Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-14962
--------------------------
CIRCOR INTERNATIONAL, INC.
(A Delaware Corporation)
I.R.S. Identification No. 04-3477276
c/o Circor, Inc.
Suite 290
35 Corporate Drive, Burlington, MA 01803-4244
Telephone: (781) 270-1200
Securities registered pursuant to Section 12 (b) of the Act:
Common Stock, par value $.01 per share
Preferred Stock Purchase Rights
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 [_]
As of July 31, 2002, there were 15,084,518 shares of the Registrant's
Common Stock, par value $0.01, outstanding.
================================================================================
CIRCOR INTERNATIONAL, INC.
TABLE OF CONTENTS
-----------------
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2002 (unaudited) and
December 31, 2001 3
Consolidated Statements of Operations for the three months and six
months ended June 30, 2002 (unaudited) and 2001 (unaudited) 4
Consolidated Statements of Cash Flows for the six months ended
June 30, 2002 (unaudited) and 2001 (unaudited) 5
Notes to Consolidated Financial Statements 6-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-19
Item 3. Qualitative and Quantitative Disclosures About Market Risk 19-20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20-21
Item 2. Changes in Securities and Use of Proceeds 21-22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 22-23
Signatures 24
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRCOR INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30, December 31,
2002 2001
--------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................. $ 67,555 $ 57,010
Trade accounts receivable, less allowance for doubtful accounts of
$2,374 and $2,637, respectively .......................................... 54,435 58,855
Inventories ............................................................... 111,250 99,879
Prepaid expenses and other current assets ................................. 4,967 4,450
Deferred income taxes ..................................................... 6,043 5,998
-------- --------
Total Current Assets ................................................... 244,250 226,192
PROPERTY, PLANT AND EQUIPMENT, NET ............................................. 64,278 66,973
OTHER ASSETS:
Goodwill, net of accumulated amortization of $17,040 ....................... 91,445 89,833
Other assets ............................................................... 3,396 3,123
-------- --------
TOTAL ASSETS ................................................................... $403,369 $386,121
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ........................................................... $ 33,415 $ 27,593
Accrued expenses and other current liabilities ............................. 14,802 12,365
Accrued compensation and benefits .......................................... 4,601 5,853
Income taxes payable ....................................................... 3,927 1,782
Notes payable and current portion of long-term debt ........................ 17,472 19,844
-------- --------
Total Current Liabilities .............................................. 74,217 67,437
LONG-TERM DEBT, NET OF CURRENT PORTION ......................................... 76,936 77,818
DEFERRED INCOME TAXES .......................................................... 2,651 2,576
OTHER NONCURRENT LIABILITIES ................................................... 8,719 9,794
MINORITY INTEREST .............................................................. 4,916 6,056
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 1,000,000 shares authorized; no shares
issued and outstanding ................................................... - -
Common stock, $0.01 par value; 29,000,000 shares authorized;
15,072,971 and 14,861,890 issued and outstanding at June 30, 2002
and December 31, 2001, respectively ...................................... 151 149
Additional paid-in capital ................................................. 203,185 200,559
Retained earnings .......................................................... 32,280 25,878
Accumulated other comprehensive income (loss) .............................. 314 (4,146)
-------- --------
Total Shareholders' Equity ............................................. 235,930 222,440
-------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..................................... $403,369 $386,121
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
3
CIRCOR INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
2002 2001 2002 2001
---------- ---------- --------- ---------
Net revenues ........................................... $82,541 $83,390 $162,003 $171,336
Cost of revenues ....................................... 57,918 57,240 112,838 119,115
------- ------- -------- --------
GROSS PROFIT ........................................ 24,623 26,150 49,165 52,221
Selling, general and administrative expenses ........... 17,032 17,133 33,521 34,260
Goodwill amortization expense .......................... - 631 - 1,268
Special charges ........................................ 292 - 745 -
------- ------- -------- --------
OPERATING INCOME .................................... 7,299 8,386 14,899 16,693
------- ------- -------- --------
Other (income) expense:
Interest income ..................................... (340) (257) (573) (344)
Interest expense .................................... 2,021 1,901 3,995 3,957
Other (income) expense, net ......................... (382) 360 (280) 493
------- ------- -------- --------
Total other expense ............................... 1,299 2,004 3,142 4,106
------- ------- -------- --------
INCOME BEFORE INCOME TAXES ............................. 6,000 6,382 11,757 12,587
Provision for income taxes ............................. 2,161 2,553 4,233 5,035
------- ------- -------- --------
NET INCOME .......................................... $ 3,839 $ 3,829 $ 7,524 $ 7,552
======= ======= ======== ========
Earnings per common share:
Basic ............................................... $0.26 $0.26 $0.50 $0.53
Diluted ............................................. $0.24 $0.25 $0.48 $0.52
Weighted average number of common shares outstanding:
Basic ............................................... 15,040 14,816 14,959 14,124
Diluted ............................................. 15,732 15,498 15,621 14,663
The accompanying notes are an integral part of these
consolidated financial statements.
4
CIRCOR INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30,
---------------------------
2002 2001
----------- ---------
OPERATING ACTIVITIES
Net income ........................................................................ $ 7,524 $ 7,552
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation ................................................................... 5,417 4,791
Amortization ................................................................... 158 1,434
Loss on write-off of property, plant and equipment ............................. 325 -
Deferred income taxes .......................................................... 76 -
(Gain) loss on disposal of property, plant and equipment ....................... 19 (33)
Changes in operating assets and liabilities, net of effects from business
acquisitions:
Trade accounts receivable ................................................... 6,339 (948)
Inventories ................................................................. (8,913) (452)
Prepaid expenses and other assets ........................................... (722) 185
Accounts payable, accrued expenses and other liabilities .................... 6,453 (1,705)
------- -------
Net cash provided by operating activities ......................................... 16,676 10,824
------- -------
INVESTING ACTIVITIES
Additions to property, plant and equipment ........................................ (1,944) (2,195)
Proceeds from the disposal of property, plant and equipment ....................... 20 46
Increase in other assets .......................................................... (20) -
Business acquisitions, net of cash acquired ....................................... (2,328) (9,302)
Purchase price adjustment on previous acquisitions ................................ 500 -
------- -------
Net cash used in investing activities ............................................. (3,772) (11,451)
------- -------
FINANCING ACTIVITIES
Proceeds from long-term borrowings ................................................ 440 15,223
Payments of long-term debt ........................................................ (3,990) (14,828)
Proceeds from the issuance of common stock, net of issuance costs ................. - 18,698
Dividends paid .................................................................... (1,122) (1,057)
Proceeds from the exercise of stock options ....................................... 1,755 12
Conversion of restricted stock units .............................................. 3 -
------- -------
Net cash provided by (used in) financing activities ............................... (2,914) 18,048
------- -------
Effect of exchange rate changes on cash and cash equivalents ...................... 555 47
------- -------
INCREASE IN CASH AND CASH EQUIVALENTS ............................................. 10,545 17,468
Cash and cash equivalents at beginning of year .................................... 57,010 8,192
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................................ $67,555 $25,660
======= =======
Supplemental Cash Flow Information:
Cash paid during the year for:
Income taxes .................................................................... $ 1,538 $ 3,840
Interest expense ................................................................ $ 3,847 $ 3,927
The accompanying notes are an integral part of these
consolidated financial statements.
5
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited, consolidated financial statements have been
prepared according to the rules and regulations of the United States Securities
and Exchange Commission ("SEC") and, in the opinion of management, reflect all
adjustments, which include normal recurring adjustments, necessary for a fair
presentation of CIRCOR International, Inc.'s consolidated balance sheets,
consolidated statements of operations and consolidated statements of cash flows
for the periods presented. We prepare our interim financial information using
the same accounting principles as we use for our annual audited financial
statements. Certain information and note disclosures normally included in the
financial statements have been condensed or omitted in accordance with
prescribed SEC rules. We believe that the disclosures made in our consolidated
financial statements and the accompanying notes are adequate to make the
information presented not misleading.
