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 SEPTEMBER 30, 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
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 October 31, 2001, there were 14,858,690 shares of our common stock,
par value $0.01, outstanding.
CIRCOR INTERNATIONAL, INC.
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2001 (Unaudited) and
December 31, 2000 3
Consolidated Statements of Operations for the three months and
nine months ended September 30, 2001 (Unaudited) and 2000 (Unaudited) 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2001 (Unaudited) and 2000 (Unaudited) 5
Notes to Consolidated Financial Statements 6-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18-19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19-20
Item 2. Changes in Securities and Use of Proceeds 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20-21
Signatures 22
Exhibit Index 23
Exhibit 10.28
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRCOR INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, December 31,
2001 2000
-------- --------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 44,397 $ 8,192
Trade accounts receivable, less allowance for doubtful accounts of
$3,123 and $2,831, respectively................................. 57,599 58,457
Inventories....................................................... 108,138 111,258
Prepaid expenses and other current assets......................... 5,486 6,192
Deferred income taxes............................................. 6,114 6,141
-------- --------
Total Current Assets........................................... 221,734 190,240
PROPERTY, PLANT AND EQUIPMENT, NET..................................... 65,618 64,794
OTHER ASSETS:
Goodwill, net of accumulated amortization of $16,204 and
$14,303, respectively............................................ 92,163 87,741
Other assets....................................................... 3,929 4,287
-------- --------
TOTAL ASSETS........................................................... $383,444 $347,062
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................... $ 23,593 $ 30,767
Accrued expenses and other current liabilities..................... 16,352 14,096
Accrued compensation and benefits.................................. 5,612 4,757
Income taxes payable............................................... 3,180 -
Current portion of long-term debt.................................. 3,581 940
-------- --------
Total Current Liabilities...................................... 52,318 50,560
LONG-TERM DEBT, NET OF CURRENT PORTION................................. 94,275 90,593
DEFERRED INCOME TAXES.................................................. 2,851 2,873
OTHER NONCURRENT LIABILITIES........................................... 9,779 7,490
MINORITY INTEREST...................................................... 5,294 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;
14,858,690 and 13,262,891 issued and outstanding at September 30,
2001 and December 31, 2000, respectively......................... 149 133
Additional paid-in capital......................................... 200,340 181,184
Retained earnings.................................................. 21,893 12,451
Accumulated other comprehensive loss............................... (3,455) (2,587)
-------- --------
Total Shareholders' Equity..................................... 218,927 191,181
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $383,444 $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 Nine Months Ended
September 30, September 30,
----------------- -----------------------
2001 2000 2001 2000
------- ------- -------- --------
Net revenues................................................ $84,287 $75,988 $255,623 $238,562
Cost of revenues............................................ 59,135 52,980 178,250 165,695
------- ------- -------- --------
GROSS PROFIT............................................. 25,152 23,008 77,373 72,867
Selling, general and administrative expenses................ 17,481 15,995 53,009 50,050
Special charges............................................. - 801 - 1,504
------- ------- -------- --------
OPERATING INCOME......................................... 7,671 6,212 24,364 21,313
------- ------- -------- --------
Other (income) expense:
Interest income............................................ (251) (166) (595) (372)
Interest expense........................................... 2,170 2,315 6,127 7,520
Other, net................................................. (84) 188 409 777
------- ------- ------- --------
Other (income) expense, net............................. 1,835 2,337 5,941 7,925
------- ------- ------- --------
INCOME BEFORE INCOME TAXES.................................. 5,836 3,875 18,423 13,388
Provision for income taxes.................................. 2,334 1,588 7,369 5,489
------- ------- ------- --------
NET INCOME............................................... $ 3,502 $ 2,287 $11,054 $ 7,899
======= ======= ======= ========
Earnings per common share:
Basic...................................................... $0.24 $0.17 $0.77 $0.60
Diluted.................................................... $0.23 $0.17 $0.74 $0.59
Weighted average number of common shares outstanding:
Basic...................................................... 14,827 13,237 14,346 13,237
Diluted.................................................... 15,395 13,324 14,873 13,500
The accompanying notes are an integral part of these
consolidated financial statements.
4
CIRCOR INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
Nine Months Ended
September 30,
-----------------------------
2001 2000
-------- --------
OPERATING ACTIVITIES
Net income............................................................. $ 11,054 $ 7,899
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation.......................................................... 7,393 8,034
Amortization.......................................................... 2,151 2,139
Gain on disposal of property, plant and equipment..................... (22) (24)
Changes in operating assets and liabilities, net of effects from
business acquisitions:
Trade accounts receivable........................................... 2,798 4,501
Inventories......................................................... 5,301 (1,375)
Prepaid expenses and other assets................................... 1,106 2,729
Accounts payable, accrued expenses and other liabilities............ 273 3,530
-------- --------
Net cash provided by operating activities............................. 30,054 27,433
-------- --------
INVESTING ACTIVITIES
Additions to property, plant and equipment............................. (3,851) (2,464)
Disposal of property, plant and equipment.............................. 52 39
Increase in other assets............................................... - (4)
Business acquisitions, net of cash acquired............................ (9,619) (75)
Purchase price adjustment on previous acquisition...................... - 1,542
-------- --------
Net cash used in investing activities................................. (13,418) (962)
-------- --------
FINANCING ACTIVITIES
Proceeds from long-term borrowings..................................... 17,739 20,988
Payments of long-term debt............................................. (15,443) (43,776)
Proceeds from the issuance of stock, net of issuance costs............. 18,698 -
Dividends paid......................................................... (1,612) (1,000)
Proceeds from the exercise of stock options............................ 345 -
Conversion of restricted stock units................................... 9 -
-------- --------
Net cash provided by (used in) financing activities................... 19,736 (23,788)
-------- --------
Effect of exchange rate changes on cash and cash equivalents........... (167) (171)
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS.................................. 36,205 2,512
Cash and cash equivalents at beginning of year......................... 8,192 5,153
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................. $ 44,397 $ 7,665
======== ========
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 September 30, 2001 and
our consolidated statements of operations and consolidated statements of cash
flows for the periods presented. We prepare our interim financial information
using the same accounting principles as we use for our audited annual financial
statements.
The consolidated balance sheet at December 31, 2000 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 Annual Report for the year ended
December 31, 2000.
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 ("FASB") issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." We adopted Statement No. 133, as amended by Statement No. 137 and
Statement 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.
In July 2001, the FASB issued Statement No. 141, "Business Combinations,"
and Statement No. 142, "Goodwill and Other Intangible Assets." Statement No.
