- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
------------------------FORM 10-K
/X/x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBERFor the fiscal year ended December 31,
19992002OR
/ /¨ 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 ------------------------Commission File Number 001-14962
CIRCOR INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 04-3477276 (State or other jurisdiction of (I.R.S. Employer(A Delaware Corporation)
I.R.S. Identification
incorporation or organization) Number)No. 04-3477276c/o Circor, Inc.
Suite 290
35
CORPORATE DRIVE, BURLINGTON,Corporate Drive, Burlington, MA01803-4230 (Address of principal executive (Zip Code) offices) (Registrant's telephone number,01803-4244Telephone: (781) 270-1200
including area code):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:
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 EXCHANGENoneSecurities registered pursuant to Section 12(g) of the Act: NoneIndicate 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/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'sRegistrant’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/xIndicate by check mark whether the registrant is an accelerated filer. Yesx No¨
The aggregate market value of voting stock held by non-affiliates of the Registrant as of
March 17, 2000,June 28, 2002 was$196,071,240.$258,501,453.As of
March 17, 2000,February 28, 2003, there were13,236,87715,109,850 shares of theRegistrant'sRegistrant’s Common Stock outstanding.DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference certain portions of the information from the
Registrant'sRegistrant’s definitive Proxy Statement for the 2003 Annual Meeting of Stockholders to be held onMay 18, 2000. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------April 24, 2003. The definitive Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the end of 2002.
Page
PART I
Item 1
2
Item 2
9
Item 3
10
Item 4
11
PART II
Item 5
Market for the Registrant’s Common Equity and Related Stockholder Matters
11
Item 6
12
Item 7
Management’s Discussion and Analysis of Financial Condition and Results of Operation
15
Item 7A
32
Item 8
33
Item 9
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
33
PART III
Item 10
33
Item 11
33
Item 12
Security Ownership of Certain Beneficial Owners and Management
33
Item 13
33
Item 14
33
PART IV
Item 15
Exhibits, Financial Statement Schedules and Reports on Form 8-K
34
38
39
41
42
43
44
45
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70
PART
1IThis 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 have used forward-looking statements in a number of parts of this report, including, without limitation, “Item 1, Our Business”, including specifically the section captioned “Our Business Objectives and Strategies”, and “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 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, 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. We have included a discussion of some of these risks and uncertainties under the heading “Certain Risk Factors That May Affect Future Results.” We have discussed these risks and uncertainties in detail within this section and encourage you to read it in its entirety in order to understand the risks and uncertainties that can affect our forward-looking statements, as well as our business generally.
Available Information
We file periodic reports on Form 10-K and 10-Q with the Securities and Exchange Commission (“SEC”) on a quarterly basis and a Definitive Proxy Statement on an annual basis. These and other reports filed by us, with, or furnished to, the SEC in accordance with section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge from the SEC on their website athttp://www.sec.gov. Additionally, our Form 10-Q and Form 10-K reports are available without charge, as soon as reasonably practicable after they have been filed with the SEC, from our website atwww.circor.com by using the “Investor Relations” hyperlink.
Our History
We were established by our former parent, Watts Industries, Inc. (“Watts”), to continue to operate the former industrial, oil and gas businesses of Watts. On October 18, 1999, Watts distributed all of our outstanding common stock to Watts shareholders of record as of October 6, 1999 in a tax-free distribution. As a result, information related to historical activities of our business units also include time periods when they constituted the former industrial, oil and gas businesses of Watts. In connection with the spin-off, our common stock was listed on the NYSE under the symbol “CIR” and we entered into agreements with Watts regarding licensing and tax sharing arrangements, benefits and indemnification matters. As used in this report, the terms “we,” “us,” “our,” and “CIRCOR” mean CIRCOR International, Inc.
("CIRCOR") designs, manufacturesanddistributesits subsidiaries (unless the context indicates another meaning). The term “common stock” means our common stock, par value $0.01 per share.Our Business
We design, manufacture and distribute a broad array of valves and related products and services to a variety of end-markets for use in a wide range of applications to optimize the efficiency and/or ensure the safety of fluid-control systems.
The valvesWe have a global presence andrelated fluid-controloperate 17 manufacturing facilities that are located in the United States, Canada, Western Europe and the People’s Republic of China. We have two major product groups: Instrumentation and Thermal Fluid Controls Products, and Petrochemical Products. Our productswe manufactureareusedsold through more than 1,300 distributors servicing more than 11,000 customers inprocessing industries; oil and gas production, pipeline construction and maintenance; aerospace, military and commercial aircraft; pharmaceutical, medical and analytical equipment; and maritime manufacturing and maintenance. Weover 100 countries around the world. Within our major product groups, we have used both internal product development and strategic acquisitions to assemblea completean array of fluid-control products and technologies thatenablesenable us to address ourcustomers'customers’ unique fluid-control application needs.We have two major product groups:Instrumentation and Thermal Fluid
RegulationControls Productsand 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")Group.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 GROUPThe Instrumentation and Thermal FluidRegulationControls Products Group designs, manufactures andsuppliesdistributes valves, fittings and controls for diverse end-uses, includinghydraulic, pneumatic,instrumentation, aerospace, cryogenic and steam applications. Selected products include precision valves, compression tube andpipe fittings,pipefitting, control valves, relief valves, couplers, regulators andregulators.strainers. The Instrumentation and Thermal FluidRegulationControls Products Group consists primarily of the followingoperations:product brand names: Aerodyne Controls; Circle Seal Controls; Leslie Controls; Nicholson Steam Trap; GO Regulator; Hoke; Spence Engineering; Atkomatic Valve; CPC-Cryolab; RTK; SART von Rohr; Rockwood Swendeman; SSI Equipment; Tomco Products and U.S. Para Plate.The Instrumentation and Thermal Fluid Controls
Atkomatic Valve,Products Group accounted for $190.5 million, or 57.5%, of our net revenues for the year ended December 31, 2002.We have had a long-standing presence in the steam application markets, starting with our 1984 acquisition of Spence Engineering Company, Inc. (“Spence Engineering” or “Spence”) and our 1989 acquisitions of Leslie Controls, Inc. (“Leslie Controls”) and Nicholson Steam Trap, Inc. (“Nicholson Steam Trap”). In January 1999, we acquired SSI Equipment Inc. (“SSI”) and added a wide variety of strainers to expand our industrial products line. This business was originally reported within the Petrochemical Products Group. However, in March 2002, we transferred SSI to the Instrumentation and Thermal Fluid Controls Group, to better reflect the products and markets that this business serves. Prior periods have been restated and net revenues, operating income, and identifiable assets are not materially different as a result of this reclassification. In June 2001, we acquired Regeltechnik Kornwestheim GmbH and affiliates (“RTK”) and Société Alsacienne Regulaves Thermiques von Rohr, S.A. (“SART”). We believe that we have a very strong franchise in steam valve products. Both Leslie Controls and Nicholson Steam Trap have been in the steam pressure reduction and control business for over 100 years. Spence Engineering has also been in these businesses for over 70 years. Due to the reputation of these businesses for reliability and quality, customers often specifically request our products by brand name. Our steam valve products are used in: municipal and institutional steam heating and air-conditioning applications; power plants; industrial and food processing; and commercial and military maritime applications.
Commencing with the 1990 acquisition of 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(“CircleSeal 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,Seal”), we have acquiredeight complementaryeleven businesses that serve the instrumentation and aerospace fluidregulation businesses, includingcontrol markets. These acquisitions included Aerodyne(December 1997),Controls (“Aerodyne”) in December 1997, Atkomatic(March 1998),Valve (“Atkomatic”) in April 1998, Hoke,(July 1998) andInc (“Hoke”) in July 1998, GO Regulator(April 1999).in April 1999, Tomco Products, Inc. (“Tomco”) in October 2002 and U.S. Para Plate Corporation (“U.S. Para Plate”) in October 2002. Aerodynebased 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 Thermal FluidRegulationControls Products Group. Atkomaticformerly based in Indianapolis, Indiana,makes heavy-duty process solenoid valvesfor clean air, gases, liquids, steam, corrosive fluidsthat automate the regulation andcryogenic fluids. In July 1998, we combined the Atkomatic product line with Circle Seal's administrative, manufacturing and distribution facilities in Corona, California.sequencing of liquid levels or volume flow. GO Regulatorof San Dimas, California,offers a complete line of specialized cylinder valves, customized valves and pneumatic pressure regulators for instrumentation, analytical and processapplications, in addition to an 2emerging productapplications. Tomco produces a full line of quick connect and disconnect couplers for general-purpose industrial applications and more sophisticated instrumentation markets. U.S. Para Plate develops and produces high-pressure valves and regulators forthe ultra high purity market, specialized cylinder valvesaerospace andcustomized valves.military applications.We significantly expanded the breadth of our instrumentation
valvefluid control productlinelines with the acquisition of Hoke in July 1998. Our largest acquisition to date, Hokebrought itsprovides us with a leading line ofGyrolok-Registered Trademark-Gyrolok® 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 we cross-market their productsare cross-marketedthrough their respective distribution channels. Furthermore, Hoke, with nearly 50% of its revenues derived from outside of the United States, significantly expandedCircle Seal'sour geographic marketing and distributioncapabilities outsidecapabilities. We integrated the administrative and distribution activities of Circle Seal and Hoke to further reduce costs. We believe that our ability to provide various instrumentation markets with complete fluid-control solutions is enhanced by the combined product line offerings of Circle Seal, Hoke and GO Regulator.With the acquisition of the
U.S. WeCryolab product line in 1995, we entered the cryogenic sector of the valve market, further enhancing our position in the instrumentation and thermal fluid controls valve business. Since then we havehadadded Consolidated Precision Corporation (“CPC”) in 1996 and the Rockwood Swendeman product line in 2000 whichcollectively gave us a
long-standingbroader array of valve products for demanding cryogenic applications and enabled us to expand our presence in thesteam 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,industrialprocessing and commercial and military maritime applications. PETROCHEMICAL PRODUCTS GROUPgas markets.Petrochemical Products Group. The Petrochemical Products Group designs, manufactures and
supplies flangeddistributes flanged-end andthreadedthreaded-end floating and trunnion ball valves, needle valves, check valves, butterfly valves,andlarge forged steel ball valves, gate valves and pipeline closuresand strainersfor use in oil, gas and chemical processing and industrial applications. We believe thattheour Petrochemical Products Group is one of thetop threeleading producers of ball valves for the oil and natural gasmarketmarkets worldwide. The Petrochemical Products Group consists primarily of the followingoperations: Contromatics Industrial Products, Eagle Check Valve,product brand names: KFIndustries, Inc., Pibiviesse S.p.A.,Industries; KF Contromatics; Pibiviesse; KF Telford; and Suzhou KFValve Co., Ltd., SSI Equipment Inc. and Telford Valve and Specialties.Valve.The Petrochemical Products Group
had combinedaccounted for $140.9 million, or 42.5%, of our net revenuesof approximately $72.2 millionfor thesix-monthsyear ended December 31,1999.2002.We entered the petrochemical products market in 1978 with the formation by Watts of the industrial products division and
itsour development ofthea floating ball valve for industrial and chemical processing applications. With the acquisition of KF Industries, Inc. (“KF Industries”) in July 1988, we expanded our product offerings to include 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. (“Pibiviesse”), based in Nerviano, Italy, was acquired in November 1994. Pibiviesse manufactures forged steel ball valves for the petrochemical market, including a complete range of trunnion-mounted ball valves.Pibiviesse'sPibiviesse’s manufacturing capabilities include valve sizes up through60"60 inches in diameter,valves,includingClass 2500very high pressure ratings to meet demanding international oil and gas pipeline and production requirements. In March 1998, we acquired and added Telford Valvewas addedand Specialties, Inc. (“KF Telford”) to KF Industries. KF TelfordValvehad been one of KFIndustries'Industries’ largest distributors and, with its acquisition, KF Industries increased its presence in Canada, as well as introducedTelford Valve'sKF Telford’s products (check valves, pipeline closures, and specialty gatevalves for use in industrial and oil and gas applications)valves) throughKF Industries'its worldwide representative network. KF TelfordValvealso hasalsoassumed the Canadian sales activities for other of our Petrochemical Products Groupdivisionscompanies 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, we consolidated the industrialproductproducts division of Wattswas consolidated intounder the KF Contromatics name into KF Industriesfacilityin Oklahoma City, Oklahoma.TheThese industrial productsdivision consistsconsist of carbon steel and stainless steel ball valves, butterfly valves and pneumatic actuators that are used in a variety of industrial, pulp,andpaper and chemical processing applications.We also own 60% of Suzhou KF Valve Company, Ltd. (“Suzhou KF Valve”),
("SKVC")a joint venture located in Suzhou,PeoplesPeople’s Republic of China. Suzhou KF Valve manufactures two inch through twelve-inch carbon and stainless steel ball valvessizes 2" 3through 12"forour operationsus andSUFA,Suzhou Valve Factory, our joint venturepartner, which is a valve company publicly-traded on the China Exchange.partner. We sell products manufactured bySKVCSuzhou KF Valve to customers worldwide for oil and gas applications and outside thePeople'sPeople’s Republic of China forallindustrial applications.SUFA hasOur joint venture partner and its related entities have exclusive rights to sellSKVCSuzhou KF Valve products for all industrial (i.e., non-oil and gas) applications within thePeople'sPeople’s Republic ofChina. INDUSTRY BACKGROUND / MARKET OVERVIEW OIL AND GAS AND PETROCHEMICAL MARKETS.China and to certain customers outside the People’s Republic of China for oil and gas applications.Industry
Oil and Gas and Petrochemical Markets. The oil and gas and petrochemical markets include domestic and international oil and gas exploration and production, distribution, refining, pipeline construction and maintenance, chemical processing and general industrial applications.
Both KF IndustriesProcess and
Pibiviesse have positioned themselves favorably within the industry with major oil companiesPower Markets. The process andmajor 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 subjectpower markets use valves tocyclicality 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 usecontrol steam and other fluids for a variety of applications,includingincluding: heatingof facilities,facilities; production of hot waterheat tracingand electricity; freeze protection of externalpiping, heating of industrial processes,piping; cleaning bylaundries,laundries; food processingcooking, sterilization, vulcanization, pulp making, textilesandother processes found across a wide range of industries.cooking; and heat transfer applications using steam or hot water in industrial processes.HVAC and Maritime Markets. The
power industry uses steamHVAC market utilizes valves andother fluid-controlcontrol systems, primarily in steam-related commercial and institutional heating applications. Steam control products also are used in theproduction of electric power. While some steam applications have been eliminated bymaritime market, which includes theintroduction of certain alternative methods, such as combined cycle unitsU.S. Navy andportable peaking units, the use of steam in the generation of electrical power continues to prevail. AEROSPACE AND MILITARY MARKETS.commercial shipping.Aerospace Markets. The
aerospacecommercial and military aerospace markets we serve include valve applications used on military combat and transport aircraft, helicopters, missiles, tracked vehicles and ships. Our products also arealsoused on commercial,aircraft, smallercommuter and business aircraft,andspace launch vehicles, space shuttles and satellites. Our products also arealsosold into the support infrastructure for these markets,from laboratory equipment towith such diverse applications as ground support maintenance equipment.TheWe supply productssupplied areused in hydraulic,systems,fuel,systems,water,systemsand air systems.These products are typically custom-designed for specific applications to optimize performance, reliability, qualityPharmaceutical, Medical 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.Analytical Instrumentation Markets. The pharmaceutical industry uses products manufactured by our Instrumentation and Thermal FluidRegulationControls Products Group in research& 4and development, analytical instrumentation
steam generation, pilot plantand 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 Thermal FluidRegulationControls Products Group also markets its products to original equipment manufacturers of surgical and medical instruments.The analytical instrumentation market includes laboratory instrumentsRepresentative applications include: surgical andmeasuringmedical instruments; orthopedic devices andcontrolling instruments. The key driverssurgical supplies; diagnostic reagents; electro-medical equipment; x-ray equipment; and dental equipment.Our Business Objectives and Strategies
We are focused on providing solutions for our customers’ fluid-control requirements through a broad base of products and services. We believe many of our product lines have leading positions 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 STRATEGIEStheir niche markets. Our objective is tocreate aenhance shareholder value through profitable growth of our diversified,internationalmulti-national, fluid-control company.OurIn order to achieve this objective, our key strategieswill beare to:-
· Continue to build market positions;
· Improve the profitability of our business;
· Expand into various fluid control industries and markets and capitalize on integration opportunities;
· Increase product offerings; and
· Expand our geographic coverage. Overall, our growth strategies are expected to continue increasing our market positions,
through acquisitions; - Capitalize on integration opportunities; - Expandbuilding our product offerings,through internal product development; - Diversify into a variety of fluid-control industriesenhancing marketing andmarkets;distribution channels and- Expand our geographic coverage. 5PRODUCTSproviding additional opportunities to realize integration cost savings.Products
The following table lists the principal products and markets served by each of the
major companiesbusinesses within our two product groups. Withinathe majority of our product lines, we believe that we have the broadest product offerings in terms ofthedistinct designs, sizes and configurations of our valves.INSTRUMENTATION AND FLUID REGULATION PRODUCTS GROUP
COMPANY PRINCIPAL PRODUCTS PRIMARY MARKETS SERVED - ------- ----------------------------- -----------------------------Product Families
Principal Products
Primary Markets Served
Instrumentation and Thermal Fluid Controls Products Group
Aerodyne Controls
Pneumatic manifold switches; mercury-free motion switches; pneumatic valves; control assemblies
Aerospace; medical instrumentation; military; automotive
Circle
Seal..................Seal ControlsMotor operated valves; check
General industrial;valves; relief valves;semiconductors; medical;pneumatic valves; solenoidpharmaceutical; cryogenics;valves; regulatorsGeneral industrial; power generation; medical; pharmaceutical; aerospace;
military Hoke.........................military; natural gas vehiclesCPC, Cryolab and Rockwood Swendeman
Cryogenic control and safety relief valves; valve assemblies
Liquified industrial gases; other high purity processing
GO Regulator
Pressure reducing regulators; specialized cylinder manifolds; high pressure regulators; pneumatic pressure regulators; diaphragm valves
Analytical instrumentation; chemical processing; semiconductors
Product Families
Principal Products
Primary Markets Served
Hoke
Compression tube fittings;
General industrial; pipe fittings;pipefitting; instrumentanalytical instrumentation;ball and needle valves; cylinders; cylinder valves; actuatorsGeneral industrial; analytical instrumentation; compressed
natural
cylinders and cylinder gas/gas; natural gas vehicles;valves; actuators petrochemical; oilchemical processing; semiconductors
Leslie Controls
Steam and
gas Leslie Controls.............. Regulators;water regulators; steam control valves; electric actuated shut-off valves; steam water heatersGeneral industrial and power;
valves; actuators;maritime; chemicalprocessing steam-water heaters Spence Engineering/processing; HVACNicholson Steam
Trap................. PilotTrapSteam traps; condensate pumps; unions
HVAC; general industrial; industrial processing
RTK and SART
Control valves; regulators; actuators;
and related instrumentation products
HVAC; industrial; food and beverage; pharmaceutical
Spence Engineering
Safety and relief valves; pilot operated and direct
Heating, ventilation and airsteam regulators; steamconditioning;control valvesHVAC; general
controlindustrialSSI Equipment
Specialty strainers; check valves;
safetybutterfly valves; connectorsGeneral industrial; chemical processing; refining; power; and HVAC
Tomco Products
Quick connect and disconnect couplers
General industrial; instrumentation
U.S. Para Plate
High pressure valves and regulators
Aerospace; military; industrial
relief valves; steam trapsPETROCHEMICAL PRODUCTS GROUP
COMPANY PRINCIPAL PRODUCTS PRIMARY MARKETS SERVED - ------- ----------------------------- -----------------------------wash systems Petrochemical Products Group
KF
Industries................ ThreadedContromaticsThreaded-end and flanged-end
Oil and gas exploration,floating ball valves;production, refining andbutterfly valves;gate transmission;pneumatic and electric activatorsOil and gas; refining; general industrial; chemical processing
KF Industries
Threaded-end and flanged-end floating ball valves; actuators; pipeline
industrial; maritime;closures;trunnion-supported chemical processingtrunnion supported ball valves; needle valves; checkvalves; strainers Pibiviesse...................valvesOil and gas exploration; production; refining and transmission; maritime; chemical processing
Pibiviesse
Forged steel ball valves
Oil and gas
exploration, productionexploration; production; refining and transmissionKF Telford Engineered
ProductsMud valves; pipeline closures, check valves and specialty gate valves
Oil and gas exploration; production; refining and transmission
Suzhou KF Valve
Flanged and floating ball valves
Oil and gas exploration; production; refining and transmission; chemical processing
SALES AND DISTRIBUTION Products are soldSales and Distribution
We sell our products to distributors and end-users primarily through
independentcommissioned representatives andsecondarilythroughaour direct salesforce.forces. Our representativenetwork offers anetworks offer technically trained salesforceforces 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 and well established sales and distribution channels
areconstitute a competitive strength, providing access to all of our markets. Wealsobelieve that we have good relationships with our representatives and distributors and we continue to implement marketing programs to enhance these relationships. Ongoing6distribution-enhancement programs include maximizingshortening shelf stock delivery,and turns,reducing assemble-to-order lead times, introducing newproduct introductionsproducts, offering competitive pricing andcompetitive 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. MANUFACTURINGincreasing inventory turns.Manufacturing
We have
fully integratedfully-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 believesWe believe thatfully integratedour fully-integratedmanufacturing capabilities are essential in the valve industry in order to control product quality, to be responsive to
customers'customers’ custom design requirements and to ensure timely delivery. Product quality and performance are a priority for our customers, especially since many oftheour product applications involve caustic or volatile chemicals and, in many cases, involve processes thatrequireare used in the precise control of fluids. We have implementedor are currently implementingintegrated enterprise-wide software systems atallmost of our major locations to make operations more efficient and to improve communications with our 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$4.4 million, $5.0 million, and$6,115,000$3.7 million on capital expenditures for thesix-month periodyears ended December 31,19992002, 2001, andfor the fiscal years ended June 30, 1999 and 1998,2000, respectively. Depreciation expense for these periods was $10.3 million, $10.0 million, andamortization for such periods were $7,076,000, $12,762,000 and $7,844,000,$10.1 million, respectively.Management believesWe believe that
itsour current facilities will meet our near-term production requirements without the need for additional facilities.QUALITY CONTROL Products representing aQuality Control
The majority of our
salesproducts require and 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 withcode requirements.these standards. Additionally,allmost 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 certain of our Instrumentation and Thermal Fluid
RegulationControls ProductsGroupmust meetare those of Underwriters Laboratory Inc.,include standards promulgated by: Underwriters’ Laboratory; American National StandardsInstitute,Institute; American Society of MechanicalEngineers,Engineers; U.S.Military Standards,Military; Federal Aviation Administration; Society of Automotive Engineers; Boeing Basic and Advanced Management System; Aerospace Quality Assurance System; the American GasAssociation andAssociation; the Department ofTransportation.Transportation; and European Pressure Equipment Directive (“PED”) and Technical Inspection Association (“TÜV”). The primary industry standardsthatrequired to be met by and applicable to our Petrochemical ProductsGroup meet are those of theinclude: American National StandardsInstitute,Institute; American Society of MechanicalEngineers, theEngineers; American Petroleum Institute and Factory Mutual.PRODUCT DEVELOPMENTProduct 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
7tolerance or close precision requirements. For example, KF Industries has fire-safe testing capabilities, Circle Seal has the ability to meet allthe 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.ResearchOurresearch and development expenditures
byfor theCompany during the six-month periodyears ended December 31,19992002, 2001 and 2000, were$3,160,000$2.8 million, $2.6 million, andduring fiscal years 1999 and 1998 were $6,094,000 and $5,479,000,$2.8 million, respectively.RAW MATERIALSRaw Materials
The raw materials used most often in our production processes are stainless steel, carbon steel,
cast iron,aluminum, bronze, and brass. We purchase these materials from numerous suppliersnationally 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 fluctuationswhichthat may adversely affect our results of operations. Historically, increases in the prices of raw materials have been partially offset by increased sales prices,anactive materials management,programproject engineering programs and the diversity of materials used in our production processes.COMPETITIONCompetition
The domestic and international markets for
fluid-controlour products are highly competitive. Some of our competitors have substantially greater financial, marketing, personnel and other resources than us. We consider product quality,andperformance, price, distribution capabilities and breadth of product offerings to be the primary competitive factors in these markets.Management believesWe believe 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 existingproducts.products to specific customer applications.The primary competitors of our Instrumentation and Thermal Fluid
RegulationControls Products Group include: Swagelok Company; Parker HannifinCorporation,Corporation; Samson AG; Spirax-Sarco Engineeringplc, 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),plc; Flowseal (a division of Crane Co.), Flowserve Corporation; andCopes-Vulcan, Inc.Fisher (a division of Emerson Process Management).The primary competitors of our Petrochemical Products Group include:
GroveGrove/Dresser Valve (a unit of First Reserve Corporation andRegulator Co. (a division of the Halliburton Company),Odyssey Investment Partners, LLC); Cooper CameronCorporation,Corporation; Apollo (adivisionunit of Conbraco Industries, Inc.),; Jamesbury, Inc. (a division ofNeles Control GroupMetso USA which is part of theRaumaMetso Corporation),; Balon; and Worcester Controls Corp. (asubsidiaryunit ofInvensys plc), Kitz Corp. of America, Velan Valve Corp., Balon Corp.Flowserve).Trademarks and
Flow Control Technologies. TRADEMARKS & PATENTSPatentsWe own patents that are scheduled to expire between 2004 and
20162021 and trademarks that can be renewed as long as we continue to use them. We do not believethatthe vitality and competitiveness of either of our business segments as a whole depends on any one or more patents or trademarks. Wealsoown certain licenses such as software licenses, but we also do not believe that our business as a whole depends on any one or more licenses.CUSTOMERS, CYCLICALITY AND SEASONALITYCustomers, Cyclicality and Seasonality
For the year ended December 31,
1999, no2002, revenues from one of our distributors in the Petrochemical Products segment amounted to $17.6 million. No other single customer accounted for more than 10% of revenues for either the Instrumentation and Thermal FluidRegulationControls Products Group or the Petrochemical Products Group.8We have experienced and expect to continue to experience fluctuations in revenues and operating results due to economic and business cycles. Our
business, specificallybusinesses, particularly thepetrochemical business, isPetrochemical Products Group, are 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 marketsis reduced.declines. Future changes in demand for petrochemical products could have a material adverse effect on our business, financial conditionandor results of operations. Similarly, although not to the same extent as thepetrochemicaloil and gas markets, the aerospace, military and maritime markets have historically experienced cyclical fluctuations in demandwhichthat could also have a material adverse effect on our business, financial conditionandor results of operations.We do not believe that our business is subject to seasonal fluctuationsBacklog
Our total order backlog was $79.4 million as of
a material nature. BACKLOG Backlog was $60,539,000 at March 17, 2000,February 24, 2003, compared to$57,755,000$76.9 million as of February 24, 2002. We expect all but $6.4 million of the backlog atMarchFebruary 24, 2003 will be shipped by December 31,1999.2003. Theincreasechange in ourbacklog
iswas primarily due tomodest 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 higherincreased orders for major oil and gasprices translated into additional plant maintenance spendingprojects andmodest expansionthermal fluid controls products and the October 2002 acquisitions ofexisting production capacity. This wasTomco and U.S. Para Plate. These increases were partially offset bythe European petrochemical market,reductions to order backlog in our Oklahoma manufacturing facility for Petrochemical Products asproject activity has been slower to recover. EMPLOYEESa result of decreased oil and gas drilling in North America.Employees
As of December 31,
1999,2002, our worldwide operations directly employed approximately1,7002,000 people,in addition to 79including 108 employees at our Suzhou KF Valve joint venture in theSuzhou joint venture.People’s Republic of China. We haveapproximately 7583 employees in the United Statesand Canadawho are covered by a single collective bargainingagreements.agreement. We also haveapproximately 80137 employees in Italy, 69 employees in France and 112 employees in Germany covered byunion regulations.governmental regulations or workers councils. We believe that our employee relations aregood. GOVERNMENT REGULATIONgood at this time.Segment and Geographic Financial Data
Financial information by segment and geographic area is incorporated herein by reference to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and note 16 in the notes to consolidated financial statements included in this report.
