<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 June 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:
<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 July 31, 2000, there were 13,236,993 shares of the Registrant's
Common Stock outstanding.
================================================================================
<PAGE>
CIRCOR INTERNATIONAL, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets for June 30, 2000 and
December 31, 1999 3
Consolidated Statements of Operations for the Three-Month
and Six-Month Periods Ended June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the Six-
Months Ended June 30, 2000 and 1999 5
Pro Forma Consolidated Statements of Operations
for the Three-Month and Six-Month Periods Ended
June 30, 1999 6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16-17
Item 4. Submission of Matters to a Vote of Security Holders 17-18
Item 6. Exhibits and Reports on Form 8-K 18-19
Signatures 20
Exhibit 27 Financial Data Schedule Filed for the Periods
Ended June 30, 2000 and 1999 21
</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>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ................................................ $ 7,161 $ 5,153
Trade accounts receivable, less allowance for doubtful accounts
of $2,503 and $2,683, respectively .................................... 58,484 60,916
Inventories .............................................................. 108,432 107,332
Other current assets ..................................................... 14,894 16,800
--------- ---------
Total Current Assets ..................................................... 188,971 190,201
Property, Plant and Equipment, Net ........................................ 71,262 75,154
Other Assets:
Goodwill, net of accumulated amortization of $12,968 and $11,775,
respectively .......................................................... 95,206 96,488
Other assets ............................................................. 4,910 5,242
--------- ---------
Total Assets .............................................................. $ 360,349 $ 367,085
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ......................................................... $ 22,908 $ 21,172
Other current liabilities ................................................ 20,040 19,069
Current portion of long-term debt ........................................ 874 2,260
--------- ---------
Total Current Liabilities .............................................. 43,822 42,501
Long-Term Debt, Net of Current Portion .................................... 110,637 122,867
Other Noncurrent Liabilities .............................................. 18,419 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 ............................................... 180,933 180,887
Retained earnings ........................................................ 8,507 3,393
Accumulated other comprehensive income ................................... (2,101) (1,003)
--------- ---------
Total Shareholders' Equity ............................................. 187,471 183,409
--------- ---------
Total Liabilities and Shareholders' Equity ................................ $ 360,349 $ 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 SIX-MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues ............................. $ 79,426 $ 77,757 $ 161,262 $ 156,991
Cost of revenues ......................... 55,135 51,291 110,365 104,658
--------- --------- --------- ---------
GROSS PROFIT .......................... 24,291 26,466 50,897 52,333
Selling, general and administrative
expenses .............................. 17,188 19,382 35,093 38,364
Special charges .......................... 530 -- 703 --
--------- --------- --------- ---------
OPERATING INCOME ...................... 6,573 7,084 15,101 13,969
--------- --------- --------- ---------
Other (income) expense:
Interest income ....................... (105) (71) (206) (141)
Interest expense ...................... 2,479 1,901 5,205 4,517
Other, net ............................ 86 217 589 285
--------- --------- --------- ---------
2,460 2,047 5,588 4,661
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES ............ 4,113 5,037 9,513 9,308
Provision for income taxes ............... 1,687 1,860 3,901 3,638
--------- --------- --------- ---------
NET INCOME ............................ $ 2,426 $ 3,177 $ 5,612 $ 5,670
========= ========= ========= =========
Basic earnings per share
Income per share ...................... $ 0.18 * $ 0.42 *
Weighted average number of shares ..... 13,237 * 13,237 *
Diluted earnings per share
Income per share ...................... $ 0.18 * $ 0.42 *
Weighted average numbered shares ...... 13,415 * 13,449 *
</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>
SIX-MONTHS ENDED
JUNE 30,
-----------------
2000 1999
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net Income .......................................................... $ 5,612 $ 5,670
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation ................................................... 5,377 4,923
Amortization ................................................... 1,346 1,904
Deferred income taxes .......................................... -- 3,551
(Gain) loss on disposal of property, plant and equipment ....... (19) 24
Changes in operating assets and liabilities, net of effects from
business acquisitions:
Trade accounts receivable ................................. 1,669 5,984
Inventories ............................................... (1,357) (2,068)
Other current assets ...................................... 1,912 (1,619)
Accounts payable, and other current liabilities ........... 3,356 (3,403)
-------- --------
Net cash provided by operating activities ...................... 17,896 14,966