The consolidated balance sheet at December 31, 2001 is as included in
our audited financial statements at that date. Our accounting policies are
described in the notes to our December 31, 2001 financial statements, which were
included in our Annual Report filed on Form 10-K. We recommend that the
financial statements included in this Report be read in conjunction with the
financial statements and notes included in our Annual Report for the year ended
December 31, 2001.
Certain prior period financial statements have been reclassified to
conform to currently reported presentations.
(2) New Accounting Standards
We adopted Financial Accounting Standard Board ("FASB") Statement No.
142, "Goodwill and Other Intangible Assets," on January 1, 2002. See Note 7 to
these financial statements for further information concerning our adoption of
Statement No. 142.
We also adopted Statement No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," on January 1, 2002. Statement No. 144 refines
existing impairment accounting guidance and extends the use of accounting for
discontinued operations to both reporting segments and distinguishable
components thereof. Statement No. 144 also eliminates the existing exception to
consolidation of a subsidiary for which control is likely to be temporary. The
adoption of Statement No. 144 did not have any impact on our consolidated
results of operations or financial position.
In April 2002, FASB Statement No. 145, "Rescission of FASB Statements
Nos. 4, 44 and 64, Amendment of Statement No. 13, and Technical Corrections,'
was issued effective for fiscal years beginning May 15, 2002 or later. Statement
No. 145 rescinds Statement No. 4, "Reporting Gains and Losses from the
Extinguishment of Debt," Statement No. 44, "Accounting for Intangible Assets of
Motor Carriers" and Statement No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements." Statement No. 145 also amends Statement No. 13,
"Accounting For Leases," to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and for certain transactions that
have economic effects that are similar to sale-leaseback transactions. This
statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meaning or describe their applicability
under changed conditions. We adopted the provisions of Statement No. 145
effective April 1, 2002, and the adoption had no impact on our reported results
of operations or financial position.
In July 2002, Statement No. 146, "Accounting for Costs Associated With
Exit or Disposal Activities," was issued. Statement No. 146 requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
This statement is effective for fiscal years beginning after December 31, 2002.
We do not believe the impact of adopting Statement No. 146 will have a material
impact on our reported results of operation or financial position.
6
(3) Inventories
Inventories consist of the following (In thousands):
June 30, 2002 December 31, 2001
------------- -----------------
(Unaudited)
Raw materials .................................................. $ 45,141 $42,829
Work in process ................................................ 31,054 26,111
Finished goods ................................................. 35,055 30,939
-------- -------
$111,250 $99,879
======== =======
(4) Segment Information
The following table presents certain operating segment information
(Unaudited, in thousands):
Instrumentation &
Thermal Fluid
Controls Petrochemical Consolidated
Three Months Ended Products Products Corporate Total
------------------ -------- -------- --------- -----
June 30, 2002
- -------------
Net Revenues ............................................. $ 47,966 $ 34,575 $ - $ 82,541
Operating income (loss) .................................. 8,138 1,261 (2,100) 7,299
June 30, 2001
- -------------
Net Revenues ............................................. $ 46,768 $ 36,622 $ - $ 83,390
Operating income (loss) .................................. 7,738 2,682 (2,034) 8,386
Goodwill amortization expense ............................ 534 97 - 631
Six Months Ended
----------------
June 30, 2002
- -------------
Net Revenues ............................................. $ 94,383 $ 67,620 $ - $162,003
Operating income (loss) .................................. 15,745 3,094 (3,940) 14,899
June 30, 2001
- -------------
Net Revenues ............................................. $ 94,733 $ 76,603 $ - $171,336
Operating income (loss) .................................. 15,736 4,826 (3,869) 16,693
Goodwill amortization expense ............................ 1,071 197 - 1,268
Identifiable Assets
-------------------
June 30, 2002 ............................................ $280,578 $167,557 $(44,766) $403,369
December 31, 2001 ........................................ 268,293 158,633 (40,805) 386,121
In March 2002, we transferred SSI Equipment Inc. ("SSI") from the
Petrochemical Products segment to the Instrumentation and Thermal Fluid Controls
Products segment. We believe that this change better reflects the products and
markets that SSI serves. Prior periods have been restated and net revenues,
operating income, and identifiable assets are not materially different with this
reclassification. Corporate operating expenses include management and other
staffing costs for compensation, corporate development, benefits administration,
facilities and equipment costs, travel, corporate governance, risk management,
treasury, investor relations, regulatory compliance, stock transfer agent costs,
and certain other professional fees and administrative expenses.
(5) Special Charges
Special charges of $0.3 million were incurred during the three months
ended June 30, 2002. The charges consisted primarily of $0.2 million of
severance costs and $0.1 million of exit related costs. Special charges of $0.7
million were incurred during the six months ended June 30, 2002. These charges
consisted of $0.3 million of manufacturing equipment write offs, $0.2 million of
severance costs and $0.2 million of exit costs principally related to leased
facilities to be closed. As a result of these actions, 16 employee positions
were terminated. All costs recognized were for the closure, consolidation and
reorganization of manufacturing and distribution facilities in the Petrochemical
Products segment. There were no special charges incurred during the three or six
months ended June 30, 2001. The
7
portion of the accrued liabilities for lease termination costs to be paid
subsequent to June 30, 2002 is less than $0.2 million.
(6) Earnings Per Common Share (Unaudited, in thousands, except per share
amounts):
Three Months Ended June 30,
----------------------------------------------------------------
2002 2001
----------------------------- -----------------------------
Per Per
Net Share Net Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic EPS ........................................ $3,839 15,040 $0.26 $3,829 14,816 $0.26
Dilutive securities, principally common stock
options ...................................... - 692 (0.02) - 682 (0.01)
------ ------ ----- ------ ------ -----
Diluted EPS ...................................... $3,839 15,732 $0.24 $3,829 15,498 $0.25
====== ====== ===== ====== ====== =====
Six Months Ended June 30,
----------------------------------------------------------------
2002 2001
----------------------------- -----------------------------
Per Per
Net Share Net Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic EPS ........................................ $7,524 14,959 $0.50 $7,552 14,124 $0.53
Dilutive securities, principally common stock
options ...................................... - 662 (0.02) - 539 (0.01)
------ ------ ----- ------ ------ -----
Diluted EPS ...................................... $7,524 15,621 $0.48 $7,552 14,663 $0.52
====== ====== ===== ====== ====== =====
All options outstanding are included in the computation of earnings per
share for the three months and six months ended June 30, 2002 and 2001 because
the exercise prices of these options were less than the average market price of
the common shares during the respective periods.
(7) Goodwill and Intangible Assets
We adopted Statement No. 142, "Goodwill and Other Intangible Assets,"
on January 1, 2002. Statement No. 142 addresses the financial accounting and
reporting standards for the acquisition of intangible assets outside of a
business combination and for goodwill and other intangible assets subsequent to
their acquisition. This accounting standard requires that existing and future
goodwill and indefinite-lived intangible assets no longer be amortized; rather
they are written-down, as needed, based upon impairment. An impairment test is
required on an annual basis, or more frequently if circumstances warrant. The
provisions of the standard also require the completion of the initial
transitional impairment test as of the beginning of the year of adoption, with
any impairments identified treated as a cumulative effect of a change in
accounting principle. Intangible assets that have finite useful lives continue
to be amortized over their useful lives.
In accordance with Statement No. 142, we completed a transitional
goodwill impairment test by comparing the fair value of our reporting units as
of January 1, 2002 to their carrying values. We determined that the fair value
of the reporting units' goodwill exceeded their carrying value and that no
impairment existed.