Government Regulation Regarding the Environment
As a result of
theirour 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 and Compensation and Liability Act.We currently do not
currentlyanticipate any materially adverse impact on ourresults of operations,business, financial condition orcompetitive positionresults of operations as a result of our compliance with federal, state, local and foreign environmentallaws or other legal requirements.laws. 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 thesix-month and twelve-month periodsyear ended December 31,1999 and June 30, 1999,2002, we capitalizedapproximately $45,000 and $273,000, respectively,$0.1 million related to environmental and safety controlfacilities andfacilities. We expect to capitalizeapproximately $351,000$0.2 million during the fiscal year2000.ending December 31, 2003. We also incurred and expensed$154,000 and $235,000$0.3 million ofother relatedchargesforduring therespective six and twelve month periods andyear ended December 31, 2002. We expect to incurapproximately $194,000 during 2000.and expense $0.3 million in the fiscal year ending December 31, 2003.We maintain
1518 major facilities worldwide, includingfacilities17 manufacturing operations located in the United States, Canada, Western Europe and thePeople'sPeople’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.The Instrumentation and Thermal Fluid Controls Products Group has facilities located in the United States, Canada, Germany, France, and the United Kingdom. Properties in Ronkonkoma, New York; Berlin, Connecticut; Spartanburg, South Carolina; and Auburn, California are leased. The Petrochemical Products Group has facilities located in the United States, Canada, Italy and the People’s Republic of China. Properties in Nerviano, Italy; Naviglio, Italy; Edmonton, Canada; a distribution center in Oklahoma City, Oklahoma; and Suzhou, People’s Republic of China are leased. 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 9Petrochemical 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, are well maintained, and are adequate and suitable for their intended uses. Our manufacturing facilities generally operate five days per week on one or two shifts. We believe
that theour manufacturingfacilities are currently operating at normal capacity.capacity could be increased by working additional shifts and weekends. This utilization is subject to change as a result of increases or decreases inrevenues.orders.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 availableunder an excess umbrella liability insurance policy. We also maintain a separate product liability policy with aggregate limits of $200.0 million for the aviation products produced by our worldwide operations.We believe this coverage to be
generally in accordanceconsistent 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,
ControlsSpence, andSpence Engineering Company, bothHoke, all subsidiaries of CIRCOR,arecollectively have been named as defendants or third-party defendants inover 300 civil product liability actions filedasbestos related claims brought on behalf of approximately 14,000 plaintiffs againstship owneranywhere from 50 to 400 defendants. In some instances, CIRCOR also has been named as successor in interest to one or more of these subsidiaries. These cases have been brought in state courts in California, Connecticut, Maryland, Michigan, Mississippi, New Jersey and New York, with the vast majority of claimants having brought their claims in Mississippi. The cases brought on behalf of the vast majority of claimants seek unspecified compensatory and punitive damages against all defendants in theU.S. District Court, Northern Districtaggregate. However, with respect to the complaints filed on behalf ofOhio (Cleveland) betweenapproximately 121 plaintiffs in New York, each plaintiff seeks $5.0 million compensatory damages and $5.0 million punitive damages against the1980s and 1996. These cases are partaggregate oftensdefendants under each ofthousandssix causes ofmaritime asbestos casesaction. Similarly, with respect to the complaints filed inthis courtCalifornia on behalf of eleven claimants, each plaintiff seeks approximately $400,000 compensatory damages and $2.5 million punitive damages againstmultiplethe aggregate of defendants.The ship owner defendants' third-party claimsAnd, with respect to approximately 1,384 claimants in Mississippi, each such claimant seeks approximately $5.0 million compensatory damages and $50.0 million punitive damages against the aggregate of defendants.Any components containing asbestos formerly used in Leslie, Spence 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 contributedHoke products were entirely internal to the product and, we believe, would not give rise to ambient asbestosexposure of plaintiffs who worked ondust during normal operation. As such, we believe that we have minimal, if any, liability with respect to thedefendants' 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 percentagevast majority of these cases and that these cases, in the aggregate, will not havecomea material adverse effect on our financial condition, results of operations or cash flows. However, due totrial since 1996 have not involved Leslie or Spence. Lesliethe nature andits insurers previously had been in dispute overnumber 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 ofapproximately $560,000these claims; the impact of bankruptcies of other companies currently or historically defending asbestos claims, including our co-defendants; the uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case; the impact of potential changes inlegal fees incurred to defend these cases through 1994legislative or judicial standards; the type andapproximately $300,000 in legal fees incurred from 1995 throughseverity of thepresent 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 agreeddisease alleged to beresponsible for 41%suffered by each claimant; and increases in the expense ofall legal feesmedical treatment, we are unable to reliably estimate the ultimate costs to us 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 believe that Customs is concluding its investigation and
settlement costs incurred from 1995 forward. We have established total reservesare hopeful that we will be able to achieve resolution of$1.7 million for allthis matter in the near future. In this regard, although we continue to believe that any such resolution will not result in any material financial impact, we cannot provide any assurances regarding the timing or nature of such a resolution. Moreover, if the investigation were to prove that violations of theclaims discussed aboveCustoms laws occurred, KF could be subjected to civil fines, forfeitures andwe do not believe it is reasonably likely that a range of loss(if such violations were determined to be intentional) criminal penalties, which couldoccur in excess of the amounts accrued. We have not recorded any probable third-party recoveries of our own on these claims.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 in New Jersey, we have been allocated
0.75% of the remediation costs, an amount
whichthat is not material to us. With respect to the Combe Landfill, we have settled both the FederalGovernment'sGovernment’s claim and the State of New Jersey’s claim for an amountwhichthat is immaterialand anticipate settling with the State of New Jersey for an amount not greater than that paidtothe Federal Government.us. Moreover, our insurers have covered defense and settlement costs to date with respect to the Sharkey and Combe Landfills. In addition, weare involvedhave also been named 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 also on the National Priorities List but, with respect to both sites, we have the right to indemnification fromthird parties.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 and, in this matter, we also have the right to indemnification from the former owners of the affected subsidiary. Based on currently available information, we believe thatourany share of clean-up costs at these sites attributable to us will not bematerial. 10On July 22, 1998, Watts Investment Company, a subsidiarymaterial, particularly given our indemnification rights against the respective former owners.We have reviewed all of our
former parent, Watts Industries, Inc., acquired Hoke, Inc. On October 18, 1999, the spin-off date, the ownershippending judicial and legal proceedings, reasonably anticipated costs and expenses in connection with such proceedings, and availability and limits ofHoke, Inc. was transferred to CIRCOR. Additionally, Watts Investment Company assigned to us allour insurance coverage, and we have established reserves that we believe are appropriate in light ofits rights under the Stock Purchase Agreement governing the Hoke acquisition (the "Stock Purchase Agreement"). Wethose outcomes that we believe arenow 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 sheetprobable andclosing 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 inestimable at thisdispute 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.time.ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the
periodfourth quarter ofOctober 18, 1999 to December 31, 1999the fiscal year covered by this report to a vote of security holders through solicitation of proxies or otherwise.PART II
ITEM 5. MARKET FOR THE
REGISTRANT'SREGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERSOur
Common Stockcommon stock is traded on the New York Stock Exchange under the symbol"CIR"“CIR”.The following table sets forth, forQuarterly share prices and dividends declared and paid are incorporated herein by reference to note 17 to theperiods indicated,consolidated financial statements included in this report.During the
high and low sale pricesfirst quarter of 2003, we also declared a dividend of $0.0375 per outstanding common share payable on March 17, 2003 to shareholders ofthe Common Stockrecord onthe New York Stock Exchange, as reported by the New York Stock Exchange.March 3, 2003.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 priceboard of$10 7/8.
FISCAL YEAR ENDED DECEMBER 31, 1999 HIGH LOW - ----------------------------------- ---------- -----------Quarter ended December 31, 1999............................. $ 11 1/8 $ 8 15/16We 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 bedirectors is responsible for determining our dividendpolicies. Whilepolicy. Although we currently intend topaycontinue paying cash dividends,as a proportionthe timing and level ofearnings, payments ofsuch dividends will necessarily depend on ourBoardboard ofDirectors' assessmentdirectors’ assessments of earnings, financial condition, capital requirements and other factors, including restrictions, if any, imposed by our lenders.On March 17, 2000,As of February 28, 2003, there were
17015,109,850 shares of our common stock outstanding and we had approximately 123 holders of record of our common stock. We believe theCompany's Common Stock. Therenumber of beneficial owners of our common stock was substantially greater on that date.The following table provides information as of December 31, 2002 regarding our shares of common stock that may be issued under our existing equity compensation plans, including the 1999 Stock Option and Incentive Plan (the “1999 Stock Plan”), and the Management Stock Purchase Plan, which is a component of the 1999 Stock Plan. The table sets forth the total number of shares of our common stock issuable upon the exercise of assumed options as of December 31, 2002, and the weighted average exercise price of these options:
Equity Compensation Plan Information
Plan category
Number of securities to be issued upon exercise of outstanding options, warrants and rights
Weighted Average exercise price of outstanding options, warrants and rights
Number of securities remaining available for future issuance under equity compensation plan (excluding securities referenced in column (a))
(a)
(b)
(c)
Equity compensation plans approved by security holders
1,398,369
(1)
$
12.16
(2)
519,461
Equity compensation plans not approved by security holders
–
–
–
Total
1,398,369
$
12.16
519,461
(1) Does not include 336,407 options with a weighted average exercise price of $11.44, which were issued at the time of our spin-off from Watts to replace options previously granted by Watts to individuals who became our employees.
(2) Does not include information about outstanding Restricted Stock Units under the 1999 Plan because such units do not have an exercise price. Subject to vesting and service requirements, Restricted Stock Units will convert to common stock on a one-for-one basis. See note 11 to the consolidated financial statements for further information concerning our 1999 Stock Plan in general and restricted stock units in particular. Use of Proceeds From Registered Securities
On March 16, 2001, we sold 1,552,500 shares of our common stock in a public offering at a price of $13.25 per share pursuant to a Registration Statement on Form S-3 (the “Registration Statement”) (Registration No. 333-54428), which was declared effective by the Securities and Exchange Commission on March 15, 2001. The managing underwriters of the offering were Robert W. Baird & Co. Incorporated and ING Barings LLC. Our aggregate proceeds from the offering were approximately
3,300 beneficial shareholders$18.7 million reflecting gross proceeds of $20.6 million net of underwriting fees of approximately $1.3 million and other offering costs of approximately $0.6 million. None of the proceeds of the offering were paid by us, directly or indirectly, to any of ourCommon Stock asdirectors, officers or general partners or any of their associates, to any persons owning ten percent or more of our outstanding stock, or to any of our affiliates, except for payments made 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 net proceeds from the offering were used consistent with the use of proceeds described in our registration statement and were disbursed through the quarter ended September 30, 2002. We immediately used $2.0 million of the $18.7 million in net proceeds received 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 March17, 2000. 112002, 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. During the third quarter of 2002, we used $1.6 million for scheduled debt reductions. 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 formafollowing table presents certain selected financial dataisthat has been derived from our audited consolidated financial statements and notes related thereto and should be read along with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and notes included in this report.The consolidated statements of operations and consolidated statements of cash flows data for the years ended December 31, 2002, 2001 and 2000, and the consolidated balance sheet data as of December 31, 2002 and 2001 are
derived from, and should be read in conjunction with, our audited consolidated financial statements and the related notes included in this report. The consolidated statements of operations and consolidated statements of cash flows data for the six months ended December 31, 1999 and fiscal years ended June 30, 1999 and 1998, and the consolidated balance sheet data as of December 31, 2000 and 1999 and as of June 30, 1999 and June 30, 1998, are derived from our audited consolidated financial statements not included in this report.
The selected, unaudited pro forma financial
informationdata for 1999 included innote 15 tothe following table are derived from the respective audited and unaudited consolidated financialstatements.statements for those years. The pro formadata reflects adjustments to reflect thepresentation for 1999 includes estimated additional administrative expense that would have been incurred by CIRCOR as a publicly owned, independent company. In addition, estimated incremental interest expenseand general, administrativefor estimated outstanding borrowings under the CIRCOR and otherexpenses 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.credit facilities is provided.SELECTED FINANCIAL DATA
(In thousands, except per share data)
Years Ended December 31,
Six Months Ended
December 31,
Fiscal Years Ended June 30,
2002(1)
2001(1)
2000(1)
Pro Forma
1999(1)(2)
1999(1)
Pro Forma
1999(1)(2)
1999(1)
Pro Forma
1999(2)
1999
1998
(unaudited)
(unaudited)
(unaudited)
(unaudited)
Statement of Operations Data:
Net revenues
$
331,448
$
343,083
$
316,863
$
314,726
$
314,726
$
157,265
$
157,265
$
324,258
$
324,258
$
291,580
Gross profit
98,285
103,477
95,791
100,496
100,496
48,652
48,652
103,646
103,646
93,428
Goodwill amortization expense
–
2,737
2,528
2,662
2,662
1,422
1,422
2,779
2,779
994
Operating income
30,374
33,617
27,636
27,627
27,815
13,785
13,846
29,297
29,550
38,191
Income before interest and taxes
31,060
33,096
26,876
17,059
18,152
13,325
13,386
29,526
29,779
38,497
Net income
15,577
15,596
10,560
9,894
10,550
4,650
4,880
11,736
12,510
22,425
Balance Sheet Data:
Total assets
$
390,734
$
386,121
$
347,062
$
367,085
$
367,085
$
367,085
$
367,085
$
362,370
$
359,043
$
256,914
Total debt(3)
77,990
97,662
91,533
125,127
125,127
125,127
125,127
116,248
26,582
15,753
Shareholders’ equity
243,659
222,440
191,181
183,409
183,409
183,409
183,409
169,590
259,256
168,656
Total capitalization
321,649
320,102
282,714
308,536
308,536
308,536
308,536
285,838
285,838
184,409
Other Financial Data:
Cash flow provided by (used in):
Operating activities
$
24,925
$
44,847
$
31,700
$
(519
)
$
137
$
(15,059
)
$
(14,829
)
$
19,754
$
20,528
$
21,075
Investing activities
(23,241
)
(14,501
)
5,827
(21,762
)
(21,762
)
(5,171
)
(5,171
)
(82,704
)
(82,704
)
(29,197
)
Financing activities
(20,504
)
18,618
(34,683
)
24,245
23,589
18,666
18,436
63,719
62,945
11,633
Net interest expense
6,721
7,102
9,276
9,823
8,918
4,864
4,542
9,845
8,808
3,471
Capital expenditures
4,418
4,950
3,743
11,984
11,984
4,557
4,557
9,499
9,499
6,115
Diluted earnings per common share(4)
$
1.00
$
1.04
$
0.78
n/a
n/a
n/a
n/a
n/a
n/a
n/a
Diluted weighted average common shares
Outstanding(4)
15,610
15,023
13,480
n/a
n/a
n/a
n/a
n/a
n/a
n/a
Cash dividends declared per common share
$
0.15
$
0.15
$
0.1125
$
–
$
–
$
–
$
–
n/a
n/a
n/a
Notes:
(1) The statement of operations data for the years ended December 31, 2002, 2001, 2000 and 1999 and the six months ended December 31, 1999 includes, respectively, $0.7 million, $0.2 million, $1.9 million, $0.7 million and $0.7 million of special charges associated with the closure, consolidation and reorganization of certain manufacturing plants.
(2) As adjusted for the spin-off for: the assumption by CIRCOR of selected indebtedness from Watts; our credit facility and the placement of $75.0 million of senior unsecured notes.
(3) Includes capitalized leases of: $0.1 million; $0.6 million; and $4.1 million as of December 31, 2000 and 1999 and June 30, 1999, respectively.
(4) Diluted earnings per common share and diluted weighted average common shares outstanding are applicable only for quarterly and annual periods ended after December 31, 1999, since we were not a publicly-owned company with a capital structure of our own until after the October 18, 1999 spin-off.
n/a Not applicable ITEM 7.
MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThis
Annual Reportreport contains certain statements that are"forward-looking statements"“forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995 (the"Act"“Act”) and releases issued by the Securities and Exchange Commission. The words"believe," "expect," "anticipate," "intend," "estimate"“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, uncertainties and other factors, which may causetheour actual results, performance or achievementsof the Companyto differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements.The Company undertakesFactors 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, 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 and current tensions in Iraq and throughout the Middle East. We advise you to read further about certain of these and other risk factors set forth under the caption “Certain Risk Factors That May Affect Future Results”. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.Basis of Presentation
All significant intercompany balances and transactions have been eliminated in consolidation. Certain prior period financial statement amounts have been reclassified to conform to currently reported presentations. We monitor our business in two segments: Instrumentation and Thermal Fluid Controls, and Petrochemical Products.
In March 2002, we transferred 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 to reflect this transfer and net revenues, operating income and identifiable assets are not materially different with this reclassification.
