<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
-----------------------------
For the quarterly period ended September 30, 2000
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 Number)
35 Corporate Drive, Burlington, MA 01803-4230
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (781) 270-1200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $.01 per share New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
As of October 31, 2000, there were 13,242,557 shares of the Registrant's
Common Stock outstanding.
================================================================================
<PAGE>
CIRCOR INTERNATIONAL, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets for September 30, 2000 and
December 31, 1999 3
Consolidated Statements of Operations for the Three-Month
and Nine-Month Periods Ended September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the Nine-
Months Ended September 30, 2000 and 1999 5
Pro Forma Consolidated Statements of Operations
for the Three-Month and Nine-Month Periods Ended
September 30, 1999 6
Notes to Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-16
Item 3. Qualitative and Quantitative Discussion About
Market Risk 16-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17-18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18-20
Signatures 21
Exhibit 10.22 Executive Change of Control Agreement
between CIRCOR, Inc. and Carmine F. Bosco
dated August 8, 2000. 22-27
Exhibit 10.23 Executive Change of Control Agreement
between CIRCOR, Inc. and Alan R. Carlsen
dated August 8, 2000. 28-33
Exhibit 10.24 Executive Change of Control Agreement
between CIRCOR, Inc. and Kenneth W. Smith
dated August 8, 2000. 34-39
Exhibit 27 Financial Data Schedule Filed for the
Periods Ended September 30, 2000 and 1999. 40
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRCOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ............................................. $ 7,665 $ 5,153
Trade accounts receivable, less allowance for doubtful accounts
of $2,753 and $2,683, respectively .................................. 55,000 60,916
Inventories ........................................................... 107,513 107,332
Other current assets .................................................. 14,199 16,800
----------- -----------
Total Current Assets ............................................... 184,377 190,201
----------- -----------
Property, Plant and Equipment, Net ..................................... 69,025 75,154
Other Assets
Goodwill, net of accumulated amortization of $13,662 and
$11,775, respectively .............................................. 92,931 96,488
Other assets .......................................................... 4,521 5,242
----------- -----------
Total Assets ........................................................... $ 350,854 $ 367,085
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ...................................................... $ 20,566 $ 21,172
Other current liabilities ............................................. 22,220 19,069
Current portion of long-term debt ..................................... 488 2,260
----------- -----------
Total Current Liabilities .......................................... 43,274 42,501
----------- -----------
Long-Term Debt, Net of Current Portion ................................. 101,616 122,867
Other Noncurrent Liabilities ........................................... 18,089 18,308
Shareholders' Equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized; no
shares issued and outstanding ...................................... -- --
Common stock, $.01 par value; 29,000,000 shares authorized;
13,236,993 and 13,236,877 issued and outstanding, respectively .... 132 132
Additional paid-in capital ............................................ 180,947 180,887
Retained earnings ..................................................... 10,292 3,393
Accumulated other comprehensive (loss) ................................ (3,496) (1,003)
----------- -----------
Total Shareholders' Equity ......................................... 187,875 183,409
----------- -----------
Total Liabilities and Shareholders' Equity ............................. $ 350,854 $ 367,085
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
CIRCOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three-Months Ended September 30, Nine-Months Ended September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues ............................ $ 75,637 $ 77,713 $ 236,899 $ 234,704
Cost of revenues ........................ 52,243 53,852 162,608 158,510
----------- ----------- ----------- -----------
GROSS PROFIT ......................... 23,394 23,861 74,291 76,194
Selling, general and administrative
expenses ................................ 16,381 17,726 51,474 56,090
Special charges ......................... 801 722 1,504 722
----------- ----------- ----------- -----------
OPERATING INCOME ..................... 6,212 5,413 21,313 19,382
----------- ----------- ----------- -----------
Other (income) expense:
Interest income ...................... (166) (22) (372) (163)
Interest expense ..................... 2,315 2,154 7,520 6,671
Other, net ........................... 188 317 777 602
----------- ----------- ----------- -----------
2,337 2,449 7,925 7,110
----------- ----------- ----------- -----------
INCOME BEFORE TAXES .................. 3,875 2,964 13,388 12,272
Provision for income taxes .............. 1,588 1,276 5,489 4,914
----------- ----------- ----------- -----------
NET INCOME ........................... $ 2,287 $ 1,688 $ 7,899 $ 7,358
=========== =========== =========== ===========
Basic earnings per share
Income per share ..................... $ 0.17 * $ 0.60 *
Weighted average number of shares .... 13,237 * 13,237 *
Diluted earnings per share
Income per share ..................... $ 0.17 * $ 0.59 *
Weighted average numbered shares ..... 13,324 * 13,500 *
</TABLE>
* See note 7 of the consolidated financial statements for an
explanation of pro forma earnings per share.
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
CIRCOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine-Months Ended September 30,
-------------------------------
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net Income ........................................................... $ 7,899 $ 7,358
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation .................................................... 8,034 7,630
Amortization .................................................... 2,139 2,683
Deferred income taxes ........................................... -- 3,552
Gain on disposal of property, plant and equipment ............... (24) (9)
Changes in operating assets and liabilities, net of
effects from business acquisitions:
Trade accounts receivable .................................. 4,501 844
Inventories ................................................ (1,375) (2,271)
Other current assets ....................................... 2,729 836
Accounts payable and other current liabilities ............. 3,530 (12,467)
----------- -----------
Net cash provided by operating activities ....................... 27,433 8,156
----------- -----------
INVESTING ACTIVITIES
Additions to property, plant and equipment ........................... (2,464) (10,689)
Disposal of property, plant and equipment ............................ 39 1,084
Increase in other assets ............................................. (79) (237)
Business acquisitions, net of cash acquired .......................... -- (10,301)
Purchase price adjustment on previous acquisition .................... 1,542 --
Net change in short term investments ................................. -- (1,075)
----------- -----------
Net cash used in investing activities ........................... (962) (21,218)
----------- -----------
FINANCING ACTIVITIES
Proceeds from long-term borrowings ................................... 20,988 3,925
Payments of long-term debt ........................................... (43,776) (14,495)
Dividends paid ....................................................... (1,000) --
Net intercompany activity with Watts Industries, Inc. ................ -- 24,555
----------- -----------
Net cash provided by (used in) financing activities ............. (23,788) 13,985
----------- -----------
Effect of exchange rate changes on cash and cash equivalents ......... (171) (702)
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS ................................. 2,512 221
Cash and cash equivalents at beginning of period ...................... 5,153 4,090
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................ $ 7,665 $ 4,311
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
CIRCOR INTERNATIONAL, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three-Months Ended September, 1999
----------------------------------
Pro Forma
Historical Adjustments Pro Forma
------------ ------------ ------------
<S> <C> <C> <C>
Net revenues .................................... $ 77,713 $ -- $ 77,713
Cost of revenues ................................ 53,852 -- 53,852
------------ ------------ ------------
GROSS PROFIT ................................. 23,861 -- 23,861
Selling, general and administrative expenses .... 17,726 51 17,777
Special charges ................................. 722 -- 722
------------ ------------ ------------
OPERATING INCOME ............................. 5,413 (51) 5,362
Other (income) expense:
Interest income .............................. (22) -- (22)
Interest expense ............................. 2,154 269 2,423
Other, net ................................... 317 -- 317
------------ ------------ ------------
2,449 269 2,718
------------ ------------ ------------
INCOME BEFORE INCOME TAXES ...................... 2,964 (320) 2,644
Provision for income taxes ...................... 1,276 (128) 1,148
------------ ------------ ------------
NET INCOME ................................... $ 1,688 $ (192) $ 1,496
============ ============ ============
<CAPTION>
Nine-Months Ended September 30, 1999
------------------------------------
Pro Forma
Historical Adjustments Pro Forma
------------ ------------ ------------
<S> <C> <C> <C>
Net revenues .................................... $ 234,704 $ -- $ 234,704
Cost of revenues ................................ 158,510 -- 158,510
------------ ------------ ------------
GROSS PROFIT ................................. 76,194 -- 76,194
Selling, general and administrative expenses .... 56,090 178 56,268
Special charges ................................. 722 -- 722
------------ ------------ ------------
OPERATING INCOME ............................. 19,382 (178) 19,204
Other (income) expense:
Interest income .............................. (163) -- (163)
Interest expense ............................. 6,671 852 7,523
Other, net ................................... 602 -- 602
------------ ------------ ------------
7,110 852 7,962
------------ ------------ ------------
INCOME BEFORE INCOME TAXES ...................... 12,272 (1,030) 11,242
Provision for income taxes ...................... 4,914 (412) 4,502
------------ ------------ ------------
NET INCOME ................................... $ 7,358 $ (618) $ 6,740
============ ============ ============
</TABLE>
See note 7 for an explanation of pro forma adjustments and earnings per share.