8
Goodwill by segment, net of accumulated amortization, as of June 30,
2002 is as follows (Unaudited, in thousands):
Instrumentation &
Thermal Fluid
Controls Petrochemical Consolidated
Products Products Total
-------- -------- -----
Goodwill as of December 31, 2001 ...................................... $77,905 $11,928 $89,833
Business acquisitions (see Note 10) ................................ 1,206 - 1,206
Purchase price adjustment of previous acquisition .................. (500) - (500)
Currency translation adjustments ................................... 788 118 906
------- ------- -------
Goodwill as of June 30, 2002 .......................................... $79,399 $12,046 $91,445
======= ======= =======
In accordance with Statement No. 142, goodwill associated with
acquisitions consummated after June 30, 2001 is not amortized and the
amortization of goodwill from business combinations consummated before June 30,
2001 ceased on January 1, 2002. The impact of discontinuing the amortization of
goodwill on net income and on basic and diluted earnings per share for the three
and six months ended June 30, 2001 would have been $0.6 million and $1.3
million, or $0.04 and $0.09 per share on both a basic and fully diluted basis,
respectively, as presented below (Unaudited, in thousands, except per share
amounts):
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- -------------------------
2002 2001 2002 2001
-------------- ------------ ------------ ---------
Net income ........................................ $3,839 $3,829 $7,524 $7,552
Add back: Goodwill amortization expense .......... - 631 - 1,268
------ ------ ------ ------
Adjusted net income .......................... $3,839 $4,460 $7,524 $8,820
====== ====== ====== ======
Basic Earnings per Share:
Net income ........................................ $0.26 $0.26 $0.50 $0.53
Goodwill amortization expense ..................... - 0.04 - 0.09
------ ------ ------ ------
Adjusted net income .......................... $0.26 $0.30 $0.50 $0.62
====== ====== ====== ======
Diluted earnings per share:
Net income ........................................ $0.24 $0.25 $0.48 $0.52
Goodwill amortization expense ..................... - 0.04 - 0.09
------ ------ ------ ------
Adjusted net income .......................... $0.24 $0.29 $0.48 $0.61
====== ====== ====== ======
The table below presents gross intangible assets and the related
accumulated amortization as of June 30, 2002 (Unaudited, in thousands):
Gross
Carrying Accumulated
Amount Amortization
------ ------------
Patents ........................................... $2,725 $(2,398)
Trademarks and trade names ........................ 1,613 (943)
Land use rights ................................... 1,181 (223)
Other ............................................. 318 (317)
------ -------
Total ........................................ $5,837 $(3,881)
------ -------
Net carrying value of intangible assets ........... $1,956
======
The table below presents estimated amortization expense for intangible
assets recorded as of January 1, 2002 (Unaudited, in thousands):
After
2002 2003 2004 2005 2006 2006
---- ---- ---- ---- ---- -----
Estimated amortization expense ...................... $303 $288 $148 $135 $108 $1,112
9
(8) Financial Instruments
As of January 1, 2001, we adopted FASB Statement No. 133. "Accounting
for Derivative Instruments and Hedging Activities" as amended by Statement No.
137 and Statement No. 138. Statement No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and hedging activities. It requires
that all derivative instruments be recorded on the balance sheet at fair value
as assets or liabilities. The adoption of Statement No. 133 did not have a
material effect on assets, liabilities, accumulated comprehensive income or net
income.
In the normal course of business, we manage risk associated with
foreign exchange rates through a variety of strategies, including the use of
hedging transactions, executed in accordance with our policies. As a matter of
policy, we ordinarily do not use derivative instruments unless there is an
underlying exposure. Any change in the value of our derivative instruments would
be substantially offset by an opposite change in the underlying hedged items. We
do not use derivative instruments for speculative trading purposes.
Accounting Policies
Using qualifying criteria defined in Statement No. 133, derivative
instruments are designed and accounted for as either a hedge of a recognized
asset or liability (fair value hedge) or a hedge of a forecasted transaction
(cash flow hedge). For a fair value hedge, both the effective and ineffective
portions of the change in fair value of the derivative instrument, along with an
adjustment to the carrying amount of the hedged item for fair value changes
attributable to the hedged risk, are recognized in earnings. For a cash flow
hedge, changes in the fair value of the derivative instrument that are highly
effective are deferred in accumulated other comprehensive income or loss until
the underlying hedged item is recognized in earnings. If the effective portion
of fair value or cash flow hedges were to cease to qualify for hedge accounting,
or to be terminated, it would continue to be carried on the balance sheet at
fair value until settled; however, hedge accounting would be discontinued
prospectively. If forecast transactions were no longer probable of occurring,
amounts previously deferred in accumulated other comprehensive income or loss
would be recognized immediately in earnings.
Foreign Currency Risk
We use forward contracts to manage the currency risk related to
business transactions denominated in foreign currencies. To the extent the
underlying transactions hedged are completed, the contracts do not subject us to
significant risk from exchange rate movements because they offset gains and
losses on the related foreign currency denominated transactions. Our foreign
currency forward contracts have not been designated as hedging instruments and,
therefore, did not qualify for fair value or cash flow hedge treatment under the
criteria of Statement No. 133 for the six months ended June 30, 2002. Therefore,
the unrealized gains and losses on our contracts have been recognized as a
component of other expense in the consolidated statements of operations. We
recorded a net gain of less than $0.4 million for the three months ended June
30, 2002 and $0.3 million for the six months ended June 30, 2002. As of June 30,
2002, we had forward contracts to buy and sell foreign currencies with a fair
value of $5.8 million. These contracts mature on various dates between July 2002
and December 2002.
(9) Comprehensive Income
Our other comprehensive income consists solely of cumulative
translation adjustments. We do not provide U.S. income taxes on foreign currency
translation adjustments since we do not provide for such taxes on undistributed
earnings of foreign subsidiaries. Comprehensive income for the three and six
months ended June 30, 2002 and 2001 was as follows (Unaudited, in thousands):
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ----------------------------
2002 2001 2002 2001
---------- --------- -------- -------
Net income ........................................ $3,839 $3,829 $ 7,524 $7,552
Foreign currency translation adjustments .......... 4,734 112 4,460 (1,726)
------ ------ ------- ------
Total comprehensive income ..................... $8,573 $3,941 $11,984 $5,826
====== ====== ======= ======
10
(10) Business Acquisitions
On June 25, 2001, we acquired a 75% interest in Regeltechnik
Kornwestheim GmbH and affiliates ("RTK"), a German closed corporation. RTK
manufactures and sells control valves, regulators, actuators and related
instrumentation products primarily for steam and fluid process applications in
the HVAC, industrial, food, beverage and pharmaceutical markets. On February 5,
2002, the minority interest shareholder of RTK exercised the put option granted
to him in the purchase agreement, thereby electing to sell us the remaining 25%
interest in RTK. Accordingly, during March 2002 we paid cash of $2.4 million for
the purchase of this 25% interest in RTK, resulting in $1.3 million of
additional goodwill.
The acquisition was accounted for as a business purchase combination.
The aggregate purchase price for this acquisition was $13.7 million, consisting
of cash and the assumption of $4.2 million of long-term debt. The excess of the
purchase price over the fair value of the net identifiable assets of $5.2
million acquired has been recorded as goodwill. The results of operations for
this business have previously been included in our consolidated financial
statements from the date our initial 75% ownership share was acquired in June
2001. The goodwill that resulted from this acquisition no longer is amortized in
determining net income in accordance with our January 1, 2002 adoption of
Statement No. 142.
During April 2002, we received $0.1 million in cash resulting from a
balance sheet true-up adjustment relating to our June 2001 acquisition of
Societe Alsacienne Regulaves Thermiques von Rohr, S.A. ("SART"), a French
limited liability company. The aggregate purchase price for SART was $3.1
million, consisting of cash and the assumption of $0.3 million of long-term
debt. The excess of the purchase price over the fair value of the net
identifiable assets of $0.6 million acquired has been recorded as goodwill.
Also, during June 2002, we received $0.5 million in cash representing a
purchase price adjustment relating to the resolution of indemnification claims
that were previously made against the former owners of Leslie Controls, Inc. The
refunded cash purchase price was accounted for as a reduction of recorded
goodwill for this transaction.
(11) Contingencies and Environmental Remediation
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 under an
excess umbrella liability insurance policy. We also maintain a products
liability policy with aggregate limits of $200 million for the aviation products
produced by our worldwide operations.
We believe this coverage to be consistent 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.
