<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 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:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<S> <C>
COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE
PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
</TABLE>
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 May 1, 2000, there were 13,236,877 shares of the Registrant's
Common Stock outstanding.
================================================================================
<PAGE>
CIRCOR INTERNATIONAL, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets for March 31, 2000 and
December 31, 1999 3
Consolidated Statements of Operations for the Three-
Months Ended March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows for the Three-
Months Ended March 31, 2000 and 1999 5
Pro Forma Consolidated Statement of Operations
for the Three-Months Ended March 31, 1999 6
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13-14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit Index 16
Exhibit 27 Financial Data Schedule Filed for the Periods
Ended March 31, 2000 and 1999 17
Exhibit 27.1 Amended Financial Data Schedule for
December 31, 1999 18
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRCOR INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ................................................... $ 8,279 $ 5,153
Trade accounts receivable, less allowance for doubtful accounts
of $2,908 and $2,683, respectively ........................... 62,492 60,916
Inventories ................................................................. 107,552 107,332
Other current assets ........................................................ 15,457 16,800
--------- ---------
Total Current Assets ...................................................... 193,780 190,201
Property, Plant and Equipment, Net ........................................... 73,580 75,154
Other Assets:
Goodwill, net of accumulated amortization of $12,393 and $11,775,
respectively ............................................................. 95,871 96,488
Other assets ................................................................ 5,037 5,242
--------- ---------
Total Assets ................................................................. $ 368,268 $ 367,085
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ............................................................ $ 21,853 $ 21,172
Other current liabilities ................................................... 20,373 19,069
Current portion of long-term debt ........................................... 2,693 2,260
--------- ---------
Total Current Liabilities ................................................. 44,919 42,501
Long-Term Debt, Net of Current Portion ....................................... 118,698 122,867
Other noncurrent liabilities ................................................. 18,691 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;
13,236,877 issued and outstanding ......................................... 132 132
Additional paid-in capital ............................................ 180,932 180,887
Retained earnings ..................................................... 6,579 3,393
Accumulated other comprehensive income ................................ (1,683) (1,003)
--------- ---------
Total Shareholders' equity ................................... 185,960 183,409
--------- ---------
Total Liabilities and Shareholders' Equity ................................... $ 368,268 $ 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>
FOR THE THREE-MONTHS ENDED
-------------------------------
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
Net revenues ...................................................... $ 81,836 $ 79,234
Cost of revenues .................................................. 55,371 53,367
-------- --------
GROSS PROFIT ................................................... 26,465 25,867
Selling, general and administrative expenses ...................... 17,937 18,982
-------- --------
OPERATING INCOME ............................................... 8,528 6,885
-------- --------
Other (income) expense:
Interest income ................................................ (101) (70)
Interest expense ............................................... 2,726 2,616
Other, net ..................................................... 503 68
-------- --------
3,128 2,614
-------- --------
INCOME BEFORE INCOME TAXES ........................................ 5,400 4,271
Provision for income taxes ........................................ 2,214 1,778
-------- --------
NET INCOME ..................................................... $ 3,186 $ 2,493
======== ========
Basic earnings per share
Income per share ............................................... $ 0.24 *
Weighted average number of shares .............................. 13,237 *
Diluted earnings per share
Income per share ............................................... $ 0.24 *
Weighted average numbered shares ............................... 13,486 *
</TABLE>
* - See Notes 6 and 7 of the Consolidated Financial Statements
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>
THREE-MONTHS ENDED
------------------------------------
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income........................................................ $ 3,186 $ 2,493
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation................................................. 2,690 2,175
Amortization................................................. 681 922
(Gain) on disposal of property, plant and equipment.......... (4) (10)