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE>
CIRCOR INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of CIRCOR International, Inc. and subsidiaries 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
consolidated financial statements and footnotes included in the Form 10-K of
CIRCOR International, Inc. (the "Company") for the year ended December 31, 1999.
On October 18, 1999, we completed the spin-off from our former parent,
Watts Industries, Inc. ("Watts"), and began to operate as an independent public
company. Additionally, effective July 1, 1999 we changed our fiscal year end
from June 30th to December 31st. Comparisons to prior year periods pertain to
the historical results of these operations under Watts' ownership, including
certain allocations of interest and general and administrative expenses, which
later were transferred to CIRCOR in connection with the spin-off. See note 7 of
these consolidated financial statements.
The following discussion is based upon the three-month and nine-month
periods ended September 30, 2000. In the opinion of management, all adjustments
considered necessary for a fair presentation of the financial statements have
been included.
The accompanying consolidated financial statements present our financial
position, results of operations and cash flows on a historical carve out basis
up to October 18, 1999, and subsequently as if we had been an independent,
publicly owned company. Certain allocations of interest and general and
administrative expenses of Watts, as well as computations of separate tax
provisions, have been made to facilitate such presentation (see note 7). The
consolidated financial statements prior to October 18, 1999 represent the former
combined operations of Watts' industrial, oil and gas businesses. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Certain prior period financial statement amounts have been reclassified to
conform to currently reported presentations.
(2) New Accounting Standards
In 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." We will adopt
SFAS 133, as amended by SFAS No. 137 and SFAS No. 138, on January 1, 2001.
Although we continue to review the effect of the implementation of SFAS No. 133,
we do not currently believe its adoption will have a material impact on our
financial position or overall trends in results of operations and do not believe
adoption will result in significant changes to our financial risk management
practices. However, the impact of adoption of SFAS No. 133 on our results of
operations is dependent upon the fair values of our derivatives and related
financial instruments at the date of adoption and may result in more pronounced
quarterly fluctuations in other income and expense.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition". An amendment has delayed the
effective date until the fourth quarter of 2000. The Company is reviewing the
requirements of this standard and has not yet determined the impact of this
standard on its consolidated financial statements.
(3) Inventories
Inventories consist of the following (in thousands):
September 30, 2000 December 31, 1999
------------------ -----------------
(unaudited) (audited)
Raw materials $ 39,857 $ 42,701
Work in process 29,271 27,466
Finished goods 38,385 37,165
-------- --------
$107,513 $107,332
======== ========
7
<PAGE>
(4) Segment Information
The following table presents certain operating segment information:
<TABLE>
<CAPTION>
Instrumentation
& Fluid
Regulation Petrochemical Corporate Consolidated
Products Products Adjustments Total
------------ ------------ ------------ ------------
(in thousands)
<S> <C> <C> <C> <C>
Three-Months Ended September 30, 2000
Net Revenues $ 43,246 $ 32,391 $ -- $ 75,637
Operating income (loss) 7,061 855 (1,704) 6,212
Three-Months Ended September 30, 1999
Net Revenues $ 41,436 $ 36,277 $ -- $ 77,713
Operating income (loss) 3,863 3,258 (1,708) 5,413
<CAPTION>
Instrumentation
& Fluid
Regulation Petrochemical Corporate Consolidated
Products Products Adjustments Total
------------ ------------ ------------ ------------
(in thousands)
<S> <C> <C> <C> <C>
Nine-Months Ended September 30, 2000
Net Revenues $ 131,987 $ 104,912 $ -- $ 236,899
Operating income (loss) 21,383 5,060 (5,130) 21,313
Nine-Months Ended September 30, 1999
Net Revenues $ 131,266 $ 103,438 $ -- $ 234,704
Operating income (loss) 17,229 6,670 (4,517) 19,382
</TABLE>
The operating segments above are presented on a basis consistent with the
presentation in our consolidated financial statements for the period ended
December 31, 1999. Identifiable assets did not change significantly from amounts
appearing in the December 31, 1999 Consolidated Segment Information (see Form
10-K for the year then ended).
(5) Special Charges
During the nine-month period ended September 30, 2000, we incurred
$1,504,000 of costs in connection with the consolidation and reorganization of
manufacturing operations. The severance costs recognized for 88 terminated
employees were $861,000. Other costs of $643,000 were incurred and were
primarily associated with the closure, consolidation and reorganization of
manufacturing plants in both the Instrumentation and Fluid Regulation and
Petrochemical segments. The portion of the accrued severance costs to be paid
subsequent to September 30, 2000 totals $470,000. Special charges of $722,000
were incurred in the first nine months of 1999, all associated with the closure,
consolidation and reorganization of manufacturing plants in the Instrumentation
and Fluid Regulation segment.
(6) Earnings Per Common Share (in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three-Months Ended September 30, 2000
--------------------------------------------
Net Income Shares Per Share Amount
---------- ------ ----------------
<S> <C> <C> <C>
Basic EPS $ 2,287 13,237 $ 0.17
Dilutive securities, principally
common stock options -- 87 --
------- ------ ------
Diluted EPS $ 2,287 13,324 $ 0.17
======= ====== ======
</TABLE>
8
<PAGE>
Options to purchase 864,941 shares of common stock at prices ranging from
$9.17 to $13.94 were outstanding during the three-month period 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 shares during the period.