141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement No. 141 also
specifies criteria that intangible assets acquired in a purchase method business
combination must meet in order to be recognized and reported apart from
goodwill. Statement No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement No.
142. Statement No. 142 also requires that intangible assets with definite
useful lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of."
We were required to adopt the provisions of Statement No. 141 immediately
and will adopt Statement No. 142 effective January 1, 2002. None of our prior
business combinations, initiated prior to July 1, 2001, were accounted for
using the pooling-of-interests method. Goodwill and intangible assets acquired
in business combinations completed before July 1, 2001 will continue to be
amortized prior to the adoption of Statement No. 142.
As of the date of adoption, we expect to have unamortized goodwill of $92.2
million and unamortized identifiable intangible assets of $2.1 million, all of
which will be subject to the transition provisions of Statement Nos. 141 and
142. We currently do not have and do not expect to record any unamortized
negative goodwill. Amortization expense related to goodwill was $2.5 million
and $1.9 million for the year ended December 31, 2000 and for the nine months
ended September 30, 2001, respectively. Due to the extensive effort needed to
comply with adopting Statement No. 141 and Statement No. 142, it is not
practicable to reasonably estimate the impact of adopting these Statements on
our financial statements at the date of this Report, including whether any
transitional impairment losses will be required to be recognized as the
cumulative effect of a change in accounting principle.
In August 2001, the FASB issued Statement No. 143 - "Accounting for Asset
Retirement Obligations." Statement No. 143 requires us to record the fair value
of a liability for an asset retirement obligation in the period in which the
obligation is incurred. When the liability is initially recorded, we will
capitalize the cost as part of the asset's carrying amount and expense the
retirement obligation over the asset's useful life. The adoption of this
statement is for fiscal years beginning after June 15, 2002, although earlier
adoption is encouraged. We are in the process of determining the impact of this
statement.
6
In October 2001, the FASB issued Statement No. 144 - "Accounting for the
Impairment or Disposal of Long-Lived Assets". Statement No. 144 supersedes
Statement No. 121 - "Accounting for the Impairment of Long-Lived Assets and for
Long-lived Assets to Be Disposed Of" and establishes a single accounting method
for valuation of long-lived assets to be disposed of by sale. Statement No.
144 is effective for fiscal years beginning after December 15, 2001. We
currently cannot determine the potential effects this statement will have on
our financial position since the provisions of this Statement, generally, only
to apply to new disposal activities initiated after the adoption of this
Statement.
(3) INVENTORIES
Inventories consist of the following (In thousands):
September 30, 2001 December 31, 2000
------------------ -----------------
(Unaudited)
Raw materials........................ $ 43,314 $ 41,233
Work in process...................... 28,164 31,804
Finished goods....................... 36,660 38,221
-------- --------
$108,138 $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 September 30, 2001
- -------------------------------------
Net revenues........................................ $46,911 $37,376 $ - $84,287
Operating income (loss)............................. 6,799 2,718 (1,846) 7,671
Three Months Ended September 30, 2000
- -------------------------------------
Net revenues........................................ $43,358 $32,630 $ - $75,988
Operating income (loss)............................. 7,061 855 (1,704) 6,212
Instrumentation
& Thermal Fluid Corporate Consolidated
Controls Petrochemical Adjustments Total
------------------ ------------------ ----------------- ---------------
Nine Months Ended September 30, 2001
- ------------------------------------
Net revenues........................................ $138,265 $117,358 $ - $255,623
Operating income (loss)............................. 22,057 8,022 (5,715) 24,364
Nine Months Ended September 30, 2000
- ----------------------------------------------------
Net revenues........................................ $132,506 $106,056 $ - $238,562
Operating income (loss)............................. 21,383 5,060 (5,130) 21,313
The operating segments above are presented on a basis consistent with the
presentation in our consolidated financial statements for the year ended
December 31, 2000. In 2001, the name Instrumentation and Fluid Regulation was
changed to Instrumentation and Thermal Fluid Controls. We believe that the name
change better reflects the products and markets we serve. Identifiable assets,
by segment, as of September 30, 2001 did not change significantly from the
amounts reported in note 14, Segment Information, included in our Annual Report
on Form 10-K for the year ended December 31, 2000 other than for approximately
$18.0 million of identifiable assets attributable to the acquired companies
described in note 10 to our consolidated financial statements. These companies
are included in the Instrumentation and Thermal Fluid Controls segment.
(5) SPECIAL CHARGES
During the three months and nine months ended September 30, 2000, we
incurred special charges of $0.8 million and $1.5 million, respectively. All of
these charges were incurred in connection with the closure, consolidation and
reorganization of manufacturing plants in the Instrumentation and Thermal Fluid
Controls segment, except for $0.1 million that was recognized in the
Petrochemical segment during the second quarter. There were no special charges
incurred during the three months or nine months ended September 30, 2001.
7
(6) EARNINGS PER COMMON SHARE (Unaudited, in thousands, except per share
amounts)
Net Per Share
Income Shares Amount
------------ ------------ -------------
Three Months Ended September 30, 2001
- -------------------------------------
Basic EPS....................................................................... $3,502 14,827 $ 0.24
Dilutive securities, principally common stock options........................... - 568 (0.01)
------ ------ ------
Diluted EPS..................................................................... $3,502 15,395 $ 0.23
====== ====== ======
Net Per Share
Income Shares Amount
------------ ------------ -------------
Nine Months Ended September 30, 2001
- ------------------------------------
Basic EPS....................................................................... $11,054 14,346 $ 0.77
Dilutive securities, principally common stock options........................... - 527 (0.03)
------- ------ ------
Diluted EPS..................................................................... $11,054 14,873 $ 0.74
======= ====== ======
All options outstanding are included in the computation of earnings per
share for the three and nine-month periods ended September 30, 2001 because
their exercise price was less than the average market price of the common shares
during the period.
Net Per Share
Income Shares Amount
------------ ------------ -------------
Three Months Ended September 30, 2000
- -------------------------------------
Basic EPS....................................................................... $2,287 13,237 $0.17
Dilutive securities, principally common stock options........................... - 87 -
------ ------ -----
Diluted EPS..................................................................... $2,287 13,324 $0.17
====== ====== =====
Net Per Share
Income Shares Amount
------------ ------------ -------------
Nine Months Ended September 30, 2000
- ------------------------------------
Basic EPS....................................................................... $7,899 13,237 $ 0.60
Dilutive securities, principally common stock options........................... - 263 (0.01)
------ ------ ------
Diluted EPS..................................................................... $7,899 13,500 $ 0.59
====== ====== ======
Options to purchase 864,941 shares of our common stock at prices ranging
from $9.17 to $13.94 were outstanding and anti-dilutive during the three months
ended September 30, 2000. Options to purchase 376,074 shares of our common stock
at prices ranging from $11.38 to $13.94 were outstanding and anti-dilutive
during the nine months ended September 30, 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 stock during the
period.
