7% of net revenues in fiscal year 1999 compared
to 61.8% in fiscal year 1998. Revenues in these groups for fiscal year 1999 and
fiscal year 1998 were as follows:
FISCAL YEAR ENDED JUNE 30,
------------------------------
1999 1998 CHANGE
-------- -------- --------
(IN THOUSANDS)
Instrumentation & Fluid Regulation............. $175,444 $110,332 $65,112
Petrochemical.................................. 147,633 178,637 (31,004)
-------- -------- -------
Total........................................ $323,077 $288,969 $34,108
======== ======== =======
The decrease in petrochemical net revenues of $31.0 million, or 17.4%, for
the fiscal year ended June 30, 1999 was predominantly in the domestic markets
which reflected a 23.8% decrease over the previous fiscal year. The increase in
instrumentation and fluid regulation net revenues of $65.1 million, or 59.0%,
for the fiscal year ended June 30, 1999 consisted primarily of volume derived
from acquisitions consisting of Hoke, Inc. and several product lines.
Gross profit increased $10.1 million, or 10.6%, to $104.7 million. Gross
margin declined slightly from 32.8% in fiscal 1998 to 32.4% in fiscal 1999. The
increased gross profit is attributable to the increased sales due to the
acquisitions discussed above. These acquisitions operated at a gross margin
slightly higher than the remainder of the Company. The increased gross profits
from acquisitions were partially offset by decreased gross profits in the
domestic and international oil and gas valve product lines. Lower energy prices
resulted in lower demand, increased competition and adversely impacted unit
pricing. Additionally, the reduced manufacturing levels, caused by these reduced
revenues, also created unfavorable overhead absorption of fixed manufacturing
expenses thereby decreasing gross margins in fiscal year 1999 compared to fiscal
year 1998.
Selling, general and administrative expenses increased $18.7 million to
$75.2 million for the fiscal year ended June 30, 1999. This increase is
attributable to the inclusion of the expenses related with recent
16
acquisitions. This increase was partially offset by both cost reductions and
reduced variable selling expenses within our oil and gas business units.
Operating income by segment for fiscal year 1999 and fiscal year 1998 were
as follows:
FISCAL YEAR ENDED JUNE 30,
------------------------------
1999 1998 CHANGE
-------- -------- --------
(IN THOUSANDS)
Instrumentation & Fluid Regulation.............. $24,844 $17,883 $ 6,961
Petrochemical................................... 10,323 25,256 (14,933)
Corporate....................................... (5,617) (4,948) (669)
------- ------- --------
Total......................................... $29,550 $38,191 $ (8,641)
======= ======= ========
The increase in operating income in the Instrumentation and Fluid Regulation
Products Group is attributable primarily to acquisitions and improved operating
efficiencies within our steam related product lines. The decrease in operating
income in the Petrochemical Products Group reflects reduced energy prices and
reduced demand for our products used in petrochemical facility projects and
maintenance programs.
The increase in interest expense is primarily due to the additional cost of
borrowed funds resulting from the acquisition of Hoke, Inc.
The effective tax rate increased to 40.3% from 36.0%. The increase is a
result of increased earnings in foreign jurisdictions with higher tax rates.
Net income decreased $9.9 million to $12.5 million. This decrease is
primarily attributable to the decreased net revenues and gross margins in the
petrochemical market.
The combined results of operations are impacted by the effect that changes
in foreign exchange rates have on its international subsidiaries' operating
results. Changes in foreign exchange rates had an immaterial impact on net
income in fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
During the six-month period ended December 31, 1999, the Company used
$14.8 million of cash flow from operating activities principally to fund
accounts receivable and accounts payable, and used $5.2 million of cash in
investing activities principally to purchase $4.6 million of capital equipment.
Capital expenditures were primarily for manufacturing machinery and equipment to
consolidate and improve manufacturing operations.
We successfully negotiated with ING (U.S.) Capital LLC, BankBoston, N.A.,
First Union National Bank, Citizens Bank and Brown Brothers Harriman & Co. for a
$75.0 million unsecured credit facility. We also sold $75.0 million of senior
unsecured notes to eleven institutional investors.
The proceeds from the unsecured credit facility and senior unsecured notes
were used to pay Watts for our assigned portion of Watts' long-term debt of
$96.0 million, refinancing of existing CIRCOR debt of $8.6 million and various
debt financing fees amounting to $1.5 million. Subsequent to these transactions,
and as of December 31, 1999, we had $43.0 million available from the unsecured
credit facility to support our acquisition program, working capital requirements
and for general corporate purposes.
Also, to fulfill a representation made to the Internal Revenue Service as
part of the application for the tax-free treatment of the spin-off, we intend to
engage in a subsequent offering of common stock within one year after the
spin-off. The timing, completion and size of the subsequent equity offering will
be subject to various market conditions. We intend to use the proceeds from the
subsequent equity offering and availability from the unsecured line of credit to
fund future acquisitions.
17
The ratio of current assets to current liabilities at December 31, 1999 was
4.5 to 1 compared to 3.3 to 1 at June 30, 1999. Cash and cash equivalents were
$5.2 million at December 31, 1999 compared to $6.7 million at June 30, 1999.
Debt as a percentage of total capital employed was 40.6% at December 31, 1999
compared to 40.7% at June 30, 1999. At December 31, 1999, CIRCOR was in
compliance with all covenants related to existing debts agreements.
We anticipate that available funds provided from ongoing operations will be
sufficient to meet current operating requirements and anticipated capital
expenditures over the next 12 months.
From time-to-time, we are involved with product liability, environmental
proceedings and other litigation proceedings and incur costs on an ongoing basis
related to these matters. We have not incurred material expenditures in the
six-month period ending December 31, 1999 in connection with any of these
matters. See Note 12 of the Consolidated Financial Statements, Contingencies and
Environmental Remediation.
YEAR 2000
Since January 1, 2000 we have not experienced any operational or business
interruptions related to Year 2000 issues. The Company completed its Year 2000
program and will continue to monitor it as appropriate. We are not aware of any
Year 2000 issues that may have an adverse impact on our financial condition or
business operations. Spending for the program during the six-month period was
budgeted and expensed as incurred and amounted to approximately $500,000.
CONVERSION TO EURO
On January 1, 1999, 11 of the 15 member countries of the European Union
adopted the Euro as their common legal currency and established fixed conversion
rates between their existing sovereign currencies and the Euro. The Euro trades
on currency exchanges and is available for non-cash transactions. The
introduction of the Euro will affect CIRCOR as we have manufacturing and
distribution facilities in several of the member countries and trades
extensively across Europe. We are currently assessing the long-term competitive
implications of the conversion and at this time. We are not anticipating that
any significant costs will be incurred due to the introduction and conversion to
the Euro.
OTHER
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." We will adopt
SFAS 133 on January 1, 2001. The impact of SFAS 133 on the Consolidated
Financial Statements is still being evaluated, but is not expected to be
material.
RECENT DEVELOPMENTS
Recent personnel changes and additions have been announced at our company.
Carmine J. Bosco has been appointed Group Vice President of the Petrochemical
Products Group. He will be responsible for the operations of the following: KF
Industries, Inc., Telford Valve & Specialties, SSI Equipment Inc., Pibiviesse
S.p.A., and SKVC. Alan J. Glass has been appointed Corporate Counsel and
Assistant Secretary. He will be responsible for advising executive and senior
management on corporate matters encompassing acquisitions and divestitures,
international and domestic joint ventures, corporate compliance programs,
employment, intellectual property, financing arrangements, equity market
transactions, and environmental and health and safety matters. Stephen J.
Carriere, Corporate Controller, has also been appointed as Vice President and
Assistant Treasurer of the Corporation. Subsequent to December 31, 1999, Cosmo
S. Trapani resigned his position as Chief Financial Officer, Treasurer and
Secretary.
18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion of our risk-management activities may include
"forward-looking statements" that involve risk and uncertainties. Actual results
could differ significantly from those forward-looking statements.
The primary risk exposures are in the areas of market risk, interest rate
risk, foreign exchange rate risk and commodity price risk.
MARKET RISK
The oil and gas market has historically been subject to cyclicality
depending upon supply and demand of crude oil and its derivatives as well as
natural gas. When oil and gas prices decrease, expenditures on maintenance and
repair decline rapidly and outlays for exploration and in-field drilling
projects decrease and, accordingly, demand for valve products is reduced. When
oil and gas prices rise, maintenance and repair activity normally increases and
we benefit from increased demand for valve products.
INTEREST RATE RISK
At December 31, 1999, our primary interest rate risk relates to borrowings
under its $75.0 million revolving credit facility. The interest rate on those
borrowings fluctuates with changes in short-term borrowing rates. There was
$32.0 million of borrowings from the revolving credit facility outstanding as of
December 31, 1999. Based upon the expected levels of borrowings under this
facility in 2000, an increase in interest rates of 100 basis points would not
have a material effect on our results of operations or cash flows (approximately
$0.1 million).
Information about our long-term debt appears in Note 9 to the Consolidated
Financial Statements.
FOREIGN EXCHANGE RATE RISK
We use foreign currency forward contracts to manage the risk related to
intercompany and third party sales that occur during the fiscal year and certain
open foreign currency denominated commitments to sell products to third parties.
We do not use derivative financial instruments for speculative or trading
purposes. We use simple straight-forward instruments that are placed with major
institutions. Risk management strategies are reviewed and approved by senior
management before being implemented. Information about our use of forward
currency forward exchange contracts appears in Note 13 to the Consolidated
Financial Statements.