<TABLE>
<CAPTION>
Nine-Months Ended September 30, 2000
-----------------------------------------------
Net Income Shares Per Share Amount
---------- ------ ----------------
<S> <C> <C> <C>
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
======= ====== ======
</TABLE>
Options to purchase 376,074 shares of common stock at prices ranging from
$11.38 to $13.94 were outstanding during the nine-month period 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 shares during the period.
(7) Pro Forma Consolidated Statement of Operations
The following unaudited pro forma financial information presents a summary
of the consolidated results of operations as if the spin-off and related
transactions had occurred at the beginning of the periods presented.
Additional administrative expenses would have been incurred had we been a
publicly held, independent company before the spin-off and are shown as a pro
forma adjustment. We would have incurred additional compensation and related
costs for employees to perform functions that had been performed at Watts'
corporate headquarters (i.e., treasury, investor relations, regulatory
compliance and risk management). We would have also incurred additional amounts
for corporate governance costs, stock transfer agent costs, incremental
professional fees and other administrative activities.
Historical interest expense includes $1,289,000 and $3,148,000 of expense
allocated from Watts for the three-month and nine-month periods ended September
30, 1999, respectively. Pro forma interest expense includes $269,000 and
$852,000 of interest expense for the three-month and nine-month periods ended
September 30, 1999, respectively, on borrowings under our credit facility and
from the issuance of senior unsecured notes. The borrowings under our credit
facility and senior unsecured notes were assumed to bear an annualized interest
rate, including amortization of related fees, of 7.3%, which was our estimate of
the then currently available rate for borrowings under comparable credit
facilities. The interest rates applicable to borrowings under our credit
facility were subject to changes in the general financial markets. The
historical allocation of Watts' interest expense was based on Watts' lower
weighted average interest rate applied to the average balance of investments by
and advances from Watts.
Pro forma income tax benefits attributable to the above adjustments were
recorded at a combined federal and state rate of 40%.
The weighted average number of common shares outstanding used to calculate
pro forma earnings per share for the three-month and nine-month periods ended
September 30, 1999 assumed the spin-off transaction ratio of one share of CIRCOR
International, Inc. for each two shares of Watts Industries, Inc. The
calculation of pro forma diluted earnings per share assumes the conversion of
all dilutive securities related to CIRCOR employees (see note 10 in Form 10-K).
Pro forma net income and number of shares used to compute pro forma net earnings
per share basic and assuming full dilution, are reconciled below (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Three-Months Ended September 30, 1999
-----------------------------------------------------------------
Pro Forma Net Income Shares Per Share Amount
-------------------- ------ ----------------
<S> <C> <C> <C>
Basic EPS $ 1,496 13,224 $ 0.11
Dilutive securities, principally
common stock options -- 39 --
------- ------ ------
Diluted EPS $ 1,496 13,263 $ 0.11
======= ====== ======
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Nine-Months Ended September 30, 1999
-----------------------------------------------------------------
Pro Forma Net Income Shares Per Share Amount
-------------------- ------ ----------------
<S> <C> <C> <C>
Basic EPS $ 6,740 13,257 $ 0.51
Dilutive securities, principally
common stock options -- 16 --
------- ------ ------
Diluted EPS $ 6,740 13,273 $ 0.51
======= ====== ======
</TABLE>
(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-month and nine-month
periods ended September 30, 2000 and 1999 was as follows (in thousands):
<TABLE>
<CAPTION>
Three-Months Ended September 30, Nine-Months Ended September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
------- ------ ------- -------
<S> <C> <C> <C> <C>
Net income $ 2,287 $ 1,688 $ 7,899 $ 7,358
Foreign currency translation adjustments (1,395) 559 (2,493) (1,213)
------- ------- ------- -------
Total comprehensive income $ 892 $ 2,247 $ 5,406 $ 6,145
======= ======= ======= =======
</TABLE>
(9) Contingencies and Environmental Remediation Contingencies
We are subject to pending or threatened lawsuits and proceedings or claims
arising from the ordinary course of operations. Reserves have been established
which management presently believes are adequate in light of probable and
estimable exposure to the pending or threatened litigation of which it has
knowledge. Such contingencies are not expected to have a material effect on our
financial position, results of operations, or liquidity.
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 Chinese joint venture. We believe that KF's
marking practices have been in substantial compliance with Customs' regulations
and we are cooperating with Customs in its investigation. While we believe that
the Customs investigation will not result in any material liability to the
Company, there can be no assurances. If the Customs investigation were to reveal
that violations of the Customs laws had occurred, KF could be subjected to civil
fines and forfeitures and (if such violations were determined to be intentional)
criminal penalties, which could 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, environmental
regulations, level of cleanup required, technologies available, number and
financial condition of other contributors to remediation and the time period
over which remediation may occur. We recognize changes in estimates as new
remediation requirements are defined or as new information becomes available. We
estimate that accrued environmental remediation liabilities will likely be paid
over the next five to ten years. Such environmental remediation contingencies
are not expected to have a material effect on our financial position, results of
operation, or liquidity.
(10) Business Acquisitions
On July 22, 1998, Watts Investment Company, a subsidiary of our former
parent, Watts Industries, Inc., acquired Hoke, Inc. ("Hoke"). On October 18,
1999, the spin-off date, the ownership of Hoke Inc. was transferred to CIRCOR.
Additionally, Watts Investment Company assigned to us all of its rights under
the Stock Purchase Agreement governing the Hoke acquisition (the "Stock Purchase
Agreement"). As a result, we became the claimant in two separate arbitration
proceedings against the former Hoke stockholders.
10
<PAGE>
Under the terms of the Stock Purchase Agreement, Watts Investment Company
was obligated to prepare a closing date balance sheet and closing net worth
statement, which when compared to the closing net worth as detailed in the Stock
Purchase Agreement, would result in either an upward or downward purchase price
adjustment. Watts Investment Company prepared the closing date balance sheet
that showed that the closing net worth was approximately $9.9 million lower than
the target amount in the Stock Purchase Agreement, and sought a purchase price
adjustment for that amount. The former Hoke stockholders objected to the closing
date balance sheet and closing net worth statement. In early 1999, pursuant to
the terms of the Stock Purchase Agreement, arbitration proceedings began,
between the former Hoke stockholders and us, to determine the closing net worth
of Hoke. In May, 2000 the arbitrator awarded us a purchase price adjustment in
the amount of $6,219,774. Because the Stock Purchase Agreement provided for a
deferred purchase price payment by us of $3,500,000, the net effect of the
arbitrator's award would result in a payment to us of $2,719,774. The Former
Hoke stockholders now have made payment of all amounts owed to us as a result of
this award. The amount of the award less the associated costs of defending our
claim has been accounted for as a $1,542,000 reduction in the purchase price for
this acquisition.
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 "believe," "expect,"
"anticipate," "intend," "estimate" and other expressions which are predictions
of or indicate future events and trends and which do not relate to historical
matters identify forward-looking statements. Forward-looking statements involve
known and unknown risks, uncertainties and other factors, which may cause the
actual results, performance or achievements of the Company to differ materially
from anticipated future results, performance or achievements expressed or
implied by such forward-looking statements. The Company undertakes no obligation
to publicly update or revise any forward-looking statement, whether as a result
of new information, future events or otherwise.