Critical Accounting Policies
The
futurefollowing discussion of accounting policies is intended to supplement the section “Summary of Significant Accounting Policies” presented in note 2 to our consolidated financial statements. These policies were selected because they are broadly applicable within our operatingresultsunits. The expenses andperformance trendsaccrued liabilities or allowances related to certain of these policies are initially based on our best estimates at the time of original entry in our accounting records. Adjustments are recorded when our actual experience, or new information concerning our expected experience, differs from underlying initial estimates. These adjustments could be material if our actual or expected experience were to change significantly in a short period of time. We make frequent comparisons of actual experience and expected experience in order to mitigate the likelihood of material adjustments.Revenue Recognition and Allowance for Sales Returns
Revenue is recognized when products are shipped and title has passed to the customer provided that no significant post-delivery obligations remain and collection of the
Company may be affected byresulting receivable is reasonably assured. Allowances for sales returns are recorded as anumberreduction offactors, including, without limitation,revenues based upon historical experience, return policies and contractual product return rights granted to customers. Adjustments to thefollowing: (i) lossallowance account are made as new information becomes available. Shipping and handling costs invoiced to customers are recorded as components ofmarket share through competition; (ii) competitive pricing pressures; (iii) ability to developrevenues andmarket new products; (iv) changes intheinstrumentation, fluid regulationassociated costs are recorded as cost of sales.Allowance for Doubtful Accounts
We estimate the collectibility of our accounts receivable 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 ofproduct bookedbad debts that may be incurred in the future. We analyze specific customer accounts, historical experience, customer concentrations andshipped within a quarter; (ix) changes in product mix; (x) fluctuatingrelationships, credit ratings, and current economic trends when evaluating the adequacy of our allowance for doubtful accounts.Inventories
Inventories are recorded at the lower of cost or market value. Cost is generally determined on the first-in, first-out (“FIFO”) basis. Where appropriate, standard cost systems are utilized for purposes of determining cost; the standards are adjusted as necessary to ensure they approximate actual costs. Estimates of the lower of cost or market value of inventory are determined at the operating unit level and are evaluated periodically. Estimates for obsolescence or unmarketable inventory are maintained based on current economic conditions, historical sales quantities and patterns and, in
markets wheresome cases, theCompany's productsspecific risk of loss on specifically identified inventories. Such inventories aremanufactured or sold; interest raterecorded at estimated realizable value net of the costs of disposal.Impairment of Long-Lived Assets
Effective January 1, 2002, we adopted Financial Accounting Standards Board (“FASB”) Statement No. 142, “Goodwill and
foreign exchange rate fluctuations; (xi) ability to integrate manufacturingOther Intangible Assets,” (“Statement No. 142”), andother 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 statementsas a result we no longer amortize goodwill. Statement No. 142 requires that a transitional impairment evaluation of goodwill and indefinite-lived intangible assets be completed within six months of theriskdate of adoption and then at least on an annual basis thereafter. During the first half of 2002, we completed our transitional impairment review and determined that there were no impairment losses related to goodwill and intangibles. During the fourth quarter of 2002, we completed our annual impairment evaluation of goodwill and indefinite-lived intangible assets and again determined that there were no impairment losses. In assessing the fair value of goodwill and indefinite-lived intangible assets, projections regarding future cash flows and other factorsset forthare made to determine the fair value of the respective assets. If these estimates or related projections change in theCompany's various filingsfuture, we may be required to record impairment charges.Other long-lived assets include property, plant, and equipment and intangibles with definite lives. We perform impairment analyses of our other long-lived assets whenever events and circumstances indicate that they may be impaired. When the
Securitiesundiscounted future cash flows are expected to be less than the carrying value of the assets being reviewed for impairment, the assets are written down to fair market value.Taxes
Significant management judgment is required in determining our provision for income taxes, deferred tax assets and
Exchange Commissionliabilities and any valuation allowance recorded against deferred tax assets. We have recorded a valuation allowance ofchanges in general economic conditions, changes in interest rates and/or exchange rates$0.7 million as of December 31, 2002, due to uncertainties related to our ability to utilize deferred tax assets, primarily consisting of certain state net operating losses andchanges in the assumptions used in making such forward-looking statements. 12On 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).state tax credits carried forward. Thefollowing discussionvaluation allowance is baseduponon estimates of taxable income in each of thesix-monthjurisdictions in which we operate and the periodendingover which our deferred tax assets will be recoverable.Other Reserves
We establish reserves for other exposures, such as environmental claims, product liability and litigation costs. Establishing loss reserves for these matters requires the use of estimates and judgment in regards to risk exposure and ultimate liability. We estimate such losses using consistent and appropriate methods; however, changes to our assumptions could materially affect our recorded liabilities for loss.
Year Ended December 31,
1999. Additionally, comparisons to prior year periods pertain2002 Compared to thepro 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 DECEMBERYear Ended December 31,1999 COMPARED TO THE SIX-MONTHS ENDED DECEMBER 31, 19982001The following tables set forth the results of operations, percentage of net revenues and the yearly percentage change in certain financial data for the
six-monthsyears ended December 31,19992002 and1998:
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 meaningful2001 (In thousands):
Year Ended December 31,
2002
2001
% Change
Net revenues
$
331,448
100.0
%
$
343,083
100.0
%
(3.4
)%
Cost of revenues
233,163
70.3
239,606
69.8
(2.7
)
Gross profit
98,285
29.7
103,477
30.2
(5.0
)
Selling, general and administrative expenses
67,166
20.3
66,919
19.5
0.4
Goodwill amortization expense
–
–
2,737
0.8
(100.0
)
Special charges
745
0.2
204
0.1
265.2
Operating income
30,374
9.2
33,617
9.8
(9.6
)
Other expense:
Interest expense, net
6,721
2.1
7,102
2.1
(5.4
)
Other (income) expense, net
(686
)
(0.2
)
521
0.1
(231.7
)
Income before income taxes
24,339
7.3
25,994
7.6
(6.4
)
Provision for income taxes
8,762
2.6
10,398
3.1
(15.7
)
Net income
$
15,577
4.7
%
$
15,596
4.5
%
(0.1
)%
Net revenues for the
six-monthsyear ended December 31,19992002 decreased by$9.7approximately $11.7 million, or5.8%3.4%,from $166.1 millionto$156.4$331.4 million compared to $343.1 million for thesame period last year.year ended December 31, 2001. The decrease in net revenuesisfor the year ended December 31, 2002 was attributable to the followingfactors:
(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 13been 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.(In thousands):
Segment
2002
2001
Total
Change
Acquisitions
Operations
Foreign Exchange
Instrumentation & Thermal Fluid Controls
$
190,524
$
193,297
$
(2,773
)
$
10,518
$
(15,325
)
$
2,034
Petrochemical
140,924
149,786
(8,862
)
–
(11,574
)
2,712
Total
$
331,448
$
343,083
$
(11,635
)
$
10,518
$
(26,899
)
$
4,746
The Instrumentation and Thermal Fluid
RegulationControls Products segment accounted forapproximately 53.8%57.5% of net revenuesduringfor thesix-month periodyear ended December 31, 2002 compared to51.6%56.3% for thecomparable period of last fiscal year.year ended December 31, 2001. The Petrochemical Products segment accounted forapproximately 46.2%42.5% of net revenuesduring the quarter compared to 48.4%for thecomparable period of last fiscal year. Revenues in these segments for the six-monthsyear ended December 31,19992002 compared to 43.7% for the year ended December 31, 2001.Instrumentation and
1998, respectively,Thermal Fluid Controls Product revenues decreased $2.8 million, or 1.4%, for the year ended December 31, 2002. Product revenues from general industrial markets decreased $17.5 million, primarily due to reduced sales volume caused by weak economic conditions in chemical processing, power generation, commercial aerospace and other general industrial instrumentation markets. Steam and HVAC markets improved later in the year with increased sales of $2.2 million over the prior year. Incremental revenue of $10.5 million provided from the June 2001 acquisitions of RTK and SART and the October 2002 acquisitions of Tomco and U.S. Para Plate and a $2.0 million increase in revenues resulting from changes in exchange rates affecting our European business units also partially offset revenue decreases in other markets. Petrochemical Products revenues decreased by $8.9 million, or 5.9%. Revenues from our North American operations decreased by $19.2 million, principally due to reduced oil and gas drilling and production activity and the short cycle maintenance, repair and overhaul (“MRO”) business, and to a lesser extent, economic weakness in chemical processing and general industrial markets. Revenues generated in the People’s Republic of China decreased by $1.2 million. These decreases in revenue wereas 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) ======== ======== =======Netpartially offset by a $8.8 million increase in revenues from our Italian subsidiary, resulting from higher volume shipments of product for large international oil and gas projects; and a $2.7 million increase in revenues resulting from changes in exchange rates which affected our Canadian and Italian operations.Gross profit decreased $5.2 million, or 5.0%, to $98.3 million for the year ended December 31, 2002 compared to $103.5 million for the year ended December 31, 2001. Gross margin decreased to 29.7% for the year ended December 31, 2002 compared to 30.2% for the year ended December 31, 2001. Gross profit for the Instrumentation and Thermal Fluid
RegulationControls Products segmentfor the six-months ended December 31, 1999decreasedslightly due to softness in capital spending for instrumentation products$4.9 million. The net decrease consisted of a $9.2 million gross profit reduction from operations, partially offset by theacquisitionincremental $3.7 million ofGO Regulator, Inc.gross profit from the June 2001 acquisitions of RTK and SART and the October 2002 acquisitions of Tomco and U.S. Para Plate, and a $0.6 million increase resulting from changes in foreign exchange rates affecting our European business units. Gross profit and gross margin decreased due to soft end-market conditions and reduced sales volume, a lower proportion of higher margin commercial aerospace and general industrial market products, a higher proportion of lower margin project order shipments, unabsorbed manufacturing costs that could not be fully avoided as orders declined and increased current year insurance costs. Gross profit for the Petrochemical Products segment decreased $0.3 million for the year ended December 31, 2002 compared to the year ended December 31, 2001. The net gross profit decrease consisted of a reduction of $0.9 million innet revenuesNorth America caused by lower product sales volume for higher margin maintenance and repair orders, competitive price reductions and higher insurance costs, partially offset by an increase in thePetrochemical segment reflected weakness in both domesticvolume, pricing and margin for large international oil and gasmarkets partially offset by the acquisitionprojects, certain manufacturing and operating cost reductions and favorable foreign exchange rate changes ofSSI 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.$0.6 million.Selling, general and administrative expenses
decreased $2.1increased $0.2 million, or 0.4%, to$34.7$67.2 million for thesix-monthsyear ended December 31,19992002 comparedtowith $66.9 million for thesame period last year. We reduced selling,year ended December 31, 2001. Selling, general and administrative expensesas revenues decreasedfor the Instrumentation and Thermal Fluid Controls Products segment increased by approximately $0.9 million. The net increase was principally the result of: $2.2 million of additional expenses related to the June 2001 acquisitions of RTK and SART and thesavingsOctober 2002 acquisitions of Tomco and U.S. Para Plate; a $0.4 million increase due to foreign exchange rate changes; offset by a $1.7 million reduction realized through lower spending for variable general and administrative and compensation expenses on lower staffing levels, partially offset by higher insurance costs. Selling, general and administrative expenses for the Petrochemical Products segment decreased $0.7 million due to $1.0 million of lower variable selling and compensation expenses; partially offset by a $0.3 million increase due to foreign exchange rate changes. Significant expense reductions realized in our North American operations were partially offset bycertainthe higher costsassociated within ourtransition to an independent public company. 14Operating incomeItalian operation as a result of increased sales activity. Corporate general and administrative expenses increased less than $0.1 million, as a result of higher corporate development, insurance costs, and legal and professional fees, partially offset bysegmentlower variable compensation and fringe benefit costs.Goodwill amortization expense was not recorded for the
six-monthsyear 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 in2002 compared with $2.7 million for the year ended December 31, 2001. Goodwill amortization expense for the year ended December 31, 2001 consisted of $2.3 million for the Instrumentation and Thermal FluidRegulationControls Products segmentis attributableand $0.4 million for the Petrochemical Products segment. On January 1, 2002, we adopted Statement No. 142 that requires goodwill no longer be amortized. See note 2 tobenefits derived from improved operating efficienciesthe consolidated financial statements for further information on our adoption of Statement No. 142.Special charges of $0.7 million 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$0.2 million were incurred in the Petrochemical Products segment for the years ended December 31, 2002 and 2001, respectively. These charges were associated with the closure, consolidation and reorganization of certain North American manufacturing operations. Special charges incurred during 2002 consisted of $0.3 million of manufacturing equipment write-offs, $0.2 million of severance costs for 16 employees and $0.2 million of exit costs principally related to leased facilities that were closed. Special charges incurred during 2001 consisted of $0.1 million of severance and $0.1 million of exit costs. Special charges were expensed in the periods incurred. The accrued liability for severance and exit costs to be paid subsequent to December 31, 2002 is less than $0.1 million.The change in operating income for the year ended December 31, 2002 compared to the year ended December 31, 2001 was as follows (In thousands):
Segment
2002
2001
Total
Change
Acquisitions
Operations
Foreign
Exchange
Instrumentation & Thermal Fluid Controls
$
28,614
$
32,158
$
(3,544
)
$
1,425
$
(5,132
)
$
163
Petrochemical
9,480
9,194
286
–
(71
)
357
Corporate
(7,720
)
(7,735
)
15
–
15
–
Total
$
30,374
$
33,617
$
(3,243
)
$
1,425
$
(5,188
)
$
520
Operating income decreased $3.2 million, or 9.6%, to $30.4 million for the year ended December 31, 2002 compared to $33.6 million for the year ended December 31, 2001. Operating income for the Instrumentation and Thermal Fluid Controls Products segment declined $3.5 million, or 11.0%, for the year ended December 31, 2002 compared to the year ended December 31, 2001. Operating income for this segment was affected by a $7.4 million decrease primarily from: lower sales volume; reduced sales of higher margin products; unabsorbed manufacturing costs in high volume manufacturing operations and higher insurance costs, partially offset by reductions in variable general and administrative and compensation expenses and lower staffing levels. This operating income decrease was partially offset by the $2.3 million from the discontinuation of amortizing goodwill, the $1.4 million contributed by the June 2001 acquisitions of RTK and SART and the October 2002 acquisitions of Tomco and U.S. Para Plate, and $0.2 million from changes in foreign exchange rates. Operating income for the Petrochemical Products segment increased $0.3 million, or 3.1%, for the year ended December 31, 2002 compared to the year ended December 31, 2001. The increase in the operating income for this segment consisted of: an increase of $0.4 million due to the discontinuation of amortizing goodwill; a net increase of $0.1 million from operating activities; a $0.3 million increase due to favorable foreign exchange rate changes, partially offset by a $0.5 million increase in special charges. The net $0.1 million increase from operating activities primarily was the result of: higher revenues and the resulting gross profits generated from large international oil and gas projects, and lower variable selling expenses; partially offset by a reduction in sales attributable to weaker MRO demand in oil and gas markets; domestic price reductions in the second, third, and fourth quarters; and increased insurance costs.
Net interest expense decreased approximately $0.4 million to $6.7 million for the year ended December 31, 2002 compared to $7.1 million for the year ended December 31, 2001. The decrease is primarily
attributablerelated todecreased orders for petrochemical facility projectsthe $15.0 million principal payment of our senior notes, the $4.6 million reduction of debt assumed from prior years acquisitions and from lower average interest rates on variable rate debt. Interest income on invested balances remained unchanged despite higher average cash balances during 2002 asthea result of lowerworld market prices for crude oil. The increaseinterest rates in 2002.Net other (income) expense decreased $1.2 million from a 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$0.5 million expense for thesix-month period was 44.8% compared to 41.4% for comparable prioryearperiod. 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-monthsended December 31,1999 reflects the benefits primarily derived from our former parent company's implementation of tax planning strategies. Net2001 to a net ($0.7) million incomedecreased $2.0 million to nearly $4.9 million,for thesix-month period, compared to last year's of $6.8 million. Thisyear ended December 31, 2002. The decrease is primarily attributable to a $1.1 million increase in favorable foreign exchange income, a $0.4 million reduction in minority interest expense resulting from reduced profitability of our Chinese joint venture, partially offset by $0.1 million higher losses on thefactorsdisposal of capital equipment, $0.1 million in fees incurred for the early extinguishments of debt and a $0.1 million reduction in nonoperating municipal grant income.The effective tax rate decreased to 36.0% for the year ended December 31, 2002 compared to 40.0% for the year ended December 31, 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 decreased less than $0.1 million, or 0.1%, to $15.6 million for the year ended December 31, 2002 compared to $15.6 million for the year ended December 31, 2001. The net decrease is the result of reduced gross profit on lower current year revenue, additional insurance expenses, and higher special charges in the current year, offset by the elimination of goodwill amortization expense, improved operating results within the Petrochemical Products segment, lower non-operating expenses, and reduced net interest expenses, as discussed above.
RESULTS OF OPERATIONS FOR THE TWELVE-MONTHS ENDED JUNE 30, 1999 COMPARED TO THE TWELVE-MONTHS ENDED JUNE 30, 1998Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000
The following tables set forth the results of operations, percentage of net revenues and the yearly percentage change in certain financial data for the
fiscalyears endedJune 30, 1999December 31, 2001 and1998:
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)% ===== =====152000 (In thousands):
Year Ended December 31,
2001
2000
% Change
Net revenues
$
343,083
100.0
%
$
316,863
100.0
%
8.3
%
Cost of revenues
239,606
69.8
221,072
69.8
8.4
Gross profit
103,477
30.2
95,791
30.2
8.0
Selling, general and administrative expenses
66,919
19.5
63,718
20.1
5.0
Goodwill amortization expense
2,737
0.8
2,528
0.8
8.3
Special charges
204
0.1
1,909
0.6
(89.3
)
Operating income
33,617
9.8
27,636
8.7
21.6
Other expense:
Interest expense, net
7,102
2.1
9,276
2.9
(23.4
)
Other expense, net
521
0.1
760
0.2
(31.4
)
Income before income taxes
25,994
7.6
17,600
5.6
47.7
Provision for income taxes
10,398
3.1
7,040
2.3
47.7
Net income
$
15,596
4.5
%
$
10,560
3.3
%
47.7
%
Net revenues for the
twelve-monthsyear endedJune 30, 1999December 31, 2001 increased by$34.1$26.2 million, or11.8%8.3%,from $289.0 millionto$323.1$343.1 million compared to $316.9 million for thefiscalyear endedJune 30, 1998.December 31, 2000. The increase in net revenuesisfor the year ended December 31, 2001 was attributable to the followingfactors:(In thousands):
(DOLLARS IN THOUSANDS) -------------------Acquisitions.............................................. $79,171 27.4 % Operations................................................ (45,552) (15.8)% Foreign exchange.......................................... 489 0.2 % ------- ----- Total................................................... $34,108 11.8 % ======= =====
Segment
2001
2000
Total
Change
Acquisitions
Operations
Foreign
Exchange
Instrumentation & Thermal Fluid Controls
$
193,297
$
183,524
$
9,773
$
9,911
$
1,331
$
(1,469
)
Petrochemical
149,786
133,339
16,447
–
19,150
(2,703
)
Total
$
343,083
$
316,863
$
26,220
$
9,911
$
20,481
$
(4,172
)
The
growth in revenues is primarily attributable to recently acquired companies. Hoke, Inc., which was acquired during July 1998, is part of theInstrumentation and Thermal FluidRegulationControls ProductsGroup. Telford Valve and Specialties acquired in March 1998, is partsegment accounted for 56.3% of net revenues for the year ended December 31, 2001 compared to 57.9% for the year ended December 31, 2000. The Petrochemical ProductsGroup. The decreasesegment accounted for 43.7% of net revenues for the year ended December 31, 2001 compared to 42.1% for the year ended December 31, 2000.Instrumentation and Thermal Fluid Controls Product revenues increased $9.8 million, or 5.3%, for the year ended December 31, 2001. Revenue increases were due to: $9.9 million of incremental revenue from the Rockwood Swendeman product line, purchased in November 2000, and from the RTK and SART companies acquired at the end of June 2001; a $4.0 million net increase in thermal fluid controls revenues resulting from general year-over-year demand and increased shipments of marine and industrial steam trap applications offset by reduced revenues for commercial and other industrial applications; and a $3.5 million increase in revenues from
operations isEuropean power and power generation, medical and general instrumentation markets, primarilyattributabledue todecreasesincreased sales penetration and higher volume sales. These increases were partially offset by a $6.2 million decrease inunitNorth American and Asian demand for products in our instrumentation applications, principally the result of lower demand in the chemical processing, semi-conductor manufacturing and general industrial markets; and a $1.4 million reduction resulting from changes in exchange rates affecting our Canadian and European business units. Revenues from aerospace customers were relatively unchanged as gains early in the year were offset by a reduction in revenues following the September 11th terrorist attacks. The $16.4 million increase in Petrochemical Products revenues for the year ended December 31, 2001, or 12.3%, was the result of: $9.4 million in higher North American revenues related to increased customer spending on maintenance and repair and increased capital project spending in both the oil and gas markets; a $9.1 million increase in revenues fromour Italian based operation due to higher shipments of
both domestic andproducts for large international oil and gasvalves. Revenues of these products have been adversely affected by the reduced demand for our products used in petrochemical facility projectsconstruction projects; andmaintenance 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 $31.0a $0.6 millionor 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. Theincrease ininstrumentation and fluid regulation netrevenuesof $65.1 million, or 59.0%, for the fiscal year ended June 30, 1999 consisted primarily of volume derivedfromacquisitions 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.Chinese customers. Theseacquisitions operated at a gross margin slightly higher than the remainder of the Company. The increased gross profits from acquisitionsincreases were partially offset by a $2.7 million decrease resulting from changes in exchange rates that affected our Canadian and Italian-based operations.Gross profit increased $7.7 million, or 8.0%, to $103.5 million for the year ended December 31, 2001 compared to $95.8 million for the year ended December 31, 2000. Gross margin remained the same at 30.2% for both 2001 and 2000. Gross profit for the Instrumentation and Thermal Fluid Controls Products segment increased $1.1 million as a result of: a $3.4 million increase from the prior year acquisition of the Rockwood Swendeman product line and the current year acquisitions of RTK and SART; partially offset by a net decrease of $1.9 million from lower gross profit from operations. The Instrumentation and Thermal Fluid Controls segment gross profits were negatively affected by the slowdown in the general industrial market. Despite spending cuts implemented during the year, unabsorbed manufacturing costs decreased gross
profitsprofit for this segment. This segment’s gross margin also decreased by $0.4 million due to unfavorable foreign exchange. Gross profit for the Petrochemical Products segment increased $6.6 million for the year ended December 31, 2001 compared to the year ended December 31, 2000. Gross profit improvement of $7.1 million was primarily due to: improved operating efficiencies inthe domestic and internationala key North American manufacturing plant; higher sales volume in a recovering worldwide oil and gasvalve product lines. Lower energy prices resulted in lower demand, increased competitionmarkets; selective price increases andadversely impacted unit pricing. Additionally, the reduced manufacturing levels, caused by these reduced revenues, also created unfavorable overhead absorption of fixed manufacturing expenses thereby decreasing grossimproved margins infiscalour Italian-based manufacturing operation. During the year1999 comparedended December 31, 2000, both gross profit and gross margin were negatively impacted as a result of inefficiencies and delays in the completion of the consolidation and integration of certain product lines in one of our key North American plants. Gross profits for our Italian-based operation increased in 2001 despite accepting reduced margin contracts that were shipped and recognized in the first quarter. The Italian plant’s first quarter competitive pricing strategy, for certain large oil and gas projects, enabled us tofiscaldemonstrate our engineering and manufacturing capabilities on the largest size ball valves and qualified us for follow-on application orders. Unfavorable current year1998.foreign currency exchange rates reduced gross profit for the Petrochemical Products segment by $0.5 million.Selling, general and administrative expenses increased
$18.7$3.2 million, or 5.0%, to$75.2$66.9 million for thefiscalyear endedJune 30, 1999.December 31, 2001 compared with $63.7 million for the year ended December 31, 2000. Operating expenses for the Instrumentation and Thermal Fluid Controls Products segment increased by $1.5 million. This increaseis attributableresulted from $2.1 million incremental current year operating expenses related to theinclusionacquisitions of theexpenses related with recent 16acquisitions.Rockwood Swendeman product line and RTK and SART. This increase was partially offset byboth cost$0.3 million of operational expense reductions in our other businesses andreduced$0.3 million lower expenses due to changes in foreign currency exchange rates. The Petrochemical Products segment operating expenses increased $0.7 million for the year ended December 31, 2001 compared to the year ended December 31, 2000 primarily the result of $1.0 million of increased variable selling and other operating expenses,within our oilpartially offset by a $0.3 million decrease due to changes in foreign currency exchange rates. Corporate spending increased by $1.0 million for the year ended December 31, 2001, attributable to higher variable employee compensation andgas business units.acquisition search expenses compared to the year ended December 31, 2000.Goodwill amortization expense increased by $0.2 million to $2.7 million for the year ended December 31, 2001 compared to $2.5 million for the year ended December 31, 2000 as a result of the acquisitions of the Rockwood Swendeman product line and RTK and SART.
