|
|
|
ITEM 1.
|
FINANCIAL STATEMENTS
|
CIRCOR INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
September 29, 2013
|
|
December 31, 2012
|
|
(Unaudited)
|
|
|
ASSETS
|
|
|
|
CURRENT ASSETS:
|
|
|
|
Cash and cash equivalents
|
$
|
86,285
|
|
|
$
|
61,738
|
|
Short-term investments
|
98
|
|
|
101
|
|
Trade accounts receivable, less allowance for doubtful accounts of $2,334 and $1,706, respectively
|
151,528
|
|
|
150,825
|
|
Inventories
|
198,454
|
|
|
198,005
|
|
Prepaid expenses and other current assets
|
18,185
|
|
|
16,510
|
|
Deferred income tax asset
|
15,601
|
|
|
15,505
|
|
Assets held for sale
|
480
|
|
|
542
|
|
Total Current Assets
|
470,631
|
|
|
443,226
|
|
PROPERTY, PLANT AND EQUIPMENT, NET
|
107,415
|
|
|
105,903
|
|
OTHER ASSETS:
|
|
|
|
Goodwill
|
76,066
|
|
|
77,428
|
|
Intangibles, net
|
42,728
|
|
|
45,157
|
|
Deferred income tax asset
|
22,600
|
|
|
30,064
|
|
Other assets
|
5,923
|
|
|
8,203
|
|
TOTAL ASSETS
|
$
|
725,363
|
|
|
$
|
709,981
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
Accounts payable
|
$
|
78,112
|
|
|
$
|
80,361
|
|
Accrued expenses and other current liabilities
|
59,674
|
|
|
67,235
|
|
Accrued compensation and benefits
|
30,575
|
|
|
26,540
|
|
Income taxes payable
|
2,610
|
|
|
393
|
|
Notes payable and current portion of long-term debt
|
6,667
|
|
|
7,755
|
|
Total Current Liabilities
|
177,638
|
|
|
182,284
|
|
LONG-TERM DEBT, NET OF CURRENT PORTION
|
43,250
|
|
|
62,729
|
|
DEFERRED INCOME TAXES
|
10,037
|
|
|
10,744
|
|
OTHER NON-CURRENT LIABILITIES
|
35,380
|
|
|
35,977
|
|
CONTINGENCIES AND COMMITMENTS (See Note 10)
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY:
|
|
|
|
Preferred stock, $0.01 par value; 1,000,000 shares authorized; no shares issued and outstanding
|
—
|
|
|
—
|
|
Common stock, $0.01 par value; 29,000,000 shares authorized; 17,590,312 and 17,445,687 shares issued and outstanding at September 29, 2013 and December 31, 2012, respectively
|
176
|
|
|
174
|
|
Additional paid-in capital
|
267,562
|
|
|
262,744
|
|
Retained earnings
|
194,797
|
|
|
158,509
|
|
Accumulated other comprehensive loss, net of taxes
|
(3,477
|
)
|
|
(3,180
|
)
|
Total Shareholders’ Equity
|
459,058
|
|
|
418,247
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$
|
725,363
|
|
|
$
|
709,981
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
CIRCOR INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 29,
2013
|
|
September 30,
2012
|
|
September 29,
2013
|
|
September 30,
2012
|
Net revenues
|
$
|
214,731
|
|
|
$
|
209,804
|
|
|
$
|
643,773
|
|
|
$
|
643,946
|
|
Cost of revenues
|
144,593
|
|
|
151,109
|
|
|
443,679
|
|
|
462,823
|
|
GROSS PROFIT
|
70,138
|
|
|
58,695
|
|
|
200,094
|
|
|
181,123
|
|
Selling, general and administrative expenses
|
46,392
|
|
|
44,314
|
|
|
139,561
|
|
|
134,562
|
|
Impairment charges
|
—
|
|
|
10,348
|
|
|
—
|
|
|
10,348
|
|
Special charges / (recoveries)
|
(190
|
)
|
|
1,377
|
|
|
3,441
|
|
|
1,377
|
|
OPERATING INCOME
|
23,936
|
|
|
2,656
|
|
|
57,092
|
|
|
34,836
|
|
Other (income) expense:
|
|
|
|
|
|
|
|
Interest income
|
(67
|
)
|
|
(101
|
)
|
|
(189
|
)
|
|
(262
|
)
|
Interest expense
|
812
|
|
|
1,223
|
|
|
2,559
|
|
|
3,482
|
|
Other expense (income), net
|
568
|
|
|
564
|
|
|
1,807
|
|
|
887
|
|
TOTAL OTHER EXPENSE
|
1,313
|
|
|
1,686
|
|
|
4,177
|
|
|
4,107
|
|
INCOME BEFORE INCOME TAXES
|
22,623
|
|
|
970
|
|
|
52,915
|
|
|
30,729
|
|
Provision (benefit) for income taxes
|
4,903
|
|
|
(899
|
)
|
|
14,619
|
|
|
9,138
|
|
NET INCOME
|
$
|
17,720
|
|
|
$
|
1,869
|
|
|
$
|
38,296
|
|
|
$
|
21,591
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
Basic
|
$
|
1.01
|
|
|
$
|
0.11
|
|
|
$
|
2.18
|
|
|
$
|
1.24
|
|
Diluted
|
$
|
1.00
|
|
|
$
|
0.11
|
|
|
$
|
2.18
|
|
|
$
|
1.24
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
17,582
|
|
|
17,433
|
|
|
17,553
|
|
|
17,391
|
|
Diluted
|
17,667
|
|
|
17,467
|
|
|
17,602
|
|
|
17,436
|
|
Dividends paid per common share
|
$
|
0.0375
|
|
|
$
|
0.0375
|
|
|
$
|
0.1125
|
|
|
$
|
0.1125
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
CIRCOR INTERNATIONAL, INC.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 29, 2013
|
|
September 30, 2012
|
|
September 29, 2013
|
|
September 30, 2012
|
Net income
|
$
|
17,720
|
|
|
$
|
1,869
|
|
|
$
|
38,296
|
|
|
$
|
21,591
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
8,236
|
|
|
7,670
|
|
|
(295
|
)
|
|
802
|
|
Other comprehensive income (loss)
|
8,236
|
|
|
7,670
|
|
|
(295
|
)
|
|
802
|
|
COMPREHENSIVE INCOME (LOSS)
|
$
|
25,956
|
|
|
$
|
9,539
|
|
|
$
|
38,001
|
|
|
$
|
22,393
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
CIRCOR INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
September 29,
2013
|
|
September 30,
2012
|
OPERATING ACTIVITIES
|
|
|
|
Net income
|
$
|
38,296
|
|
|
$
|
21,591
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
Depreciation
|
11,943
|
|
|
11,765
|
|
Amortization
|
2,273
|
|
|
2,823
|
|
Payment for Leslie bankruptcy settlement
|
—
|
|
|
(1,000
|
)
|
Impairment charges
|
—
|
|
|
10,348
|
|
Compensation expense of share-based plans
|
3,343
|
|
|
3,409
|
|
Tax effect of share-based compensation
|
(536
|
)
|
|
573
|
|
(Gain) loss on property, plant and equipment
|
(70
|
)
|
|
1,148
|
|
Gain on return of acquisition purchase price
|
(3,400
|
)
|
|
—
|
|
Change in operating assets and liabilities, net of effects from business acquisitions:
|
|
|
|
Trade accounts receivable
|
493
|
|
|
(123
|
)
|
Inventories
|
(33
|
)
|
|
8,586
|
|
Prepaid expenses and other assets
|
193
|
|
|
(2,110
|
)
|
Accounts payable, accrued expenses and other liabilities
|
1,259
|
|
|
(26,178
|
)
|
Net cash provided by operating activities
|
53,761
|
|
|
30,832
|
|
INVESTING ACTIVITIES
|
|
|
|
Additions to property, plant and equipment
|
(13,579
|
)
|
|
(14,097
|
)
|
Proceeds from the sale of property, plant and equipment
|
348
|
|
|
200
|
|
Business acquisitions, return of purchase price
|
3,400
|
|
|
—
|
|
Net cash used in investing activities
|
(9,831
|
)
|
|
(13,897
|
)
|
FINANCING ACTIVITIES
|
|
|
|
Proceeds from long-term debt
|
104,626
|
|
|
170,795
|
|
Payments of long-term debt
|
(124,351
|
)
|
|
(192,040
|
)
|
Dividends paid
|
(2,011
|
)
|
|
(1,997
|
)
|
Proceeds from the exercise of stock options
|
1,843
|
|
|
348
|
|
Tax effect of share-based compensation
|
536
|
|
|
(573
|
)
|
Net cash used in financing activities
|
(19,357
|
)
|
|
(23,467
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
(27
|
)
|
|
653
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
24,547
|
|
|
(5,879
|
)
|
Cash and cash equivalents at beginning of period
|
61,738
|
|
|
54,855
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
$
|
86,285
|
|
|
$
|
48,976
|
|
Supplemental Cash Flow Information:
|
|
|
|
Cash paid during the period presented for:
|
|
|
|
Income taxes
|
$
|
5,463
|
|
|
$
|
12,959
|
|
Interest
|
$
|
3,132
|
|
|
$
|
2,333
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited, consolidated financial statements have been prepared according to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) and, in the opinion of management, reflect all adjustments, which include normal recurring adjustments, necessary for a fair presentation of the consolidated balance sheets, consolidated statements of income and consolidated statements of cash flows of CIRCOR International, Inc. (“CIRCOR”, the “Company”, “us”, “we” or “our”) for the periods presented. We prepare our interim financial information using the same accounting principles as we use for our annual audited financial statements. Certain information and note disclosures normally included in the annual audited financial statements have been condensed or omitted in accordance with prescribed SEC rules. We believe that the disclosures made in our consolidated financial statements and the accompanying notes are adequate to make the information presented not misleading.
The consolidated balance sheet at
December 31, 2012
is as reported in our audited financial statements as of that date. Our accounting policies are described in the notes to our
December 31, 2012
financial statements, which were included in our Annual Report filed on Form 10-K. We recommend that the financial statements included in our Quarterly Report on Form 10-Q be read in conjunction with the financial statements and notes included in our Annual Report filed on Form 10-K for the year ended
December 31, 2012
.
We operate and report financial information using a 52-week fiscal year ending December 31. The data periods contained within our Quarterly Reports on Form 10-Q reflect the results of operations for the 13-week, 26-week and 39-week periods which generally end on the Sunday nearest the calendar quarter-end date. Operating results for the
three
and
nine
months ended
September 29, 2013
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2013
.
(2) Summary of Significant Accounting Policies
The significant accounting policies used in preparation of these condensed consolidated financial statements for the
three
and
nine
months ended
September 29, 2013
are consistent with those discussed in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended
December 31, 2012
.
In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-02,
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("AOCI")
. The new ASU requires entities to disclose in a single location (either on the face of the financial statement that reports net income or in the notes) the effects of reclassifications out of accumulated other comprehensive income. For items reclassified out of AOCI in their entirety into net income, entities must disclose the effect of the reclassification on each affected net income item. For AOCI reclassification items that are not reclassified in their entirety into net income, entities must provide a cross reference to other required U.S. GAAP disclosures. The new disclosure requirements are effective for annual reporting after December 15, 2012, and interim periods within those years.