Results of Operations for the Three-Months Ended September 30, 2000 Compared to
the Three-Months Ended September 30, 1999
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, 2000 and 1999.
<TABLE>
<CAPTION>
As a percentage of net revenues
three-months ended September 30,
-------------------------------- Year-to-Year
2000 1999 Percentage Increase (Decrease)
---- ---- ------------------------------
<S> <C> <C> <C>
Net revenues 100.0% 100.0% (2.7)%
Cost of revenues 69.1% 69.3% (3.0)%
----- -----
Gross profit 30.9% 30.7% (2.0)%
Selling, general and administrative expenses 21.6% 22.8% (7.6)%
Special charges 1.1% 0.9% 10.9%
----- -----
Operating income 8.2% 7.0% 14.8%
Other (income) expense:
Interest (income) expense, net 2.8% 2.7% 0.8%
Other (income) expense, net 0.3% 0.5% (40.7)%
----- -----
Income before income taxes 5.1% 3.8% 30.7%
Provisions for income taxes 2.1% 1.6% 24.5%
----- -----
Net income 3.0% 2.2% 35.5%
===== =====
</TABLE>
11
<PAGE>
Net revenues for the three-months ended September 30, 2000 decreased by
$2.1 million, or 2.7%, to $75.6 million compared to $77.7 million for the
quarter ended September 30, 1999. The decrease in net revenues for the quarter
ended September 30, 2000 is attributable to the following:
<TABLE>
<CAPTION>
Total Foreign
2000 1999 Change Operations Exchange
--------- --------- --------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Instrumentation & Fluid Regulation $ 43,246 $ 41,436 $ 1,810 $ 2,448 $ (638)
Petrochemical 32,391 36,277 (3,886) (3,136) (750)
--------- --------- --------- --------- ---------
Total $ 75,637 $ 77,713 $ (2,076) $ (688) $ (1,388)
========= ========= ========= ========= =========
</TABLE>
The Instrumentation and Fluid Regulation products segment accounted for
57.2% of net revenues in the current quarter compared to 53.3% last year. The
Petrochemical products segment accounted for 42.8% of net revenues in the third
quarter of 2000 compared to 46.7% for the same quarter last year.
Instrumentation and Fluid Regulation revenues increased $1.8 million, or
4.4%. The net increase is primarily due to $2.7 million higher sales in the
Instrumentation product lines, partially offset by the weakening of the Euro
which reduced instrumentation product revenues by $0.6 million. The net decrease
in Petrochemical revenues of $3.9 million, or 10.7%, was principally the result
of a $3.4 million decrease in revenues from our Italian based operation
partially caused by reduced oil and gas construction project activity. This
decrease was partially offset by a $0.5 million increase in sales of products
from our Chinese joint venture. Foreign exchange rate changes were unfavorable
in Europe, resulting in a decrease in Petrochemical revenues of $0.8 million.
Gross profit decreased $0.5 million, or 2.0%, to $23.4 million for the
three-months ended September 30, 2000 compared to $23.9 million at September 30,
1999. However, gross margin increased from 30.7% in 1999 to 30.9% in 2000 as a
result of improved operating efficiencies within the Instrumentation and Fluid
Regulation segment. Gross profit from the Petrochemical segment decreased
year-over-year by $2.7 million due to lower volume and competitive pricing
related to slower market conditions. The decrease is also the net result of
higher revenues primarily in the North American market offset by higher
manufacturing costs in one of its key plants. The plant was the recipient of a
product line transfer during late 1999 to consolidate manufacturing. Subcontract
machining and other costs increased as the management team began to work through
its manufacturing planning issues. The Petrochemical segment also had a lower
level of orders for the large oil and gas construction projects this year in its
Italian operation. Total gross profit declined by $0.2 million as a result of
the weaker Euro.
Selling, general and administrative expenses decreased $1.3 million, or
7.6%, to $16.4 million for the three-months ended September 30, 2000 compared
with $17.7 million for the same quarter in the prior year. The Instrumentation
and Fluid Regulation segment reduced operating expenses by $0.8 million, of
which approximately $0.5 million was the result of the consolidation of
manufacturing and administrative functions. Petrochemical segment expenses
declined by $0.2 million, primarily as a result of lower spending in the Italian
operation. The weaker Euro resulted in a favorable reduction of expenses of $0.3
million.
During the third quarters of 2000 and 1999, special charges of $0.8
million and $0.7 million, respectively, were incurred associated with the
closure, consolidation and reorganization of manufacturing operations in the
Instrumentation and Fluid Regulation segment. These costs consisted primarily of
severance for terminated employees and exit costs associated with plant
closures, and relocation of manufacturing equipment.
The change in operating income for the quarter ended September 30, 2000 is
attributable to the following:
<TABLE>
<CAPTION>
Total Foreign
2000 1999 Change Operations Exchange
--------- --------- --------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Instrumentation & Fluid Regulation $ 7,061 $ 3,863 $ 3,198 $ 3,203 $ (5)
Petrochemical 855 3,258 (2,403) (2,444) 41
Corporate (1,704) (1,708) 4 4 --
--------- --------- --------- --------- ---------
Total $ 6,212 $ 5,413 $ 799 $ 763 $ 36
========= ========= ========= ========= =========
</TABLE>
The net increase in total company operating earnings of $0.8 million
included an increase of $3.2 million in the Instrumentation and Fluid Regulation
segment's result partially offset by a decline in results from the Petrochemical
segment of $2.4 million. The increase in operating income in the Instrumentation
and Fluid Regulation product segment
12
<PAGE>
was partially attributable to improved operating efficiencies, primarily
resulting from the completion of plant consolidations that occurred late last
year. These gains were partially offset by lower overhead absorption,
resulting from the lower production requirements of the current quarter
versus that of the prior year. The decrease in operating income in the
Petrochemical segment is primarily due to lower revenues and gross profit
which were impacted by competitive market pricing and certain manufacturing
cost inefficiencies, partially offset by modest expense reductions.
Net interest expense remained essentially unchanged at $2.1 million at
September 30, 2000 due to a lower average debt balance outstanding in the
current year, compared to the higher prior year average balance used by Watts
for allocation of interest expenses prior to the spin-off, and higher current
year interest rates.
Other non-operating expense decreased by $0.1 million, to $0.2 million at
September 30, 2000 compared with $0.3 million as of September 30, 1999. The
decrease is primarily attributable to reduced foreign exchange losses.
The effective tax rate decreased to 41.0% from 43.0%. Prior to the
spin-off, income tax was calculated, to the extent possible, as if we had filed
separate income tax returns and benefited from the Watts strategies associated
with our operations. Similar strategies were put in place this year following a
favorable supplemental ruling from the Internal Revenue Service received in
April, 2000.
Net income increased $0.6 million to $2.3 million. This increase is
primarily attributable to the improved results of the Instrumentation and Fluid
Regulation segment and lower tax rates partially offset by lower revenues and
cost inefficiencies in the Petrochemical segment as well as higher special
charges related to plant consolidation activities.