-------- --------
INVESTING ACTIVITIES
Additions to property, plant and equipment .......................... (1,756) (7,427)
Disposal of property, plant and equipment ........................... 33 1,039
(Increase) decrease in other assets ................................. (75) 98
Business acquisitions, net of cash acquired ......................... -- (10,301)
-------- --------
Net cash used in investing activities .......................... (1,798) (16,591)
-------- --------
FINANCING ACTIVITIES
Proceeds from long-term borrowings .................................. 10,501 2,593
Payments of long-term debt .......................................... (23,911) (13,684)
Dividends paid ...................................................... (498) --
Net intercompany activity with Watts Industries, Inc. ............... -- 16,244
-------- --------
Net cash provided by (used in) financing activities ............ (13,908) 5,153
-------- --------
Effect of exchange rate changes on cash and cash equivalents ........ (182) (904)
INCREASE IN CASH AND CASH EQUIVALENTS ................................ 2,008 2,624
-------- --------
Cash and cash equivalents at beginning of period ..................... 5,153 4,090
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................... $ 7,161 $ 6,714
======== ========
</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 JUNE 30, 1999
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Net revenues ............................... $ 77,757 $ -- $ 77,757
Cost of revenues ........................... 51,291 -- 51,291
-------- -------- --------
GROSS PROFIT ............................. 26,466 26,466
Selling, general and administrative
expenses ................................. 19,382 64 19,446
-------- -------- --------
OPERATING INCOME ......................... 7,084 (64) 7,020
Other (income) expense:
Interest income .......................... (71) -- (71)
Interest expense ......................... 1,901 306 2,207
Other, net ............................... 217 -- 217
-------- -------- --------
2,047 306 2,353
-------- -------- --------
INCOME BEFORE INCOME TAXES ................. 5,037 (370) 4,667
Provision for income taxes ................. 1,860 (148) 1,712
-------- -------- --------
NET INCOME ............................... $ 3,177 $ (222) $ 2,955
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
SIX-MONTHS ENDED JUNE 30, 1999
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Net revenues ............................... $ 156,991 $ -- $ 156,991
Cost of revenues ........................... 104,658 -- 104,658
--------- --------- ---------
GROSS PROFIT ............................. 52,333 52,333
Selling, general and administrative
expenses ................................. 38,364 127 38,491
--------- --------- ---------
OPERATING INCOME ......................... 13,969 (127) 13,842
Other (income) expense:
Interest income .......................... (141) -- (141)
Interest expense ......................... 4,517 583 5,100
Other, net ............................... 285 -- 285
--------- --------- ---------
4,661 583 5,244
--------- --------- ---------
INCOME BEFORE INCOME TAXES ................. 9,308 (710) 8,598
Provision for income taxes ................. 3,638 (284) 3,354
--------- --------- ---------
NET INCOME ............................... $ 5,670 $ (426) $ 5,244
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
See note 7 for an explanation of pro forma adjustments and 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 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 the consolidated financial statements.
The following discussion is based upon the three-month and six-month
periods ending June 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 an independent, publicly
owned company. Certain allocations of previously unallocated interest of
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.
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):
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
Raw materials.................. $ 40,941 $ 42,701
Work in process............... 29,236 27,466
Finished goods................. 38,255 37,165
-------- -------
$108,432 $107,332
======== =======
</TABLE>
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 JUNE 30, 2000
Net Revenues ................................ $44,432 $34,994 $ -- $79,426
Operating income (loss) ..................... 7,479 814 (1,720) 6,573
THREE-MONTHS ENDED JUNE 30, 1999
Net Revenues ................................ $45,448 $32,309 $ -- $77,757
Operating income (loss) ..................... 7,139 1,350 (1,405) 7,084
</TABLE>
<TABLE>
<CAPTION>
INSTRUMENTATION
& FLUID
REGULATION PETROCHEMICAL CORPORATE CONSOLIDATED
PRODUCTS PRODUCTS ADJUSTMENTS TOTAL
--------------- ------------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
SIX-MONTHS ENDED JUNE 30, 2000
Net Revenues ................................ $88,741 $72,521 $ -- $161,262
Operating income (loss) ..................... 14,322 4,205 (3,426) 15,101
SIX-MONTHS ENDED JUNE 30, 1999
Net Revenues ................................ $89,830 $67,161 $ -- $156,991
Operating income (loss) ..................... 13,366 3,412 (2,809) 13,969
</TABLE>
The operating segments above are presented on a basis consistent
with the presentation in our consolidated financial statements for the period
ending 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 six-month period ended June 30, 2000, we incurred $703,000
of costs in connection with the consolidation and reorganization of
manufacturing operations. The severance costs for 29 terminated employees were
$340,000. Other costs of $363,000 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 severance costs accrued and to be paid to former employees
subsequent to June 30, 2000 totals $78,000.