Special charges of $0.2 million were incurred in the Petrochemical Products segment for the year ended December 31, 2001. During the year ended December 31, 2000, special charges of $1.9 million were incurred, of which $1.6 million were incurred in the Instrumentation and Thermal Fluid Controls Products segment and $0.3 million in the Petrochemical Products segment. These special charges were associated with the closure, consolidation and reorganization of certain U.S. manufacturing operations and were expensed in the periods as incurred.
The change in operating income for the year ended December 31, 2001 compared to the year ended December 31, 2000 was as follows (In thousands):
Segment
2001
2000
Total
Change
Acquisitions
Operations
Foreign
Exchange
Instrumentation & Thermal Fluid Controls
$
32,158
$
31,211
$
947
$
1,257
$
(196
)
$
(114
)
Petrochemical
9,194
3,137
6,057
–
6,246
(189
)
Corporate
(7,735
)
(6,712
)
(1,023
)
–
(1,023
)
–
Total
$
33,617
$
27,636
$
5,981
$
1,257
$
5,027
$
(303
)
Operating income
by segmentincreased $6.0 million, or 21.6%, to $33.6 million forfiscalthe year1999 and fiscalended December 31, 2001 compared to $27.6 million for the year1998 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 operatingended December 31, 2000. Operating income in the Instrumentation and Thermal FluidRegulationControls ProductsGroup issegment increased $0.9 million primarily attributableprimarilytoacquisitionsimproved manufacturing andimprovedadministrative operating efficiencieswithin our steam related product lines.and the absence of special charges in the current year, partially offset by the unfavorable impact of unabsorbed manufacturing costs. Thedecrease$6.1 million increase in operating income in the Petrochemical ProductsGroup reflects reduced energy pricessegment was primarily the result of additional gross profits due to: higher current year sales volume; selective price increases; andreduced demandmanufacturing process improvements and efficiencies. Corporate spending increased by $1.0 million forour products used in petrochemical facility projectsthe year ended December 31, 2001 compared to the year ended December 31, 2000.Net interest expense decreased approximately $2.2 million to $7.1 million for the year ended December 31, 2001 compared to $9.3 million for the year ended December 31, 2000. The decrease was due to: lower average debt balances outstanding; lower average interest rates on variable rate debt; and
maintenance programs. Thean increase in current year interest income on invested balances. Significant net positive cash flow generated during our prior year enabled us to reduce our revolving line of credit debt balance to zero as of December 31, 2000. Proceeds from our equity offering in March 2001 were used to: payoff first quarter borrowings from our unsecured revolving line of credit; fund our June 2001 acquisitions; reduce outstanding debt balances of acquired companies; and generate interest income on invested balances.Other expense
isdecreased $0.2 million to $0.5 million for the year ended December 31, 2001, compared to $0.8 million for the year ended December 31, 2000, primarilydue to the additional costas a result ofborrowed funds resultingreductions in net losses fromthe acquisition of Hoke, Inc.foreign currency exchange rate changes.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 toremained thedecreased net revenues and gross margins insame at 40.0% for thepetrochemical 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 periodyears ended December 31,1999,2001 and 2000.Net income increased $5.0 million, or 47.7%, to $15.6 million for the
Company used $14.8year ended December 31, 2001 compared to $10.6 millionoffor the year ended December 31, 2000. Improved operating results within the Petrochemical Products segment, lower special charges in the current year and reduced net interest expenses were the primary reasons for this change.Liquidity and Capital Resources
The following table summarizes our cash flow activities for the periods indicated (In thousands):
Year Ended
December 31,
2002
2001
Cash flow from:
Operating activities
$
24,925
$
44,847
Investing activities
(23,241
)
(14,501
)
Financing activities
(20,504
)
18,618
Effect of exchange rates on cash balances
192
(146
)
Increase (decrease) in cash and cash equivalents
$
(18,628
)
$
48,818
During the year ended December 31, 2002, we generated $24.9 million in cash flow from operating
activities principally to fundactivities. Net income plus non-cash charges, such as depreciation, amortization, losses on the disposal and write-off of property, plant and equipment and the change in deferred taxes, accounted for $29.7 million of operating cash flows. Increases in working capital used $4.8 million of operating cash, and consisted of: a decrease in trade accounts receivable of $6.7 million, an increase in inventories of $4.3 million, an increase in prepaid expenses and other assets of $2.4 million, and a decrease in accounts payable accrued expenses and other liabilities of $4.9 million. The $23.2 million used$5.2for investing activities included: a net $18.9 million used for acquisition activities that included $17.6 million for the purchases of Tomco and U.S. Para Plate, approximately $2.5 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 $1.1 million in purchase price adjustments relating to our prior acquisitions of Leslie Controls, Inc. and Hoke, Inc.; $4.4 million for the purchase of capital equipment, partially offset by the receipt of $0.1 million in proceeds from the disposal of equipment. We used $20.5 million for financing activities that included: a net $20.6 million reduction of our long-term debt, $2.3 million to pay dividends to shareholders; offset by $2.4 million in cash received from the exercise of stock options and the conversion of restricted stock units. The effects of exchange rate changes on cash and cash equivalents increased cash balances by $0.2 million.We have $4.1 million of marketable securities that are designated as available for sale and readily convertible to cash
in investing activities principally to purchase $4.6 million ofshould the need for additional working capitalequipment.arise.Our capital expenditure budget for the fiscal year ending December 31, 2003 is $8.0 million. Capital expenditures
wereare primarily formanufacturingmachinery and equipment as part of our ongoing commitment toconsolidatefurther improve our manufacturing operations andimprove 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 millionto manufacture new products.The ratio of
senior unsecured notescurrent assets toeleven 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, andcurrent liabilities as of December 31,1999,2002 was 3.2:1 compared to 3.4:1 as of December 31, 2001. Cash and cash equivalents were $38.4 million as of December 31, 2002 compared to $57.0 million as of December 31, 2001. Net debt (total debt less cash and marketable securities) as a percentage of total net capital (net debt plus equity) employed was 12.7% as of December 31, 2002 compared to 15.5% as of December 31, 2001.As of December 31, 2002 and 2001, we had
$43.0no amounts outstanding under our corporate unsecured revolving credit facility. On December 4, 2002, we refinanced this credit facility by entering into an amendment to the original credit agreement that extends the term of the credit facility to December 2006. The amendment to the credit agreement also provides us with an option to increase the line to $100 million, subject to leverage and certain other conditions. In accordance with the credit facility agreement, the rate of interest and facility fees we are charged vary based upon changes in our net debt leverage ratio. We can borrow at either the Euro dollar rate plus an applicable margin of 0.625% to 1.625%, or at a base rate plus an applicable margin of 0% to 0.25%. The base rate for any day is the higher of the federal funds rate plus ½ of 1% or the lender’s prime rate. We are also required to pay an unused facility fee that can range from 0.15% to 0.35% per annum, and a utilization fee of 0.125% per annum if our borrowings exceed 50% of the credit facility limit. As of December 31, 2002, we had $75.0 million availablefromunder theunsecuredrevolving credit facility to support our acquisition program, working capital requirements andforgeneral corporate purposes.Also,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
fulfill a representation made to the Internal Revenue Service as partshareholders; acquire and dispose ofthe application for the tax-free treatmentbusinesses; invest in capital equipment; participate in certain higher yielding long-term investment vehicles; and issue additional shares ofthe 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.our stock. Weintend to use the proceeds from the subsequent equity offering and availability from the unsecured line of credit to fund future acquisitions. 17The 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 equivalentswere$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 wasin compliance with all covenants related to our existingdebtsdebt obligations at December 31, 2002 and 2001.On February 5, 2002, the minority interest shareholder of RTK exercised the put option rights granted in the purchase agreement, thereby electing to sell us the remaining 25% interest in RTK. Accordingly, we disbursed an additional $2.5 million during the first quarter of 2002 for the purchase of this 25% interest in RTK.
On April 9, 2002, we filed a registration statement on Form S-3. The registration statement, which 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 our common stock offered by this prospectus. We paid the preparation and filing expenses for the registration statement for these shares.
During August 2002, we paid down the remaining outstanding $3.5 million of debt that had been assumed as a part of our purchase of RTK. As a result of pre-paying these debt balances, we also incurred and paid an additional $0.1 million in bank fees.
In October 2002, we purchased Tomco and U.S. Para Plate for $17.6 million in cash, net of cash acquired, and assumed $0.7 million in debt and $4.0 million of marketable securities at fair market value. We also deposited an additional $2.3 million into separate escrow accounts for the benefit of the sellers, subject to any such claims by us as are allowed in accordance with the purchase agreements.
We anticipate that availableAny fundsprovided from ongoing operationsremaining in the escrow funds at the conclusion of the contingency periods will besufficientdistributed tomeetthe sellers and accounted for as additional purchase cost.Beginning on October 19, 2002, we commenced making $15.0 million annual payments, in accordance with the note agreement, to reduce the $75.0 million outstanding balance of our unsecured 8.23% senior notes, which mature in October 2006.
During November 2002, we contributed an additional $3.0 million into our pension plan trust, increasing the level of current
operating requirements and anticipated capital expenditures overyear contributions to $5.7 million. This additional contribution was made to increase plan assets to a level that was equivalent to thenext 12 months.accumulated benefit obligations as of December 31, 2002.From time-to-time, we are involved with product liability, environmental
proceedingsand other litigation proceedings and incur costs on an ongoing basis related to these matters. We have not incurred material expendituresinduring thesix-month period endingyear ended December 31,19992002 in connection with any of these matters.The following table summarizes our significant contractual obligations and commercial commitments at December 31, 2002 that affect our liquidity (In thousands):
Payments due by Period
Total
Less Than
1 Year
1 – 3
Years
4 – 5
Years
Thereafter
Contractual Cash Obligations:
Notes payable
$
3,166
$
3,166
$
–
$
–
$
–
Current portion of long-term debt
15,430
15,430
–
–
–
Total short-term borrowings
18,596
18,596
–
–
–
Long-term debt, less current portion
59,394
–
31,418
22,814
5,162
Operating leases
16,097
3,249
5,284
4,374
3,190
Total contractual cash obligations
$
94,087
$
21,845
$
36,702
$
27,188
$
8,352
Other Commercial Commitments:
U.S. standby letters of credit
$
2,045
$
1,880
$
–
$
–
$
165
International standby letters of credit
4,103
1,930
1,843
330
–
Commercial contract commitments
2,543
1,290
949
287
17
Total commercial commitments
$
8,691
$
5,100
$
2,792
$
617
$
182
We anticipate that available cash balances, marketable securities that are readily convertible to cash 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.
Effects of Recent Accounting Pronouncements
We adopted FASB Statement No. 142, “Goodwill and Other Intangible Assets,” on January 1, 2002. See
Note 12note 2 to the consolidated financial statements contained in Item 8 for further information concerning our adoption of Statement No. 142.We also adopted FASB Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“Statement No. 144”) 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 a material impact on our consolidated results of operations or financial position.
In April 2002, FASB Statement No. 145, “Rescission of FASB Statement Nos. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections,” (“Statement No. 145”), 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, FASB Statement No. 146, “Accounting for Costs Associated With Exit or Disposal Activities,” (“Statement No. 146”), 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.
In December 2002, FASB Statement No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-An Amendment of SFAS No. 123,” (“Statement No. 148”), was issued. Statement No. 148 amends Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“Statement No. 123”), to provide alternative methods of transition for a voluntary change to the fair-value-based method of accounting for stock-based employee compensation that measures the associated compensation cost on the date of the
Consolidated Financial Statements, Contingenciesaward andEnvironmental Remediation. YEAR 2000 Sincerecognizes the expense over the service period. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in not only annual, but also interim financial statements about the effect the fair value method would have had on reported results. The transition and annual disclosure requirements of Statement No. 148 are effective for fiscal years ending after December 15, 2002. We have adopted the annual disclosure provisions of Statement No. 148 in the consolidated financial statements contained in Item 8. The interim disclosure requirements are effective for interim periods beginning after December 15, 2002. We have chosen to continue to account for stock-based compensation for employees using the intrinsic method prescribed in APB No.25. The method does not result in recording an associated expense in our results of operations until the options are exercised.FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34,” (“FIN No. 45”) was issued in November 2002. FIN No. 45 elaborates on the disclosures to be made by a guarantor and clarifies requirements relating to the guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. FIN No. 45 requires that upon issuance of a guarantee, companies recognize a liability for the fair value of the obligation it assumes under that guarantee. We have adopted the annual disclosure provisions of FIN No. 45 in the consolidated financial statements contained in Item 8. We will adopt the provisions for initial recognition and measurement and interim disclosures during the first quarter of 2003. We do offer warranties, but the returns under warranty have been immaterial. We have not issued any guarantees other than for stand-by letters of credit used in the ordinary course of conducting our business. The adoption of FIN No. 45 is not expected to have a material effect on the consolidated financial statements.
In January 2003, FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,” (“FIN No. 46”) was issued. FIN No. 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1,
20002003, the provisions of FIN No. 46 must be applied for the first interim or annual period beginning after June 15, 2003. We have no variable interest entities at this time, and as such, the adoption of FIN No. 46 will not have an effect on the consolidated financial statements.CERTAIN RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
Set forth below are certain risk factors that we believe are material to our stockholders. If any of the following risks occur, our business, financial condition, results of operations, and reputation could be harmed. You should also consider these risk factors when you read “forward-looking statements” elsewhere in this report. You can identify forward-looking statements by terms such as “may,” “hope,” “will,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” or “continue,” the negative of those terms or other comparable terminology. Those forward-looking statements are only predictions and can be adversely affected if any of the following risks occur:
Some of our end-markets are cyclical, which may cause us to experience fluctuations in revenues or operating results.
We have experienced, and expect to continue to experience, fluctuations in revenues and operating results due to economic and business cycles. We sell our products principally to oil, gas, petrochemical, process, power, aerospace, military, heating, ventilation and air conditioning, or HVAC, maritime, pharmaceutical, medical and instrumentation markets. Although we serve a variety of markets to avoid a dependency on any one, a significant downturn in any one of these markets could cause a material reduction in our revenues that could be difficult to offset.
In particular, our petrochemical business is cyclical in nature as the worldwide demand for oil and gas fluctuates. When worldwide demand for oil and gas is depressed, the demand for our products used in maintenance and repair of existing oil and gas applications, as well as exploration or new oil and gas project applications, is reduced. As a result, we historically have generated lower revenues and profits in periods of declining demand for petrochemical products. Therefore, results of operations for any particular period are not necessarily indicative of the results of operations for any future period. Future downturns in demand for petrochemical products could have a material adverse effect on our business, financial condition or results of operations. 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 that also could have a material adverse effect on our business, financial condition or results of operations.
We face the 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, as well as current tensions in Iraq and the rest of the Middle East.
The terrorist attacks have negatively impacted general economic, market and political conditions. In particular, the terrorist attacks, compounded with the slowing national economy, have resulted in reduced revenues in the aerospace and general industrial markets in fiscal year 2002. Additional terrorist acts or acts of war (wherever located around the world) may cause damage or disruption to our business, our facilities, our joint-venture partners or our employees which could significantly impact our business, financial condition or results of operations. The potential for future terrorist attacks, the national and international responses to terrorist attacks, and other acts of war or hostility, including the current tensions in Iraq and the Middle East, have created many economic and political uncertainties, which could adversely affect our business and results of operations in ways that cannot presently be predicted. In addition, with manufacturing facilities located worldwide, including facilities located in the United States, Canada, Western Europe and the People’s Republic of China, we may be impacted by terrorist actions not only against the United States but in other parts of the world as well. We are predominately uninsured for losses and interruptions caused by terrorist acts and acts of war.
If we cannot continue operating our manufacturing facilities at current or higher levels, our results of operations could be adversely affected.
We operate a number of manufacturing facilities for the production of our products. The equipment and management systems necessary for such operations may break down, perform poorly, or fail, resulting in fluctuations in manufacturing efficiencies. Such fluctuations may affect our ability to deliver products to our customers on a timely basis, which could have a material adverse effect on our business, financial condition or results of operations.
We face significant competition in our markets and, if we are not able to respond to competition in our markets, our revenues may decrease.
We face significant competition from a variety of competitors in each of our markets. Some of our competitors have substantially greater financial, marketing, personnel and other resources than we do. New competitors also could enter our markets. We consider product quality, performance, price, distribution capabilities and breadth of product offerings to be the primary competitive factors in our markets. Our competitors may be able to offer more attractive pricing, duplicate our strategies, or develop enhancements to products that could offer performance features that are superior to our products. Competitive pressures, including those described above, and other factors could adversely affect our competitive position, involving a loss of market share or decreases in prices, either of which could have a material adverse effect on our business, financial condition or results of operations. In addition, some of our competitors are based in foreign countries and have cost structures and prices based on foreign currencies. Accordingly, currency fluctuations could cause our U.S. dollar-priced products to be less competitive than our competitors’ products that are priced in other currencies.
If we experience delays in introducing new products or if our existing or new products do not achieve or maintain market acceptance, our revenues may decrease.
Our industries are characterized by: intense competition; changes in end-user requirements; technically complex products; and evolving product offerings and introductions.
We believe our future success will depend, in part, on our ability to anticipate or adapt to these factors and to offer, on a timely basis, products that meet customer demands. Failure to develop new and innovative products or to custom design existing products could result in the loss of existing customers to competitors or the inability to attract new business, either of which may adversely affect our revenues. The development of new or enhanced products is a complex and uncertain process requiring the anticipation of technological and market trends. We may experience design, manufacturing, marketing or other difficulties, such as an inability to attract a sufficient number of qualified engineers, that could delay or prevent our development, introduction or marketing of new products or enhancements and result in unexpected expenses.
Implementation of our acquisition strategy may not be successful, which could affect our ability to increase our revenues or could reduce our profitability.
One of our continued strategies is to increase our revenues and expand our markets through acquisitions that will provide us with complementary instrumentation and thermal fluid controls and petrochemical products. We expect to spend significant time and effort in expanding our existing businesses and identifying, completing and integrating acquisitions. We expect to face competition for acquisition candidates that may limit the number of acquisition opportunities available to us and may result in higher acquisition prices. We cannot be certain that we will be able to identify, acquire or profitably manage additional companies or successfully integrate such additional companies without substantial costs, delays or other problems. Also, there can be no assurance that companies we acquire in the future will achieve revenues, profitability or cash flows that justify our investment in them. In addition, acquisitions may involve a number of special risks, including: adverse short-term effects on our reported operating results; diversion of management’s attention; loss of key personnel at acquired companies; or unanticipated management or operational problems or legal liabilities. Some or all of these special risks could have a material adverse effect on our business, financial condition or results of operations.
If we fail to manufacture and deliver high quality products, we may lose customers.
Product quality and performance are a priority for our customers since many of our product applications involve caustic or volatile chemicals and, in many cases, involve processes that require precise control of fluids. Our products also are used in the aerospace, military, commercial aircraft, pharmaceutical, medical, analytical equipment, oil and gas exploration, transmission and refining, chemical processing, and maritime industries. These industries require products that meet stringent performance and safety standards. If we fail to maintain and enforce quality control and testing
procedures, our products will not meet these stringent performance and safety standards. Substandard products would seriously harm our reputation, resulting in both a loss of current customers to our competitors and damage to our ability to attract new customers, which could have a material adverse effect on our business, financial condition or results of operations.
If we are unable to continue operating successfully overseas or to successfully expand into new international markets, our revenues may decrease.
We derive a significant portion of our revenue from sales outside the United States. In addition, one of our key growth strategies is to market our products in international markets not currently served by us in portions of Europe, Latin America and Asia. We may not succeed in marketing, selling and distributing our products in these new markets. Moreover, conducting business outside the United States is subject to additional risks, including currency exchange rate fluctuations, changes in regional, political or economic conditions, trade protection measures such as tariffs or import or export restrictions, and unexpected changes in regulatory requirements. One or more of these factors could prevent us from successfully expanding into new international markets and could also have a material adverse effect on our current international operations.
Prices of our raw materials may increase which may adversely affect our business.
We obtain our raw materials for the manufacture of our products from third-party suppliers. We do not have contracts with many of these suppliers that require them to sell us the materials we need to manufacture our products. Historically, stainless steel, iron and carbon steel, in particular, have each increased in price as a result of increases in demand. While in the past we have not experienced
any operational or business interruptions related to Year 2000 issues. The Company completed its Year 2000 programdifficulties in obtaining the raw materials we require (including stainless steel, cast iron and carbon steel), we cannot be certain that our suppliers will continue tomonitor itprovide us with the raw materials we need in the quantities requested or at a price we are willing to pay. In the past we have been able to partially offset increases in the cost of raw materials by increased sales prices, active materials management, product engineering programs and the diversity of materials used in our production processes. However, we cannot be certain that we will be able to accomplish this in the future. Since we do not control the actual production of these raw materials, we may also be subject to delays caused by interruption in production of materials for reasons we cannot control. These include job actions or strikes by employees of suppliers, transportation interruptions and natural disasters or other catastrophic events. Our inability to obtain adequate supplies of raw materials for our products at favorable prices, or at all, could have a material adverse effect on our business, financial condition or results of operations.A change in international governmental policies or restrictions could result in decreased availability and increased costs for certain components and finished products that we outsource, which could adversely affect our profitability.