Changes in operating assets and liabilities, net of effects
from business acquisitions:
Trade accounts receivable............................... (2,007) 1,951
Inventories............................................. (596) (595)
Prepaid expenses and other current assets............... 1,375 435
Accounts payable, accrued expenses and other liabilities. 2,845 (8,575)
-------- -------
Net cash provided by (used in) operating activities.......... 8,170 (1,204)
-------- -------
INVESTING ACTIVITIES
Additions to property, plant and equipment........................ (1,272) (2,000)
Disposal of property, plant and equipment......................... 5 63
(Increase) decrease in other assets............................... (75) 9
Business acquisitions, net of cash acquired....................... - (677)
-------- -------
Net cash provided by investing activities.................... (1,342) (2,605)
-------- -------
FINANCING ACTIVITIES
Proceeds from long-term borrowings................................ 6,847 140
Payments of long-term debt........................................ (10,534) (8,286)
Net intercompany activity with Watts Industries, Inc.............. -- 12,485
-------- -------
Net cash provided by (used in) financing activities.......... (3,687) 4,339
-------- -------
Effect of exchange rate changes on cash and cash equivalents...... (15) (309)
-------- -------
INCREASE IN CASH AND CASH EQUIVALENTS................... 3,126 221
Cash and cash equivalents at beginning of period................... 5,153 4,090
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......................... $ 8,279 $ 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
THREE-MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Net revenues ............................... $ 79,234 $ -- $ 79,234
Cost of revenues ........................... 53,367 -- 53,367
-------- -------- --------
GROSS PROFIT ............................ 25,867 25,867
Selling, general and administrative
expenses ................................ 18,982 63 19,045
-------- -------- --------
OPERATING INCOME ........................ 6,885 (63) 6,822
Other (income) expense:
Interest income ......................... (70) -- (70)
Interest expense ........................ 2,616 277 2,893
Other, net .............................. 68 -- 68
-------- -------- --------
2,614 277 2,891
-------- -------- --------
INCOME BEFORE INCOME TAXES ................. 4,271 (340) 3,931
Provision for income taxes ................. 1,778 (136) 1,642
-------- -------- --------
NET INCOME .............................. $ 2,493 $ (204) $ 2,289
======== ======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
See Note 7 for an explanation of pro forma earnings per share.
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 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 six-months ended December 31, 1999,
our fiscal year end.
On October 15, 1999, we completed the spin-off from our former
parent, Watts Industries, Inc., and began to operate as an independent public
company. Additionally, we announced that we would change our fiscal year from
June 30th to December 31st. The following discussion is based upon the
three-month period ending March 31, 2000. Additionally, comparisons to prior
year periods pertain to the historical results of these operations under
Watts, 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 the Consolidated Financial Statements.
In the opinion of management, all adjustments considered necessary for
a fair presentation of the financial statements have been included. Effective
July 1, 1999, we changed our fiscal year end from June 30th to December 31st.
The accompanying consolidated financial statements present our
financial position, results of operations and cash flows on a historical carve
out basis up to and including December 31, 1999, and subsequently as if we had
been an independent, publicly owned company. Certain allocations of previously
unallocated interest of Watts Industries, Inc. (Watts) and general and
administrative expenses, 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.
(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 on January 1, 2001. The impact of SFAS 133 on the consolidated
financial statements is still being evaluated, but is not expected to be
material.
Also in 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use", and SOP 98-5, "Reporting on the Costs of Start-Up
Activities". We adopted SOP 98-1 and SOP 98-5 on July 1, 1999. The adoption of
these statements did not have a material affect the consolidated financial
statements.
(3) INVENTORIES
Inventories consist of the following (IN THOUSANDS):
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
(UNAUDITED) (AUDITED)
Raw materials $ 43,030 $ 42,701
Work in process 31,259 27,466
Finished goods 33,263 37,165
-------- --------
$107,552 $107,332
======== ========
7
<PAGE>
(4) SEGMENT INFORMATION
The following table presents certain operating segment information
(unaudited):
<TABLE>
<CAPTION>
INSTRUMENTATION
& FLUID
REGULATION PETROCHEMICAL CORPORATE CONSOLIDATED
PRODUCTS PRODUCTS ADJUSTMENTS TOTAL
---------------- ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
THREE-MONTHS ENDED MARCH 31, 2000
Net Revenues................................ $44,309 $ 37,527 $ -- $ 81,836
Operating income (loss)..................... 6,843 3,502 (1,817) 8,528
THREE-MONTHS ENDED MARCH 30, 1999
Net Revenues................................ $44,382 $ 34,852 $ -- $ 79,234
Operating income (loss)..................... 6,227 2,062 (1,404) 6,885
</TABLE>
(5) 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.