(6) EARNINGS PER COMMON SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE-MONTHS ENDED JUNE 30, 2000
-----------------------------------------------
NET INCOME SHARES PER SHARE AMOUNT
---------- ------ ----------------
<S> <C> <C> <C>
Basic EPS ...................... $2,426 13,237 $ 0.18
Dilutive securities, principally
common stock options ........... -- 178 --
------ ------ --------
Diluted EPS .................... $2,426 13,415 $ 0.18
====== ====== ========
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
SIX-MONTHS ENDED JUNE 30, 2000
----------------------------------------------
NET INCOME SHARES PER SHARE AMOUNT
---------- ------ ----------------
<S> <C> <C> <C>
Basic EPS ...................... $5,612 13,237 $ 0.42
Dilutive securities, principally
common stock options ........... -- 212 --
------ ------ --------
Diluted EPS .................... $5,612 13,449 $ 0.42
====== ====== ========
</TABLE>
(7) PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
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 six-month periods ended
June 30, 1999, respectively. Pro forma interest expense includes $306,000 and
$583,000 of interest expense for the three-month and six-month periods ended
June 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 six-month periods
ended June 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 JUNE 30, 1999
----------------------------------------------
PRO FORMA
NET INCOME SHARES PER SHARE AMOUNT
---------- ------ ----------------
<S> <C> <C> <C>
Basic EPS ...................... $2,955 13,322 $0.22
Dilutive securities, principally
common stock options ........... -- 6 --
------ ------ -----
Diluted EPS .................... $2,955 13,228 $0.22
====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
SIX-MONTHS ENDED JUNE 30, 1999
---------------------------------------------
PRO FORMA
NET INCOME SHARES PER SHARE AMOUNT
---------- ------ ----------------
<S> <C> <C> <C>
Basic EPS ...................... $5,244 13,273 $0.39
Dilutive securities, principally
common stock options ........... -- 4 --
------ ------ -----
Diluted EPS .................... $5,244 13,277 $0.39
====== ====== =====
</TABLE>
9
<PAGE>
(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 six month periods ended June 30, 2000 and 1999 was as
follows (in thousands):
<TABLE>
<CAPTION>
THREE-MONTHS ENDED SIX-MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income ............................... $ 2,426 $ 3,177 $ 5,612 $ 5,670
Foreign currency translation adjustments . (418) (855) (1,098) (1,772)
------- ------- ------- -------
Total comprehensive income ............ $ 2,008 $ 2,322 $ 4,514 $ 3,898
======= ======= ======= =======
</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.
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.
NEW DEVELOPMENTS
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.
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.
10
<PAGE>
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 orders 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, effective July 1, 1999, we changed our fiscal year from June 30th
to December 31st. 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. The following discussion is based upon the three-month and
six-month periods ending June 30, 2000.
RESULTS OF OPERATIONS FOR THE THREE-MONTHS ENDED JUNE 30, 2000 COMPARED TO THE
THREE-MONTHS ENDED JUNE 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
June 30, 2000 and 1999.
