<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission file number 1-14962
CIRCOR INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3477276
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 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 No X (1)
------ ------
There were 13,236,877 shares of common stock outstanding as of November 19,
1999.
- --------------
(1)The registrant has been subject to such filing requirements since October
18, 1999, less than 90 days.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CIRCOR International, Inc.
Combined Balance Sheets
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, 1999 June 30, 1999
Assets (Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,311 $ 6,714
Short-term Investments 1,097 -
Accounts receivable, net of allowances
of $2,756 in September, 1999
and $2,949 in June, 1999 55,497 49,857
Inventories:
Raw materials 43,875 45,098
Work in process 28,617 23,087
Finished goods 36,840 40,725
------- -------
Total inventories 109,332 108,910
------- -------
Deferred income taxes 11,955 11,919
Prepaid expenses and other
current assets 5,091 6,817
------- -------
Total current assets 187,283 184,217
------- -------
Property, plant and equipment, at cost 147,222 143,877
Accumulated depreciation (69,837) (67,195)
------- -------
Property, plant and equipment, net 77,385 76,682
------- -------
Goodwill, net of accumulated amortization of
$11,077 in September, 1999 and
$10,353 in June, 1999 96,524 96,900
Other assets 4,426 4,571
------- -------
Total assets $365,618 $362,370
======= =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
2
<PAGE>
CIRCOR International, Inc.
Combined Balance Sheets
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, 1999 June 30, 1999
LIABILITIES AND SHAREHOLDER'S EQUITY (Unaudited) (Audited)
<S> <C> <C>
Current liabilities:
Accounts payable $ 20,568 $ 25,543
Accrued expenses and other current
liabilities 18,431 19,448
Accrued compensation and benefits 4,376 5,705
Income taxes payable 2,786 3,275
Current portion of long-term debt 5,548 4,178
------- -------
Total current liabilities 51,709 58,149
------- -------
Long-term debt, net of current portion 21,847 22,404
Deferred income taxes 10,780 10,766
Other non-current liabilities 7,366 7,675
Minority interest 4,102 4,120
-------- --------
Shareholder's equity:
Shareholder's equity 269,946 259,947
Accumulated other comprehensive income (132) (691)
-------- --------
Total shareholder's equity 269,814 259,256
------- -------
Total liabilities and
shareholder's equity $365,618 $362,370
======= =======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
3
<PAGE>
CIRCOR International, Inc.
Combined Statements of Operations
(Unaudited)
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the three months ended
September 30, 1999 September 30, 1998
<S> <C> <C>
Net revenues $ 77,713 $ 80,997
Cost of revenues 54,574 55,167
------ ------
Gross profit 23,139 25,830
Selling, general and administrative
expenses 17,726 17,580
------ ------
Income from operations 5,413 8,250
Other (income) expense:
Interest income (22) (86)
Interest expense 2,154 1,987
Other (income) expense, net 317 (70)
------ ------
Total other (income) expense 2,449 1,831
------ ------
Income before income taxes 2,964 6,419
Provision for income taxes 1,276 2,713
------- ------
Net income $ 1,688 $ 3,706
====== ======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
4
<PAGE>
CIRCOR International, Inc.
Combined Statements of Cash Flows
(Unaudited)
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the three months ended
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,688 $ 3,706
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Depreciation 2,707 2,214
Amortization 779 664
(Gain) loss on disposal of equipment (33) 7
Change in operating assets & liabilities,
net of effects from business acquisitions:
Accounts receivable (5,140) (145)
Inventories (203) 797
Deferred income taxes 1 105
Prepaid expenses and current assets 2,455 678
Accounts payable (5,271) (10,684)
Income taxes payable (1,047) (740)
Accrued expenses and other liabilities (2,746) (1,241)
------- ------ -
Net cash (used) by operating activities (6,810) (4,639)
------- -------
Cash flows from investing activities:
Additions to property, plant and equipment (3,262) (907)
Proceeds from sale of assets 45 1,005
Increase in other assets (335) -
Business acquisitions, net of cash acquired - (64,190)
Net change in short-term investments (1,075) -
------- -------
Net cash (used) by investing activities (4,627) (64,092)
------- ------
Cash flows from financing activities:
Proceeds from long-term borrowings 1,332 1,588
Payments of long-term debt (811) (3,013)
Net intercompany activity with Watts Industries, Inc. 8,311 70,969
------- ------
Net cash by financing activities 8,832 69,544
------- ------
Effect of exchange rate changes on cash and
cash equivalent 202 515
------- ------
Net increase (decrease) in cash and cash equivalents (2,403) 1,328
Cash and cash equivalents at beginning of period 6,714 6,241
------- ------
Cash and cash equivalents at end of period $ 4,311 $ 7,569
======= ======
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
5
<PAGE>
CIRCOR International, Inc.