The combined results of operations are impacted by changes in foreign
exchange rates which have an effect on our international subsidiaries' operating
results. Year to year changes in foreign exchange rates had an immaterial impact
on net income for the quarter ended September 30, 2000.
Results of Operations for the Nine-Months Ended September 30, 2000 Compared to
the Nine-Months Ended September 30, 1999
The following tables set forth the percentage of net revenues and the
yearly percentage change in certain financial data for the nine-months ended
September 30, 2000 and 1999.
<TABLE>
<CAPTION>
As a percentage of net revenues
nine-months ended September 30,
------------------------------- Year-to-Year
2000 1999 Percentage Increase (Decrease)
---- ---- ------------------------------
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 0.9%
Cost of revenues 68.6% 67.5% 2.6%
----- -----
Gross profit 31.4% 32.5% (2.5)%
Selling, general and administrative expenses 21.8% 23.9% (8.2)%
Special charges 0.6% 0.3% 108.3%
----- -----
Operating income 9.0% 8.3% 10.0%
Other (income) expense:
Interest (income) expense, net 3.0% 2.8% 9.8%
Other (income) expense, net 0.3% 0.3% 29.1%
----- -----
Income before income taxes 5.7% 5.2% 9.1%
Provisions for income taxes 2.4% 2.1% 11.7%
----- -----
Net income 3.3% 3.1% 7.4%
===== =====
</TABLE>
Net revenues for the nine-months ended September 30, 2000 increased by
$2.2 million, or 0.9%, to $236.9 million compared to $234.7 million for the
nine-months ended September 30, 1999. The increase in net revenues for the
period ended September 30, 2000 is attributable to the following:
<TABLE>
<CAPTION>
Total Foreign
2000 1999 Change Acquisitions Operations Exchange
--------- --------- --------- ----------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Instrumentation & Fluid Regulation $ 131,987 $ 131,266 $ 721 $ 1,458 $ 672 $ (1,409)
Petrochemical 104,912 103,438 1,474 141 3,334 (2,001)
--------- --------- --------- --------- --------- ---------
Total $ 236,899 $ 234,704 $ 2,195 $ 1,599 $ 4,006 $ (3,410)
========= ========= ========= ========= ========= =========
</TABLE>
13
<PAGE>
The Instrumentation and Fluid Regulation products segment accounted for
approximately 55.7% of net revenues in the first nine months compared to 55.9%
last year. The Petrochemical product segment accounted for approximately 44.3%
of net revenues this year compared to 44.1% for the same period last year.
Instrumentation and Fluid Regulation product revenues increased $0.7
million, or 0.5%. The net increase is primarily due to: incremental revenue of
$1.5 million as a result of the GO Regulator acquisition in April, 1999; a
year-to-year increase in U.S. instrumentation revenues of $2.3 million,
primarily within the aerospace markets; a $0.6 million increase in the volume of
European instrumentation product revenues; $2.2 million lower revenues of steam
products, resulting from a lower product order backlog at the beginning of the
year than was available in the prior year; and the effect of a weaker Euro which
reduced instrumentation revenues by $1.4 million. The net increase in
petrochemical revenues of $1.5 million, or 1.4%, was principally the result of
$8.4 million in higher North American revenues related to improved customer
spending on maintenance and repair and small capital projects, a $2.0 million
increase in revenue from the Chinese joint venture and a $6.9 million decrease
in revenues from the Italian based operation due to a reduced number of large
oil and gas construction projects. Net foreign exchange rate changes were
unfavorable, which decreased Petrochemical revenues by $2.0 million.
Gross profit decreased $1.9 million, or 2.5%, to $74.3 million for the
nine-months ended September 30, 2000 compared to $76.2 million at September 30,
1999. Gross margin declined from 32.5% in 1999 to 31.4% in 2000. Gross profit
from the Instrumentation and Fluid Regulation segment was flat, with the
increase in gross profit attributable to operations of $0.4 million offset by
unfavorable foreign exchange. Gross profit from the Petrochemical segment
decreased year-over-year by $1.9 million. The decrease is the net result of:
lower revenues in certain higher margin product lines, resulting from reduced
capital project activity for the global oil and gas markets this year; coupled
with the related effect of competitive pricing; and by higher manufacturing
costs at a key North American plant.
Selling, general and administrative expenses decreased $4.6 million, or
8.2%, to $51.5 million at September, 2000 compared with $56.1 million for the
same period in the prior year. The Instrumentation and Fluid Regulation segment
reduced operating expenses by $4.7 million, of which approximately $4.2 million
was the result of the consolidation of manufacturing and administrative
functions. Increased corporate spending of approximately $0.6 million reflects
additional costs associated with operating as an independent public company. The
weaker Euro resulted in reduced overall expenses of $0.7 million.
During the first nine months, special charges of $1.5 million were
incurred associated with the closure, consolidation and reorganization of
manufacturing operations in both the Instrumentation and Fluid Regulation and
Petrochemical segments. These costs consisted primarily of severance for
terminated employees and exit costs associated with plant closures, including
relocation of manufacturing equipment. During the first nine months of 1999
similar consolidation charges of $0.7 million were incurred.
The change in operating income for the nine-months ended September 30,
2000 is attributable to the following:
<TABLE>
<CAPTION>
Total Foreign
2000 1999 Change Acquisitions Operations Exchange
---------- ---------- ---------- ------------ ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Instrumentation & Fluid Regulation $ 21,383 $ 17,229 $ 4,154 $ 105 $ 4,058 $ (9)
Petrochemical 5,060 6,670 (1,610) 51 (1,801) 140
Corporate (5,130) (4,517) (613) -- (613) --
---------- ---------- ---------- ---------- ---------- ----------
Total $ 21,313 $ 19,382 $ 1,931 $ 156 $ 1,644 $ 131
========== ========== ========== ========== ========== ==========
</TABLE>
The increase in operating income in the Instrumentation and Fluid
Regulation products segment was primarily attributable to improved
manufacturing and administrative operating efficiencies. These gains were
partially offset by lower manufacturing overhead absorption, resulting from
the lower production requirements of the current period versus that of the
prior year, and by the effect of the special charges incurred during the
period. The decrease in operating income in the Petrochemical products
segment is primarily due to: additional gross profit related to incremental
revenues offset by lower gross profit due to the effect of competitive
pricing pressures, manufacturing cost inefficiencies and the special charges
related to plant closures and reorganization. Additional corporate spending
of $0.6 million is associated with operating as an independent public company.
14
<PAGE>
Net interest expense increased $0.6 million to $7.1 million at September
30, 2000 due to higher current year interest rates.
Other non-operating expense increased by $0.2 million, to $0.8 million at
September 30, 2000 compared with $0.6 million as of September 30, 1999. The
increase is primarily attributable to higher minority interest expense related
to the current year improvement in the profitability of our Chinese joint
venture operation.
