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| CIR > SEC Filings for CIR > Form 10-K on 26-Feb-2009 | All Recent SEC Filings |
26-Feb-2009
Annual Report
This Annual Report contains certain statements that are "forward-looking statements" as that term is defined under the Private Securities Litigation Reform Act of 1995 (the "Act") and releases issued by the Securities and Exchange Commission. The words "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, variability of raw material and component pricing, changes in our suppliers' performance, fluctuations in foreign currency exchange rates, our ability to continue operating our manufacturing facilities at efficient levels including our ability to 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, increasing interest rates, our ability to continue to successfully defend product liability actions including asbestos-related claims, as well as the uncertainty associated with the current worldwide economic downturn and credit crisis 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 this Annual Report. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
Overview
CIRCOR International, Inc. is a leading provider of valves and other highly engineered products that allow customers around the world to use fluid safely and efficiently in the instrumentation, fluid regulation, aerospace and energy markets. We offer one of the industry's broadest and most diverse range of products - a range that allows us to supply end-users with a wide array of valves and component products for fluid systems.
We have organized the Company into two segments: Instrumentation and Thermal Fluid Controls Products and Energy Products. The Instrumentation and Thermal Fluid Controls Products segment serves our broadest variety of end-markets, including military and commercial aerospace, chemical processing, marine, power generation, commercial HVAC systems, petroleum and gas processing and refining, food and beverage processing, medical equipment and other general industrial markets. The Energy Products segment primarily serves the oil and gas exploration, production and distribution markets.
Our growth strategy includes organic profitable growth as well as strategic acquisitions that extend our current offering of engineered flow control products. For organic growth, our businesses focus on developing new products and reacting quickly to changes in market conditions in order to help grow our revenues. Regarding acquisitions, we have made thirteen acquisitions in the last seven years that extended our product offerings. Our acquisitions of Loud in January 2005 and Industria in October 2005 provided us with complementary aerospace component and subassembly manufacturing capabilities. In February 2006, we acquired two businesses: Hale Hamilton and its subsidiary Cambridge Fluid Systems, a leading provider of high pressure valves and flow control equipment, and Sagebrush
which provides pipeline flow control and measurement equipment to oil and gas markets. In July 2007, we purchased the assets of SEI, a leader in the design of pneumatic controls and inflation systems for the aerospace, marine, defense, and industrial markets. In May 2008, we acquired Motor Tech, a leader in the design and manufacture of specialty electric motors, actuators, and tachometers for aerospace, defense, medical and transportation markets.
Regarding our 2008 financial results, we had record revenues of $793.8 million, a 19% increase over 2007 with double digit growth in both segments as a result of a strong backlog entering the year, favorable foreign exchange rate impacts of $18.8 million, and robust end markets during the first half of 2008. Our net loss was $59.0 million and our diluted earnings were a loss of $3.51 per share. Special charges that substantially consist of non-cash goodwill and intangible asset impairments resulted in a $129.2 million reduction in net income.
We enter 2009 with significantly more uncertainty than we did 2008 with an ending backlog of $342.7 million as of December 31, 2008 which is $48.9 million lower than $391.6 million as of December 31, 2007. The recent macroeconomic factors impacting global credit markets, the drop in oil and gas prices, large swings in global currencies and general weakness in most business industries have reduced our 2009 revenue and earnings outlook compared to 2008. While the magnitude and timing of deteriorating economic conditions on our businesses are highly volatile, we have proactively developed and are ready to implement other contingency plans in order to protect market share, quality of earnings and cash flow. At the same time, we are continuing to dedicate resources to pursuing and achieving certain strategic deployment objectives which, we believe, will enable us to emerge from economic recession even stronger than we entered it.
During 2008 across the Company, we continued to strengthen our management teams and accelerated our lean operating improvement initiatives, both with respect to our manufacturing operations and to our front and back office processes. These efforts contributed to improvements in both our Energy Products and Instrumentation and Thermal Fluids segments. The Energy Products segment achieved record revenues and record operating margins in 2008. Our Instrumentation and Thermal Fluid Products segment, while adversely impacted by a non-cash special charge for an impairment of our goodwill and intangible assets and an increase in our asbestos costs related to Leslie, also achieved record revenues and realized meaningful operational improvements during 2008.