<TABLE>
<CAPTION>
AS A PERCENTAGE OF NET REVENUES
THREE-MONTHS ENDED JUNE 30,
-------------------------------- YEAR-TO-YEAR
2000 1999 PERCENTAGE INCREASE (DECREASE)
---- ----- -----------------------------
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 2.1%
Cost of revenues 69.4% 66.0% 7.5%
----- -----
Gross profit 30.6% 34.0% (8.2)%
Selling, general and administrative expenses 21.6% 24.9% (11.3)%
Special charges .7% -- NMF
----- -----
Operating income 8.3% 9.1% (7.2)%
Other (income) expense:
Interest (income) expense, net 3.0% 2.4% 29.7%
Other (income) expense, net 0.1% 0.2% (60.4)%
----- -----
Income before income taxes 5.2% 6.5% (18.3)%
Provisions for income taxes 2.1% 2.4% (9.3)%
----- -----
Net income 3.1% 4.1% (23.6)%
===== =====
</TABLE>
NMF: Not meaningful
Net revenues for the three-months ended June 30, 2000 increased by $1.7
million, or 2.1%, to $79.4 million compared to $77.8 million for the quarter
ended June 30, 1999. The increase in net revenues for the quarter ended June 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 $44,432 $45,448 $(1,016) $80 $ (693) $ (403)
Petrochemical 34,994 32,309 2,685 -- 3,466 (781)
------- ------- ------- --- ------- -------
Total $79,426 $77,757 $ 1,669 $80 $ 2,773 $(1,184)
======= ======= ======= === ======= =======
</TABLE>
The Instrumentation and Fluid Regulation Products Segment accounted for
55.9% of net revenues in the current quarter compared to 58.4% last year. The
Petrochemical Products Segment accounted for 44.1% of net revenues in the second
quarter of 2000 compared to 41.6% for the same quarter last year.
11
<PAGE>
Instrumentation and fluid regulation revenues decreased $1.0 million,
or 2.2%. The decrease is primarily due to: $1.5 million lower sales in the steam
product divisions, resulting from a lower product order backlog at the beginning
of the second quarter than was available in the prior year; sales gains in the
European retail and distribution channels were $0.4 million; and the weakening
of the Euro reduced instrumentation sales by $0.4 million. The net increase in
petrochemical revenues of $2.7 million, or 8.3%, was principally the result of
$4.7 million in higher North American revenues, and a $1.4 million decrease in
revenues from our Italian based operation. Foreign exchange rate changes were
unfavorable in both Canada and Italy, resulting in a decrease in revenues of
$0.8 million.
Gross profit decreased $2.2 million, or 8.2%, to $24.3 million for
the three-months ended June 30, 2000 compared to $26.5 million at June 30,
1999. Gross margin declined from 34.0% in 1999 to 30.6% in 2000. Gross profit
from the Instrumentation and Fluid Regulation segment decreased by $1.3
million. The decrease was primarily due to favorable performance last year
when we increased inventory levels in anticipation of the relocation of
certain instrumentation manufacturing operations. Gross profit from the
Petrochemical segment decreased year-over-year by $0.9 million. The decrease
is 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 it worked
through its manufacturing planning issues. This segment also had a lower
level of orders for large oil and gas construction projects this year in its
Italian unit.
Selling, general and administrative expenses decreased $2.2 million,
or 11.3%, to $17.2 million at June, 2000 compared with $19.4 million for the
same quarter in the prior year. The Instrumentation and Fluid Regulation
Segment reduced operating expenses by $2.1 million, of which approximately
$1.6 million was the result of the consolidation of manufacturing and
administrative functions. Expense savings of $0.4 million in the Petrochemical
segment were partially offset by $0.3 million increased spending at the
corporate level. The increased corporate spending reflects the additional costs
associated with operating as an independent public company.
During the second quarter, special charges of $0.5 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.
The change in operating income for the quarter ended June 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 $ 7,479 $ 7,139 $ 340 $16 $ 313 $11
Petrochemical 814 1,350 (536) -- (574) 38
Corporate (1,720) (1,405) (315) -- (315) --
------- ------- ----- --- ----- ---
Total $ 6,573 $ 7,084 $(511) $16 $(576) $49
======= ======= ===== === ===== ===
</TABLE>
The increase in operating income in the Instrumentation and Fluid
Regulation Products Segment was primarily attributable to improved operating
efficiencies within the instrumentation related product lines. 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 and
by the effect of the special charges incurred during the quarter. The effect of
the decrease in steam product revenues was mitigated by improvements in product
line gross profit and reduced operating expenses. The decrease in operating
income in the Petrochemical Products Segment is primarily due to the lower gross
profit, due to manufacturing cost inefficiencies, offset by modest expense
reductions. Additional corporate spending associated with operating as an
independent public company also reduced operating income during the quarter.
Net interest expense increased $0.5 million to $2.4 million at June 30,
2000 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, and higher current year interest rates.