Notes to Combined Financial Statements
September 30, 1999
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
On December 15, 1998 the Board of Directors of Watts Industries, Inc. ("Watts")
approved a plan to spin off its industrial, oil and gas businesses as an
independent, publicly-traded company through a distribution to its shareholders
of all of the outstanding shares of CIRCOR International, Inc. CIRCOR owns the
assets and assumed the liabilities of Watts' industrial, oil and gas businesses.
The distribution was completed on October 18, 1999, after the appropriate
approvals of third parties and the receipt of a private letter ruling from the
Internal Revenue Service that the receipt of the Company shares by Watts'
shareholders would be tax-free and that no gain or loss would be recognized by
Watts or Watts' shareholders on the distribution. However, Watts' shareholders
would be subject to tax on gains attributable to cash received in lieu of
fractional shares.
Prior to the distribution, CIRCOR obtained an unsecured credit facility which is
intended to provide sufficient liquidity for the Company's current funding
needs. The unsecured credit facility has a four-year term.
In addition, CIRCOR and Watts entered into several agreements providing for the
separation of the companies and governing various relationships between CIRCOR
and Watts, including a Distribution Agreement, Supply Agreement, and Tradename
License Agreement.
The accompanying unaudited combined financial statements include the accounts of
CIRCOR International, Inc. and have been prepared in accordance with generally
accepted accounting principles for interim financial information and pursuant to
the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
For further information, refer to the combined financial statements and
footnotes included in the Form 10 of CIRCOR International, Inc. (the "Company")
for the year ended June 30, 1999.
In the opinion of management, all adjustments considered necessary for a fair
presentation of the financial statements have been included. The Company will
adopt the calendar year as its fiscal year beginning January 1, 2000. Operating
results for the three-month period ended September 30, 1999 are not necessarily
indicative of the results that may be expected for the "six month" short year
ending December 31, 1999.
NOTE 2 - NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issues SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities". The Company will
adopt SFAS 133 no later than January 1, 2001. Its impact on the combined
financial statements is still being evaluated, but it is not expected to be
material.
6
<PAGE>
NOTE 3 - SEGMENT INFORMATION
The following table presents certain operating segment information:
<TABLE>
<CAPTION>
(IN THOUSANDS)
Instrumentation &
Fluid Regulation Petrochemical
Products Products Corporate Total
-------- -------- --------- -----
Three months ended
September 30, 1999
<S> <C> <C> <C> <C>
Net revenue $41,436 $36,277 $ - $77,713
Operating income (loss) 3,863 3,258 (1,708) 5,413
Three months ended
September 30, 1998
Net revenue $40,304 $40,693 $ - $80,997
Operating income (loss) 5,319 4,449 (1,518) 8,250
</TABLE>
The above operating segments are presented on a basis consistent with the
presentation included in the Company's June 30, 1999 financial statements. There
have been no material changes in the identifiable assets of the individual
segments since June 30, 1999.
NOTE 4 - COMPREHENSIVE INCOME
As of July 1, 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive
Income", which established standards for the reporting and display of
comprehensive income and its components in the Financial statements. The
Company's other comprehensive income consists solely of cumulative translation
adjustments. The Company does not provide U.S. income taxes on foreign currency
translation adjustments since it does not provide for such taxes on
undistributed earnings of foreign subsidiaries. Comprehensive income for the
three months ended September 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
1999 1998
---- ----
<S> <C> <C>
Net income $1,688 $3,706
Foreign currency translation adjustments 559 920
------ ------
Total comprehensive income $2,247 $4,626
====== ======
</TABLE>
NOTE 5 - CONTINGENCIES AND ENVIRONMENTAL REMEDIATION
CONTINGENCIES
The Company has lawsuits and proceedings or claims arising from the ordinary
course of business pending or threatened. The Company has established reserves
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
financial position, results of operations, or liquidity of the Company.