No
reclassifications out of AOCI were made by the Company for the three and
nine
months ended
September 29, 2013
or the three and
nine
months ended
September 30, 2012
and therefore no additional AOCI disclosure is presented in our Quarterly Report on Form 10-Q.
In July 2013, FASB issued ASU 2013-11,
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.
The new ASU requires companies to present an unrecognized tax benefit as a reduction of a deferred tax asset for a tax loss or credit carryforward on the balance sheet when either: (A) the tax law requires the company to use the tax loss or credit carryforward to satsify amounts payable upon disallowance of the tax position, or (B) the tax loss or credit carryforward is available to satisfy amounts payable upon disallowance of the tax position, and the company intends to use the deferred tax asset for that purpose. The new disclosure requirements are effective for annual reporting after December 15, 2013 and interim periods within those years. We do not believe the adoption of this update will have a material impact on our financial statements.
There were no additional new accounting pronouncements adopted during the
nine
months ended
September 29, 2013
that had a material impact on our financial statements.
Subsequent events - On October 31, 2013, we announced an organizational restructuring under which we will simplify the manner in which we manage our businesses. Under this restructuring we will consolidate our group structure from three groups to two, reducing management layers and administrative expenses. Consistent with our new management structure we intend to begin reporting in two segments during the fourth quarter of 2013. The first segment will be ‘Energy,’ which will include all of the businesses from the existing Energy segment and the majority of the current ‘Flow Technologies’ businesses. The second segment will be ‘Aerospace and Defense,’ which will include all of the current Aerospace segment businesses plus a few primarily defense-oriented businesses currently in the Flow Technologies segment.
We expect to complete this reorganization in the fourth quarter of 2013 and expect to incur special charges of between
$2.6 million
to
$3.0 million
associated with this reorganization during the fourth quarter of 2013.
(3) Share-Based Compensation
As of
September 29, 2013
, we have one share-based compensation plan. The Amended and Restated 1999 Stock Option and Incentive Plan (the “1999 Stock Plan”), which was adopted by our Board of Directors and approved by our shareholders, permits the granting of the following types of awards to our officers, other employees and non-employee directors: incentive stock options; non-qualified stock options; deferred stock awards; restricted stock awards; unrestricted stock awards; performance share awards; cash-based awards; stock appreciation rights and dividend equivalent rights. The 1999 Stock Plan provides for the issuance of up to
3,000,000
shares of common stock (subject to adjustment for stock splits and similar events). New options granted under the 1999 Stock Plan could have varying vesting provisions and exercise periods. Options granted vest in periods ranging from
one year
to
five years
and expire
ten years
after the grant date. Restricted stock units granted generally vest from
three years
to
six years
. Vested restricted stock units will be settled in shares of our common stock. As of
September 29, 2013
, there were
279,819
stock options (including the April 9, 2013 CEO stock option award noted below) and
274,675
restricted stock units outstanding. In addition, there were
397,730
shares available for grant under the 1999 Stock Plan as of
September 29, 2013
. As of
September 29, 2013
, there were
no
outstanding restricted stock units that contain rights to nonforfeitable dividend equivalents and are considered participating securities that are included in our computation of basic and fully diluted earnings per share. There is no difference in the earnings per share amounts between the two class method and the treasury stock method, which is why we continue to use the treasury stock method.
For all stock options granted under the 1999 Stock Plan, the fair value of each grant was estimated at the date of grant using the Black-Scholes option pricing model. Black-Scholes utilizes assumptions related to volatility, the risk-free interest rate, the dividend yield and employee exercise behavior. Expected volatilities utilized in the model are based on the historic volatility of the Company’s stock price. The risk free interest rate is derived from the U.S. Treasury Yield curve in effect at the time of the grant.
On April 9, 2013, the Company granted stock options to purchase
200,000
shares of common stock to its newly appointed President and Chief Executive Officer, Scott A. Buckhout, at an exercise price of
$41.17
per share. This option award was not granted under the Company's 1999 Stock Plan and includes both a service period and a market vesting condition. The stock options will vest if the following stock price targets are met based on the stock price closing at or above these targets for
60
consecutive trading days:
|
|
|
Stock Price Target
|
Cumulative Vested Portion of Stock Options (in Shares)
|
$50.00
|
50,000
|
$60.00
|
100,000
|
$70.00
|
150,000
|
$80.00
|
200,000
|
Vested options may be exercised
25%
at the time of vesting,
50%
one year from the date of vesting and
100%
two years from the date of vesting. On August 8, 2013, the
$50.00
Price Target was met, therefore,
50,000
options have vested and
12,500
are currently exercisable. This stock option award is being expensed utilizing a graded method and is subject to forfeiture in the event of employment termination (whether voluntary or involuntary) prior to vesting. To the extent that the market conditions above (stock price targets) are not met, those options will not vest and will forfeit
5
years from grant date. The Company used a Monte Carlo simulation option pricing model to value this option award with the following assumptions:
10
year term, expected life of
5.5
years, risk-free rate of
1.2%
, expected volatility of
41.2%
, and fair value of
$14.46
per share at grant date. No other options were granted during the first
nine
months of
2013
.
We account for Restricted Stock Unit (“RSU Awards”) by expensing the weighted average fair value to selling, general and administrative expenses ratably over vesting periods generally ranging from
three years
to
six years
. During the
nine
months ended
September 29, 2013
and
September 30, 2012
, we granted
130,845
and
132,471
RSU Awards with approximate fair values of
$41.96
and
$33.54
per RSU Award, respectively.
The CIRCOR Management Stock Purchase Plan, which is a component of the 1999 Stock Plan, provides that eligible employees may elect to receive restricted stock units in lieu of all or a portion of their pre-tax annual incentive bonus and, in some cases, make after-tax contributions in exchange for restricted stock units (“RSU MSPs”). In addition, non-employee directors may elect to receive restricted stock units in lieu of all or a portion of their annual directors’ fees. Each RSU MSP represents a right to receive one share of our common stock after a
three
year vesting period. RSU MSPs are granted at a discount of
33%
from the fair market value of the shares of our common stock on the date of grant. This discount is amortized as compensation expense, to selling, general and administrative expenses, over a
four
year period. A total of
28,463
and
34,534
RSU MSPs with per unit discount amounts representing fair values of
$13.90
and
$10.81
were granted under the CIRCOR Management Stock Purchase Plan during the
nine
months ended
September 29, 2013
and
September 30, 2012
, respectively.
Compensation expense related to our share-based plans for the
nine
month periods ended
September 29, 2013
, and
September 30, 2012
was
$3.5 million
and
$3.3 million
, respectively, and was recorded as selling, general and administrative expense. As of
September 29, 2013
, there was
$9.0 million
of total unrecognized compensation costs related to our outstanding share-based compensation arrangements (inclusive of the April 9, 2013 CEO option award). That cost is expected to be recognized over a weighted average period of
2.2
years.
The weighted average contractual term for stock options outstanding and options exercisable as of
September 29, 2013
was
8.9
years and
7.4
years, respectively. The aggregate intrinsic value of stock options exercised during the
nine
months ended
September 29, 2013
was
$1.1 million
and the aggregate intrinsic value of stock options outstanding and options exercisable as of
September 29, 2013
was
$6.5 million
and
$1.0 million
, respectively.
The aggregate intrinsic value of RSU Awards settled during the
nine
months ended
September 29, 2013
was
$3.6 million
and the aggregate intrinsic value of RSU Awards outstanding and RSU Awards vested and deferred as of
September 29, 2013
was
$12.7 million
and
$0.0 million
, respectively.
The aggregate intrinsic value of RSU MSPs settled during the
nine
months ended
September 29, 2013
was
$0.7 million
and the aggregate intrinsic value of RSU MSPs outstanding and RSU MSPs vested and deferred as of
September 29, 2013
was
$2.6 million
and
$0.0 million
, respectively.