Like most manufacturers of fluid control products, we attempt, where appropriate, to reduce costs by seeking lower cost sources of certain components and finished products. Many such sources are located in developing countries such as
appropriate.the People’s Republic of China, India and Taiwan where a change in governmental approach toward U.S. trade could restrict the availability to us of such sources. In addition, periods of war or other international tension could interfere with international freight operations and hinder our ability to take delivery of such components and products. A decrease in the availability of these items could hinder our ability to meet timely our customers’ orders. We attempt, when possible, to mitigate this risk by maintaining alternate sources for these components and products and by maintaining the capability to produce such items in our own manufacturing facilities. However, even when we are able to mitigate this risk, the cost of obtaining such items from alternate sources or producing them ourselves is often considerably greater, and a shift toward such higher cost production could therefore adversely affect our profitability.The costs of complying with existing or future environmental regulations, and of curing any violations of these regulations, could increase our expenses or reduce our profitability.
We are subject to a variety of environmental laws relating to the storage, discharge, handling, emission, generation, use and disposal of chemicals, solid and hazardous waste and other toxic and hazardous materials used to manufacture, or
resulting from the process of manufacturing, our products. We cannot predict the nature, scope or effect of future regulatory requirements to which our operations might be subject or the manner in which existing or future laws will be administered or interpreted. Future regulations could be applied to materials, products or activities that have not
awarebeen subject to regulation previously. The costs of complying with new or more stringent regulations, or with more vigorous enforcement of these or existing regulations could be significant.Environmental laws require us to maintain and comply with a number of permits, authorizations and approvals and to maintain and update training programs and safety data regarding materials used in our processes. Violations of these requirements could result in financial penalties and other enforcement actions. We also could be required to halt one or more portions of our operations until a violation is cured. Although we attempt to operate in compliance with these environmental laws, we may not succeed in this effort at all times. The costs of curing violations or resolving enforcement actions that might be initiated by government authorities could be substantial.
The costs of complying with existing or future governmental regulations applicable to our importing and exporting practices, and of curing any violations of these regulations, could increase our expenses, reduce our revenues or reduce our profitability.
We are subject to a variety of laws regarding our international trade practices including regulations issued by the United States Customs Service, the Bureau of Export Administration, the Department of State, and the Department of Treasury. We cannot predict the nature, scope or effect of future regulatory requirements to which our international trading practices might be subject or the manner in which existing laws might be administered or interpreted. Future regulations could limit the countries into which certain of our products may be sold or could restrict our access to and increase the cost of obtaining products from foreign sources. In addition, actual or alleged violations of import-export laws could result in enforcement actions and/or financial penalties that could result in substantial costs.
We face risks from product liability lawsuits that may adversely affect our business.
We, like other manufacturers and distributors of products designed to control and regulate fluids and chemicals, face an inherent risk of exposure to product liability claims in the event that the use of our products results in personal injury, property damage or business interruption to our customers. We may be subjected to various product liability claims, including, among others, that our products include inadequate or improper instructions for use or installation, or inadequate warnings concerning the effects of the failure of our products. Although we maintain strict quality controls and procedures, including the testing of raw materials and safety testing of selected finished products, we cannot be certain that our products will be completely free from defect. In addition, in certain cases, we rely on third-party manufacturers for our products or components of our products. Although we have liability insurance coverage, we cannot be certain that this insurance coverage will continue to be available to us at a reasonable cost, or, if available, will be adequate to cover any such liabilities. We generally seek to obtain contractual indemnification from our third-party suppliers, and for us to be added as an additional insured party under such parties’ insurance policies. Any such indemnification or insurance is limited by its terms and, as a practical matter, is limited to the credit worthiness of the indemnifying or insuring party. In the event that we do not have adequate insurance or contractual indemnification, product liabilities could have a material adverse effect on our business, financial condition or results of operations.
The costs associated with the defense of asbestos-related claims and the payment of any
Year 2000 issuesjudgments or settlements with respect to such claims are subject to a number of uncertainties. As such, we cannot guarantee thatmaysuch claims ultimately will not have an adverseimpacteffect on our financial statements, results of operations or cash flows.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 general, any components containing asbestos formerly used in our products were entirely internal to the product and, we believe, 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
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 incurredcash flows. However, due to theintroductionnature andconversionnumber of variables associated with asbestos related claims, such as the rate at whichnew claims may be filed; the availability of insurance policies to continue to recover certain of our costs relating to the
Euro. OTHER In June 1998,defense and payment of these claims; theFinancial Accounting Standards Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." We will adopt SFAS 133 on January 1, 2001. Theimpact ofSFAS 133 onbankruptcies of other companies currently or historically defending asbestos claims; theConsolidated Financial Statements is still being evaluated, but is not expecteduncertainties 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 bematerial. RECENT DEVELOPMENTS Recent personnel changessuffered by each claimant; andadditions have been announced at our company. Carmine J. Bosco has been appointed Group Vice Presidentincreases in the expense of medical treatment, we are unable to reliably estimate thePetrochemical Products Group. He willultimate costs of these claims.We may be responsible for certain historical liabilities in the
operationsevent Watts and its affiliates are ultimately unable to satisfy such liabilities.Until the spin-off, we were a member of Watts’ consolidated group for federal income tax purposes. Each member of the
following: KF Industries, Inc., Telford Valve & Specialties, SSI Equipment Inc., Pibiviesse S.p.A.,consolidated group is liable for the federal income tax liability of the other members of the group, as well as for pension andSKVC. Alan J. Glass has been appointed Corporate Counselbenefit funding liabilities of the other group members. Under federal law we continue to be contingently liable for these Watts consolidated group liabilities for periods beginning before the spin-off.We entered into a distribution agreement with Watts that allocates tax, pension and
Assistant Secretary. He willbenefit funding liabilities between Watts and us. Under this agreement, Watts maintains full control and absolute discretion with regard to any combined or consolidated United States federal and state 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. These arrangements may result in conflicts of interest with Watts. In addition, if Watts is ultimately unable to satisfy its liabilities, we could be responsible foradvising executivesatisfying them, despite the distribution agreement.We would be jointly and severally liable for Watts’ federal income taxes resulting from the spin-off if the Internal Revenue Service, or IRS, treats the spin-off as a taxable distribution.
At the time of the spin-off, Watts received a ruling from the IRS to the effect that, for United States federal income tax purposes, the spin-off would be tax-free to Watts and its shareholders. If the undertakings made to the IRS regarding the spin-off are not complied with or if representations made to the IRS regarding the spin-off were inaccurate, we could lose the benefit of the IRS tax ruling and the IRS could assert that the spin-off was a taxable distribution. In that case, under United States federal income tax law, we would be jointly and severally liable with Watts for a material amount of federal income tax. In our distribution agreement with Watts, we agreed that we will be wholly responsible for that tax if it results from our act or omission, and Watts will be wholly responsible for that tax if it results from Watts’ act or omission. Under federal income tax law, however, we would be required to pay that tax if Watts was unable to, regardless of the distribution agreement.
We depend on our key personnel and the loss of their services may adversely affect our business.
We believe that our success will depend on the continued employment of our senior management team and other key personnel. If one or more members of our senior management team or other key personnel were unable or unwilling to continue in their present positions, our business could be seriously harmed. In addition, if any of our key personnel joins a competitor or forms a competing company, some of our customers might choose to use the services of that competitor or those of a new company instead of our own. Other companies seeking to develop capabilities and products similar to ours may hire away some of our key personnel. Nonetheless, if we are unable to maintain our key personnel and attract new employees, the execution of our business strategy may be hindered and our growth limited.
Various restrictions and agreements could hinder a takeover of us which is not supported by our board of directors or which is leveraged.
Our amended and restated certificate of incorporation and amended and restated by-laws, the Delaware General Corporation Law and our shareholder rights plan contain provisions that could delay or prevent a change in control in a transaction that is not approved by our board of directors or that is on
corporate matters encompassing acquisitionsa leveraged basis or otherwise. These include provisions creating a staggered board, limiting the shareholders’ powers to remove directors, anddivestitures, internationalprohibiting shareholders from calling a special meeting or taking action by written consent in lieu of a shareholders’ meeting. Inaddition, our board of directors has the authority, without further action by the shareholders, to set the terms of 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 Treasurerto issue preferred stock. Issuing preferred stock could adversely affect the voting power of theCorporation. Subsequentowners of our common stock, including the loss of voting control to others. Additionally, we have adopted a shareholder rights plan providing for the issuance of rights that will cause substantial dilution to a person or group of persons that acquires 15% or more of our shares of common stock, unless the rights are redeemed.Delaying or preventing a takeover could result in our shareholders ultimately receiving less for their shares by deterring potential bidders for our stock or assets.
Our debt agreements limit our ability to issue equity, make acquisitions, incur debt, pay dividends, make investments, sell assets, merge or raise capital.
Our senior note purchase agreement, dated October 19, 1999, and our revolving credit facility agreement, dated October 19, 1999 and most recently amended on December
31, 1999, Cosmo S. Trapani resigned his position4, 2002, govern our indebtedness to our lenders. The debt agreements include provisions which place limitations on certain activities including our ability to: issue shares of our common stock; incur additional indebtedness; create any liens or encumbrances on our assets or make any guarantees; make certain investments; pay cash dividends above certain limits; or dispose of or sell assets or enter into a merger or a similar transaction.The trading price of our common stock may be volatile and investors in our common stock may experience substantial losses.
The trading price of our common stock may be volatile. Our common stock could decline or fluctuate in response to a variety of factors, including, but not limited to: our failure to meet the performance estimates of securities analysts; changes in financial estimates of our revenues and operating results or buy/sell recommendations by securities analysts; the timing of announcements by us or our competitors concerning significant product line developments, contracts or acquisitions or publicity regarding actual or potential results or performance; fluctuation in our quarterly operating results caused by fluctuations in revenue and expenses; substantial sales of our common stock by our existing shareholders; general stock market conditions; or other economic or external factors.
In addition, the stock market as
Chief Financial Officer, Treasurera whole has recently experienced extreme price andSecretary. 18volume fluctuations. In the past, securities class action litigation has often been instituted against companies following periods of volatility in the market price of their securities. This type of litigation could result in substantial costs and a diversion of management attention and resources. Our international activities expose us to fluctuations in currency exchange rates that could adversely effect our results of operations and cash flows.
Our international manufacturing and sales activities expose us changes in foreign currency exchange rates. Such fluctuations could result in our (i) paying higher prices for certain imported goods and services, (ii) realizing lower prices for any sales denominated in currencies other than U.S. dollars, (iii) realizing lower net income, on a U.S. dollar basis, from our international operations due to the effects of translation from weakened functional currencies, and (iv) realizing higher costs to settle transactions denominated in other currencies. Any of these risks could adversely effect our results of operations and cash flows. Our major foreign currency exposures involve the markets in Western Europe, Canada and Asia.
We use forward contracts to manage the currency risk related to business transactions denominated in foreign currencies. We primarily utilize forward exchange contracts with maturities of less than eighteen months. To the extent these transactions are completed, the contracts do not subject us to significant risk from exchange rate fluctuations because they offset gains and losses on the related foreign currency denominated transactions.
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 RISKMarket Risk
The oil and gas
market hasmarkets historically have been subject to cyclicality depending upon supply and demandoffor crude oil,andits derivativesas well asand natural gas. When oilandor 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.WhenHowever, when oil and gas prices rise, maintenance and repair activity and spending for facilities projects normallyincreasesincrease, and we benefit from increased demand for valve products.INTEREST RATE RISK AtHowever, oil or gas price increases may be considered temporary in nature, or not driven by customer demand and, therefore, may result in longer lead times for increases in petrochemical sales orders. As a result, the timing and magnitude of changes in market demand for oil and gas 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 that also could have a material adverse effect on our business, financial condition or results of operations.Interest Rate Sensitivity Risk
As of December 31,
1999,2002, our primary interest rate riskrelatesis related to borrowings underits $75.0 millionour revolving creditfacility.facility and our industrial revenue bonds. The interestrate on those borrowings fluctuatesrates for our revolving credit facility and industrial revenue bonds fluctuate with changes in short-term borrowing rates. Therewas $32.0 million ofwere no borrowingsfrom theunder our revolving credit facility outstanding as of December 31,1999.2002. Based upontheexpected levels of borrowings underthisour credit facility in2000,2003 and our current balances for industrial revenue bonds, an increase in variable interest rates of 100 basis points would not have a material effect on our results of operations or cashflows (approximately $0.1 million). Information about our long-term debt appears in Note 9 to the Consolidated Financial Statements. FOREIGN EXCHANGE RATE RISKflows.Currency Exchange Risk
We use
foreign currencyforward contracts to manage the currency risk related tointercompanybusiness transactions denominated in foreign currencies. Related gains andthird party sales that occur duringlosses are recognized when thefiscal year and certain opencontracts expire, which are generally in the same period as the underlying foreign currency denominatedcommitmentstransactions. To the extent these transactions are completed, the contracts do not subject us tosell productssignificant risk from exchange rate movements because they offset gains and losses on the related foreign currency denominated transactions. As of December 31, 2002, we had forward contracts tothird parties.buy foreign currencies with a face value of $1.0 million. These contracts mature on various dates between January and March 2003. Net unrealized gains attributable to foreign currency forward contracts were less than $0.1 million at December 31, 2002 and $0.1 million at December 31, 2001. 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
speculative ortrading purposes.We use simple straight-forward instruments that are placed with major institutions.Risk management strategies are reviewed and approved by senior management beforebeing implemented. Information about our use of forward currency forward exchange contracts appears in Note 13 to the Consolidated Financial Statements. COMMODITY PRICE RISKimplementation.Commodity Price Risk
The primary raw materials used in
theour 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 fluctuationswhichthat may adversely affect our results of operations. We manage this risk by offsetting increases in commodities with increased sales prices,anactive materials management,programproduct engineering programs and the diversity of materials used in our production processes.19ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTALSUPPLEMENTARY DATACIRCOR INTERNATIONAL, INC
INDEX TO CONSOLIDATED FINANCIAL STATEMENTSIndex to Consolidated Financial Statements
PAGE --------Report ofPage
Independent
Auditors.............................. 26Auditors’ Report41
Consolidated Balance Sheets as of December 31,
1999, June 30, 19992002 andJune 30, 1998................................ 27200142
Consolidated Statements of Operations for the
six-monthsyears ended December 31,1999,2002, 2001 andDecember 31, 1998 (unaudited) and the twelve-months ended June 30, 1999 and 1998........ 28200043
Consolidated Statements of Cash Flows for the
six-monthsyears ended December 31,1999,2002, 2001 andthe Twelve-months ended June 30, 1999 and 1998......................................... 29200044
Consolidated Statements of
Stockholders'Shareholders’ Equity for thesix-monthsyears ended December 31,1999,2002, 2001 andthe twelve-months ended June 30, 1999 and 1998.............................. 30200045
Notes to the Consolidated Financial
Statements.............. 31Statements46
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.None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information called for by Item 10 is incorporated herein by reference toThe information appearing under the sections “Information Regarding Directors” and “Information Regarding Executive Officers” in our Definitive Proxy Statement
forrelating to the1999Annual Meeting of Stockholders to be held onMay 18, 2000.April 24, 2003 is incorporated herein by reference.ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the section
"Executive Compensation"“Executive Compensation” inthe Registrant'sour Definitive Proxy Statement relating to the1999Annual Meeting of Stockholders to be heldMay 18, 2000April 24, 2003 is incorporated herein by reference.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing under the section
"Security“Security Ownership of CIRCOR Common Stock by Certain Beneficial Owners, Directors and ExecutiveOfficialsOfficers of theCompany"Company” inthe Registrant'sour Definitive Proxy Statement relating to the1999Annual Meeting of Stockholders to be heldMay 18, 2000April 24, 2003 is incorporated herein by reference.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTION
The information appearing under the section
"Certain“Certain Relationships and RelatedTransactions"Transactions” inthe Registrant'sour Definitive Proxy Statement relating to the1999Annual Meeting of Stockholders to be heldMay 18, 2000April 24, 2003 is incorporated herein by reference.20ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. As required by new Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”), within the 90 days prior to the date of this report, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. We will continue to review and document our disclosure controls and procedures and consider such changes, as we may deem advisable based on future evaluations of the effectiveness of such controls and procedures
(b) Changes in internal controls. There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation. From time-to time, we may make changes in our system of internal controls aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.
PART IV
ITEM
14.15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K(a)(1)Financial Statements
(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 SchedulesStatements.
PAGE --------(a)(2)
Financial Statement Schedules
Page
Schedule
III Valuation and Qualifying Accounts for thesix monthsyears ended December 31,1999,2002, 2001 andthe twelve-months ended June 30, 1999 and 1998...................................... 50200070
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)(a)(3)
EXHIBITSExhibits
EXHIBIT NO. DESCRIPTION AND LOCATION - ----------- ------------------------Exhibit
No.
Description and Location
2
Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession:
2.1
Distribution Agreement between Watts Industries, Inc. and
the CompanyCIRCOR International, Inc. dated as of October 1, 1999, is incorporated herein by reference to Exhibit 2.1 to Amendment No. 2 tothe Company'sCIRCOR 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 Form10"10”).3
Articles of Incorporation and By-Laws:
3.1
The Amended and Restated Certificate of Incorporation of
the CompanyCIRCOR International, Inc. is incorporated herein by reference to Exhibit 3.1 tothe Company'sCIRCOR International, Inc.’s Registration Statement on Form 10, File No. 000-26961, filed with the Securities and Exchange Commission on August 6, 1999("(“Form10"10”).3.2
The Amended and Restated By-Laws of
the CompanyCIRCOR 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
the Company'sCIRCOR International, Inc.’s Registration Statement on Form 8-A, File No. 001-14962, filed with the Securities and Exchange Commission on October 21, 1999("(“Form8-A"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.
*4.2
Agreement of Substitution and Amendment of Shareholder Rights Agent Agreement dated as of November 1, 2002 between CIRCOR International, Inc. and American Stock Transfer and Trust Company.
9
Voting Trust Agreements:
9.1
The Amended and Restated George B. Horne Voting Trust
Agreement--1997Agreement-1997 dated as of September 14, 1999 is incorporated herein by reference to Exhibit 9.1 to Amendment No. 1 to theCompany'sCompany’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 Form10"10”).10
Material Contracts:
Exhibit
No.
Description and Location
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. 10.10Lease 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*10.9
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*10.10
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*10.11
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*10.12
Form of Indemnification Agreement between CIRCOR International, Inc. and each of its
directorsDirectors dated November 6, 2002 is incorporated hereinincorporatedbyreference to Exhibit 10.20 to the Form 10. 10.15reference.*10.13
Executive Employment Agreement, as amended and restated, 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. 10.17October 23, 2002.10.14
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 incorporated herein
incorporatedby reference to Exhibit 10.17 tothe Company'sCIRCOR International, Inc.’s Current23
EXHIBIT NO. DESCRIPTION AND LOCATION - ----------- ------------------------Report on Form 8-K, File No. 001-14962, filed with the Securities and Exchange Commission on October 21, 1999.10.1810.15
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 incorporated herein
incorporatedby reference to Exhibit 10.18 tothe Company'sCIRCOR International, Inc.’s Current Report on Form 8-K, File No. 001-14962, filed with the Securities and Exchange Commission on October 21, 1999.10.1910.16
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 incorporated herein
incorporatedby reference to Exhibit 10.19 tothe Company'sCIRCOR International, Inc.’s Current Report on Form 8-K, File No. 001-14962, filed with the Securities and Exchange Commission on October 21, 1999.10.2010.17
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 incorporated herein
incorporatedby reference to Exhibit 10.20 tothe Company'sCIRCOR International, Inc.’s Current Report on Form 8-K, File No. 001-14962, filed with the Securities and Exchange Commission on October 21, 1999.21 Subsidiaries
Exhibit
No.
Description and Location
10.18
Sharing agreements regarding the rights of
Registrant: A listdebt holders relative to one another in the event ofSubsidiaries of the Companyinsolvency is incorporated herein by reference to Exhibit21.110.21 on From 10 Q/A filed with the Securities and Exchange Commission on August 14, 2000.10.19
Executive Change of Control Agreement between CIRCOR, Inc. and Alan R. Carlsen dated August 8, 2000 is incorporated herein by reference to Exhibit 10.23 on Form 10-Q, File No. 001-14962, filed with the Securities and Exchange Commission on November 14, 2000.
10.20
Executive Change of Control Agreement between CIRCOR, Inc. and Kenneth W. Smith dated August 8, 2000 is incorporated herein by reference to Exhibit 10.24 on Form 10-Q, File No. 001-14962, filed with the Securities and Exchange Commission on November 14, 2000.
10.21
Executive Change of Control Agreement between CIRCOR, Inc. and Stephen J. Carriere dated August 8, 2000 is incorporated herein by reference to Exhibit 10.25 on Form 10-K, File No. 001-14962, filed with the Securities and Exchange Commission on March 7, 2001.
10.22
Executive Change of Control Agreement between CIRCOR, Inc. and Alan J. Glass dated August 8, 2000 is incorporated herein by reference to Exhibit 10.26 on Form 10-K, File No. 001-14962, filed with the Securities and Exchange Commission on March 7, 2001.
10.23
Executive Change of Control Agreement between CIRCOR, Inc. and Paul M. Coppinger dated August 1, 2001 is incorporated herein by reference to Exhibit 10.28 on Form 10-K, File No. 001-14962, filed with the Securities and Exchange Commission on March 7, 2001.
10.24
First Amendment to Executive Change of Control Agreement between Alan R. Carlsen and CIRCOR, Inc. dated December 7, 2001 is incorporated herein by reference to Exhibit 10.27 on Form 10-K, File No. 001-14962, filed with the Securities and Exchange Commission on March 12, 2002.
10.25
First Amendment to Executive Change of Control Agreement between Kenneth W. Smith and CIRCOR, Inc. dated December 7, 2001 is incorporated herein by reference to Exhibit 10.28 on Form 10-K, File No. 001-14962, filed with the Securities and Exchange Commission on March 12, 2002.
10.26
First Amendment to Executive Change of Control Agreement between Stephen J. Carriere and CIRCOR, Inc. dated December 7, 2001 is incorporated herein by reference to Exhibit 10.29 on Form 10-K, File No. 001-14962, filed with the Securities and Exchange Commission on March 12, 2002.
10.27
First Amendment to Executive Change of Control Agreement between Alan J. Glass and CIRCOR, Inc. dated December 7, 2001 is incorporated herein by reference to Exhibit 10.30 on Form 10-K, File No. 001-14962, filed with the Securities and Exchange Commission on March 12, 2002.
10.28
First Amendment to Executive Change of Control Agreement between Paul M. Coppinger and CIRCOR, Inc. dated December 7, 2001 is incorporated herein by reference to Exhibit 10.31 on Form 10-K, File No. 001-14962, filed with the Securities and Exchange Commission on March 12, 2002.