Contingencies
Like many other manufacturers of fluid control products, we have been
named as defendants in a growing number of product liability actions brought on
behalf of individuals who seek compensation for their alleged exposure to
airborne asbestos fibers. In particular, Leslie Controls, Inc. ("Leslie"),
Spence Engineering Company, Inc. ("Spence"), and Hoke, Inc. ("Hoke"), all
subsidiaries of CIRCOR, collectively have been named as defendants or
third-party defendants in asbestos related claims brought on behalf of
approximately 5,000 plaintiffs against anywhere from 50 to 400 defendants. In
some instances, CIRCOR also has been named as successor in interest to one or
more of these subsidiaries. The cases brought on behalf of the vast majority of
claimants seek unspecified compensatory and punitive damages against all
defendants in the aggregate. However, with respect to the complaints filed on
behalf of approximately 122 plaintiffs in New York, each plaintiff seeks $5
million compensatory damages and $5 million punitive damages against the
aggregate of defendants under each of six causes of action. Similarly, with
respect to the complaints filed in California on behalf of nine claimants, each
plaintiff seeks approximately $400,000 compensatory damages and $2.5 million
punitive damages against the aggregate of defendants.
We believe that any components containing asbestos formerly used in
Leslie, Spence and Hoke products were entirely internal to the product and would
not give rise to ambient asbestos dust during normal operation. As such, we
11
believe that we have minimal, if any, liability with respect to the vast
majority of these cases and that these cases, in the aggregate, will not have a
material adverse effect on our financial condition, results of operations or
cash flows. However, due to the nature and number of variables associated with
asbestos related claims, such as the rate at which new claims may be filed; the
availability of insurance policies to continue to recover certain of our costs
relating to the defense and payment of these claims; the impact of bankruptcies
of other companies currently or historically defending asbestos claims; the
uncertainties surrounding the litigation process from jurisdiction to
jurisdiction and from case to case; the impact of potential changes in
legislative or judicial standards; the type and severity of the disease alleged
to be suffered by each claimant; and increases in the expense of medical
treatment, we are unable to reliably estimate the ultimate costs of these
claims.
As we previously have disclosed, we learned on July 12, 2000 that the
United States Customs Service ("Customs") had commenced an investigation to
determine whether our subsidiary KF Industries, Inc. ("KF") was then in
compliance with country of origin marking requirements on those valves that KF
imports from sources in the People's Republic of China including our joint
venture there. We continue to cooperate with Customs and, to date, we have not
received any formal notification from Customs regarding the extent, if any, to
which KF's country of origin marking practices may have been deficient. We
continue to believe that such marking practices have been in substantial
compliance with Customs' regulations. However, if the Customs investigation were
to reveal that violations of the Customs laws had occurred, KF could be
subjected to civil fines, forfeitures and (if such violations were determined to
be intentional) criminal penalties, which could be material.
Environmental Remediation
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 that is not material to us. With
respect to the Combe Landfill, we have settled both the Federal Government's
claim, and the State of New Jersey's claim, for an amount that is immaterial to
us. 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 the prior owners of the affected subsidiaries. We also have
been identified as a PRP with respect to the Lightman Drum Company site in New
Jersey. But, in this instance we also have the right to indemnification from the
former owners of the affected subsidiary. Based on currently available
information, we believe that our share of clean-up costs at these sites will not
be material.
We have reviewed all of our pending judicial and legal proceedings,
reasonably anticipated costs and expenses in connection with such proceedings,
and availability and limits of our insurance coverage, and we have established
reserves which we believe are appropriate in light of those outcomes that we
believe are probable and estimable.
In the ordinary course of business, we issued standby letters of credit
totaling $6.0 million at June 30, 2002. We do not anticipate incurring losses
from these letters of credit.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This 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 "may," "hope," "will," "should," "expect,"
"plan," "anticipate," "intend," "believe," "estimate," "predict," "potential,"
"continue," 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. We believe that it is important to communicate our
future expectations to our stockholders, and we, therefore, make forward-looking
statements in reliance upon the safe harbor provisions of the Act. However,
there may be events in the future that we are not able to accurately predict or
control, and our actual results may differ materially from the expectations we
describe in our forward looking statements. Forward-looking statements involve
known and unknown risks,
12
uncertainties and other factors, which may cause our actual results, performance
or achievements to differ materially from anticipated future results,
performance or achievements expressed or implied by such forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, the cyclicality and highly competitive nature of some of
our end markets which can affect the overall demand for and pricing of our
products, changes in the price of and demand for oil and gas in both domestic
and international markets, variability of raw material and component pricing,
fluctuations in foreign currency exchange rates, our ability to continue
operating our manufacturing facilities at efficient levels and to successfully
implement our acquisition strategy, the ultimate outcome of various judicial and
legal proceedings, the impact of present or future import-export laws, the
potential impairment of recorded goodwill, and the uncertain continuing impact
on economic and financial conditions in the United States and around the world
as a result of the September 11th terrorist attacks, and related matters. We
advise you to read further about certain of these and other risk factors set
forth under the caption "Risk Factors" in our registration statement on Form
S-3/A filed on June 6, 2002. We undertake no obligation to publicly update or
revise any forward-looking statement, whether as a result of new information,
future events or otherwise.
Results of Operations for the Three Months Ended June 30, 2002 Compared to the
Three Months Ended June 30, 2001.
The following tables set forth the results of operations, percentage of
net revenue and the period-to-period percentage change in certain financial data
for the three months ended June 30, 2002 and 2001:
Three Months Ended June 30,
-------------------------------------------
2002 2001 % Change
-------- -------- --------
(Dollars in thousands)
Net revenues ................................................. $82,541 100.0% $83,390 100.0% (1.0)%
Cost of revenues ............................................. 57,918 70.2 57,240 68.6 1.2
------- ----- ------- -----
Gross profit ............................................... 24,623 29.8 26,150 31.4 (5.8)
Selling, general and administrative expenses ................. 17,032 20.6 17,133 20.5 (0.6)
Goodwill amortization expense ................................ - - 631 0.8 (100.0)
Special charges .............................................. 292 0.4 - - n/a
------- ----- ------- -----
Operating income ........................................... 7,299 8.8 8,386 10.1 (13.0)
Other (income) expense:
Interest expense, net ...................................... 1,681 2.0 1,644 2.0 2.3
Other (income) expense, net ................................ (382) (0.5) 360 0.4 (206.1)
------- ----- ------- -----
Income before income taxes ................................... 6,000 7.3 6,382 7.7 (6.0)
Provision for income taxes ................................... 2,161 2.6 2,553 3.1 (15.4)
------- ----- ------- -----
Net Income ................................................. $ 3,839 4.7% $ 3,829 4.6% 0.3%
======= ===== ======= =====
Net revenues for the three months ended June 30, 2002 decreased by $0.9
million, or 1.0%, to $82.5 million from $83.4 million for the three months ended
June 30, 2001. The decrease in net revenues for the three months ended June 30,
2002 was attributable to the following:
Total Foreign
Segment 2002 2001 Change Acquisitions Operations Exchange
------- ---- ---- ------ ------------ ---------- --------
(In thousands)
Instrumentation & Thermal Fluid Controls .... $47,966 $46,768 $1,198 $4,269 $(3,399) $ 328
Petrochemical ............................... 34,575 36,622 (2,047) - (2,984) 937
-------- ------- ------ ------ ------- ------
Total ...................................... $82,541 $83,390 $ (849) $4,269 $(6,383) $1,265
======= ======= ====== ====== ======= ======
The Instrumentation and Thermal Fluid Controls Products segment
accounted for 58.1% of net revenues for the three months ended June 30, 2002
compared to 56.1% for the three months ended June 30, 2001. The Petrochemical
Products segment accounted for 41.9% of net revenues for the three months ended
June 30, 2002 compared to 43.9% for the three months ended June 30, 2001.
