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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 1-14962
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CIRCOR INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 04-3477276
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
C/O CIRCOR, INC. 01803-4230
35 CORPORATE DRIVE, BURLINGTON, MA (Zip Code)
(Address of principal executive
offices)
(Registrant's telephone number, (781) 270-1200
including area code):
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- ---------------------------------------------
COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE
PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 17, 2000, was $196,071,240. As of March 17, 2000, there
were 13,236,877 shares of the Registrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference certain portions of the information from
the Registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 18, 2000.
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TABLE OF CONTENTS
The following sections of the Report are hereby amended and restated in full
by amending the following items to include the audited statements of operations,
cash flows and shareholders' equity for the fiscal year ended June 30, 1997 and
an unaudited statement of cash flows for the six months ended December 31, 1998.
Page
--------
Part II Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 3-12
Part II Item 8 Financial Statements and Supplemental Data.................. 12
Part IV Item 14 Exhibits, Financial Schedules and Reports on Form 10-K...... 13
Exhibit Index................................................................. 13-15
Signatures.................................................................... 16
Report of Independent Auditors................................................ 17
Consolidated Financial Statements............................................. 18-21
Notes to the Consolidated Financial Statements................................ 22-41
Schedule II Valuation and Qualifying Accounts................................ 42
2
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Annual Report contains certain statements that are "forward-looking
statements" as that term is defined under the Private Securities Litigation
Reform Act of 1995 (the "Act") and releases issued by the Securities and
Exchange Commission. The words "believe," "expect," "anticipate," "intend,"
"estimate" and other expressions which are predictions of or indicate future
events and trends and which do not relate to historical matters identify
forward-looking statements. Forward-looking statements involve known and unknown
risks, uncertainties and other factors, which may cause the actual results,
performance or achievements of the Company to differ materially from anticipated
future results, performance or achievements expressed or implied by such
forward-looking statements. The Company undertakes no obligation to publicly
update or revise any forward-looking statement, whether as a result of new
information, future events or otherwise.
The future operating results and performance trends of the Company may be
affected by a number of factors, including, without limitation, the following:
(i) loss of market share through competition; (ii) competitive pricing
pressures; (iii) ability to develop and market new products; (iv) changes in the
instrumentation, fluid regulation and petrochemical markets; (v) changes in
demand for the Company's products; (vi) fluctuations in manufacturing yields;
(vii) insufficient or excess manufacturing capacity; (viii) the amount of
product booked and shipped within a quarter; (ix) changes in product mix;
(x) fluctuating economic conditions in markets where the Company's products are
manufactured or sold; interest rate and foreign exchange rate fluctuations;
(xi) ability to integrate manufacturing and other operating entities;
(xii) changes in commodity prices including stainless steel, cast iron and
carbon steel; and (xiii) integrations of future acquisitions. In addition to the
foregoing, the Company's actual future results could differ materially from
those projected in the forward-looking statements as a result of the risk
factors set forth in the Company's various filings with the Securities and
Exchange Commission and of changes in general economic conditions, changes in
interest rates and/or foreign exchange rates and changes in the assumptions used
in making such forward-looking statements.
On October 18, 1999, we completed the spin-off from our former parent, Watts
Industries, Inc., and began to operate as an independent public company.
Additionally, we announced that we would change our fiscal year from June 30th
to December 31st. The following discussion is based upon the six-month period
ending December 31, 1999. Additionally, comparisons to prior year periods
pertain to the pro forma results of these operations under Watts which later
were transferred to CIRCOR in connection with the spin-off.
The following discussion is based upon and should be read in conjunction
with our Consolidated Financial Statements and the related footnotes set forth
in this report.
3
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THE
SIX MONTHS ENDED DECEMBER 31, 1998
The following tables set forth the percentage of net revenues and the yearly
percentage change in certain financial data for the six-months ended
December 31, 1999 and 1998:
AS A PERCENTAGE OF NET
REVENUES
SIX MONTHS ENDED
DECEMBER 31, YEAR-TO-YEAR
------------------------- PERCENTAGE INCREASE
1999 1998 (DECREASE)
-------- -------- -------------------
Net revenues............................................. 100.0 % 100.0 % (5.8)%
Cost of revenues......................................... 69.0 % 68.5 % (5.1)%
----- -----
Gross profit............................................. 31.0 % 31.5 % (7.4)%
Selling, general and administrative expenses............. 22.2 % 22.2 % (5.7)%
----- -----
Operating income......................................... 8.8 % 9.3 % (11.1)%
Other (income) expense:
Interest (income) expense, net........................... 2.9 % 2.6 % 2.5 %
Other (income) expense, net.............................. 0.3 % (0.3)% nmf
----- -----
Income before income taxes............................... 5.6 % 7.0 % (24.2)%
Provision for income taxes............................... 2.5 % 2.9 % (17.8)%
----- -----
Net income............................................... 3.1 % 4.1 % (28.7)%
===== =====
nmf: Not meaningful
Net revenues for the six months ended December 31, 1999 decreased by
$9.7 million, or 5.8%, from $166.1 million to $156.4 million compared to the
same period last year. The decrease in net revenues is attributable to the
following factors:
(DOLLARS IN
THOUSANDS)
---------------
Acquisitions................................................ $ 4,996 3.0 %
Operations.................................................. (12,459) (7.5)%
Foreign exchange............................................ (2,252) (1.3)%
-------- ----
Total..................................................... $ (9,715) (5.8)%
======== ====
The decrease in net revenues from operations and foreign exchange was
partially offset by the inclusion of revenues of acquired businesses including
SSI Equipment, Inc., a Canadian manufacturer of strainers for industrial and
petrochemical applications and GO Regulator, Inc., a producer of regulators for
the instrumentation market located in San Dimas, California, which were acquired
since September 30, 1998. The decrease in net revenues from operations is
primarily attributable to reduced unit shipments of valves that serve both
domestic and international oil and gas applications. Revenues of these products
have been adversely affected by the reduced demand for products used in the
petrochemical industry, caused by reduced energy prices during calendar year
1998, which continued until the second-half of 1999 when prices began to
increase. Historically, when energy prices have increased for a sustained period
of time, maintenance programs in the petrochemical industry become more active
followed by increased capital spending on more extensive facility projects.
During the latter part of 1999, we began to experience increasing activity in
maintenance programs but continued to experience lackluster business in the
facility project programs.
4
The impact of foreign exchange was due primarily to the strength of the
dollar to the Euro. International business accounted for approximately 29% of
net revenues during the current and prior year six-month periods.
We monitor our revenue in two segments: Instrumentation and Fluid Regulation
Products and Petrochemical Products. The Instrumentation and Fluid Regulation
Products segment accounted for approximately 53.8% of net revenues during the
six-month period compared to 51.6% for the comparable period of last fiscal
year. The Petrochemical Products segment accounted for approximately 46.2% of
net revenues during the quarter compared to 48.4% for the comparable period of
last fiscal year.
Revenues in these segments for the six-months ended December 31, 1999 and
1998, respectively, were as follows:
SIX-MONTHS ENDED DECEMBER 31,
------------------------------
1999 1998 CHANGE
-------- -------- --------
(IN THOUSANDS)
Instrumentation and Fluid Regulation........... $ 84,148 $ 85,622 $(1,474)
Petrochemical.................................. 72,223 80,464 (8,241)
-------- -------- -------
Total........................................ $156,371 $166,086 $(9,715)
======== ======== =======
Net revenues in the Instrumentation and Fluid Regulation segment for the six
months ended December 31, 1999 decreased slightly due to softness in capital
spending for instrumentation products partially offset by the acquisition of GO
Regulator, Inc. The decrease in net revenues in the Petrochemical segment
reflected weakness in both domestic and international oil and gas markets
partially offset by the acquisition of SSI Equipment, Inc.
Gross profit for the six months ended December 31, 1999 decreased by nearly
$3.9 million, or 7.4% from $52.4 million to $48.5 million compared to the same
period last year. Gross margin decreased from 31.5% to 31.0%. Gross profit was
adversely affected by start-up costs of the new factory in Spartanburg, South
Carolina and relocation costs associated with the closure of Hoke's Cresskill,
New Jersey plant. In addition, gross profit was adversely affected by
competitive pricing pressures, especially in the petrochemical markets. Lower
energy prices experienced prior to the second-half of the year reduced demand
for petrochemical products, thereby decreasing unit pricing. The reduced demand
also lowered manufacturing levels creating unfavorable overhead absorption of
fixed manufacturing costs, thereby decreasing gross margins during the six-month
period.
Selling, general and administrative expenses decreased $2.1 million to
$34.7 million for the six months ended December 31, 1999 compared to the same
period last year. We reduced selling, general and administrative expenses as
revenues decreased and the savings were partially offset by certain costs
associated with our transition to an independent public company.
Operating income by segment for the six months ended December 31, 1999 and
1998 was as follows:
SIX MONTHS ENDED DECEMBER 31,
------------------------------
1999 1998 CHANGE
-------- -------- --------
(IN THOUSANDS)
Instrumentation and Fluid Regulation............. $10,253 $ 9,618 $ 635
Petrochemical.................................... 6,332 8,771 (2,439)
Corporate........................................ (2,739) (2,808) 69
------- ------- -------
Total.......................................... $13,846 $15,581 $(1,735)
======= ======= =======
The increase in operating income in the Instrumentation and Fluid Regulation
Products segment is attributable to benefits derived from improved operating
efficiencies and favorable product mix partially
5
offset by the start-up cost of the Spartanburg, South Carolina plant and plant
relocation costs. The decrease in the operating income in the Petrochemical
Products segment is primarily attributable to decreased orders for petrochemical
facility projects as the result of lower world market prices for crude oil.
The increase in other net non-operating expenses consisted primarily of
realized and unrealized foreign exchange net losses caused primarily by the
strengthening of the U.S. dollar against the Euro.
The effective tax rate for the six month period was 44.8% compared to 41.4%
for comparable prior year period. Initiatives to reduce our effective tax rate
are expected to be implemented pending receipt of a favorable supplemental
ruling by the Internal Revenue Service. The tax rate for the six months ended
December 31, 1999 reflects the benefits primarily derived from our former parent
company's implementation of tax planning strategies.
Net income decreased $2.0 million to nearly $4.9 million, for the six-month
period, compared to last year's of $6.8 million. This decrease is primarily
attributable to the factors discussed above.
RESULTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE
TWELVE MONTHS ENDED JUNE 30, 1998
The following tables set forth the percentage of net revenues and the yearly
percentage change in certain financial data for the fiscal years ended June 30,
1999 and 1998:
AS A PERCENTAGE OF NET
REVENUES
TWELVE MONTHS ENDED
JUNE 30, YEAR-TO-YEAR
------------------------- PERCENTAGE INCREASE
1999 1998 (DECREASE)
-------- -------- -------------------
Net revenues............................................. 100.0 % 100.0 % 11.8 %
Cost of revenues......................................... 67.6 % 67.2 % 12.4 %
----- -----
Gross profit............................................. 32.4 % 32.8 % 10.6 %
Selling, general and administrative expenses............. 23.3 % 19.6 % 33.1 %
----- -----
Operating income......................................... 9.1 % 13.2 % (22.6)%
Other (income) expense:
Interest (income) expense, net........................... 2.7 % 1.2 % 153.8 %
Other (income) expense, net.............................. (0.1)% (0.1)% (25.2)%
----- -----
Income before income taxes............................... 6.5 % 12.1 % (40.1)%
Provision for income taxes............................... 2.6 % 4.3 % (32.9)%
----- -----
Net income............................................... 3.9 % 7.8 % (44.2)%
===== =====
Net revenues for the twelve months ended June 30, 1999 increased by
$34.1 million, or 11.8%, from $289.0 million to $323.1 million compared to the
fiscal year ended June 30, 1998. The increase in net revenues is attributable to
the following factors:
(DOLLARS IN
THOUSANDS)
-------------------
Acquisitions.............................................. $79,171 27.4 %
Operations................................................ (45,552) (15.8)%
Foreign exchange.......................................... 489 0.2 %
------- -----
Total................................................... $34,108 11.8 %
======= =====
The growth in revenues is primarily attributable to recently acquired
companies. Hoke, Inc., which was acquired during July 1998, is part of the
Instrumentation and Fluid Regulation Products Group.