ENVIRONMENTAL REMEDIATION
We have been named a potentially responsible party with respect to
identified contaminated sites. The level of contamination varies significantly
from site to site as do the related levels of remediation efforts. Environmental
liabilities are recorded based on the most probable cost, if known, or on the
estimated minimum cost of remediation. Our accrued estimated environmental
liabilities are based on assumptions which are subject to a number of factors
and uncertainties. Circumstances which can affect the reliability and precision
of these estimates include identification of additional sites, environmental
regulations, level of cleanup required, technologies available, number and
financial condition of other contributors to remediation and the time period
over which remediation may occur. We recognize changes in estimates as new
remediation requirements are defined or as new information becomes available. We
estimate that accrued environmental remediation liabilities will likely be paid
over the next five to ten years. Such environmental remediation contingencies
are not expected to have a material effect on our financial position, results of
operation, or liquidity.
(6) EARNINGS PER COMMON SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE-MONTHS ENDED MARCH 31, 2000
--------------------------------------------------------
NET INCOME SHARES PER SHARE AMOUNT
---------- ------ ----------------
<S> <C> <C> <C>
Basic EPS............................. $3,186 13,237 $0.24
Dilutive securities, principally
common stock options................. -- 249 --
------ ------ -----
Diluted EPS........................... $3,186 13,486 $0.24
====== ====== =====
</TABLE>
8
<PAGE>
(7) PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Additional administrative expenses would have been incurred had we
been a publicly held, independent company and are shown as a pro forma
adjustment. We 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, 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 $1,859,000 of expense allocated
from Watts. Pro forma interest expense includes $2,136,000 of interest
expense on borrowings under our credit facility and from the issuance of
senior unsecured notes. The borrowings under our 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 our credit facility will
continue to be subject changes in the general financial markets. 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.
Pro forma income tax benefits attributable to the above adjustments
were recorded at a combined federal and state rate of 40%.
The number of shares used to calculate pro forma earnings per share for
the three months ended March 31, 1999 assumes the spin-off transaction occurred
at July 1, 1999. Basic net income per common share is calculated by dividing net
income by the weighted average number of common shares outstanding. The
calculation of diluted earnings per share assumes the conversion of all dilutive
securities (see Note 10 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 MARCH 31, 1999
----------------------------------------------------------------
PRO FORMA NET INCOME SHARES PER SHARE AMOUNT
-------------------- ------ ----------------
<S> <C> <C> <C>
Basic EPS.......................... $2,289 13,324 $0.17
Dilutive securities, principally
common stock options.............. -- 3 --
------ ------ -----
Diluted EPS........................ $2,289 13,327 $0.17
====== ====== =====
</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 it does not provide for such taxes on
undistributed earnings of foreign subsidiaries. Comprehensive income for the
three-month period ended March 31, 2000 and 1999 was as follows:
<TABLE>
<CAPTION>
THREE-MONTHS ENDED MARCH 31,
----------------------------
2000 1999
---- ----
(IN THOUSANDS)
<S> <C> <C>
Net income $3,186 $2,493
Foreign currency translation adjustments (680) 917
------ ------
Total comprehensive income $2,506 $3,410
====== ======
</TABLE>
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
9
<PAGE>
of or indicate future events and trends and which do not relate to historical
matters identify forward-looking statements. Forward-looking statements involve
known and unknown risks, uncertainties and other factors, which may cause the
actual results, performance or achievements of the Company to differ materially
from anticipated future results, performance or achievements expressed or
implied by such forward-looking statements. The Company undertakes no obligation
to publicly update or revise any forward-looking statement, whether as a result
of new information, future events or otherwise.
The future operating results and performance trends of the Company may
be affected by a number of factors, including, without limitation, the
following: (i) loss of market share through competition; (ii) competitive
pricing pressures; (iii) ability to develop and market new products; (iv)
changes in the instrumentation, fluid regulation and petrochemical markets; (v)
changes in demand for the Company's products; (vi) fluctuations in manufacturing
yields; (vii) insufficient or excess manufacturing capacity; (viii) the amount
of product booked and shipped within a quarter; (ix) changes in product mix; (x)
fluctuating economic conditions in markets where the Company's products are
manufactured or sold; interest rate and foreign exchange rate fluctuations; (xi)
ability to integrate manufacturing and other operating entities; (xii) changes
in commodity prices including stainless steel, cast iron and carbon steel; and
(xiii) integrations of future acquisitions. In addition to the foregoing, the
Company's actual future results could differ materially from those projected in
the forward-looking statements as a result of the risk factors set forth in the
Company's various filings with the Securities and Exchange Commission and of
changes in general economic conditions, changes in interest rates and/or
exchange rates and changes in the assumptions used in making such
forward-looking statements.