Instrumentation and Thermal Fluid Controls Products revenues increased
$1.2 million, or 2.6%. The net increase was due to $4.3 million of incremental
revenue from RTK and SART that were acquired in June 2001; a $0.3
13
million increase in revenues resulting from changes in exchange rates affecting
our European business units; partially offset by a $3.4 million reduction in
instrumentation product revenues, primarily due to weak market conditions and
reduced sales volume in the domestic commercial aerospace and general industrial
markets. The net $2.0 million decrease in Petrochemical Products revenues, or
5.6%, was the result of $6.3 million in lower North American revenues related to
reduced oil and gas drilling, chemical processing, and general industrial
activity; a $0.3 million reduction in revenues from Chinese customers; partially
offset by a $3.7 million increase from our Italian subsidiary due to higher
volume from international oil and gas projects; and a $0.9 million increase in
revenues resulting from changes in exchange rates which affected our Canadian
and Italian operations.
Gross profit decreased $1.5 million, or 5.8%, to $24.6 million for the
three months ended June 30, 2002 from $26.2 million for the three months ended
June 30, 2001. Gross margin decreased to 29.8% for the three months ended June
30, 2002 compared to 31.4% for the three months ended June 30, 2001. Gross
profit from the Instrumentation and Thermal Fluid Controls Products segment
increased $0.1 million. The net increase consisted of: a $1.4 million increase
in gross profit from the RTK and SART businesses acquired in June 2001; a $0.1
million increase due to the effect of exchange rates in Europe; partially offset
by a $1.4 million net reduction due to: lower product sales in aerospace and
general instrumentation markets; higher insurance costs, offset by operational
manufacturing cost reductions. Gross profit for the Petrochemical Products
segment decreased $1.6 million for the three months ended June 30, 2002 compared
to the three months ended June 30, 2001. Gross profit decreased by $1.8 million
as a result of lower sales volume, lower margins on small oil and gas projects,
and short-term price reductions to discourage new competitors and sell targeted
inventory items. This decrease was partially offset by a $0.2 million increase
in revenues resulting from favorable foreign exchange rate changes.
Selling, general and administrative expenses decreased $0.1 million, or
0.6%, to $17.0 million for the three months ended June 30, 2002 from $17.1
million for the three months ended June 30, 2001. Selling, general and
administrative expenses for the Instrumentation and Thermal Fluid Controls
Products segment increased by $0.3 million. This net increase was the result of:
$0.8 million of additional expenses related to the acquired RTK and SART
operations; partially offset by a $0.4 million reduction in expenses, primarily
from lower variable selling expenses. Favorable foreign exchange rates resulted
in a further expense reduction of $0.1 million. Selling, general and
administrative expenses for the Petrochemical Products segment decreased $0.5
million. This decrease was principally due to $0.4 million of lower variable
selling expenses and $0.1 million due to favorable exchange rate changes.
Corporate expenses increased by $0.1 million, resulting from higher corporate
development expenses that were partially offset by lower compensation and fringe
benefit costs.
Goodwill amortization expense was not recorded for the three months
ended June 30, 2002 compared with the $0.6 million recognized for the three
months ended June 30, 2001. Goodwill amortization expense for the three months
ended June 30, 2001 consisted of $0.5 million for the Instrumentation and
Thermal Fluid Controls Products segment and $0.1 million for the Petrochemical
Products segment. The decrease in goodwill amortization expense is the result of
our adoption of Statement No. 142 "Goodwill and Other Intangible Assets," which
eliminated the amortization of acquisition goodwill, effective January 1, 2002.
During the three months ended June 30, 2002, special charges of $0.3
million were incurred in the Petrochemical Products segment. These expenses
included $0.2 million of severance costs and a $0.1 million of exit related
costs. There were no special charges incurred during the three months ended June
30, 2001. These charges resulted from the decisions made during first quarter of
2002 to close, consolidate and reorganize certain facilities in the
Petrochemical Products segment.
The change in operating income for the three months ended June 30, 2002
compared to the three months ended June 2001 was as follows:
Total Foreign
Segment 2002 2001 Change Acquisitions Operations Exchange
------- ------- --------- ------ ------------ ---------- --------
(In thousands)
Instrumentation & Thermal Fluid Controls ..... $8,138 $7,738 $ 400 $620 $ (255) $ 35
Petrochemical ................................ 1,261 2,682 (1,421) - (1,550) 129
Corporate .................................... (2,100) (2,034) (66) - (66) -
------ ------ ------- ---- ------- ----
Total ....................................... $7,299 $8,386 $(1,087) $620 $(1,871) $164
====== ====== ======= ==== ======= ====
14
The $0.4 million increase in operating income in the Instrumentation
and Thermal Fluid Controls Products segment was primarily attributable to:
incremental income generated by RTK and SART; lower variable selling expenses;
and the elimination of current year goodwill amortization expenses; partially
offset by lower sales volume in our instrumentation product lines and higher
insurance costs. The $1.4 million decrease in operating income in the
Petrochemical Products segment was also primarily due to lower sales, lower
margins on small oil and gas projects, short-term price reductions to discourage
new competitors and sell targeted inventory items and current year special
charges, partially offset by higher volume and margins on large international
oil and gas project sales, lower variable selling expenses and the decrease in
goodwill amortization expenses.
Net interest expense increased $0.1 million to $1.7 million for the
three months ended June 30, 2002 compared to $1.6 million for the three months
ended June 30, 2001. The net increase in interest expense was due to added
interest costs related to acquisition debt assumed, partially offset by
additional interest income earned on higher cash balances.
Net other expense decreased $0.7 million for the three months ended
June 30, 2002 and 2001, and is primarily attributable to favorable gains on
foreign exchange.
The effective tax rate decreased to 36.0% for the three months ended
June 30, 2002 compared to 40.0% for the three months ended June 30, 2001. The
decrease in the tax rate is primarily the result of the elimination of goodwill
amortization expense in accordance with Statement No. 142, which was not
deductible for income tax purposes. Additionally, the implementation of various
tax strategies at the beginning of 2002 provided a modest rate reduction
benefit.
Net income was relatively unchanged for the three months ended June 30,
2002 as compared to the three months ended June 30, 2001. Although net income
for the three months ended June 30, 2002 and 2001 was comparable, gross profits
decreased due to lower current year sales, short-term pricing actions and higher
insurance costs; and due to special charges during the current year. The gross
profit decrease was offset by the incremental income generated by RTK and SART,
reductions in variable selling expenses, reduced goodwill amortization expense
and lower foreign currency losses.
Results of Operations for the Six Months Ended June 30, 2002 Compared to the Six
Months Ended June 30, 2001.
The following tables set forth the results of operations, percentage of
net revenue and the period-to-period percentage change in certain financial data
for the six months ended June 30, 2002 and 2001:
Six Months Ended June 30,
------------------------------------------
2002 2001 % Change
-------- -------- --------
(Dollars in thousands)
Net revenues ................................................ $162,003 100.0% $171,336 100.0% (5.4)%
Cost of revenues ............................................ 112,838 69.7 119,115 69.5 (5.3)
-------- ----- -------- ----
Gross profit .............................................. 49,165 30.3 52,221 30.5 (5.9)
Selling, general and administrative expenses ................ 33,521 20.6 34,260 20.1 (2.2)
Goodwill amortization expense ............................... - - 1,268 0.7 (100.0)
Special charges ............................................. 745 0.5 - - n/a
-------- ----- -------- ----
Operating income .......................................... 14,899 9.2 16,693 9.7 (10.7)
Other (income) expense:
Interest expense, net ..................................... 3,422 2.1 3,613 2.1 (5.3)
Other (income) expense, net ............................... (280) (0.2) 493 0.3 (156.8)
-------- ----- -------- ----
Income before income taxes .................................. 11,757 7.3 12,587 7.3 (6.6)
Provision for income taxes .................................. 4,233 2.7 5,035 2.9 (15.9)
-------- ----- -------- ----
Net Income ................................................ $ 7,524 4.6% $ 7,552 4.4% (0.4)%
======== ===== ======== ====
Net revenues for the six months ended June 30, 2002 decreased by $9.3
million, or 5.4%, to $162.0 million compared to $171.3 million for the six
months ended June 30, 2001. The decrease in net revenues for the six months
15
ended June 30, 2002 was attributable to the following:
Total Foreign
Segment 2002 2001 Change Acquisitions Operations Exchange
------- ---- ---- ------ ------------ ---------- --------
(In thousands)
Instrumentation & Thermal Fluid Controls .... $ 94,383 $ 94,733 $ (350) $8,078 $ (8,603) $175
Petrochemical ............................... 67,620 76,603 (8,983) - (9,372) 389
-------- -------- ------- ------ -------- ----
Total ...................................... $162,003 $171,336 $(9,333) $8,078 $(17,975) $564
======== ======== ======= ====== ======== ====
The Instrumentation and Thermal Fluid Controls Products segment
accounted for 58.3% of net revenues for the six months ended June 30, 2002
compared to 55.3% for the six months ended June 30, 2001. The Petrochemical
Products segment accounted for 41.7% of net revenues for the six months ended
June 30, 2002 compared to 44.7% for the six months ended June 30, 2001.