(7) Derivative Instruments and Hedging Activities
As of January 1, 2001, we adopted FASB Statement No. 133. "Accounting for
Derivative Instruments and Hedging Activities" as amended by Statement No. 137
and Statement No. 138. Statement No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and hedging activities. It requires that all
derivative instruments be recorded on the balance sheet at fair value as assets
or liabilities. The adoption of Statement No. 133 did not have a material
effect on assets, liabilities, accumulated comprehensive income or net income.
In the normal course of our business, we manage risk associated with
foreign exchange rates through a variety of strategies, including the use of
hedging transactions, executed in accordance with our policies. As a matter of
policy, we ordinarily do not use derivative instruments unless there is an
underlying exposure. Any change in the value of our derivative instruments
would be substantially offset by an opposite change in the underlying hedged
items. We do not use derivative instruments for speculative trading purposes.
ACCOUNTING POLICIES
Using qualifying criteria defined in Statement No. 133, derivative
instruments are designed and accounted for as
8
either a hedge of a recognized asset or liability (fair value hedge) or a hedge
of a forecasted transaction (cash flow hedge). For a fair value hedge, both the
effective and ineffective portions of the change in fair value of the derivative
instrument, along with an adjustment to the carrying amount of the hedged item
for fair value changes attributable to the hedged risk, are recognized in
earnings. For a cash flow hedge, changes in the fair value of the derivative
instrument that are highly effective are deferred in accumulated other
comprehensive income or loss until the underlying hedged item is recognized in
earnings. If the effective portion of fair value or cash flow hedges were to
cease to qualify for hedge accounting, or to be terminated, it would continue to
be carried on the balance sheet at fair value until settled; however, hedge
accounting would be discontinued prospectively. If forecast transactions were no
longer probable of occurring, amounts previously deferred in accumulated other
comprehensive income or loss would be recognized immediately in earnings.
FOREIGN CURRENCY RISK
We use forward contracts to manage the currency risk related to business
transactions denominated in foreign currencies. To the extent the underlying
transactions hedged are completed, the contracts do not subject us to
significant risk from exchange rate movements because they offset gains and
losses on the related foreign currency denominated transactions. Our foreign
currency forward contracts have not been designated as hedging instruments and,
therefore, did not qualify for fair value or cash flow hedge treatment under the
criteria of Statement No. 133 for the nine months ended September 30, 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.
Unrealized losses attributable to foreign currency forward contracts resulted in
a net gain of $0.1 million as of September 30, 2001. We recorded net realized
and unrealized gains of $0.2 million for the three months ended September 30,
2001 and a net loss of $0.1 million for the nine months ended September 30,
2001. As of September 30, 2001, we had forward contracts to buy foreign
currencies with fair values of $2.2 million. These contracts mature on various
dates between October 2001 and January 2002.
(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 and nine
months ended September 30, 2001 and 2000 were as follows (Unaudited, in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ------------------------
2001 2000 2001 2000
------ ------- ------- -------
Net income......................................... $3,502 $ 2,287 $11,054 $ 7,899
Foreign currency translation adjustments........... 858 (1,395) (868) (2,493)
------ ------- ------- -------
Total comprehensive income...................... $4,360 $ 892 $10,186 $ 5,406
====== ======= ======= =======
(9) CONTINGENCIES AND ENVIRONMENTAL REMEDIATION CONTINGENCIES
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 that 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
9
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.
More recently, Spence was named as one of approximately 60 defendants in
approximately 90 civil product liability actions filed in the 5th Judicial
District (Onendaga County) New York. These actions have been brought by a
single law firm on behalf of past and present employees of Revere Copper
Products (an upstate New York manufacturer) who claim to have been exposed to
asbestos during the course of their employment at Revere Copper Products. We
believe that the plaintiffs consider Spence to be a "de minimus" defendant in
these actions. Although issuing a reservation of rights, Spence's insurers have
agreed to assume responsibility for the defense of these actions.
We are currently a party to or otherwise involved in various administrative
or legal proceedings under federal, state or local environmental laws or
regulations involving a number of sites, in some cases as a participant in a
group of potentially responsible parties, referred to as PRPs. Two of these
sites, the Sharkey and Combe Landfills in New Jersey, are listed on the National
Priorities List. With respect to the Sharkey Landfill, we have been allocated
0.75% of the remediation costs, an amount that is not material to us. With
respect to the Combe Landfill, we have settled both the Federal Government's
claim, and the State of New Jersey's claim, for an amount that is immaterial to
us. Moreover, our insurers have covered defense and settlement costs to date
with respect to the Sharkey and Combe Landfills. In addition we are involved as
a PRP with respect to the Solvent Recovery Service of New England site and the
Old Southington landfill site, both in Connecticut. These sites are on the
National Priorities List but, with respect to both sites, we have the right to
indemnification from the prior owners of the affected subsidiaries. Based on
currently available information, we believe that our share of clean-up costs at
these sites will not be material.
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, changes in 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 contingencies are not expected to have a material effect on our
financial position, results of operation, 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 the Customs investigation will not result in any material liability
to us, 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.
We have established reserves for those claims discussed above for which
losses are probable and estimable and we do not believe it is reasonably likely
that a range of loss could occur in excess of the amounts accrued. We have not
recorded any probable third-party recoveries.
(10) Business Acquisitions
On June 25, 2001 and June 29, 2001, respectively, we acquired Regeltechnik
Kornwestheim GmbH and affiliate ("RTK"), a German closed corporation, and
Societe Alsacienne Regulaves Thermiques von Rohr, S.A. ("SART"), a French
limited liability company. Both businesses manufacture and sell control valves,
regulators, actuators and related instrumentation products primarily for steam
and fluid process applications in the HVAC, industrial, food, beverage and
pharmaceutical markets. The aggregate purchase price for these acquisitions was
$13.1 million, including the assumption of $3.9 million of long-term debt. The
goodwill that resulted from these acquisitions is being amortized on a straight-
line basis over a 40-year period, until January 1, 2002, at which time Statement
142 will be adopted and goodwill will no longer be amortized.
These acquisitions have been accounted for under the purchase method and
the balance sheets and results of
10
operations for RTK and SART, from the dates of the acquisitions for the acquired
businesses, have been included in the September 30, 2001 consolidated balance
sheet and consolidated statement of operations.