On October 18, 1999, we completed the spin-off from our former parent,
Watts Industries, Inc., and began to operate as an independent public company.
Additionally, we announced that we would change our fiscal year from June 30th
to December 31st. The following discussion is based upon the three-month period
ending March 31, 2000. Additionally, comparisons to prior year periods pertain
to the historical results of these operations under Watts, 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 the
Consolidated Financial Statements.
RESULTS OF OPERATIONS FOR THE THREE-MONTHS ENDED MARCH 31, 2000 COMPARED TO THE
THREE-MONTHS ENDED MARCH 31, 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
March 31, 2000 and 1999.
<TABLE>
<CAPTION>
AS A PERCENTAGE OF NET REVENUES
THREE-MONTHS ENDED MARCH 31,
---------------------------- YEAR-TO-YEAR
2000 1999 PERCENTAGE INCREASE (DECREASE)
---- ---- ------------------------------
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 3.3%
Cost of revenues 67.7% 67.4% 3.8%
----- -----
Gross profit 32.3% 32.6% 2.3%
Selling, general and administrative expenses 21.9% 23.9% (5.5)%
----- -----
Operating income 10.4% 8.7% 23.9%
Other (income) expense:
Interest (income) expense, net 3.2% 3.2% --
Other (income) expense, net 0.6% 0.1% NMF
----- -----
Income before income taxes 6.6% 5.4% 26.4%
Provisions for income taxes 2.7% 2.3% 24.5%
----- -----
Net income 3.9% 3.1% 27.8%
===== =====
</TABLE>
NMF: Not meaningful
10
<PAGE>
Net revenues for the three-months ended March 31, 2000 increased by
$2.6 million, or 3.3%, to $81.8 million compared to $79.2 million for the
quarter ended March 31, 1999. The increase in net revenues for the quarter ended
March 31, 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 $44,309 $44,382 $ (73) $1,378 $(1,083) $(368)
Petrochemical 37,527 34,852 2,675 141 3,004 (470)
------- ------- ------- ------ ------- -----
Total $81,836 $79,234 $ 2,602 $1,519 $ 1,921 $(838)
======= ======= ======= ====== ======= =====
</TABLE>
The Instrumentation and Fluid Regulation Products Group accounted for
approximately 54.1% of net revenues in the current quarter compared to 56.0%
last year. The Petrochemical Products Group accounted for approximately 45.9% of
net revenues in the first quarter of 2000 compared to 44.0% for the same quarter
last year.
The net decrease in instrumentation and fluid regulation revenues of
$0.1 million, or 0.1% primarily consisted of: incremental revenues of $1.4
million as a result of the GO Regulator Inc. acquisition; a $1.4 million
decrease in European retail and distribution revenues; and a $0.4 million
decrease resulting from a stronger U.S. dollar. The net increase in
petrochemical revenues of $2.7 million, or 3.4%, was principally the result
of: $4.0 million in higher North American revenues, of which $0.1 million was
related to the acquisition of SSI Equipment Inc.; a $0.8 million increase in
revenues by our Chinese joint venture; and a net $1.9 million decrease in
revenues from our Italian based operation. Foreign exchange rate
changes, which were favorable in Canada and unfavorable in Italy, resulted in
a net decrease in revenues of $0.5 million.
Gross profit increased $0.6 million, or 2.3%, to $26.5 million for
the three-months ended March 31, 2000 compared to the $25.9 million at March
31, 1999. Gross margin declined slightly from 32.6% in 1999 to 32.3% in 2000.
Gross profits from instrumentation products decreased by $1.0 million. The
decrease was primarily due to temporary labor and material inefficiencies
related to the relocation, consolidation and integration of manufacturing
facilities, offset by favorable changes in the mix of products sold.