6
Telford Valve and Specialties acquired in March 1998, is part of the
Petrochemical Products Group. The decrease in revenues from operations is
primarily attributable to decreases in unit shipments of both domestic and
international oil and gas valves. Revenues of these products have been adversely
affected by the reduced demand for our products used in petrochemical facility
projects and maintenance programs which has been caused by reduced energy prices
during last fiscal year.
International business accounted for approximately 41.4% of net revenues in
fiscal year 1999 compared to 31.9% in fiscal year 1998. We monitor our revenues
in two market segments: Instrumentation and Fluid Regulation Products Group and
the Petrochemical Products Group. The Instrumentation and Fluid Regulation
Products Group accounted for approximately 54.3% of net revenues in fiscal year
1999 compared to 38.2% in fiscal year 1998. The Petrochemical Products Group
accounted for approximately 45.7% of net revenues in fiscal year 1999 compared
to 61.8% in fiscal year 1998. Revenues in these groups for fiscal year 1999 and
fiscal year 1998 were as follows:
FISCAL YEAR ENDED JUNE 30,
------------------------------
1999 1998 CHANGE
-------- -------- --------
(IN THOUSANDS)
Instrumentation and Fluid Regulation........... $175,444 $110,332 $65,112
Petrochemical.................................. 147,633 178,637 (31,004)
-------- -------- -------
Total........................................ $323,077 $288,969 $34,108
======== ======== =======
The decrease in petrochemical net revenues of $31.0 million, or 17.4%, for
the fiscal year ended June 30, 1999 was predominantly in the domestic markets
which reflected a 23.8% decrease over the previous fiscal year. The increase in
instrumentation and fluid regulation net revenues of $65.1 million, or 59.0%,
for the fiscal year ended June 30, 1999 consisted primarily of volume derived
from acquisitions consisting of Hoke, Inc. and several product lines.
Gross profit increased $10.1 million, or 10.6%, to $104.7 million. Gross
margin declined slightly from 32.8% in fiscal 1998 to 32.4% in fiscal 1999. The
increased gross profit is attributable to the increased sales due to the
acquisitions discussed above. These acquisitions operated at a gross margin
slightly higher than the remainder of the Company. The increased gross profits
from acquisitions were partially offset by decreased gross profits in the
domestic and international oil and gas valve product lines. Lower energy prices
resulted in lower demand, increased competition and adversely impacted unit
pricing. Additionally, the reduced manufacturing levels, caused by these reduced
revenues, also created unfavorable overhead absorption of fixed manufacturing
expenses thereby decreasing gross margins in fiscal year 1999 compared to fiscal
year 1998.
Selling, general and administrative expenses increased $18.7 million to
$75.2 million for the fiscal year ended June 30, 1999. This increase is
attributable to the inclusion of the expenses related with recent acquisitions.
This increase was partially offset by both cost reductions and reduced variable
selling expenses within our oil and gas business units.
Operating income by segment for fiscal year 1999 and fiscal year 1998 were
as follows:
FISCAL YEAR ENDED JUNE 30,
------------------------------
1999 1998 CHANGE
-------- -------- --------
(IN THOUSANDS)
Instrumentation and 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)
======= ======= ========
7
The increase in operating income in the Instrumentation and Fluid Regulation
Products Group is attributable primarily to acquisitions and improved operating
efficiencies within our steam related product lines. The decrease in operating
income in the Petrochemical Products Group reflects reduced energy prices and
reduced demand for our products used in petrochemical facility projects and
maintenance programs.
The increase in interest expense is primarily due to the additional cost of
borrowed funds resulting from the acquisition of Hoke, Inc.
The effective tax rate increased to 40.3% from 36.0%. The increase is a
result of increased earnings in foreign jurisdictions with higher tax rates.
Net income decreased $9.9 million to $12.5 million. This decrease is
primarily attributable to the decreased net revenues and gross margins in the
petrochemical market.
The combined results of operations are impacted by the effect that changes
in foreign exchange rates have on its international subsidiaries' operating
results. Changes in foreign exchange rates had an immaterial impact on net
income in fiscal 1999.
RESULTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE
TWELVE MONTHS ENDED JUNE 30, 1997
The following tables set forth the percentage of net revenues and the yearly
percentage change in certain financial data for the fiscal years ended June 30,
1998 and 1997:
AS A PERCENTAGE OF
NET REVENUES
TWELVE MONTHS ENDED
JUNE 30, YEAR-TO-YEAR
------------------------- PERCENTAGE INCREASE
1998 1997 (DECREASE)
-------- -------- -------------------
Net revenues............................................. 100.0 % 100.0 % 5.2 %
Cost of revenues......................................... 67.2 % 67.8 % 4.4 %
----- -----
Gross profit............................................. 32.8 % 32.2 % 6.8 %
Selling, general and administrative expenses............. 19.6 % 19.9 % 3.2 %
----- -----
Operating income......................................... 13.2 % 12.3 % 12.6 %
Other (income) expense:
Interest (income) expense, net........................... 1.2 % 1.2 % 6.0 %
Other (income) expense, net.............................. (0.1)% 0.2 % 145.5 %
----- -----
Income before income taxes............................... 12.1 % 10.9 % 16.9 %
Provision for income taxes............................... 4.3 % 3.8 % 21.8 %
----- -----
Net income............................................... 7.8 % 7.1 % 14.3 %
===== =====
Net revenues for the twelve months ended June 30, 1998 increased
$14.3 million, or 5.2%, from $274.7 million to $289.0 million compared to the
fiscal year ended June 30, 1997. This increase in net revenues was attributable
to the following factors:
(DOLLARS IN
THOUSANDS)
-------------------
Acquisitions................................................ $14,624 5.3%
Operations.................................................. 4,008 1.5%
Foreign Exchange............................................ (4,379) (1.6%)
------- ----
Total................................................... $14,253 5.2%
======= ====
8
The growth in net revenues due to acquired companies was primarily
attributable to the inclusion of the net revenues of Telford Valve, which was
acquired in March 1998, and the net revenues of Aerodyne Controls, which was
acquired in December 1997. Aerodyne Controls is part of the Instrumentation and
Fluid Regulation Products Group. The increase in net revenues from operations
was primarily attributable to increased unit shipments of international oil and
gas valves and increased unit shipments of domestic instrumentation valves. Net
revenues were adversely impacted by a change in foreign exchange rates primarily
associated with the Italian lire during fiscal year 1998.
Revenues in the Instrumentation and Fluid Regulation Products Group and the
Petrochemical Products Group for fiscal 1998 and fiscal 1997 were as follows:
FISCAL YEAR ENDED JUNE 30,
------------------------------
1998 1997 CHANGE
-------- -------- --------
(IN THOUSANDS)
Instrumentation and Fluid Regulation........... $110,332 $102,691 $ 7,641
Petrochemical.................................. 178,637 172,025 6,612
-------- -------- -------
Total...................................... $288,969 $274,716 $14,253
======== ======== =======
The increase in instrumentation and fluid regulation revenues was primarily
attributable to the acquisition of Aerodyne Controls, increased unit shipments
of domestic valves and two product line acquisitions. The increase in
petrochemical revenues was primarily attributable to increased unit shipments of
international oil and gas valves and the acquisition of Telford Valve. These
increases were partially offset by the unfavorable foreign exchange rates
associated with the Italian lire.
Gross profit increased $6.0 million, or 6.8%, to $94.7 million for the
fiscal year ended June 30, 1998 and gross margin increased from 32.2% to 32.8%
compared to the fiscal year ended June 30, 1997. This percentage increase was
primarily attributable to improved gross margins for international oil and gas
valves and domestic steam valves. These improvements were partially offset by
the inclusion of certain acquisitions which operated at a lower gross margin
than the remainder of our operations.
Selling, general and administrative expenses increased $1.7 million, or
3.2%, to $56.5 million. This increase was primarily attributable to the
inclusion of the expenses of acquired companies and increased selling expenses
for oil and gas valves. This increase was partially offset by the effect of the
change in foreign exchange rates.
Operating income increased by $4.3 million, or 12.6%, from $33.9 million to
$38.2 million and increased as a percentage of revenues from 12.3% in fiscal
1997 to 13.2% in fiscal 1998.
Operating income in the Instrumentation and Fluid Regulation Products Group
and the Petrochemical Products Group for fiscal year 1998 and fiscal year 1997
was as follows:
FISCAL YEAR ENDED JUNE 30,
------------------------------
1998 1997 CHANGE
-------- -------- --------
(IN THOUSANDS)
Petrochemical..................................... $25,256 $21,012 $4,244
Instrumentation and Fluid Regulation.............. 17,883 17,280 603
Corporate......................................... (4,948) (4,386) (562)
------- ------- ------
Total......................................... $38,191 $33,906 $4,285
======= ======= ======
The increase in operating income in the Petrochemical Products Group was
primarily attributable to the increase in net revenues and increased gross
margins on international oil and gas valves.
The increase in operating income in the Instrumentation and Fluid Regulation
Products Group was primarily attributable to increased net revenues.
9
The effective tax rate increased to 36.0% from 34.5%. This increase was
attributable to acquisition related goodwill amortization which was not
deductible for US Federal Income Tax purposes.
Net income increased by $2.8 million, or 14.3%, to $22.4 million. This
increase was primarily attributable to increased net revenues and improved gross
margins.
Our consolidated results of operations were impacted by the effect that
changes in foreign exchange rates had on our international subsidiaries'
operating results. Changes in foreign exchange rates had an adverse impact on
net income for fiscal 1998 of approximately $0.7 million.
LIQUIDITY AND CAPITAL RESOURCES
During the six-month period ended December 31, 1999, the Company used
$14.8 million of cash flow from operating activities principally to fund
accounts receivable and accounts payable, and used $5.2 million of cash in
investing activities principally to purchase $4.6 million of capital equipment.
Capital expenditures were primarily for manufacturing machinery and equipment to
consolidate and improve manufacturing operations.
We successfully negotiated with ING (U.S.) Capital LLC, BankBoston, N.A.,
First Union National Bank, Citizens Bank and Brown Brothers Harriman & Co. for a
$75.0 million unsecured credit facility. We also sold $75.0 million of senior
unsecured notes to eleven institutional investors.
The proceeds from the unsecured credit facility and senior unsecured notes
were used to pay Watts for our assigned portion of Watts' long-term debt of
$96.0 million, refinancing of existing CIRCOR debt of $8.6 million and various
debt financing fees amounting to $1.5 million. Subsequent to these transactions,
and as of December 31, 1999, we had $43.0 million available from the unsecured
credit facility to support our acquisition program, working capital requirements
and for general corporate purposes.