COMMODITY PRICE RISK
The raw materials used in the production process are stainless steel, carbon
steel, cast iron and brass. We purchase these materials from numerous suppliers
nationally and internationally, and have not historically experienced
significant difficulties in obtaining these commodities in quantities sufficient
for our operations. However, these commodities are subject to price fluctuations
which may adversely affect our results of operations. We manage this risk by
offsetting increases in commodities with increased sales prices, an active
materials management program and the diversity of materials used in our
production processes.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
CIRCOR INTERNATIONAL, INC
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
Report of Independent Auditors.............................. 26
Consolidated Balance Sheets as of December 31, 1999, June
30, 1999 and June 30, 1998................................ 27
Consolidated Statements of Operations for the six-months
ended December 31, 1999, and December 31, 1998 (unaudited)
and the twelve-months ended June 30, 1999 and 1998........ 28
Consolidated Statements of Cash Flows for the six-months
ended December 31, 1999, and the Twelve-months ended June
30, 1999 and 1998......................................... 29
Consolidated Statements of Stockholders' Equity for the
six-months ended December 31, 1999, and the twelve-months
ended June 30, 1999 and 1998.............................. 30
Notes to the Consolidated Financial Statements.............. 31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The firm of KPMG LLP has served as our independent public accountants since
our inception in July, 1999. There have been no changes in our accountants
during the most recent fiscal year and no material disagreements between
management and our accountants.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information called for by Item 10 is incorporated herein by reference to our
Definitive Proxy Statement for the 1999 Annual Meeting of Stockholders to be
held on May 18, 2000.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the section "Executive Compensation" in the
Registrant's Definitive Proxy Statement relating to the 1999 Annual Meeting of
Stockholders to be held May 18, 2000 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing under the section "Security Ownership of CIRCOR
Common Stock by Certain Beneficial Owners, Directors and Executive Officials of
the Company" in the Registrant's Definitive Proxy Statement relating to the 1999
Annual Meeting of Stockholders to be held May 18, 2000 is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTION
The information appearing under the section "Certain Relationships and
Related Transactions" in the Registrant's Definitive Proxy Statement relating to
the 1999 Annual Meeting of Stockholders to be held May 18, 2000 is incorporated
herein by reference.
20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1)Financial Statements
The financial statements filed as part of the report are listed in
Part II, Item 8 of this report on the Index to Consolidated Financial
Statements included on page 20.
(a)(2)Financial Statement Schedules
PAGE
--------
Schedule II Valuation and Qualifying Accounts for the six
months ended December 31, 1999, and the twelve-months ended
June 30, 1999 and 1998...................................... 50
All schedules for which provision is made in the applicable accounting
regulations of the Security and Exchange Commission are not required
under the related instructions or are not material, and therefore have
been omitted.
21
(A)(3) EXHIBITS
EXHIBIT NO. DESCRIPTION AND LOCATION
- ----------- ------------------------
2 Plan of Acquisition, Reorganization, Arrangement,
Liquidation or Succession:
2.1 Distribution Agreement between Watts Industries, Inc. and
the Company dated as of October 1, 1999, is incorporated
herein by reference to Exhibit 2.1 to Amendment No. 2 to the
Company's Registration Statement on Form 10, File
No. 000-26961, filed with the Securities and Exchange
Commission on October 6, 1999 ("Amendment No. 2 to the
Form 10").
3 Articles of Incorporation and By-Laws:
3.1 The Amended and Restated Certificate of Incorporation of the
Company is incorporated herein by reference to Exhibit 3.1
to the Company's Registration Statement on Form 10, File
No. 000-26961, filed with the Securities and Exchange
Commission on August 6, 1999 ("Form 10").
3.2 The Amended and Restated By-Laws of the Company are
incorporated herein by reference to Exhibit 3.2 to the
Form 10.
3.3 Certificate of Designations, Preferences and Rights of a
Series of Preferred Stock of CIRCOR International, Inc.
classifying and designating the Series A Junior
Participating Cumulative Preferred Stock is incorporated
herein by reference to Exhibit 3.1 to the Company's
Registration Statement on Form 8-A, File No. 001-14962,
filed with the Securities and Exchange Commission on
October 21, 1999 ("Form 8-A").
4 Instruments Defining the Rights of Security Holders,
Including Debentures:
4.1 Shareholder Rights Agreement, dated as of September 16,
1999, between CIRCOR International, Inc. and BankBoston,
N.A., as Rights Agent is incorporated herein by reference to
Exhibit 4.1 to the Form 8-A.
9 Voting Trust Agreements:
9.1 The Amended and Restated George B. Horne Voting Trust
Agreement--1997 dated as of September 14, 1999 is
incorporated herein by reference to Exhibit 9.1 to Amendment
No. 1 to the Company's Registration Statement on Form 10,
File No. 000-26961, filed with the Securities and Exchange
Commission on September 22, 1999 ("Amendment No. 1 to the
Form 10").
10 Material Contracts:
10.1 CIRCOR International, Inc. 1999 Stock Option and Incentive
Plan is incorporated herein by reference to Exhibit 10.1 to
Amendment No. 1 to the Form 10.
10.2 Form of Incentive Stock Option Agreement under the 1999
Stock Option and Incentive Plan is incorporated herein by
reference to Exhibit 10.2 to Amendment No. 1 to the
Form 10.
10.3 Form of Non-Qualified Stock Option Agreement for Employees
under the 1999 Stock Option and Incentive Plan (Five Year
Graduated Vesting Schedule) is incorporated herein by
reference to Exhibit 10.3 to Amendment No. 1 to the
Form 10.
22
EXHIBIT NO. DESCRIPTION AND LOCATION
- ----------- ------------------------
10.4 Form of Non-Qualified Stock Option Agreement for Employees
under the 1999 Stock Option and Incentive Plan (Performance
Accelerated Vesting Schedule) is incorporated herein by
reference to Exhibit 10.4 to Amendment No. 1 to the
Form 10.
10.5 Form of Non-Qualified Stock Option Agreement for Independent
Directors under the 1999 Stock Option and Incentive Plan is
incorporated herein by reference to Exhibit 10.5 to
Amendment No. 1 to the Form 10.
10.6 CIRCOR International, Inc. Management Stock Purchase Plan is
incorporated herein by reference to Exhibit 10.6 to
Amendment No. 1 to the Form 10.
10.7 Form of CIRCOR International, Inc. Supplemental Employee
Retirement Plan is incorporated herein by reference to
Exhibit 10.7 to Amendment No. 1 to the Form 10.
10.8 Supply Agreement between Watts Industries, Inc. and CIRCOR
International, Inc. is incorporated herein by reference to
Exhibit 10.8 to Amendment No. 2 to the Form 10.
10.9 Trademark License Agreement between Watts Industries, Inc.
and CIRCOR International, Inc. is incorporated herein by
reference to Exhibit 10.9 to Amendment No. 2 to the
Form 10.
10.10 Lease Agreement, dated as of February 14, 1999, between
BY-PASS 85 Associates, LLC and CIRCOR International, Inc. is
incorporated herein by reference to Exhibit 10.10 to
Amendment No. 1 to the Form 10.
10.11 Trust Indenture from Village of Walden Industrial
Development Agency to The First National Bank of Boston, as
Trustee, dated June 1, 1994 is herein incorporated by
reference to Exhibit 10.14 of the Watts Industries, Inc.
Annual Report on Form 10-K, File No. 0-14787, filed with the
Securities and Exchange Commission on September 26, 1994.
10.12 Loan Agreement between Hillsborough County Industrial
Development Authority and Leslie Controls, Inc. dated
July 1, 1994 is herein incorporated by reference to
Exhibit 10.15 of the Watts Industries, Inc. Annual Report
on Form 10-K, File No. 0-14787, filed with the Securities
and Exchange Commission on September 26, 1994.
10.13 Trust Indenture from Hillsborough County Industrial
Development Authority to The First National Bank of Boston,
as Trustee, dated July 1, 1994 is herein incorporated by
reference to Exhibit 10.17 of the Watts Industries, Inc.
Annual Report on Form 10-K, File No. 0-14787, filed with the
Securities and Exchange Commission on September 26, 1994.
10.14 Form of Indemnification Agreement between CIRCOR and each of
its directors is herein incorporated by reference to
Exhibit 10.20 to the Form 10.
10.15 Executive Employment Agreement between CIRCOR, Inc. and
David A. Bloss, Sr., dated as of September 16, 1999 is
incorporated herein by reference to Exhibit 10.15 to
Amendment No. 1 to the Form 10.
10.16 Executive Employment Agreement between CIRCOR, Inc. and
Cosmo S. Trapani, dated as of September 16, 1999 is
incorporated herein by reference to Exhibit 10.16 to
Amendment No. 1 to the Form 10.
10.17 Amended and Restated Letter of Credit, Reimbursement and
Guaranty Agreement dated as of October 18, 1999 among Leslie
Controls, Inc., as Borrower, CIRCOR International, Inc., as
Guarantor, and First Union National Bank as Letter of Credit
Provider is herein incorporated by reference to
Exhibit 10.17 to the Company's Current
23
EXHIBIT NO. DESCRIPTION AND LOCATION
- ----------- ------------------------
Report on Form 8-K, File No. 001-14962, filed with the
Securities and Exchange Commission on October 21, 1999.