Additionally, the absorption of current year overhead costs is lower than in
the prior year. During the prior year, we increased inventory levels in
anticipation of the relocation of certain instrumentation manufacturing
operations. Gross profit from petrochemical products revenues increased
year-over-year by $1.6 million. The increase is the result of higher revenues
primarily in the North American and Asian markets. The increase in total
gross profit is net of decreases in revenues and gross profits generated from
our Italian operating unit that serves the large construction project sector
of the petrochemical market. Gross profit from petrochemical products
revenues increased year-over year by $1.6 million. The increase is the result
of higher revenues in the North American and Asian markets. The increase in
total gross profit comes despite decreases in both the volume and gross
margin of revenues generated from our Italian operating unit.
Selling, general and administrative expenses decreased approximately
$1.0 million, or 5.5%, to $17.9 million at March 31, 2000 compared with $19.0
million for same quarter in the prior year. The consolidation of
manufacturing and administrative functions within the Instrumentation and
Fluid Regulation Group reduced operating expenses by $2.2 million. These
savings were offset by higher spending in the North American Petrochemical
Group and by the additional expenses related to acquired companies. The
effect of foreign exchange rate changes reduced operating expenses by $0.2
million.
The increase in operating income for the quarter ended March 31, 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 $ 6,843 $ 6,227 $ 616 $ 89 $ 542 $ (15)
Petrochemical 3,391 2,062 1,329 51 1,217 61
Corporate (1,706) (1,404) (302) -- (302) --
------- ------- ------ ------- ------ -----
Total $ 8,528 $ 6,885 $1,643 $ 140 $1,457 $ 46
======= ======= ====== ======= ====== =====
</TABLE>
The increase in operating income in the Instrumentation and Fluid
Regulation Products Group is attributable primarily to improved operating
efficiencies within our instrumentation related product lines, which was
offset by lower overhead absorption resulting from reduced production. The
increase in operating income in the Petrochemical Products Group reflects
higher North American demand for our products used in oil and gas
exploration, production and refining applications.
Interest expense increased $0.1 million to $2.7 million at March 31,
2000 primarily due to a higher average debt balance outstanding in the
current year versus the prior year average balance used by Watts for
allocation of interest expenses prior to the spin-off.
11
<PAGE>
Other non-operating expense increased by $0.4 million, to $0.5
million at March 31, 2000 compared with $0.1 million as of March 31, 1999.
The increase is attributable to higher minority interest expense related to
the current year improvement in the profitability of our Chinese joint
venture operation and certain foreign exchange losses.
The effective tax rate decreased to 41.0% from 41.6%. The decrease
is primarily the result of the current year implementation of the tax
planning strategies designed to minimize income taxes to the extent
possible. 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. During our transition
year ended December 31, 1999, a delay in receiving a favorable supplemental
ruling from the Internal Revenue Service concerning our post-spin operations,
resulted in an increase of the effective tax rate for the period to 44.8% for
that six-month period.
Net income increased $0.7 million to $3.2 million. This increase is
primarily attributable to the increase in net revenues and the reduction in
operating expenses realized as a result of the consolidation of manufacturing
and administrative functions.
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 quarter ended March 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
During the three-month period ended March 31, 2000, we generated
$8.2 million in cash flow from operating activities and used $1.3 million of
cash for investing activities, principally to purchase capital equipment, and
a net $3.7 million toward reduction of 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.
During the six-month period ended December 31, 1999, we entered into
a $75.0 million unsecured credit facility with several banks. We also sold
$75.0 million of senior unsecured notes to institutional investors. The
proceeds from the unsecured credit facility and senior unsecured notes were
used, during the prior year, to pay Watts for our assigned portion of Watts'
long-term debt of $96.0 million, refinancing of existing CIRCOR debt of $8.6
million and various debt financing fees amounting to $1.5 million. Since
December 31, 1999, we further reduced the balance of the unsecured credit
facility by $4.5 million to $27.5 million and at March 31, 2000, we had $47.5
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 as
part of the application for the tax-free treatment of the spin-off, we intend
to engage in an equity offering within one year after the
spin-off. The timing, completion and size of the equity offering will be
subject to various market conditions. We intend to use the proceeds from the
equity offering and availability from the unsecured line of credit to fund
future acquisitions.