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, and we, therefore, make
forward-looking statements in reliance upon the safe harbor provisions of the
Act. However, there may be events in the future that we are not able to
accurately predict or control, and our actual results may differ materially from
the expectations we describe in our forward looking statements. Forward-looking
statements involve known and unknown risks, uncertainties and other factors,
which may cause our actual results, performance or achievements to differ
materially from anticipated future results, performance or achievements
expressed or implied by such forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, the
cyclicality and highly competitive nature of some of our end markets which can
affect the overall demand for and pricing of our products, changes in the price
of and demand for oil and gas in both domestic and international markets,
variability of raw material and component pricing, fluctuations in foreign
currency exchange rates, our ability to continue operating our manufacturing
facilities at efficient levels and to successfully implement our acquisition
strategy, and the uncertain continuing impact on economic and financial
conditions in the United States and around the world as a result of the
September 11th terrorist attacks and related matters. We advise you to read
further about certain of these and other risk factors set forth under the
caption "Certain Risk Factors That May Affect Future Results" in our Annual
Report on Form 10-K filed for the year ended December 31, 2000. We undertake no
obligation to publicly update or revise any forward-looking statement, whether
as a result of new information, future events or otherwise.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 30, 2000.
The following tables set forth the results of operations, percentage of net
revenue and the period to period percentage change in certain financial data for
the three months ended September 30, 2001 and 2000:
Three Months Ended September 30,
---------------------------------
2001 2000 % Change
---------------- -------------- --------
(Dollars in thousands)
Net revenues.......................................... $84,287 100.0% $75,988 100.0% 10.9%
Cost of revenues...................................... 59,135 70.2 52,980 69.7 11.6
------- ----- ------- -----
Gross profit........................................ 25,152 29.8 23,008 30.3 9.3
Selling, general and administrative expenses.......... 17,481 20.7 15,995 21.0 9.3
Special charges....................................... - - 801 1.1 n/a
------- ----- ------- -----
Operating income.................................... 7,671 9.1 6,212 8.2 23.5
Other (income) expense:...............................
Interest expense, net............................... 1,919 2.3 2,149 2.9 (10.7)
Other expense, net.................................. (84) (0.1) 188 0.2 (144.7)
------- ----- ------- -----
Income before income taxes............................ 5,836 6.9 3,875 5.1 50.6
Provision for income taxes............................ 2,334 2.7 1,588 2.1 47.0
------- ----- ------- -----
Net Income......................................... $ 3,502 4.2% $ 2,287 3.0% 53.1%
======= ===== ======= =====
11
Net revenues for the three months ended September 30, 2001 increased by
$8.3 million, or 10.9%, to $84.3 million compared to $76.0 million for the three
months ended September 30, 2000. The increase in net revenues for the three
months ended September 30, 2001 was attributable to the following:
Total Foreign
Segment 2001 2000 Change Acquisitions Operations Exchange
- ------- ------- ------- ------ ------------ ---------- --------
(In thousands)
Instrumentation & Thermal Fluid Controls. $46,911 $43,358 $3,553 $4,547 $ (891) $(103)
Petrochemical............................ 37,376 32,630 4,746 - 5,053 (307)
------- ------- ------ ------ ------ -----
Total.................................. $84,287 $75,988 $8,299 $4,547 $4,162 $(410)
======= ======= ====== ====== ====== =====
The Instrumentation and Thermal Fluid Controls segment accounted for 55.7%
of net revenues for the three months ended September 30, 2001 compared to 57.1%
for the three months ended September 30, 2000. The Petrochemical segment
accounted for 44.3% of net revenues for the three months ended September 30,
2001 compared to 42.9% for the three months ended September 30, 2000.
Instrumentation and Thermal Fluid Controls segment revenues increased
$3.6 million, or 8.2%. Revenue increases were due to: $4.6 million of
incremental revenue from the Rockwood Swendeman product line, purchased in
November 2000 and the RTK and SART operations, acquired at the end of June
2001; and a $1.3 million increase in instrumentation revenue from the European
aerospace, power and power generation, medical and general instrumentation
markets, primarily due to increased sales penetration and higher volume sales.
These increases were partially offset by: a $2.2 million decrease from
world-wide demand for instrumentation products for the chemical processing,
semi-conductor manufacturing and general industrial markets; and a $0.1 million
reduction resulting from changes in exchange rates affecting our European
business units. The net $4.7 million increase in Petrochemical segment
revenues, or 14.5%, was the result of: $2.6 million in higher North American
revenues related to increased customer spending on maintenance and repair and
small capital projects in both the oil and gas markets; a $2.3 million
increase in revenues from our Italian based operation due to higher shipments
of products for large oil and gas construction projects; a $0.1 million
increase in revenues from Suzhou KF Valve Company, our Chinese joint venture;
and partially offset by a $0.3 million decrease resulting from changes in
exchange rates which affected our Canadian and Italian-based operations.
Gross profit increased approximately $2.1 million, or 9.3%, to $25.2
million for the three months ended September 30, 2001 compared to $23.0 million
for the three months ended September 30, 2000. Gross margin decreased to 29.8%
for the three months ended September 30, 2001 compared to 30.3% for the three
months ended September 30, 2000. Gross profit from the Instrumentation and
Thermal Fluid Controls segment decreased $0.6 million for the three months ended
September 30, 2001 compared to the three months ended September 30, 2000.
Increases in gross profit of $1.5 million from the newly acquired RTK and SART
operations and the prior year Rockwood Swendeman acquisition were more than
offset by $2.1 million in lower gross profit from other ongoing operations. The
continued slowdown in the general industrial market has reduced the throughput
of manufacturing operations for the Instrumentation and Thermal Fluid Controls.
Despite spending cuts instituted during the current and prior quarters, the
gross profit and gross margin for this segment has decreased, primarily as a
result of unabsorbed manufacturing costs. Unfavorable net foreign currency
adjustments accounted for $0.1 million. Gross profit for the Petrochemical
segment increased $2.8 million for the three months ended September 30, 2001
compared to the three months ended September 30, 2000. Gross profit and gross
margin increases were primarily due to: improved operating efficiencies in a key
North American manufacturing plant; higher sales volume in a recovering
worldwide petrochemical market; selective price increases; and improved margins
in our Italian and Chinese based manufacturing operations. During the quarter
ended September 30, 2000, both the gross profit and gross margin were negatively
impacted as a result of inefficiencies and delays in the completion of the
consolidation and integration of certain product lines in the key North American
plant. Unfavorable changes in foreign currency exchange rate reduced gross
profit by $0.1 million for the quarter ended September 30, 2001, as compared to
the quarter ended September 30, 2000.