7
<PAGE>
ENVIRONMENTAL REMEDIATION
The Company has 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. The Company's 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. The Company recognizes changes in
estimates as new remediation requirements are defined or as new information
becomes available. The Company estimates that its 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 the financial position, results of operation, or liquidity of the
Company.
8
<PAGE>
CIRCOR International, Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet
September 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,311 $ - $ 4,311
Short-term investments 1,097 - 1,097
Accounts receivable, net 55,497 - 55,497
Inventories, net 109,332 - 109,332
Other assets 17,046 - 17,046
-------- --------
TOTAL CURRENT ASSETS 187,283 - 187,283
Property, plant and equipment, net 77,385 - 77,385
Goodwill, net 96,524 - 96,524
Other assets 4,426 - 4,426
------- ------- -------
TOTAL ASSETS $365,618 $ - $365,618
======= ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 20,568 $ - $ 20,568
Accrued expenses and other current
liabilities 22,807 - 22,807
Income taxes payable 2,786 - 2,786
Current portion of long-term debt 5,548 - 5,548
------- ------- -------
TOTAL CURRENT LIABILITIES 51,709 - 51,709
Long term debt, net of current portion 21,847 96,000 (a) 117,847
Deferred income taxes 10,780 - 10,780
Other non-current liabilities 11,468 - 11,468
SHAREHOLDER'S EQUITY
Common stock - 132 132
Additional paid-in capital - 173,814(a) 173,814
Accumulated other comprehensive income (132) - (132)
Shareholder's Equity 269,946 (269,946) -
-------- -------- --------
TOTAL SHAREHOLDER'S EQUITY 269,814 (96,000) 170,737
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDER'S
EQUITY $365,618 $ - $365,618
======== ======== ========
</TABLE>
9
<PAGE>
CIRCOR International, Inc.
Unaudited Pro Forma Combined Statement of Operations
For Three Months Ended September 30, 1999
(IN THOUSAND EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
Net revenues $ 77,713 $ - $ 77,713
Cost of revenues 54,574 - 54,574
-------- -------- --------
GROSS PROFIT 23,139 - 23,139
Selling, general and administrative
expenses 17,726 51 (b) 17,777
-------- -------- --------
INCOME FROM OPERATIONS 5,413 (51) 5,362
Other (income) expense:
Interest income (22) - (22)
Interest expense 2,154 269 (c) 2,423
Other expense, net 317 - 317
-------- -------- --------
Income before income taxes 2,964 (320) 2,644
Provision for income taxes 1,276 (128)(d) 1,276
-------- -------- --------
NET INCOME $ 1,688 $ (192) $ 1,496
======== ======== ========
Net income per share-basic (e) $ .13 $ (.02) $ .11
======== ======== ========
Net income per share-diluted (e) $ .13 $ (.02) $ .11
======== ======== ========
</TABLE>
10
<PAGE>
CIRCOR International, Inc.
Notes to Unaudited Pro Forma Combined Financial Information
September 30, 1999
Note (a) To record a $96.0 million payment made to Watts by CIRCOR
on October 18, 1999, which settled all inter-company loans and
advances. The net debt allocated to CIRCOR and included in the
Combined Balance Sheet amounted to $99.1 million at September 30,
1999.
Note (b) To record estimated additional administrative expenses that would
have been incurred by CIRCOR as a publicly held, independent
company. CIRCOR would have incurred additional compensation and
related costs for employees to perform functions that have been
performed at Watts' corporate headquarters (i.e., treasury,
investor relations, regulator compliance and risk management).
CIRCOR would have also incurred additional amounts for corporate
governance costs, stock transfer agent costs, incremental
professional fees and other administrative activities.
Approximately $51,000 of such incremental costs are expected above
the $1,533,000 of general and administrative expenses allocated
from Watts.
Note (c) Historical interest expense includes $1,594,000 of interest expense
allocated from Watts to CIRCOR. Pro forma interest expense includes
$1,863,000 of interest expense on borrowings under the CIRCOR
credit facility and from the issuance of senior unsecured notes.