The effective tax rate increased to 41.0% from 40.0%. Prior to the
spin-off, income tax was calculated, to the extent possible, as if we had filed
separate income tax returns and we benefited from the Watts strategies
associated with our operations. Similar strategies were not put in place
immediately following the spin-off as we were required to wait for a favorable
supplemental ruling from the Internal Revenue Service which we eventually
received in April, 2000.
Net income increased $0.5 million to $7.9 million from $7.4 million in the
comparable period last year as improved operating results within the
Instrumentation and Fluid Regulation segment were partially offset by the
decrease in performance within the Petrochemical products segment and higher
special charges related to consolidation activities identified above.
The combined results of operations are impacted by the effect that changes
in foreign exchange rates have on our international subsidiaries' operating
results. Year to year changes in foreign exchange rates had an immaterial impact
on net income for the period ended September 30, 2000.
Liquidity and Capital Resources
During the nine-month period ended September 30, 2000, we generated $27.4
million in cash flow from operating activities and we received $1.5 million as
partial settlement of our litigation against the former Hoke stockholders. Our
uses of cash included $2.5 million to purchase capital equipment, and a net
$22.8 million was used to reduce our long-term debt. Capital expenditures were
primarily for manufacturing machinery and equipment to further improve and
consolidate manufacturing operations. Our capital expenditure budget for the
year ending December 31, 2000 is $5.0 million.
Since December 31, 1999, we have reduced the balance of our $75.0 million
unsecured credit facility by $21.0 million to $11.0 million, and as of September
30, 2000, we had $64.0 million available to support our acquisition program,
working capital requirements and for general corporate purposes.
To fulfill a representation made to the Internal Revenue Service ("IRS")
as part of the application for the tax-free treatment of our spin-off from
Watts, we had intended to engage in an equity offering within approximately one
year after the spin-off. Because we believed that market conditions were not
favorable for completion of such an offering during that one-year period, we
filed for and received a supplemental ruling from the IRS extending our original
timeline by an additional six months. Therefore, we now intend to engage in an
equity offering by April 18, 2001. We intend to use the proceeds from an equity
offering, together with available funds from our unsecured line of credit, to
fund future acquisitions.
The ratio of current assets to current liabilities at September 30, 2000
was 4.3 to 1 compared to 4.5 to 1 at December 31, 1999. Cash and cash
equivalents were $7.7 million at September 30, 2000 compared to $5.2 million at
December 31, 1999. Debt as a percentage of total capital employed was 35.2% at
September 30, 2000 compared to 40.6% at December 31, 1999. At September 30,
2000, we were in compliance with all covenants related to existing debt
obligations.
We anticipate that available funds and those funds provided from ongoing
operations will be sufficient to meet current operating requirements and
anticipated capital expenditures for at least the next 24 months.
We use foreign currency forward contracts to manage the risk related to
intercompany and third party sales and certain open foreign currency denominated
commitments to sell product to third parties. Related gains and losses are
recognized when the contracts expire, which are generally in the same period as
the underlying foreign currency denominated transaction. These contracts do not
subject us to significant market risk from exchange movement because they offset
gains and losses on the related foreign currency denominated transactions. At
September 30, 2000, we had forward contracts to buy foreign currencies with a
face value of $2.5 million. These contracts mature on various dates between
November 2000 and July 2001 and had a fair market value of less than $0.1
million at September 30, 2000. The counterparties to these contracts are major
financial institutions. Our risk of loss in the event of non-performance by the
counterparty is not significant.
15
<PAGE>
From time-to-time, we are involved with product liability, environmental
proceedings and other litigation proceedings and incur costs on an ongoing basis
related to these matters. We have not incurred material expenditures in the
nine-month period ended September 30, 2000 in connection with any of these
matters. See Part II, Item 1, Legal Proceedings.
Other
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition". An amendment has delayed the
effective date until the fourth quarter of 2000. The Company is reviewing the
requirements of this standard and has not yet determined the impact of this
standard on its consolidated financial statements.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCUSSION ABOUT MARKET RISK
The following discussion of our risk-management activities may include
"forward-looking statements" that involve risk and uncertainties. Actual results
could differ significantly from those forward-looking statements.
The primary risk exposures are in the areas of market risk, interest rate
risk, foreign exchange rate risk and commodity price risk.
Market 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 and gas prices decrease, expenditures on maintenance and
repair decline rapidly and outlays for exploration and in-field drilling
projects decrease and, accordingly, demand for valve products is reduced. When
oil and gas prices rise, maintenance and repair activity normally increases and
we benefit from increased demand for valve products. However, price increase
which may be considered temporary in nature, or not driven by customer demand
may result in longer lead times for Petrochemical sales orders.
Interest Rate Risk
At September 30, 2000, our primary interest rate risk relates to
borrowings under its $75.0 million revolving credit facility. The interest rate
on those borrowings fluctuates with changes in short-term borrowing rates. There
was $11.0 million of borrowings from the revolving credit facility outstanding
as of September, 2000. Based upon the expected levels of borrowings under this
facility in 2001, an increase in interest rates of 100 basis points would not
have a material effect on our results of operations or cash flows (less than
$0.1 million).
Information about our long-term debt appears in Note 9 to the consolidated
financial statements filed with our Annual Report on Form 10-K.
Foreign Exchange Rate Risk
We use foreign currency forward contracts to manage the risk related to
intercompany and third party sales that occur during the fiscal year and certain
open foreign currency denominated commitments to sell products to third parties.
We do not use derivative financial instruments for speculative or trading
purposes. We use simple straight-forward instruments that are placed with major
institutions. Risk management strategies are reviewed and approved by senior
management before being implemented. Information about our use of forward
currency forward exchange contracts appears in Note 13 to the consolidated
financial statements filed with our Annual Report on Form 10-K and included in
Part 1. Item 2 Liquidity and Capital Resources section in the Report.
Commodity Price Risk
The raw materials used in production process are stainless steel, carbon
steel, cast iron and brass. We purchase these materials from numerous suppliers
nationally and internationally, and have not historically experienced
significant difficulties in obtaining these commodities in quantities sufficient
for our operations. However, these commodities are subject to price fluctuations
which may adversely affect our results of operations. We manage this risk by
offsetting
16
<PAGE>
increases in commodities with increased sales prices, an active materials
management program and the diversity of materials used in our production
processes.
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 Circle Seal Controls operation. We believe this coverage to be
generally in accordance with industry practices. Nonetheless, such insurance
coverage may not be adequate to protect us fully against substantial damage
claims which may arise from product defects and failures or from environmental
liability.
Leslie Controls, Inc. ("Leslie") and Spence Engineering Company, Inc.
("Spence"), both subsidiaries of CIRCOR, are third-party defendants in over 300
civil product liability actions filed against ship owner defendants in the U.S.