Selling, general and administrative expenses increased $1.5 million, or
9.3%, to $17.5 million for the three months ended September 30, 2001 compared
with $16.0 million for the three months ended September 30, 2000. Operating
expenses for the Instrumentation and Thermal Fluid Controls segment increased by
net $0.4 million. This increase resulted from $0.8 million of incremental
current year expenses in the Rockwood Swendeman, RTK and SART acquisitions
partially offset by $0.4 million of operational expense reductions in our other
businesses. The Petrochemical segment operating expenses increased $0.9 million
for the three months ended September 30, 2001 compared to the three months ended
September 30, 2000 primarily the result of increased variable operating
expenses. Increased corporate spending of $0.1 million for the three months
ended September 30, 2001 is primarily the result of increased variable employee
compensation costs compared to the three months ended September 30, 2000.
Worldwide operating expenses decreased $0.1 million as a result of changes in
foreign currency exchange rates.
12
During the three months ended September 30, 2000, special charges of $0.8
million were incurred in the Instrumentation and Thermal Fluid Controls segment
and none in the Petrochemical segment. These special charges were associated
with the closure, consolidation and reorganization of certain U.S. manufacturing
operations and were expensed in the period as incurred. There were no special
charges incurred during the three months ended September 30, 2001.
The change in operating income for the three months ended September 30,
2001 compared to the three months ended September 30, 2000 was as follows:
Total Foreign
Segment 2001 2000 Change Acquisitions Operations Exchange
- ----------------------------------------- ------- ------- ------ ----------- ---------- --------
(In thousands)
Instrumentation & Thermal Fluid Controls. $ 6,799 $ 7,061 $ (262) $668 $ (924) $ (6)
Petrochemical............................ 2,718 855 1,863 - 1,906 (43)
Corporate................................ (1,846) (1,704) (142) - (142) -
------- ------- ------ ---- ------ ----
Total.................................. $ 7,671 $ 6,212 $1,459 $668 $ 840 $(49)
======= ======= ====== ==== ====== ====
Operating income increased $1.5 million, or 23.5%, to $7.7 million for the
three months ended September 30, 2001 compared to $6.2 million for the three
months ended September 30, 2000. Operating income in the Instrumentation and
Thermal Fluid Controls segment decreased by $0.3 million due to: lower gross
profits, an overall increase in operating expenses due to the new acquisitions;
that were partially offset by the absence of special charges during the current
year. The $1.9 million increase in operating income in the Petrochemical
segment was primarily due to: additional gross profits based on the higher
current year sales volume; selective price increases, and manufacturing process
improvements and efficiencies, that were partially offset by higher operating
expense levels. Corporate spending increased by $0.1 million for the three
months ended September 30, 2001 compared to the three months ended September 30,
2000.
Net interest expense decreased approximately $0.2 million to $1.9 million
for the three months ended September 30, 2001 compared to $2.1 million for the
three months ended September 30, 2000. The decrease was due to: the lower
average debt balances outstanding, lower average interest rates on variable rate
debt and an increase in current year interest income on invested balances.
Significant net positive cash flow generated during our prior year enabled us to
reduce our revolving line of credit debt balance to zero as of December 31,
2000. Proceeds from our equity offering in March 2001 were used to: pay-off
first quarter borrowings from our unsecured revolving line of credit, fund our
June 2001 acquisitions, reduce outstanding debt balances of acquired companies
and generate interest income from invested balances.
Other expense decreased $0.3 million to $(0.1) million for the three months
ended September 30, 2001, compared to $0.2 million for the three months ended
September 30, 2000, primarily the result of lower net losses from hedge
contracts and foreign currency exchange rate changes.
The effective tax rate decreased to 40.0% for the three months ended
September 30, 2001 compared to 41.0% for the three months ended September 30,
2000 due to the implementation of various U.S. tax strategies during the second
half of 2000.
Net income increased $1.2 million, or 53.1%, to $3.5 million for the three
months ended September 30, 2001 compared to $2.3 million for the three months
ended September 30, 2000. Improved operating results within the Petrochemical
segment, the absence of special charges during the current year and reduced net
interest expense were the primary reasons for this change.
13
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 2000.
The following tables set forth the results of operations, percentage of net
revenue and the period-to-period percentage change in certain financial data for
the nine months ended September 30, 2001 and 2000:
Nine Months Ended September 30,
----------------------------------
2001 2000
--------------- ----------------
(Dollars in thousands) % Change
--------
Net revenues.......................................... $255,623 100.0% $238,562 100.0% 7.2%
Cost of revenues...................................... 178,250 69.7 165,695 69.5 7.6
-------- ----- -------- -----
Gross profit........................................ 77,373 30.3 72,867 30.5 6.2
Selling, general and administrative expenses.......... 53,009 20.8 50,050 21.0 5.9
Special charges....................................... - - 1,504 0.6 n/a
-------- ----- -------- -----
Operating income.................................... 24,364 9.5 21,313 8.9 14.3
Other expense:........................................
Interest expense, net............................... 5,532 2.2 7,148 3.0 (22.6)
Other expense, net.................................. 409 0.1 777 0.3 (47.4)
-------- ----- -------- -----
Income before income taxes............................ 18,423 7.2 13,388 5.6 37.6
Provision for income taxes............................ 7,369 2.9 5,489 2.3 34.3
-------- ----- -------- -----
Net Income......................................... $ 11,054 4.3% $ 7,899 3.3% 39.9%
======== ===== ======== =====
Net revenues for the nine months ended September 30, 2001 increased by
approximately $17.1 million, or 7.2%, to $255.6 million compared to $238.6
million for the nine months ended September 30, 2000. The increase in net
revenues for the nine months ended September 30, 2001 was attributable to the
following:
Total Foreign
Segment 2001 2000 Change Acquisitions Operations Exchange
- ----------------------------------------- -------- -------- ------- ------------ ---------- --------
(In thousands)
Instrumentation & Thermal Fluid Controls. $138,265 $132,506 $ 5,759 $5,217 $ 1,671 $(1,129)
Petrochemical............................ 117,358 106,056 11,302 - 13,706 (2,404)
-------- -------- ------- ------ ------- -------
Total.................................. $255,623 $238,562 $17,061 $5,217 $15,377 $(3,533)
======== ======== ======= ====== ======= =======
The Instrumentation and Thermal Fluid Controls segment accounted for 54.1%
of net revenues for the nine months ended September 30, 2001 compared to 55.5%
for the nine months ended September 30, 2000. The Petrochemical segment
accounted for 45.9% of net revenues for the nine months ended September 30, 2001
compared to 44.5% for the nine months ended September 30, 2000.