The borrowings under the CIRCOR credit facility and senior
unsecured notes are assumed to bear an annualized interest rate,
including amortization of related fees, of 7.3%, which is
management's estimate of the currently available rate for
borrowings under comparable credit facilities. The interest rates
applicable to borrowings under the CIRCOR credit facility will
continue to be subject to changes in the general financial markets
interest rates. The historical allocation of Watts' interest
expense was based on Watts' weighted average interest rate applied
to the average balance of investments by and advances from Watts to
CIRCOR.
Note (d) To record income tax benefits attributable to adjustments
(b) and (c) at a combined federal and state rate of 40%.
Note (e) Pro forma earnings per share information is based upon the
weighted average number of common and common equivalent shares used
by Watts to determine its earnings per share for the respective
periods, adjusted in accordance with the distribution ratio (one
share of CIRCOR Common Stock for every two shares of Watts Common
Stock held). The pro forma number of common and common equivalent
shares for the period ended September 30, 1999 are 13,223,968 for
basic and 13,262,706 for diluted.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
CIRCOR was incorporated in July 1999 as a wholly-owned subsidiary of Watts
Industries, Inc. On October 18, 1999, Watts transferred to CIRCOR the
Instrumentation and Fluid Regulation Products Group and The Petrochemical
Products Group. On that date, Watts distributed to its stockholders, in the form
of a dividend, all of the outstanding shares of capital stock of CIRCOR (the
"Distribution").
CIRCOR will adopt the calendar year as its fiscal year beginning January 1,
2000. Therefore, the six-month period from July 1, 1999 to December 31, 1999,
will be a transitional or "short" period.
The following tables set forth the percentage of net revenues and the yearly
percentage change in certain financial data for the three months ended September
30, 1999 and September 30, 1998:
<TABLE>
<CAPTION>
Percentage Increase (Decrease)
Items as a percentage of net revenues Year-to-Year
------------------------------------- ------------------------------
Three months ended September 30, September 30, 1999 versus
1999 1998 September 30, 1998
-------------- --------------- ----------------------------
<S> <C> <C> <C>
Net revenues 100.0% 100.0% (4.1%)
Cost of revenues 70.3% 68.1% (1.1%)
----- -----
Gross margin 29.7% 31.9% (10.4%)
Selling, general and
administrative expenses 22.8% 21.7% .8%
----- -----
Income from operations 6.9% 10.2% (34.4%)
Other (income) expense:
Net interest (income)
expense 2.7% 2.4% 7.3%
Other (income) expense,
net .4% (.1%) NMF
----- ----
Income before income tax
provisions 3.8% 7.9% (53.3%)
Income tax provisions 1.6% 3.3% (53.3%)
----- -----
Net income 2.2% 4.6% (54.5%)
===== =====
</TABLE>
NMF: Not meaningful
Net revenues for the three months ended September 30, 1999 decreased by $3.3
million, or 4.1%, from $81.0 million to $77.7 million compared to the same
period last year. The decrease in net revenues is attributable to the following
factors:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Acquisitions $ 2,559
Operations (4,984)
Foreign Exchange (859)
--------
Total Decrease $(3,284)
--------
--------
</TABLE>
The decrease in net revenues from operations and foreign exchange was partially
offset by the inclusion of revenues of acquired businesses including SSI
Equipment, Inc., a Canadian manufacturer of strainers for industrial and
petrochemical applications and GO Regulator, Inc., a producer of regulators for
the instrumentation market located in San Dimas, California, which were acquired
since September 30, 1998. The decrease in net revenues from operations is
primarily attributable to decrease in unit shipments of both domestic and
international oil and gas valves. As has been the situation for the previous two
quarters, revenues of these products have been adversely affected by the reduced
demand for products used in petrochemical facility projects and in maintenance
programs, all of which have been caused by reduced energy prices during most of
calendar year 1998 and continued during the first half of 1999. Recently, energy
prices have increased and, historically, when this has
12
<PAGE>
occurred for a sustained period of time, maintenance programs become more active
by the petrochemical operators followed by increased capital spending on
facility projects. The impact of foreign exchange was due primarily to the
strength of the dollar to the Italian lire. International business accounted for
approximately 27% of net revenues during the quarter compared to 29% for the
first fiscal quarter of last fiscal year.