(4) Inventories
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
September 29, 2013
|
|
December 31, 2012
|
Raw materials
|
$
|
53,429
|
|
|
$
|
63,104
|
|
Work in process
|
99,153
|
|
|
86,564
|
|
Finished goods
|
45,872
|
|
|
48,337
|
|
|
$
|
198,454
|
|
|
$
|
198,005
|
|
(5) Goodwill and Intangible Assets
The following table shows goodwill, by segment, as of
September 29, 2013
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
|
|
Aerospace
|
|
Flow
Technologies
|
|
Consolidated
Total
|
Goodwill as of December 31, 2012
|
$
|
51,526
|
|
|
$
|
22,121
|
|
|
$
|
3,781
|
|
|
$
|
77,428
|
|
Currency translation adjustments
|
(1,169
|
)
|
|
42
|
|
|
(235
|
)
|
|
(1,362
|
)
|
Goodwill as of September 29, 2013
|
$
|
50,357
|
|
|
$
|
22,163
|
|
|
$
|
3,546
|
|
|
$
|
76,066
|
|
The table below presents gross intangible assets and the related accumulated amortization as of
September 29, 2013
(in thousands):
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
Patents
|
$
|
6,078
|
|
|
$
|
(5,671
|
)
|
Non-amortized intangibles (primarily trademarks and trade names)
|
23,601
|
|
|
—
|
|
Customer relationships
|
34,032
|
|
|
(18,088
|
)
|
Backlog
|
1,114
|
|
|
(1,114
|
)
|
Other
|
7,479
|
|
|
(4,703
|
)
|
Total
|
$
|
72,304
|
|
|
$
|
(29,576
|
)
|
Net carrying value of intangible assets
|
42,728
|
|
|
|
The table below presents estimated remaining amortization expense for intangible assets recorded as of
September 29, 2013
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
|
After 2017
|
Estimated amortization expense
|
$
|
774
|
|
|
$
|
3,066
|
|
|
$
|
3,045
|
|
|
$
|
2,760
|
|
|
$
|
2,626
|
|
|
$
|
6,856
|
|
(6) Segment Information
The following table presents certain reportable segment information (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
|
|
Aerospace
|
|
Flow
Technologies
|
|
Corporate /
Eliminations
|
|
Consolidated
Total
|
Three Months Ended September 29, 2013
|
|
|
|
|
|
|
|
|
|
Net revenues
|
$
|
108,474
|
|
|
$
|
36,483
|
|
|
$
|
69,775
|
|
|
$
|
—
|
|
|
$
|
214,731
|
|
Inter-segment revenues
|
410
|
|
|
32
|
|
|
126
|
|
|
(568
|
)
|
|
—
|
|
Operating income (loss)
|
21,620
|
|
|
3,002
|
|
|
8,334
|
|
|
(9,020
|
)
|
|
23,936
|
|
Interest income
|
|
|
|
|
|
|
|
|
(67
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
812
|
|
Other expense, net
|
|
|
|
|
|
|
|
|
568
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
$
|
22,623
|
|
Identifiable assets
|
410,975
|
|
|
180,025
|
|
|
223,737
|
|
|
(89,374
|
)
|
|
725,363
|
|
Capital expenditures
|
1,381
|
|
|
2,071
|
|
|
906
|
|
|
489
|
|
|
4,847
|
|
Depreciation and amortization
|
1,651
|
|
|
1,167
|
|
|
1,508
|
|
|
346
|
|
|
4,672
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2012
|
|
|
|
|
|
|
|
|
|
Net revenues
|
$
|
109,968
|
|
|
$
|
31,795
|
|
|
$
|
68,041
|
|
|
$
|
—
|
|
|
$
|
209,804
|
|
Inter-segment revenues
|
577
|
|
|
10
|
|
|
194
|
|
|
(781
|
)
|
|
—
|
|
Operating income (loss)
|
11,236
|
|
|
(10,284
|
)
|
|
8,873
|
|
|
(7,169
|
)
|
|
2,656
|
|
Interest income
|
|
|
|
|
|
|
|
|
(101
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
1,223
|
|
Other expense, net
|
|
|
|
|
|
|
|
|
564
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
$
|
970
|
|
Identifiable assets
|
366,730
|
|
|
180,547
|
|
|
204,107
|
|
|
(53,748
|
)
|
|
697,636
|
|
Capital expenditures
|
647
|
|
|
686
|
|
|
1,856
|
|
|
125
|
|
|
3,314
|
|
Depreciation and amortization
|
1,713
|
|
|
1,233
|
|
|
1,543
|
|
|
378
|
|
|
4,867
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 29, 2013
|
|
|
|
|
|
|
|
|
|
Net revenues
|
$
|
316,027
|
|
|
$
|
111,986
|
|
|
$
|
215,760
|
|
|
$
|
—
|
|
|
$
|
643,773
|
|
Inter-segment revenues
|
1,136
|
|
|
56
|
|
|
526
|
|
|
(1,718
|
)
|
|
—
|
|
Operating income (loss)
|
46,233
|
|
|
5,469
|
|
|
28,335
|
|
|
(22,945
|
)
|
|
57,092
|
|
Interest income
|
|
|
|
|
|
|
|
|
(189
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
2,559
|
|
Other expense, net
|
|
|
|
|
|
|
|
|
1,807
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
$
|
52,915
|
|
Identifiable assets
|
410,975
|
|
|
180,025
|
|
|
223,737
|
|
|
(89,374
|
)
|
|
725,363
|
|
Capital expenditures
|
5,459
|
|
|
4,236
|
|
|
3,207
|
|
|
677
|
|
|
13,579
|
|
Depreciation and amortization
|
4,943
|
|
|
3,588
|
|
|
4,599
|
|
|
1,085
|
|
|
14,215
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2012
|
|
|
|
|
|
|
|
|
|
Net revenues
|
$
|
332,759
|
|
|
$
|
105,776
|
|
|
$
|
205,411
|
|
|
$
|
—
|
|
|
$
|
643,946
|
|
Inter-segment revenues
|
1,477
|
|
|
41
|
|
|
589
|
|
|
(2,107
|
)
|
|
—
|
|
Operating income (loss)
|
32,744
|
|
|
(3,007
|
)
|
|
25,503
|
|
|
(20,404
|
)
|
|
34,836
|
|
Interest income
|
|
|
|
|
|
|
|
|
(262
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
3,482
|
|
Other expense, net
|
|
|
|
|
|
|
|
|
887
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
$
|
30,729
|
|
Identifiable assets
|
366,730
|
|
|
180,547
|
|
|
204,107
|
|
|
(53,748
|
)
|
|
697,636
|
|
Capital expenditures
|
2,397
|
|
|
2,263
|
|
|
7,600
|
|
|
1,837
|
|
|
14,097
|
|
Depreciation and amortization
|
5,546
|
|
|
3,672
|
|
|
4,348
|
|
|
1,022
|
|
|
14,588
|
|
Each reporting segment is individually managed and has separate financial results that are reviewed by our chief operating decision-maker. Each segment contains related products and services particular to that segment. For further discussion of the products included in each segment refer to Note (1) of the consolidated financial statements included in our Annual Report on Form 10-K for the year ended
December 31, 2012
.
In calculating operating income for each reporting segment, substantial administrative expenses incurred at the corporate level for the benefit of other reporting segments were allocated to the segments based upon specific identification of costs, employment related information or net revenues.
Corporate / Eliminations are reported on a net “after allocations” basis. Inter-segment intercompany transactions affecting net operating profit have been eliminated within the respective operating segments.
The operating loss reported in the Corporate / Eliminations column in the preceding table consists primarily of the following corporate expenses: compensation and fringe benefit costs for executive management and other corporate staff; corporate development costs (relating to mergers and acquisitions); human resource development and benefit plan administration expenses; legal, accounting and other professional and consulting fees; facilities, equipment and maintenance costs; and travel and various other administrative costs. The above costs are incurred in the course of furthering the business prospects of the Company and relate to activities such as: implementing strategic business growth opportunities; corporate governance; risk management; treasury; investor relations and shareholder services; regulatory compliance; and stock transfer agent costs.
The total assets for each operating segment have been reported as the Identifiable Assets for that segment, including inter-segment intercompany receivables, payables and investments in other CIRCOR businesses. Identifiable assets reported in Corporate / Eliminations include both corporate assets, such as cash, deferred taxes, prepaid and other assets, fixed assets, as well as the elimination of all inter-segment intercompany assets. The elimination of intercompany assets results in negative amounts reported in Corporate / Eliminations for Identifiable Assets for the periods ended
September 29, 2013
and
September 30, 2012
. Corporate Identifiable Assets after elimination of intercompany assets were
$36.8 million
and
$41.8 million
as of
September 29, 2013
and
September 30, 2012
, respectively.
(7) Earnings Per Common Share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
September 29, 2013
|
|
September 30, 2012
|
|
Net
Income
|
|
Shares
|
|
Per Share
Amount
|
|
Net
Income
|
|
Shares
|
|
Per Share
Amount
|
Basic Earnings Per Common Share ("EPS")
|
$
|
17,720
|
|
|
17,582
|
|
|
$
|
1.01
|
|
|
$
|
1,869
|
|
|
17,433
|
|
|
$
|
0.11
|
|
Dilutive securities, common stock options
|
—
|
|
|
85
|
|
|
(0.01
|
)
|
|
—
|
|
|
34
|
|
|
0.00
|
|
Diluted EPS
|
$
|
17,720
|
|
|
17,667
|
|
|
$
|
1.00
|
|
|
$
|
1,869
|
|
|
17,467
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
September 29, 2013
|
|
September 30, 2012
|
|
Net
Income
|
|
Shares
|
|
Per Share
Amount
|
|
Net
Income
|
|
Shares
|
|
Per Share
Amount
|
Basic EPS
|
$
|
38,296
|
|
|
17,553
|
|
|
$
|
2.18
|
|
|
$
|
21,591
|
|
|
17,391
|
|
|
$
|
1.24
|
|
Dilutive securities, common stock options
|
—
|
|
|
49
|
|
|
0.00
|
|
|
—
|
|
|
45
|
|
|
0.00
|
|
Diluted EPS
|
$
|
38,296
|
|
|
17,602
|
|
|
$
|
2.18
|
|
|
$
|
21,591
|
|
|
17,436
|
|
|
$
|
1.24
|
|
There were
133,218
and
396,849
anti-dilutive stock options, RSU Awards, and RSU MSPs for the
nine
months ended
September 29, 2013
and
September 30, 2012
, respectively.
(8) Financial Instruments
Fair Value
The carrying amounts of cash and cash equivalents, trade receivables and trade payables approximate fair value because of the short maturity of these financial instruments. Short-term investments (principally guaranteed investment certificates) are carried at cost which approximates fair value at the balance sheet date. The fair value of our variable rate debt approximates its carrying amount.
Foreign Currency Exchange Risk
The Company is exposed to certain risks relating to its ongoing business operations including foreign currency exchange rate risk and interest rate risk. The Company currently uses derivative instruments to manage foreign currency risk on certain business transactions denominated in foreign currencies. To the extent the underlying transactions hedged are completed, these forward contracts do not subject us to significant risk from exchange rate movements because they offset gains and losses on the related foreign currency denominated transactions. These forward contracts do not qualify as hedging instruments and, therefore, do not qualify for fair value or cash flow hedge treatment. Any unrealized gains and losses on our contracts are recognized as a component of other expense in our consolidated statements of income.
As of
September 29, 2013
, we had
twenty-three
forward contracts with total values as follows (in thousands):
|
|
|
|
|
|
|
Currency
|
Number
|
|
Contract Amount
|
|
Currency
|
Canadian Dollar/Euro
|
3
|
|
115
|
|
Canadian Dollars
|
U.S. Dollar/Euro
|
15
|
|
13,007
|
|
U.S. Dollars
|
Brazilian Real/Euro
|
5
|
|
0
|
|
Brazilian Reais
|
This compares to
twelve
forward contracts as of
December 31, 2012
. The fair value asset of the derivative forward contracts as of
September 29, 2013
was approximately $
0.1 million
and was included in prepaid expenses and other current assets on our balance sheet. This compares to a fair value asset of approximately $
0.5 million
that was included in prepaid expenses and other current assets on our balance sheet as of
December 31, 2012
. The unrealized foreign exchange gain (loss) for the
nine
month periods ended
September 29, 2013
and
September 30, 2012
was less than
$0.5 million
and
$0.5 million
, respectively. Unrealized foreign exchange gains (losses) are included in other (income) expense in our consolidated statements of income.
We have determined that the majority of the inputs used to value our foreign currency forward contracts fall within Level 2 of the fair value hierarchy, found under Accounting Standards Codification (“ASC”) Topic 820. The credit valuation adjustments, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties are Level 3 inputs. However, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our foreign currency forward contracts and determined that the credit valuation adjustments are not significant to the overall valuation. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
(9) Guarantees and Indemnification Obligations
As permitted under Delaware law, we have agreements whereby we indemnify certain of our officers and directors for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. However, we have directors’ and officers’ liability insurance policies that limit our exposure for events covered under the policies and should enable us to recover a portion of any future amounts paid. As a result of the coverage under these insurance policies, we believe the estimated fair value of these indemnification agreements based on Level 3 criteria as described under ASC Topic 820 is minimal and, therefore, we have
no
liabilities recorded from those agreements as of
September 29, 2013
.
We record provisions for the estimated cost of product warranties, primarily from historical information, at the time product revenue is recognized. While we engage in extensive product quality programs and processes, our warranty obligation is affected by product failure rates, utilization levels, material usage, service delivery costs incurred in correcting a product failure, and supplier warranties on parts delivered to us. Should actual product failure rates, utilization levels, material usage, service delivery costs or supplier warranties on parts differ from our estimates, revisions to the estimated warranty liability would be required.