10.18 Amended and Restated Letter of Credit, Reimbursement and
Guaranty Agreement dated as of October 18, 1999 among Spence
Engineering Company, Inc. as Borrower, CIRCOR
International, Inc., as Guarantor, and First Union National
Bank as Letter of Credit Provider is herein incorporated by
reference to Exhibit 10.18 to the Company's Current Report
on Form 8-K, File No. 001-14962, filed with the Securities
and Exchange Commission on October 21, 1999.
10.19 Credit Agreement, dated as of October 18, 1999, by and among
CIRCOR International, Inc., a Delaware corporation, as
Borrower, each of the Subsidiary Guarantors named therein,
the Lenders from time to time a party thereto, ING (U.S.)
Capital LLC, as Agent for such Lenders, BankBoston, N.A., as
Syndication Agent, First Union National Bank, as
Documentation Agent and ING Barings LLC, as Arranger for the
Lenders is herein incorporated by reference to
Exhibit 10.19 to the Company's Current Report on Form 8-K,
File No. 001-14962, filed with the Securities and Exchange
Commission on October 21, 1999.
10.20 Note Purchase Agreement, dated as of October 19, 1999, among
CIRCOR International, Inc., a Delaware corporation, the
Subsidiary Guarantors and each of the Purchasers listed on
Schedule A attached thereto is herein incorporated by
reference to Exhibit 10.20 to the Company's Current Report
on Form 8-K, File No. 001-14962, filed with the Securities
and Exchange Commission on October 21, 1999.
21 Subsidiaries of Registrant: A list of Subsidiaries of the
Company is incorporated herein by reference to Exhibit 21.1
to Amendment No. 1 to the Company's Form 10.
23 Consent of Experts and Counsel: Consent of KPMG LLP is filed
herewith as Exhibit 23.1.
27 Financial Data Schedule.
(b) Reports on Form 8-K. The registrant filed the following Current Reports on
Form 8-K during the three-month period ended December 31, 1999:
1. On October 21, 1999, the Company filed a Current Report on Form 8-K
announcing the beginning of the Company's trading on the New York Stock
Exchange on October 19, 1999 and announcing the closing of the Company's
revolving credit facility, bridge loan and sale of senior unsecured notes
to institutional investors in a private placement.
(c) See Item 14(a)3 above.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized this
30(th) day of March 2000.
CIRCOR INTERNATIONAL, INC.
By: /S/ DAVID A. BLOSS, SR.
-----------------------------------------
David A. Bloss, Sr.
CHAIRMAN, CHIEF EXECUTIVE
OFFICER AND PRESIDENT
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
Chairman, Chief Executive
/s/ DAVID A. BLOSS, SR. Officer, President and
------------------------------------------- Director (Principal March 30, 2000
David A. Bloss, Sr. Executive Officer)
Vice President, Corporate
/S/ STEPHEN J. CARRIERE Controller and Assistant
------------------------------------------- Treasurer (Principal March 30, 2000
Stephen J. Carriere Accounting Officer)
/S/ DEWAIN K. CROSS
------------------------------------------- Director March 30, 2000
Dewain K. Cross
/S/ DAVID F. DIETZ
------------------------------------------- Director March 30, 2000
David F. Dietz
/S/ TIMOTHY P. HORNE
------------------------------------------- Director March 30, 2000
Timothy P. Horne
/S/ DANIEL J. MURPHY, III
------------------------------------------- Director March 30, 2000
Daniel J. Murphy, III
25
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
CIRCOR International, Inc.
We have audited the accompanying consolidated balance sheets of CIRCOR
International, Inc. as of December 31, 1999, and June 30, 1999 and 1998, and the
related consolidated statements of operations, cash flows and shareholders'
equity for the six-month period ended December 31, 1999, and the fiscal years
ended June 30, 1999 and 1998. In connection with our audits of the consolidated
financial statements, we also audited the accompanying financial statement
schedule of valuation and qualifying accounts. These consolidated financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CIRCOR
International, Inc. as of December 31, 1999, and June 30, 1999 and 1998, and the
results of their operations and their cash flows for the six-month period ended
December 31, 1999, and the fiscal years ended June 30, 1999 and 1998 in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
KPMG LLP
Boston, Massachusetts
March 24, 2000
26
CIRCOR INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
JUNE 30,
DECEMBER 31, -------------------
1999 1999 1998
------------ -------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 5,153 $ 6,714 $ 6,241
Trade accounts receivable, less allowance for doubtful
accounts of $2,683, $2,949 and $2,092, respectively..... 60,916 49,857 53,565
Inventories............................................... 107,332 108,910 89,788
Prepaid expenses and other current assets................. 7,006 6,817 2,634
Deferred income taxes..................................... 9,794 8,592 2,182
-------- -------- --------
Total Current Assets.................................. 190,201 180,890 154,410
PROPERTY, PLANT AND EQUIPMENT, NET.......................... 75,154 76,682 55,982
OTHER ASSETS:
Goodwill, net of accumulated amortization of $11,775,
$10,353 and $7,688, respectively........................ 96,488 96,900 39,173
Other assets.............................................. 5,242 4,571 3,912
-------- -------- --------
TOTAL ASSETS................................................ $367,085 $359,043 $253,477
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 21,172 $ 25,543 $ 28,345
Accrued expenses and other current liabilities............ 15,167 16,598 13,328
Accrued compensation and benefits......................... 3,902 5,705 5,099
Income taxes payable...................................... -- 3,275 5,344
Current portion of long-term debt......................... 2,260 4,178 2,977
-------- -------- --------
Total Current Liabilities............................. 42,501 55,299 55,093
LONG-TERM DEBT, NET OF CURRENT PORTION...................... 122,867 22,404 12,776
DEFERRED INCOME TAXES....................................... 5,162 7,439 6,210
OTHER NONCURRENT LIABILITIES................................ 9,022 10,525 6,478
MINORITY INTEREST........................................... 4,124 4,120 4,264
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; 1,000,000 shares
authorized; no shares issued and outstanding............ -- -- --
Common stock, $.01 par value; 29,000,000 shares
authorized; 13,236,877 issued and outstanding at
December 31, 1999....................................... 132 -- --
Additional paid-in capital................................ 180,887 -- --
Retained earnings......................................... 3,393 -- --
Accumulated other comprehensive income.................... (1,003) (691) 479
Investments by and advances from Watts Industries, Inc.... -- 259,947 168,177
-------- -------- --------
Total Shareholders' Equity............................ 183,409 259,256 168,656
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $367,085 $359,043 $253,477
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
27
CIRCOR INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
SIX-MONTHS ENDED FISCAL YEAR
DECEMBER 31, ENDED JUNE 30,
---------------------- -------------------
1999 1998 1999 1998
-------- ----------- -------- --------
(UNAUDITED)
Net revenues....................................... $156,371 $ 166,086 $323,077 $288,969
Cost of revenues................................... 107,829 113,693 218,351 194,312
-------- ----------- -------- --------
GROSS PROFIT................................. 48,542 52,393 104,726 94,657
Selling, general and administrative expenses....... 34,696 36,812 75,176 56,466
-------- ----------- -------- --------
OPERATING INCOME............................. 13,846 15,581 29,550 38,191
-------- ----------- -------- --------
Other (income) expense:
Interest income.................................. (90) (192) (333) (427)
Interest expense................................. 4,632 4,624 9,141 3,898
Other, net....................................... 460 (514) (229) (306)
-------- ----------- -------- --------
5,002 3,918 8,579 3,165
-------- ----------- -------- --------
INCOME BEFORE INCOME TAXES......................... 8,844 11,663 20,971 35,026
Provision for income taxes......................... 3,964 4,823 8,461 12,601
-------- ----------- -------- --------
NET INCOME................................... $ 4,880 $ 6,840 $ 12,510 $ 22,425
======== =========== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
28
CIRCOR INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FISCAL YEAR ENDED
SIX-MONTHS ENDED JUNE 30,
DECEMBER 31, -------------------
1999 1999 1998
---------------- -------- --------
OPERATING ACTIVITIES
Net Income............................................... $ 4,880 $ 12,510 $22,425
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 5,468 9,440 6,312
Amortization........................................... 1,608 3,322 1,532
Deferred income taxes (benefit)........................ (3,503) 4,193 173
(Gain) loss on disposal of property, plant and
equipment............................................ (285) (54) 19
Changes in operating assets and liabilities, net of
effects from business acquisitions:
Trade accounts receivable............................ (11,274) 13,665 (6,254)
Inventories.......................................... 1,340 209 (9,783)
Prepaid expenses and other assets.................... (570) (3,102) 1,491
Accounts payable, accrued expenses and other
liabilities........................................ (12,493) (19,655) 5,160
-------- -------- -------
Net cash provided by (used in) operating activities.... (14,829) 20,528 21,075
-------- -------- -------
INVESTING ACTIVITIES
Additions to property, plant and equipment............... (4,557) (9,499) (6,115)
Disposal of property, plant and equipment................ 298 1,208 146
Increase in other assets................................. (912) (237) (725)
Business acquisitions, net of cash acquired.............. -- (74,176) (22,503)
-------- -------- -------
Net cash used in investing activities.................... (5,171) (82,704) (29,197)
-------- -------- -------
FINANCING ACTIVITIES
Proceeds from long-term borrowings....................... 188,643 4,331 2,957
Payments of long-term debt............................... (90,157) (20,646) (428)
Net intercompany activity with Watts Industries, Inc..... 15,950 79,260 9,104
Partial payment of investments by and from Watts
Industries, Inc........................................ (96,000) -- --
-------- -------- -------
Net cash provided by financing activities.............. 18,436 62,945 11,633
-------- -------- -------
Effect of exchange rate changes on cash and cash
equivalents............................................ 3 (296) 143
-------- -------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... (1,561) 473 3,654
Cash and cash equivalents at beginning of year........... 6,714 6,241 2,587
-------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR................. $ 5,153 $ 6,714 $ 6,241
======== ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
29
CIRCOR INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY
(IN THOUSANDS)
ADDITIONAL INVESTMENTS BY OTHER TOTAL
COMMON STOCK PAID-IN RETAINED AND ADVANCES COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS FROM WATTS INCOME EQUITY
-------- -------- ---------- -------- -------------- -------------- -------------
BALANCE AT JUNE 30, 1997.......... -- $ -- $ -- $ -- $136,648 $ 629 $137,277
Net income........................ -- -- -- -- 22,425 -- 22,425
Cumulative translation
adjustment...................... -- -- -- -- -- (150) (150)
--------
Comprehensive income.............. 22,275
--------
Net intercompany activity......... -- -- -- -- 9,104 -- 9,104
------ ------ -------- -------- -------- ------- --------
BALANCE AT JUNE 30, 1998.......... -- -- -- -- 168,177 479 168,656
------ ------ -------- -------- -------- ------- --------
Net income........................ -- -- -- -- 12,510 -- 12,510
Cumulative translation
adjustment...................... -- -- -- -- -- (1,170) (1,170)
--------
Comprehensive income.............. 11,340
--------
Net intercompany activity......... -- -- -- -- 79,260 -- 79,260
------ ------ -------- -------- -------- ------- --------
BALANCE AT JUNE 30, 1999.......... -- -- -- -- 259,947 (691) 259,256
------ ------ -------- -------- -------- ------- --------
Net income prior to Spin-off...... -- -- -- -- 1,487 -- 1,487
Net income after Spin-off......... -- -- -- 3,393 -- -- 3,393
Cumulative translation
adjustment...................... -- -- -- -- -- (312) (312)
--------
Comprehensive income.............. 4,568
--------
Partial repayment of advances..... -- -- -- -- (96,000) -- (96,000)
Issuance of shares of common stock
in connection with the
Spin-off........................ 13,237 132 -- -- (132) -- --
Net intercompany activity......... -- -- -- -- 15,551 -- 15,551
Contribution to capital of
remaining unpaid advances....... -- -- 180,853 -- (180,853) -- --
Net change in restricted stock
units........................... -- -- 34 -- -- -- 34
------ ------ -------- -------- -------- ------- --------
BALANCE AT DECEMBER 31, 1999...... 13,237 $ 132 $180,887 $ 3,393 $ -- $(1,003) $183,409
====== ====== ======== ======== ======== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
30
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS
CIRCOR International, Inc. ("CIRCOR" or the "Company") designs, manufactures
and distributes valves and related products and services for use in a wide range
of applications to optimize the efficiency or ensure the safety of fluid-control
systems. The valves and related fluid-control products we manufacture are used
in processing industries; oil and gas production, pipeline construction and
maintenance; aerospace, military and commercial aircraft; and maritime
manufacturing and maintenance. We have used both internal product development
and strategic acquisitions to assemble a complete array of fluid-control
products and technologies that enables us to address our customers' unique
fluid-control application needs. We have two major product groups:
Instrumentation and Fluid Regulation Products and Petrochemical Products.
The Instrumentation and Fluid Regulation Products Group designs,
manufactures and supplies valves and controls for diverse end-uses including
hydraulic, pneumatic, cryogenic and steam applications. Selected products
include precision valves, compression tube and pipe fittings, control valves and
regulators. The Instrumentation and Fluid Regulation Products Group includes the
following subsidiaries: Circle Seal Corporation (Aerodyne Controls Division),
Atkomatic Valve, Circle Seal Controls, Inc. GO Regulator, Inc., Leslie
Controls, Inc., and Spence Engineering Company, Inc.
The Petrochemical Products Group designs, manufactures and supplies flanged
and threaded floating and trunnion ball valves, needle valves, check valves,
butterfly valves and large forged steel ball valves, gate valves and strainers
for use in oil, gas and chemical processing and industrial applications. The
Petrochemical Products Group includes the following subsidiaries: Contromatics
Industrial Products, Eagle Check Valve, KF Industries, Inc., Pibiviesse S.p.A.,
Suzhou KF Valve Co., Ltd., SSI Equipment Inc. and Telford Valve and Specialties.
On October 18, 1999 (the "Spin-off Date"), we became a publicly owned
company via a tax-free distribution of our common stock (the "Distribution" or
"Spin-off") to the shareholders of our former parent, Watts Industries, Inc.
("Watts"). A description of the Spin-off and certain transactions with Watts is
included in Note 3.
(2) ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements present our financial
position, results of operations and cash flows as if we had been an independent,
publicly owned company for all periods presented. Certain allocations of
previously unallocated Watts interest and general and administrative expenses,
as well as computations of separate tax provisions, have been made to facilitate
such presentation (see Note 3). The consolidated financial statements prior to
October 18, 1999 represent the former combined operations of Watts' industrial,
oil and gas businesses. All significant intercompany balances and transactions
have been eliminated in consolidation.
CHANGE IN FISCAL YEAR
Effective July 1, 1999, we changed our fiscal year-end from June 30(th) to
December 31(st). Accordingly, the audited financial statements include the
results for the six-month period ended December 31, 1999 ("transition period"),
and the prior two fiscal years ended June 30, 1999 ("fiscal 1999"), and
June 30, 1998 ("fiscal 1998"). In addition to the basic audited financial
statements and related notes, unaudited financial
31
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) ACCOUNTING POLICIES (CONTINUED)
information for the six-month period ended December 31, 1998 has been presented
to enhance comparability.
REVENUE RECOGNITION
Revenue is recognized upon shipment, net of a provision for estimated
returns and allowances.
RESEARCH AND DEVELOPMENT
Research and development expenditures are expended when incurred and are
included in the operating expense in the Consolidated Statement of Operations.
CASH EQUIVALENTS
Cash equivalents consist of investments with maturities of three months or
less at the date of original issuance.
INVENTORIES
Inventories are stated at the lower of cost (principally first-in, first-out
method) or market.
GOODWILL
Goodwill represents the excess of cost over the fair value of net assets of
businesses acquired. This balance is amortized over 40 years using the
straight-line method. We assess the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its remaining
life can be recovered through undiscounted future operating cash flows of the
acquired operation. The amount of goodwill impairment, if any, is measured based
on projected discounted future operating cash flows using a discount rate
reflecting the average cost of funds.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Plant and equipment
under capital leases are stated at the present value of minimum lease payments.
Depreciation is provided on a straight-line basis over the estimated useful
lives of the assets which range from 10 to 40 years for buildings and
improvements and 3 to 15 years for machinery and equipment. Plant and equipment
held under capital leases and leasehold improvements are amortized on a
straight-line basis over the shorter of the lease term or estimated useful life
of the asset.
LONG-LIVED ASSETS
Impairment losses are recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. In
such instances, the carrying values of long-lived assets are reduced to their
estimated fair value, as determined using an appraisal or a discounted cash flow
approach, as appropriate.
32
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
FOREIGN CURRENCY TRANSLATION
Balance sheet accounts of foreign subsidiaries are translated into United
States dollars at fiscal year-end exchange rates. Operating accounts are
translated at weighted average exchange rates for each year. Net translation
gains or losses are adjusted directly to a separate component of shareholders'
equity. The Company does not provide for U.S. income taxes on foreign currency
translation adjustments since it does not provide for such taxes on
undistributed earnings of foreign subsidiaries.
EARNINGS PER COMMON SHARE
Historical earnings per share has been omitted since we were not an
independent publicly owned company with a capital structure of our own for any
of the periods presented in the accompanying consolidated statement of
operations. The computation of pro forma net income per share is included in
Note 15.
STOCK BASED COMPENSATION
As allowed under Statement of Financial Accounting Standards (SFAS)
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, we account for its stock-based
employee compensation plans in accordance with the provisions of APB Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
DERIVATIVE FINANCIAL INSTRUMENTS
We use foreign currency forward exchange contracts to manage currency
exchange exposures in certain foreign currency denominated transactions. Gains
and losses on contracts designated as hedges are recognized when the contracts
expire, which is generally in the same time period as the underlying foreign
currency denominated transactions.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
33
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATION OF PRIOR YEARS
Certain prior-year financial statement amounts have been reclassified to
conform to December 31, 1999 presentation.
NEW ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." We will adopt
SFAS 133 on January 1, 2001. The impact of SFAS 133 on the consolidated
financial statements is still being evaluated, but is not expected to be
material.
Also in 1998, the American Institute of Certified Public Accountants issued
SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use", and SOP 98-5, "Reporting on the Costs of Start-Up
Activities". We adopted SOP 98-1 and SOP 98-5 on July 1, 1999. The adoption of
these statements did not have a material affect on the consolidated financial
statements.
(3) SPIN-OFF FROM AND TRANSACTIONS WITH FORMER AFFILIATES
SPIN-OFF AND RELATIONSHIPS AFTER THE SPIN-OFF
At the Spin-off Date of October 18, 1999, all of our common shares were
distributed on a pro-rata basis to the record date holders of Watts common
shares at a ratio of one share for each two outstanding Watts shares. After the
Spin-off, Watts had no ownership in us. Immediately after the Spin-off, however,
certain of our shares were held by the Watts pension trust on behalf of Watts'
employees. We have entered into separation and other related agreements (the
"Distribution Agreement"), outlined below, governing the Spin-off transaction
and our subsequent relationship with Watts. Such agreements provide certain
indemnities to the parties, and provide for the allocation of tax and other
assets, liabilities and obligations arising from periods prior to the Spin-off.