CIRCOR monitors its revenues in two segments: Instrumentation and Fluid
Regulation Products and Petrochemical Products. The Instrumentation and Fluid
Regulation Products segment accounted for approximately 53.3% of net revenues
during the quarter compared to 49.8% for the comparable quarter of last fiscal
year. The Petrochemical Products segment accounted for approximately 46.7% of
net revenues during the quarter compared to 50.2% for the comparable quarter of
last fiscal year.
CIRCOR's revenues in these segments for fiscal quarters ended September 30, 1999
and 1998, respectively, were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
FISCAL QUARTER ENDED
----------------------------------------
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
<S> <C> <C>
Instrumentation & Fluid Regulation $41,436 $40,304
Petrochemical 36,277 40,693
------- -------
$77,713 $80,997
======= =======
</TABLE>
The increase in net revenues in the Instrumentation and Fluid Regulation
segment was caused primarily by the acquisition of GO Regulator, Inc. The
decrease in net revenues in the Petrochemical segment reflected weakness in
both domestic and international markets partially offset by the acquisition
of SSI Equipment, Inc. Revenue decreases in the domestic markets were caused
primarily by reduced orders for maintenance programs. Revenue decreases in
international markets were caused primarily by reductions of orders for major
capital projects within the petrochemical markets served. CIRCOR's net
revenues were also adversely impacted by a change in foreign exchange rates
primarily associated with the Italian lire.
CIRCOR's gross profit decreased by nearly $2.7 million, or 10.4% to $23.1
million for the quarter ended September 30, 1999 and gross margin decreased from
31.9% to 29.7% when compared to the same quarter last year. Gross profit was
adversely affected by start-up costs of the new factory in Spartanburg, South
Carolina and relocation costs of the Hoke Cresskill, New Jersey plant, which was
closed, of approximately $1.7 million. In addition, gross profit was adversely
affected by competitive pricing pressures, especially in the petrochemical
markets. Lower energy prices during most of the year reduced demand for
petrochemical products, thereby decreasing unit pricing. The reduced demand also
lowered manufacturing levels creating unfavorable overhead absorption of fixed
manufacturing costs, thereby decreasing gross margins during the quarter.
Selling, general and administrative expenses increased $146 thousand to $17.7
million for the quarter ended September 30, 1999 compared to the same quarter
last year. CIRCOR had reduced selling, general and administrative expenses as
revenues decreased but savings were more than offset with certain costs
associated with the Company's transition to an independent public company. The
impact of these costs was approximately $700 thousand.
CIRCOR's operating income by segment for the fiscal quarters ended September 30,
1999 and September 30, 1998 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
FISCAL QUARTER ENDED
---------------------------------------
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
<S> <C> <C>
Instrumentation & Fluid Regulation $3,863 $5,319
Petrochemical 3,258 4,449
Corporate (1,708) (1,518)
------ ------
$5,413 $8,250
====== ======
</TABLE>
The decrease in operating income in the Instrumentation and Fluid Regulation
Products segment is attributable to the start-up costs of the Spartanburg, South
Carolina plant and relocation costs of the Cresskill, New Jersey plant. The
decrease in the operating income in the
13
<PAGE>
Petrochemical Products segment reflects lower volume in net revenues primarily
attributable to decreased orders for petrochemical facility projects and for
maintenance programs as the result of lower world market prices for crude oil.
The increase in other net non-operating expenses consisted primarily of realized
and unrealized foreign exchange net losses principally attributable to the
strengthening of the US dollar against the Italian lire.
The effective tax rate for the quarter was 43.0% compared to 42.3% for last
year's quarter, reflecting increased earnings in foreign jurisdictions with
higher tax rates.
Net income decreased $2.0 million to nearly $1.7 million or $.13 per share
compared to last year's quarter of $3.7 million or $.27 per share. This
decrease is primarily attributable to the factors discussed above.
FINANCIAL CONDITION
During the three-month period ended September 30, 1999, the Company used $6.8
million of cash flow from operating activities principally to fund accounts
receivable and accounts payable, and, used $4.6 million of cash in investing
activities principally to purchase $3.2 million of capital equipment. Capital
expenditures were primarily for manufacturing machinery and equipment to
consolidate and improve manufacturing operations. The Company's capital
expenditure budget for the six months ending December 31, 1999 is $4.5 million.
