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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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
CIRCOR INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 04-3477276
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
C/O CIRCOR, INC.
SUITE 290
35 CORPORATE DRIVE, BURLINGTON, MA 01803-4230
(Address of principal executive offices) (ZIP CODE)
(Registrant's telephone number, including area code): (781) 270-1200
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 [_]
As of April 30, 2001, there were 14,815,391 shares of our common stock, par
value $0.01, outstanding.
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CIRCOR INTERNATIONAL, INC.
TABLE OF CONTENTS
-----------------
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2001 and
December 31, 2000 3
Consolidated Statements of Operations for the
three months ended March 31, 2001 and 2000 4
Consolidated Statements of Cash Flows for the
three months ended March 31, 2001 and 2000 5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-12
Item 3. Qualitative and Quantitative Disclosures About
Market Risk 12-13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13-14
Item 2. Changes in Securities and Use of Proceeds 14
Item 6. Exhibits and Reports on Form 8-K 15-16
Signatures 17
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRCOR INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31, December 31,
2001 2000
-------- --------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents........................................... $ 25,307 $ 8,192
Trade accounts receivable, less allowance for doubtful accounts of
$3,218 and $2,831, respectively................................... 65,350 58,457
Inventories......................................................... 113,592 111,258
Prepaid expenses and other current assets........................... 6,276 6,192
Deferred income taxes............................................... 6,086 6,141
-------- --------
Total Current Assets............................................ 216,611 190,240
PROPERTY, PLANT AND EQUIPMENT, NET...................................... 62,989 64,794
OTHER ASSETS:
Goodwill, net of accumulated amortization of $14,940 and
$14,303, respectively............................................. 87,310 87,741
Other assets........................................................ 4,105 4,287
-------- --------
TOTAL ASSETS............................................................ $371,015 $347,062
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................... $ 28,891 $ 30,767
Accrued expenses and other current liabilities...................... 17,650 14,096
Accrued compensation and benefits................................... 3,693 4,757
Income taxes payable................................................ 1,587 -
Current portion of long-term debt................................... 1,711 940
-------- --------
Total Current Liabilities....................................... 53,532 50,560
LONG-TERM DEBT, NET OF CURRENT PORTION.................................. 90,491 90,593
DEFERRED INCOME TAXES................................................... 2,833 2,873
OTHER NONCURRENT LIABILITIES............................................ 8,380 7,490
MINORITY INTEREST....................................................... 4,478 4,365
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 1,000,000 shares authorized; no
shares issued and outstanding...................................... - -
Common stock, $0.01 par value; 29,000,000 shares authorized;
14,815,391 and 13,262,891 issued and outstanding at March 31, 2001
and December 31, 2000, respectively............................... 148 133
Additional paid-in capital.......................................... 199,906 181,184
Retained earnings................................................... 15,672 12,451
Accumulated other comprehensive loss................................ (4,425) (2,587)
-------- --------
Total Shareholders' Equity...................................... 211,301 191,181
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............................. $371,015 $347,062
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
CIRCOR INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended March 31,
--------------------------------
2001 2000
------- -------
Net revenues ........................................................ $87,946 $82,305
Cost of revenues .................................................... 61,875 56,086
------- -------
GROSS PROFIT .................................................... 26,071 26,219
Selling, general and administrative expenses......................... 17,764 17,518
Special charges .................................................... - 173
------- -------
OPERATING INCOME ................................................ 8,307 8,528
------- -------
Other (income) expense:
Interest income ................................................... (87) (101)
Interest expense .................................................. 2,056 2,726
Other, net ........................................................ 133 503
------- -------
2,102 3,128
------- -------
INCOME BEFORE INCOME TAXES ......................................... 6,205 5,400
Provision for income taxes ......................................... 2,482 2,214
------- -------
NET INCOME .................................................... $ 3,723 $ 3,186
======= =======
Earnings per common share:
Basic ............................................................. $0.28 $0.24
Diluted............................................................. $0.27 $0.24
Weighted average number of common shares outstanding:
Basic............................................................... 13,454 13,237
Diluted............................................................. 13,802 13,486
The accompanying notes are an integral part of these consolidated financial
statements.