The Distribution Agreement provided for, among other things, our assumption
of all liabilities relating to industrial, oil and gas businesses of Watts, and
the indemnification of Watts with respect to such liabilities. The Distribution
Agreement provided that we pay, prior to the Spin-off, $96.0 million to Watts as
repayment of certain amounts due to Watts. The net investment by and advances
from Watts were preliminarily determined to be approximately $277.0 million at
the Spin-off Date. Watts contributed to our capital its remaining unpaid
advances of approximately $181.0 million, as provided by the Distribution
Agreement. The Distribution Agreement also specifies that Watts make a final
determination regarding the net assets of the industrial, oil and gas businesses
transferred to us at the Spin-off Date.
This determination has been preliminarily completed, but is subject to our
Agreement. The accompanying consolidated financial statements reflect our
estimates, based on available information, of the net assets that should be
transferred. The final approved determination could vary from these estimates.
Any changes are not expected to materially affect future net income.
In connection with the Spin-off, Watts received a ruling from the Internal
Revenue Service (the "IRS") to the effect, among other things, that the Spin-off
would qualify as a tax-free distribution under Section 355 of the Internal
Revenue Code of 1986, as amended. Such a ruling, while generally binding upon
the IRS, is subject to certain factual representations and assumptions provided
by Watts. We have agreed to certain restrictions on our future actions to
provide further assurances that the Spin-off will qualify as a tax-free
distribution. Restrictions include, among other things: limitations on the
liquidation,
34
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) SPIN-OFF FROM AND TRANSACTIONS WITH FORMER AFFILIATES (CONTINUED)
merger or consolidation with another company. Additionally, we have agreed to
engage in a public offering of a significant amount of our common stock within
one year of the distribution date. If the distribution is held to be taxable for
United States federal income tax purposes, Watts and CIRCOR would be joint and
severally liable for the resulting Watts' Federal taxes, which could be
substantial.
Under the Distribution Agreement, Watts maintains full control and absolute
discretion with regard to any combined or consolidated tax filings for periods
through the Spin-off Date. Watts also maintains full control and absolute
discretion regarding common tax audit issues of such entities. Although Watts
has contractually agreed to, in good faith, use its best efforts to settle all
joint interests in any common audit issue on a consistent basis with prior
practice, there can be no assurance that determinations so made by Watts would
be the same as we would reach, acting on our own behalf.
The Distribution Agreement specifies methods for allocation of assets,
liabilities and responsibilities with respect to certain existing employee
compensation and benefit plans and programs. Such allocations have been
preliminarily completed for current employees of Watts who became CIRCOR
employees at the Spin-off Date. In addition, all vested and unvested Watts
options held by our employees were terminated and replaced with CIRCOR options
of equivalent value. We have agreed to indemnify Watts as to any employer
payroll tax it incurs related to the exercise of such options after the
Spin-off. Certain provisions of the Distribution Agreement also governs the
transfer of employees between the parties during the transition period ending in
1999. We have also agreed on arrangements between the parties with respect to
certain internal software, third-party agreements, telecommunications services
and computing services.
ALLOCATIONS AND DETERMINATION OF COMMON COSTS IN HISTORICAL FINANCIAL STATEMENTS
Prior to the Spin-off, our operations were financed through our operating
cash flows, and investments by and advances from Watts. For this reason, our
historical financial statements include interest expense on our external debt
plus an allocation of interest expense which had not previously been separately
allocated by Watts. These interest allocations were based on Watts' weighted
average interest rate applied to the average annual balance of investments by
and advances from Watts.
Additionally, our historical financial statements include an allocation of
Watts' previously unallocated general and administrative expenses. These
allocations were based on our revenue as a percent of Watts' total revenue. The
amounts, by year, of the historical allocations described above are as follows:
JULY 1, 1999
FISCAL YEAR ENDED JUNE 30,
THROUGH -------------------------
SPIN-OFF DATE 1999 1998
------------- -------- --------
(IN THOUSANDS)
General and administrative expenses Allocated........... $1,678 $5,600 $4,900
Interest expense allocated.............................. 1,899 6,455 3,101
We believe that the bases of allocation of interest and general and
administrative expenses were reasonable based on the facts available at the date
of their allocation. However, based on current information, such amounts are not
indicative of amounts which we would have incurred if we had been an
independent, publicly owned entity for all periods presented. As noted in the
accompanying consolidated balance sheet, our capital structure changed as a
result of the Distribution to Watts and bears little relationship to the average
net outstanding investments by and advances from Watts. We will be required to
add personnel and incur other costs to perform services previously provided by
Watts. The full cost
35
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) SPIN-OFF FROM AND TRANSACTIONS WITH FORMER AFFILIATES (CONTINUED)
reflective of our capital structure and our personnel complement will be
included in our Consolidated Statement of Operations as incurred.
For periods prior to the Spin-off, income tax expense was calculated, to the
extent possible, as if we had filed separate income tax returns. As Watts
managed its tax position on a consolidated basis, which takes into account the
results of all of its businesses, our effective tax rate in the future could
vary significantly from our historical effective tax rates. Our future effective
tax rate will be largely dependent on our structure and tax strategies as a
separate entity.
OTHER TRANSACTIONS WITH FORMER AFFILIATES
Prior and subsequent to the Spin-off transaction we conducted business with
various other subsidiaries of Watts, under various contracts and agreements. The
following table summarizes transactions with these related parties:
FISCAL YEAR ENDED
SIX-MONTHS ENDED JUNE 30,
DECEMBER 31, -------------------
1999 1999 1998
---------------- -------- --------
(IN THOUSANDS)
Purchases of inventory...................................... $3,621 $7,484 $7,672
Sale of goods............................................... 2,042 1,366 1,081
(4) BUSINESS ACQUISITIONS
During fiscal 1999, we acquired Hoke, Inc. ("Hoke"), a multinational
manufacturer of industrial valves and fittings, for approximately $85.0 million
including assumption of debt. The following table reflects unaudited pro forma
consolidated results on the basis that the Hoke acquisition had taken place and
was recorded at the beginning of the fiscal year for each of the periods
presented:
FISCAL YEAR ENDED JUNE 30,
---------------------------
1999 1998
--------- ---------
(IN THOUSANDS)
Net revenues................................................ $326,707 $358,191
Net income.................................................. 12,436 19,365
In our opinion the unaudited pro forma consolidated results of operations
are not indicative of the actual results that would have occurred had the
acquisition been consummated at the beginning of fiscal 1998 or at the beginning
of fiscal 1999 or of future operations of the consolidated companies under our
ownership and management.
As allowed in the Purchase Agreement, we have initiated an arbitration
proceeding against the former shareholders of Hoke to recover a portion of the
purchase price based on alleged misrepresentations made by the former
shareholders and errors in the financial information provided us.
Additionally, in connection with the Hoke acquisition, we implemented a plan
to integrate certain of Hoke's operations and activities into our existing
operations. This plan included the closure of Hoke's headquarters facility and
relocation of certain manufacturing operations to other CIRCOR facilities. As a
result of this plan, it is anticipated that 170 former Hoke employees will be
involuntarily terminated (166
36
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) BUSINESS ACQUISITIONS (CONTINUED)
employees have been involuntarily terminated to date). Details of costs recorded
as part of the acquisition for the integration activities and the related
activity to date are as follows:
BALANCE AT
ORIGINAL DECEMBER 31,
ACCRUAL ACTIVITY 1999
-------- -------- ------------
(IN THOUSANDS)
Employee severance and related benefits..................... $3,167 $2,839 $328
Relocation of employees..................................... 45 6 39
Other exit costs............................................ 1,365 1,365 --
------ ------ ----
$4,577 $4,210 $367
====== ====== ====
Additionally, during the six-month period ended December 31, 1999 costs of
$749,000 were incurred to relocate certain Hoke manufacturing equipment to our
other manufacturing facilities. These costs are included in cost of revenues and
selling, general and administrative expense.
During fiscal 1999, we also acquired SSI Equipment Inc. of Burlington,
Ontario, Canada, and GO Regulator, Inc. of San Dimas, California. In fiscal 1998
we acquired Telford Valve and Specialties, Inc. of Edmonton, Alberta, Canada,
Atkomatic Valve Company, located in Indianapolis, Indiana and Aerodyne Controls
Corp. of Ronkonkoma, New York. All of these acquired companies are valve
manufacturers and the aggregate purchase price of these acquisitions was
approximately $33.4 million. The goodwill which resulted from these acquisitions
is being amortized on a straight-line basis over a 40-year period.
All acquisitions have been accounted for under the purchase method and the
results of operations of the acquired businesses have been included in the
consolidated financial statements from the date of acquisition. Had these
acquisitions, other than Hoke, occurred at the beginning of fiscal year 1999 or
1998, the effect on operating results would not have been material.