The following table sets forth information related to our product warranty reserves for the
nine
months ended
September 29, 2013
(in thousands):
|
|
|
|
|
Balance beginning December 31, 2012
|
$
|
3,322
|
|
Provisions
|
2,878
|
|
Claims settled
|
(1,896
|
)
|
Currency translation adjustment
|
46
|
|
Balance ending September 29, 2013
|
$
|
4,350
|
|
(10) Contingencies and Commitments
Asbestos-related product liability claims continue to be filed against two of our subsidiaries-Spence Engineering Company, Inc. (“Spence”), the stock of which we acquired in 1984; and Circor Instrumentation Technologies, Inc. (f/k/a Hoke Incorporated) (“Hoke”), the stock of which we acquired in 1998. Due to the nature of the products supplied by these entities, the markets they serve and our historical experience in resolving these claims, we do not believe that these asbestos-related claims will have a material adverse effect on the financial condition, results of operations or liquidity of Spence or Hoke, or the financial condition, consolidated results of operations or liquidity of the Company.
During the third quarter of 2011, we commenced arbitration proceedings against T.M.W. Corporation (“TMW”), the seller from which we acquired the assets of Castle Precision Industries in August 2010, seeking to recover damages from TMW for breaches of certain representations and warranties made by TMW in the Asset Purchase Agreement dated
August 3, 2010
relative to such acquisition. We currently are in the discovery phase of this arbitration and now expect the actual hearings to occur in the second quarter of 2014.
We are currently involved in various legal claims and legal proceedings, some of which may involve substantial dollar amounts. Periodically, we review the status of each significant matter and assess our potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be estimated, we accrue a liability for the estimated loss. Significant judgment is required in both the determination of probability and the determination as to whether an exposure can be reasonably estimated. Because of uncertainties related to these matters, accruals are based on the best information available at the time. As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates. Such revisions in the estimates of the potential liabilities could have a material adverse effect on our business, results of operations and financial position.
Standby Letters of Credit
We execute standby letters of credit, which include bid bonds and performance bonds, in the normal course of business to ensure our performance or payments to third parties. The aggregate notional value of these instruments was
$52.6 million
at
September 29, 2013
. Our historical experience with these types of instruments has been good and no claims have been paid in the current or past five fiscal years. We believe that the likelihood of demand for payments relating to the outstanding instruments is remote. These instruments generally have expiration dates ranging from less than
1 month
to
5 years
from
September 29, 2013
.
The following table contains information related to standby letters of credit instruments outstanding as of
September 29, 2013
(in thousands):
|
|
|
|
|
Term Remaining
|
Maximum Potential
Future Payments
|
0–12 months
|
$
|
42,808
|
|
Greater than 12 months
|
9,821
|
|
Total
|
$
|
52,629
|
|
(11) Defined Pension Benefit Plans
We maintain two pension benefit plans, a qualified noncontributory defined benefit plan and a nonqualified, noncontributory defined benefit supplemental plan that provides benefits to certain retired highly compensated officers and employees. To date, the supplemental plan remains an unfunded plan. These plans include significant pension benefit obligations which are calculated based on actuarial valuations. Key assumptions are made in determining these obligations and related expenses,
including expected rates of return on plan assets and discount rates. Benefits are based primarily on years of service and employees’ compensation.
As of July 1, 2006, in connection with a revision to our retirement plan, we froze the pension benefits of our qualified noncontributory plan participants. Under the revised plan, such participants generally do not accrue any additional benefits under the defined benefit plan after July 1, 2006.
During the
three
and
nine
months ended
September 29, 2013
, we made cash contributions of
$0.4 million
and
$1.2 million
, respectively to our qualified defined benefit pension plan. Additionally, substantially all of our U.S. employees are eligible to participate in a 401(k) savings plan. Under this plan, we make a core contribution and match a specified percentage of employee contributions, subject to certain limitations.
The components of net pension benefit expense are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 29,
2013
|
|
September 30,
2012
|
|
September 29,
2013
|
|
September 30,
2012
|
Service cost-benefits earned
|
$
|
—
|
|
|
$
|
52
|
|
|
$
|
—
|
|
|
$
|
157
|
|
Interest cost on benefits obligation
|
491
|
|
|
513
|
|
|
1,473
|
|
|
1,540
|
|
Estimated return on assets
|
(591
|
)
|
|
(531
|
)
|
|
(1,773
|
)
|
|
(1,595
|
)
|
Prior service cost amortization
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Loss amortization
|
189
|
|
|
158
|
|
|
567
|
|
|
473
|
|
Net periodic cost of defined pension benefit plans
|
$
|
89
|
|
|
$
|
192
|
|
|
$
|
267
|
|
|
$
|
575
|
|
(12) Income Taxes
As required by the Income Tax Topic of the ASC, at
September 29, 2013
and at
December 31, 2012
, we had
$1.8 million
and
$2.0 million
of unrecognized tax benefits, respectively, of which
$0.9 million
and
$1.1 million
, respectively, would affect our effective tax rate if recognized in any future period.
We recognize interest and penalties related to uncertain tax positions in income tax expense. As of
September 29, 2013
, we had approximately
$0.9 million
of accrued interest related to uncertain tax positions.
The Company files income tax returns in the U.S. federal jurisdiction and in various state, local and foreign jurisdictions. The Company is no longer subject to examination by the Internal Revenue Service for years prior to 2010 and is no longer subject to examination by the tax authorities in foreign and state jurisdictions prior to 2006. The Company is under examination for income tax filings in various state and foreign jurisdictions.
For 2013, we expect an effective income tax rate of approximately
28.0%
. The effective tax rate was
21.7%
for the quarter ended September 29, 2013. The primary driver of this lower tax rate in the quarter was foreign rate differentials, the UK tax rate change and a non-taxable gain on a foreign price purchase settlement, offset by a change in the valuation allowance.
Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and vice versa. Changes in the valuation of our deferred tax assets or liabilities, or changes in tax laws or interpretations thereof may also adversely affect our future effective tax rate. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.
The Company has a net domestic deferred income tax asset and a net foreign deferred tax asset. With regard to deferred income tax assets, we maintained a total valuation allowance of
$14.2 million
at
September 29, 2013
and
$13.5 million
at
December 31, 2012
due to uncertainties related to our ability to utilize certain of these assets, primarily consisting of certain foreign tax credits, foreign and state net operating losses and state tax credits carried forward. The valuation allowance is based on estimates of taxable income in each of the jurisdictions in which we operate and the period over which our deferred tax assets will be recoverable. If market conditions improve and future results of operations exceed our current expectations, our existing tax valuation allowances may be adjusted, resulting in future tax benefits. Alternatively, if market conditions deteriorate or future results of operations are less than expected, future assessments may result in a determination that some or all of the deferred tax assets are not realizable. Consequently, we may need to establish additional tax valuation allowances for all or a portion of the gross deferred tax assets, which may have a material adverse effect on our business, results of operations
and financial condition. The Company has had a history of domestic and foreign taxable income, is able to avail itself of federal tax carryback provisions, has future taxable temporary differences and projects future domestic and foreign taxable income. We believe that after considering all of the available objective evidence, it is more likely than not that the results of future operations will generate sufficient taxable income to realize the remaining deferred tax assets.
(13) Special Charges / Recoveries
During the third quarter of 2012 we announced restructuring actions in the Energy, Aerospace, and Flow Technologies segments ("2012 Announced Restructuring") including actions to consolidate facilities, shift expenses to lower cost regions, and exiting some non-strategic product lines.
On July 12, 2013 we reached a settlement on the SF Valves arbitration (“SF Settlement”) and have received a refund of a portion of the purchase price which resulted in a gain of approximately
$3.2 million
during the third quarter of 2013. This gain was recorded as a special recovery during the third quarter of 2013.
On August 1, 2013 we announced additional restructuring actions associated with our Aerospace and Flow Technologies segments ("August 1, 2013 Announced Restructuring") including actions to consolidate facilities, shift expenses to lower cost regions, and exiting some non-strategic product lines.
In addition during the third quarter of 2013 we announced that our Chief Financial Officer would be retiring and recorded a
$0.6 million
(“CFO retirement”) special charge for associated salary continuation and bonus.