4
CIRCOR INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended March 31,
-----------------------------
2001 2000
-------- --------
OPERATING ACTIVITIES
Net income............................................................... $ 3,723 $ 3,186
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation............................................................ 2,405 2,690
Amortization............................................................ 721 681
(Gain) loss on disposal of property, plant and equipment................ 1 (4)
Changes in operating assets and liabilities, net of effects from
business acquisitions:
Trade accounts receivable............................................. (7,958) (2,007)
Inventories........................................................... (3,288) (596)
Prepaid expenses and other assets..................................... (99) 1,375
Accounts payable, accrued expenses and other liabilities.............. 4,068 2,845
-------- --------
Net cash provided by (used in) operating activities..................... (427) 8,170
-------- --------
INVESTING ACTIVITIES
Additions to property, plant and equipment............................... (915) (1,272)
Disposal of property, plant and equipment................................ 11 5
Increase in other assets................................................. (432) (75)
-------- --------
Net cash used in investing activities......................... (1,336) (1,342)
-------- --------
FINANCING ACTIVITIES
Proceeds from long-term borrowings....................................... 14,307 6,847
Payments of long-term debt............................................... (13,534) (10,534)
Proceeds from the issuance of stock, net of issuance costs............... 18,698 -
Dividends paid........................................................... (503) -
-------- --------
Net cash provided by (used in) financing activities..................... 18,968 (3,687)
-------- --------
Effect of exchange rate changes on cash and cash equivalents............. (90) (15)
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS.................................... 17,115 3,126
Cash and cash equivalents at beginning of year........................... 8,192 5,153
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................... $ 25,307 $ 8,279
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited, consolidated
financial statements contain all necessary adjustments, consisting only of
adjustments of a normal recurring nature, to present fairly CIRCOR
International, Inc.'s consolidated balance sheets as of March 31, 2001 and 2000,
and our consolidated statements of operations and consolidated statements of
cash flows for the three months ended March 31, 2001 and 2000.
The consolidated balance sheet at December 31, 2001 has been derived from the
audited financial statements at that date. Our accounting policies are
described in the notes to our December 31, 2000 financial statements, which were
included in our Annual Report filed on Form 10-K. We recommend that the
financial statements included in this Report be read in conjunction with the
financial statements and notes included in our December 31, 2000 Annual Report.
Certain prior period financial statement amounts have been reclassified to
conform to currently reported presentations.
(2) NEW ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board issued SFAS 133,
''Accounting for Derivative Instruments and Hedging Activities.'' We adopted
SFAS 133, as amended by SFAS No. 137 and SFAS No. 138, on January 1, 2001. The
adoption of this statement did not have a significant impact on our financial
condition, results of operations or cash flows. See note 7, Derivative
Instruments and Hedging Activities for further details.
(3) INVENTORIES
Inventories consist of the following (In thousands): March 31, 2001 December 31, 2000
------------------------ -----------------------
(Unaudited)
Raw materials.......................................................... $ 42,977 $ 41,233
Work in process........................................................ 31,836 31,804
Finished goods......................................................... 38,779 38,221
-------- --------
$113,592 $111,258
======== ========
(4) SEGMENT INFORMATION
The following table presents certain operating segment information
(Unaudited, in thousands):
Instrumentation
& Thermal Fluid Corporate Consolidated
Controls Petrochemical Adjustments Total
------------------ ------------------ ----------------- ---------------
Three Months Ended March 31, 2001
- ---------------------------------
Net Revenues....................................... $46,309 $41,637 $ - $87,946
Operating income (loss)............................ 7,743 2,399 (1,835) 8,307
Three Months Ended March 31, 2000
- ----------------------------------
Net Revenues........................................ $44,513 $37,792 $ - $82,305
Operating income (loss)............................. 6,843 3,391 (1,706) 8,528
The operating segments above are presented on a basis consistent with the
presentation in our consolidated financial statements for the period ended
December 31, 2000. In 2001, the name Instrumentation and Fluid Regulation was
changed to Instrumentation and Thermal Fluid Controls. The name change better
reflects our products and markets we serve as we increasingly sell our steam
valves and actuators into end-user applications of higher and lower
temperatures. Amounts included in identifiable assets, as of March 31, 2001,
did not change significantly from those amounts reported in note 14, Segment
Information, included in our Annual Report on Form 10-K for the year ended
December 31, 2000.
6
(5) SPECIAL CHARGES
Special charges of $0.2 million were incurred in the first three months of
2000, all associated with the closure, consolidation and reorganization of
manufacturing plants in the Instrumentation and Thermal Fluid Controls segment.
Special charges totaling $1.9 million were recognized for the year ended
December 31, 2000, of which $1.6 million was incurred and expense in the
Instrumentation and Thermal Fluid Controls segment and $0.3 million in the
Petrochemical segment. There were no special charges incurred during the three
months ended March 31, 2001. The portion of the accrued severance costs to be
paid subsequent to March 31, 2001 is less than $0.1 million.
(6) EARNINGS PER COMMON SHARE (Unaudited, in thousands, except per share
amounts)
Net Per Share
Income Shares Amount
------------ ----------- -------------
Three Months Ended March 31, 2001
- ---------------------------------
Basic EPS........................................................................ $3,723 13,454 $ 0.28
Dilutive securities, principally common stock options............................ - 348 (0.01)
------ ------ ------
Diluted EPS...................................................................... $3,723 13,802 $ 0.27
====== ====== ======
Options to purchase 190,207 shares of common stock at prices ranging from
$12.98 to $13.94 were outstanding during the three-month period ended March 31,
2001. These options were not included in the related computations of diluted
EPS since the exercise price of the options was greater than the average market
price of the common shares during the period.
Net Per Share
Income Shares Amount
------------ ----------- ------------
Three Months Ended March 31, 2000
- -----------------------------------
Basic EPS........................................................................ $3,186 13,237 $0.24
Dilutive securities, principally common stock options............................ - 249 -
------ ------ -----
Diluted EPS...................................................................... $3,186 13,486 $0.24
====== ====== =====
Options to purchase 28,000 shares of common stock at prices ranging from
$13.31 to $13.94 were outstanding during the three-month period ended March 31,
2000. These options were not included in the related computations of diluted
EPS since the exercise price of the options was greater than the average market
price of the common shares during the period.