Instrumentation and Thermal Fluid Controls Products revenues decreased
$0.4 million, or 0.4%. The net decrease was due to: a $7.5 million reduction in
instrumentation application revenues, primarily due to weak market conditions
resulting in reduced sales volume in the domestic commercial aerospace and
general industrial markets; a $1.1 million decrease in thermal fluid controls
product sales resulting from lower customer demand for steam related HVAC
products due to mild winter temperatures; partially offset by $8.0 million of
incremental revenue from RTK and SART that were acquired in June 2001 and a $0.2
million increase in revenues resulting from changes in exchange rates affecting
our European business units. The net $9.0 million decrease in Petrochemical
Products revenues, or 11.7%, was the result of $11.6 million in lower North
American revenues, related to reduced oil and gas drilling, chemical processing,
and general industrial activity; a $1.5 million reduction in revenues from
Chinese customers; partially offset by a $3.7 million increase from our Italian
subsidiary due to higher volume for large international oil and gas projects;
and a $0.4 million increase in revenues resulting from changes in exchange rates
which affected our Canadian and Italian operations.
Gross profit decreased $3.0 million, or 5.9%, to $49.2 million for the
six months ended June 30, 2002 compared to $52.2 million for the six months
ended June 30, 2001. Gross margin decreased to 30.3% for the six months ended
June 30, 2002 compared to 30.5% for the three months ended June 30, 2001. Gross
profit from the Instrumentation and Thermal Fluid Controls Products segment
decreased $0.7 million. The net decrease consisted of: a $3.5 million gross
profit reduction due to lower sales volume due to soft end-market conditions;
partially offset by a $2.7 million increase in gross profit from the RTK and
SART businesses acquired in June 2001 and a $0.1 million increase as a result of
net favorable exchange rates from European subsidiaries. Gross profit for the
Petrochemical Products segment decreased $2.3 million for the six months ended
June 30, 2002 compared to the six months ended June 30, 2001. Gross profit
decreased $2.4 million as a result of lower sales volume that was partially
offset by a $0.1 million of favorable foreign exchange rate changes.
Selling, general and administrative expenses decreased $0.7 million to
$33.5 million for the six months ended June 30, 2002 compared to $34.3 million
for the six months ended June 30, 2001. Selling, general and administrative
expenses for the Instrumentation and Thermal Fluid Controls Products segment
increased by $0.3 million. The increase was principally the result of: $1.6
million of additional expenses related to the acquired RTK and SART operations;
partially offset by a $1.2 million reduction in expenses, primarily from lower
variable selling expenses and a $0.1 million reduction due to favorable foreign
exchange rate changes. Selling, general and administrative expenses for the
Petrochemical Products segment decreased $1.1 million due to $1.0 million of
lower variable selling and $0.1 million due to favorable foreign exchange rate
changes. Corporate expenses increased by $0.1 million, as a result of higher
corporate development expenses, partially offset by lower compensation and
fringe benefit costs.
Goodwill amortization expense was not recorded for the six months ended
June 30, 2002 compared with $1.3 million for the six months ended June 30, 2001.
Goodwill amortization expense for the six months ended June 30, 2001 consisted
of $1.1 million for the Instrumentation and Thermal Fluid Controls Products
segment and $0.2 million for the Petrochemical Products segment.
During the six months ended June 30, 2002, special charges of $0.7
million were incurred in the Petrochemical Products segment. These expenses
included $0.3 million in write-offs of manufacturing equipment assets, $0.2
million of severance costs and $0.2 million of exit costs principally related to
two small North American manufacturing
16
operations to be closed. There were no special charges incurred during the six
months ended June 30, 2001.
The change in operating income for the six months ended June 30, 2002
compared to the six months ended June, 2001 was as follows:
Total Foreign
Segment 2002 2001 Change Acquisitions Operations Exchange
------- ---- ---- ------ ------------ ---------- --------
(In thousands)
Instrumentation & Thermal Fluid Controls ..... $15,745 $15,736 $ 9 $1,136 $(1,152) $ 25
Petrochemical ................................ 3,094 4,826 (1,732) - (1,832) 100
Corporate .................................... (3,940) (3,869) (71) - (71) -
------- ------- ------- ------ ------- ----
Total ....................................... $14,899 $16,693 $(1,794) $1,136 $(3,055) $125
======= ======= ======== ====== ======= ====
There was no net change in operating income of the Instrumentation and
Thermal Fluid Controls Products segment. Its operating income decreased $2.2
million predominately due to the decrease in revenues plus the higher insurance
costs, offset by an increase of $1.1 million from goodwill amortization expense
in the prior year that was zero in the current year and $1.1 million of
increased income from RTK and SART, which were acquired in June 2001. The $1.7
million decrease in operating income in the Petrochemical Products segment was
primarily due to: the sales reduction attributable to weaker demand for small
projects and maintenance and repair orders in oil and gas markets; short-term
domestic price reductions in the second quarter; current year special charges;
partially offset by revenue and gross margin increases for large international
oil and gas projects; the reduction of goodwill amortization expenses in the
current year; and favorable foreign exchange rate changes.
Net interest expense decreased $0.2 million to $3.4 million for the six
months ended June 30, 2002 compared to $3.6 million for the six months ended
June 30, 2001. The decrease was primarily due to higher interest income on
invested balances. Increased interest expense related to the debt assumed with
the acquisition of RTK and SART were offset by decreased interest expense due to
lower current year average debt balances and lower interest rates on variable
debt instruments.
Net other expense decreased $0.8 million for the six months ended June
30, 2002, and is attributable to a $0.6 million reduction in favorable foreign
exchange losses and a $0.2 million reduction of minority interest expense
attributable to lower profitability of our Chinese joint venture.
The effective tax rate decreased to 36.0% for the six months ended June
30, 2002 compared to 40.0% for the six months ended June 30, 2001. The decrease
in the tax rate is primarily the result of the elimination of goodwill
amortization expense in accordance with FASB Statement No. 142, which was not
deductible for income tax purposes. Additionally, the implementation of various
tax strategies at the beginning of 2002 provided a modest rate reduction
benefit.
Net income was relatively unchanged for the six months ended June 30,
2002 as compared to the six months ended June 30, 2001. Decreases in operating
profit due to lower current year sales and selective price reductions, higher
insurance costs and the special charges incurred during the current year were
offset by the incremental net income generated the by RTK and SART operations,
reductions in variable selling expenses, reduced goodwill amortization expense,
reduced net interest costs, plus foreign currency gains.
Liquidity and Capital Resources
The following table summarizes our cash flow activities for the six
months ended June 30, 2002 (In thousands):
Cash flow from:
Operating activities ..................................... $16,676
Investing activities ..................................... (3,772)
Financing activities ..................................... (2,914)
Effect of exchange rates on cash balances ................ 555
-------
Increase in cash and cash equivalents ...................... $10,545
=======
17
During the six months ended June 30, 2002, we generated $16.7 million
in cash flow from operating activities. Net income plus non-cash charges, such
as depreciation, amortization and the write-off of manufacturing equipment,
account for $13.5 million of the cash provided by operating activities.