Regarding cash flow in 2008, we generated cash flow from operating activities of $64.8 million, or 8% of revenues, an increase of $7.9 million compared to $56.9 million generated in 2007. The increase from 2007 resulted primarily from greater 2008 profitability before adjusting for impairment charges compared to 2007. We also used $48.9 million of cash for investing activities and $7.1 million in financing activities. As of December 31, 2008, we believe we remain a well-capitalized company with total debt-to-total shareholders equity of 4%.
Basis of Presentation
All significant intercompany balances and transactions have been eliminated in consolidation. Certain prior period financial statement amounts have been reclassified to conform to currently reported
presentations. We monitor our business in two segments: Instrumentation and Thermal Fluid Controls Products and Energy Products.
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. 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.
Except for income taxes and a change in the measurement of pension liabilities, there have been no significant changes from the methodology applied by management for critical accounting estimates previously disclosed in our 2007 Annual Report on Form 10-K. The methodology applied to management's estimate for income taxes has changed due to the implementation of a new accounting pronouncement as described below and in Note (8) of the accompanying consolidated financial statements.
Revenue Recognition
Revenue is recognized when products are delivered, title and risk of loss have passed to the customer, no significant post-delivery obligations remain and collection of the resulting receivable is reasonably assured. 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 as the difference between the cost of the inventory and estimated market value and charged to the provision for inventory, which is a component of our cost of revenues. Assumptions about future demand are one of 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 $183.3 million as of December 31, 2008, compared to $171.7 million as of December 31, 2007. Our inventory allowance as of December 31, 2008 was $12.5 million, compared
to $11.6 million as of December 31, 2007. Our provision for inventory obsolescence was $5.1 million, $3.5 million, and $5.6 million, for 2008, 2007, and 2006, respectively.
If there were to be a sudden and significant decrease in demand for our products, or if there were a higher incidence of inventory obsolescence because of changing technology and 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 because of changing technology and customer requirements.
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 limited historical customer settlement experience and management's assessment of specific shipment delay information. Accruals related to these potential late shipment penalties as of the December 31, 2008 and 2007 were $10.6 million and $4.0 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 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, industrial, and aerospace markets. We perform ongoing credit evaluations of our customers and maintain allowances for potential credit losses. During 2008 and 2007, the Company has not experienced any significant losses related to the collection of our accounts receivable. For the year ended December 31, 2008, we had one customer in our Energy Products segment that accounted for 11.4% of the Company's consolidated revenues. For the year ended December 31, 2007, we had no customers with revenues that exceeded the threshold of 10% of the Company's consolidated revenues.
Purchase 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 process and is concluded within twelve months of the acquisition. Our methodology for allocating the purchase price relating to purchase acquisitions is determined through established valuation techniques for industrial manufacturing companies and we typically utilize third party valuation firms to assist in the valuation of certain tangible and intangible assets. We accrue estimates for certain costs, related primarily to personnel reductions and facility closures or restructurings, anticipated at the date of acquisition, in accordance with Financial Accounting Standards Board ("FASB") Statement No. 141 "Business Combinations" and Emerging Issues Task Force Issue No. 95-3, "Recognition of Liabilities in Connection with a Purchase Business
Combination." Adjustments to these estimates are made during the acquisition allocation period, which is generally up to twelve months from the acquisition date as plans are finalized. Subsequent to the allocation period, costs incurred in excess of the recorded acquisition accruals are generally expensed as incurred and if accruals are not utilized for the intended purpose the excess is recorded as an adjustment to the cost of the acquired entity, usually decreasing goodwill.
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 Guarantees" in Note
(14) of the accompanying consolidated financial statements as well as "Legal
Proceedings" in Part I, Item 3.
Impairment Analysis
As required by SFAS No.142, "Goodwill and Intangible Assets", 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 weighted average cost of capital.
Certain negative macroeconomic factors began to impact the global credit markets in late 2008 and we noted significant adverse trends in business conditions in the fourth quarter of 2008. Concurrent with these adverse developments, we commenced our annual impairment assessment of goodwill and certain intangible assets. In connection with preparing the impairment assessment, we identified deterioration in the expected future financial performance of our Instrumentation and Thermal Fluid Controls segment compared to the expected future financial performance of this segment at the end of 2007. We also determined that the appropriate discount rate (based on weighted average cost of capital) as of December 31, 2008 was significantly higher than the discount rate used in our 2007 impairment assessment. As a result, we recognized goodwill and intangible impairments of $140.3 million and $1.0 million, respectively, within the Instrumentation and Thermal Fluid Controls segment for the year ended December 31, 2008.