(7) Derivative Instruments and Hedging Activities
As of January 1, 2001, we adopted Statement of Financial Accounting
Standards ("SFAS") No. 133. "Accounting for Derivative Instruments and Hedging
Activities" as amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities. It requires that all derivative instruments be recorded on
the balance sheet at fair value as assets or liabilities. The adoption of SFAS
No. 133 did not have a material effect on assets, liabilities, accumulated
comprehensive income or net income.
In the normal course of business, we manage risk associated with foreign
exchange rates through a variety of strategies, including the use of hedging
transactions, executed in accordance with our policies. As a matter of policy,
we ordinarily do not use derivative instruments unless there is an underlying
exposure. Any change in the value of our derivative instruments would be
substantially offset by an opposite change in the underlying hedged items. We
do not use derivative instruments for speculative trading purposes.
7
ACCOUNTING POLICIES
Using qualifying criteria defined in SFAS No. 133, derivative instruments
are designed and accounted for as either a hedge of a recognized asset or
liability (fair value hedge) or a hedge of a forecasted transaction (cash flow
hedge). For a fair value hedge, both the effective an ineffective portions of
the change in fair value of the derivative instrument, along with an adjustment
to the carrying amount of the hedged item for fair value changes attributable to
the hedged risk, are recognized in earnings. For a cash flow hedge, changes in
the fair value of the derivative instrument that are highly effective are
deferred in accumulated other comprehensive income or loss until the underlying
hedged item is recognized in earnings. If the effective portion of fair value
or cash flow hedges were to cease to qualify for hedge accounting, or to be
terminated, it would continue to be carried on the balance sheet at fair value
until settled, however, hedge accounting would be discontinued prospectively.
If forecast transactions were no longer probable of occurring, amounts
previously deferred in accumulated other comprehensive income or loss would be
recognized immediately in earnings.
FOREIGN CURRENCY RISK
We use forward contracts to manage the currency risk related to business
transactions denominated in foreign currencies. To the extent the underlying
transactions hedged are completed, the contracts do not subject us to
significant risk from exchange rate movements because they offset gains and
losses on the related foreign currency denominated transactions. Our foreign
currency forward contracts have not been designated as hedging instruments and,
therefore, did not qualify for fair value or cash flow hedge treatment under the
criteria of SFAS No. 133 for the three months ended March 31, 2001. Therefore,
the unrealized gains and losses on our contracts have been recognized as a
component of other expense in the consolidated statements of operations. We
recorded a net loss of less than $0.1 million for the three months ended March
31, 2001. As of March 31, 2001, we had forward contracts to buy foreign
currencies with a fair value of $1.9 million. These contracts mature on various
dates between April 2001 and July 2001.
(8) Comprehensive Income
Our other comprehensive income consists solely of cumulative translation
adjustments. We do not provide U.S. income taxes on foreign currency
translation adjustments since we do not provide for such taxes on undistributed
earnings of foreign subsidiaries. Comprehensive income for the three months
ended March 31, 2001 and 2000 was as follows (Unaudited, in thousands):
Three Months Ended March 31,
----------------------------
2001 2000
------- ------
Net income......................................................................... $ 3,723 $3,186
Foreign currency translation adjustments .......................................... (1,838) (680)
------- ------
Total comprehensive income....................................................... $ 1,885 $2,506
======= ======
(9) CONTINGENCIES AND ENVIRONMENTAL REMEDIATION CONTINGENCIES
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.
On July 12, 2000, we were notified that the United States Customs Service
("Customs") had begun an investigation to determine whether our subsidiary, KF
Industries, Inc. ("KF") was, and continues to be, in compliance with country of
origin marking requirements on those valves that KF imports from sources in the
People's Republic of China, including our Chinese joint venture. While we
believe that Customs investigation will not result in any material liability to
KF Industries, there can be no assurances as to the outcome of the matter. If
the Customs investigation were to reveal that violations of the customs laws had
occurred, KF could be subjected to civil fines and forfeitures and, if such
violations were determined to be intentional, criminal penalties, which could be
material. We believe that KF Industries' marking practices have been in
substantial compliance with Customs' regulations and we are cooperating with
Customs in its investigation.
8
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This quarterly Report contains certain statements that are "forward-looking
statements" as that term is defined under the Private Securities Litigation
Reform Act of 1995 (the "Act") and releases issued by the Securities and
Exchange Commission. The words "may, " "hope, " "will," "should, " "expect, "
"plan," "plan," "anticipate," "intend," "believe," "estimate," "predict,"
"potential," "continue," and other expressions which are predictions of or
indicate future events and trends and which do not relate to historical matters
identify forward-looking statements. We believe that it is important to
communicate our future expectations to our stockholders. However, there may be
events in the future that we are not able to accurately predict or control, and
our actual results may differ materially from the expectations we describe in
our forward looking statements. Forward-looking statements involve known and
unknown risks, uncertainties and other factors, which may cause our actual
results, performance or achievements to differ materially from anticipated
future results, performance or achievements expressed or implied by such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those set forth under the caption
"Certain Risks Factors That May Affect Future Results" in our Annual Report on
Form 10-K filed for the year ended December 31, 2000. We undertakes no
obligation to publicly update or revise any forward-looking statement, whether
as a result of new information, future events or otherwise.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 2000.