The ratio of current assets to current liabilities at March 31, 2000
was 4.3 to 1 compared to 4.5 to 1 at December 31, 1999. Cash and cash
equivalents were $8.3 million at March 31, 2000 compared to $5.2 million at
December 31, 1999. Debt as a percentage of total capital employed was 39.5% at
March 31, 2000 compared to 40.6% at December 31, 1999. At March 31, 2000, we
were in compliance with all covenants related to existing debts.
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
March 31, 2000, we had forward contracts to buy foreign currencies with a face
value of $2.4 million. These contracts mature on various dates between April
2000 and July 2000 and had a negative fair market value of $94,000 at March 31,
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.
From time-to-time, we are involved with product liability,
environmental proceedings and other litigation
12
<PAGE>
proceedings and incur costs on an ongoing basis related to these matters. We
have not incurred material expenditures in the three-month period ending March
31, 2000 in connection with any of these matters. See Part II, Item 1, Legal
Proceedings.
YEAR 2000
Our year 2000 initiative program was successful and no interruptions to
business processes have occurred.
CONVERSION TO EURO
On January 1, 1999, 11 of the 15 member countries of the European
Union adopted the Euro as their common legal currency and established fixed
conversion rates between their existing sovereign currencies and the Euro.
The Euro trades on currency exchanges and is available for non-cash
transactions. The introduction of the Euro will affect CIRCOR as we have
manufacturing and distribution facilities in several of the member countries
and trades extensively across Europe. We are currently assessing the
long-term competitive implications of the conversion and, at this time, are
not anticipating that any significant costs will be incurred due to the
introduction and conversion the Euro.
OTHER
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." We will adopt
SFAS 133 on January 1, 2001. The impact of SFAS 133 on the consolidated
financial statements is still being evaluated, but is not expected to be
material.
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 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. and Spence Engineering Company, 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 previously 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 duspute 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 total reserves of $1.7 million for all of the
claims discussed above, including reserves of $681,000 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
13
<PAGE>
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 22, 1998, Watts Investment Company, a subsidiary of our former
parent, Watts Industries, Inc., acquired Hoke, Inc. 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"). We are now 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. We now
anticipate a final ruling in this dispute from the arbitrator in late May,
2000. Based on the progress of the proceedings to-date, we expect to be
awarded a recovery from the former Hoke stockholders; however, the amount
remains uncertain pending the arbitrator's final ruling.
We are also 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 being heard in a separate proceeding, with a
different arbitrator, and no hearing has yet been scheduled.
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K
(a) Exhibit Index is listed on Page 16 of this report.
(b) There were no reports filed on Form 8-K during the quarter ended
March 31, 2000.
14
<PAGE>
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.
MAY 15, 2000 /s/ DAVID A. BLOSS, SR.
- ------------------ -----------------------------------------
DATE DAVID A. BLOSS, SR.
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
MAY 15, 2000 /s/ KENNETH W. SMITH
- ------------------ -----------------------------------------
DATE KENNETH W. SMITH
VICE PRESIDENT, CHIEF FINANCIAL OFFICER
AND TREASURER
CHIEF FINANCIAL AND ACCOUNTING OFFICER
15
<PAGE>
EXHIBIT INDEX
Listed and indexed below are all Exhibits filed as part of this report.
Exhibit Number Description
10.21 Sharing agreement regarding the rights of debt holders
relative to one another in the event of insolvency.
11 Computation of Earnings per Share (1)
27 Financial Data Schedule Filed for the Periods Ended
March 31, 2000 and 1999 (*)
27.1 Amended Financial Data Schedule for
December 31, 1999 (*)
(1) Incorporated by reference to the Notes to Consolidated Financial Statements,
Note 6, of this Report.