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 December 31, 2008 was $32.1 million compared with $169.1 million as of December 31, 2007. The amounts of our non-amortizing intangible assets were $17.3 million and $18.7 million, as of December 31, 2008 and 2007, respectively. Based on impairment tests performed, there was no impairment of our goodwill in 2007 or 2006.
As a result of the evolving factors associated with Leslie's asbestos matters, our outlook of diminished future cash flow for Leslie, which is reported in our Instrumentation and Thermal Fluid Controls, was an indicator of impairment that triggered an impairment analysis on the long-lived assets of Leslie's in accordance with SFAS No. 144 in the fourth quarter 2007. As part of our year-end 2008 closing process, with the assistance of an independent third-party appraisal firm, an updated SFAS No. 144 impairment analysis was performed again for Leslie. This analysis led us to conclude that the fair value of Leslie's long-lived assets was at least equal to net book value, and no impairment charge was necessary.
Income Taxes
Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and any valuation allowance. Our effective tax rates differ from the statutory rate due to the impact of research and product development tax credits, extraterritorial income exclusion, domestic manufacturing deduction, state taxes, and the tax impact of non-U.S. operations. Our effective tax rate was 44.9%, 31.1%, and 30.6%, for 2008, 2007, and 2006, respectively. The tax rate for 2008 included the tax impact of an adjustment for goodwill and intangible impairment of $141.3 million for which the tax basis was $32.8 million. Excluding the goodwill and impairment charge, the 2008 effective tax rate would have been 30.3%.
For 2009, we expect an effective income tax rate of 32.0%. 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.
In 2008, deferred income tax liabilities decreased primarily due to the reversal of prior depreciation differences, amortization relating to non-goodwill intangibles and the impairment charge related to tax basis goodwill. Tax basis goodwill will continue to be amortized over its remaining life. Deferred income tax assets increased primarily due to an increase in other comprehensive income, accrued expenses and the shift of the goodwill related deferred tax from a deferred tax liability to a deferred tax asset following the impairment charge. Regarding deferred income tax assets, we maintained a total valuation allowance of $9.1 million at December 31, 2008, due to uncertainties related to our ability to utilize these assets, primarily consisting of certain foreign tax credits, 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 further 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. As a result, 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.
In June 2006, the FASB issued Interpretation 48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109" ("FIN 48"), which became effective for us beginning in 2007. FIN 48 addresses the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. The result of the Company's reassessment of its tax positions in accordance with FIN 48 did not have a material impact on the results of operations, financial condition or liquidity.
It is the Company's policy to record estimated interest and penalties as income tax expense and tax credits as a reduction in income tax expense. The Company recognizes both interest and penalties as part of the income tax provision. During the year ended December 31, 2008, the Company recognized approximately $0.1 million in interest. As of December 31, 2008, accrued interest and penalties were $0.3 million.
Deferred tax assets and liabilities are determined based upon the differences between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. Valuation allowances are provided if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
As of December 31, 2008, the liability for uncertain income tax positions was $2.4 million. Due to the high degree of uncertainty regarding the timing of potential future cash flows associated with these liabilities, we are unable to make a reasonably reliable estimate of the amount and period in which these liabilities might be paid.
For additional information regarding the adoption of FIN 48, see "Income Taxes" in Note (8), of the accompanying 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 will 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.
Effective December 2006, we adopted the recognition and disclosure provisions of
SFAS No.158 "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R)". This Statement requires employers to recognize in their balance sheets
the over-funded or under-funded status of defined benefit post-retirement plans,
measured as the difference between the fair value of plan assets and the benefit
obligation (the projected benefit obligation for pension plans and the
accumulated postretirement benefit obligation for other post-retirement plans).
Employers must recognize the change in the funded status of the plan in the year
in which the change occurs through other comprehensive income. This Statement
also requires plan assets and obligations to be measured as of the employers'
balance sheet date. We adopted the measurement provisions of SFAS 158 beginning
January 1, 2007. See Note (13) of the accompanying consolidated financial
statements for further information on our benefit plans.
Prior to the adoption of the recognition provisions of SFAS No. 158, we . . .
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