Also, to fulfill a representation made to the Internal Revenue Service as
part of the application for the tax-free treatment of the spin-off, we intend to
engage in a subsequent offering of common stock within one year after the
spin-off. The timing, completion and size of the subsequent equity offering will
be subject to various market conditions. We intend to use the proceeds from the
subsequent equity offering and availability from the unsecured line of credit to
fund future acquisitions.
The ratio of current assets to current liabilities at December 31, 1999 was
4.5 to 1 compared to 3.3 to 1 at June 30, 1999. Cash and cash equivalents were
$5.2 million at December 31, 1999 compared to $6.7 million at June 30, 1999.
Debt as a percentage of total capital employed was 40.6% at December 31, 1999
compared to 40.7% at June 30, 1999. At December 31, 1999, CIRCOR was in
compliance with all covenants related to existing debts agreements.
We anticipate that available funds provided from ongoing operations will be
sufficient to meet current operating requirements and anticipated capital
expenditures over the next 12 months.
From time-to-time, we are involved with product liability, environmental
proceedings and other litigation proceedings and incur costs on an ongoing basis
related to these matters. We have not incurred material expenditures in the
six-month period ending December 31, 1999 in connection with any of these
matters. See Note 12 of the Consolidated Financial Statements, Contingencies and
Environmental Remediation.
YEAR 2000
Since January 1, 2000 we have not experienced any operational or business
interruptions related to Year 2000 issues. The Company completed its Year 2000
program and will continue to monitor it as appropriate. We are not aware of any
Year 2000 issues that may have an adverse impact on our financial condition or
business operations. Spending for the program during the six-month period was
budgeted and expensed as incurred and amounted to approximately $500,000.
10
CONVERSION TO EURO
On January 1, 1999, 11 of the 15 member countries of the European Union
adopted the Euro as their common legal currency and established fixed conversion
rates between their existing sovereign currencies and the Euro. The Euro trades
on currency exchanges and is available for non-cash transactions. The
introduction of the Euro will affect CIRCOR as we have manufacturing and
distribution facilities in several of the member countries and trades
extensively across Europe. We are currently assessing the long-term competitive
implications of the conversion and at this time. We are not anticipating that
any significant costs will be incurred due to the introduction and conversion to
the Euro.
OTHER
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." We will adopt
SFAS 133 on January 1, 2001. The impact of SFAS 133 on the Consolidated
Financial Statements is still being evaluated, but is not expected to be
material.
RECENT DEVELOPMENTS
Recent personnel changes and additions have been announced at our company.
Carmine F. Bosco has been appointed Group Vice President of the Petrochemical
Products Group. He will be responsible for the operations of the following: KF
Industries, Inc., Telford Valve & Specialties, SSI Equipment Inc., Pibiviesse
S.p.A., and SKVC. Alan J. Glass has been appointed Corporate Counsel and
Assistant Secretary. He will be responsible for advising executive and senior
management on corporate matters encompassing acquisitions and divestitures,
international and domestic joint ventures, corporate compliance programs,
employment, intellectual property, financing arrangements, equity market
transactions, and environmental and health and safety matters. Stephen J.
Carriere, Corporate Controller, has also been appointed as Vice President and
Assistant Treasurer of the Company. Subsequent to December 31, 1999, Cosmo S.
Trapani resigned his position as Chief Financial Officer, Treasurer and
Secretary.
11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
CIRCOR INTERNATIONAL, INC
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
Report of Independent Auditors.............................. 17
Consolidated Balance Sheets as of December 31, 1999, June
30, 1999 and June 30, 1998................................ 18
Consolidated Statements of Operations for the six months
ended December 31, 1999 and December 31, 1998 (unaudited)
and the twelve months ended June 30, 1999, 1998 and 1997.. 19
Consolidated Statements of Cash Flows for the six months
ended December 31, 1999 and December 31, 1998 (unaudited)
and the twelve months ended June 30, 1999, 1998 and 1997.. 20
Consolidated Statements of Stockholders' Equity for the six
months ended December 31, 1999 and the twelve months ended
June 30, 1999, 1998 and 1997.............................. 21
Notes to the Consolidated Financial Statements.............. 22-41
12
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1)Financial Statements
The financial statements filed as part of the report are listed in
Part II, Item 8 of this report on the Index to Consolidated Financial
Statements included on page 12.
(a)(2)Financial Statement Schedules
PAGE
--------
Schedule II Valuation and Qualifying Accounts for the six
months ended December 31, 1999, and the twelve months ended
June 30, 1999, 1998 and 1997................................ 42
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.
(A)(3) EXHIBITS
EXHIBIT NO. DESCRIPTION AND LOCATION
- ----------- ------------------------
2 Plan of Acquisition, Reorganization, Arrangement,
Liquidation or Succession:
2.1 Distribution Agreement between Watts Industries, Inc. and
the Company dated as of October 1, 1999, is incorporated
herein by reference to Exhibit 2.1 to Amendment No. 2 to the
Company's Registration Statement on Form 10, File
No. 000-26961, filed with the Securities and Exchange
Commission on October 6, 1999 ("Amendment No. 2 to the
Form 10").
3 Articles of Incorporation and By-Laws:
3.1 The Amended and Restated Certificate of Incorporation of the
Company is incorporated herein by reference to Exhibit 3.1
to the Company's Registration Statement on Form 10, File
No. 000-26961, filed with the Securities and Exchange
Commission on August 6, 1999 ("Form 10").
3.2 The Amended and Restated By-Laws of the Company are
incorporated herein by reference to Exhibit 3.2 to the
Form 10.
3.3 Certificate of Designations, Preferences and Rights of a
Series of Preferred Stock of CIRCOR International, Inc.
classifying and designating the Series A Junior
Participating Cumulative Preferred Stock is incorporated
herein by reference to Exhibit 3.1 to the Company's
Registration Statement on Form 8-A, File No. 001-14962,
filed with the Securities and Exchange Commission on
October 21, 1999 ("Form 8-A").
4 Instruments Defining the Rights of Security Holders,
Including Debentures:
4.1 Shareholder Rights Agreement, dated as of September 16,
1999, between CIRCOR International, Inc. and BankBoston,
N.A., as Rights Agent is incorporated herein by reference to
Exhibit 4.1 to the Form 8-A.
9 Voting Trust Agreements:
9.1 The Amended and Restated George B. Horne Voting Trust
Agreement-1997 dated as of September 14, 1999 is
incorporated herein by reference to Exhibit 9.1 to Amendment
No. 1 to the Company's Registration Statement on Form 10,
File No. 000-26961, filed with the
13
EXHIBIT NO. DESCRIPTION AND LOCATION
- ----------- ------------------------
Securities and Exchange Commission on September 22, 1999
("Amendment No. 1 to the Form 10").
10 Material Contracts:
10.1 CIRCOR International, Inc. 1999 Stock Option and Incentive
Plan is incorporated herein by reference to Exhibit 10.1 to
Amendment No. 1 to the Form 10.
10.2 Form of Incentive Stock Option Agreement under the 1999
Stock Option and Incentive Plan is incorporated herein by
reference to Exhibit 10.2 to Amendment No. 1 to the
Form 10.
10.3 Form of Non-Qualified Stock Option Agreement for Employees
under the 1999 Stock Option and Incentive Plan (Five Year
Graduated Vesting Schedule) is incorporated herein by
reference to Exhibit 10.3 to Amendment No. 1 to the
Form 10.
10.4 Form of Non-Qualified Stock Option Agreement for Employees
under the 1999 Stock Option and Incentive Plan (Performance
Accelerated Vesting Schedule) is incorporated herein by
reference to Exhibit 10.4 to Amendment No. 1 to the
Form 10.
10.5 Form of Non-Qualified Stock Option Agreement for Independent
Directors under the 1999 Stock Option and Incentive Plan is
incorporated herein by reference to Exhibit 10.5 to
Amendment No. 1 to the Form 10.
10.6 CIRCOR International, Inc. Management Stock Purchase Plan is
incorporated herein by reference to Exhibit 10.6 to
Amendment No. 1 to the Form 10.
10.7 Form of CIRCOR International, Inc. Supplemental Employee
Retirement Plan is incorporated herein by reference to
Exhibit 10.7 to Amendment No. 1 to the Form 10.
10.8 Supply Agreement between Watts Industries, Inc. and CIRCOR
International, Inc. is incorporated herein by reference to
Exhibit 10.8 to Amendment No. 2 to the Form 10.
10.9 Trademark License Agreement between Watts Industries, Inc.
and CIRCOR International, Inc. is incorporated herein by
reference to Exhibit 10.9 to Amendment No. 2 to the
Form 10.
10.10 Lease Agreement, dated as of February 14, 1999, between
BY-PASS 85 Associates, LLC and CIRCOR International, Inc. is
incorporated herein by reference to Exhibit 10.10 to
Amendment No. 1 to the Form 10.
10.11 Trust Indenture from Village of Walden Industrial
Development Agency to The First National Bank of Boston, as
Trustee, dated June 1, 1994 is herein incorporated by
reference to Exhibit 10.14 of the Watts Industries, Inc.
Annual Report on Form 10-K, File No. 0-14787, filed with the
Securities and Exchange Commission on September 26, 1994.
10.12 Loan Agreement between Hillsborough County Industrial
Development Authority and Leslie Controls, Inc. dated
July 1, 1994 is herein incorporated by reference to
Exhibit 10.15 of the Watts Industries, Inc. Annual Report
on Form 10-K, File No. 0-14787, filed with the Securities
and Exchange Commission on September 26, 1994.
10.13 Trust Indenture from Hillsborough County Industrial
Development Authority to The First National Bank of Boston,
as Trustee, dated July 1, 1994 is herein incorporated by
reference to Exhibit 10.17 of the Watts Industries, Inc.
Annual Report on Form 10-K, File No. 0-14787, filed with the
Securities and Exchange Commission on September 26, 1994.
10.14 Form of Indemnification Agreement between CIRCOR and each of
its directors is herein incorporated by reference to
Exhibit 10.20 to the Form 10.
14
EXHIBIT NO. DESCRIPTION AND LOCATION
- ----------- ------------------------
10.15 Executive Employment Agreement between CIRCOR, Inc. and
David A. Bloss, Sr., dated as of September 16, 1999 is
incorporated herein by reference to Exhibit 10.15 to
Amendment No. 1 to the Form 10.
10.16 Executive Employment Agreement between CIRCOR, Inc. and
Cosmo S. Trapani, dated as of September 16, 1999 is
incorporated herein by reference to Exhibit 10.16 to
Amendment No. 1 to the Form 10.
10.17 Amended and Restated Letter of Credit, Reimbursement and
Guaranty Agreement dated as of October 18, 1999 among Leslie
Controls, Inc., as Borrower, CIRCOR International, Inc., as
Guarantor, and First Union National Bank as Letter of Credit
Provider is herein incorporated by reference to
Exhibit 10.17 to the Company's Current Report on Form 8-K,
File No. 001-14962, filed with the Securities and Exchange
Commission on October 21, 1999.
10.18 Amended and Restated Letter of Credit, Reimbursement and
Guaranty Agreement dated as of October 18, 1999 among Spence
Engineering Company, Inc. as Borrower, CIRCOR
International, Inc., as Guarantor, and First Union National
Bank as Letter of Credit Provider is herein incorporated by
reference to Exhibit 10.18 to the Company's Current Report
on Form 8-K, File No. 001-14962, filed with the Securities
and Exchange Commission on October 21, 1999.