District Court, Northern District of Ohio (Cleveland) between the 1980s and
1996. These cases are part of tens of thousands of maritime asbestos cases filed
in this court against multiple defendants. The ship owner defendants'
third-party claims in the Leslie and Spence cases typically involve 20-30
third-party defendants. The claims against Leslie and Spence assert that the
packing in metal pumps and the gaskets in metal valves supplied by Leslie and
Spence contained asbestos which contributed to the asbestos exposure of
plaintiffs who worked on the defendants' ships. To date, two cases involving
Leslie only have settled in a way that required a payment from Leslie. One case
settled in 1995 with a $2,000 payment from Leslie; another settled in 1989 with
a $500 payment from Leslie. These thousands of cases are subject to court
ordered moratoriums on answers and motion practice, and the very small
percentage of these cases that have come to trial since 1996 have not involved
Leslie or Spence.
Leslie and its insurers had been in dispute over payment of approximately
$560,000 in legal fees incurred to defend these cases through 1994 and
approximately $300,000 in legal fees incurred from 1995 through the present
time. The dispute resulted from a gap in Leslie's insurance coverage from 1965
to 1973. During the fall of 1999, Leslie and its insurers entered into an
agreement pursuant to which Leslie has agreed to be responsible for 41% of all
legal fees and settlement costs incurred from 1995 forward.
We have established reserves for all of the claims discussed above,
including reserves relating to the claims disputed by our insurance carriers,
and we do not currently believe it is reasonably likely that a range of loss
could occur in excess of the amounts accrued. We have not recorded any probable
third-party recoveries of our own on these claims.
We are currently a party to or otherwise involved in various
administrative or legal proceedings under federal, state or local environmental
laws or regulations involving a number of sites, in some cases as a participant
in a group of potentially responsible parties, referred to as PRPs. Two of these
sites, the Sharkey and Combe Landfills in New Jersey, are listed on the National
Priorities List. With respect to the Sharkey Landfill, we have been allocated
0.75% of the remediation costs, an amount which is not material to us. With
respect to the Combe Landfill, we have settled the Federal Government's claim
for an amount which is immaterial and anticipate settling with the State of New
Jersey for an amount not greater than that paid to the Federal Government.
Moreover, our insurers have covered defense and settlement costs to date with
respect to the Sharkey and Combe Landfills. In addition we are involved as a PRP
with respect to the Solvent Recovery Service of New England site and the Old
Southington landfill site, both in Connecticut. These sites are on the National
Priorities List but, with respect to both sites, we have the right to
indemnification from third parties. Based on currently available information, we
believe that our share of clean-up costs at these sites will not be material.
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. We believe that KF's
marking practices have been in substantial compliance with Customs' regulations
and we are cooperating with Customs in its investigation. While we believe that
the Customs investigation will not result in any material liability to us, there
can be no assurances. If the Customs investigation were to reveal that
violations of the Customs laws had occurred, KF could be subjected to civil
fines, forfeitures and (if such violations were determined to be intentional)
criminal penalties, which could be material.
17
<PAGE>
On July 22, 1998, Watts Investment Company, a subsidiary of our former
parent, Watts Industries, Inc., acquired Hoke, Inc. ("Hoke"). On October 18,
1999, the spin-off date, the ownership of Hoke Inc. was transferred to CIRCOR.
Additionally, Watts Investment Company assigned to us all of its rights under
the Stock Purchase Agreement governing the Hoke acquisition (the "Stock Purchase
Agreement"). As a result, we became the claimant in two separate arbitration
proceedings against the former Hoke stockholders.
Under the terms of the Stock Purchase Agreement, Watts Investment Company
was obligated to prepare a closing date balance sheet and closing net worth
statement, which when compared to the closing net worth as detailed in the Stock
Purchase Agreement, would result in either an upward or downward purchase price
adjustment. Watts Investment Company prepared the closing date balance sheet
that showed that the closing net worth was approximately $9.9 million lower than
the target amount in the Stock Purchase Agreement, and sought a purchase price
adjustment for that amount. The former Hoke stockholders objected to the closing
date balance sheet and closing net worth statement. In early 1999, pursuant to
the terms of the Stock Purchase Agreement, arbitration proceedings began,
between the former Hoke stockholders and us, to determine the closing net worth
of Hoke. In May, 2000 the arbitrator awarded us a purchase price adjustment in
the amount of $6,219,774. Because the Stock Purchase Agreement provided for a
deferred purchase price payment by us of $3,500,000, the net effect of the
arbitrator's award would result in a payment to us of $2,719,774. The Former
Hoke stockholders now have made payment of all amounts owed to us as a result of
this award.
We also are the claimant in an indemnification claim against the former
Hoke stockholders pursuant to the Stock Purchase Agreement. This claim, made on
December 11, 1998, asserts that the former Hoke stockholders, either
intentionally or unintentionally, made misrepresentations in the Stock Purchase
Agreement regarding Hoke's financial statements and that those
misrepresentations caused Hoke's earnings for 1997 to be inflated, thereby
causing us harm. This claim is the subject of a separate proceeding, with a
different arbitrator than was used in the closing date balance sheet dispute. In
August 2000, the parties participated in a two-day hearing in front of the
arbitrator and expect a resolution of this matter in the near future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K
(a) EXHIBIT INDEX
Exhibit No. Description and Location
----------- ------------------------
2 Plan of Acquisition, Reorganization, Arrangement, Liquidation
or Succession:
2.1 Distribution Agreement between Watts Industries, Inc. and the
Company dated as of October 1, 1999, is incorporated herein by
reference to Exhibit 2.1 to Amendment No. 2 to the Company's
Registration Statement on Form 10, File No. 000-26961, filed
with the Securities and Exchange Commission on October 6, 1999
("Amendment No. 2 to the Form 10").
3 Articles of Incorporation and By-Laws:
3.1 The Amended and Restated Certificate of Incorporation of the
Company is incorporated herein by reference to Exhibit 3.1 to
the Company's Registration Statement on Form 10, File No.
000-26961, filed with the Securities and Exchange Commission
on August 6, 1999 ("Form 10").
3.2 The Amended and Restated By-Laws of the Company are
incorporated herein by reference to Exhibit 3.2 to the Form
10.
3.3 Certificate of Designations, Preferences and Rights of a
Series of Preferred Stock of CIRCOR International, Inc.
classifying and designating the Series A Junior Participating
Cumulative Preferred Stock is incorporated herein by reference
to Exhibit 3.1 to the Company's Registration Statement on Form
8-A, File No. 001-14962, filed with the Securities and
Exchange Commission on October 21, 1999 ("Form 8-A").
4 Instruments Defining the Rights of Security Holders, Including
Debentures:
4.1 Shareholder Rights Agreement, dated as of September 16, 1999,
between CIRCOR International, Inc. and BankBoston, N.A., as
Rights Agent is incorporated herein by reference to Exhibit
4.1 to the Form 8-A.
9 Voting Trust Agreements:
9.1 The Amended and Restated George B. Horne Voting Trust
Agreement - 1997 dated as of September 14, 1999 is
incorporated herein by reference to Exhibit 9.1 to Amendment
No. 1 to the Company's Registration
18
<PAGE>
Statement on Form 10, File No. 000-26961, filed with the
Securities and Exchange Commission on September 22, 1999
("Amendment No. 1 to the Form 10").
10 Material Contracts:
10.1 CIRCOR International, Inc. 1999 Stock Option and Incentive
Plan is incorporated herein by reference to Exhibit 10.1 to
Amendment No. 1 to the Form 10.