Decreases in working capital and other assets provided $3.2 million of cash. The
$3.8 million used for investing activities included: a net $1.8 million used for
acquisition activities that included $2.4 million for the purchase of the
remaining 25% minority interest in our RTK subsidiary, a $0.1 million reduction
in purchase price relating to the acquisition of SART, and a $0.5 million
purchase price adjustment relating to our prior acquisition of Leslie Controls,
Inc.; and approximately $2.0 million for the purchase of capital equipment. We
used $2.9 million of cash in financing activities that included: a net $3.6
million reduction of debt balances; $1.1 million used to pay dividends to
shareholders; offset by $1.8 million received from the exercise of stock
options. The effects of exchange rate changes on cash and cash equivalents
increased cash balances by $0.6 million.
Our capital expenditure budget for the year ended December 31, 2002 is
$7.1 million. Capital expenditures are primarily for manufacturing machinery and
equipment for new products and as part of our ongoing commitment to further
improve our manufacturing operations.
As of June 30, 2002 and 2001, we had no amounts outstanding under our
corporate unsecured revolving credit facility. Under the credit facility
agreement we are required to pay an unused facility fee of 0.35% per annum, and
are able to borrow at interest rates that may vary, either the Euro dollar rate
plus 1.5% or at the prime rate specified by the agent. As of June 30, 2002, we
had $75.0 million available under the revolving credit agreement to support our
acquisition program, working capital requirements and for general corporate
purposes.
The ratio of current assets to current liabilities as of June 30, 2002
was 3.3:1 compared to 3.4:1 as of December 31, 2001. Cash and cash equivalents
were $67.6 million as of June 30, 2002 compared to $57.0 million as of December
31, 2001. Net debt (total debt less cash) as a percentage of total net capital
employed (net debt plus equity) was 10.2% as of June 30, 2002 compared to 15.5%
as of December 31, 2001.
Beginning on October 19, 2002, we will commence making $15.0 million
annual payments reducing the $75.0 million outstanding balance of our unsecured
8.23% senior notes, which mature in October 2006.
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 and unsecured borrowing arrangements; issue dividends to
shareholders; acquire and dispose of businesses; invest in capital equipment;
participate in certain higher yielding long-term investment vehicles; and issue
additional shares of our stock. We were in compliance with all covenants related
to our existing debt obligations at June 30, 2002 and December 31, 2001.
On April 9, 2002 we filed a registration statement on Form S-3. The
registration statement, which most recently was amended and filed on June 6,
2002, relates to the sale of up to an aggregate of 1.0 million shares of common
stock currently outstanding and beneficially owned by Timothy P. Horne and other
members of the Horne family. We will not receive any of the proceeds from the
sale of the shares of common stock offered by this prospectus. We are bearing
the preparation and filing expenses for the registration statement for these
shares.
On February 5, 2002, the minority interest shareholder of RTK exercised
the put option right granted to him in the purchase agreement, thereby electing
to sell us the remaining 25% interest in RTK. Accordingly, we paid cash of $2.4
million for the purchase of this 25% interest in RTK during March 2002.
From time-to-time, we are involved with product liability,
environmental and other litigation proceedings and incur costs on an ongoing
basis related to these matters. We have not incurred material expenditures
during the six months ended June 30, 2002 in connection with any of these
matters.
We anticipate that available funds, and those funds provided from
ongoing operations, will be sufficient to meet current operating requirements,
anticipated capital expenditures, scheduled debt payments and contingencies for
at least the next 24 months.
18
Effect of Recent Accounting Pronouncements
We adopted Statement No. 142, "Goodwill and Other Intangible Assets,"
on January 1, 2002. Statement No. 142 addresses the financial accounting and
reporting standards for the acquisition of intangible assets outside of a
business combination and for goodwill and other intangible assets subsequent to
their acquisition. This accounting standard requires that existing and future
goodwill and indefinite-lived intangible assets no longer be amortized; rather
they are written-down, as needed, based upon impairment. An impairment test is
required on an annual basis, or more frequently if circumstances warrant. The
provisions of the standard also require the completion of the initial
transitional impairment test as of the beginning of the year of adoption, with
any impairments identified treated as a cumulative effect of a change in
accounting principle. Intangible assets that have finite useful lives continue
to be amortized over their useful lives.
In accordance with Statement No. 142, we completed a transitional
goodwill impairment test by comparing the fair value of our reporting units as
of January 1, 2002 to their carrying values. We determined that the fair value
of the reporting units' goodwill exceeded their carrying value and that no
impairment existed. See Note 7 to the consolidated financial statements for
information concerning the adoption of Statement No. 142.
We also adopted Statement No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" on January 1, 2002. Statement No. 144 refines
existing impairment accounting guidance and extends the use of accounting for
discontinued operations to both reporting segments and distinguishable
components thereof. Statement No. 144 also eliminates the existing exception to
consolidation of a subsidiary for which control is likely to be temporary. The
adoption of Statement No. 144 did not have any impact on our consolidated
results of operations or financial position.
In April 2002, Statement No. 145, "Rescission of Statements Nos. 4, 44
and 64, Amendment of Statement No. 13, and Technical Corrections," was issued
effective for fiscal years beginning May 15, 2002 or later. Statement No. 145
rescinds Statement No. 4, "Reporting Gains and Losses from the Extinguishment of
Debt," Statement No. 44, "Accounting for Intangible Assets of Motor Carriers"
and Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements." Statement No. 145 also amends Statement No. 13, "Accounting For
Leases," to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and for certain transactions that have economic
effects that are similar to sale-leaseback transactions. This statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meaning or describe their applicability under changed
conditions. We adopted the provisions of Statement No. 145 effective April 1,
2002, and the adoption had no impact on our reported results of operations or
financial position.
In July 2002, Statement No. 146, "Accounting for Costs Associated With
Exit or Disposal Activities" was issued. Statement No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
This statement is effective for fiscal years beginning after December 31, 2002.
We do not believe the impact of adopting Statement No. 146 will have a material
impact on our reported results of operation or financial position.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET 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 or 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.
However, when oil and gas prices rise, generally, maintenance and repair
activity and spending for facilities projects normally increase, and we benefit
from increased demand for valve products. However, oil and gas price increases
may be considered temporary in nature, or not driven by customer demand and,
therefore, may result in longer lead times for obtaining petrochemical sales
orders. As a result, the timing and magnitude of changes in market demand for
oil and valve products are difficult to predict. Similarly, although not to the
same extent as the oil and gas markets, the aerospace, military and maritime
markets have historically experienced cyclical fluctuations in demand, which
also could have a material adverse effect on our business, financial condition
or results of operations.
19
Interest Rate Risk
At June 30, 2002, our primary interest rate risk relates to borrowings
under our revolving credit facility. The interest rate on those borrowings
fluctuates with changes in short-term borrowing rates. There were no outstanding
borrowings under our revolving credit facility as of June 30, 2002. Based upon
the expected levels of borrowings under our credit facility in 2002, an increase
in interest rates of 100 basis points would not have a material effect on our
results of operations or cash flows.
Currency Exchange Risk
We use forward contracts to manage the currency risk related to
business transactions denominated in foreign currencies. To the extent the
underlying transactions hedged are completed, the contracts do not subject us to
significant risk from exchange rate movements because they offset gains and
losses on the related foreign currency denominated transactions. Our foreign
currency forward contracts have not been designated as hedging instruments and,
therefore, did not qualify for fair value or cash flow hedge treatment under the
criteria of Statement No. 133 for the three months ended June 30, 2002.
Therefore, the unrealized gains and losses on our contracts have been recognized
as a component of other expense in the consolidated statement of operations. As
of June 30, 2002, we had forward contracts to buy and sell foreign currencies
with a fair value of $5.8 million. These contracts mature on various dates
between July 2002 and December 2002.
The counterparties to these contracts are major financial institutions.