10.19 Credit Agreement, dated as of October 18, 1999, by and among
CIRCOR International, Inc., a Delaware corporation, as
Borrower, each of the Subsidiary Guarantors named therein,
the Lenders from time to time a party thereto, ING (U.S.)
Capital LLC, as Agent for such Lenders, BankBoston, N.A., as
Syndication Agent, First Union National Bank, as
Documentation Agent and ING Barings LLC, as Arranger for the
Lenders is herein incorporated by reference to
Exhibit 10.19 to the Company's Current Report on Form 8-K,
File No. 001-14962, filed with the Securities and Exchange
Commission on October 21, 1999.
10.20 Note Purchase Agreement, dated as of October 19, 1999, among
CIRCOR International, Inc., a Delaware corporation, the
Subsidiary Guarantors and each of the Purchasers listed on
Schedule A attached thereto is herein incorporated by
reference to Exhibit 10.20 to the Company's Current Report
on Form 8-K, File No. 001-14962, filed with the Securities
and Exchange Commission on October 21, 1999.
21 Subsidiaries of Registrant: A list of Subsidiaries of the
Company is incorporated herein by reference to Exhibit 21.1
to Amendment No. 1 to the Company's Form 10.
*23 Consent of Experts and Counsel: Consent of KPMG LLP is filed
herewith as Exhibit 23.1.
**27 Financial Data Schedule.
(b) Reports on Form 8-K. The registrant filed the following Current Reports on
Form 8-K during the three-month period ended December 31, 1999:
1. On October 21, 1999, the Company filed a Current Report on Form 8-K
announcing the beginning of the Company's trading on the New York Stock
Exchange on October 19, 1999 and announcing the closing of the Company's
revolving credit facility, bridge loan and sale of senior unsecured notes
to institutional investors in a private placement.
(c) See Item 14(a)3 above.
* Filed with this report.
** Previously filed on Form 10-K, filed on 3/30/00.
15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CIRCOR INTERNATIONAL, INC
By: /s/ DAVID A. BLOSS, SR.
-----------------------------------------
David A. Bloss, Sr.
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DAVID A. BLOSS, SR.
---------------------------- Chairman, President, Chief Executive February 23, 2001
David A. Bloss, Sr. Officer, (Principal Executive Officer)
/s/ KENNETH W. SMITH Vice President, Chief Financial Officer,
---------------------------- (Principal Financial Officer) and February 23, 2001
Kenneth W. Smith Treasurer
/s/ STEPHEN J. CARRIERE Vice President, Corporate Controller,
---------------------------- (Principal Accounting Officer) and February 23, 2001
Stephen J. Carriere Assistant Treasurer
/s/ DEWAIN K. CROSS
---------------------------- Director February 23, 2001
Dewain K. Cross
/s/ DAVID F. DIETZ
---------------------------- Director February 23, 2001
David F. Dietz
/s/ TIMOTHY P. HORNE
---------------------------- Director February 23, 2001
Timothy P. Horne
/s/ DANIEL J. MURPHY, III
---------------------------- Director February 23, 2001
Daniel J. Murphy, III
/s/ THOMAS N. TULLO
---------------------------- Director February 23, 2001
Thomas N. Tullo
16
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
CIRCOR International, Inc.
We have audited the accompanying consolidated balance sheets of CIRCOR
International, Inc. as of December 31, 1999, and June 30, 1999 and 1998, and the
related consolidated statements of operations, cash flows and shareholders'
equity for the six-month period ended December 31, 1999, and the fiscal years
ended June 30, 1999, 1998 and 1997. In connection with our audits of the
consolidated financial statements, we also audited the accompanying financial
statement schedule of valuation and qualifying accounts. These consolidated
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CIRCOR
International, Inc. as of December 31, 1999, and June 30, 1999 and 1998, and the
results of their operations and their cash flows for the six-month period ended
December 31, 1999, and the fiscal years ended June 30, 1999, 1998 and 1997 in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
KPMG LLP
Boston, Massachusetts
March 24, 2000
17
CIRCOR INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
JUNE 30,
DECEMBER 31, -------------------
1999 1999 1998
------------ -------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 5,153 $ 6,714 $ 6,241
Trade accounts receivable, less allowance for doubtful
accounts of $2,683, $2,949 and $2,092, respectively..... 60,916 49,857 53,565
Inventories............................................... 107,332 108,910 89,788
Prepaid expenses and other current assets................. 7,006 6,817 2,634
Deferred income taxes..................................... 9,794 8,592 2,182
-------- -------- --------
Total Current Assets.................................. 190,201 180,890 154,410
PROPERTY, PLANT AND EQUIPMENT, NET.......................... 75,154 76,682 55,982
OTHER ASSETS:
Goodwill, net of accumulated amortization of $11,775,
$10,353 and $7,688, respectively........................ 96,488 96,900 39,173
Other assets.............................................. 5,242 4,571 3,912
-------- -------- --------
TOTAL ASSETS................................................ $367,085 $359,043 $253,477
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 21,172 $ 25,543 $ 28,345
Accrued expenses and other current liabilities............ 15,167 16,598 13,328
Accrued compensation and benefits......................... 3,902 5,705 5,099
Income taxes payable...................................... - 3,275 5,344
Current portion of long-term debt......................... 2,260 4,178 2,977
-------- -------- --------
Total Current Liabilities............................. 42,501 55,299 55,093
LONG-TERM DEBT, NET OF CURRENT PORTION...................... 122,867 22,404 12,776
DEFERRED INCOME TAXES....................................... 5,162 7,439 6,210
OTHER NONCURRENT LIABILITIES................................ 9,022 10,525 6,478
MINORITY INTEREST........................................... 4,124 4,120 4,264
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; 1,000,000 shares
authorized; no shares issued and outstanding............ - - -
Common stock, $.01 par value; 29,000,000 shares
authorized; 13,236,877 issued and outstanding at
December 31, 1999....................................... 132 - -
Additional paid-in capital................................ 180,887 - -
Retained earnings......................................... 3,393 - -
Accumulated other comprehensive income.................... (1,003) (691) 479
Investments by and advances from Watts Industries, Inc.... - 259,947 168,177
-------- -------- --------
Total Shareholders' Equity............................ 183,409 259,256 168,656
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $367,085 $359,043 $253,477
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
18
CIRCOR INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
SIX MONTHS ENDED
DECEMBER 31, FISCAL YEAR ENDED JUNE 30,
---------------------- ------------------------------
1999 1998 1999 1998 1997
-------- ----------- -------- -------- --------
(UNAUDITED)
Net revenues............................. $156,371 $ 166,086 $323,077 $288,969 $274,716
Cost of revenues......................... 107,829 113,693 218,351 194,312 186,093
-------- ----------- -------- -------- --------
GROSS PROFIT....................... 48,542 52,393 104,726 94,657 88,623
Selling, general and administrative
expenses............................... 34,696 36,812 75,176 56,466 54,717
-------- ----------- -------- -------- --------
OPERATING INCOME................... 13,846 15,581 29,550 38,191 33,906
-------- ----------- -------- -------- --------
Other (income) expense:
Interest income........................ (90) (192) (333) (427) (148)
Interest expense....................... 4,632 4,624 9,141 3,898 3,422
Other, net............................. 460 (514) (229) (306) 673
-------- ----------- -------- -------- --------
5,002 3,918 8,579 3,165 3,947
-------- ----------- -------- -------- --------
INCOME BEFORE INCOME TAXES............... 8,844 11,663 20,971 35,026 29,959
Provision for income taxes............... 3,964 4,823 8,461 12,601 10,345
-------- ----------- -------- -------- --------
NET INCOME......................... $ 4,880 $ 6,840 $ 12,510 $ 22,425 $ 19,614
======== =========== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
19
CIRCOR INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED SIX MONTHS ENDED FISCAL YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ------------------------------
1999 1998 1999 1998 1997
---------------- ---------------- -------- -------- --------
(UNAUDITED)
OPERATING ACTIVITIES
Net Income................................ $ 4,880 $ 6,840 $ 12,510 $22,425 $19,614
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation............................ 5,468 4,517 9,440 6,312 5,844
Amortization............................ 1,608 1,418 3,322 1,532 1,072
Deferred income taxes (benefit)......... (3,503) 642 4,193 173 (151)
(Gain) loss on disposal of property,
plant and equipment................... (285) (78) (54) 19 119
Changes in operating assets and
liabilities, net of effects from
business acquisitions:
Trade accounts receivable............. (11,274) 7,681 13,665 (6,254) (204)
Inventories........................... 1,340 2,277 209 (9,783) (1,988)
Prepaid expenses and other assets..... (570) (1,483) (3,102) 1,491 (1,842)
Accounts payable, accrued expenses and
other liabilities................... (12,493) (16,252) (19,655) 5,160 5,378
-------- -------- -------- ------- -------
Net cash provided by (used in) operating
activities............................ (14,829) 5,562 20,528 21,075 27,842
-------- -------- -------- ------- -------
INVESTING ACTIVITIES
Additions to property, plant and
equipment............................... (4,557) (2,072) (9,499) (6,115) (5,457)
Disposal of property, plant and
equipment............................... 298 169 1,208 146 -
Increase in other assets.................. (912) (335) (237) (725) (402)
Business acquisitions, net of cash
acquired................................ - (63,875) (74,176) (22,503) (933)
-------- -------- -------- ------- -------
Net cash used in investing activities..... (5,171) (66,113) (82,704) (29,197) (6,792)
-------- -------- -------- ------- -------
FINANCING ACTIVITIES
Proceeds from long-term borrowings........ 188,643 1,738 4,331 2,957 93
Payments of long-term debt................ (90,157) (6,962) (20,646) (428) (862)
Net intercompany activity with Watts
Industries, Inc......................... 15,950 63,016 79,260 9,104 (17,036)
Partial payment of investments by and from
Watts Industries, Inc................... (96,000) - - - -
-------- -------- -------- ------- -------
Net cash provided by (used in) financing
activities............................ 18,436 57,792 62,945 11,633 (17,805)
-------- -------- -------- ------- -------
Effect of exchange rate changes on cash
and cash equivalents.................... 3 608 (296) 143 (44)
-------- -------- -------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................. (1,561) (2,151) 473 3,654 3,201
Cash and cash equivalents at beginning of
year.................................... 6,714 6,241 6,241 2,587 $ (614)
-------- -------- -------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF
YEAR.................................... $ 5,153 $ 4,090 $ 6,714 $ 6,241 $ 2,587
======== ======== ======== ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
20
CIRCOR INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY
(IN THOUSANDS)
ADDITIONAL INVESTMENTS BY OTHER TOTAL
COMMON STOCK PAID-IN RETAINED AND ADVANCES COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS FROM WATTS INCOME EQUITY
-------- -------- ---------- -------- -------------- -------------- -------------
BALANCE AT JUNE 30, 1996.......... - $ - $ - $ - $134,070 $ 1,051 $135,121
------ ------ -------- -------- -------- ------- --------
Net income........................ 19,614 19,614
Cumulative translation
adjustment...................... (422) (422)
--------
Comprehensive income.............. 19,192
Net intercompany activity......... (17,036) (17,036)
------ ------ -------- -------- -------- ------- --------
BALANCE AT JUNE 30, 1997.......... - - - - 136,648 629 137,277
------ ------ -------- -------- -------- ------- --------
Net income........................ 22,425 22,425
Cumulative translation
adjustment...................... (150) (150)
--------
Comprehensive income.............. 22,275
Net intercompany activity......... 9,104 9,104
------ ------ -------- -------- -------- ------- --------
BALANCE AT JUNE 30, 1998.......... - - - - 168,177 479 168,656
------ ------ -------- -------- -------- ------- --------
Net income........................ 12,510 12,510
Cumulative translation
adjustment...................... (1,170) (1,170)
--------
Comprehensive income.............. 11,340
Net intercompany activity......... 79,260 79,260
------ ------ -------- -------- -------- ------- --------
BALANCE AT JUNE 30, 1999.......... - - - - 259,947 (691) 259,256
------ ------ -------- -------- -------- ------- --------
Net income prior to Spin-off...... 1,487 1,487
Net income after Spin-off......... 3,393 3,393
Cumulative translation
adjustment...................... (312) (312)
--------
Comprehensive income.............. 4,568
Partial repayment of advances..... (96,000) (96,000)
Issuance of shares of common stock
in connection with the
Spin-off........................ 13,237 132 (132) -
Net intercompany activity......... 15,551 15,551
Contribution to capital of
remaining unpaid advances....... 180,853 (180,853) -
Net change in restricted stock
units........................... 34 34
------ ------ -------- -------- -------- ------- --------
BALANCE AT DECEMBER 31, 1999...... 13,237 $ 132 $180,887 $ 3,393 $ - $(1,003) $183,409
====== ====== ======== ======== ======== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
21
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS
CIRCOR International, Inc. ("CIRCOR" or the "Company") designs, manufactures
and distributes valves and related products and services for use in a wide range
of applications to optimize the efficiency or ensure the safety of fluid-control
systems. The valves and related fluid-control products we manufacture are used
in processing industries; oil and gas production, pipeline construction and
maintenance; aerospace, military and commercial aircraft; and maritime
manufacturing and maintenance. We have used both internal product development
and strategic acquisitions to assemble a complete array of fluid-control
products and technologies that enables us to address our customers' unique
fluid-control application needs. We have two major product groups:
Instrumentation and Fluid Regulation Products and Petrochemical Products.