Other non-operating expense decreased by $0.1 million, to $0.1 million
at June 30, 2000 compared with $0.2 million as of June 30, 1999. The decrease is
primarily attributable to reduced foreign exchange expenses.
The effective tax rate increased to 41.0% from 36.9%. 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
12
<PAGE>
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 received in April, 2000.
Net income decreased $0.8 million to $2.4 million. This decrease is
primarily attributable to special charges associated with relocation and
severance at our plants, cost inefficiencies in the petrochemical segment
offset by the additional gross profit added from incremental petrochemical
revenues and the net expense savings achieved in the instrumentation
divisions.
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 June 30,
2000.
RESULTS OF OPERATIONS FOR THE SIX-MONTHS ENDED JUNE 30, 2000 COMPARED TO THE
SIX-MONTHS ENDED JUNE 30, 1999
The following tables set forth the percentage of net revenues and the
yearly percentage change in certain financial data for the six-months ended June
30, 2000 and 1999.
<TABLE>
<CAPTION>
AS A PERCENTAGE OF
NET REVENUES
SIX-MONTHS ENDED
JUNE 30,
------------------- YEAR-TO-YEAR
2000 1999 PERCENTAGE INCREASE (DECREASE)
--------- ------- -----------------------------
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 2.7%
Cost of revenues 68.4% 66.7% 5.5%
----- -----
Gross profit 31.6% 33.3% (2.7)%
Selling, general and administrative expenses 21.8% 24.4% (8.5)%
Special charges 0.4% -- NMF
----- -----
Operating income 9.4% 8.9% 8.1%
Other (income) expense:
Interest (income) expense, net 3.1% 2.8% 14.2%
Other (income) expense, net 0.4% 0.2% 106.7%
----- -----
Income before income taxes 5.9% 5.9% 2.2%
Provisions for income taxes 2.4% 2.3% 7.2%
----- -----
Net income 3.5% 3.6% (1.0)%
===== =====
</TABLE>
NMF: Not meaningful
Net revenues for the six-months ended June 30, 2000 increased by $4.3
million, or 2.7%, to $161.3 million compared to $157.0 million for the
six-months ended June 30, 1999. The increase in net revenues for the period
ended June 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 $ 88,741 $ 89,830 $(1,089) $1,458 $(1,776) $ (771)
Petrochemical 72,521 67,161 5,360 141 6,470 (1,251)
-------- -------- ------- ------ ------- -------
Total $161,262 $156,991 $ 4,271 $1,599 $ 4,694 $(2,022)
======== ======== ======= ====== ======= =======
</TABLE>
The Instrumentation and Fluid Regulation Products Segment accounted
for approximately 55.0% of net revenues in the half year compared to 57.2%
last year. The Petrochemical Products Segment accounted for approximately
45.0% of net revenues in the first half of 2000 compared to 42.8% for the
same period last year.
Instrumentation and fluid regulation revenues decreased $1.1
million, or 1.2%. The net decrease is primarily due to: $1.5 million lower
sales in the steam product divisions, resulting from a lower product order
backlog at the beginning of the second quarter than was available in the
prior year; incremental revenue of $1.5 million as a result of the GO
Regulator acquisition in April, 1999; a $1.0 million decrease in European
retail and distribution revenues; and the weakening of the Euro reduced
instrumentation sales by $0.8 million. The net increase in petrochemical
revenues of $5.4 million, or 8.0%, was principally the result of $8.9 million
in higher North American revenues, a $3.8 million decrease in revenues from
the Italian based operation; and a $1.4 million increase in revenue from the
Chinese joint venture. Net foreign exchange rate changes were unfavorable,
resulting in decreased revenues of $1.3 million.
13
<PAGE>
Gross profit decreased $1.4 million, or 2.7%, to $50.9 million for
the six-months ended June 30, 2000 compared to $52.3 million at June 30,
1999. Gross margin declined from 33.3% in 1999 to 31.6% in 2000. Gross profit
from the Instrumentation and Fluid Regulation segment decreased by $2.3
million. The decrease resulted from: not realizing the same favorable gross
profit effect recognized during the prior year due to increased manufacturing
activity in order to raise inventory levels in anticipation of the relocation
and consolidation of certain manufacturing operations; and a more favorable
mix of products sold. Gross profit from the Petrochemical segment increased
year-over-year by $0.9 million. The increase is the net result of higher
revenues primarily in the U.S. and Western Canada markets this year offset by
higher manufacturing costs at a key North American plant and the lack of
large construction orders this year for the Italian operating unit.