10.29
Executive Change of Control Agreement between Douglas E. Frank and CIRCOR, Inc. dated December 7, 2001 is incorporated herein by reference to Exhibit 10.32 on Form 10-K, File No. 001-14962, filed with the Securities and Exchange Commission on March 12, 2002.
10.30
Executive Change of Control Agreement between Carl J. Nasca and CIRCOR, Inc. dated December 7, 2001 is incorporated herein by reference to Exhibit 10.33 on Form 10-K, File No. 001-14962, filed with the Securities and Exchange Commission on March 12, 2002.
10.31
Executive Change of Control Agreement between Barry L. Taylor, Sr. and CIRCOR, Inc. dated December 7, 2001 is incorporated herein by reference to Exhibit 10.34 on Form 10-K, File No. 001-14962, filed with the Securities and Exchange Commission on March 12, 2002.
*10.32
Amendment No. 1 to the
Company'sCredit Agreement dated as of December 22, 2000, among CIRCOR International, Inc.; each of the Subsidiary Guarantors referred to therein; each of the lenders that is a signatory hereto; and ING Capital LLC, a Delaware limited liability company, as agent for the lenders that are a signatory thereto.
Exhibit
No.
Description and Location
10.33
Amendment No. 2 to the Credit Agreement dated as of December 4, 2002, among CIRCOR International, Inc.; each of the Subsidiary Guarantors referred to therein; each of the lenders that is a signatory hereto; and ING Capital LLC, a Delaware limited liability company, as agent for the lenders that are a signatory thereto is incorporated herein by reference to Exhibit 10.2 on Form
10.8-K, file No. 001-14962, filed with the Securities and Exchange Commission on December 12, 2002.* 21
Schedule of Subsidiaries of CIRCOR International, Inc.
* 23
Consent of Experts and Counsel:Consent of KPMG
LLP is filed herewith as Exhibit 23.1. 27 Financial Data Schedule.LLP.* Filed with this report
(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 Companyfiled a Current Report on Form 8-Kannouncingon December 12, 2002 relating to thebeginningrefinancing of theCompany's trading onCompany’s existing $75.0 million revolving line of credit by entering into Amendment No. 2 to theNew 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.original Credit Agreement.(c) See Item
14(a)315(a)(3) above.24(d) See Item 15(a)(2) above.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
registration statementreport to be signed on its behalf by the undersigned, thereunto dulyauthorized this 30(th) day of March 2000.authorized.
CIRCOR
INTERNATIONAL, INC.INTERNATIONAL, INC.By:
/S//s/ DAVID A. BLOSS, SR.
-----------------------------------------David A. Bloss, Sr.
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENTChairman, President
and Chief Executive Officer
Date:
March 12, 2003
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
indicatedand on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ----Signature
Title
Date
/s/ DAVID A. BLOSS, SR.
David A. Bloss, Sr.
Chairman, President, Chief Executive
/s/Officer and Director (Principal Executive Officer)March 12, 2003
/s/ KENNETH W. SMITH
Kenneth W. Smith
Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)
March 12, 2003
/s/ STEPHEN J. CARRIERE
Stephen J. Carriere
Vice President, Corporate Controller and Assistant Treasurer (Principal Accounting Officer)
March 12, 2003
/s/ DEWAIN K. CROSS
Dewain K. Cross
Director
March 12, 2003
/s/ DAVID F. DIETZ
David F. Dietz
Director
March 12, 2003
/s/ DOUGLAS M. HAYES
Douglas M. Hayes
Director
March 12, 2003
/s/ DANIEL J. MURPHY, III
Daniel J. Murphy, III
Director
March 12, 2003
/s/ THOMAS E. CALLAHAN
Thomas E. Callahan
Director
March 12, 2003
/s/ THOMAS E. NAUGLE
Thomas E. Naugle
Director
March 12, 2003
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, David A. Bloss, Sr., certify that:
1. I have reviewed this annual report on Form 10-K of CIRCOR International, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 12, 2003
Signature:
/s/ DAVID A. BLOSS, SR.
Officer, President and ------------------------------------------- Director (Principal March 30, 2000David A. Bloss, Sr.
Chairman, President and
Chief Executive
Officer)OfficerCERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Kenneth W. Smith, certify that:
1. I have reviewed this annual report on Form 10-K of CIRCOR International, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 12, 2003
Signature:
/s/ KENNETH W. SMITH
Kenneth W. Smith
Vice President,
Corporate /S/ STEPHEN J. CARRIERE ControllerChief Financial Officerand
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, III25INDEPENDENT
AUDITORS'AUDITORS’ REPORTTo 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,
1999,2002 andJune 30, 1999 and 1998,2001 and the related consolidated statements of operations, cash flows andshareholders'shareholders’ equity for thesix-month periodyears ended December 31,1999,2002, 2001 andthe fiscal years ended June 30, 1999 and 1998.2000. 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 theCompany'sCompany’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.We conducted our audits in accordance with auditing standards generally accepted
auditing standards.in the United States of America. 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,
1999,2002 andJune 30, 1999 and 1998,2001, and the results oftheirits operations andtheirits cash flows for thesix-month periodyears ended December 31,1999,2002, 2001 andthe fiscal years ended June 30, 1999 and 19982000 in conformity with accounting principles generally acceptedaccounting principles.in the United States of America. 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.As discussed in note 2 to the consolidated financial statements, effective January 1, 2002, the Company changed its method of accounting for goodwill and other intangible assets.
/s/ KPMG LLP
Boston, Massachusetts
March 24, 2000 26February 4, 2003
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 ======== ======== ========(In thousands, except share data)
December 31,
2002
2001
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
$
38,382
$
57,010
Marketable securities
4,064
–
Trade accounts receivable, less allowance for doubtful accounts of $2,041 and $2,637, respectively
56,130
58,855
Inventories
110,287
99,879
Prepaid expenses and other current assets
4,262
4,450
Deferred income taxes
5,884
5,998
Total Current Assets
219,009
226,192
PROPERTY, PLANT AND EQUIPMENT, NET
64,365
66,973
OTHER ASSETS:
Goodwill, net of accumulated amortization of $17,040
100,419
89,833
Other assets
6,941
3,123
TOTAL ASSETS
$
390,734
$
386,121
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable
$
26,769
$
27,593
Accrued expenses and other current liabilities
14,715
12,365
Accrued compensation and benefits
5,252
5,853
Income taxes payable
2,801
1,782
Notes payable and current portion of long-term debt
18,596
19,844
Total Current Liabilities
68,133
67,437
LONG-TERM DEBT, NET OF CURRENT PORTION
59,394
77,818
DEFERRED INCOME TAXES
3,934
2,576
OTHER NONCURRENT LIABILITIES
10,605
9,794
MINORITY INTEREST
5,009
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; 15,107,850 and 14,861,890 issued and outstanding at December 31, 2002 and 2001, respectively
151
149
Additional paid-in capital
203,952
200,559
Retained earnings
39,200
25,878
Accumulated other comprehensive income (loss)
356
(4,146
)
Total Shareholders’ Equity
243,659
222,440
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
390,734
$
386,121
The accompanying
notesNotes are an integral part of these consolidated financial statements.27CIRCOR 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 ======== =========== ======== ========(In thousands, except per share data)
Year Ended
December 31,
2002
2001
2000
Net revenues
$
331,448
$
343,083
$
316,863
Cost of revenues
233,163
239,606
221,072
GROSS PROFIT
98,285
103,477
95,791
Selling, general and administrative expenses
67,166
66,919
63,718
Goodwill amortization expense
–
2,737
2,528
Special charges
745
204
1,909
OPERATING INCOME
30,374
33,617
27,636
Other (income) expense:
Interest income
(966
)
(922
)
(451
)
Interest expense
7,687
8,024
9,727
Other, net
(686
)
521
760
TOTAL OTHER EXPENSE
6,035
7,623
10,036
INCOME BEFORE INCOME TAXES
24,339
25,994
17,600
Provision for income taxes
8,762
10,398
7,040
NET INCOME
$
15,577
$
15,596
$
10,560
Earnings per common share:
Basic
$
1.04
$
1.08
$
0.80
Diluted
$
1.00
$
1.04
$
0.78
Weighted average common shares outstanding:
Basic
15,028
14,477
13,238
Diluted
15,610
15,023
13,480
The accompanying
notesNotes are an integral part of these consolidated financial statements.28CIRCOR 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 ======== ======== =======(In thousands)
Year Ended December 31,
2002
2001
2000
OPERATING ACTIVITIES
Net income
$
15,577
$
15,596
$
10,560
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation
10,343
9,977
10,141
Amortization
307
3,069
2,864
Deferred income taxes
3,064
289
1,315
(Gain) loss on disposal of property, plant and equipment
139
(22
)
(312
)
Loss on write-off of property, plant and equipment
325
–
–
Changes in operating assets and liabilities, net of effects from business acquisitions:
Trade accounts receivable
6,740
1,291
1,681
Inventories
(4,251
)
12,927
(4,147
)
Prepaid expenses and other assets
(2,425
)
3,532
1,357
Accounts payable, accrued expenses and other liabilities
(4,894
)
(1,812
)
8,241
Net cash provided by operating activities
24,925
44,847
31,700
INVESTING ACTIVITIES
Additions to property, plant and equipment
(4,418
)
(4,950
)
(3,743
)
Proceeds from the disposal of property, plant and equipment
119
66
4,179
Business acquisitions, net of cash acquired
(19,964
)
(9,617
)
(4,105
)
Purchase price adjustments on previous acquisitions
1,088
–
9,500
Other
(66
)
–
(4
)
Net cash provided by (used in) investing activities
(23,241
)
(14,501
)
5,827
FINANCING ACTIVITIES
Proceeds from long-term debt
3,934
17,952
36,172
Payments of long-term debt
(24,564
)
(16,241
)
(69,590
)
Proceeds from the issuance of common stock, net of issuance costs
–
18,698
–
Dividends paid
(2,255
)
(2,169
)
(1,502
)
Proceeds from the exercise of stock options
2,249
369
179
Conversion of restricted stock units
132
9
58
Net cash provided by (used in) financing activities
(20,504
)
18,618
(34,683
)
Effect of exchange rate changes on cash and cash equivalents
192
(146
)
195
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(18,628
)
48,818
3,039
Cash and cash equivalents at beginning of year
57,010
8,192
5,153
CASH AND CASH EQUIVALENTS AT END OF YEAR
$
38,382
$
57,010
$
8,192
Supplemental Cash Flow Information:
Cash paid during the twelve months for:
Income taxes
$
4,387
$
7,460
$
5,573
Interest
$
7,240
$
7,689
$
9,727
Pension plan contributions
$
5,717
$
69
$
918
The accompanying
notesNotes are an integral part of these consolidated financial statements.29CIRCOR INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS'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 ====== ====== ======== ======== ======== ======= ========(In thousands)
Common Stock
Additional
Paid-in Capital
Retained Earnings
Accumulated
Other
Comprehensive Income (Loss)
Total
Shareholders’ Equity
Shares
Amount
BALANCE AT DECEMBER 31, 1999
13,237
$
132
$
180,887
$
3,393
$
(1,003
)
$
183,409
Net income
10,560
10,560
Cumulative translation adjustment
(1,584
)
(1,584
)
Comprehensive income
8,976
Common stock dividends declared
(1,502
)
(1,502
)
Stock options exercised
20
1
178
179
Conversion of restricted stock units
6
–
58
58
Net change in restricted stock units
61
61
BALANCE AT DECEMBER 31, 2000
13,263
133
181,184
12,451
(2,587
)
191,181
Net income
15,596
15,596
Cumulative translation adjustment
(1,559
)
(1,559
)
Comprehensive income
14,037
Issuance of common stock
1,553
16
18,682
18,698
Common stock dividends declared
(2,169
)
(2,169
)
Stock options exercised
45
–
527
527
Conversion of restricted stock units
1
–
9
9
Net change in restricted stock units
157
157
BALANCE AT DECEMBER 31, 2001
14,862
149
200,559
25,878
(4,146
)
222,440
Net income
15,577
15,577
Cumulative translation adjustment
5,481
5,481
Additional minimum pension liability (net of tax benefit of $608)
(996
)
(996
)
Unrealized net gain-marketable securities (net of tax of $10)
17
17
Comprehensive income
20,079
Common stock dividends declared
(2,255
)
(2,255
)
Stock options exercised
234
2
3,064
3,066
Conversion of restricted stock units
12
–
132
132
Net change in restricted stock units
197
197
BALANCE AT DECEMBER 31, 2002
15,108
$
151
$
203,952
$
39,200
$
356
$
243,659
The accompanying
notesNotes are an integral part of these consolidated financial statements.30CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
DESCRIPTION OF BUSINESSDescription of BusinessCIRCOR International, Inc.
("CIRCOR"(“CIRCOR” or the"Company"“Company” or “we”) 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 exploration, production, distribution and refining; pipeline construction and maintenance; HVAC and power; 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 ourcustomers'customers’ unique fluid-control application needs. We have two major product groups: Instrumentation and Thermal FluidRegulationControls Products, and Petrochemical Products.The Instrumentation and Thermal Fluid
RegulationControls Products Group designs, manufactures andsuppliessells valves and controls for diverse end-uses includinghydraulic, pneumatic,instrumentation, aerospace, cryogenic and steam applications. Selected products include precision valves, compression tube andpipe fittings,pipefitting, control valves, relief valves, couplers, regulators andregulators.strainers. The Instrumentation and Thermal FluidRegulationControls Products Group includes the followingsubsidiaries: Circle Seal Corporation (Aerodyne Controls Division), Atkomatic Valve,subsidiaries and major divisions: Aerodyne Controls; Circle Seal Controls, Inc.GO Regulator,; CPC-Cryolab; Hoke, Inc.,; Leslie Controls, Inc., and; Nicholson Steam Trap; Rockwood Swendemen; Regeltechnik Kornwestheim GmbH; Société Alsacienne Regulaves Thermiques von Rohr, S.A.; Spence Engineering Company, Inc.; SSI Equipment, Inc.; Tomco Products, Inc.; and U.S. Para Plate Corporation.The Petrochemical Products Group designs, manufactures and
supplies flangedsells flanged-end andthreadedthreaded-end floating and trunnion ball valves, needle valves, check valves, butterfly valves and large forged steel ball valves and gate valvesand strainersfor use in oil, gas and chemical processing and industrial applications. The Petrochemical Products Group includes the followingsubsidiaries:subsidiaries and major divisions: KF ContromaticsIndustrial Products, Eagle Check Valve,Specialty Products; KF Industries, Inc.,; Pibiviesse S.p.A.,; Suzhou KF Valve Co., Ltd., SSI Equipment Inc.; and KF TelfordValve and Specialties.Engineered Products.On October 18, 1999 (the
"Spin-off Date"“spin-off date”), we became a publicly owned companyviaas a result of a tax-free distribution of our common stock (the"Distribution"“distribution” or"Spin-off"“spin-off”) to the shareholders of our former parent, Watts Industries, Inc.("Watts"(“Watts”).A description(2) Summary of
the Spin-offSignificant Accounting PoliciesPrinciples of Consolidation 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, resultsBasis ofoperations 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).PresentationThe consolidated financial statements
prior to October 18, 1999 representinclude theformer combined operationsaccounts ofWatts' industrial, oilCIRCOR International, Inc. andgas businesses.it’s wholly and majority owned subsidiaries. The results of companies acquired during the year are included in the consolidated financial statements from the date of acquisition. 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 auditedUse of Estimates
The preparation of these financial statements
includein conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect theresults foramounts reported in thesix-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 auditedconsolidated financial statements andrelated notes, unauditedaccompanying disclosures. Some of the more significant estimates include depreciation, amortization and impairment of long-lived assets, pension obligations, deferred income taxes, inventory valuations, sales returns, special charges, environmental liability, product liability, warranty accruals and allowance for doubtful accounts. While management believes that the estimates and assumptions used in the preparation of the financial31statements are appropriate, actual results could differ from those estimates. Revenue Recognition and Allowance for Sales Returns
Revenue is recognized when products are shipped and title has passed to the customer provided that no significant post-delivery obligations remain and collection of the resulting receivable is reasonably assured. Allowances for sales returns are recorded as a reduction of revenues based upon historical experience, return policies and contractual
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED) (2) ACCOUNTING POLICIES (CONTINUED)STATEMENTS—(Continued)product return rights granted to customers. Adjustments to the allowance account are made as new information becomes available. Shipping and handling costs invoiced to customers are recorded as components of revenues and the associated costs are recorded as cost of sales.
Allowance for Doubtful Accounts
We estimate the
six-month period ended December 31, 1998 has been presented to enhance comparability. REVENUE RECOGNITION Revenue is recognized upon shipment, netcollectibility ofa provision for estimated returnsour accounts receivable andallowances. RESEARCH AND DEVELOPMENT Research and development expenditures are expended whenthe amount of bad debts that may be incurredand are includedin theoperating expense infuture. We analyze specific customer accounts, historical experience, customer concentrations and relationships, credit ratings, and current economic trends when evaluating theConsolidated Statementadequacy ofOperations. CASH EQUIVALENTSour allowance for doubtful accounts.Cash Equivalents
Cash equivalents consist of highly liquid investments with maturities of three months or
lessless.Marketable Securities
Marketable securities consist of various forms of mutual funds and equity securities, all of which are currently designated as available for sale. As such, the carrying values of our marketable securities are marked to market and unrealized gains and losses at the balance sheet date are recognized net of
original issuance. INVENTORIEStax in other comprehensive income.Inventories
Inventories are
statedvalued at the lower of cost(principallyor market. Cost is generally determined on the first-in, first-outmethod) or market. GOODWILL Goodwill represents(“FIFO”) basis. Where appropriate, standard cost systems are utilized for purposes of determining cost; theexcessstandards are adjusted as necessary to ensure they approximate actual costs. Estimates of lower of costover the fairor market value ofnet assetsinventory are determined at the operating unit level and evaluated periodically. Estimates for obsolescence or unmarketable inventory are maintained based on current economic conditions, historical sales quantities and patterns and, in some cases, the specific risk ofbusinesses 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 amortizationloss on specifically identified inventories. Such inventories are recorded at estimated realizable value net of thegoodwill balance over its remaining life can be recovered through undiscounted future operating cash flowscosts ofthe 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 EQUIPMENTdisposal.Property, Plant and Equipment
Property, plant and equipment
areis 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 to4050 years for buildings and improvements and 3 to 15 years for machinery and equipment.Plant and equipment held under capital leases and leaseholdLeasehold improvements are amortized on a straight-line basis over the shorter of the lease term or estimated useful life of the asset.LONG-LIVED ASSETSRepairs and maintenance costs are expensed as incurred.Goodwill and Other Intangible Assets
We adopted Financial Accounting Standards Board (“FASB”) Statement No. 142, “Goodwill and Other Intangible Assets,” (“Statement No. 142”) 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. As a result of adopting Statement No. 142, we no longer amortize goodwill and indefinite-lived intangible assets; rather they are written-down, as needed, based upon impairment. During the first half of 2002, we completed our transitional impairment review, as required by Statement No. 142, and determined that there was no impairment. Additionally, we perform an impairment test on an annual basis or more frequently if circumstances warrant. Intangible assets that have definite useful lives continue to be amortized over their useful lives.
Impairment
losses are recorded onof Other Long-Lived AssetsOther long-lived assets
used in operations when indicatorsinclude property, plant, and equipment and intangibles with definite lives. We perform impairment analyses ofimpairment 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 ofour other long-lived assetsare reduced to their estimated fair value, as determined using an appraisal or a discounted cash flow approach, as appropriate. 32whenever events and circumstances indicate that they may be CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED) (2) ACCOUNTING POLICIES (CONTINUED) INCOME TAXESSTATEMENTS—(Continued)impaired. When the undiscounted future cash flows are expected to be less than the carrying value of the assets being reviewed for impairment, the assets are written down to fair market value.
Research and Development
Research and development expenditures are expensed when incurred and are included in the operating income in the Consolidated Statements of Operations. Our research and development expenditures for the years ended December 31, 2002, 2001 and 2000, were $2.8 million, $2.6 million and $2.8 million, respectively.
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 accountsA valuation allowance is recognized if we anticipate that we may not realize some or all offoreigna deferred tax asset.Environmental Compliance and Remediation
Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to existing conditions caused by past operations, which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and, or, remedial efforts are probable and the costs can be reasonably estimated. Estimated costs are based upon current laws and regulations, existing technology and the most probable method of remediation. The costs are not discounted and exclude the effects of inflation. If the cost estimates result in a range of equally probable amounts, the lower end of the range is accrued.
Foreign Currency Translation
Our international subsidiaries operate and report their financial results using local functional currencies. Accordingly, all assets and liabilities of these subsidiaries are translated into United States dollars using exchange rates in effect at
fiscal year-end exchange rates. Operating accountsthe end of the period, and revenues and costs are translatedatusing weighted average exchange rates foreach year. Netthe period. The resulting translationgains or lossesadjustments areadjusted directly topresented as a separate component ofshareholders' equity. The Company doesaccumulated other comprehensive income. We do not provide for U.S. income taxes on foreign currency translation adjustments sinceit doeswe do not provide for such taxes on undistributed earnings of foreign subsidiaries.EARNINGS PER COMMON SHARE HistoricalEarnings Per Common Share
Basic earnings per common share is calculated by dividing net income by the number of weighted average common shares outstanding. Diluted earnings per common share is calculated by dividing net income by the weighted average common shares outstanding and assumes the conversion of all dilutive securities.
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Earnings per common share and the weighted average number of shares used to compute net earnings per common share, basic and assuming full dilution, are reconciled below (In thousands, except per share data):
Year Ended December 31,
2002
2001
Net
Income
Shares
Per Share
Amount
Net
Income
Shares
Per Share
Amount
Basic EPS
$
15,577
15,028
$
1.04
$
15,596
14,477
$
1.08
Dilutive securities, principally common stock options
–
582
.04
–
546
.04
Diluted EPS
$
15,577
15,610
$
1.00
$
15,596
15,023
$
1.04
Options to purchase 255,500 and 260,500 shares of our common stock, at an exercise price of $16.32 in both years, were not included in the computation of diluted earnings per share
has been omitted since we were not an independent publicly owned company with a capital structure of our ownforanythe years ended December 31, 2002 and 2001, respectively, because the exercise price was more than the average market price of theperiods presented incommon shares for theaccompanying 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 employeetwelve-month period.Stock Based Compensation
We measure compensation
planscost in accordance withthe provisions of APBAccounting Principles Board Opinion No. 25,ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. DERIVATIVE FINANCIAL INSTRUMENTS“Accounting for Stock Issued to Employees,” (“APB No. 25”) and related interpretations. Accordingly, no accounting recognition is given to stock options granted to our employees at fair market value until the options are exercised. Upon exercise, we credit the net proceeds, including income tax benefits realized, if any, to equity. The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock Based Compensation”, to stock based employee compensation (In thousands, except per share data):
Year Ended December 31,
2002
2001
2000
Net income
$
15,577
$
15,596
$
10,560
Stock-based employee compensation cost, net of tax, that would have been included in the determination of income if the fair value based method had been applied to all awards
639
397
299
Pro forma net income as if the fair value based method had been applied to all awards
$
14,938
$
15,199
$
10,261
Earnings per common share (as reported):
Basic
$
1.04
$
1.08
$
0.80
Diluted
$
1.00
$
1.04
$
0.78
Pro forma earnings per common share:
Basic
$
0.99
$
1.05
$
0.78
Diluted
$
0.96
$
1.01
$
0.76
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.