The Instrumentation and Fluid Regulation Products Group designs,
manufactures and supplies valves and controls for diverse end-uses including
hydraulic, pneumatic, cryogenic and steam applications. Selected products
include precision valves, compression tube and pipe fittings, control valves and
regulators. The Instrumentation and Fluid Regulation Products Group includes the
following subsidiaries: Circle Seal Corporation (Aerodyne Controls Division),
Atkomatic Valve, Circle Seal Controls, Inc. GO Regulator, Inc., Leslie
Controls, Inc., and Spence Engineering Company, Inc.
The Petrochemical Products Group designs, manufactures and supplies flanged
and threaded floating and trunnion ball valves, needle valves, check valves,
butterfly valves and large forged steel ball valves, gate valves and strainers
for use in oil, gas and chemical processing and industrial applications. The
Petrochemical Products Group includes the following subsidiaries: Contromatics
Industrial Products, Eagle Check Valve, KF Industries, Inc., Pibiviesse S.p.A.,
Suzhou KF Valve Co., Ltd., SSI Equipment Inc. and Telford Valve and Specialties.
On October 18, 1999 (the "Spin-off Date"), we became a publicly owned
company via a tax-free distribution of our common stock (the "Distribution" or
"Spin-off") to the shareholders of our former parent, Watts Industries, Inc.
("Watts"). A description of the Spin-off and certain transactions with Watts is
included in Note 3.
(2) ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements present our financial
position, results of operations and cash flows as if we had been an independent,
publicly owned company for all periods presented. Certain allocations of
previously unallocated Watts interest and general and administrative expenses,
as well as computations of separate tax provisions, have been made to facilitate
such presentation (see Note 3). The consolidated financial statements prior to
October 18, 1999 represent the former combined operations of Watts' industrial,
oil and gas businesses. All significant intercompany balances and transactions
have been eliminated in consolidation.
CHANGE IN FISCAL YEAR
Effective July 1, 1999, we changed our fiscal year-end from June 30th to
December 31st. Accordingly, the audited financial statements include the results
for the six-month period ended December 31, 1999 ("transition period"), and the
prior three fiscal years ended June 30, 1999 ("fiscal 1999"), June 30, 1998
("fiscal 1998") and June 30, 1997 ("fiscal 1997"). In addition to the basic
audited financial statements and
22
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) ACCOUNTING POLICIES (CONTINUED)
related notes, unaudited financial information for the six-month period ended
December 31, 1998 has been presented to enhance comparability.
REVENUE RECOGNITION
Revenue is recognized upon shipment, net of a provision for estimated
returns and allowances.
RESEARCH AND DEVELOPMENT
Research and development expenditures are expended when incurred and are
included in the operating expense in the Consolidated Statement of Operations.
CASH EQUIVALENTS
Cash equivalents consist of investments with maturities of three months or
less at the date of original issuance.
INVENTORIES
Inventories are stated at the lower of cost (principally first-in, first-out
method) or market.
GOODWILL
Goodwill represents the excess of cost over the fair value of net assets of
businesses acquired. This balance is amortized over 40 years using the
straight-line method. We assess the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its remaining
life can be recovered through undiscounted future operating cash flows of the
acquired operation. The amount of goodwill impairment, if any, is measured based
on projected discounted future operating cash flows using a discount rate
reflecting the average cost of funds.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Plant and equipment
under capital leases are stated at the present value of minimum lease payments.
Depreciation is provided on a straight-line basis over the estimated useful
lives of the assets which range from 10 to 40 years for buildings and
improvements and 3 to 15 years for machinery and equipment. Plant and equipment
held under capital leases and leasehold improvements are amortized on a
straight-line basis over the shorter of the lease term or estimated useful life
of the asset.
LONG-LIVED ASSETS
Impairment losses are recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. In
such instances, the carrying values of long-lived assets are reduced to their
estimated fair value, as determined using an appraisal or a discounted cash flow
approach, as appropriate.
23
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
FOREIGN CURRENCY TRANSLATION
Balance sheet accounts of foreign subsidiaries are translated into United
States dollars at fiscal year-end exchange rates. Operating accounts are
translated at weighted average exchange rates for each year. Net translation
gains or losses are adjusted directly to a separate component of shareholders'
equity. The Company does not provide for U.S. income taxes on foreign currency
translation adjustments since it does not provide for such taxes on
undistributed earnings of foreign subsidiaries.
EARNINGS PER COMMON SHARE
Historical earnings per share has been omitted since we were not an
independent publicly owned company with a capital structure of our own for any
of the periods presented in the accompanying consolidated statement of
operations. The computation of pro forma net income per share is included in
Note 15.
STOCK BASED COMPENSATION
As allowed under Statement of Financial Accounting Standards (SFAS)
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, we account for its stock-based
employee compensation plans in accordance with the provisions of APB Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
DERIVATIVE FINANCIAL INSTRUMENTS
We use foreign currency forward exchange contracts to manage currency
exchange exposures in certain foreign currency denominated transactions. Gains
and losses on contracts designated as hedges are recognized when the contracts
expire, which is generally in the same time period as the underlying foreign
currency denominated transactions.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
24
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATION OF PRIOR YEARS
Certain prior-year financial statement amounts have been reclassified to
conform to December 31, 1999 presentation.
NEW ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." We will adopt
SFAS 133 on January 1, 2001. The impact of SFAS 133 on the consolidated
financial statements is still being evaluated, but is not expected to be
material.
Also in 1998, the American Institute of Certified Public Accountants issued
SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use", and SOP 98-5, "Reporting on the Costs of Start-Up
Activities". We adopted SOP 98-1 and SOP 98-5 on July 1, 1999. The adoption of
these statements did not have a material affect on the consolidated financial
statements.
(3) SPIN-OFF FROM AND TRANSACTIONS WITH FORMER AFFILIATES
SPIN-OFF AND RELATIONSHIPS AFTER THE SPIN-OFF
At the Spin-off Date of October 18, 1999, all of our common shares were
distributed on a pro-rata basis to the record date holders of Watts common
shares at a ratio of one share for each two outstanding Watts shares. After the
Spin-off, Watts had no ownership in us. Immediately after the Spin-off, however,
certain of our shares were held by the Watts pension trust on behalf of Watts'
employees. We have entered into separation and other related agreements (the
"Distribution Agreement"), outlined below, governing the Spin-off transaction
and our subsequent relationship with Watts. Such agreements provide certain
indemnities to the parties, and provide for the allocation of tax and other
assets, liabilities and obligations arising from periods prior to the Spin-off.
The Distribution Agreement provided for, among other things, our assumption
of all liabilities relating to industrial, oil and gas businesses of Watts, and
the indemnification of Watts with respect to such liabilities. The Distribution
Agreement provided that we pay, prior to the Spin-off, $96.0 million to Watts as
repayment of certain amounts due to Watts. The net investment by and advances
from Watts were preliminarily determined to be approximately $277.0 million at
the Spin-off Date. Watts contributed to our capital its remaining unpaid
advances of approximately $181.0 million, as provided by the Distribution
Agreement. The Distribution Agreement also specifies that Watts make a final
determination regarding the net assets of the industrial, oil and gas businesses
transferred to us at the Spin-off Date.
This determination has been preliminarily completed, but is subject to our
Agreement. The accompanying consolidated financial statements reflect our
estimates, based on available information, of the net assets that should be
transferred. The final approved determination could vary from these estimates.
Any changes are not expected to materially affect future net income.
In connection with the Spin-off, Watts received a ruling from the Internal
Revenue Service (the "IRS") to the effect, among other things, that the Spin-off
would qualify as a tax-free distribution under Section 355 of the Internal
Revenue Code of 1986, as amended. Such a ruling, while generally binding upon
the IRS, is subject to certain factual representations and assumptions provided
by Watts. We have agreed to certain restrictions on our future actions to
provide further assurances that the Spin-off will qualify as a tax-free
distribution. Restrictions include, among other things: limitations on the
liquidation,
25
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) SPIN-OFF FROM AND TRANSACTIONS WITH FORMER AFFILIATES (CONTINUED)
merger or consolidation with another company. Additionally, we have agreed to
engage in a public offering of a significant amount of our common stock within
one year of the distribution date. If the distribution is held to be taxable for
United States federal income tax purposes, Watts and CIRCOR would be joint and
severally liable for the resulting Watts' Federal taxes, which could be
substantial.
Under the Distribution Agreement, Watts maintains full control and absolute
discretion with regard to any combined or consolidated tax filings for periods
through the Spin-off Date. Watts also maintains full control and absolute
discretion regarding common tax audit issues of such entities. Although Watts
has contractually agreed to, in good faith, use its best efforts to settle all
joint interests in any common audit issue on a consistent basis with prior
practice, there can be no assurance that determinations so made by Watts would
be the same as we would reach, acting on our own behalf.
The Distribution Agreement specifies methods for allocation of assets,
liabilities and responsibilities with respect to certain existing employee
compensation and benefit plans and programs. Such allocations have been
preliminarily completed for current employees of Watts who became CIRCOR
employees at the Spin-off Date. In addition, all vested and unvested Watts
options held by our employees were terminated and replaced with CIRCOR options
of equivalent value. We have agreed to indemnify Watts as to any employer
payroll tax it incurs related to the exercise of such options after the
Spin-off. Certain provisions of the Distribution Agreement also governs the
transfer of employees between the parties during the transition period ending in
1999. We have also agreed on arrangements between the parties with respect to
certain internal software, third-party agreements, telecommunications services
and computing services.