(*)-filed herewith
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 31,
2000 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-2000 JUN-30-1999
<PERIOD-START> JAN-01-2000 JAN-01-1999
<PERIOD-END> MAR-31-2000 MAR-31-1999
<CASH> 8,279 4,311
<SECURITIES> 0 0
<RECEIVABLES> 62,492 54,160
<ALLOWANCES> 2,908 3,142
<INVENTORY> 107,552 105,445
<CURRENT-ASSETS> 193,780 170,962
<PP&E> 73,580 68,315
<DEPRECIATION> 74,433 64,860
<TOTAL-ASSETS> 368,268 347,436
<CURRENT-LIABILITIES> 44,919 53,979
<BONDS> 121,391<F1> 29,863<F1>
132 0
0 0
<COMMON> 0 0
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 368,268 347,436
<SALES> 81,836 79,234
<TOTAL-REVENUES> 81,836 79,234
<CGS> 55,371 53,367
<TOTAL-COSTS> 73,308<F2> 72,349<F2>
<OTHER-EXPENSES> 402<F3> (2)<F3>
<LOSS-PROVISION> 69 28
<INTEREST-EXPENSE> 2,726 2,616
<INCOME-PRETAX> 5,400 4,271
<INCOME-TAX> 2,214 1,778
<INCOME-CONTINUING> 3,186 2,493
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,186 2,493
<EPS-BASIC> .24 .17<F4>
<EPS-DILUTED> .24 .17<F4>
<FN>
<F1>INCLUDES LONG-TERM DEBT AND CURRENT PORTION
<F2>INCULDES ONLY COST OF GOODS SOLD AND OPERATING EXPENSES.
<F3>INCLUDES INTEREST EXPENSE AND LOSS PROVISION SHOWN BELOW.
<F4>NET INCOME IS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1999. COMMON STOCK WAS
NOT ISSUED UNTIL OCTOBER 18, 1999, WHICH COINCIDED WITH THE SPIN-OFF. THE
HISTORICAL CARVE-OUT EARNINGS PER SHARE OF $0.19 WERE ADJUSTED BY $0.02 PER
SHARE TO REFLECT THE ESTIMATED ADDITIONAL INTEREST AND GENERAL ADMINISTRATIVE
EXPENSES WHICH WE WOULD HAVE INCURRED AS AN INDEPENDENT PUBLIC COMPANY TO
ARRIVE AT PRO FORMA EARNINGS PER SHARE OF $0.17.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31,
2000 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,153
<SECURITIES> 0
<RECEIVABLES> 60,916
<ALLOWANCES> 2,683
<INVENTORY> 107,332
<CURRENT-ASSETS> 190,201
<PP&E> 75,154
<DEPRECIATION> 71,930
<TOTAL-ASSETS> 367,085
<CURRENT-LIABILITIES> 42,501
<BONDS> 125,127<F1>
132
0
<COMMON> 0
<OTHER-SE> 183,277
<TOTAL-LIABILITY-AND-EQUITY> 367,085
<SALES> 156,371
<TOTAL-REVENUES> 156,371
<CGS> 107,829
<TOTAL-COSTS> 142,525<F2>
<OTHER-EXPENSES> 370<F3>
<LOSS-PROVISION> 180
<INTEREST-EXPENSE> 4,632
<INCOME-PRETAX> 8,844
<INCOME-TAX> 3,964
<INCOME-CONTINUING> 4,880
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,880
<EPS-BASIC> .35<F4>
<EPS-DILUTED> .35<F4>
<FN>
<F1>INCLUDES LONG-TERM DEBT AND CURRENT PORTION
<F2>INCULDES ONLY COST OF GOODS SOLD AND OPERATING EXPENSES.
<F3>INCLUDES INTEREST EXPENSE AND LOSS PROVISION SHOWN BELOW.
<F4>NET INCOME IS FOR THE VIX- MONTH PERIOD ENDED DECEMBER 31, 1999. COMMON
STOCK WAS NOT ISSUED UNTIL OCTOBER 18, 1999, WHICH COINCIDED WITH THE
SPIN-OFF. THE HISTORICAL CARVE-OUT EARNINGS PER SHARE OF $0.37 WERE ADJUSTED
BY $0.02 PER SHARE TO REFLECT THE ESTIMATED ADDITIONAL INTEREST AND GENERAL
ADMINISTRATIVE EXPENSES WHICH WE WOULD HAVE INCURRED AS AN INDEPENDENT PUBLIC
COMPANY TO ARRIVE AT PRO FORMA EARNINGS PER SHARE OF $0.35.
</FN>
</TABLE>