10.2 Form of Incentive Stock Option Agreement under the 1999 Stock
Option and Incentive Plan is incorporated herein by reference
to Exhibit 10.2 to Amendment No. 1 to the Form 10.
10.3 Form of Non-Qualified Stock Option Agreement for Employees
under the 1999 Stock Option and Incentive Plan (Five Year
Graduated Vesting Schedule) is incorporated herein by
reference to Exhibit 10.3 to Amendment No. 1 to the Form 10.
10.4 Form of Non-Qualified Stock Option Agreement for Employees
under the 1999 Stock Option and Incentive Plan (Performance
Accelerated Vesting Schedule) is incorporated herein by
reference to Exhibit 10.4 to Amendment No. 1 to the Form 10.
10.5 Form of Non-Qualified Stock Option Agreement for Independent
Directors under the 1999 Stock Option and Incentive Plan is
incorporated herein by reference to Exhibit 10.5 to Amendment
No. 1 to the Form 10.
10.6 CIRCOR International, Inc. Management Stock Purchase Plan is
incorporated herein by reference to Exhibit 10.6 to Amendment
No. 1 to the Form 10.
10.7 Form of CIRCOR International, Inc. Supplemental Employee
Retirement Plan is incorporated herein by reference to Exhibit
10.7 to Amendment No. 1 to the Form 10.
10.8 Supply Agreement between Watts Industries, Inc. and CIRCOR
International, Inc. is incorporated herein by reference to
Exhibit 10.8 to Amendment No. 2 to the Form 10.
10.9 Trademark License Agreement between Watts Industries, Inc. and
CIRCOR International, Inc. is incorporated herein by reference
to Exhibit 10.9 to Amendment No. 2 to the Form 10.
10.10 Lease Agreement, dated as of February 14, 1999, between
BY-PASS 85 Associates, LLC and CIRCOR International, Inc. is
incorporated herein by reference to Exhibit 10.10 to Amendment
No. 1 to the Form 10.
10.11 Trust Indenture from Village of Walden Industrial Development
Agency to The First National Bank of Boston, as Trustee, dated
June 1, 1994 is herein incorporated by reference to Exhibit
10.14 of the Watts Industries, Inc. Annual Report on Form
10-K, File No. 0-14787, filed with the Securities and Exchange
Commission on September 26, 1994.
10.12 Loan Agreement between Hillsborough County Industrial
Development Authority and Leslie Controls, Inc. dated July 1,
1994 is herein incorporated by reference to Exhibit 10.15 of
the Watts Industries, Inc. Annual Report on Form 10-K, File
No. 0-14787, filed with the Securities and Exchange Commission
on September 26, 1994.
10.13 Trust Indenture from Hillsborough County Industrial
Development Authority to The First National Bank of Boston, as
Trustee, dated July 1, 1994 is herein incorporated by
reference to Exhibit 10.17 of the Watts Industries, Inc.
Annual Report on Form 10-K, File No. 0-14787, filed with the
Securities and Exchange Commission on September 26, 1994.
10.14 Form of Indemnification Agreement between CIRCOR and each of
its directors is herein incorporated by reference to Exhibit
10.20 to the Form 10.
10.15 Executive Employment Agreement between CIRCOR, Inc. and David
A. Bloss, Sr., dated as of September 16, 1999 is incorporated
herein by reference to Exhibit 10.15 to Amendment No. 1 to the
Form 10.
10.17 Amended and Restated Letter of Credit, Reimbursement and
Guaranty Agreement dated as of October 18, 1999 among Leslie
Controls, Inc., as Borrower, CIRCOR International, Inc., as
Guarantor, and First Union National Bank as Letter of Credit
Provider is herein incorporated by reference to Exhibit 10.17
to the Company's Current Report on Form 8-K, File No.
001-14962, filed with the Securities and Exchange Commission
on October 21, 1999.
10.18 Amended and Restated Letter of Credit, Reimbursement and
Guaranty Agreement dated as of October 18, 1999 among Spence
Engineering Company, Inc. as Borrower, CIRCOR International,
Inc., as Guarantor, and First Union National Bank as Letter of
Credit Provider is herein incorporated by reference to Exhibit
10.18 to the Company's Current Report on Form 8-K, File No.
001-14962, filed with the Securities and Exchange Commission
on October 21, 1999.
10.19 Credit Agreement, dated as of October 18, 1999, by and among
CIRCOR International, Inc., a Delaware corporation, as
Borrower, each of the Subsidiary Guarantors named therein, the
Lenders from time to time a party thereto, ING (U.S.) Capital
LLC, as Agent for such Lenders, BankBoston, N.A., as
Syndication Agent, First Union National Bank, as Documentation
Agent and ING Barings LLC, as Arranger for the Lenders is
19
<PAGE>
herein incorporated by reference to Exhibit 10.19 to the
Company's Current Report on Form 8-K, File No. 001-14962,
filed with the Securities and Exchange Commission on October
21, 1999.
10.20 Note Purchase Agreement, dated as of October 19, 1999, among
CIRCOR International, Inc., a Delaware corporation, the
Subsidiary Guarantors and each of the Purchasers listed on
Schedule A attached thereto is herein incorporated by
reference to Exhibit 10.20 to the Company's Current Report on
Form 8-K, File No. 001-14962, filed with the Securities and
Exchange Commission on October 21, 1999.
10.21 Sharing agreement regarding the rights of debt holders
relative to one another in the event of insolvency is herein
incorporated by reference to Exhibit 10.21 on Form 10 Q/A File
No. 1-14962 filed with the Securities and Exchange Commission
on August 14, 2000.
11 Computation of Earnings per Share (1).
21 Subsidiaries of Registrant: A list of Subsidiaries of the
Company is incorporated herein by reference to Exhibit 21.1 to
Amendment No. 1 to the Company's Form 10.
* 10.22 Executive Change of Control Agreement between CIRCOR, Inc. and
Carmine F. Bosco dated August 8, 2000.
* 10.23 Executive Change of Control Agreement between CIRCOR, Inc. and
Alan R. Carlsen dated August 8, 2000.
* 10.24 Executive Change of Control Agreement between CIRCOR, Inc. and
Kenneth W. Smith dated August 8, 2000.
* 27 Financial Data Schedule Filed for the Periods Ended September
30, 2000 and 1999.
(1) Incorporated by reference to the notes to consolidated financial
statements, note 6, of this report.
(*) Filed herewith
(b) Reports on Form 8-K
None
20
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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 this 14th day of November 2000.
CIRCOR INTERNATIONAL, INC.
/s/ DAVID A. BLOSS, SR.
------------------------------------
DAVID A. BLOSS, SR.
CHAIRMAN, CHIEF EXECUTIVE OFFICER
AND PRESIDENT
PRINCIPAL EXECUTIVE OFFICER
/s/ KENNETH W. SMITH
------------------------------------
KENNETH W. SMITH
VICE PRESIDENT, CHIEF FINANCIAL OFFICER
AND TREASURER
PRINCIPAL ACCOUNTING OFFICER
21