(5) INVENTORIES
Inventories consist of the following:
JUNE 30,
DECEMBER 31, -------------------
1999 1999 1998
------------ -------- --------
(IN THOUSANDS)
Raw materials............................................... $ 42,701 $ 45,098 $32,874
Work in process............................................. 27,466 23,087 25,970
Finished goods.............................................. 37,165 40,725 30,944
-------- -------- -------
$107,332 $108,910 $89,788
======== ======== =======
37
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
JUNE 30,
DECEMBER 31, ---------------------
1999 1999 1998
------------ --------- ---------
(IN THOUSANDS)
Land...................................................... $ 6,225 $ 6,222 $ 4,445
Buildings and improvements................................ 27,665 26,022 22,041
Machinery and equipment................................... 111,470 105,085 85,881
Construction in progress.................................. 1,724 6,548 2,106
--------- --------- ---------
147,084 143,877 114,473
Accumulated depreciation.................................. (71,930) (67,195) (58,491)
--------- --------- ---------
$ 75,154 $ 76,682 $ 55,982
========= ========= =========
(7) INCOME TAXES
The significant components of our deferred income tax liabilities and assets
are as follows:
JUNE 30,
DECEMBER 31, -------------------
1999 1999 1998
------------ -------- --------
(IN THOUSANDS)
Deferred income tax liabilities:
Excess tax over book depreciation......................... $ 6,965 $ 6,819 $ 5,373
Inventory................................................. 3,577 3,327 3,437
Other..................................................... 914 620 837
-------- -------- --------
Total deferred income tax liabilities................... 11,456 10,766 9,647
-------- -------- --------
Deferred income tax assets:
Accrued expenses.......................................... 5,727 5,554 1,849
Net operating loss carryforward........................... 529 716 --
Cost basis differences in intangible assets............... 2,499 -- --
Other..................................................... 7,333 5,649 3,770
-------- -------- --------
Total deferred income tax assets........................ 16,088 11,919 5,619
Valuation allowance....................................... -- -- --
-------- -------- --------
Net deferred income tax assets.......................... 16,088 11,919 5,619
-------- -------- --------
Net deferred income tax asset (liability)................... $ 4,632 $ 1,153 $ (4,028)
======== ======== ========
The above components of deferred income taxes are classified
in the respective consolidated balance sheet as follows:
Net current deferred income tax assets.................... $ 9,794 $ 8,592 $ 2,182
Net non-current deferred income tax liabilities........... (5,162) (7,439) (6,210)
-------- -------- --------
Net deferred income tax asset (liability)............... $ 4.632 $ 1,153 $ (4,028)
======== ======== ========
38
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) INCOME TAXES (CONTINUED)
The provision for income taxes is based on the following pre-tax income:
FISCAL YEAR ENDED
SIX-MONTHS ENDED JUNE 30,
DECEMBER 31, -------------------------
1999 1999 1998
---------------- -------- --------
(IN THOUSANDS)
Domestic........................................... $6,587 $14,011 $22,864
Foreign............................................ 2,257 6,960 12,162
------ ------- -------
$8,844 $20,971 $35,026
====== ======= =======
The provision for income taxes consists of the following:
FISCAL YEAR ENDED
SIX-MONTHS ENDED JUNE 30,
DECEMBER 31, -------------------------
1999 1999 1998
---------------- -------- --------
(IN THOUSANDS)
Current tax expense (benefit):
Federal........................................... $(1,360) $ 173 $ 7,156
Foreign........................................... 1,272 2,408 3,085
State............................................. 244 26 1,678
------- ------ -------
156 2,607 11,919
------- ------ -------
Deferred tax expense (benefit):
Federal........................................... 3,798 4,684 599
Foreign........................................... (366) 613 (22)
State............................................. 376 557 105
------- ------ -------
3,808 5,854 682
------- ------ -------
$ 3,964 $8,461 $12,601
======= ====== =======
Actual income taxes reported from operations are different than those which
would have been computed by applying the federal statutory tax rate to income
before income taxes. The reasons for these differences are as follows:
FISCAL YEAR ENDED
SIX-MONTHS ENDED JUNE 30,
DECEMBER 31, -------------------------
1999 1999 1998
---------------- -------- --------
(IN THOUSANDS)
Computed expected federal income tax expense........ $3,095 $7,340 $12,259
State income taxes, net of federal tax benefit...... 403 416 703
Goodwill amortization............................... 375 806 284
Foreign tax rate differential....................... 115 384 (1,124)
Other, net.......................................... (24) (485) 479
------ ------ -------
$3,964 $8,461 $12,601
====== ====== =======
Undistributed earnings of our foreign subsidiaries amounted to $4,735,000 at
December 31, 1999, and $3,217,000 and $831,000 at June 30, 1999 and 1998,
respectively. Those earnings are considered to be indefinitely reinvested and,
accordingly, no provision for U.S. federal and state income taxes has been
recorded thereon. Upon distribution of those earnings, in the form of dividends
or otherwise, we will be
39
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) INCOME TAXES (CONTINUED)
subject to both U.S. income taxes (subject to an adjustment for foreign tax
credits) and withholding taxes payable to the various foreign countries.
Determination of the amount of U.S. income tax liability that would be incurred
is not practicable because of the complexities associated with its hypothetical
calculation; however, unrecognized foreign tax credits would be available to
reduce some portion of any U.S. income tax liability. Withholding taxes of
$250,000 would be payable upon remittance of all previously unremitted earnings
at December 31, 1999. We made income tax payments of $2,690,000 during the
six-month period ended December 31, 1999, and $4,716,000 and $4,282,000 in
fiscal years 1999 and 1998, respectively.
(8) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
JUNE 30,
DECEMBER 31, -------------------
1999 1999 1998
------------ -------- --------
(IN THOUSANDS)
Commissions and sales incentive payable..................... $ 3,895 $ 4,272 $ 2,846
Acquisition related costs................................... 1,068 4,708 1,507
Insurance................................................... 2,875 2,414 1,497
Other....................................................... 7,329 5,204 7,478
------- ------- -------
Total..................................................... $15,167 $16,598 $13,328
======= ======= =======
(9) FINANCING ARRANGEMENTS
Long-term debt consists of the following:
JUNE 30,
DECEMBER 31, -------------------
1999 1999 1998
------------ -------- --------
(IN THOUSANDS)
Senior unsecured notes, maturing in 2006, at a fixed
interest rate of 8.23%.................................... $ 75,000 $ -- $ --
Revolving line of credit, maturing in 2003, at a variable
interest rate (7.57% at December 31, 1999)................ 32,000 -- --
Industrial revenue bonds, maturing in varying amounts
through 2020, at a variable interest rate (5.45% at
December 31, 1999, and 3.88% and 3.60% at June 30, 1999
and 1998, respectively)................................... 12,265 12,540 12,265
Term Loan, at a variable interest rate (8.50% at June 30,
1999)..................................................... -- 4,658 --
Capital lease obligations, at varying interest rates ranging
from 9.26% to 18.50%...................................... 596 4,081 --
Other borrowings, at varying interest rates ranging from
6.15% to 10.25%........................................... 5,266 5,303 3,488
-------- ------- -------
Total long-term debt...................................... 125,127 26,582 15,753
Less: current portion....................................... 2,260 4,178 2,977
-------- ------- -------
Total long-term debt, less current portion................ $122,867 $22,404 $12,776
======== ======= =======
On October 18, 1999, we entered into a $75.0 million unsecured revolving
credit facility maturing in 2003. Under the credit facility agreement we are
required to pay a facility fee of 0.35% per annum, and are
40
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) FINANCING ARRANGEMENTS (CONTINUED)
able to borrow at various interest rates based on either the Euro dollar rate
plus 1.5%, prime, or a competitive money market rate specified by the lender. On
October 19, 1999, we also issued $75.0 million of unsecured notes maturing in
2006. Proceeds from the notes and borrowings under the credit facility were used
to repay $96.0 million of investments by and advances from Watts and the
outstanding balance under the term loan agreement.
At December 31, 1999, we had $43.0 million available from the unsecured
credit facility to support our acquisition program, working capital requirements
and for general corporate purposes.
Certain of our loan agreements contain covenants that require, among other
items, maintenance of certain financial ratios and also limit our ability to
enter into secured borrowing arrangements.
Principal payments during each of the next five fiscal years are due as
follows (in thousands): 2000-$2,260; 2001-$144; 2002-$15,961; 2003-$47,482; and
2004-$15,910 and $43,370 thereafter. Interest paid for all periods presented in
the accompanying consolidated financial statements approximates interest
expense.
(10) STOCK-BASED COMPENSATION
During the transition period, the 1999 Stock Option and Incentive Plan (the
"1999 Stock Plan") was adopted by our Board of Directors. Generally, the 1999
Stock Plan permits the grant of the following types of awards to our officers,
other employees and non-employee directors: incentive stock options,
non-qualified stock options, deferred stock awards, restricted stock awards,
unrestricted stock awards, performance share awards, stock appreciation rights
and dividend equivalent rights. The 1999 Stock Plan provides for the issuance of
up to 2,000,000 shares of common stock (subject to adjustment for stock splits
and similar events). New options granted under the 1999 Stock Plan can have
varying vesting provisions and exercise periods. Options granted subsequent to
the Spin-off vest in periods ranging from 1 to 7 years and expire 10 years after
grant.
The CIRCOR Management Stock Purchase Plan, which is a component of the 1999
Stock Plan, provides that eligible employees may elect to receive restricted
stock units in lieu of all or a portion of their pre-tax annual incentive bonus
and, in some cases, make after-tax contributions in exchange for restricted
stock units. In addition, non-employee directors may elect to receive restricted
stock units in lieu of all or a portion of their annual directors' fees. Each
restricted stock unit represents a right to receive one share of our common
stock after a three-year vesting period. Restricted stock units are granted at a
discount of 33% from the fair market value of the shares of common stock on the
date of grant. This discount is amortized to compensation expense ratably over
the vesting period.