Instrumentation and Thermal Fluid Controls segment revenues increased $5.8
million, or 4.3% for the nine months ended September 30, 2001. Revenue increases
were due to: a $1.4 million increase in thermal fluid control markets resulting
from higher year-to-year demand; $5.2 million of incremental revenue from the
Rockwood Swendeman product line, purchased in November 2000 and the RTK and SART
operations, acquired at the end of June 2001; and a $3.2 million increase in
instrumentation revenues from the European aerospace, power and power
generation, medical and general instrumentation markets, primarily due to
increased sales penetration and higher volume sales. These increases were
partially offset by a $2.9 million decrease in worldwide demand for
instrumentation products for the chemical processing, semi-conductor
manufacturing and general industrial markets; and a $1.1 million reduction
resulting from changes in exchange rates affecting our European business units.
The net increase in Petrochemical segment revenues of $11.3 million, or 10.7%,
was the result of $7.8 million in higher North American revenues related to
increased customer spending on maintenance and repair and small capital
projects; a $5.6 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 increase in revenue from Suzhou KF Valve Company, our Chinese joint
venture; and were partially offset by a $2.4 million decrease in revenues
resulting from changes in exchange rates which affected our Canadian and Italian
based operations.
14
Gross profit increased approximately $4.5 million, or 6.2%, to $77.4
million for the nine months ended September 30, 2001 compared to $72.9 million
for the nine months ended September 30, 2000. Gross margin declined to 30.3%
for the nine months ended September 30, 2001 compared to 30.5% for the nine
months ended September 30, 2000. Gross profit from the Instrumentation and
Thermal Fluid Controls segment increased $0.1 million as a result of: $1.8
million from the prior year Rockwood Swendeman acquisition and the newly
acquired RTK and SART acquisitions; partially offset by a decrease of $1.4
million from operations and a decrease of $0.3 million due to changes in foreign
currency exchange rates. Despite spending reductions instituted upon the slow-
down in the general instrumentation markets, the gross profit and gross margin
for this segment have decreased, primarily as a result of unabsorbed
manufacturing costs. Gross profit for the Petrochemical segment increased $4.4
million for the nine months ended September 30, 2001 compared to the nine months
ended September 30, 2000. Gross profit improvements of $4.8 million and gross
margin increases were primarily due to: improved operating efficiencies in a key
North American manufacturing plant; higher sales volume in a recovering
worldwide oil and gas markets; selective price increases and improved margins in
our Italian and Chinese based manufacturing operation. During the nine months
ended September 30, 2000, both the gross profit and gross margin were negatively
impacted as a result of inefficiencies and delays in the completion of the
consolidation and integration of certain product lines in one of our key North
American plants. During the nine months ended September 30, 2001, we have
realized significant improvement in the results of operations for this North
American manufacturing plant. Gross profits for the nine months ended September
30, 2001 for our Italian based operation increased compared to the nine months
ended September 30, 2000, despite the reduced margin contracts shipped and
recognized in the first quarter of the current year. This plant's first quarter
competitive pricing strategy, for certain large oil and gas projects, 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 reduced Petrochemical segment gross profits by $0.4 million for
the nine months ended September 30, 2001, compared to the nine months ended
September 30, 2000.
Selling, general and administrative expenses increased approximately $3.0
million, or 5.9%, to $53.0 million for the nine months ended September 30, 2001
compared with $50.1 million for the nine months ended September 30, 2000. The
Instrumentation and Thermal Fluid Controls segment had increased operating
expenses of $0.8 million largely due to new acquisitions. The Petrochemical
segment operating expenses increased $1.6 million due to of increased sales
related and other operating costs. Increased corporate spending of $0.6 million
for the nine months ended September 30, 2001 is attributable to a fully staffed
headquarters unit, higher employee relocation and variable stock-based
compensation expenses as compared to the nine months ended September 30, 2000.
During the nine months ended September 30, 2000, special charges of $1.4
million were incurred in the Instrumentation and Thermal Fluid Controls segment
and $0.1 million in the Petrochemical segment. These special charges were
associated with the closure, consolidation and reorganization of certain
manufacturing operations and were expensed in the period as incurred. There
were no special charges incurred during the nine months ended September 30,
2001.
The change in operating income for the nine months ended September 30, 2001
compared to the nine months ended September 30, 2000 was as follows:
Total Foreign
Segment 2001 2000 Change Acquisitions Operations Exchange
- ------- ------- ------- ------ ------------ ---------- --------
(In thousands)
Instrumentation & Thermal Fluid Controls. $22,057 $21,383 $ 674 $827 $ (101) $ (52)
Petrochemical............................ 8,022 5,060 2,962 - 3,102 (140)
Corporate................................ (5,715) (5,130) (585) - (585) -
------- ------- ------ ---- ------ -----
Total.................................. $24,364 $21,313 $3,051 $827 $2,417 $(192)
======= ======= ====== ==== ====== =====
Operating income increased $3.1 million to $24.4 million for the nine
months ended September 30, 2001 compared to $21.3 million for the nine months
ended September 30, 2000. The increase in operating income in the
Instrumentation and Thermal Fluid Controls segment was primarily attributable to
improved manufacturing and administrative operating efficiencies and the absence
of special charges in the current year, partially offset by the unfavorable
impact of unabsorbed manufacturing costs. The increase in operating income in
the Petrochemical segment was primarily due to: net cumulative manufacturing
process improvements and efficiencies; higher current year sales volume,
additional gross profits based on volume and selective price increases;
partially offset by higher operating expense levels. Increased current year
corporate spending for compensation related costs also adversely affected
operating earnings.
Net interest expense decreased $1.6 million to $5.5 million for the nine
months ended September 30, 2001 compared to $7.1 million for the three months
ended September 30, 2000. The decrease during the nine months ended September
30, 2001 as compared with the nine months ended September 30, 2000 was due to:
the lower average debt balances outstanding, lower average interest rates on
variable rate debt and an increase in current year interest income on invested
balances.
15
Significant net positive cash flow generated during our prior year enabled us to
reduce our revolving line of credit balance to zero as of December 31, 2000.
Proceeds from our equity offering in March 2001 were used to: pay-off first
quarter borrowings from our unsecured revolving line of credit, fund our June
2001 acquisitions, reduce outstanding debt balances of acquired companies and
generate interest income from invested balances.