During the
three
and
nine
months ended
September 30, 2012
we incurred
$1.4 million
in special charges (recoveries) associated with the 2012 Announced Restructuring actions. The following table summarizes our special charges by expense type and business segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special Charges / Recoveries
|
|
As of and for the three months ended September 30, 2012
|
|
Energy
|
|
Aerospace
|
|
Flow
Technologies
|
|
Corporate
|
|
Total
|
Accrued special charges as of July 1, 2012
|
|
|
|
|
|
|
|
|
$
|
—
|
|
Facility and professional fee related expenses
|
1,093
|
|
|
209
|
|
|
—
|
|
|
—
|
|
|
1,302
|
|
Employee-related expenses
|
—
|
|
|
30
|
|
|
45
|
|
|
—
|
|
|
75
|
|
Total restructuring related special charges
|
$
|
1,093
|
|
|
$
|
239
|
|
|
$
|
45
|
|
|
$
|
—
|
|
|
$
|
1,377
|
|
Special charges paid
|
|
|
|
|
|
|
|
|
(1,377
|
)
|
Accrued special charges as of September 30, 2012
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Special Charges / Recoveries
|
|
As of and for the nine months ended September 30, 2012
|
|
Energy
|
|
Aerospace
|
|
Flow
Technologies
|
|
Corporate
|
|
Total
|
Accrued special charges as of December 31, 2011
|
|
|
|
|
|
|
|
|
$
|
—
|
|
Facility and professional fee related expenses
|
1,093
|
|
|
209
|
|
|
—
|
|
|
—
|
|
|
1,302
|
|
Employee-related expenses
|
—
|
|
|
30
|
|
|
45
|
|
|
—
|
|
|
75
|
|
Total restructuring related special charges
|
$
|
1,093
|
|
|
$
|
239
|
|
|
$
|
45
|
|
|
$
|
—
|
|
|
$
|
1,377
|
|
Special charges paid
|
|
|
|
|
|
|
|
|
(1,377
|
)
|
Accrued special charges as of September 30, 2012
|
|
|
|
|
|
|
|
|
$
|
—
|
|
During the
three
and
nine
months ended
September 29, 2013
we incurred
$(0.2) million
and
$3.4 million
in special charges (recoveries) associated with the 2012 Announced Restructuring actions, August 1, 2013 Announced Restructuring actions, SF Settlement, and CFO Retirement. The following table summarizes our special charges by expense type and business segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special Charges / Recoveries
|
|
As of and for the three months ended September 29, 2013
|
|
Energy
|
|
Aerospace
|
|
Flow
Technologies
|
|
Corporate
|
|
Total
|
Accrued special charges as of June 30, 2013
|
|
|
|
|
|
|
|
|
$
|
592
|
|
Facility and professional fee related expenses
|
—
|
|
|
800
|
|
|
536
|
|
|
—
|
|
|
1,336
|
|
Employee-related expenses
|
90
|
|
|
337
|
|
|
598
|
|
|
—
|
|
|
1,025
|
|
Total restructuring related special charges
|
$
|
90
|
|
|
$
|
1,137
|
|
|
$
|
1,134
|
|
|
$
|
—
|
|
|
$
|
2,361
|
|
CFO retirement charges
|
—
|
|
|
—
|
|
|
—
|
|
|
600
|
|
|
600
|
|
Total Special Charges Incurred During Period
|
$
|
90
|
|
|
$
|
1,137
|
|
|
$
|
1,134
|
|
|
$
|
600
|
|
|
$
|
2,961
|
|
Special charges paid
|
|
|
|
|
|
|
|
|
(1,650
|
)
|
Accrued special charges as of September 29, 2013
|
|
|
|
|
|
|
|
|
$
|
1,903
|
|
|
|
|
|
|
|
|
|
|
|
Total Special Charges Incurred During Period
|
90
|
|
|
1,137
|
|
|
1,134
|
|
|
600
|
|
|
2,961
|
|
SF Settlement special (recoveries)
|
(3,151
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,151
|
)
|
Special Charges / (Recoveries) During Period
|
$
|
(3,061
|
)
|
|
$
|
1,137
|
|
|
$
|
1,134
|
|
|
$
|
600
|
|
|
$
|
(190
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Special Charges / Recoveries
|
|
As of and for the nine months ended September 29, 2013
|
|
Energy
|
|
Aerospace
|
|
Flow
Technologies
|
|
Corporate
|
|
Total
|
Accrued special charges as of December 31, 2012
|
|
|
|
|
|
|
|
|
$
|
800
|
|
Facility and professional fee related expenses
|
811
|
|
|
2,638
|
|
|
563
|
|
|
—
|
|
|
4,012
|
|
Employee-related expenses
|
391
|
|
|
910
|
|
|
680
|
|
|
—
|
|
|
1,981
|
|
Total restructuring related special charges
|
$
|
1,202
|
|
|
$
|
3,548
|
|
|
$
|
1,243
|
|
|
$
|
—
|
|
|
$
|
5,993
|
|
CFO retirement charges
|
—
|
|
|
—
|
|
|
—
|
|
|
600
|
|
|
600
|
|
Total Special Charges Incurred During Period
|
$
|
1,202
|
|
|
$
|
3,548
|
|
|
$
|
1,243
|
|
|
$
|
600
|
|
|
$
|
6,593
|
|
Special charges paid
|
|
|
|
|
|
|
|
|
(5,490
|
)
|
Accrued special charges as of September 29, 2013
|
|
|
|
|
|
|
|
|
$
|
1,903
|
|
|
|
|
|
|
|
|
|
|
|
Total Special Charges Incurred During Period
|
1,202
|
|
|
3,548
|
|
|
1,243
|
|
|
600
|
|
|
6,593
|
|
SF Settlement special (recoveries)
|
(3,152
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,152
|
)
|
Special Charges / (Recoveries) During Period
|
$
|
(1,950
|
)
|
|
$
|
3,548
|
|
|
$
|
1,243
|
|
|
$
|
600
|
|
|
$
|
3,441
|
|
The following table summarizes our 2012 Announced Restructuring action special charges incurred from the end of the third quarter of 2012 through September 29, 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 Announced Restructurings Incurred as of September 29, 2013
|
|
Energy
|
|
Aerospace
|
|
Flow
Technologies
|
|
Corporate
|
|
Total
|
Facility and professional fee related expenses - incurred to date
|
2,113
|
|
|
2,869
|
|
|
162
|
|
|
—
|
|
|
5,144
|
|
Employee-related expenses - incurred to date
|
896
|
|
|
925
|
|
|
191
|
|
|
—
|
|
|
2,012
|
|
Total restructuring related special charges - incurred to date
|
$
|
3,009
|
|
|
$
|
3,794
|
|
|
$
|
353
|
|
|
$
|
—
|
|
|
$
|
7,156
|
|
Also, in connection with the 2012 Announced Restructuring special charges noted above, we recorded
$1.2 million
and
$3.0 million
of repositioning related inventory obsolescence charges since the third quarter of 2012, for the Energy and Aerospace segments, respectively.
We do not anticipate any additional special charges to be incurred associated with the 2012 Announced Restructurings.
The following table summarizes our August 1, 2013 Announced Restructuring action special charges incurred during the third quarter of 2013. Charges with this action began in the third quarter of 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 1, 2013 Announced Restructurings Incurred as of September 29, 2013
|
|
Energy
|
|
Aerospace
|
|
Flow
Technologies
|
|
Corporate
|
|
Total
|
Facility and professional fee related expenses - incurred to date
|
—
|
|
|
80
|
|
|
536
|
|
|
—
|
|
|
616
|
|
Employee-related expenses - incurred to date
|
—
|
|
|
171
|
|
|
598
|
|
|
—
|
|
|
769
|
|
Total restructuring related special charges - incurred to date
|
$
|
—
|
|
|
$
|
251
|
|
|
$
|
1,134
|
|
|
$
|
—
|
|
|
$
|
1,385
|
|
Additional special charges that we expect to be recorded with the August 1, 2013 Announced Restructuring action are included in the projected amounts below.
On October 31, 2013 we announced an organizational restructuring under which we will simplify the manner in which we manage our businesses. Under this restructuring we will consolidate our group structure from three groups to two, reducing management layers and administrative expenses. We expect to complete this reorganization in the fourth quarter of 2013 and expect to incur special charges of between
$2.6 million
to
$3.0 million
associated with this reorganization during the fourth quarter of 2013.
We expect to incur Restructuring related special charges between
$5.3 million
and
$6.0 million
during Q4 2013 (between
$0.8 million
and
$0.9 million
for the Energy segment, between
$1.3 million
and
$1.4 million
for the Aerospace segment, and between
$3.2 million
and
$3.7 million
for the Flow Technologies segment). We expect to incur additional Restructuring related special charges between
$3.9 million
and
$4.3 million
during the first half of 2014 (between
$0.5 million
and
$0.6 million
for the Aerospace segment and between
$3.4 million
and
$3.7 million
for the Flow Technologies segment) to complete these restructuring actions. These restructuring activities are expected to be funded with cash generated from operations.
|
|
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|
This Quarterly Report on Form 10-Q 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 SEC. The words “may,” “hope,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,” “continue,” and other expressions which are predictions of or indicate future events and trends and which do not relate to historical matters, identify forward-looking statements. We believe that it is important to communicate our future expectations to our stockholders, and we, therefore, make forward-looking statements in reliance upon the safe harbor provisions of the Act. However, there may be events in the future that we are not able to accurately predict or control and our actual results may differ materially from the expectations we describe in our forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the cyclicality and highly competitive nature of some of our end markets which can affect the overall demand for and pricing of our products, changes in the price of and demand for oil and gas in both domestic and international markets, any adverse changes in governmental policies, variability of raw material and component pricing, changes in our suppliers' performance, fluctuations in foreign currency exchange rates, our ability to hire and maintain key personnel, our ability to continue operating our manufacturing facilities at efficient levels including our ability to prevent cost overruns and continue to reduce costs, our ability to generate increased cash by reducing our inventories, our prevention of the accumulation of excess inventory, our ability to successfully implement our acquisition strategy, fluctuations in interest rates, our ability to continue to successfully defend product liability actions including asbestos-related claims, our ability to realize savings anticipated to result from the restructuring activities discussed herein, as well as the uncertainty associated with the current worldwide economic conditions and the continuing impact on economic and financial conditions in the United States and around the world as a result of terrorist attacks, current Middle Eastern conflicts and related matters.
We advise you to read further about certain of these and other risk factors set forth in Part I, Item 1A, “Risk Factors” of our Annual Report filed on Form 10-K for the year ended December 31, 2012, together with subsequent reports we have filed with the SEC on Forms 10-Q and 8-K, which may supplement, modify, supersede, or update those risk factors.
We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
Company Overview
CIRCOR International, Inc. designs, manufactures and markets valves and other highly engineered products for markets including energy, oil & gas, power generation, and aerospace. Within our major product groups, we develop, manufacture, sell and service a portfolio of fluid-control products, subsystems and technologies that enable us to fulfill our customers’ unique fluid-control application needs.
We have organized our reporting structure into three segments: Energy, Aerospace, and Flow Technologies. Our Energy segment primarily serves large international energy projects, short-cycle North American energy, and the pipeline transmission equipment and services end-markets. Our Aerospace segment primarily serves the commercial and military aerospace end-markets. Our Flow Technologies segment serves our broadest variety of end-markets, including power generation, industrial and process markets, chemical and refining, and industrial and commercial HVAC/steam. The Flow Technologies segment also provides products specifically designed for U.S. and international Navy applications.
On October 31, 2013, we announced an organizational restructuring under which we will simplify the manner in which we manage our businesses. Under this restructuring we will consolidate our group structure from three groups to two during the fourth quarter of 2013. Consistent with our new management structure we intend to begin reporting in two segments during the fourth quarter of 2013. The first segment will be ‘Energy,’ which will include all of the businesses from the existing Energy segment and the majority of the current ‘Flow Technologies’ businesses. The second segment will be ‘Aerospace and Defense,’ which will include all of the current Aerospace segment businesses plus a few primarily defense-oriented businesses currently in the Flow Technologies segment.
We have been enhancing both our domestic and our worldwide operations through the development of the CIRCOR Business System. The CIRCOR Business System is based on lean operating techniques designed to continuously improve product and work flow and drive waste out of our manufacturing, sales, procurement and office-related systems (“Lean”). Within the CIRCOR Business System, we are committed to attracting, developing and refining the best talent and pursuing continuous improvement in all aspects of our business and operations. The CIRCOR Business System promotes improved shareholder value through the enhancement of core competencies across all of our business units, including continuous improvement, talent
acquisition, development and retention, acquisition integration and factory restructuring, global business and supply chain development and product innovation.
Our primary objective is to enhance shareholder value through improvement of operating margins on existing businesses as well as profitable growth of our diversified, multi-national company utilizing the CIRCOR Business System. We are working to accomplish these objectives by focusing on factory repositioning activities and by winning highly engineered project and product opportunities in key end-markets that have above average growth. These end-markets include the upstream and midstream oil and gas, power generation, process and aerospace markets. In capitalizing on these opportunities, we are using the CIRCOR Business System to excel at:
|
|
•
|
Lean Enterprise, Six Sigma and Continuous Improvement;
|
|
|
•
|
Talent Acquisition, Development and Retention;
|
|
|
•
|
Acquisition and Factory Restructuring;
|
|
|
•
|
Global Business and Supply Chain Development;
|
|
|
•
|
Customer Relationship Development; and
|
Through organic and acquisition-based growth our three to five year objectives are to gain significant market positions in our key end-markets and build a global capability in high-growth emerging markets while improving operating margins.
Basis of Presentation
All significant intercompany balances and transactions have been eliminated in consolidation. We monitor our business in three segments: Energy, Aerospace and Flow Technologies.
We operate and report financial information using a 52-week fiscal year ending December 31. The data periods contained within our Quarterly Reports on Form 10-Q reflect the results of operations for the 13-week, 26-week and 39-week periods which generally end on the Sunday nearest the calendar quarter-end date.