The following tables set forth the results of operations, percentage of net
revenue and the year-to-year percentage change in certain financial data for the
three months ended March 31, 2001 and 2000:
Three Months Ended March 31,
--------------------------------
2001 2000 %Change
-------------- ------------- -------
(Dollars In Thousands)
Net revenues.......................................... $87,946 100.0% $82,305 100.0% 6.9%
Cost of revenues...................................... 61,875 70.4 56,086 68.1 10.3
------- ----- ------- -----
Gross profit........................................ 26,071 29.6 26,219 31.9 (0.6)
Selling, general and administrative expenses.......... 17,764 20.2 17,518 21.3 1.4
Special charges....................................... - - 173 0.2 n/a
------- ----- ------- -----
Operating income..................................... 8,307 9.4 8,528 10.4 (2.6)
Other expense:
Interest expense, net............................... 1,969 2.2 2,625 3.2 (25.0)
Other expense, net.................................. 133 0.1 503 0.6 (73.6)
------- ----- ------- -----
Income before income taxes............................ 6,205 7.1 5,400 6.6 14.9
Provision for income taxes............................ 2,482 2.9 2,214 2.7 12.1
------- ----- ------- -----
Net income......................................... $ 3,723 4.2% $ 3,186 3.9% 16.9%
======= ===== ======= =====
9
Net revenues for the three months ended March 31, 2001 increased by $5.6
million, or 6.9%, to $87.9 million compared to $82.3 million for the three
months ended March 31, 2000. The increase in net revenues for the three months
ended March 31, 2001 was attributable to the following:
Total Foreign
Segment 2001 2000 Change Acquisitions Operations Exchange
------- ------- ------- ---------- ------------ ------------ ---------------
(In Thousands)
Instrumentation & Thermal Fluid Controls... $46,309 $44,513 $1,796 $347 $2,047 $ (598)
Petrochemical.............................. 41,637 37,792 3,845 - 5,021 (1,176)
------- ------- ------ ---- ------ -------
Total...................................... $87,946 $82,305 $5,641 $347 $7,068 $(1,774)
======= ======= ====== ==== ====== =======
The Instrumentation and Thermal Fluid Controls segment accounted for
approximately 52.7% of net revenues for the three months ended March 31, 2001
compared to 54.1% for the three months ended March 31, 2000. The Petrochemical
segment accounted for 47.3% of net revenues for the three months ended March 31,
2001 compared to 45.9% for the three months ended March 31, 2000.
Instrumentation and Thermal Fluid Controls revenues increased $1.8 million,
or 4.0%. The net increase was due to: a $1.8 million increase in instrumentation
revenues, primarily due to increased sales penetration and the of volume sales
within the aerospace, power and power generation and European general
instrumentation markets; a $0.3 million increase in thermal fluid control
markets, resulting from higher year-to-year demand; $0.3 million of incremental
revenue from the Rockwood Swendeman product line, purchased in November 2000.
These increases were partially offset by a $0.6 million reduction in revenues
resulting from changes in exchange rates affecting our European business units.
The net increase in Petrochemical revenues of $3.8 million, or 10.2%, was the
result of $2.8 million in higher North American revenues, related to increased
customer spending on maintenance and repair and small capital projects; a $2.5
million increase in revenues from our Italian-based operation, due to an
increase in the number of large oil and gas construction projects; a $0.3
million decrease in revenue from Suzhou KF Valve, our Chinese joint venture; and
a $1.2 million decrease in revenues resulting from changes in exchange rates
which affected our Canadian and Italian-based operations.
Gross profit decreased $0.1 million, or 0.6%, to $26.1 million for the
three months ended March 31, 2001 compared to $26.2 million for the three-month
ended March 31, 2000. Gross margin declined to 29.6% for the three months ended
March 31, 2001 compared to 31.9% for the three months ended March 31, 2000.
Gross profit from the Instrumentation and Thermal Fluid Controls segment
increased $0.8 million as a result of; $0.2 million from the Rockwood Swendeman
acquisition, $0.8 million from operations; and unfavorable net foreign exchange
rate changes of $0.2 million. Gross profit for the Petrochemical segment
decreased $0.9 million for the three months ended March 31, 2001 compared to the
three months ended March 31, 2000. Of this amount, a $0.6 million decrease
resulted from the consolidation and integration of product lines into a key
North American manufacturing plant. Inefficiencies and delays in the completion
of the consolidation and integration process resulted in higher manufacturing
costs compared to last year. An additional $0.3 million decrease was the result
of reduced margin revenues for certain large oil and gas projects that were very
competitively priced during the three months ended March 31, 2001. This
competitive pricing strategy enabled us to demonstrate our engineering and
manufacturing capabilities on the largest-size ball valves and qualified us for
follow-on application orders. Unfavorable exchange rates accounted for an
additional decrease of $0.2 million.