Other expense decreased $0.4 million to $0.4 million for the nine months
ended September 30, 2001, compared to $0.8 million for the nine months ended
September 30, 2000. This reduction is primarily the result of reductions in net
losses from foreign currency exchange rate changes.
The effective tax rate decreased to 40.0% for the nine months ended
September 30, 2001 compared to 41.0% for the nine months ended September 30,
2000 due to the implementation of various U.S. tax strategies during the second
half of 2000.
Net income increased approximately $3.2 million to $11.1 million for the
nine months ended September 30, 2001 compared to $7.9 million for the nine
months ended September 30, 2000. Improved operating results within both of our
operating segments, the absence of special charges, reduced interest expense and
lower foreign currency losses were the primary reasons for this change.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2001, we generated a net
increase in cash of $36.2 million. Operating activities generated $30.1 million
of cash, with $9.5 million of this amount coming from significant reductions in
working capital. These gains were primarily realized as a result of continued
efforts to reduce inventory levels and lower outstanding trade accounts
receivable balances. We generated $19.7 million from financing activities. We
received: $18.7 million as a result of the secondary public equity offering that
we completed during March 2001, a net $2.3 million from short-term international
credit facilities; and $0.3 million proceeds from the exercise of stock options.
Additionally, we used $1.6 million to fund cash dividends paid to shareholders.
We used: $13.4 million for investing activities, which included the purchase of
RTK and SART for $9.2 million, net of acquired cash balances, and $3.9 million
to purchase capital equipment. Both of the acquired companies manufacture and
sell control valves, regulators, actuators and related instrumentation products
primarily for steam and fluid process applications in the HVAC, industrial,
food, beverage, and pharmaceutical markets. Capital expenditures were primarily
for manufacturing machinery and equipment as part of our commitment to further
improve our manufacturing operations. Our capital expenditure spending for the
year ending December 31, 2001 is expected to be approximately $5.5 million. The
effects of exchange rate changes on cash and cash equivalents reduced cash $0.2
million.
As of September 30, 2001, we had no balances outstanding under our $75.0
million unsecured revolving credit facility. As of September 30, 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 immediately used $2.0 million to reduce the balance on our
unsecured, revolving credit facility to zero. We acquired RTK and SART during
June 2001. We have used $10.0 million to acquire these businesses, which on a
combined basis included $0.8 million of cash and cash equivalents on their
balance sheets. Subsequent to the acquisitions, we used an additional $0.2
million to pay-down a portion of the assumed debt. We expect 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 September 30, 2001
was 4.2:1 compared to 3.8:1 as of December 31, 2000. Cash and cash equivalents
were $44.4 million as of September 30, 2001 compared to $8.2 million as of
December 31, 2000. Net debt (including cash) as a percentage of total capital
employed was 16.9% as of September 30, 2001 compared to 29.5% as of December 31,
2000. As of September 30, 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,
anticipated capital expenditures, scheduled debt payments and contingencies for
at least the next 24 months. Beginning in October 2002, we will commence making
$15.0 million annual payments reducing our outstanding senior unsecured 8.23%
notes, which mature in October 2006.
16
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Statement No. 133 established accounting
and reporting standards requiring that every derivative instrument be recorded
in the balance sheet as either an asset or liability measured at its fair value.
On January 1, 2001, we adopted Statement No. 133, as amended by Statement No.
137 and Statement No. 138. The adoption of this statement did not have a
significant impact on our financial condition, results of operations or cash
flows.
In July 2001, the FASB issued Statement No. 141, "Business Combinations,"
and Statement No. 142, "Goodwill and Other Intangible Assets." Statement No. 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement No. 141 also
specifies criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill.
Statement No. 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement No.
142. Statement No. 142 will also require that intangible assets with definite
useful lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of".
We were required to adopt the provisions of Statement No. 141 immediately
and will adopt Statement No. 142 effective January 1, 2002. None of our business
combinations initiated prior to July 1, 2001, were accounted for using the
pooling-of-interests method. Goodwill and intangible assets acquired in business
combinations completed before July 1, 2001 will continue to be amortized prior
to the adoption of Statement No. 142. Furthermore, any goodwill and any
intangible asset acquired in a purchase business combination completed after
June 30, 2001, that are determined to have an indefinite useful life, will not
be amortized but will continue to be evaluated for impairment in accordance with
the appropriate pre-Statement No. 142 accounting literature.
Statement No. 141 will require, upon adoption of Statement No. 142, that we
evaluate our existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in Statement No. 141 for recognition
apart from goodwill. Upon adoption of Statement No. 142, we will be required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, we will be required to test the intangible asset for impairment in
accordance with the provisions of Statement No. 142 within the first interim
period. Any impairment loss will be measured as of the date of adoption and
recognized as the cumulative effect of a change in accounting principle in the
first interim period.
In connection with the transitional goodwill impairment evaluation,
Statement No. 142 will require us to perform an assessment of whether there is
an indication that goodwill, and equity-method goodwill, is impaired as of the
date of adoption. To accomplish this we must determine the carrying value of
each reporting unit by assigning the assets and liabilities, including the
existing goodwill and intangible assets, to those reporting units as of the date
of adoption. We will then have up to nine months from the date of adoption to
determine the fair value of each reporting unit and compare it to the reporting
unit's carrying amount. To the extent a reporting unit's carrying amount exceeds
its fair value, an indication exists that the reporting unit's goodwill may be
impaired and we must perform the second step of the transitional impairment
test. In the second step, we must compare the implied fair value to all of its
assets and liabilities to its carrying amount, in a manner similar to a purchase
price allocation in accordance with Statement No. 141, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in our statement of earnings.
As of the date of adoption, we expect to have unamortized goodwill of $92.2
million and unamortized identifiable intangible assets of $2.1 million, all of
which will be subject to the transition provisions of Statements Nos. 141 and
142. We currently do not have and do not expect to record any unamortized
negative goodwill. Amortization expense related to goodwill was $2.5 million and
$1.9 million for the year ended December 31, 2000 and the nine months ended
September 30, 2001, respectively. Due to the extensive effort needed to comply
with adopting Statements Nos. 141 and 142, it is not practicable to reasonably
estimate the impact of adopting these Statements on our financial statements at
the date of this report, including whether any transitional impairment losses
will be required to be recognized as the cumulative effect of a change in
accounting principle.
17
In August 2001, the FASB issued Statement No. 143 - "Accounting for Asset
Retirement Obligations." Statement No. 143 requires us to record the fair value
of a liability for an asset retirement obligation in the period in which the
obligation is incurred. When the liability is initially recorded, we will
capitalize the cost as part of the asset's carrying amount and expense the
retirement obligation over the asset's useful life. The adoption of this
statement is for fiscal years beginning after June 15, 2002, although earlier
adoption is encouraged. We are in the process of determining the impact of this
statement.