Critical Accounting Policies
The following discussion of accounting policies is intended to supplement the section “Summary of Significant Accounting Policies” presented in Note (2) to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended
December 31, 2012
. These policies were selected because they are broadly applicable within our operating units. The expenses and accrued liabilities or allowances related to certain of these policies are initially based on our best estimates at the time of original entry in our accounting records. Adjustments are recorded when our actual experience, or new information concerning our expected experience, differs from underlying initial estimates. These adjustments could be material if our actual or expected experience were to change significantly in a short period of time. We make frequent comparisons of actual experience and expected experience in order to mitigate the likelihood of material adjustments.
There have been no significant changes from the methodology applied by management for critical accounting estimates previously disclosed in our most recent Annual Report on Form 10-K.
In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-02,
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("AOCI")
. The new ASU requires entities to disclose in a single location (either on the face of the financial statement that reports net income or in the notes) the effects of reclassifications out of accumulated other comprehensive income. For items reclassified out of AOCI in their entirety into net income, entities must disclose the effect of the reclassification on each affected net income item. For AOCI reclassification items that are not reclassified in their entirety into net income, entities must provide a cross reference to other required U.S. GAAP disclosures. The new disclosure requirements are effective for annual reporting after December 15, 2012, and interim periods within those years. No reclassifications out of AOCI were made by the Company for the
three
and
nine
months ended
September 29, 2013
or the
three
months and
nine
months ended
September 30, 2012
and therefore no additional AOCI disclosure is presented in our Quarterly Report on Form 10-Q.
In July 2013, FASB issued ASU 2013-11,
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.
The new ASU requires companies to present an unrecognized tax benefit as a reduction of a deferred tax asset for a tax loss or credit carryforward on the balance sheet when either: (A) the tax law requires the company to use the tax loss or credit carryforward to satsify amounts payable upon disallowance of the tax position, or (B) the tax loss or credit carryforward is available to satisfy amounts payable upon disallowance of the tax position, and the company intends to use the deferred tax asset for that purpose. The new disclosure requirements are effective for annual reporting after December 15, 2013, and interim periods within those years. We do not believe the adoption of this update will have a material impact on our financial statements.
Revenue Recognition
Revenue is recognized when products are delivered, title and risk of loss have passed to the customer, persuasive evidence of an arrangement exists, no significant post-delivery obligations remain, the price to the buyers is fixed or determinable and collection of the resulting receivable is reasonably assured. We have limited long-term arrangements, representing less than 2% of our revenue, requiring delivery of products or services over extended periods of time and revenue and profits on certain of these arrangements are recognized in accordance with the percentage of completion method of accounting. Shipping and handling costs invoiced to customers are recorded as components of revenues and the associated costs are recorded as cost of revenues.
Allowance for Inventory
We typically analyze our inventory aging and projected future usage on a quarterly basis to assess the adequacy of our inventory allowances. We provide inventory allowances for excess, slow-moving, and obsolete inventories determined primarily by estimates of future demand. The allowance is measured on an item-by-item basis determined based on the difference between the cost of the inventory and estimated market value. The provision for inventory allowance is a component of our cost of revenues. Assumptions about future demand are among the primary factors utilized to estimate market value. At the point of the loss recognition, a new, lower-cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
Our net inventory balance was
$198.5 million
as of
September 29, 2013
, compared to
$198.0 million
as of
December 31, 2012
. Our inventory allowance as of
September 29, 2013
was
$24.0 million
, compared with
$22.3 million
as of
December 31, 2012
. Our provision for inventory obsolescence was
$4.2 million
and
$8.4 million
for the first
nine
months of
2013
and
2012
, respectively.
If there were to be a sudden and significant decrease in demand for our products, significant price reductions, or if there were a higher incidence of inventory obsolescence for any reason, including a change in technology or customer requirements, we could be required to increase our inventory allowances and our gross profit could be adversely affected.
Inventory management remains an area of focus as we balance the need to maintain adequate inventory levels to ensure competitive lead times against the risk of inventory obsolescence.
Penalty Accruals
Some of our customer agreements, primarily in our project related businesses, contain late shipment penalty clauses whereby we are contractually obligated to pay consideration to our customers if we do not meet specified shipment dates. The accrual for estimated penalties is shown as a reduction of revenue and is based on several factors including historical customer settlement experience and management’s assessment of specific shipment delay information. Accruals related to these potential late shipment penalties as of
September 29, 2013
, and
December 31, 2012
were
$10.0 million
and
$8.6 million
, respectively. As we conclude performance under these agreements, the actual amount of consideration paid to our customers may vary significantly from the amounts we currently have accrued.
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash, cash equivalents, short-term investments and trade receivables. A significant portion of our revenue and receivables are from customers who are either in or service the energy, aerospace and industrial markets. We perform ongoing credit evaluations of our customers and maintain allowances for potential credit losses. During
2012
,
2011
, and
2010
, the Company did not experience any significant losses related to the collection of our accounts receivable. For the years ended December 31,
2012
,
2011
and
2010
we had no customers from which we derived revenues that exceeded 10% of our consolidated revenues.
Acquisition Accounting
In connection with our acquisitions, we assess and formulate a plan related to the future integration of the acquired entity. This process begins during the due diligence phase and is concluded within twelve months of the acquisition. We account for business combinations under the purchase method, and accordingly, the assets and liabilities of the acquired businesses are recorded at their estimated fair value on the acquisition date with the excess of the purchase price over their estimated fair value recorded as goodwill. We determine acquisition related asset and liability fair values through established valuation techniques for industrial manufacturing companies and utilize third party valuation firms to assist in the valuation of certain tangible and intangible assets.
Legal Contingencies
We are currently involved in various legal claims and legal proceedings, some of which may involve substantial dollar amounts. Periodically, we review the status of each significant matter and assess our potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be estimated, we accrue a liability for the estimated loss. Significant judgment is required in both the determination of probability and the determination as to whether an exposure can be reasonably estimated. Because of uncertainties related to these matters, accruals are based on the best information available at the time. As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates. Such revisions in the estimates of the potential liabilities could have a material adverse effect on our business, results of operations and financial position. For more information related to our outstanding legal proceedings, see “Contingencies and Commitments” in Note 10 of the accompanying unaudited consolidated financial statements as well as “Legal Proceedings” in Part II, Item 1 hereof.
Impairment Analysis
As required by ASC Topic 350, “Intangibles - Goodwill and Other,” we perform an annual assessment as to whether there was an indication that goodwill and certain intangible assets are impaired. We also perform impairment analyses whenever events and circumstances indicate that goodwill or certain intangibles may be impaired. In assessing the fair value of goodwill, we use our best estimates of future cash flows of operating activities and capital expenditures of the reporting unit, the estimated terminal value for each reporting unit and a discount rate based on the weighted average cost of capital.
If our estimates or related projections change in the future due to changes in industry and market conditions, we may be required to record additional impairment charges. The goodwill recorded on the consolidated balance sheet as of
September 29, 2013
decreased
$1.4 million
to
$76.1 million
compared to
$77.4 million
as of December 31, 2012 due to foreign currency fluctuations. There were no impairment triggering events as of
September 29, 2013
.
Income Taxes
See "Income Taxes" in Note 12 of the accompanying unaudited consolidated financial statements.
Pension Benefits
We maintain two pension benefit plans, a qualified noncontributory defined benefit plan and a nonqualified, noncontributory defined benefit supplemental plan that provides benefits to certain highly compensated officers and employees. To date, the supplemental plan remains an unfunded plan. These plans include significant pension benefit obligations which are calculated based on actuarial valuations. Key assumptions are made in determining these obligations and related expenses, including expected rates of return on plan assets and discount rates. Benefits are based primarily on years of service and employees’ compensation.
As of July 1, 2006, in connection with a revision to our retirement plan, we froze the pension benefits of our qualified noncontributory plan participants. Under the revised plan, such participants generally do not accrue any additional benefits under the defined benefit plan after July 1, 2006 and instead receive enhanced benefits associated with our defined contribution 401(k) plan in which substantially all of our U.S. employees are eligible to participate.
During the
three
and
nine
months ended
September 29, 2013
, we made cash contributions of
$0.4 million
and $1.2 million, respectively to our qualified defined benefit pension plan. For the remainder of 2013, we expect to make a voluntary cash contribution of approximately
$0.4 million
to our qualified defined benefit pension plan, although global capital market and interest rate fluctuations may impact future funding requirements.
Results of Operations for the Three Months Ended
September 29, 2013
Compared to the Three Months Ended
September 30, 2012
The following table sets forth the results of operations, percentage of net revenues and the period-to-period percentage change in certain financial data for the three months ended
September 29, 2013
and
September 30, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
|
September 29, 2013
|
|
September 30, 2012
|
|
% Change
|
|
(Dollars in thousands)
|
Net revenues
|
$
|
214,731
|
|
|
100.0
|
%
|
|
$
|
209,804
|
|
|
100.0
|
%
|
|
2.3
|
%
|
Cost of revenues
|
144,593
|
|
|
67.3
|
%
|
|
151,109
|
|
|
72.0
|
%
|
|
(4.3
|
)%
|
Gross profit
|
70,138
|
|
|
32.7
|
%
|
|
58,695
|
|
|
28.0
|
%
|
|
19.5
|
%
|
Selling, general and administrative expenses
|
46,392
|
|
|
21.6
|
%
|
|
44,314
|
|
|
21.1
|
%
|
|
4.7
|
%
|
Impairment charges
|
—
|
|
|
—
|
%
|
|
10,348
|
|
|
4.9
|
%
|
|
(100.0
|
)%
|
Special charges / (recoveries)
|
(190
|
)
|
|
(0.1
|
)%
|
|
1,377
|
|
|
0.7
|
%
|
|
(113.8
|
)%
|
Operating income
|
23,936
|
|
|
11.1
|
%
|
|
2,656
|
|
|
1.3
|
%
|
|
801.2
|
%
|
Other expense:
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
745
|
|
|
0.3
|
%
|
|
1,122
|
|
|
0.5
|
%
|
|
(33.6
|
)%
|
Other expense, net
|
568
|
|
|
0.3
|
%
|
|
564
|
|
|
0.3
|
%
|
|
0.7
|
%
|
Total other expense
|
1,313
|
|
|
0.6
|
%
|
|
1,686
|
|
|
0.8
|
%
|
|
(22.1
|
)%
|
Income before income taxes
|
22,623
|
|
|
10.5
|
%
|
|
970
|
|
|
0.5
|
%
|
|
2,232.3
|
%
|
Provision for income taxes
|
4,903
|
|
|
2.3
|
%
|
|
(899
|
)
|
|
(0.4
|
)%
|
|
(645.4
|
)%
|
Net income
|
$
|
17,720
|
|
|
8.3
|
%
|
|
$
|
1,869
|
|
|
0.9
|
%
|
|
848.1
|
%
|
Net Revenues
Net revenues for the three months ended
September 29, 2013
increased
by
$4.9 million
, or
2%
, to
$214.7 million
from
$209.8 million
for the three months ended
September 30, 2012
. The change in net revenues for the three months ended
September 29, 2013
was attributable to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Total Change
|
|
Operations
|
|
Foreign
Exchange
|
Segment
|
September 29,
2013
|
|
September 30,
2012
|
|
|
(In thousands)
|
Energy
|
$
|
108,474
|
|
|
$
|
109,968
|
|
|
$
|
(1,494
|
)
|
|
$
|
(3,567
|
)
|
|
$
|
2,073
|
|
Aerospace
|
36,483
|
|
|
31,795
|
|
|
4,688
|
|
|
4,026
|
|
|
662
|
|
Flow Technologies
|
69,774
|
|
|
68,041
|
|
|
1,733
|
|
|
1,207
|
|
|
526
|
|
Total
|
$
|
214,731
|
|
|
$
|
209,804
|
|
|
$
|
4,927
|
|
|
$
|
1,666
|
|
|
$
|
3,261
|
|
The Energy segment accounted for approximately
51%
of net revenues for the three months ended
September 29, 2013
compared to
52%
for the three months ended
September 30, 2012
. The Aerospace segment accounted for
17%
of net revenues for the three months ended
September 29, 2013
compared to
15%
for the three months ended
September 30, 2012
. The Flow Technologies segment accounted for
32%
of net revenues for the three months ended
September 29, 2013
compared to
32%
for the three months ended
September 30, 2012
.