Selling, general and administrative expenses decreased $3.3 million,
or 8.5%, to $35.1 million at June, 2000 compared with $38.4 million for the
same period in the prior year. The Instrumentation and Fluid Regulation
Segment reduced operating expenses by $3.9 million, of which approximately
$3.8 million was the result of the consolidation of manufacturing and
administrative functions. Increased expenses of $0.2 million in the
Petrochemical segment were offset by a $0.3 million decrease in spending due
to foreign currency exchange rate changes. Increased corporate spending of
approximately $0.7 reflects the additional costs associated with operating as
an independent public company.
During the half-year, special charges of $0.7 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 equipent.
The change in operating income for the six-months ended June 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 $ 14,322 $ 13,366 $ 956 $105 $ 855 $ (4)
Petrochemical 4,205 3,412 793 51 643 99
Corporate (3,426) (2,809) (617) -- (617) --
-------- -------- ------- ---- ----- ----
Total $ 15,101 $ 13,969 $ 1,132 $156 $ 881 $ 95
======== ======== ======= ==== ===== ====
</TABLE>
The increase in operating income in the Instrumentation and Fluid
Regulation Products Segment was primarily attributable to improved operating
efficiencies within the instrumentation related product lines. These gains
were partially offset by lower 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
effect of the decrease in steam product revenues was mitigated by improvements
in product line gross profit and reduced operating expenses. The increase in
operating income in the Petrochemical Products Segment is primarily due to:
additional gross profit related to incremental revenues, lower gross profit
due to manufacturing cost inefficiencies and the special charges related to
plant closures and reorganization. Additional corporate spending associated
with operating as an independent public company also reduced operating income
during the period.
Net interest expense increased to $5.0 million at June 30, 2000 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, and higher current year interest rates.
Other non-operating expense increased by $0.3 million, to $0.6 million
at June 30, 2000 compared with $0.3 million as of June 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 and certain foreign exchange losses.
The effective tax rate increased to 41.0% from 39.1%. 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 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 received in April, 2000.
Net income is relatively unchanged at $5.6 million.
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 June 30, 2000.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the six-month period ended June 30, 2000, we generated $17.9
million in cash flow from operating activities and used $1.8 million of cash for
investing activities, principally to purchase capital equipment, and a net $13.4
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.
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 $12.0 million to
$20.0 million and at June 30, 2000, we had $55.0 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. Although we still intend to engage in such an
offering, we believe that current market conditions may not be favorable, and,
accordingly, we have filed for a supplemental ruling to obtain approval from the
IRS to extend our original timeline. We intend to use the proceeds from an
equity offering, together with availability from our unsecured line of credit,
to fund future acquisitions.
The ratio of current assets to current liabilities at June 30, 2000 was
4.3 to 1 compared to 4.5 to 1 at December 31, 1999. Cash and cash equivalents
were $7.2 million at June 30, 2000 compared to $5.2 million at December 31,
1999. Debt as a percentage of total capital employed was 37.3% at June 30, 2000
compared to 40.6% at December 31, 1999. At June 30, 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
June 30, 2000, we had forward contracts to buy foreign currencies with a face
value of $1.7 million. These contracts mature on various dates between July 2000
and July 2001 and had a fair market value of less than $0.1 million at June 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.
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 six-month period ending June 30, 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 that trade
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.
15
<PAGE>
OTHER
In June 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.
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. ("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.
NEW DEVELOPMENTS
On July 12, 2000, we were notified that the United States Customs
Service ("Customs") is conducting an
16
<PAGE>
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.
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"). 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. 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. To date, the former Hoke Stockholders have failed to make any
payments to us on account of this award, and on May 24, 2000, we filed a
petition to confirm the Arbitration Award in the federal district court in
Chicago (the place of the arbitration). The Former Hoke Stockholders have
indicated that they will contest our petition and will move to vacate the
arbitrator's award. Until the award is fully and finally confirmed, it accrues
interest at an annual rate of 9%.