Selling, general and administrative expenses increased $0.3 million, or
1.4%, to $17.8 million for the three months ended March 31, 2001 compared with
$17.5 million for the three months ended March 31, 2000. The Instrumentation
and Thermal Fluid Controls segment increased operating expenses by $0.1 million,
primarily from increased sales commissions on higher revenue. The Petrochemical
segment operating expenses remained unchanged. Increased corporate spending of
$0.1 million for the three months ended March 31, 2001 reflected a fully staffed
unit compared to the three months ended March 31, 2000.
During the three months ended March 31, 2000, special charges of $0.2
million were incurred in the Instrumentation and Thermal Fluid Controls segment
associated with the closure, consolidation and reorganization of certain U.S.
manufacturing operations. These special charges were expensed in the period as
incurred. There were no special charges incurred during the three months ended
March 31, 2001.
10
The change in operating income for the three months ended March 31, 2001
compared to the three months ended March 31, 2000 was as follows:
Total Foreign
Segment 2001 2000 Change Acquisitions Operations Exchange
------- ------- ------- ------ ----------- ----------- --------
(In Thousands)
Instrumentation & Thermal Fluid Controls. $ 7,743 $ 6,843 $ 900 $73 $ 849 $(22)
Petrochemical............................ 2,399 3,391 (992) - (928) (64)
Corporate................................ (1,835) (1,706) (129) - (129) -
------- ------- ----- --- ----- ----
Total.................................... $ 8,307 $ 8,528 $(221) $73 $(208) $(86)
======= ======= ===== === ===== ====
The increase in operating income in the Instrumentation and Thermal Fluid
Controls segment was primarily attributable to improved manufacturing and
administrative operating efficiencies. The decrease in operating income in the
Petrochemical segment was primarily due to lower gross profit as a result of
competitive pricing pressures and manufacturing cost inefficiencies at a key
North American plant.
Net interest expense decreased $0.6 million to $2.0 million for the three
months ended March 31, 2001 compared to $2.6 million for the three months ended
March 31, 2000. The decrease was primarily due to the lower average debt
balances outstanding during the three months ended March 31, 2001 as compared
with the three months ended March 31, 2000. Significant net positive cash flow
generated during our prior year enabled us to reduce our revolving line of
credit debt balance to zero as of December 31, 2000.
Other expense declined $0.4 million to $0.1 million for the three months
ended March 31, 2001, compared to $0.5 million for the three months ended March
31, 2000, as a result of reductions in losses from foreign currency exchange
rate changes.
The effective tax rate decreased to 40.0% for the three months ended March
31, 2001 compared to 41.0% for the three months ended March 31, 2000 due to the
implementation of various U.S. tax strategies in the second half of 2000.
Net income increased for the three months ended March 31, 2001. Improved
operating results within the Instrumentation and Thermal Fluid Controls segment,
reduced interest expense and lower foreign currency losses were the primary
reasons for this change.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 2001, we generated a net increase
in cash of $17.1 million. We received $18.7 million as a result of a secondary
public equity offering that we completed during March 2001 and $0.8 million from
short-term international credit facilities. We used: $0.4 million of cash flow
in operating activities; $1.3 million for investing activities, which included
the purchase of $0.9 million of capital equipment; and $0.5 million to fund cash
dividends paid to shareholders. Capital expenditures were primarily for
manufacturing machinery and equipment as part of our commitment to further
improve our manufacturing operations. Our capital expenditure budget for the
year ending December 31, 2001 is $7.2 million.
As of March 31, 2001, we had no balances outstanding under our $75.0
million unsecured revolving credit facility. As of March 31, 2001, we had $75.0
million available from this revolving credit facility to support our acquisition
program, working capital requirements and for general corporate purposes.
On March 16, 2001, we completed a secondary equity offering in which we
sold 1,552,500 shares of our common stock at $13.25 per share. We received net
cash proceeds of $18.7 million, after deducting underwriters' fees and other
estimated issuance and distribution expenses. Upon the closing of the equity
offering, we used $2.0 million to reduce the balance on our unsecured, revolving
credit facility to zero. We intend to use the remainder of the proceeds to
acquire complimentary businesses or products. Until such acquisitions require
our capital, we may use a portion of the net proceeds for general corporate
purposes, including working capital.
The ratio of current assets to current liabilities at March 31, 2001 was
4.0:1 compared to 3.8:1 at December 31, 2000. Cash and cash equivalents were
$25.3 million at March 31, 2001 compared to $8.2 million at December 31, 2000.
Net debt (including cash) as a percentage of total capital employed was 22.0% at
March 31, 2001
11
compared to 29.5% at December 31, 2000. At March 31, 2001, we were in compliance
with all covenants related to existing debt obligations.