At the Spin-off Date, vested and non-vested Watts options held by our
employees terminated in accordance with their terms and new options of
equivalent value were issued under the 1999 Stock Plan to replace the Watts
options ("replacement options"). The vesting dates and exercise periods of the
options were not affected by the replacement. Based on their original Watts
grant date, CIRCOR replacement options vest during the 1999 to 2003 time period
and expire 10 years after grant of the original Watts options. Additionally, at
the Spin-off Date vested and non-vested Watts restricted stock units held by our
employees were converted into comparable restricted stock units based on our
common stock and will be payable in shares of our common stock. At December 31,
1999, 134,649 restricted stock units were outstanding.
41
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) STOCK-BASED COMPENSATION (CONTINUED)
Had compensation cost for all our option grants subsequent to the Spin-off
to employees and non-employee directors been determined consistent with
SFAS 123, our net income for the six-month period ended December 31, 1999 would
have decreased from $4,880,000 to $4,799,000. The pro forma net income may not
be representative of future disclosures of pro forma net income since the
estimated fair value of stock options is amortized to expense over the vesting
period, which was only a partial year in the transition period, and additional
options may be granted in varying quantities in future years. SFAS 123 pro forma
income per share data is not meaningful as we were not an independent, publicly
owned company prior to the Spin-off.
The fair value of each option grant made subsequent to the Spin-off was
estimated as of the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions used for grants in the
transition period:
Risk-free interest rate..................................... 6.1%
Expected life (years)....................................... 5
Expected stock volatility................................... 15.0%
Expected dividend yield..................................... 1.5%
A summary of the status of all options granted to employees and non-employee
directors at December 31, 1999, and changes during the six-month period then
ended is presented in the table below:
DECEMBER 31, 1999
------------------------------
OPTIONS WEIGHTED AVERAGE
(THOUSANDS) EXERCISE PRICE
----------- ----------------
Options outstanding at June 30, 1999........................ -- $ --
Replacement of Watts options................................ 627 10.60
Granted..................................................... 398 10.13
Exercised................................................... -- --
Forfeited................................................... -- --
-----
Options outstanding at December 31, 1999.................... 1,025 10.43
-----
Options exercisable at December 31, 1999.................... 359 10.67
-----
Weighted average fair value of options granted.............. $2.37
=====
The following table summarizes information about stock options outstanding
at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- ------------------------------
WEIGHTED AVERAGE
RANGE OF EXERCISE OPTIONS REMAINING WEIGHTED AVERAGE OPTIONS WEIGHTED AVERAGE
PRICES (THOUSANDS) CONTRACTUAL LIFE EXERCISE PRICE (THOUSANDS) EXERCISE PRICE
- --------------------- ----------- ---------------- ---------------- ----------- ----------------
8$.04- 9.21......... 180 5.9 $ 8.34 127 $ 8.32
9.43-10.38......... 527 9.5 9.94 27 9.43
11.00-11.96........ 103 5.8 11.84 78 11.90
12.15-12.98........ 215 6.7 12.71 127 12.53
----- ---
8.04-12.98......... 1,025 7.9 10.43 359 10.67
===== ===
42
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) EMPLOYEE BENEFIT PLANS
We sponsor a defined benefit pension plan covering substantially all of our
domestic non-union employees. Benefits are based primarily on years of service
and employees' compensation. Our funding policy for these plans is to contribute
annually the maximum amount that can be deducted for federal income tax
purposes. Prior to the Spin-off, the participants in the plan were covered by
plans with similar benefits, sponsored by Watts. Under an agreement with Watts,
we have assumed or retained pension liabilities related to substantially all of
our participants. Assets of the Watts plans have been allocated, in accordance
with regulatory rules, between the Watts plans and our plan.
Additionally, substantially all of our domestic non-union employees are
eligible to participate in a 401(k) savings plan. Under this plan, we match a
specified percentage of employee contributions, subject to certain limitations.
The components of net benefit expense are as follows:
FISCAL YEAR ENDED
SIX-MONTHS ENDED JUNE 30,
DECEMBER 31, -------------------------
1999 1999 1998
---------------- -------- --------
) (IN THOUSANDS
COMPONENTS OF NET BENEFIT EXPENSE
Service cost--benefits earned........................ $526 $1,085 $ 786
Interest cost on benefits obligation................. 298 531 459
Estimated return on assets........................... (330) (654) (443)
---- ------ ------
494 962 802
Defined contribution plans........................... 203 216 210
---- ------ ------
Total net benefits expense......................... $697 $1,178 $1,012
==== ====== ======
43
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) EMPLOYEE BENEFIT PLANS (CONTINUED)
The funded status of the defined benefit plan and amounts recognized in the
balance sheet follow:
JUNE 30,
DECEMBER 31, -------------------
1999 1999 1998
------------ -------- --------
(IN THOUSANDS)
CHANGE IN PROJECTED BENEFIT OBLIGATION
Balance at beginning of period............................ $ 8,014 $ 7,021 $ 5,035
Service cost.............................................. 526 1,085 786
Interest cost............................................. 298 531 459
Actuarial gain (loss)..................................... 267 (623) 624
Amendments................................................ -- -- 117
------- ------- -------
Balance at end of period................................ 9,105 8,014 7,021
------- ------- -------
CHANGE IN FAIR VALUE OF PLAN ASSETS
Balance at beginning of period............................ 7,173 6,459 4,784
Actual return on assets................................... 650 595 1,323
Employer contributions.................................... -- 119 352
------- ------- -------
Fair value of plan assets at end of period.............. 7,823 7,173 6,459
------- ------- -------
FUNDED STATUS
Plan assets less than benefit obligation.................. (1,282) (841) (562)
Unrecognized transition obligation........................ (264) (257) (313)
Unrecognized prior service cost........................... 353 207 229
Unrecognized actuarial gain (loss)........................ (298) (1,047) (450)
------- ------- -------
Net accrued benefit cost................................ $(1,491) $(1,938) $(1,096)
======= ======= =======
The weighted average assumptions used in determining the obligations of
pension benefit plans are shown below:
JUNE 30,
DECEMBER 31, -------------------
1999 1999 1998
------------ -------- --------
Discount rate............................................... 7.75% 7.00% 7.00%
Expected return on plan assets.............................. 9.00% 9.00% 9.00%
Rate of compensation increase............................... 5.00% 5.00% 5.00%
(12) CONTINGENCIES AND ENVIRONMENTAL REMEDIATION
CONTINGENCIES
We are subject to pending or threatened lawsuits and proceedings or claims
arising from the ordinary course of operations. Reserves have been established
which management presently believes are adequate in light of probable and
estimable exposure to the pending or threatened litigation of which it has
knowledge. Such contingencies are not expected to have a material effect on our
financial position, results of operations, or liquidity.
44
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) CONTINGENCIES AND ENVIRONMENTAL REMEDIATION (CONTINUED)
ENVIRONMENTAL REMEDIATION
We have been named a potentially responsible party with respect to
identified contaminated sites. The level of contamination varies significantly
from site to site as do the related levels of remediation efforts. Environmental
liabilities are recorded based on the most probable cost, if known, or on the
estimated minimum cost of remediation. Our accrued estimated environmental
liabilities are based on assumptions which are subject to a number of factors
and uncertainties. Circumstances which can affect the reliability and precision
of these estimates include identification of additional sites, environmental
regulations, level of cleanup required, technologies available, number and
financial condition of other contributors to remediation and the time period
over which remediation may occur. We recognize changes in estimates as new
remediation requirements are defined or as new information becomes available. We
estimate that accrued environmental remediation liabilities will likely be paid
over the next five to ten years. Such environmental remediation contingencies
are not expected to have a material effect on our financial position, results of
operation, or liquidity.
OPERATING LEASE COMMITMENTS
Minimum rental commitments under noncancellable operating leases, primarily
for office and warehouse facilities are (in thousands): $3,236 in 2000, $2,617
in 2001, $1,791 in 2002, $1,665 in 2003, $1,568 in 2004 and $3,985 for years
thereafter. Rental expense amounted to (in thousands): $1,482 during the
six-month period ended December 31, 1999, and $3,358 and $1,372 during the years
ended June 30, 1999 and 1998, respectively.
(13) FINANCIAL INSTRUMENTS
FAIR VALUE
The carrying amounts of cash and cash equivalents, short-term investments,
trade receivables and trade payables approximate fair value because of the short
maturity of these financial instruments. The fair value of the senior unsecured
notes, based on the value of comparable instruments brought to market, is
$74.5 million December 31, 1999. The fair value of the Company's variable rate
debt approximates its carrying value.
USE OF DERIVATIVES
We use foreign currency forward exchange contracts to reduce the impact of
currency fluctuations on certain anticipated intercompany purchase transactions
that are expected to occur within the fiscal year and certain other foreign
currency transactions. Related gains and losses are recognized when the
contracts expire, which is generally in the same period as the underlying
foreign currency denominated transaction. These contracts do not subject us to
significant market risk from exchange movement because they offset gains and
losses on the related foreign currency denominated transactions. At June 30,
1998, there were no significant amounts of open foreign currency forward
exchange contracts or related unrealized gains or losses. At June 30, 1999, we
had forward contracts to buy foreign currencies with a face value of
$9.0 million. These contracts matured on various dates between July 1999 and
January 2000 and had a negative fair market value of $632,000 at June 30, 1999.