During the three-month period, CIRCOR had access to its former parent's, Watts
Industries, line of credit. This continued until October 17, 1999. Watts
Industries spun-off CIRCOR as an independent Company on October 18, 1999.
In anticipation of the spin-off from Watts, CIRCOR (i) successfully negotiated
with ING (U.S.) Capital LLC, BankBoston, N.A., First Union National Bank, and
Citizens Bank for a $75.0 million unsecured credit facility, and, (ii)
negotiated with institutional investors consisting of eleven insurance companies
for $75.0 million senior unsecured notes. At the date of the spin-off, ING
(U.S.) Capital LLC provided CIRCOR with a $35.0 million bridge loan until the
final terms and conditions on the unsecured notes were completed, which occurred
the following day.
The proceeds from the unsecured credit facility and senior unsecured notes were
used to pay Watts for CIRCOR's assigned portion of Watts' long-term debt of
$96.0 million, refinancing of existing CIRCOR debt of $8.6 million and various
debt financing fees amounting to $1.5 million. Subsequent to these transactions,
CIRCOR had $43.9 million available from the unsecured credit facility.
Also, to fulfill a representation made to the Internal Revenue Service as part
of the application for the tax-free treatment of the spin-off, CIRCOR intends to
engage in a subsequent public offering of approximately $35.0 million of common
stock within one year after the spin-off. The timing, completion and size of the
subsequent public offering will be subject to various market conditions. The
Company intends to use the proceeds from the subsequent public offering and
availability from the unsecured line of credit to fund future acquisitions.
The ratio of current assets to current liabilities at September 30, 1999 was 3.6
to 1 compared to 3.2 to 1 at June 30, 1999. Cash, cash equivalents and
short-term investments were $5.4 million at September 30, 1999 compared to $6.7
million at June 30, 1999. Debt as a percentage of total capital employed was
42.6% at September 30, 1999 compared to 40.7% at June 30, 1999. At September 30,
1999, CIRCOR was in compliance with all covenants related to existing debt.
CIRCOR anticipates that available funds and those funds provided from ongoing
operations will be sufficient to meet current operating requirements and
anticipated capital expenditures over the next 24 months.
CIRCOR, from time-to-time, is involved with product liability, environmental
proceedings and other litigation proceedings and incurs costs on an ongoing
basis related to these matters. CIRCOR has not incurred material expenditures in
the three-month period ending September 30, 1999 in connection with any of these
matters. See Note 5, Commitments and Environmental Remediation.
14
<PAGE>
NEW ACCOUNTING STANDARDS
See Note 2 in the Company's combined financial statements for a discussion of
recently issued accounting standards.
YEAR 2000 ISSUE
CIRCOR has developed a comprehensive program to address its potential exposure
to the Year 2000 issue. CIRCOR manages the program by having each subsidiary and
operating unit identify their own Year 2000 issues and develop appropriate
corrective action steps, while instituting a series of management processes that
coordinate and manage the program across CIRCOR.
A significant portion of CIRCOR's Year 2000 issues relative to its information
technology systems have been addressed as part of a CIRCOR-wide initiative to
upgrade and replace its information systems, which began in fiscal 1997. At
September 30, 1999, nearly all of CIRCOR's critical information technology
systems have been replaced or upgraded and are Year 2000 compliant.
Assessments and remediation activities for non-information technology systems,
including manufacturing equipment, have been completed.
CIRCOR has identified its critical vendors, suppliers of information processing
services, customers, financial institutions and other vendors and surveyed their
Year 2000 remediation efforts. Those determined not to be Year 2000 compliant
have been replaced with vendors who are Year 2000 compliant. The vendor survey
and review process is complete. The cost of the program was immaterial. CIRCOR
did not utilize any independent verification processes to confirm that these
vendor responses were reliable, however, CIRCOR purchasing department personnel
communicate regularly with critical vendors. This communication includes Year
2000 compliance confirmation.