Our risk of loss in the event of non-performance by the counterparties is not
significant. We do not use derivative financial instruments for trading
purposes. Risk management strategies are reviewed and approved by senior
management before implementation.
Commodity Price Risk
The primary raw materials used 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 commodities are
subject to price fluctuations that may adversely affect our results of
operations. We manage this risk by offsetting increases in commodity prices with
increased sales prices, active materials management, product engineering
programs and the diversity of materials used in our production process.
PART II OTHER INFORMATION
ITEM 1. 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 under an
excess umbrella liability insurance policy. We also maintain a products
liability policy with aggregate limits of $200 million for the aviation products
produced by our worldwide operations.
We believe this coverage to be consistent 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.
Like many other manufacturers of fluid control products, we have been
named as defendants in a growing number of product liability actions brought on
behalf of individuals who seek compensation for their alleged exposure to
airborne asbestos fibers. In particular, Leslie Controls, Inc. ("Leslie"),
Spence Engineering Company, Inc. ("Spence"), and Hoke, Inc. ("Hoke"), all
subsidiaries of CIRCOR, collectively have been named as defendants or
third-party defendants in asbestos related claims brought on behalf of
approximately 5,000 plaintiffs against anywhere from 50 to 400 defendants. In
some instances, CIRCOR also has been named as successor in interest to one or
more of these subsidiaries. The cases brought on behalf of the vast majority of
claimants seek unspecified compensatory and punitive damages against all
defendants in the aggregate. However, with respect to the complaints filed on
behalf of approximately 122 plaintiffs in New York, each plaintiff seeks $5
million compensatory damages and $5 million punitive damages against the
aggregate of defendants under each of six causes of action. Similarly, with
respect to the
20
complaints filed in California on behalf of eleven claimants, each plaintiff
seeks approximately $400,000 compensatory damages and $2.5 million punitive
damages against the aggregate of defendants.
We believe that any components containing asbestos formerly used in
Leslie, Spence and Hoke products were entirely internal to the product and would
not give rise to ambient asbestos dust during normal operation. As such, we
believe that we have minimal, if any, liability with respect to the vast
majority of these cases and that these cases, in the aggregate, will not have a
material adverse effect on our financial condition, results of operations or
cash flows. However, due to the nature and number of variables associated with
asbestos related claims, such as the rate at which new claims may be filed; the
availability of insurance policies to continue to recover certain of our costs
relating to the defense and payment of these claims; the impact of bankruptcies
of other companies currently or historically defending asbestos claims; the
uncertainties surrounding the litigation process from jurisdiction to
jurisdiction and from case to case; the impact of potential changes in
legislative or judicial standards; the type and severity of the disease alleged
to be suffered by each claimant; and increases in the expense of medical
treatment, we are unable to reliably estimate the ultimate costs of these
claims.
As we previously have disclosed, we learned on July 12, 2000 that the
United States Customs Service ("Customs") had commenced an investigation to
determine whether our subsidiary KF Industries, Inc. ("KF") was then in
compliance with country of origin marking requirements on those valves that KF
imports from sources in the People's Republic of China including our joint
venture there. We continue to cooperate with Customs and, to date, we have not
received any formal notification from Customs regarding the extent, if any, to
which KF's country of origin marking practices may have been deficient. We
continue to believe that such marking practices have been in substantial
compliance with Customs' regulations. However, if the Customs investigation were
to reveal that violations of the Customs laws had occurred, KF could be
subjected to civil fines, forfeitures and (if such violations were determined to
be intentional) criminal penalties, which could be material.
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 that is not material to us. With
respect to the Combe Landfill, we have settled both the Federal Government's
claim, and the State of New Jersey's claim, for an amount that is immaterial to
us. 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 the prior owners of the affected subsidiaries. We also have
been identified as a PRP with respect to the Lightman Drum Company site in New
Jersey. But, in this instance we also have the right to indemnification from the
former owners of the affected subsidiary. Based on currently available
information, we believe that our share of clean-up costs at these sites will not
be material.
We have reviewed all of our pending judicial and legal proceedings,
reasonably anticipated costs and expenses in connection with such proceedings,
and availability and limits of our insurance coverage, and we have established
reserves which we believe are appropriate in light of those outcomes that we
believe are probable and estimable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Use of Proceeds From Registered Securities
The effective date of the Securities and Exchange Act registration
statement for which the use of proceeds information is being disclosed was March
15, 2001, and the commission file number assigned to the registration statement
is 333-54428. We used $2.0 million of the net proceeds to reduce the balance
owed on our unsecured revolving credit facility to zero. During June 2001, we
acquired 100% of SART and 75% of RTK. During March 2002, we acquired the
remaining 25% minority interest in RTK. In the course of acquiring these
companies we utilized $12.6 million of the proceeds to purchase these businesses
and retire a portion of assumed debt. During the second quarter of 2002, we used
$2.5 million of the proceeds for: $1.1 million related to our capital
expenditure program, $0.9 million for scheduled debt reduction payments and $0.5
million for dividends paid to our common shareholders. No payments out of the
net proceeds were made to (i) any of our directors, officers, general partners
or their associates, (ii) any person(s)
21
owning 10% or more of any class of our equity securities or (iii) any of our
affiliates, except to Goodwin Procter LLP, the Boston, Massachusetts law firm
that represented us in connection with the registration statement. David F.
Dietz, a director and officer of our company, is the sole owner of David F.
Dietz, P.C., a partner of Goodwin Procter LLP. The remaining proceeds have been
invested overnight in money market funds with holdings of U.S. Government
obligations and are included in cash and cash equivalents as of June 30, 2002.
The uses of proceeds described do not represent a material change in the use of
proceeds as described in our registration statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its Annual Meeting of Stockholders on April 25, 2002.
The proposals in front of the Stockholders and the results of voting on
such proposals were as noted below.
(b) Election of Directors: the following director of the Company was
re-elected as a Class I director for a three-year term expiring at the
Annual Meeting held after conclusion of the 2004 fiscal year: The
voting results were as follows:
VOTES FOR VOTES WITHHELD
--------- --------------
David A. Bloss, Sr. 12,129,208 1,481,865
Timothy P. Horne, whose term of office as a director was to
expire at the Annual Meeting, had previously informed us of his
decision not to stand for re-election. Accordingly, the Board of
Directors voted to reduce the size of the Board from six to five.
(c) Ratification of Independent Auditors: The selection of KPMG LLP as our
independent auditors for fiscal year 2002 was ratified. The voting
results were as follows:
VOTES FOR VOTES WITHHELD VOTES ABSTAINED
--------- -------------- ---------------
13,532,923 75,300 2,850
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K
(a)(1) Financial Statements
The consolidated financial statements filed as part of this report are
included in Part I, Item 1 of this report and listed in the Table of Contents.
(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 CIRCOR
International, Inc. dated as of October 1, 1999, is incorporated
herein by reference to Exhibit 2.1 to Amendment No. 2 to CIRCOR
International, Inc.'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 CIRCOR
International, Inc. is incorporated herein by reference to Exhibit
3.1 to CIRCOR International, Inc.'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 CIRCOR International, Inc. 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 CIRCOR
International, Inc.'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").
22
Exhibit
No. Description and Location
------- ------------------------
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")
- ---------------
(b) Reports on Form 8-K.
The registrant filed no Current Reports on Form 8-K during the
three-month period ended June 30, 2002.
(c) Exhibit Index
See Item 6(a)(3) above.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CIRCOR INTERNATIONAL, INC.
Date: August 13, 2002 /s/ DAVID A. BLOSS, SR.
---------------------------------------------
David A. Bloss, Sr.
Chairman, President and Chief Executive
Officer
Principal Executive Officer
Date: August 13, 2002 /s/ KENNETH W. SMITH
---------------------------------------------
Kenneth W. Smith
Vice President, Chief Financial Officer
and Treasurer
Principal Financial Officer
Date: August 13, 2002 /s/ STEPHEN J. CARRIERE
---------------------------------------------
Stephen J. Carriere
Vice President, Corporate Controller
and Assistant Treasurer
Principal Accounting Officer
24