We anticipate that available funds and those funds provided from ongoing
operations will be sufficient to meet current operating requirements and
anticipated capital expenditures for at least the next 24 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
three months ended March 31, 2001 in connection with any of these matters. See
Part II, Item 1, Legal Proceedings.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
established accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset of liability
measured at its fair value. On January 1, 2001, we adopted SFAS 133, as amended
by SFAS No. 137 and SFAS No. 138. The adoption of this statement did not have a
significant impact on our financial condition, results of operations or cash
flows.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
The oil and gas market has historically been subject to cyclicality
depending upon supply and demand of crude oil and its derivatives as well as
natural gas. When oil or gas prices decrease, expenditures on maintenance and
repair decline rapidly and outlays for exploration and in-field drilling
projects decrease and, accordingly, demand for valve products is reduced.
However, when oil and gas prices rise, maintenance and repair activity and
spending for facilities projects normally increase, and we benefit from
increased demand for valve products. However, oil and gas price increases may
be considered temporary in nature, or not driven by customer demand and,
therefore, may result in longer lead times for obtaining petrochemical sales
orders. As a result, the timing and magnitude of changes in market demand for
oil and valve products are difficult to predict. Similarly, although not to the
same extent as the oil and gas markets, the aerospace, military and maritime
markets have historically experienced cyclical fluctuations in demand, which
also could have a material adverse effect on our business, financial condition
or results of operations.
Interest Rate Risk
At March 31, 2001, our primary interest rate risk relates to borrowings
under our revolving credit facility. The interest rate on those borrowings
fluctuates with changes in short-term borrowing rates. There were no
outstanding borrowings under our revolving credit facility as of March 31, 2001.
Based upon the expected levels of borrowings under our credit facility in 2001,
an increase in interest rates of 100 basis points would not have a material
effect on our results of operations or cash flows.
Currency Exchange Risk
We use forward contracts to manage the currency risk related to business
transactions denominated in foreign currencies. To the extent the underlying
transactions hedged are completed, the contracts do not subject us to
significant risk from exchange rate movements because they offset gains and
losses on the related foreign currency denominated transactions. Our foreign
currency forward contracts have not been designated as hedging instruments and,
therefore, did not qualify for fair value or cash flow hedge treatment under the
criteria of SFAS No. 133 for the three months ended March 31, 2001. Therefore,
the unrealized gains and losses on our contracts have been recognized as a
component of other expense in the consolidated statement of operations. As of
March 31, 2001, we had forward contracts to buy foreign currencies with a fair
value of $1.9 million. These contracts mature on various dates between April
2001 and July 2001.
The counterparties to these contracts are major financial institutions.
Our risk of loss in the event of non-performance by the counterparties is not
significant. We do not use derivative financial instruments for trading
purposes. Risk management strategies are reviewed and approved by senior
management before implementation.
12
Commodity Price Risk
The primary raw materials used in our products process are stainless steel,
carbon steel, cast iron and brass. We purchase these materials from numerous
suppliers nationally and internationally, and have not historically experienced
significant difficulties in obtaining these commodities in quantities sufficient
for our operations. However, these commodities are subject to price
fluctuations, which may adversely affect our results of operations. We manage
this risk by offsetting increases in commodities with increased sales prices,
active materials management, product engineering programs and the diversity of
materials used in our production process.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We, like other worldwide manufacturing companies, are subject to a variety
of potential liabilities connected with our business operations, including
potential liabilities and expenses associated with possible product defects or
failures and compliance with environmental laws. We maintain $5.0 million in
aggregate product liability insurance and $75.0 million coverage available under
an excess umbrella liability insurance policy. We also maintain a products
liability policy with aggregate limits of $200 million for the aviation products
produced by our worldwide operations.
We believe this coverage to be generally in accordance with industry
practices. Nonetheless, such insurance coverage may not be adequate to protect
us fully against substantial damage claims, which may arise from product defects
and failures or from environmental liability.
Leslie Controls, Inc. ("Leslie") and Spence Engineering Company, Inc.
("Spence"), both subsidiaries of CIRCOR, are third-party defendants in over 300
civil product liability actions filed against ship owner defendants in the U.S.
District Court, Northern District of Ohio (Cleveland) between the 1980s and
1996. These cases are part of tens of thousands of maritime asbestos cases
filed in this court against multiple defendants. The ship owner defendants'
third-party claims in the Leslie and Spence cases typically involve 20-30 third-
party defendants. The claims against Leslie and Spence assert that the packing
in metal pumps and the gaskets in metal valves supplied by Leslie and Spence
contained asbestos which contributed to the asbestos exposure of plaintiffs who
worked on the defendants' ships. To date, two cases involving Leslie only have
settled in a way that required a payment from Leslie. One case settled in 1995
with a $2,000 payment from Leslie; another settled in 1989 with a $500 payment
from Leslie. These thousands of cases are subject to court ordered moratoriums
on answers and motion practice, and the very small percentage of these cases
that have come to trial since 1996 have not involved Leslie or Spence.
Leslie and its insurers had been in dispute over payment of approximately
$560,000 in legal fees incurred to defend these cases through 1994 and
approximately $300,000 in legal fees incurred from 1995 through the present
time. The dispute resulted from a gap in Leslie's insurance coverage from 1965
to 1973. During the fall of 1999, Leslie and its insurers entered into an
agreement pursuant to which Leslie has agreed to be responsible for 41% of all
legal fees and settlement costs incurred from 1995 forward.