CIRCOR considers less than ten of its vendors critical and has developed
contingency plans for those vendors. Critical vendors supply CIRCOR with base
raw materials and certain component parts. Contingency plans include increasing
levels of on-site and consigned inventory. Additionally, raw materials are
readily available and most can be supplied by a number of alternative vendors
who are Year 2000 compliant. These contingency plans for vendors are complete.
CIRCOR's operations depend on infrastructure in a number of foreign countries in
which it operates, and, therefore, a failure of any of those infrastructures
could adversely affect its operations. CIRCOR's most significant foreign markets
are Canada, China, Germany, Italy and the United Kingdom. In these countries,
CIRCOR is not aware of any significant weaknesses in their infrastructure.
CIRCOR continues to develop detailed contingency plans to deal with unexpected
Year 2000 issues, which may occur. These plans include the identification of
appropriate resources and response teams. Individual business managers at each
of CIRCOR's subsidiaries and operating units are responsible to ensure their
business functions continue to operate normally. While the specifics vary by
operation, the general contingency planning strategies include: increasing the
on-hand supply of raw materials and finished goods; identifying alternate
suppliers of raw materials; ensuring key personnel (both business and technical)
are physically on-site; backing up critical systems just before year-end; and
identifying alternative methods of doing business with customers as necessary.
CIRCOR has completed its contingency plans for Year 2000 compliance.
Despite CIRCOR's comprehensive program, CIRCOR cannot be certain that issues
will not develop or events occur that could have material adverse affects on
CIRCOR's financial condition or results of operations. Nevertheless, CIRCOR does
not expect any material adverse affect from Year 2000 failure. CIRCOR's Year
2000 program is designed to minimize the likelihood of any failure occurring.
The most reasonably likely worst-case scenario is that a short-term disruption
will occur with a small number of customers or suppliers requiring an
appropriate response.
Expenditures to date, consisting of spending for this program and related
capital items, amounted to approximately $5.4 million.
15
<PAGE>
CONVERSION TO EURO
On January 1, 1999, eleven of the fifteen member countries of the European Union
adopted the Euro as their common legal currency and established fixed conversion
rates between their existing sovereign currencies and the Euro. The Euro trades
on currency exchanges and is available for non-cash transactions. The
introduction of the Euro has affected CIRCOR since the Company has manufacturing
and distribution facilities in several of the member countries which have
adopted the Euro. At this time, CIRCOR has not and is not anticipating that any
significant costs will be incurred due to the conversion to the Euro.
FACTORS AFFECTING FUTURE RESULTS
Certain statements contained herein are forward looking. The Company's future
operating results are difficult to predict and may be affected by a number of
factors including loss of market share through competition; competitive pricing
pressures; ability to develop and market new products; changes in the
instrumentation, fluid regulation and petrochemical markets; changes in demand
for the Company's products; fluctuations in manufacturing yields; insufficient
or excess manufacturing capacity; the amount of product booked and shipped
within a quarter; changes in product mix; fluctuating economic conditions in
markets where the Company's products are manufactured or sold; interest rates;
foreign exchange fluctuations; ability to integrate manufacturing and other
operating entities; changes in commodity prices especially stainless steel, cast
iron and carbon steel; integrations of future acquisitions; and, other factors
discussed in the Company's reports filed with the Securities and Exchange
Commission.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
PRODUCT LIABILITIES
Leslie Controls, Inc. and Spence Engineering Company, both subsidiaries of
CIRCOR, are third-party defendants in 314 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 a
significant number 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 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, only two cases
involving Leslie 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. Although new cases continue to be filed against the defendant
ship owners, third-party claims against Leslie or Spence have not been filed
since 1996.
Leslie and its insurers are in dispute over payment of approximately $560,000 in
legal fees incurred to defend these cases through 1994. The dispute resulted
from a gap in Leslie's insurance coverage from 1965 to 1973, and discussions
regarding the $560,000 payment are ongoing.
CIRCOR has established total reserves of $1.7 million for all of the maritime
asbestos claims discussed above, including $560,000 relating to the claims
disputed by our insurance carriers, and the Company does not believe it is
reasonably likely that losses could occur in excess of the amounts accrued. The
Company has not recorded any probable third-party recoveries on these claims
that it may receive from insurance carriers and previous owners of Leslie
Control.