ESTIMATESGains and losses on contracts that do not qualify for hedge accounting treatment are recognized as incurred as a component of other non-operating income or expense.CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
New Accounting Standards
We adopted FASB Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“Statement No. 144”) on January 1, 2002. Statement No. 144 refines existing impairment accounting guidance for long-lived assets 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
preparationadoption of Statement No. 144 had no impact on our consolidated results of operations or financialstatements in conformity with generally acceptedposition.In April 2002, FASB Statement No. 145, “Rescission of FASB Statement Nos. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections,” (“Statement No. 145”), 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
principles requires managementfor 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 makeestimatesvarious technical corrections, clarify meaning or describe their applicability under changed conditions. We adopted the provisions of Statement No. 145 effective April 1, 2002, andassumptions that affectthereported amountsadoption had no impact on our consolidated results ofassets and liabilities and disclosure of contingent assets and liabilitiesoperations or financial position.In July 2002, FASB Statement No. 146, “Accounting for Costs Associated With Exit or Disposal Activities,” (“Statement No. 146”), 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
the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 33CIRCOR INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (2) ACCOUNTING POLICIES (CONTINUED) RECLASSIFICATION OF PRIOR YEARS Certain prior-year financiala commitment to an exit or disposal plan. This statementamounts have been reclassified to conform tois effective for fiscal years beginning after December 31,1999 presentation. NEW ACCOUNTING STANDARDS2002. We do not believe the impact of adopting Statement No. 146 will have a material impact on our reported consolidated of operation or financial position.In
1998, theDecember 2002, FASB Statement No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-An Amendment of SFAS No. 123,” (“Statement No. 148”), was issued. Statement No. 148 amends Statement of Financial Accounting StandardsBoardNo. 123, “Accounting for Stock-Based Compensation” (“Statement No. 123”), to provide alternative methods of transition for a voluntary change to the fair-value-based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in not only annual, but also interim financial statements about the effect the fair value method would have had on reported results. The transition and annual disclosure requirements of Statement No. 148 are effective for fiscal years ending after December 15, 2002. We have adopted the annual disclosure provisions of Statement No. 148 in these consolidated financial statements. The interim disclosure requirements are effective for interim periods beginning after December 15, 2002. We have chosen to continue to account for stock-based compensation of employees using the fair value method prescribed in APB No.25.FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an Interpretation of FASB No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34,” (“FIN No. 45”) was issued
SFAS 133, "Accountingin November 2002. FIN No. 45 elaborates on the disclosures to be made by a guarantor and clarifies requirements relating to the guarantor’s accounting for,Derivative InstrumentsandHedging Activities."disclosure of, the issuance of certain types of guarantees. FIN No. 45 requires that upon issuance of a guarantee, companies recognize a liability for the fair value of the obligation it assumes under that guarantee. We have adopted the annual disclosure provisions of FIN No. 45 in these consolidated financial statements. We will adoptSFAS 133 on January 1, 2001.the provisions for initial recognition and measurement and interim disclosures during the first quarter of 2003. We do offer warranties, but the returns under warranty have been immaterial. Theimpactadoption ofSFAS 133 on the consolidated financial statements is still being evaluated, butFIN No. 45 is not expected tobe 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 nothave a materialaffecteffect 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, 34CIRCOR 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, weSTATEMENTS—(Continued)In January 2003, FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,” (“FIN No. 46”) was issued. FIN No. 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have
agreed to engage in a public offeringthe characteristics of asignificant 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 liablecontrolling financial interest or do not have sufficient equity at risk for theresulting Watts' Federal taxes, which couldentity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN No. 46 must besubstantial. Underapplied for theDistribution Agreement, Watts maintains full control and absolute discretion with regard to any combinedfirst interim orconsolidated 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.annual period beginning after June 15, 2003. We haveagreed to indemnify Wattsno variable interest entities at this time, and asto any employer payroll tax it incurs related tosuch, theexerciseadoption ofsuch 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. WeFIN No. 46 will not havealso 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 plusanallocation 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 3,101We believe that the bases of allocation of interest and general and administrative expenses were reasonable basedeffect on thefacts available at the dateconsolidated financial statements.(3) Business Acquisitions
On July 22, 1998, Watts Investment Company, a subsidiary 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 toWatts,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 35CIRCOR 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, weacquired Hoke, Inc.("Hoke"(“Hoke”), a multinational manufacturer of industrial valves and fittings, for approximately $85.0 million,includingconsisting of cash and the assumption of debt. On October 18, 1999, the spin-off date, the ownership of Hoke 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”). As a result, we became the claimant in two separate arbitration proceedings against the former Hoke stockholders. 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 net worth of the Hoke closing balance sheet. In May 2000, the arbitrator awarded us a purchase price adjustment in the amount of $6.2 million. Because the Stock Purchase Agreement provided for a deferred purchase price payment by us of $3.5 million, the net effect of the arbitrator’s award resulted in a net payment to us of $1.5 million net of associated professional fees. The former Hoke stockholders paid all amounts owed to us as a result of this award. In a second claim made on December 11, 1998, we asserted 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 was the subject of a separate proceeding with a different arbitrator than was used in the closing date balance sheet dispute. During November 2000, the former Hoke stockholders agreed to settle this claim and paid us $8.0 million net of professional fees. During September 2002, we reduced recorded goodwill by $0.6 million as a result of the recovery of a portion of our purchase price paid for the acquisition of Hoke. This recovery of purchase price was in accordance with an arbitration agreement with the former shareholders of Hoke, who awarded us the rights to the recovery of certain previously paid income taxes.On November 29, 2000, we acquired the Rockwood Swendeman product line, a line of cryogenic safety relief valves that was manufactured and distributed in Scarborough, Maine. The cost of this acquisition was $4.0 million and was paid in cash. The excess of the purchase price over the fair value of the net identifiable assets of $3.4 million acquired has been recorded as goodwill. The purchase agreement also provides for additional payments over the next five years contingent on future sales. The additional payments, if any, will be accounted for as additional goodwill. As of December 31, 2002, no additional payments have been made.
On June 25, 2001, we acquired a 75% interest in Regeltechnik Kornwestheim GmbH and affiliates (“RTK”), a German closed corporation. The aggregate purchase price paid for RTK was $10.6 million, net of cash acquired and included the assumption of $4.2 in long-term debt. 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 approximately $2.5 million for the purchase of this 25% interest in RTK, resulting in $1.3 million of additional goodwill. The aggregate purchase price for RTK acquisition was $13.0 million, consisting of $8.8 million of cash, net of acquired 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.
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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.
On June 29, 2001, we acquired 100% interest in Société Alsacienne Regulaves Thermiques von Rohr, S.A. (“SART”), a French limited liability company. SART 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. We paid $2.8 million in cash; net of $0.1 million in cash acquired, and assumed $0.3 million of long-term debt for an aggregate purchase price of $3.1 million. The purchase agreement also provides for additional payments over the next five years contingent on future sales. The excess of the purchase price over the fair value of the net identifiable assets of $0.7 million acquired has been recorded as goodwill. The results of operations of SART have been included in our consolidated financial statements since the date of acquisition.
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.
In October 2002, we purchased Tomco and U.S. Para Plate for $17.6 million in cash. We assumed $0.7 million in long-term debt, received $2.5 million in cash, and $4.0 million in marketable securities at fair market value. We also deposited an additional $2.3 million into separate escrow accounts for the benefit of the sellers subject to any such claims by us as are allowed in accordance with the purchase agreements. Any funds remaining in the escrow account at the conclusion of the contingency periods will be distributed to the sellers and accounted for as additional purchase price. Tomco, located in Painesville, Ohio, manufactures a full line of quick connect and disconnect couplers for general purpose industrial applications and for use in more sophisticated instrumentation markets. U.S. Para Plate, located in Auburn, California, develops and produces high-pressure valves and regulators for industrial, aerospace and military applications. The combined annual revenues for both Tomco and U.S. Para Plate are approximately $13.0 million. We financed both of these acquisitions through our available cash flow. The excess of the purchase price over the fair value of the net identifiable assets of $9.5 million has been recorded as goodwill and is expected to be deductible for tax purposes.
All acquisitions were accounted for as purchase business combinations.
The following table reflects unaudited pro forma consolidated results on the basis that
the Hoke acquisition had takenTomco, U.S. Para Plate, RTK and SART acquisitions took place andwaswere recorded at the beginning of the fiscal year for each of the respective periodspresented:
FISCAL YEAR ENDED JUNE 30, --------------------------- 1999 1998 --------- --------- (IN THOUSANDS)Net revenues................................................ $326,707 $358,191 Net income.................................................. 12,436 19,365In our opinion thepresented (In thousands):
Year Ended December 31,
2002
2001
2000
Net revenue
$
343,420
$
364,180
$
348,186
Net income
16,561
16,735
11,378
Earnings per share: basic
1.10
1.16
.86
diluted
1.06
1.11
.84
The unaudited pro forma consolidated results of operations
aremay not be indicative of the actual results that would have occurred had theacquisitionacquisitions been consummated at the beginning of each fiscal1998 or at the beginning of fiscal 1999period, 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 36CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED) (4) BUSINESS ACQUISITIONS (CONTINUED) employees have been involuntarily terminated to date). Details of costs recorded as partSTATEMENTS—(Continued)The following tables provide reconciliations of the
acquisitionnet cash paid and goodwill recorded forthe 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,acquisitions during thesix-month periodyears ended December 31,1999 costs2002, 2001 and 2000 (In thousands):
Year Ended December 31,
2002
2001
2000
Reconciliation of net cash paid:
Fair value of assets acquired
$
24,960
$
19,542
$
4,350
Purchase price adjustment
(1,088
)
–
(9,500
)
Less: liabilities assumed
2,377
9,140
245
Cash paid (received)
21,495
10,402
(5,395
)
Less: cash acquired
2,619
785
–
Net cash paid (received) for acquired businesses
$
18,876
$
9,617
$
(5,395
)
Determination of goodwill:
Cash paid (received), net of cash acquired
$
18,876
$
9,617
$
(5,395
)
Liabilities assumed
2,377
9,140
245
Less: fair value of tangible assets acquired, net of cash acquired
11,780
13,764
832
Goodwill
$
9,473
$
4,993
$
(5,982
)
(4) Marketable Securities
All marketable securities are designated as available for sale. No marketable securities were held in 2000 or 2001. A schedule of
$749,000 were incurredmarketable securities at December 31, 2002 follows (In thousands):
Adjusted
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
U.S. government agency mutual funds
$
3,150
$
27
$
–
$
3,177
Equity mutual funds
254
–
5
249
Equity securities
633
8
3
638
$
4,037
$
35
$
8
$
4,064
(5) Inventories
Inventories consist of the following (In thousands):
December 31,
2002
2001
Raw materials
$
44,065
$
42,829
Work in process
26,480
26,111
Finished goods
39,742
30,939
$
110,287
$
99,879
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(6) Property, Plant and Equipment
Property, plant and equipment consists of the following (In thousands):
December 31,
2002
2001
Land
$
6,433
$
4,662
Buildings and improvements
33,406
25,063
Machinery and equipment
118,234
119,425
Construction in progress
925
311
158,998
149,461
Accumulated depreciation
(94,633
)
(82,488
)
$
64,365
$
66,973
(7) Goodwill and Other Intangible Assets
In accordance with Statement No. 142, we completed a transitional goodwill impairment evaluation by comparing the fair value of our reporting units as of January 1, 2002 to
relocate certain Hoke manufacturing equipment totheir carrying values and determined that the fair value of the reporting units’ goodwill exceeded their carrying value and that no impairment existed. We completed ourother manufacturing facilities. These costs are included in costannual goodwill impairment valuation as ofrevenuesNovember 1, 2002 during the fourth quarter of 2002, andselling, generaldetermined that the fair value of the reporting units’ goodwill exceeded their carrying value andadministrative expense. During fiscal 1999, we also acquired SSI Equipment Inc.that no impairment existed for the annual evaluation as well.The following table shows goodwill, by segment, net of
Burlington, Ontario, Canada, and GO Regulator, Inc.accumulated amortization, as ofSan Dimas, California.December 31, 2002 (In thousands):
Instrumentation & Thermal Fluid
Controls
Products
Petrochemical
Products
Consolidated
Total
Goodwill as of December 31, 2001
$
77,905
$
11,928
$
89,833
Business acquisitions (see note 3)
10,561
–
10,561
Purchase price adjustment of previous acquisitions
(see note 3)
(1,088
)
–
(1,088
)
Currency translation adjustments
1,094
19
1,113
Goodwill as of December 31, 2002
$
88,472
$
11,947
$
100,419
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 manufacturersaccordance with Statement No. 142, goodwill associated with acquisitions consummated after June 30, 2001 is not amortized and theaggregate purchase priceamortization ofthese acquisitions was approximately $33.4 million.goodwill from business combinations consummated before June 30, 2001 ceased on January 1, 2002. Thegoodwill 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 andfollowing table reflects the results of operations had Statement No. 142 been adopted and applied to all prior periods (In thousands, except per share data):
Year Ended December 31,
2002
2001
2000
Net income
$
15,577
$
15,596
$
10,560
Goodwill amortization expense
–
2,737
2,528
Adjusted net income
$
15,577
$
18,333
$
13,088
Basic earnings per Share:
Net income
$
1.04
$
1.08
$
0.80
Goodwill amortization expense
–
0.19
0.19
Adjusted earnings per share
$
1.04
$
1.27
$
0.99
Diluted earnings per share:
Net income
$
1.00
$
1.04
$
0.78
Goodwill amortization expense
–
0.18
0.19
Adjusted earnings per share
$
1.00
$
1.22
$
0.97
The table below presents gross intangible assets and the related accumulated amortization as of
the acquired businesses have been included in the consolidated financial statements from the dateDecember 31, 2002 (In thousands):
Gross
Carrying
Amount
Accumulated
Amortization
Patents
$
2,935
$
(2,591
)
Trademarks and trade names
1,613
(1,051
)
Land use rights
1,180
(243
)
Other
149
(149
)
Total
$
5,877
$
(4,034
)
Net carrying value of intangible assets
$
1,843
The table below presents estimated amortization expense for intangible assets recorded as 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 ======== ======== =======37January 1, 2002 (In thousands):
2003
2004
2005
2006
2007
After
2007
Estimated amortization expense
$
292
$
152
$
139
$
128
$
60
$
1,072
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 TAXESSTATEMENTS—(Continued)(8) 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) ======== ======== ========38CIRCOR INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (7) INCOME TAXES (CONTINUED)follows (In thousands):
December 31,
2002
2001
Deferred income tax liabilities:
Excess tax over book depreciation
$
7,320
$
7,034
Inventory
4,483
2,978
Other
–
580
Total deferred income tax liabilities
11,803
10,592
Deferred income tax assets:
Accrued expenses
6,104
6,026
Net operating loss and credit carryforward
1,741
1,681
Cost basis differences in intangible assets
1,290
1,649
Other
5,330
5,214
Total deferred income tax assets
14,465
14,570
Valuation allowance
712
556
Deferred income tax asset, net of valuation allowance
13,753
14,014
Deferred income tax asset, net
$
1,950
$
3,422
The above components of deferred income taxes are classified in the respective consolidated balance sheet as follows:
Net current deferred income tax assets
$
5,884
$
5,998
Net noncurrent deferred income tax liabilities
(3,934
)
(2,576
)
Deferred income tax asset, net
$
1,950
$
3,422
The provision for income taxes is based on the following pre-tax
income:income (In thousands):
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 ====== ======= =======
Year Ended December 31,
2002
2001
2000
Domestic
$
15,516
$
18,699
$
13,790
Foreign
8,823
7,295
3,810
$
24,339
$
25,994
$
17,600
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The provision for income taxes (benefit) consists of the
following:following (In thousands):
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 ======= ====== =======
Year Ended December 31,
2002
2001
2000
Current tax expense:
Federal
$
1,714
$
7,030
$
3,759
Foreign
3,604
2,380
1,354
State
380
699
612
5,698
10,109
5,725
Deferred tax expense (benefit):
Federal
3,334
9
73
Foreign
(572
)
180
954
State
302
100
288
3,064
289
1,315
$
8,762
$
10,398
$
7,040
Actual income taxes reported from operations are different
thanfrom thosewhichthat 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 ====== ====== =======
Year Ended December 31,
2002
2001
2000
Computed expected federal income tax rate
35.0
%
35.0
%
35.0
%
State income taxes, net of federal tax benefit
1.8
2.0
3.3
Goodwill amortization
0.0
2.9
4.4
Foreign tax rate differential
0.6
–
1.5
Extraterritorial income exclusion (formerly FSC)
(2.2
)
(2.0
)
(5.0
)
Other, net
0.8
2.1
0.8
Effective Tax Rate
36.0
%
40.0
%
40.0
%
At December 31, 2002, we had a foreign net operating loss of $877,000 and foreign tax credits of $760,000. The Company also had state net operating losses of $5.3 million and state tax credits of $400,000. At December 31, 2001, the Company had foreign tax credits of $1.1 million, federal net operating loss of $155,000, state net operating losses of $3.9 million, and state tax credits of $341,000. The foreign net operating losses can be carried forward indefinitely. Foreign tax credits if not utilized will expire in 2005. The state net operating losses and state tax credits if not utilized will expire in 2014 through 2022. The Company had a valuation allowance of $712,000 and $556,000 as of December 31, 2002 and December 31, 2001, respectively, against the state net operating losses and state tax credits. Management believes that after considering all of the available objective evidence, it is more likely than not that the results of future operations will generate sufficient taxable income to realize the remaining deferred tax assets.
Undistributed earnings of our foreign subsidiaries amounted to
$4,735,000$12.5 million at December 31,1999,2002 and$3,217,000 and $831,000$8.0 million atJune 30, 1999 and 1998, respectively.December 31, 2001. 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 be39CIRCOR 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$0.5 million 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, 1999,2002.CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(9) Accrued Expenses and
$4,716,000 and $4,282,000 in fiscal years 1999 and 1998, respectively. (8) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIESOther Current LiabilitiesAccrued 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 ARRANGEMENTSfollowing (In thousands):
December 31,
2002
2001
Commissions and sales incentives payable
$
4,900
$
3,582
Insurance
2,627
2,121
Interest
1,210
1,513
Other
5,978
5,149
$
14,715
$
12,365
(10) Financing Arrangements
Long-term debt consists of the
following:following (In thousands):
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 ======== ======= =======
December 31,
2002
2001
Senior unsecured notes, maturing October 19, 2002-2006, at a fixed interest rate of 8.23%
$
60,000
$
75,000
Industrial revenue bonds, maturing in December 2006 and August 2019, at variable interest rates of 1.45% and 1.64% at December 31, 2002, and 1.45% and 1.60% at December 31, 2001
12,260
12,265
Capital lease obligations
3
–
Other borrowings, at varying interest rates ranging from 1.65% to 8.5% in 2002
and 2.15% to 8.5% in 2001
5,727
10,397
Total long-term debt
77,990
97,662
Less: current portion
18,596
19,844
Total long-term debt, less current portion
$
59,394
$
77,818
On October 18, 1999, we entered into a $75.0 million unsecured revolving credit facility agreement maturing in October 2003.
UnderOn December 4, 2002, we refinanced this credit line by entering into an amendment to the original credit agreement that extends the term of the facility to December 2006. The credit agreement provides us with an option to increase the line to $100 million. In accordance with the credit facility agreement, the rate of interest and facility fees we arerequired to pay a facility fee of 0.35% per annum, and are 40CIRCOR INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (9) FINANCING ARRANGEMENTS (CONTINUED) able tocharged vary based upon changes in our net debt leverage ratio. We can borrow atvarious interest rates based oneither the Euro dollar rate plus1.5%,an applicable margin of 0.625% to 1.625% or at a base rate plus an applicable margin of 0% to 0.25%. The base rate for any day is the higher of the federal funds rate plus ½ of 1% or the lenders primeorrate. We are also required to pay an unused facility fee that can range from 0.15 to 0.35% per annum and acompetitive money market rate specified byutilization fee of 0.125% per annum if our borrowings exceed 50% of thelender.credit facility limit.At December 31, 2002, we had $75.0 million available from the unsecured revolving credit facility to support our acquisition program, working capital requirements, and for general corporate purposes.