Energy segment revenues
decreased
by
$1.5 million
, or
1%
, for the three months ended
September 29, 2013
compared to the three months ended
September 30, 2012
. The
decreased
revenue was driven by $3.6 million (3%) of organic declines primarily due to reductions in the short-cycle North American market as rig counts are down year over year partially offset by growth in large international projects. This net year over year organic decrease was offset by favorable foreign currency fluctuations of $2.1 million. Energy segment orders
decreased
$17.1 million
to
$101.0 million
for the three months ended
September 29, 2013
compared to
$118.1 million
for the same period in
2012
primarily due to lower large international projects. Backlog for our Energy segment has
decreased
$1.9 million
to
$208.5 million
as of
September 29, 2013
compared to
$210.4 million
as of
September 30, 2012
primarily due to our large international project business.
Aerospace segment revenues
increased
by
$4.7 million
, or
15%
, for the three months ended
September 29, 2013
compared to the same period in
2012
. The revenue increase was due to net organic increases of $4.0 million (13%) with contributions from most of our markets as well as favorable foreign currency fluctuations of $0.7 million. Orders for this segment
increased
$0.9 million
to
$43.8 million
for the three months ended
September 29, 2013
compared to
$42.9 million
for the same period in 2012 primarily due to growth in most markets partially offset by a decline in landing gear. Order backlog
decreased
$1.7 million
to
$161.0 million
as of
September 29, 2013
compared to
$162.7 million
as of
September 30, 2012
.
Flow Technologies segment revenues
increased
by
$1.7 million
, or
3%
, for the three months ended
September 29, 2013
compared to the same period in
2012
. The revenue increase was due to net organic increases of $1.2 million (2%) primarily due to contributions from power and instrumentation, as well as favorable foreign currency fluctuations of $0.5 million. This segment’s customer orders
increased
$14.0 million
to
$78.5 million
for the three months ended
September 29, 2013
compared to
$64.5 million
for the same period in
2012
with growth across the segment. Order backlog
increased
$6.2 million
to
$77.4 million
as of
September 29, 2013
compared to
$71.2 million
as of
September 30, 2012
.
Special Charges / (Recoveries)
Special charges / (recoveries) of ($0.2) million were recorded during the three months ended
September 29, 2013
; ($3.1) million of recoveries in our Energy segment, partially offset by $1.1 million of expenses in our Aerospace segment, $1.1 million of expenses in our Flow Technologies segment, and $0.6 million in Corporate.
Special charges of $1.3 million were recorded during the three months ended September 30, 2012; $1.1 million in our Energy segment, $0.2 million in our Aerospace segment, and less than $0.1 million in our Flow Technologies segment.
For additional information on the special charges / (recoveries), see Note 13 of the accompanying unaudited consolidated financial statements.
Operating Income (Loss)
The change in operating income for the three months ended
September 29, 2013
compared to the three months ended
September 30, 2012
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Total
Change
|
|
Operations
|
|
Foreign
Exchange
|
|
Impairment, Special, and Restructuring (1)
|
Segment
|
September 29, 2013
|
|
September 30, 2012
|
|
|
(In thousands)
|
|
|
Energy
|
$
|
21,620
|
|
|
$
|
11,236
|
|
|
$
|
10,384
|
|
|
$
|
2,544
|
|
|
$
|
581
|
|
|
$
|
7,258
|
|
Aerospace
|
3,002
|
|
|
(10,284
|
)
|
|
13,286
|
|
|
2,793
|
|
|
20
|
|
|
10,473
|
|
Flow Technologies
|
8,334
|
|
|
8,873
|
|
|
(539
|
)
|
|
443
|
|
|
109
|
|
|
(1,091
|
)
|
Corporate
|
(9,020
|
)
|
|
(7,169
|
)
|
|
(1,851
|
)
|
|
(1,253
|
)
|
|
3
|
|
|
(600
|
)
|
Total
|
$
|
23,936
|
|
|
$
|
2,656
|
|
|
$
|
21,280
|
|
|
$
|
4,527
|
|
|
$
|
713
|
|
|
$
|
16,040
|
|
(1) Includes inventory restructuring, impairment and special charges - see tables below
|
Inventory restructuring, impairment, and special charges for the three months ended
September 29, 2013
and
September 30, 2012
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Inventory Restructuring
|
|
Impairment Charges
|
|
Special and Restructuring
|
Segment
|
September 30, 2012
|
|
|
(In thousands)
|
|
|
|
|
|
Energy
|
$
|
4,196
|
|
$
|
947
|
|
|
$
|
2,156
|
|
|
$
|
1,093
|
|
Aerospace
|
11,609
|
|
|
3,177
|
|
|
8,193
|
|
|
239
|
|
Flow Technologies
|
45
|
|
|
—
|
|
|
—
|
|
|
45
|
|
Corporate
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
15,850
|
|
|
$
|
4,124
|
|
|
$
|
10,349
|
|
|
$
|
1,377
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Inventory Restructuring
|
|
Impairment Charges
|
|
Special and Restructuring
|
Segment
|
September 29, 2013
|
|
|
(In thousands)
|
|
|
|
|
|
Energy
|
$
|
(3,062
|
)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(3,062
|
)
|
Aerospace
|
1,136
|
|
|
—
|
|
|
—
|
|
|
1,136
|
|
Flow Technologies
|
1,136
|
|
|
—
|
|
|
—
|
|
|
1,136
|
|
Corporate
|
600
|
|
|
—
|
|
|
—
|
|
|
600
|
|
Total
|
$
|
(190
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(190
|
)
|
Operating income
increased
801%
, or
$21.3 million
, to
$23.9 million
for the three months ended
September 29, 2013
compared to
$2.7 million
for the same period in 2012.
Operating income for our Energy segment
increased
$10.4 million
, or
92%
, to
$21.6 million
for the three months ended
September 29, 2013
, compared to the same period in 2012. The increase in operating income was primarily driven by net organic increases of $2.5 million (23%), a $7.3 million year over year reduction of special, impairment, and inventory restructuring related charges, and favorable foreign currency fluctuations $0.6 million. Operating margins
improved
970
basis points to
19.9%
compared to the same period in 2012 primarily driven by a year over year reduction of inventory restructuring, impairment, and restructuring related charges, SF Settlement recovery of purchase price and by improved order mix and pricing within our large international project business as well as Brazil restructuring benefits.
Operating income for the Aerospace segment
increased
$13.3 million
, or
129%
, to
$3.0 million
for the three months ended
September 29, 2013
compared to the same period in 2012. The increase in operating income was primarily driven by net organic increases of $2.8 million (27%) and a $10.5 million reduction in inventory restructuring, impairment, and restructuring related charges from the prior year. Operating margins
improved
4,050
basis points to
8.2%
compared to the same period in 2012 due primarily to reduced restructuring charges, increased volume and savings associated with the California restructuring.
Operating income for the Flow Technologies segment
decreased
$0.5 million
, or
6%
, to
$8.3 million
for the three months ended
September 29, 2013
compared to the same period in 2012. The decrease in operating income was primarily driven by $1.1 million in higher restructuring related charges partially offset by net organic increase of $0.4 million (5%) and favorable foreign currency fluctuations of $0.1 million. Operating margins
declined
by
110
basis points to
11.9%
compared to the same period in 2012 primarily due to increased restructuring related special charges and sales and marketing investments for growth partially offset by improved sales volume, associated leverage and improved pricing.
Corporate operating expenses
increased
$1.9 million
, or
26%
, to
$9.0 million
for the three months ended
September 29, 2013
compared to the same period in 2012, primarily due to higher special charges and variable compensation.
Interest Expense, Net
Interest expense, net,
decreased
$0.4 million
to
$0.7 million
for the three months ended
September 29, 2013
compared to the three months ended
September 30, 2012
. This change in interest expense was primarily due to lower outstanding debt balances.
Other Expense, Net
Other expense, net, was
$0.6 million
for the three months ended
September 29, 2013
compared to
$0.6 million
in the same period of 2012.
Provision for Taxes
The effective tax rate was
21.7%
for the quarter ended
September 29, 2013
compared to
(92.8)%
for the same period of 2012. The primary driver of the higher tax rate in the quarter ended September 29, 2013 was that pre-tax income exceeded $22 million versus less than $1 million in the quarter ended September 30, 2012.
For 2013, we expect an effective income tax rate of approximately
28.0%
. The primary driver of this lower tax rate in the quarter was foreign rate differentials, the UK tax rate change and a non-taxable gain on a foreign price purchase settlement, offset by a change in the valuation allowance.
Net Income
Net income
increased
approximately
$15.9 million
to
$17.7 million
for the quarter ended
September 29, 2013
compared to
$1.9 million
for the same period in 2012.