At December 31, 1999, we had forward contracts to buy foreign currencies with a
face value $4.8 million. These contracts mature on various dates between
January 2000 and June 2000 and had a negative fair market value of $228,000 at
December 31, 1999. The
45
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) FINANCIAL INSTRUMENTS (CONTINUED)
counterparties to these contracts are major financial institutions. The risk of
loss to the Company in the event of non-performance by a counterparty is not
significant.
(14) SEGMENT INFORMATION
The following table presents certain operating segment information:
INSTRUMENTATION &
FLUID REGULATION PETROCHEMICAL CORPORATE CONSOLIDATED
PRODUCTS PRODUCTS ADJUSTMENTS TOTAL
----------------- ------------- ----------- ------------
(IN THOUSANDS)
SIX-MONTHS ENDED DECEMBER 31, 1999
Net Revenues............................. $ 84,148 $ 72,223 $ -- $156,371
Operating income (loss).................. 10,253 6,332 (2,739) 13,846
Identifiable assets...................... 212,328 141,773 12,984 367,085
Capital expenditures..................... 1,822 2,258 477 4,557
Depreciation and amortization............ 4,412 2,566 98 7,076
FISCAL YEAR ENDED JUNE 30, 1999
Net Revenues............................. $175,444 $147,633 $ -- $323,077
Operating income (loss).................. 24,844 10,323 (5,617) 29,550
Identifiable assets...................... 136,328 218,732 3,983 359,043
Capital expenditures..................... 6,592 2,907 -- 9,499
Depreciation and amortization............ 7,939 4,823 -- 12,762
FISCAL YEAR ENDED JUNE 30, 1998
Net Revenues............................. $110,332 $178,637 $ -- $288,969
Operating income (loss).................. 17,883 25,256 (4,948) 38,191
Identifiable assets...................... 97,245 153,186 3,046 253,477
Capital expenditures..................... 1,586 4,529 -- 6,115
Depreciation and amortization............ 3,611 4,233 -- 7,844
- ------------------------
(1) unaudited
Each operating segment is individually managed and has separate financial
results that are reviewed by the Company's chief operating decision-maker. Each
segment contains closely related products that are unique to the particular
segment. Refer to Note 1 for further discussion of the products included in each
segment.
In calculating profit from operations for individual operating segments,
substantial administrative expenses incurred at the operating level that are
common to more than one segment are allocated on a net revenues basis. Certain
headquarters expenses of an operational nature also are allocated to segments
and geographic areas.
46
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) SEGMENT INFORMATION (CONTINUED)
All intercompany transactions have been eliminated, and inter-segment
revenues are not significant.
FISCAL YEAR ENDED
SIX-MONTHS ENDED JUNE 30,
DECEMBER 31, -------------------
NET REVENUES BY GEOGRAPHIC AREA 1999 1999 1998
- ------------------------------- ---------------- -------- --------
(IN THOUSANDS)
United States........................................... $ 95,155 $189,193 $196,927
Italy................................................... 2,280 42,491 49,708
Canada.................................................. 16,094 27,830 23,783
Other................................................... 42,842 63,563 18,551
-------- -------- --------
Total revenues........................................ $156,371 $323,077 $288,969
======== ======== ========
JUNE 30,
DECEMBER 31, -------------------
LONG-LIVED ASSETS BY GEOGRAPHIC AREA 1999 1999 1998
- ------------------------------------ ------------ -------- --------
(IN THOUSANDS)
United States............................................... $64,193 $64,773 $43,916
Italy....................................................... 3,770 4,254 4,942
Canada...................................................... 2,439 2,671 1,154
Other....................................................... 4,752 4,984 5,970
------- ------- -------
Total long-lived assets................................... $75,154 $76,682 $55,982
======= ======= =======
47
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
As discussed in Note 3, we became an independent publicly owned company on
October 18, 1999 as a result of a spin-off from Watts. The following unaudited
pro forma financial information presents a summary of the consolidated results
of operations as if the Spin-off and related transactions had occurred at the
beginning of the periods presented (in thousands, except per share amounts):
SIX-MONTHS ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
Net income as reported...................................... $4,880 $6,840
Pro forma adjustments:
Incremental administrative expenses (a)................... (61) (126)
Incremental interest expenses (b)......................... (322) (519)
Income tax effect of pro forma adjustments (c)............ 153 258
------ ------
Net pro forma adjustments............................... (230) (387)
------ ------
Pro forma net income........................................ $4,650 $6,453
====== ======
Basic earnings per share: (d)
Before pro forma adjustments.............................. $ 0.37 $ 0.51
Impact of pro forma adjustments........................... (0.02) (0.03)
------ ------
Pro forma basic earnings per share...................... $ 0.35 $ 0.48
====== ======
Diluted earnings per share: (d)
Before pro forma adjustments.............................. $ 0.37 $ 0.51
Impact of pro forma adjustments........................... (0.02) (0.03)
------ ------
Pro forma diluted earnings per share.................... $ 0.35 $ 0.48
====== ======
- ------------------------
(a) To record estimated additional administrative expenses that would have been
incurred by CIRCOR as a publicly held, independent company. We would have
incurred additional compensation and related costs for employees to perform
functions that have been performed by Watts' corporate headquarters
(treasury, investor relations, regulatory compliance, risk management,
etc.). We would have also incurred additional amounts for corporate
governance costs, stock transfer agent costs, incremental professional fees
and other administrative activities.
(b) To record estimated incremental interest expense for estimated outstanding
borrowings under the CIRCOR credit facility and from the issuance of senior
unsecured notes. The borrowings under the credit facility and senior
unsecured notes are assumed to bear an annualized interest rate, including
amortization of related fees, of 7.3% for the six-month period ended
December 31, 1999, and 8.5% for the six-month period ended December 31, 1998
and the fiscal years ended June 30, 1999 and 1998. These interest rates
represent management's best estimate of the available rates for borrowings
under similar facilities. Net income as reported includes an allocation of
Watts' interest expense based on Watts' weighted average interest rate
applied to the average balance of investments by and advances to CIRCOR.
(c) To record the income tax benefit attributable to adjustments (a) and (b) at
a combined Federal and state tax rate of 40.0%.
48
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) PRO FORMA FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
(d) The number of shares used to calculate pro forma earnings per share for the
six-months ended December 31, 1999 assumes the spin-off transaction occurred
at July 1, 1999. The number of shares used to calculate pro forma earnings
per share for the six-months ended December 31, 1998 is based on the
weighted average common stock and common stock equivalents outstanding used
by Watts to determine earnings per share for that period, adjusted in
accordance with the distribution ratio (see Note 3).
Basic net income per common share is calculated by dividing net income by
the weighted average number of common shares outstanding. The calculation of
diluted earnings per share assumes the conversion of all dilutive securities
(see Note 10).
Pro forma net income and number of shares used to compute pro forma net
earnings per share basic and assuming full dilution, are reconciled below
(in thousands, except per share amounts):
SIX-MONTHS ENDED DECEMBER 31,
---------------------------------------------------------------------
1999 1998
--------------------------------- ---------------------------------
PRO FORMA PER SHARE PRO FORMA PER SHARE
NET INCOME SHARES AMOUNT NET INCOME SHARES AMOUNT
---------- -------- --------- ---------- -------- ---------
Basic EPS.................................. $4,650 13,229 $0.35 $6,453 13,468 $0.48
Dilutive securities, principally common
stock options............................ -- 86 -- -- 52 --
------ ------ ----- ------ ------ -----
Diluted EPS................................ $4,650 13,315 $0.35 $6,453 13,520 $0.48
====== ====== ===== ====== ====== =====
(16) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
SIX-MONTHS ENDED DECEMBER 31, 1999
Net revenues.......................................... $77,713 $78,658 N/A N/A
Gross profit.......................................... 23,139 25,403 N/A N/A
Net income............................................ 1,688 3,192 N/A N/A
Pro forma earnings per share:
Basic............................................... 0.11 0.24 N/A N/A
Diluted............................................. 0.11 0.24 N/A N/A
Dividends per share................................... -- -- N/A N/A
FISCAL YEAR ENDED JUNE 30, 1999
Net revenues.......................................... $80,997 $85,089 $79,234 $77,757
Gross profit.......................................... 25,830 26,563 25,867 26,466
Net income............................................ 3,706 3,134 2,493 3,177
FISCAL YEAR ENDED JUNE 30, 1998
Net revenues.......................................... $67,891 $67,624 $75,719 $77,735
Gross profit.......................................... 22,805 23,274 25,267 23,311
Net income............................................ 5,589 5,291 6,077 5,468
49
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
CIRCOR INTERNATIONAL, INC.
(IN THOUSANDS)
- --------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
-----------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE
BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS AT END
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE (1) OF PERIOD
- ----------------------------------------------------------------------------------------------------------
Six-months ended December 31, 1999
Deducted from asset account:
Allowance for doubtful accounts........ $2,949 $483 -- $749 $2,683
Fiscal year ended June 30, 1999
Deducted from asset account:
Allowance for doubtful accounts........ $2,092 $106 $1,259 (2) $508 $2,949
Fiscal year ended June 30, 1998
Deducted from asset account:
Allowance for doubtful accounts........ $1,709 $493 $ 208 (2) $318 $2,092
- ------------------------
(1) Uncollectible accounts written off, net of recoveries.
(2) Balance acquired in connection with acquisition of SSI Equipment Inc. and
Hoke, Inc. in 1999, and Telford Valve and Specialties, Inc. in 1998.
50