ENVIRONMENTAL REMEDIATION
CIRCOR is 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, the Company has been
allocated 0.75% of the remediation costs, an amount which is not material. With
respect to the Combe Landfill, the Company has settled its Federal Government's
claim for an amount which is immaterial, and anticipates settling with the State
of New Jersey for an amount not greater than that paid to the Federal
Government. In addition, CIRCOR is 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, the Company has the right to indemnification from third
parties. Based on currently available information, management believes that its
share of remediation costs at these sites will not be material.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) In July 1999, the Company issued and sold 100 shares of common
stock to Webster Valve, Inc., which is an indirectly wholly owned subsidiary of
Watts Industries, Inc., at a purchase price of $.01 per share. No underwriters
or underwriting discounts or commissions were involved.
17
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The sole stockholder of the Company voted by written consent in lieu of
a special joint meeting of directors and the stockholder on August 6, 1999 (the
"August Consent") and the September 16, 1999 (the "September Consent").
As described in the next paragraph, pursuant to the August Consent, the
Company's sole stockholder approved the appointment of the Company's current
directors, David A. Bloss, Sr., Timothy P. Horne, Dewain K. Cross, David F.
Dietz, P.C. and Daniel J. Murphy, III.
Pursuant to the September Consent, the Company's stockholder approved
the Company's Amended and Restated Certificate of Incorporation, the Company's
Amended and Restated By-laws and the Company's 1999 Stock Option and Incentive
Plan.
Each of such consents was unanimous with 100 votes cast for, zero votes
cast against, no votes withheld, no abstentions and no broker non-votes. The
foregoing results were the same for each of the directors.
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K
(a) Exhibits
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, Registration No.
000-26962, 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.
27 Financial Data Schedule is filed herewith as Exhibit 27.
(b) Reports on Form 8-K during the quarter ended September 30, 1999. The
registrant did not file any Current Reports on Form 8-K during the three
month period ended September 30, 1999.
18
<PAGE>
CIRCOR International, Inc.
September 30, 1999
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.
DECEMBER 2, 1999 /S/ DAVID A. BLOSS, SR. .
- --------------------------- -------------------------------------------
Date David A. Bloss, Sr.
Chairman, President and Chief Executive Officer
DECEMBER 2, 1999 /S/ COSMO S. TRAPANI .
- --------------------------- -------------------------------------------
Date Cosmo S. Trapani
Senior Vice President, Chief Financial Officer
And Treasurer
Chief Financial and Accounting Officer
19
<PAGE>
EXHIBIT INDEX
Listed and indexed below are all Exhibits filed as part of this report.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
3.1 Amended and Restated Certificate of Incorporation. (1)
3.2 Amended and Restated By-Laws. (2)
27 Financial Data Schedule*
</TABLE>
(1) Incorporated by reference to the Exhibit 3.1 to the Company's
Registration Statement on Form 10, Registration No. 000-26962, filed
with the Securities and Exchange Commission on August 6, 1999 ("Form
10").
(2) Incorporated by reference to Exhibit 3.2 to the Form 10.
- -----------------------
*Filed herewith.
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM September
30, 1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 JUN-30-1999
<PERIOD-START> JUL-01-1999 JUL-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 4,311 7,569
<SECURITIES> 1,097 0
<RECEIVABLES> 55,497 67,405
<ALLOWANCES> 2,756 3,003
<INVENTORY> 109,332 106,138
<CURRENT-ASSETS> 187,283 185,415
<PP&E> 77,385 68,792
<DEPRECIATION> 69,837 60,785
<TOTAL-ASSETS> 365,618 360,592
<CURRENT-LIABILITIES> 51,709 66,801
<BONDS> 27,395 40,349
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 269,814 244,251
<TOTAL-LIABILITY-AND-EQUITY> 365,618 360,592
<SALES> 77,713 80,997
<TOTAL-REVENUES> 77,713 80,997
<CGS> 54,574 55,167
<TOTAL-COSTS> 54,574 55,167
<OTHER-EXPENSES> 295 (156)
<LOSS-PROVISION> 79 28
<INTEREST-EXPENSE> 2,154 1,987
<INCOME-PRETAX> 2,964 6,419
<INCOME-TAX> 1,276 2,713
<INCOME-CONTINUING> 1,688 3,706
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,688 3,706
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
</TABLE>