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 the subject of a separate proceeding, with a
different arbitrator than that used in the closing date balance sheet
disputes. The parties recently participated in a two day hearing in front of the
arbitrator and expect the arbitrator to issue a final ruling in the near
future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(1) The Company held its first ever Annual Meeting of Stockholders on
May 18, 2000. The proposals in front of the Stockholders and the
results of voting on such proposals are as follows:
1. Election of Directors: David F. Dietz, a director of the Company,
was re-elected as a Class I director for a three-year term expiring at
the annual meeting held after conclusion of the 2002 fiscal year.
Voting results: 10,348,107 votes FOR; 647,469 votes WITHHELD.
2. Ratification of Independent Auditors: The selection of KPMG LLP as
the Company's independent auditors for fiscal year 2000 was ratified.
Voting results: 10,992,783 votes FOR; 2,541 votes AGAINST; and 252
votes ABSTAINED.
3. Approval of Material Terms of Certain Performance Goals under the
Company's 1999 Stock Option and Incentive Plan (the "Plan"): The
stockholders approved the authority of a committee of two or more
independent directors, from time to time, to issue awards under the
Plan containing one or more of the performance goals which enable such
awards to qualify as "performance-based compensation" under Section
162(m) of the Internal Revenue Code of 1986, as amended. The Plan had
previously been approved prior to our spin-off from Watts Industries,
Inc. By virtue of the approval granted by the stockholders, the
Company may now maximize its realizable tax deduction in connection
with performance-based compensation. Voting results: 10,287,815 votes
FOR; 704,120
17
<PAGE>
votes AGAINST; and 3,641 votes ABSTAINED.
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K
(A) EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION AND LOCATION
----------- -------------------------
<S> <C>
2 Plan of Acquisition, Reorganization, Arrangement, Liquidation or
Succession:
2.1 Distribution Agreement between Watts Industries, Inc. and the Company
dated as of October 1, 1999, is incorporated herein by reference to
Exhibit 2.1 to Amendment No. 2 to the Company's Registration Statement
on Form 10, File No. 000-26961, filed with the Securities and Exchange
Commission on October 6, 1999 ("Amendment No. 2 to the Form 10").
3 Articles of Incorporation and By-Laws:
3.1 The Amended and Restated Certificate of Incorporation of the Company
is incorporated herein by reference to Exhibit 3.1 to the Company's
Registration Statement on Form 10, File No. 000-26961, filed with the
Securities and Exchange Commission on August 6, 1999 ("Form 10").
3.2 The Amended and Restated By-Laws of the Company are incorporated
herein by reference to Exhibit 3.2 to the Form 10. 3.3 Certificate of
Designations, Preferences and Rights of a Series of Preferred Stock of
CIRCOR International, Inc. classifying and designating the Series A
Junior Participating Cumulative Preferred Stock is incorporated herein
by reference to Exhibit 3.1 to the Company's Registration Statement on
Form 8-A, File No. 001-14962, filed with the Securities and Exchange
Commission on October 21, 1999 ("Form 8-A").
4 Instruments Defining the Rights of Security Holders, Including
Debentures:
4.1 Shareholder Rights Agreement, dated as of September 16, 1999, between
CIRCOR International, Inc. and BankBoston, N.A., as Rights Agent is
incorporated herein by reference to Exhibit 4.1 to the Form 8-A.
9 Voting Trust Agreements:
9.1 The Amended and Restated George B. Horne Voting Trust Agreement - 1997
dated as of September 14, 1999 is incorporated herein by reference to
Exhibit 9.1 to Amendment No. 1 to the Company's Registration Statement
on Form 10, File No. 000-26961, filed with the Securities and Exchange
Commission on September 22, 1999 ("Amendment No. 1 to the Form 10").
10 Material Contracts:
10.1 CIRCOR International, Inc. 1999 Stock Option and Incentive Plan is
incorporated herein by reference to Exhibit 10.1 to Amendment No. 1 to
the Form 10.
10.2 Form of Incentive Stock Option Agreement under the 1999 Stock Option
and Incentive Plan is incorporated herein by reference to Exhibit 10.2
to Amendment No. 1 to the Form 10.
10.3 Form of Non-Qualified Stock Option Agreement for Employees under the
1999 Stock Option and Incentive Plan (Five Year Graduated Vesting
Schedule) is incorporated herein by reference to Exhibit 10.3 to
Amendment No. 1 to the Form 10.