ALLOCATIONS AND DETERMINATION OF COMMON COSTS IN HISTORICAL FINANCIAL STATEMENTS
Prior to the Spin-off, our operations were financed through our operating
cash flows, and investments by and advances from Watts. For this reason, our
historical financial statements include interest expense on our external debt
plus an allocation of interest expense which had not previously been separately
allocated by Watts. These interest allocations were based on Watts' weighted
average interest rate applied to the average annual balance of investments by
and advances from Watts.
Additionally, our historical financial statements include an allocation of
Watts' previously unallocated general and administrative expenses. These
allocations were based on our revenue as a percent of Watts' total revenue. The
amounts, by year, of the historical allocations described above are as follows:
JULY 1, 1999
FISCAL YEAR ENDED JUNE 30,
THROUGH ------------------------------------------
SPIN-OFF DATE 1999 1998 1997
------------- -------- -------- --------
(IN THOUSANDS)
General and administrative expenses
Allocated.................................. $1,678 $5,600 $4,900 $4,400
Interest expense allocated................... 1,899 6,455 3,101 2,466
We believe that the bases of allocation of interest and general and
administrative expenses were reasonable based on the facts available at the date
of their allocation. However, based on current information, such amounts are not
indicative of amounts which we would have incurred if we had been an
independent, publicly owned entity for all periods presented. As noted in the
accompanying consolidated balance sheet, our capital structure changed as a
result of the Distribution to Watts and bears little relationship to the average
net outstanding investments by and advances from Watts. We will be required to
add personnel and incur other costs to perform services previously provided by
Watts. The full cost
26
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) SPIN-OFF FROM AND TRANSACTIONS WITH FORMER AFFILIATES (CONTINUED)
reflective of our capital structure and our personnel complement will be
included in our Consolidated Statement of Operations as incurred.
For periods prior to the Spin-off, income tax expense was calculated, to the
extent possible, as if we had filed separate income tax returns. As Watts
managed its tax position on a consolidated basis, which takes into account the
results of all of its businesses, our effective tax rate in the future could
vary significantly from our historical effective tax rates. Our future effective
tax rate will be largely dependent on our structure and tax strategies as a
separate entity.
OTHER TRANSACTIONS WITH FORMER AFFILIATES
Prior and subsequent to the Spin-off transaction we conducted business with
various other subsidiaries of Watts, under various contracts and agreements. The
following table summarizes transactions with these related parties:
SIX MONTHS
ENDED FISCAL YEAR ENDED JUNE 30,
DECEMBER 31, ------------------------------
1999 1999 1998 1997
-------------- -------- -------- --------
(IN THOUSANDS)
Purchases of inventory............................... $3,621 $7,484 $7,672 $8,182
Sale of goods........................................ 2,042 1,366 1,081 1,611
(4) BUSINESS ACQUISITIONS
During fiscal 1999, we acquired Hoke, Inc. ("Hoke"), a multinational
manufacturer of industrial valves and fittings, for approximately $85.0 million
including assumption of debt. The following table reflects unaudited pro forma
consolidated results on the basis that the Hoke acquisition had taken place and
was recorded at the beginning of the fiscal year for each of the periods
presented:
FISCAL YEAR ENDED JUNE 30,
------------------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
Net revenues........................................... $326,707 $358,191 $346,266
Net income............................................. 12,436 19,365 17,239
In our opinion the unaudited pro forma consolidated results of operations
are not indicative of the actual results that would have occurred had the
acquisition been consummated at the beginning of fiscal years 1997, 1998 or 1999
or of future operations of the consolidated companies under our ownership and
management.
As allowed in the Purchase Agreement, we have initiated an arbitration
proceeding against the former shareholders of Hoke to recover a portion of the
purchase price based on alleged misrepresentations made by the former
shareholders and errors in the financial information provided us.
Additionally, in connection with the Hoke acquisition, we implemented a plan
to integrate certain of Hoke's operations and activities into our existing
operations. This plan included the closure of Hoke's headquarters facility and
relocation of certain manufacturing operations to other CIRCOR facilities. As a
result of this plan, it is anticipated that 170 former Hoke employees will be
involuntarily terminated (166
27
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) BUSINESS ACQUISITIONS (CONTINUED)
employees have been involuntarily terminated to date). Details of costs recorded
as part of the acquisition for the integration activities and the related
activity to date are as follows:
BALANCE AT
ORIGINAL DECEMBER 31,
ACCRUAL ACTIVITY 1999
-------- -------- ------------
(IN THOUSANDS)
Employee severance and related benefits..................... $3,167 $2,839 $328
Relocation of employees..................................... 45 6 39
Other exit costs............................................ 1,365 1,365 -
------ ------ ----
$4,577 $4,210 $367
====== ====== ====
Additionally, during the six-month period ended December 31, 1999 costs of
$0.7 million were incurred to relocate certain Hoke manufacturing equipment to
our other manufacturing facilities. These costs are included in cost of revenues
and selling, general and administrative expense.
During fiscal 1999, we also acquired SSI Equipment Inc. of Burlington,
Ontario, Canada, and GO Regulator, Inc. of San Dimas, California. In fiscal 1998
we acquired Telford Valve and Specialties, Inc. of Edmonton, Alberta, Canada,
Atkomatic Valve Company, located in Indianapolis, Indiana and Aerodyne Controls
Corp. of Ronkonkoma, New York. All of these acquired companies are valve
manufacturers and the aggregate purchase price of these acquisitions was
approximately $33.4 million. The goodwill which resulted from these acquisitions
is being amortized on a straight-line basis over a 40-year period.
All acquisitions have been accounted for under the purchase method and the
results of operations of the acquired businesses have been included in the
consolidated financial statements from the date of acquisition. Had these
acquisitions, other than Hoke, occurred at the beginning of fiscal year 1999 or
1998, the effect on operating results would not have been material.
(5) INVENTORIES
Inventories consist of the following:
JUNE 30,
DECEMBER 31, -------------------
1999 1999 1998
------------ -------- --------
(IN THOUSANDS)
Raw materials............................................... $ 42,701 $ 45,098 $32,874
Work in process............................................. 27,466 23,087 25,970
Finished goods.............................................. 37,165 40,725 30,944
-------- -------- -------
$107,332 $108,910 $89,788
======== ======== =======
28
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
JUNE 30,
DECEMBER 31, ---------------------
1999 1999 1998
------------ --------- ---------
(IN THOUSANDS)
Land...................................................... $ 6,225 $ 6,222 $ 4,445
Buildings and improvements................................ 27,665 26,022 22,041
Machinery and equipment................................... 111,470 105,085 85,881
Construction in progress.................................. 1,724 6,548 2,106
--------- --------- ---------
147,084 143,877 114,473
Accumulated depreciation.................................. (71,930) (67,195) (58,491)
--------- --------- ---------
$ 75,154 $ 76,682 $ 55,982
========= ========= =========
(7) INCOME TAXES
The significant components of our deferred income tax liabilities and assets
are as follows:
JUNE 30,
DECEMBER 31, -------------------
1999 1999 1998
------------ -------- --------
(IN THOUSANDS)
Deferred income tax liabilities:
Excess tax over book depreciation......................... $ 6,965 $ 6,819 $ 5,373
Inventory................................................. 3,577 3,327 3,437
Other..................................................... 914 620 837
-------- -------- --------
Total deferred income tax liabilities................... 11,456 10,766 9,647
-------- -------- --------
Deferred income tax assets:
Accrued expenses.......................................... 5,727 5,554 1,849
Net operating loss carryforward........................... 529 716 -
Cost basis differences in intangible assets............... 2,499 - -
Other..................................................... 7,333 5,649 3,770
-------- -------- --------
Total deferred income tax assets........................ 16,088 11,919 5,619
Valuation allowance....................................... - - -
-------- -------- --------
Net deferred income tax assets.......................... 16,088 11,919 5,619
-------- -------- --------
Net deferred income tax asset (liability)................... $ 4,632 $ 1,153 $ (4,028)
======== ======== ========
The above components of deferred income taxes are classified
in the respective consolidated balance sheet as follows:
Net current deferred income tax assets.................... $ 9,794 $ 8,592 $ 2,182
Net non-current deferred income tax liabilities........... (5,162) (7,439) (6,210)
-------- -------- --------
Net deferred income tax asset (liability)............... $ 4.632 $ 1,153 $ (4,028)
======== ======== ========
29
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) INCOME TAXES (CONTINUED)
The provision for income taxes is based on the following pre-tax income:
SIX MONTHS ENDED FISCAL YEAR ENDED JUNE 30,
DECEMBER 31, ------------------------------------
1999 1999 1998 1997
---------------- -------- -------- --------
(IN THOUSANDS)
Domestic........................................ $6,587 $14,011 $22,864 $25,238
Foreign......................................... 2,257 6,960 12,162 4,721
------ ------- ------- -------
$8,844 $20,971 $35,026 $29,959
====== ======= ======= =======
The provision for income taxes consists of the following:
SIX MONTHS
ENDED FISCAL YEAR ENDED JUNE 30,
DECEMBER 31, ------------------------------------
1999 1999 1998 1997
-------------- -------- -------- --------
(IN THOUSANDS)
Current tax expense (benefit):
Federal........................................ $(1,360) $ 173 $ 7,156 $ 8,481
Foreign........................................ 1,272 2,408 3,085 (312)
State.......................................... 244 26 1,678 1,737
------- ------ ------- -------
156 2,607 11,919 9,906
------- ------ ------- -------
Deferred tax expense (benefit):
Federal........................................ 3,798 4,684 599 364
Foreign........................................ (366) 613 (22) 11
State.......................................... 376 557 105 64
------- ------ ------- -------
3,808 5,854 682 439
------- ------ ------- -------
$ 3,964 $8,461 $12,601 $10,345
======= ====== ======= =======
Actual income taxes reported from operations are different than those which
would have been computed by applying the federal statutory tax rate to income
before income taxes. The reasons for these differences are as follows:
SIX MONTHS
ENDED FISCAL YEAR ENDED JUNE 30,
DECEMBER 31, ------------------------------------
1999 1999 1998 1997
-------------- -------- -------- --------
(IN THOUSANDS)
Computed expected federal income tax expense..... $3,095 $7,340 $12,259 $10,486
State income taxes, net of federal tax benefit... 403 416 703 1,069
Goodwill amortization............................ 375 806 284 314
Foreign tax rate differential.................... 115 384 (1,124) (1,329)
Other, net....................................... (24) (485) 479 (195)
------ ------ ------- -------
$3,964 $8,461 $12,601 $10,345
====== ====== ======= =======
Undistributed earnings of our foreign subsidiaries amounted to $4.7 million
at December 31, 1999, and $3.2 million, $0.8 million and $0.1 million at
June 30, 1999, 1998 and 1997, respectively. Those earnings are considered to be
indefinitely reinvested and, accordingly, no provision for U.S. federal and
state income taxes has been recorded thereon. Upon distribution of those
earnings, in the form of
30
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) INCOME TAXES (CONTINUED)
dividends or otherwise, we will be subject to both U.S. income taxes (subject to
an adjustment for foreign tax credits) and withholding taxes payable to the
various foreign countries. Determination of the amount of U.S. income tax
liability that would be incurred is not practicable because of the complexities
associated with its hypothetical calculation; however, unrecognized foreign tax
credits would be available to reduce some portion of any U.S. income tax
liability. Withholding taxes of $250,000 would be payable upon remittance of all
previously unremitted earnings at December 31, 1999. We made income tax payments
of $2,690,000 during the six-month period ended December 31, 1999, and
$4.7 million, $4.3 million and $7.6 million in fiscal years 1999, 1998 and 1997,
respectively.