We have established reserves for all of the claims discussed above,
including reserves relating to the claims disputed by our insurance carriers,
and we do not currently believe it is reasonably likely that a range of loss
could occur in excess of the amounts accrued. We have not recorded any probable
third-party recoveries of our own on these claims.
We are currently a party to or otherwise involved in various administrative
or legal proceedings under federal, state or local environmental laws or
regulations involving a number of sites, in some cases as a participant in a
group of potentially responsible parties, referred to as PRPs. Two of these
sites, the Sharkey and Combe Landfills in New Jersey, are listed on the National
Priorities List. With respect to the Sharkey Landfill, we have been allocated
0.75% of the remediation costs, an amount which is not material to us. With
respect to the Combe Landfill, we have settled both the Federal Government's
claim, and the State of New Jersey's claim, for an amount which is immaterial to
us. Moreover, our insurers have covered defense and settlement costs to date
with respect to the Sharkey and Combe Landfills. In addition we are involved as
a PRP with respect to the Solvent Recovery Service of New England site and the
Old Southington landfill site, both in Connecticut. These sites are on the
National Priorities List but, with respect to both sites, we have the right to
indemnification from third parties. Based on currently available information,
we believe that our share of clean-up costs at these sites will not be material.
13
On July 12, 2000, we were notified that the United States Customs Service
("Customs") is conducting an investigation to determine whether our subsidiary
KF Industries, Inc. ("KF"), is in compliance with country of origin marking
requirements on those valves that KF imports from sources in the People's
Republic of China including our joint venture there. While we believe that the
Customs investigation will not result in any material liability to us, there can
be no assurances. If the Customs investigation were to reveal that violations
of the Customs laws had occurred, KF could be subjected to civil fines,
forfeitures and (if such violations were determined to be intentional) criminal
penalties, which could be material. We believe that KF's marking practices have
been in substantial compliance with Customs' regulations and we are cooperating
with Customs in its investigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Use of Proceeds from Registered Securities
1. The effective date of the Securities Act registration statement for which
the use of proceeds information is being disclosed was March 15, 2001, and
the Commission file number assigned to the registration statement is
333-54428.
2. The offering commenced as of March 16, 2001.
3. The offering did not terminate before any securities were sold.
4.(i) As of the date of the filing of this report, the offering has
terminated and 1,552,500 of the securities registered were sold.
(ii) The names of the managing underwriters are Robert W. Baird & Co.
Incorporated and ING Barings LLC.
(iii) Our common stock, par value $0.01 per share, was the class of
securities registered.
(iv) We registered 1,552,500 shares of our common stock (which included
202,500 shares solely to cover over-allotments), having an aggregate
price of the offering amount registered of $20.6 million. As of the
date of the filing of this report 1,552,500 of the total shares
registered have been sold at an aggregate offering price of $20.6
million.
(v) From March 15, 2001 to the filing of this Report, a reasonable
estimate of the amount of expenses incurred by us in connection with
the issuance and distribution of the securities totaled $1.9 million,
which consisted of direct payments of $1.3 million in underwriters
discount, fees and commissions and $0.6 million in other issuance and
distribution expenses (reasonable estimate). No payments for such
expenses were made to (i) any of our directors, officers, general
partners or their associates, except to Goodwin Procter LLP, Boston
Massachusetts. David F. Dietz, a Director and Officer of our company,
is the sole owner of David F. Dietz, P.C., a partner of Goodwin
Procter LLP. (ii) any person(s) owning 10% or more of any class of
our equity securities or (iii) any of our affiliates.
(vi) Our net offering proceeds after deducting our total expenses were
$18.7 million.
(vii) Subsequent to receipt of the net proceeds, we used $2.0 million to
reduce the balance owed on our unsecured revolving credit facility to
zero. The remaining proceeds have been invested in short-term
investments and are included in cash and cash equivalents as of March
31, 2001. No payments out of the net proceeds were made to (i) any of
our directors, officers, general partners or their associates, (ii)
any person(s) owning 10% or more of any class of our equity securities
or (iii) any of our affiliates.
(viii) The uses of proceeds described do not represent a material change
in the use of proceeds described in our registration statement.
14
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K
(A) EXHIBIT INDEX
Exhibit No. Description and Location
----------- ------------------------
2 Plan of Acquisition, Reorganization, Arrangement, Liquidation or
Succession:
2.1 Distribution Agreement between Watts Industries, Inc. and the Company
dated as of October 1, 1999, is incorporated herein by reference to
Exhibit 2.1 to Amendment No. 2 to the Company's Registration Statement
on Form 10, File No. 000-26961, filed with the Securities and Exchange
Commission on October 6, 1999 ("Amendment No. 2 to the Form 10").
3 Articles of Incorporation and By-Laws:
3.1 The Amended and Restated Certificate of Incorporation of the Company is
incorporated herein by reference to Exhibit 3.1 to the Company's
Registration Statement on Form 10, File No. 000-26961, filed with the
Securities and Exchange Commission on August 6, 1999 ("Form 10").
3.2 The Amended and Restated By-Laws of the Company are incorporated herein
by reference to Exhibit 3.2 to the Form 10.