10.4 Form of Non-Qualified Stock Option Agreement for Employees under the
1999 Stock Option and Incentive Plan (Performance Accelerated Vesting
Schedule) is incorporated herein by reference to Exhibit 10.4 to
Amendment No. 1 to the Form 10.
10.5 Form of Non-Qualified Stock Option Agreement for Independent Directors
under the 1999 Stock Option and Incentive Plan is incorporated herein
by reference to Exhibit 10.5 to Amendment No. 1 to the Form 10.
10.6 CIRCOR International, Inc. Management Stock Purchase Plan is
incorporated herein by reference to Exhibit 10.6 to Amendment No. 1 to
the Form 10.
10.7 Form of CIRCOR International, Inc. Supplemental Employee Retirement
Plan is incorporated herein by reference to Exhibit 10.7 to Amendment
No. 1 to the Form 10.
10.8 Supply Agreement between Watts Industries, Inc. and CIRCOR
International, Inc. is incorporated herein by reference to Exhibit
10.8 to Amendment No. 2 to the Form 10.
10.9 Trademark License Agreement between Watts Industries, Inc. and CIRCOR
International, Inc. is incorporated herein by reference to Exhibit
10.9 to Amendment No. 2 to the Form 10.
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<S> <C>
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.
10.16 Executive Employment Agreement between CIRCOR, Inc. and Cosmo S.
Trapani, dated as of September 16, 1999 is incorporated herein by
reference to Exhibit 10.16 to Amendment No. 1 to the Form 10.
10.17 Amended and Restated Letter of Credit, Reimbursement and Guaranty
Agreement dated as of October 18, 1999 among Leslie Controls, Inc., as
Borrower, CIRCOR International, Inc., as Guarantor, and First Union
National Bank as Letter of Credit Provider is herein incorporated by
reference to Exhibit 10.17 to the Company's Current Report on Form
8-K, File No. 001-14962, filed with the Securities and Exchange
Commission on October 21, 1999.
10.18 Amended and Restated Letter of Credit, Reimbursement and Guaranty
Agreement dated as of October 18, 1999 among Spence Engineering
Company, Inc. as Borrower, CIRCOR International, Inc., as Guarantor,
and First Union National Bank as Letter of Credit Provider is herein
incorporated by reference to Exhibit 10.18 to the Company's Current
Report on Form 8-K, File No. 001-14962, filed with the Securities and
Exchange Commission on October 21, 1999.
10.19 Credit Agreement, dated as of October 18, 1999, by and among CIRCOR
International, Inc., a Delaware corporation, as Borrower, each of the
Subsidiary Guarantors named therein, the Lenders from time to time a
party thereto, ING (U.S.) Capital LLC, as Agent for such Lenders,
BankBoston, N.A., as Syndication Agent, First Union National Bank, as
Documentation Agent and ING Barings LLC, as Arranger for the Lenders
is herein incorporated by reference to Exhibit 10.19 to the Company's
Current Report on Form 8-K, File No. 001-14962, filed with the
Securities and Exchange Commission on October 21, 1999.
10.20 Note Purchase Agreement, dated as of October 19, 1999, among CIRCOR
International, Inc., a Delaware corporation, the Subsidiary Guarantors
and each of the Purchasers listed on Schedule A attached thereto is
herein incorporated by reference to Exhibit 10.20 to the Company's
Current Report on Form 8-K, File No. 001-14962, filed with the
Securities and Exchange Commission on October 21, 1999.
10.21 Sharing agreement regarding the rights of debt holders relative to one
another in the event of insolvency is herein incorporated by
reference to Exhibit 10.21 on Form 10Q/A 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.
*27 Financial Date Schedule Filed for the Periods Ended June 30, 2000 and
1999
</TABLE>
(1) Incorporated by reference to the notes to consolidated financial
statements, note 6, of this report.
(*) Filed herewith
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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.
CIRCOR INTERNATIONAL, INC.
AUGUST 14, 2000 /s/ KENNETH W. SMITH
---------------------------- ------------------------------------
DATE KENNETH W. SMITH
VICE PRESIDENT, CHIEF FINANCIAL OFFICER
AND TREASURER
PRINCIPAL ACCOUNTING OFFICER
20