(8) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
JUNE 30,
DECEMBER 31, -------------------
1999 1999 1998
------------ -------- --------
(IN THOUSANDS)
Commissions and sales incentive payable..................... $ 3,895 $ 4,272 $ 2,846
Acquisition related costs................................... 1,068 4,708 1,507
Insurance................................................... 2,875 2,414 1,497
Other....................................................... 7,329 5,204 7,478
------- ------- -------
Total..................................................... $15,167 $16,598 $13,328
======= ======= =======
(9) FINANCING ARRANGEMENTS
Long-term debt consists of the following:
JUNE 30,
DECEMBER 31, -------------------
1999 1999 1998
------------ -------- --------
(IN THOUSANDS)
Senior unsecured notes, maturing in 2006, at a fixed
interest rate of 8.23%.................................... $ 75,000 $ - $ -
Revolving line of credit, maturing in 2003, at a variable
interest rate (7.57% at December 31, 1999)................ 32,000 - -
Industrial revenue bonds, maturing in varying amounts
through 2020, at a variable interest rate (5.45% at
December 31, 1999, and 3.88% and 3.60% at June 30, 1999
and 1998, respectively)................................... 12,265 12,540 12,265
Term Loan, at a variable interest rate (8.50% at June 30,
1999)..................................................... - 4,658 -
Capital lease obligations, at varying interest rates ranging
from 9.26% to 18.50%...................................... 596 4,081 -
Other borrowings, at varying interest rates ranging from
6.15% to 10.25%........................................... 5,266 5,303 3,488
-------- ------- -------
Total long-term debt...................................... 125,127 26,582 15,753
Less: current portion....................................... 2,260 4,178 2,977
-------- ------- -------
Total long-term debt, less current portion................ $122,867 $22,404 $12,776
======== ======= =======
On October 18, 1999, we entered into a $75.0 million unsecured revolving
credit facility maturing in 2003. Under the credit facility agreement we are
required to pay a facility fee of 0.35% per annum, and are able to borrow at
various interest rates based on either the Euro dollar rate plus 1.5%, prime, or
a
31
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) FINANCING ARRANGEMENTS (CONTINUED)
competitive money market rate specified by the lender. On October 19, 1999, we
also issued $75.0 million of unsecured notes maturing in 2006. Proceeds from the
notes and borrowings under the credit facility were used to repay $96.0 million
of investments by and advances from Watts and the outstanding balance under the
term loan agreement.
At December 31, 1999, we had $43.0 million available from the unsecured
credit facility to support our acquisition program, working capital requirements
and for general corporate purposes.
Certain of our loan agreements contain covenants that require, among other
items, maintenance of certain financial ratios and also limit our ability to
enter into secured borrowing arrangements.
Principal payments during each of the next five fiscal years are due as
follows: 2000-$2.3 million; 2001-$0.1 million; 2002-$16.0 million;
2003-$47.5 million; and 2004-$15.9 million and $43.4 million thereafter.
Interest paid for all periods presented in the accompanying consolidated
financial statements approximates interest expense.
(10) STOCK-BASED COMPENSATION
During the transition period, the 1999 Stock Option and Incentive Plan (the
"1999 Stock Plan") was adopted by our Board of Directors. Generally, the 1999
Stock Plan permits the grant of the following types of awards to our officers,
other employees and non-employee directors: incentive stock options,
non-qualified stock options, deferred stock awards, restricted stock awards,
unrestricted stock awards, performance share awards, stock appreciation rights
and dividend equivalent rights. The 1999 Stock Plan provides for the issuance of
up to 2,000,000 shares of common stock (subject to adjustment for stock splits
and similar events). New options granted under the 1999 Stock Plan can have
varying vesting provisions and exercise periods. Options granted subsequent to
the Spin-off vest in periods ranging from 1 to 7 years and expire 10 years after
grant.
The CIRCOR Management Stock Purchase Plan, which is a component of the 1999
Stock Plan, provides that eligible employees may elect to receive restricted
stock units in lieu of all or a portion of their pre-tax annual incentive bonus
and, in some cases, make after-tax contributions in exchange for restricted
stock units. In addition, non-employee directors may elect to receive restricted
stock units in lieu of all or a portion of their annual directors' fees. Each
restricted stock unit represents a right to receive one share of our common
stock after a three-year vesting period. Restricted stock units are granted at a
discount of 33% from the fair market value of the shares of common stock on the
date of grant. This discount is amortized to compensation expense ratably over
the vesting period.
At the Spin-off Date, vested and non-vested Watts options held by our
employees terminated in accordance with their terms and new options of
equivalent value were issued under the 1999 Stock Plan to replace the Watts
options ("replacement options"). The vesting dates and exercise periods of the
options were not affected by the replacement. Based on their original Watts
grant date, CIRCOR replacement options vest during the 1999 to 2003 time period
and expire 10 years after grant of the original Watts options. Additionally, at
the Spin-off Date vested and non-vested Watts restricted stock units held by our
employees were converted into comparable restricted stock units based on our
common stock and will be payable in shares of our common stock. At December 31,
1999, 134,649 restricted stock units were outstanding.
32
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) STOCK-BASED COMPENSATION (CONTINUED)
Had compensation cost for all our option grants subsequent to the Spin-off
to employees and non-employee directors been determined consistent with
SFAS 123, our net income for the six-month period ended December 31, 1999 would
have decreased from $4,880,000 to $4,799,000. The pro forma net income may not
be representative of future disclosures of pro forma net income since the
estimated fair value of stock options is amortized to expense over the vesting
period, which was only a partial year in the transition period, and additional
options may be granted in varying quantities in future years. SFAS 123 pro forma
income per share data is not meaningful as we were not an independent, publicly
owned company prior to the Spin-off.
The fair value of each option grant made subsequent to the Spin-off was
estimated as of the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions used for grants in the
transition period:
Risk-free interest rate..................................... 6.1%
Expected life (years)....................................... 5
Expected stock volatility................................... 15.0%
Expected dividend yield..................................... 1.5%
A summary of the status of all options granted to employees and non-employee
directors at December 31, 1999, and changes during the six-month period then
ended is presented in the table below:
DECEMBER 31, 1999
------------------------------
OPTIONS WEIGHTED AVERAGE
(THOUSANDS) EXERCISE PRICE
----------- ----------------
Options outstanding at June 30, 1999........................ - $ -
Replacement of Watts options................................ 627 10.60
Granted..................................................... 398 10.13
Exercised................................................... - -
Forfeited................................................... - -
-----
Options outstanding at December 31, 1999.................... 1,025 10.43
-----
Options exercisable at December 31, 1999.................... 359 10.67
Weighted average fair value of options granted.............. $ 2.37
The following table summarizes information about stock options outstanding
at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- ------------------------------
WEIGHTED AVERAGE
RANGE OF EXERCISE OPTIONS REMAINING WEIGHTED AVERAGE OPTIONS WEIGHTED AVERAGE
PRICES (THOUSANDS) CONTRACTUAL LIFE EXERCISE PRICE (THOUSANDS) EXERCISE PRICE
- --------------------- ----------- ---------------- ---------------- ----------- ----------------
8$.04- 9.21......... 180 5.9 $ 8.34 127 $ 8.32
9.43-10.38......... 527 9.5 9.94 27 9.43
11.00-11.96........ 103 5.8 11.84 78 11.90
12.15-12.98........ 215 6.7 12.71 127 12.53
----- ---
8.04-12.98......... 1,025 7.9 10.43 359 10.67
===== ===
33
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) EMPLOYEE BENEFIT PLANS
We sponsor a defined benefit pension plan covering substantially all of our
domestic non-union employees. Benefits are based primarily on years of service
and employees' compensation. Our funding policy for these plans is to contribute
annually the maximum amount that can be deducted for federal income tax
purposes. Prior to the Spin-off, the participants in the plan were covered by
plans with similar benefits, sponsored by Watts. Under an agreement with Watts,
we have assumed or retained pension liabilities related to substantially all of
our participants. Assets of the Watts plans have been allocated, in accordance
with regulatory rules, between the Watts plans and our plan.
Additionally, substantially all of our domestic non-union employees are
eligible to participate in a 401(k) savings plan. Under this plan, we match a
specified percentage of employee contributions, subject to certain limitations.
The components of net benefit expense are as follows:
SIX MONTHS
ENDED FISCAL YEAR ENDED JUNE 30,
DECEMBER 31, ------------------------------------
1999 1999 1998 1997
-------------- -------- -------- --------
(IN THOUSANDS)
COMPONENTS OF NET BENEFIT EXPENSE
Service cost--benefits earned........................ $526 $1,085 $ 786 $684
Interest cost on benefits obligation................. 298 531 459 378
Estimated return on assets........................... (330) (654) (443) (404)
---- ------ ------ ----
494 962 802 658
Defined contribution plans........................... 203 216 210 138
---- ------ ------ ----
Total net benefits expense......................... $697 $1,178 $1,012 $796
==== ====== ====== ====
34
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) EMPLOYEE BENEFIT PLANS (CONTINUED)
The funded status of the defined benefit plan and amounts recognized in the
balance sheet follow:
JUNE 30,
DECEMBER 31, ------------------------------
1999 1999 1998 1997
------------ -------- -------- --------
(IN THOUSANDS)
CHANGE IN PROJECTED BENEFIT OBLIGATION
Balance at beginning of period....................... $ 8,014 $ 7,021 $ 5,035 $4,718
Service cost......................................... 526 1,085 786 684
Interest cost........................................ 298 531 459 378
Actuarial gain (loss)................................ 267 (623) 624 (849)
Amendments........................................... - - 117 104
------- ------- ------- ------
Balance at end of period........................... 9,105 8,014 7,021 5,035
------- ------- ------- ------
CHANGE IN FAIR VALUE OF PLAN ASSETS
Balance at beginning of period....................... 7,173 6,459 4,784 4,472
Actual return on assets.............................. 650 595 1,323 164
Employer contributions............................... - 119 352 148
------- ------- ------- ------
Fair value of plan assets at end of period......... 7,823 7,173 6,459 4,784
------- ------- ------- ------
FUNDED STATUS
Plan assets less than benefit obligation............. (1,282) (841) (562) (251)
Unrecognized transition obligation................... (264) (257) (313) (370)
Unrecognized prior service cost...................... 353 207 229 136
Unrecognized actuarial gain (loss)................... (298) (1,047) (450) (160)
------- ------- ------- ------
Net accrued benefit cost........................... $(1,491) $(1,938) $(1,096) $ (645)
======= ======= ======= ======
The weighted average assumptions used in determining the obligations of
pension benefit plans are shown below:
JUNE 30,
DECEMBER 31, ------------------------------------
1999 1999 1998 1997
------------ -------- -------- --------
Discount rate............................................... 7.75% 7.00% 7.00% 8.00%
Expected return on plan assets.............................. 9.00% 9.00% 9.00% 8.00%
Rate of compensation increase............................... 5.00% 5.00% 5.00% 5.00%
(12) CONTINGENCIES AND ENVIRONMENTAL REMEDIATION
CONTINGENCIES
We are subject to pending or threatened lawsuits and proceedings or claims
arising from the ordinary course of operations. Reserves have been established
which management presently believes are adequate in light of probable and
estimable exposure to the pending or threatened litigation of which it has
knowledge. Such contingencies are not expected to have a material effect on our
financial position, results of operations, or liquidity.