3.3 Certificate of Designations, Preferences and Rights of a Series of
Preferred Stock of CIRCOR International, Inc. classifying and
designating the Series A Junior Participating Cumulative Preferred Stock
is incorporated herein by reference to Exhibit 3.1 to the Company's
Registration Statement on Form 8-A, File No. 001-14962, filed with the
Securities and Exchange Commission on October 21, 1999 ("Form 8-A").
4 Instruments Defining the Rights of Security Holders, Including
Debentures:
4.1 Shareholder Rights Agreement, dated as of September 16, 1999, between
CIRCOR International, Inc. and BankBoston, N.A., as Rights Agent is
incorporated herein by reference to Exhibit 4.1 to the Form 8-A.
9 Voting Trust Agreements:
9.1 The Amended and Restated George B. Horne Voting Trust Agreement - 1997
dated as of September 14, 1999 is incorporated herein by reference to
Exhibit 9.1 to Amendment No. 1 to the Company's Registration Statement
on Form 10, File No. 000-26961, filed with the Securities and Exchange
Commission on September 22, 1999 ("Amendment No. 1 to the Form 10").
10 Material Contracts:
10.1 CIRCOR International, Inc. 1999 Stock Option and Incentive Plan is
incorporated herein by reference to Exhibit 10.1 to Amendment No. 1 to
the Form 10.
10.2 Form of Incentive Stock Option Agreement under the 1999 Stock Option
and Incentive Plan is incorporated herein by reference to Exhibit 10.2
to Amendment No. 1 to the Form 10.
10.3 Form of Non-Qualified Stock Option Agreement for Employees under the
1999 Stock Option and Incentive Plan (Five Year Graduated Vesting
Schedule) is incorporated herein by reference to Exhibit 10.3 to
Amendment No. 1 to the Form 10.
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 Hoke 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
15
Report on Form 10-K, File No. 0-14787, filed with the Securities
and Exchange Commission on September 26, 1994.
10.13 Trust Indenture from Hillsborough County Industrial Development
Authority to The First National Bank of Boston, as Trustee, dated
July 1, 1994 is herein incorporated by reference to Exhibit 10.17 of
the Watts Industries, Inc. Annual Report on Form 10-K, File No. 0-
14787, filed with the Securities and Exchange Commission on September
26, 1994.
10.14 Form of Indemnification Agreement between CIRCOR and each of its
directors is herein incorporated by reference to Exhibit 10.20 to the
Form 10.
10.15 Executive Employment Agreement between CIRCOR, Inc. and David A.
Bloss, Sr., dated as of September 16, 1999 is incorporated herein by
reference to Exhibit 10.15 to Amendment No. 1 to the Form 10.
10.17 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.
10.21 Sharing agreement regarding the rights of debt holders relative to
one another in the event of insolvency is herein incorporated by
reference to Exhibit 10.21 on Form 10 Q/A File No. 1-14962 filed with
the Securities and Exchange Commission on August 14, 2000.
10.22 Executive Change of Control Agreement between CIRCOR, Inc. and
Carmine F. Bosco dated August 8, 2000 is herein incorporated by
reference to Exhibit 10.22 on Form 10-Q, File No. 001-14962, filed
with the Securities and Exchange Commission on November 14, 2000.
10.23 Executive Change of Control Agreement between CIRCOR, Inc. and Alan
R. Carlsen dated August 8, 2000 is herein incorporated by reference
to Exhibit 10.23 on Form 10-Q, File No. 001-14962, filed with the
Securities and Exchange Commission on November 14, 2000.
10.24 Executive Change of Control Agreement between CIRCOR, Inc. and
Kenneth W. Smith dated August 8, 2000 is herein incorporated by
reference to Exhibit 10.24 on Form 10-Q, File No. 001-14962, filed
with the Securities and Exchange Commission on November 14, 2000.
10.25 Executive Change of Control Agreement between CIRCOR, Inc. and
Stephen J. Carriere dated August 8, 2000.
10.26 Executive Change of Control Agreement between CIRCOR, Inc. and Alan
J. Glass dated August 8, 2000.
*10.27 Form of Indemnification Agreement between CIRCOR and each of its
executive officers.
21 Subsidiaries of Registrant: A list of Subsidiaries of the Company
is incorporated by reference to Exhibit 21 on Form 10-K, File No.
001-14962, filed with the Securities and Exchange Commission on
March 9, 2001.
(*) Filed herewith
(B) REPORTS ON FORM 8-K
None
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CIRCOR INTERNATIONAL, INC.
Date: May 15, 2001 /S/ DAVID A. BLOSS, SR.
-----------------------
David A. Bloss, Sr.
Chairman, President and Chief Executive
Officer
Principal Executive Officer
Date: May 15, 2001 /S/ KENNETH W. SMITH
--------------------
Kenneth W. Smith
Vice President, Chief Financial Officer
and Treasurer
Principal Financial Officer
Date: May 15, 2001 /S/ STEPHEN J. CARRIERE
-----------------------
Stephen J. Carriere
Vice President, Corporate Controller
and Assistant Treasurer
Principal Accounting Officer
17