On October 19, 1999, we also issued $75.0 million of unsecured notes
maturing inthat matures through annual principal payments from October 2002–2006. 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 underthea then existing term loan agreement.At December 31, 1999,Beginning on October 19, 2002, wehad $43.0commenced making $15.0 millionavailable fromannual payments reducing the $75.0 million outstanding balance of our unsecuredcredit facility to support our acquisition program, working capital requirements and for general corporate purposes.8.23% senior notes, which mature in October 2006.CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Certain of our loan agreements contain covenants that require, among other items, maintenance of certain financial ratios and also
limitlimits our abilitytoto: enter into secured and unsecured borrowingarrangements. Principalarrangements; 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 December 31, 2002 and 2001.At December 31, 2002, minimum principal payments required during each of the next five
fiscalyears aredueas follows(in(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
Year ending December 31,
2003
$
18,596
2004
16,153
2005
15,265
2006
22,765
2007
49
Thereafter
5,162
$
77,990
(11) Stock-Based Compensation
The 1999 Stock Option and Incentive Plan (the
"1999“1999 StockPlan"Plan”)wasadopted by our Board ofDirectors. Generally, the 1999 Stock PlanDirectors 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 awardsstock appreciation rightsand dividend equivalent rights. The 1999 Stock Plan provides for the issuance of up to 2,000,000 new shares of common stock (subject to adjustment for stock splits and similar events). New options granted under the 1999 Stock Plancancould have varying vesting provisions and exercise periods. Options grantedsubsequent to the Spin-offvest in periods ranging from 1 to 7 years and expire 10 years aftergrant.the grant date.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'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 amortizedtoas compensation expense ratably over the vesting period.At the
Spin-off Date,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("(“replacementoptions"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 years 1999 to 2003time periodand expire 10 years after grant of the original Watts options. Additionally, at theSpin-off Datespin-off date, vested and non-vested Watts restricted stock units and stock appreciation rights (“SARS”) held by our employees were converted into comparable restricted stock units and SARS based on our common stock. Vested restricted stockandunits will bepayabledistributed in shares of our common stock. Upon exercise, vested SARS will be payable in cash. At December 31,1999, 134,6492002, there were 236,389 restricted stock unitswereand 50,441 SARS outstanding.41Compensation expense related to restricted stock units and SARS for the years ended December 31, 2002, 2001 and 2000 was $0.3 million, $0.4 million and $0.1 million, respectively. 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.STATEMENTS—(Continued)The fair value of each option grant
made subsequent to the Spin-offwas estimated as of the date of grant using the Black-Scholesoption pricingoption-pricing model with the followingweighted average assumptions used for grants in the transition period:assumptions:
Risk-free interest rate..................................... 6.1% Expected life (years)....................................... 5 Expected stock volatility................................... 15.0% Expected dividend yield..................................... 1.5%
December 31,
2002
2001
2000
Risk-free interest rate
4.1
%
5.4
%
5.8
%
Expected life (years)
7
7
5
Expected stock volatility
45.5
%
55.7
%
46.3
%
Expected dividend yield
0.9
%
0.9
%
1.8
%
A summary of the status of all options granted to employees and non-employee directors at December 31,
1999,2002, 2001, and 2000 and changes during thesix-month periodyears then ended is presented in the tablebelow:below (Options in thousands):
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 =====
December 31,
2002
2001
2000
Options
Weighted
Average
Exercise Price
Options
Weighted
Average
Exercise Price
Options
Weighted
Average
Exercise Price
Options outstanding at beginning of period
1,417
$
11.14
1,232
$
9.85
1,025
$
10.43
Granted
339
13.90
279
16.10
406
8.60
Exercised
(234
)
9.58
(45
)
8.11
(20
)
8.78
Canceled
(24
)
9.95
(49
)
10.59
(179
)
10.48
Options outstanding at end of period
1,498
$
12.00
1,417
$
11.14
1,232
$
9.85
Options exercisable at end of period
644
$
10.75
631
$
10.49
464
$
10.62
Weighted average fair value of options granted
$
6.69
$
9.17
$
3.61
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 ===== ===422002 (Options in thousands):
Options Outstanding
Options Exercisable
Range of
Exercise Prices
Options
Weighted Average
Remaining
Contractual Life (Years)
Weighted Average
Exercise Price
Options
Weighted Average
Exercise Price
$ 7.50 – $ 8.37
301
7.0
$
7.63
148
$
7.76
9.43 – 10.50
307
6.7
10.02
206
9.95
11.00 – 12.98
248
3.3
12.40
244
12.42
13.00 – 16.32
642
9.2
14.84
46
15.17
$ 7.50 – $16.32
1,498
7.3
$
12.00
644
$
10.75
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED) (11) EMPLOYEE BENEFIT PLANSSTATEMENTS—(Continued)(12) Accumulated Other Comprehensive Income
The accumulated other comprehensive income as of December 31, 2002 consists of the following (In thousands):
December 31, 2002
Gross Item
Tax Effect
Net of Tax
Cumulative translation adjustment
$
1,335
$
–
$
1,335
Additional minimum pension liability
(1,604
)
608
(996
)
Unrealized net gains-marketable securities
27
(10
)
17
Total accumulated comprehensive income (loss)
$
(242
)
$
598
$
356
Accumulated other comprehensive income at December 31, 2001 consisted of the accumulated translation adjustment of $4.1 million.
(13) Employee Benefit Plans
We sponsor
aseveral defined benefit pensionplanplans covering substantially all of ourdomesticU.S. non-union employees. Benefits are based primarily on years of service andemployees'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-unionU.S. 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 ==== ====== ======43CIRCOR 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:follows (In thousands):
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) ======= ======= =======
Year Ended December 31,
2002
2001
2000
Service cost-benefits earned
$
1,396
$
1,210
$
1,071
Interest cost on benefits obligation
811
733
643
Estimated return on assets
(680
)
(815
)
(793
)
Net periodic cost of defined benefits plans
1,527
1,128
921
Cost of 401(k) plan contributions
335
368
345
Net benefit plans expense
$
1,862
$
1,496
$
1,266
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
Year Ended December 31,
2002
2001
2000
Discount rate
6.75
%
7.50
%
8.00
%
Expected return on plan assets
9.00
%
9.00
%
9.00
%
Rate of compensation increase
4.00
%
4.00
%
5.00
%
A 25 basis point increase or decrease in the expected return of plan assets would increase or decrease the pension expense by approximately $25,000. We have assumed an 8.75% expected rate of return of plan assets for 2003. A 25 basis point increase or decrease in the assumed discount rate assumption would increase or decrease our interest expense by approximately $100,000.
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The funded status of the defined benefit plan and amounts recognized in the balance sheet are as follows (In thousands):
December 31,
2002
2001
Change in projected benefit obligation
Balance at beginning of year
$
11,316
$
9,187
Service cost
1,396
1,210
Interest cost
811
733
Actuarial (gain) loss
1,491
(272
)
Benefits paid
(157
)
(120
)
Administrative expenses
(209
)
(173
)
Liabilities acquired
2,673
–
Amendments
–
751
Balance at end of year
$
17,321
$
11,316
Change in fair value of plan assets
Balance at beginning of year
$
6,691
$
8,623
Actual return on assets
(1,108
)
(1,708
)
Benefits paid
(157
)
(120
)
Administrative expenses
(209
)
(173
)
Assets acquired
1,562
–
Employer contributions
5,717
69
Fair value of plan assets at end of year
$
12,496
$
6,691
Funded status
Plan assets less than projected benefit obligation
$
(3,715
)
$
(4,625
)
Unrecognized transition asset
(72
)
(136
)
Unrecognized prior service cost
857
955
Unrecognized acquired prior service cost
1,111
–
Unrecognized actuarial loss
4,566
1,253
Net prepaid (accrued) benefit cost
$
2,747
$
(2,553
)
During the year ended December 31, 2002, a $2.3 million adjustment was made to record the minimum pension liability required to the extent the accumulated benefit obligations exceeded plan assets as of September 30, 2002, the plan measurement date. In conjunction with the adjustment to the liability account, a $0.7 million intangible asset was recorded up to the amount of unrecognized prior service cost for those plans. A $1.0 million corresponding charge, net of tax, was recorded to other accumulated comprehensive income.
(14) Contingencies, Guarantees and Environmental Remediation
We, like other worldwide manufacturing companies, are subject to
pendinga variety of potential liabilities connected with our business operations, including potential liabilities and expenses associated with possible product defects orthreatened lawsuitsfailures andproceedingscompliance 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 separate product liability policy with aggregate limits of $200.0 million for the aviation products produced by our worldwide operations.CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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
claims arisingfromthe ordinary courseenvironmental liability.Contingencies
Like many other manufacturers of
operations. Reservesfluid control products, we have beenestablished which management presently believes are adequatenamed as defendants inlighta growing number ofprobable and estimableproduct liability actions brought on behalf of individuals who seek compensation for their alleged exposure to airborne asbestos fibers. In particular, Leslie, Spence, and Hoke, all subsidiaries of CIRCOR, collectively have been named as defendants or third-party defendants in asbestos related claims brought on behalf of approximately 14,000 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. These cases have been brought in state courts in California, Connecticut, Maryland, Michigan, Mississippi, New Jersey and New York, with thepending or threatened litigationvast majority ofwhich it has knowledge. Such contingencies areclaimants having brought their claims in Mississippi. 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 121 plaintiffs in New York, each plaintiff seeks $5.0 million compensatory damages and $5.0 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 eleven claimants, each plaintiff seeks approximately $400,000 compensatory damages and $2.5 million punitive damages against the aggregate of defendants. And, with respect to approximately 1,384 claimants in Mississippi, each such claimant seeks approximately $5.0 million compensatory damages and $50.0 million punitive damages against the aggregate of defendants.Any components containing asbestos formerly used in Leslie, Spence and Hoke products were entirely internal to the product and, we believe, would not
expectedgive 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 financialposition,condition, results of operations orliquidity. 44cash 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 including our co-defendants; 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 to us 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 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 believe that Customs is concluding its investigation and are hopeful that we will be able to achieve resolution of this matter in the near future. In this regard, although we continue to believe that any such resolution will not result in any material financial impact, we cannot provide any assurances regarding the timing or nature of such a resolution. Moreover, if the investigation were to prove that violations of the Customs laws occurred, KF could be subjected to civil fines, forfeitures and (if such violations were determined to be intentional) criminal penalties, which could be material.
Guarantees
We execute stand-by letters of credit, bid bonds, performance bonds and other guarantees in the normal course of business that ensure our performance or payments to third parties. The aggregate notional value of these instruments was $6.1 million at December 31, 2002. These instruments have expiration dates ranging from less than one month to
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED) (12) CONTINGENCIES AND ENVIRONMENTAL REMEDIATION (CONTINUED) ENVIRONMENTAL REMEDIATION WeSTATEMENTS—(Continued)eight years from December 31, 2002. Sixty-four percent (64%) of the $6.1 million of the instruments expire within one year from December 31, 2002, with a total of eighty-seven percent (87%) expiring within two years. Our historical experience with these types of guarantees has been good. No claims have been
namedpaid in any of the fiscal years presented. We believe that the likelihood of demand for payments relating to the outstanding instruments is minimal.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
partyparties, 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 in New Jersey, 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 toidentified contaminated sites. The levelthe Sharkey and Combe Landfills. In addition, we have also been named as a PRP with respect to the Solvent Recovery Service ofcontamination varies significantly fromNew England sitetoand the Old Southington landfill site,as do the related levels of remediation efforts. Environmental liabilitiesboth in Connecticut. These sites arerecorded basedalso on themostNational 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 and, in this matter, we also have the right to indemnification from the former owners of the affected subsidiary. Based on currently available information, we believe that any share of clean-up costs at these sites attributable to us will not be material, particularly given our indemnification rights against the respective former owners.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 that we believe are appropriate in light of those outcomes that we believe are 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 factorsanduncertainties. 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 VALUEestimable at this time.(15) 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. Marketable securities are marked to market at the balance sheet date. The fair value of the senior unsecured notes, based on the value of comparable instruments brought to market, is$74.5$63.1 million as of December 31,1999.2002. The fair value of theCompany'sCompany’s variable rate debt approximates its carrying value.USE OF DERIVATIVESAs of January 1, 2001, we adopted FASB Statement No. 133. “Accounting for Derivative Instruments and Hedging Activities,” (“Statement No. 133”), as amended by 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 our 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 designated 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
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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
foreign currencyforwardexchangecontracts toreducemanage theimpact ofcurrencyfluctuations on certain anticipated intercompany purchaserisk related to business transactionsthat are expected to occur withindenominated in foreign currencies. To thefiscal year and certain other foreign currency transactions. Related gains and losses are recognized when the contracts expire, which is generally in the same period asextent the underlyingforeign currency denominated transaction. Thesetransactions hedged are completed, the contracts do not subject us to significantmarketrisk from exchangemovementrate movements because they offset gains and losses on the related foreign currency denominated transactions.At June 30, 1998, there were no significant amounts of openOur foreign currency forwardexchangecontracts have not been designated as hedging instruments and, therefore, did not qualify for fair value orrelatedcash flow hedge treatment under the criteria of Statement No. 133 for the year ended December 31, 2002. Therefore, the unrealized gainsor losses. At June 30, 1999,and losses on our contracts have been recognized as a component of other expense in the consolidated statements of operations. Net unrealized gains attributable to foreign currency forward contracts were $0.1 million at December 31, 2002, and less than $0.1 million at December 31, 2001. As of December 31, 2002, we had forward contracts to buyforeigncurrencies withafacevaluevalues of$9.0 million. These contracts matured on various dates between July 1999$1.0 million andJanuary 2000 and had a negativefairmarket valuevalues 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$1.1 million. These contracts mature on various dates between January2000andJune 2000March 2003.Operating Lease Commitments
Rental expense under operating lease commitments amounted to: $4.0 million during the year ended December 31, 2002, $3.4 million during the year ended December 31, 2001, and
had a negative fair market value of $228,000$3.2 million during the year ended December 31, 2000. Minimum rental commitments due under non-cancelable operating leases, primarily for office and warehouse facilities, at December 31,1999. The 45CIRCOR 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 INFORMATION2002 were (In thousands):
Year ending December 31,
2003
$
3,249
2004
2,847
2005
2,437
2006
2,308
2007
2,066
Thereafter
3,190
$
16,097
(16) Segment Information
The following table presents certain
operatingreportable segmentinformation:
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) unauditedinformation (In thousands):
Instrumentation &
Thermal Fluid Controls
Products
Petrochemical
Products
Corporate
Adjustments
Consolidated
Total
Year Ended December 31, 2002
Net trade revenues
$
190,524
$
140,924
$
–
$
331,448
Operating income (loss)
28,614
9,480
(7,720
)
30,374
Income (loss) before income taxes
28,934
9,769
(14,364
)
24,339
Identifiable assets
390,067
165,291
(164,624
)
390,734
Capital expenditures
2,134
2,097
187
4,418
Depreciation and amortization
6,057
4,246
347
10,650
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Instrumentation &
Thermal Fluid Controls
Products
Petrochemical
Products
Corporate
Adjustments
Consolidated
Total
Year Ended December 31, 2001
Net trade revenues
$
193,297
$
149,786
$
–
$
343,083
Operating income (loss)
32,158
9,194
(7,735
)
33,617
Income (loss) before income taxes
31,296
8,922
(14,224
)
25,994
Identifiable assets
268,315
157,672
(39,866
)
386,121
Capital expenditures
2,934
1,959
57
4,950
Depreciation and amortization
8,067
4,652
327
13,046
Year Ended December 31, 2000
Net trade revenues
$
183,524
$
133,339
$
–
$
316,863
Operating income (loss)
31,211
3,137
(6,712
)
27,636
Income (loss) before income taxes
30,209
5,618
(18,227
)
17,600
Identifiable assets
245,100
144,405
(42,443
)
347,062
Capital expenditures
2,063
1,499
181
3,743
Depreciation and amortization
7,981
4,764
260
13,005
Each
operatingreporting segment is individually managed and has separate financial results that are reviewed by theCompany'sCompany’s chief operating decision-maker. Each segment contains closely related products that are unique to the particular segment. Refer toNotenote 1 for further discussion of the products included in each segment.In calculating profit from operations for individual
operatingreporting segments, substantial administrative expenses incurred at the operating level thatarewere common to more than one segmentarewere allocatedon abased upon specific identification of costs, employment related information or netrevenues basis.revenues. Certain headquarters expenses of an operational nature alsoarewere allocated to segments and geographic areas.46CIRCOR 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(a) Net revenues by geographic area (In thousands):
Year Ended December 31,
2002
2001
2000
United States
$
182,058
$
226,069
$
220,568
Canada
25,857
32,500
18,020
Germany
17,220
11,706
1,820
France
10,649
9,397
7,495
Netherlands
11,928
5,726
3,566
Other
83,736
57,685
65,394
Total revenues
$
331,448
$
343,083
$
316,863
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (CONTINUED) (15) PRO FORMA FINANCIAL INFORMATION (UNAUDITED) As discussedSTATEMENTS—(Continued)(b) Long-lived assets by geographic area (In thousands):
December 31,
2002
2001
2000
United States
$
48,852
$
50,001
$
55,040
Germany
7,087
6,218
49
France
1,125
1,039
–
Italy
2,965
2,651
3,107
Canada
2,165
2,382
2,262
Other
2,171
4,682
4,336
Total long-lived assets
$
64,365
$
66,973
$
64,794
In March 2002, we transferred 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. During October 2002, we acquired Tomco and U.S. Para Plate. On a combined basis, the long-lived assets of these two operations totaled $2.1 million at December 31, 2002.
(17) Quarterly Financial Information (Unaudited, 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 (inthousands, except per shareamounts):
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%. 48information)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Year ended December 31, 2002
Net revenues
$
79,462
$
82,541
$
83,092
$
86,353
Gross profit
24,542
24,623
24,040
25,080
Net income
3,685
3,839
3,770
4,283
Earnings per common share:
Basic
$
0.25
$
0.26
$
0.25
$
0.28
Diluted
0.24
0.24
0.24
0.28
Dividends per common share
$
0.0375
$
0.0375
$
0.0375
$
0.0375
Stock Price range:
High
$
22.38
$
22.25
$
18.05
$
16.58
Low
16.95
16.85
13.25
11.75
Year ended December 31, 2001
Net revenues
$
87,946
$
83,390
$
84,287
$
87,460
Gross profit
26,071
26,150
25,152
26,104
Net income
3,723
3,829
3,502
4,542
Earnings per common share:
Basic
$
0.28
$
0.26
$
0.24
$
0.31
Diluted
0.27
0.25
0.23
0.29
Dividends per common share
$
0.0375
$
0.0375
$
0.0375
$
0.0375
Stock Price range:
High
$
15.20
$
24.10
$
19.40
$
19.69
Low
10.00
13.10
13.65
15.05
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 forSTATEMENTS—(Continued)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Year ended December 31, 2000
Net revenues
$
82,305
$
80,269
$
75,988
$
78,301
Gross profit
26,219
23,640
23,008
22,924
Net income
3,186
2,426
2,287
2,661
Earnings per common share:
Basic
$
0.24
$
0.18
$
0.17
$
0.20
Diluted
0.24
0.18
0.17
0.20
Dividends per common share
$
–
$
0.0375
$
0.0375
$
0.0375
Stock Price range:
High
$
15.25
$
13.88
$
10.50
$
11.88
Low
9.94
7.50
7.00
9.25
(18) Special Charges
During the
six-monthsyears ended December 31, 2002, 2001 and 2000, we incurred costs associated with the closure, consolidation and reorganization of certain manufacturing operations as follows (In thousands):
Severance Benefits
Facility/Exit Costs
Total
Balance as of December 31, 1999
$
–
$
–
$
–
Charges
1,066
843
1,909
Less: cash payments
1,066
843
1,909
Balance as of December 31, 2000
–
–
–
Charges
79
125
204
Less: cash payments
33
57
90
Balance as of December 31, 2001
46
68
114
Charges
206
539
745
Less: cash payments
186
589
775
Balance as of December 31, 2002
$
66
$
18
$
84
Costs incurred during 2002 and 2001 were related to the Petrochemical Products segment. Costs in 2000 were related to actions taken in both the Instrumentation and Thermal Fluid Controls Products and Petrochemical Products segments of $1.6 million and $0.3 million, respectively. A write-down of fixed assets of $0.3 million is included in the facility and exit special charges incurred for the year ended December 31, 2002. As a result of these actions taken there were 16 employee positions terminated during 2002, 36 during 2001 and 88 during 2000. Special charges have been recognized as incurred. The remaining costs at December 31, 2002 are expected to be paid within the first half of 2003.
(19) Capital Structure
We have adopted a shareholder rights plan providing for the issuance of rights that will cause substantial dilution to a person or group of persons that acquires 15% or more of our shares of common stock, unless the rights are redeemed. These rights allow shareholders of our common stock to purchase a unit consisting of one ten thousandth of a share of our series A junior participating cumulative preferred stock, par value $0.01 per share, at a cash exercise price per unit of $48.00, subject to adjustments.
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(20) Relationship with our Former Parent
At the spin-off date of October 18, 1999,
assumesall 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, however, certain of our shares were held by the Watts pension trust on behalf of Watts’ employees. We entered into separation and other related agreements (the “Distribution Agreement”), outlined below, governing the spin-off transactionoccurred at July 1, 1999. The number of shares usedand our subsequent relationship with Watts. Such agreements provided certain indemnities tocalculate pro forma earnings per sharethe parties, and provided for thesix-monthsallocation of tax and other assets, liabilities and obligations arising from periods prior to the spin-off.Until the spin-off, we were a member of Watts’ consolidated group for federal income tax purposes. Each member of the consolidated group is liable for the federal income tax liability of the other members of the group, as well as for pension and benefit funding liabilities of the other group members. Under federal law we continue to be contingently liable for these Watts consolidated group liabilities for periods beginning before the spin-off.
We entered into a distribution agreement with Watts that allocates tax, pension and benefit funding liabilities between Watts and us. Under this agreement, Watts maintains full control and absolute discretion with regard to any combined or consolidated United States federal and state 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. These arrangements may result in conflicts of interest with Watts. In addition, if Watts is ultimately unable to satisfy its liabilities, we could be responsible for satisfying them, despite the distribution agreement.
At the time of the spin-off, Watts received a ruling from the IRS to the effect that, for United States federal income tax purposes, the spin-off would be tax-free to Watts and its shareholders. If the undertakings made to the IRS regarding the spin-off were not complied with or if representations made to the IRS regarding the spin-off were inaccurate, we could lose the benefit of the IRS tax ruling and the IRS could assert that the spin-off was a taxable distribution. In that case, under United States federal income tax law, we would be jointly and severally liable with Watts for a material amount of federal income tax. In our distribution agreement with Watts, we agreed that we would be wholly responsible for that tax if it results from our act or omission, and Watts will be wholly responsible for that tax if it results from Watts’ act or omission. Under federal income tax law, however, we would be required to pay that tax if Watts was unable to, regardless of the distribution agreement.
Prior and subsequent to the spin-off transaction, we conducted business with various other subsidiaries of Watts, under various contracts and agreements. The table below summarizes transactions with these related parties for the years ended December 31,
1998 is based on the weighted average common stock2002, 2001 andcommon 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)2000 (In thousands):
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 5,46849
Year Ended December 31,
2002
2001
2000
Purchases of inventory
$
2,322
$
3,234
$
4,277
Sale of goods
393
521
835
CIRCOR INTERNATIONAL, INC.
SCHEDULE
II--VALUATIONI—VALUATION AND QUALIFYING ACCOUNTSCIRCOR INTERNATIONAL, INC. (IN THOUSANDS) - --------------------------------------------------------------------------------
Description
Balance at Beginning of Period
Additions
Deductions(1)
Balance at End of Period
Charged to Costs and Expenses
Charged to Other Accounts
(In thousands)
Fiscal Year ended December 31, 2002
Deducted from asset account:
Allowance for doubtful accounts
$
2,637
$
17
$
4
(2)
$
617
$
2,041
Fiscal Year ended December 31, 2001
Deducted from asset account:
Allowance for doubtful accounts
$
2,831
$
754
$
230
(3)
$
1,178
$
2,637
Fiscal Year ended December 31, 2000
Deducted from asset account:
Allowance for doubtful accounts
$
2,683
$
77
–
$
(71
)
$
2,831
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 $1,259Uncollectable accounts written off, net of recoveries.
(2) $508 $2,949 Fiscal year ended June 30, 1998 Deducted from asset account: Allowance for doubtful accounts........ $1,709 $493 $ 208 (2) $318 $2,092Acquired in connection with the acquisition of Tomco and U.S. Para Plate. - ------------------------ (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
(3) Includes $223 acquired in connection with the acquisition of RTK and SART. 70