35
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) CONTINGENCIES AND ENVIRONMENTAL REMEDIATION (CONTINUED)
ENVIRONMENTAL REMEDIATION
We have been named a potentially responsible party with respect to
identified contaminated sites. The level of contamination varies significantly
from site to site as do the related levels of remediation efforts. Environmental
liabilities are recorded based on the most probable cost, if known, or on the
estimated minimum cost of remediation. Our accrued estimated environmental
liabilities are based on assumptions which are subject to a number of factors
and uncertainties. Circumstances which can affect the reliability and precision
of these estimates include identification of additional sites, environmental
regulations, level of cleanup required, technologies available, number and
financial condition of other contributors to remediation and the time period
over which remediation may occur. We recognize changes in estimates as new
remediation requirements are defined or as new information becomes available. We
estimate that accrued environmental remediation liabilities will likely be paid
over the next five to ten years. Such environmental remediation contingencies
are not expected to have a material effect on our financial position, results of
operation, or liquidity.
OPERATING LEASE COMMITMENTS
Minimum rental commitments under noncancellable operating leases, primarily
for office and warehouse facilities are: $3.2 million in 2000, $2.6 million in
2001, $1.8 million in 2002, $1.7 million in 2003, $1.6 million in 2004 and
$4.0 million for years thereafter. Rental expense amounted to: $1.5 million
during the six-month period ended December 31, 1999, and $3.4 million,
$1.4 million and $1.2 million during the years ended June 30, 1999, 1998 and
1997, respectively.
(13) FINANCIAL INSTRUMENTS
FAIR VALUE
The carrying amounts of cash and cash equivalents, short-term investments,
trade receivables and trade payables approximate fair value because of the short
maturity of these financial instruments. The fair value of the senior unsecured
notes, based on the value of comparable instruments brought to market, is
$74.5 million December 31, 1999. The fair value of the Company's variable rate
debt approximates its carrying value.
USE OF DERIVATIVES
We use foreign currency forward exchange contracts to reduce the impact of
currency fluctuations on certain anticipated intercompany purchase transactions
that are expected to occur within the fiscal year and certain other foreign
currency transactions. Related gains and losses are recognized when the
contracts expire, which is generally in the same period as the underlying
foreign currency denominated transaction. These contracts do not subject us to
significant market risk from exchange movement because they offset gains and
losses on the related foreign currency denominated transactions. At June 30,
1998, there were no significant amounts of open foreign currency forward
exchange contracts or related unrealized gains or losses. At June 30, 1999, we
had forward contracts to buy foreign currencies with a face value of
$9.0 million. These contracts matured on various dates between July 1999 and
January 2000 and had a negative fair market value of $0.6 million at June 30,
1999. At December 31, 1999, we had forward contracts to buy foreign currencies
with a face value $4.8 million. These contracts mature on various dates between
January 2000 and June 2000 and had a negative fair market value of $0.2 million
at December 31,
36
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) FINANCIAL INSTRUMENTS (CONTINUED)
1999. The counterparties to these contracts are major financial institutions.
The risk of loss to the Company in the event of non-performance by a
counterparty is not significant.
(14) SEGMENT INFORMATION
The following table presents certain operating segment information:
INSTRUMENTATION &
FLUID REGULATION PETROCHEMICAL CORPORATE CONSOLIDATED
PRODUCTS PRODUCTS ADJUSTMENTS TOTAL
----------------- ------------- ----------- ------------
(IN THOUSANDS)
SIX-MONTHS ENDED DECEMBER 31, 1999
Net Revenues............................. $ 84,148 $ 72,223 $ - $156,371
Operating income (loss).................. 10,253 6,332 (2,739) 13,846
Identifiable assets...................... 212,328 141,773 12,984 367,085
Capital expenditures..................... 1,822 2,258 477 4,557
Depreciation and amortization............ 4,412 2,566 98 7,076
FISCAL YEAR ENDED JUNE 30, 1999
Net Revenues............................. $175,444 $147,633 $ - $323,077
Operating income (loss).................. 24,844 10,323 (5,617) 29,550
Identifiable assets...................... 218,732 136,328 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
FISCAL YEAR ENDED JUNE 30, 1997
Net Revenues............................. $102,691 $172,025 $ - $274,716
Operating income (loss).................. 17,280 21,012 (4,386) 33,906
Identifiable assets...................... 85,069 121,840 5,818 212,727
Capital expenditures..................... 2,148 3,309 - 5,457
Depreciation and amortization............ 3,544 3,372 - 6,916
Each operating segment is individually managed and has separate financial
results that are reviewed by the Company's chief operating decision-maker. Each
segment contains closely related products that are unique to the particular
segment. Refer to Note 1 for further discussion of the products included in each
segment.
In calculating profit from operations for individual operating segments,
substantial administrative expenses incurred at the operating level that are
common to more than one segment are allocated on a net revenues basis. Certain
headquarters expenses of an operational nature also are allocated to segments
and geographic areas.
37
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) SEGMENT INFORMATION (CONTINUED)
All intercompany transactions have been eliminated, and inter-segment
revenues are not significant.
SIX MONTHS
ENDED FISCAL YEAR ENDED JUNE 30,
DECEMBER 31, ------------------------------
NET REVENUES BY GEOGRAPHIC AREA 1999 1999 1998 1997
- ----------------------------------------------- -------------- -------- -------- --------
(IN THOUSANDS)
United States.................................. $ 95,155 $189,193 $196,927 $198,398
Italy.......................................... 2,280 42,491 49,708 45,475
Canada......................................... 16,094 27,830 23,783 7,682
Other.......................................... 42,842 63,563 18,551 23,161
----------- -------- -------- --------
Total revenues............................... $156,371 $323,077 $288,969 $274,716
=========== ======== ======== ========
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
=========== ======== ========
38
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
As discussed in Note 3, we became an independent publicly owned company on
October 18, 1999 as a result of a spin-off from Watts. The following unaudited
pro forma financial information presents a summary of the consolidated results
of operations as if the Spin-off and related transactions had occurred at the
beginning of the periods presented below (in thousands, except per share
amounts):
SIX MONTHS ENDED FISCAL YEAR ENDED
DECEMBER 31, JUNE 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS)
Net income as reported.................................... $4,880 $6,840 $12,510 $22,425
Pro forma adjustments:
Incremental administrative expenses (a)................. (61) (126) (253) (246)
Incremental interest expenses (b)....................... (322) (519) (1,037) (429)
Income tax effect of pro forma adjustments (c).......... 153 258 516 (270)
------ ------ ------- -------
Net pro forma adjustments............................. (230) (387) (774) (405)
------ ------ ------- -------
Pro forma net income...................................... $4,650 $6,453 $11,736 $22,020
====== ====== ======= =======
Basic earnings per share: (d)
Before pro forma adjustments............................ $ 0.37 $ 0.51 $ 0.95 $ 1.65
Impact of pro forma adjustments......................... (0.02) (0.03) (0.07) (0.03)
------ ------ ------- -------
Pro forma basic earnings per share.................... $ 0.35 $ 0.48 $ 0.88 $ 1.62
====== ====== ======= =======
Diluted earnings per share: (d)
Before pro forma adjustments............................ $ 0.37 $ 0.51 $ 0.95 $ 1.65
Impact of pro forma adjustments......................... (0.02) (0.03) (0.07) (0.03)
------ ------ ------- -------
Pro forma diluted earnings per share.................. $ 0.35 $ 0.48 $ 0.88 $ 1.62
====== ====== ======= =======
- ------------------------
(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%.
39
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) PRO FORMA FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
(d) The number of shares used to calculate pro forma earnings per share for the
six months ended December 31, 1999 assumes the spin-off transaction occurred
at July 1, 1999. The number of shares used to calculate pro forma earnings
per share for the six months ended December 31, 1998 is based on the
weighted average common stock and common stock equivalents outstanding used
by Watts to determine earnings per share for that period, adjusted in
accordance with the distribution ratio (see Note 3).
Basic net income per common share is calculated by dividing net income by
the weighted average number of common shares outstanding. The calculation of
diluted earnings per share assumes the conversion of all dilutive securities
(see Note 10).
Pro forma net income and number of shares used to compute pro forma net
earnings per share basic and assuming full dilution, are reconciled below
(in thousands, except per share amounts):
SIX MONTHS ENDED DECEMBER 31,
---------------------------------------------------------------------
1999 1998
--------------------------------- ---------------------------------
PRO FORMA PER SHARE PRO FORMA PER SHARE
NET INCOME SHARES AMOUNT NET INCOME SHARES AMOUNT
---------- -------- --------- ---------- -------- ---------
Basic EPS.................................. $ 4,650 13,229 $0.35 $ 6,453 13,468 $0.48
Dilutive securities, principally common
stock options............................ - 86 - - 52 -
------- ------ ----- ------- ------ -----
Diluted EPS................................ $ 4,650 13,315 $0.35 $ 6,453 13,520 $0.48
======= ====== ===== ======= ====== =====
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------------------------------
1999 1998
--------------------------------- ---------------------------------
PRO FORMA PER SHARE PRO FORMA PER SHARE
NET INCOME SHARES AMOUNT NET INCOME SHARES AMOUNT
---------- -------- --------- ---------- -------- ---------
Basic EPS.................................. $11,736 13,368 $0.88 $22,020 13,554 $1.62
Dilutive securities, principally common
stock options............................ - 7 - - 40 -
------- ------ ----- ------- ------ -----
Diluted EPS................................ $11,736 13,375 $0.88 $22,020 13,594 $1.62
======= ====== ===== ======= ====== =====
40
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(16) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
SIX-MONTHS ENDED DECEMBER 31, 1999
Net revenues.......................................... $77,713 $78,658 n/a n/a
Gross profit.......................................... 23,139 25,403 n/a n/a
Net income............................................ 1,688 3,192 n/a n/a
Pro forma earnings per share:
Basic............................................... 0.11 0.24 n/a n/a
Diluted............................................. 0.11 0.24 n/a n/a
Dividends per share................................... - - n/a n/a
FISCAL YEAR ENDED JUNE 30, 1999
Net revenues.......................................... $80,997 $85,089 $79,234 $77,757
Gross profit.......................................... 25,830 26,563 25,867 26,466
Net income............................................ 3,706 3,134 2,493 3,177
FISCAL YEAR ENDED JUNE 30, 1998
Net revenues.......................................... $67,891 $67,624 $75,719 $77,735
Gross profit.......................................... 22,805 23,274 25,267 23,311
Net income............................................ 5,589 5,291 6,077 5,468
41
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
CIRCOR INTERNATIONAL, INC.
(IN THOUSANDS)
- --------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
----------------------
CHARGED
TO
BALANCE AT CHARGED TO OTHER BALANCE
BEGINNING COSTS AND ACCOUNTS- DEDUCTIONS AT END
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE (1) OF PERIOD
- -----------------------------------------------------------------------------------------------------------
Six-months ended December 31, 1999
Deducted from asset account:
Allowance for doubtful accounts...... $2,949 $483 $ - $749 $2,683
Fiscal year ended June 30, 1999
Deducted from asset account:
Allowance for doubtful accounts...... $2,092 $106 $1,259(2) $508 $2,949
Fiscal year ended June 30, 1998
Deducted from asset account:
Allowance for doubtful accounts...... $1,709 $493 $ 208(2) $318 $2,092
Fiscal year ended June 30, 1997
Deducted from asset account:
Allowance for doubtful accounts...... $1,803 $455 $ - $549 $1,709
- ------------------------
(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.
42