Results of Operations for the
Nine Months Ended
September 29, 2013
Compared to the
Nine Months Ended
September 30, 2012
The following table sets forth the results of operations, percentage of net revenues and the period-to-period percentage change in certain financial data for the
nine
months ended
September 29, 2013
and
September 30, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Nine Months Ended
|
|
|
|
September 29, 2013
|
|
September 30, 2012
|
|
% Change
|
|
(Dollars in thousands)
|
Net revenues
|
$
|
643,773
|
|
|
100.0
|
%
|
|
$
|
643,946
|
|
|
100.0
|
%
|
|
—
|
%
|
Cost of revenues
|
443,679
|
|
|
68.9
|
%
|
|
462,823
|
|
|
71.9
|
%
|
|
(4.1
|
)%
|
Gross profit
|
200,094
|
|
|
31.1
|
%
|
|
181,123
|
|
|
28.1
|
%
|
|
10.5
|
%
|
Selling, general and administrative expenses
|
139,561
|
|
|
21.7
|
%
|
|
134,562
|
|
|
20.9
|
%
|
|
3.7
|
%
|
Impairment charges
|
—
|
|
|
—
|
%
|
|
10,348
|
|
|
1.6
|
%
|
|
(100.0
|
)%
|
Special charges
|
3,441
|
|
|
0.5
|
%
|
|
1,377
|
|
|
0.2
|
%
|
|
149.9
|
%
|
Operating income
|
57,092
|
|
|
8.9
|
%
|
|
34,836
|
|
|
5.4
|
%
|
|
63.9
|
%
|
Other expense:
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
2,370
|
|
|
0.4
|
%
|
|
3,220
|
|
|
0.5
|
%
|
|
(26.4
|
)%
|
Other expense, net
|
1,807
|
|
|
0.3
|
%
|
|
887
|
|
|
0.1
|
%
|
|
103.7
|
%
|
Total other expense
|
4,177
|
|
|
0.6
|
%
|
|
4,107
|
|
|
0.6
|
%
|
|
1.7
|
%
|
Income before income taxes
|
52,915
|
|
|
8.2
|
%
|
|
30,729
|
|
|
4.8
|
%
|
|
72.2
|
%
|
Provision for income taxes
|
14,619
|
|
|
2.3
|
%
|
|
9,138
|
|
|
1.4
|
%
|
|
60.0
|
%
|
Net income
|
$
|
38,296
|
|
|
5.9
|
%
|
|
$
|
21,591
|
|
|
3.4
|
%
|
|
77.4
|
%
|
Net Revenues
Net revenues for the
nine
months ended
September 29, 2013
decreased
by
$0.2 million
, or 0.0%, to
$643.8 million
from
$643.9 million
for the
nine
months ended
September 30, 2012
. The change in net revenues for the
nine
months ended
September 29, 2013
was attributable to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Total Change
|
|
Operations
|
|
Foreign
Exchange
|
Segment
|
September 29,
2013
|
|
September 30,
2012
|
|
|
(In thousands)
|
Energy
|
$
|
316,027
|
|
|
$
|
332,759
|
|
|
$
|
(16,732
|
)
|
|
$
|
(18,150
|
)
|
|
$
|
1,418
|
|
Aerospace
|
111,986
|
|
|
105,776
|
|
|
6,210
|
|
|
5,479
|
|
|
731
|
|
Flow Technologies
|
215,760
|
|
|
205,411
|
|
|
10,349
|
|
|
10,612
|
|
|
(263
|
)
|
Total
|
$
|
643,773
|
|
|
$
|
643,946
|
|
|
$
|
(173
|
)
|
|
$
|
(2,059
|
)
|
|
$
|
1,886
|
|
The Energy segment accounted for
49%
of net revenues for the
nine
months ended
September 29, 2013
compared to
52%
for the
nine
months ended
September 30, 2012
. The Aerospace segment accounted for
17%
of net revenues for the
nine
months ended
September 29, 2013
compared to
16%
for the
nine
months ended
September 30, 2012
. The Flow Technologies segment accounted for
34%
of net revenues for the
nine
months ended
September 29, 2013
compared to
32%
for the
nine
months ended
September 30, 2012
.
Energy segment revenues
decreased
by
$16.7 million
, or
5%
, for the
nine
months ended
September 29, 2013
compared to the
nine
months ended
September 30, 2012
. The decrease was primarily driven by $18.2 million (6%) of organic declines primarily due to reductions in the North America short-cycle markets as rig counts are down year over year, offset by favorable foreign currency fluctuations of $1.4 million. Energy segment orders
decreased
$63.6 million
to
$318.4 million
for the
nine
months ended
September 29, 2013
compared to
$382.0 million
for the same period in 2012, primarily due to lower North American short-cycle orders and large international projects.
Aerospace segment revenues
increased
by
$6.2 million
, or
6%
, for the
nine
months ended
September 29, 2013
compared to the same period in 2012. The increase was due to organic growth of $5.5 million (5%) across most areas with the exception of landing gear, and favorable foreign currency fluctuations of $0.7 million. Orders for this segment
increased
$1.3 million
to
$112.9 million
for the
nine
months ended
September 29, 2013
compared to
$111.6 million
for the same period in 2012.
Flow Technologies segment revenues
increased
by
$10.3 million
, or
5%
, for the
nine
months ended
September 29, 2013
compared to the same period in 2012. The revenue increase was due to net organic growth of $10.6 million (5%), offset by unfavorable foreign currency fluctuations of $0.3 million. The organic revenue growth was primarily due to increased process, power, and oil & gas areas. This segment’s customer orders
increased
$11.1 million
to
$218.9 million
for the
nine
months ended
September 29, 2013
compared to
$207.8 million
for the same period in 2012 driven by increased process, power, and oil and gas orders.
Special Charges / (Recoveries)
Special charges / (recoveries) of $3.4 million were recorded during the
nine
months ended
September 29, 2013
;
$(1.7) million
of recoveries in our Energy segment, offset by
$3.3 million
of expenses in our Aerospace segment,
$1.2 million
of expenses in our Flow Technologies segment, and
$0.6 million
of expenses in Corporate.
Special charges of $1.3 million were recorded during the
nine
months ended September 30, 2012; $1.1 million in our Energy segment, $0.2 million in our Aerospace segment, and less than $0.1 million in our Flow Technologies segment.
For additional information on the special charges / (recoveries), see Note 13 of the accompanying unaudited consolidated financial statements.
Operating Income (Loss)
The change in operating income for the
nine
months ended
September 29, 2013
compared to the
nine
months ended
September 30, 2012
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Total
Change
|
|
Operations
|
|
Foreign
Exchange
|
|
Impairment, Special and Restructuring (1)
|
Segment
|
September 29, 2013
|
|
September 30, 2012
|
|
|
(Dollars In thousands)
|
|
|
Energy
|
$
|
46,234
|
|
|
$
|
32,744
|
|
|
$
|
13,490
|
|
|
$
|
6,781
|
|
|
$
|
859
|
|
|
$
|
5,850
|
|
Aerospace
|
5,469
|
|
|
(3,007
|
)
|
|
8,476
|
|
|
114
|
|
|
15
|
|
|
8,348
|
|
Flow Technologies
|
28,336
|
|
|
25,503
|
|
|
2,833
|
|
|
4,112
|
|
|
(84
|
)
|
|
(1,198
|
)
|
Corporate
|
(22,946
|
)
|
|
(20,404
|
)
|
|
(2,542
|
)
|
|
(1,933
|
)
|
|
(7
|
)
|
|
(600
|
)
|
Total
|
$
|
57,093
|
|
|
$
|
34,836
|
|
|
$
|
22,257
|
|
|
$
|
9,074
|
|
|
$
|
783
|
|
|
$
|
12,400
|
|
(1) Includes inventory restructuring, impairment and special charges - see tables below
|
Inventory restructuring, impairment, and special charges for the
nine
months ended
September 29, 2013
and September 30, 2012 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Inventory Restructuring
|
|
Impairment Charges
|
|
Special and Restructuring
|
Segment
|
September 30, 2012
|
|
|
(In thousands)
|
Energy
|
$
|
4,196
|
|
|
$
|
947
|
|
|
$
|
2,156
|
|
|
$
|
1,093
|
|
Aerospace
|
11,609
|
|
|
3,177
|
|
|
8,193
|
|
|
239
|
|
Flow Technologies
|
45
|
|
|
—
|
|
|
—
|
|
|
45
|
|
Corporate
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
Total
|
$
|
15,850
|
|
|
$
|
4,124
|
|
|
$
|
10,349
|
|
|
$
|
1,377
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Inventory Restructuring
|
|
Impairment Charges
|
|
Special and Restructuring
|
Segment
|
September 29, 2013
|
|
|
(In thousands)
|
Energy
|
$
|
(1,654
|
)
|
|
$
|
296
|
|
|
$
|
—
|
|
|
$
|
(1,950
|
)
|
Aerospace
|
3,259
|
|
|
(288
|
)
|
|
—
|
|
|
3,547
|
|
Flow Technologies
|
1,244
|
|
|
—
|
|
|
—
|
|
|
1,244
|
|
Corporate
|
600
|
|
|
—
|
|
|
—
|
|
|
600
|
|
Total
|
$
|
3,449
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
3,441
|
|
Operating income
increased
64%
, or
$22.3 million
, to
$57.1 million
for the
nine
months ended
September 29, 2013
compared to
$34.8 million
for the same period in 2012.
Operating income for our Energy segment
increased
$13.5 million
, or
41%
, to
$46.2 million
for the
nine
months ended
September 29, 2013
, compared to the same period in 2012. Operating margins
improved
480
basis points to
14.6%
on a revenue decrease of
5%
, compared to the first
nine
months in 2012. The increase in operating income was primarily driven by favorable pricing within our large international project business, lower inventory restructuring charges and savings from the Brazil restructuring partially offset primarily by lower impairment charges, lower gross margin associated with lower shipment volume and higher operating expenses.
Operating income for the Aerospace segment
increased
$8.5 million
, or
282%
, to
$5.5 million
for the
nine
months ended
September 29, 2013
compared to the same period in 2012. Operating income was higher primarily due to lower impairment charges, lower inventory restructuring charges, savings from the California restructuring as well as higher gross margin associated with higher shipment volume partially offset by large new program expenses.
Operating income for the Flow Technologies segment
increased
$2.8 million
, or
11%
, to
$28.3 million
for the
nine
months ended
September 29, 2013
compared to the same period in 2012. Operating income was higher primarily due to lower restructuring charges, improved gross margin associated with higher shipment volume and favorable pricing partially offset by sales and marketing investments for growth and special and restructuring charges.
Corporate operating expenses
increased
$2.5 million
, or
12%
, to
$22.9 million
for the
nine
months ended
September 29, 2013
compared to the same period in 2012, primarily due to higher variable compensation.
Interest Expense, Net
Interest expense, net,
decreased
$0.9 million
to
$2.4 million
for the
nine
months ended
September 29, 2013
compared to the
nine
months ended
September 30, 2012
. This reduction in interest expense was primarily due to lower interest charges from lower borrowings associated with our revolving credit facility and other borrowings.
Other Expense, Net
Other expense, net, was
$1.8 million
for the
nine
months ended
September 29, 2013
compared to
$0.9 million
in the same period of 2012. The difference of
$0.9 million
was largely the result of the remeasurement of foreign currency balances.
Provision for Taxes
The effective tax rate was
27.6%
for the
nine
months ended
September 29, 2013
compared to
29.7%
for the same period of 2012. The primary driver of the lower 2013 tax rate was a smaller loss for one of our international subsidiaries, which was not tax-benefited in either period, partially offset by discrete tax benefits recognized in the quarter ended September 30, 2012.
Net Income
Net income
increased
$16.7 million
to
$38.3 million
for the
nine
months ended
September 29, 2013
compared to
$21.6 million
for the same period in 2012.
Liquidity and Capital Resources
Our liquidity needs arise primarily from capital investment in machinery, equipment and the improvement of facilities, funding working capital requirements to support business growth initiatives, acquisitions, dividend payments, pension funding obligations and debt service costs. We have historically generated cash from operations and remain in a strong financial position, with resources available for reinvestment in existing businesses, strategic acquisitions and managing our capital structure on a short and long-term basis.
The following table summarizes our cash flow activities for the
nine
months ended
September 29, 2013
(in thousands):