In October 2001, the FASB issued Statement No. 144 - "Accounting for the
Impairment or Disposal of Long-Lived Assets". Statement No. 144 supersedes
Statement No. 121 - "Accounting for the Impairment of Long-Lived Assets and for
Long-lived Assets to Be Disposed Of" and establishes a single accounting method
for valuation of long-lived assets to be disposed of by sale. Statement No. 144
is effective for fiscal years beginning after December 15, 2001. We currently
cannot determine the potential effects this statement will have on our financial
position since the provisions of this Statement, generally, only to apply to new
disposal activities initiated after the adoption of this Statement.
ITEM 3. QUANTITATIVE AND QUALITATIVE 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. Although not typically cyclical in nature, the
strength of our other product markets may also vary based upon overall economic
conditions.
INTEREST RATE RISK
At September 30, 2001, our primary interest rate risk relates to borrowings
under our revolving credit facility and industrial revenue bonds. The interest
rates for our revolving credit facility and industrial revenue bonds fluctuate
with changes in short-term borrowing rates. There were no outstanding
borrowings under our revolving credit facility as of September 30, 2001. Based
upon the expected levels of borrowings under our credit facility in 2001 and our
current balance for industrial revenue bonds, an increase in interest rates of
100 basis points would not have a material effect on our results of operations
or cash flows.
CURRENCY EXCHANGE RISK
We use forward contracts to manage the currency risk related to business
transactions denominated in foreign currencies. To the extent the underlying
transactions hedged are completed, the contracts do not subject us to
significant risk from exchange rate movements because they offset gains and
losses on the related foreign currency denominated transactions. Our foreign
currency forward contracts have not been designated as hedging instruments and,
therefore, did not qualify for fair value or cash flow hedge treatment under the
criteria of Statement No. 133 for the nine months ended September 30, 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 September 30, 2001, we had forward contracts to buy foreign currencies with a
fair value of $2.1 million. These contracts mature on various dates between
October 2001 and January 2002.
The counterparties to these contracts are major financial institutions.
Our risk of loss in the event of non-performance by the counterparties is not
significant. We do not use derivative financial instruments for speculative
trading purposes. Risk management strategies are reviewed and approved by
senior management before implementation.
18
COMMODITY PRICE RISK
The primary raw materials used in our products process are stainless steel,
carbon steel, cast iron, aluminum 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 that 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.
More recently, Spence was named as one of approximately 60 defendants in
approximately 90 civil product liability actions filed in the 5th Judicial
District (Onendaga County) New York. These actions have been brought by a
single law firm on behalf of past and present employees of Revere Copper
Products (an upstate New York manufacturer) who claim to have been exposed to
asbestos during the course of their employment at Revere Copper Products. We
believe that the plaintiffs consider Spence to be a "de minimus" defendant in
these actions. Although issuing a reservation of rights, Spence's insurers have
agreed to assume responsibility for the defense of these actions.
We are currently a party to or otherwise involved in various administrative
or legal proceedings under federal, state or local environmental laws or
regulations involving a number of sites, in some cases as a participant in a
group of potentially responsible parties, referred to as PRPs. Two of these
sites, the Sharkey and Combe Landfills in New Jersey, are listed on the National
Priorities List. With respect to the Sharkey Landfill, we have been allocated
0.75% of the remediation costs, an amount that is not material to us. With
respect to the Combe Landfill, we have settled both the Federal Government's
claim, and the State of New Jersey's claim, for an amount that is immaterial to
us. Moreover, our insurers have covered defense and settlement costs to date
with respect to the Sharkey and Combe Landfills. In addition we are involved as
a PRP with respect to the Solvent Recovery Service of New England site and the
Old Southington landfill site, both in Connecticut. These sites are on the
National Priorities List but, with respect to both sites, we have the right to
indemnification from the prior owners of the affected subsidiaries. Based on
currently available information, we believe that our share of clean-up costs at
these sites will not be material.
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
19
assurances as to the outcome of this matter. 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.
We have established reserves for those claims discussed above for which
losses are probable and estimable 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
USE OF PROCEEDS FROM REGISTERED SECURITIES
The effective date of the Securities and Exchange Act registration statement
for which the use of proceeds information is being disclosed was March 31, 2001,
and the Commission File number assigned to the registration statement is 333-
54428. As disclosed in our quarterly report on Form 10-Q for the period ended
March 31, 2001, we used $2.0 million of the net proceeds to reduce the balance
owed on our unsecured revolving credit facility to zero. During June 2001, we
acquired the businesses of RTK and SART. We utilized $10.2 million of the
proceeds to purchase these businesses and retire a portion of the assumed debt.
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,
except to Goodwin Procter LLP, the Boston, Massachusetts law firm that
represented us in connection with the registration statement. David F. Dietz, a
Director and Officer of our company, is the sole owner of David F. Dietz, P.C.,
a partner of Goodwin Procter LLP. The remaining proceeds have been invested
overnight in money market funds with holdings of U.S. Government obligations and
are included in cash and cash equivalents as of September 30, 2001. The uses of
proceeds described do not represent a material change in the use of proceeds as
described in our registration statement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
three-month period ended September 30, 2001.
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K
(a) 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.
20
Exhibit No. Description and Location
----------- ------------------------
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).
*10.28 Executive Change of Control Agreement between CIRCOR, Inc. and
Paul M. Coppinger dated August 1, 2001.
(*) Filed herewith
(b) Reports on Form 8-K
The registrant filed no Current Reports on Form 8-K during the three-month
period ended September 30, 2001.
21
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: NOVEMBER 13, 2001 /S/ DAVID A. BLOSS, SR.
-----------------------
David A. Bloss, Sr.
Chairman, President and Chief Executive
Officer
Principal Executive Officer
DATE: NOVEMBER 13, 2001 /S/ KENNETH W. SMITH
-----------------------
Kenneth W. Smith
Vice President, Chief Financial Officer
and Treasurer
Principal Financial Officer
Date: NOVEMBER 13, 2001 /S/ STEPHEN J. CARRIERE
-----------------------
Stephen J. Carriere
Vice President, Corporate Controller
and Assistant Treasurer
Principal Accounting Officer
22
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).
*10.28 Executive Change of Control Agreement between CIRCOR, Inc. and
Paul M. Coppinger dated August 1, 2001.
(*) Filed herewith
23