10-K 1 cir_10kx12312013xtobefiled.htm 10-K CIR_10K_12.31.2013_ToBeFiled


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                     to                     .
Commission File Number 001-14962
 
 
CIRCOR INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
04-3477276
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
c/o CIRCOR, Inc.
 
 
30 Corporate Drive, Suite 200, Burlington, MA
 
01803-4238
(Address of principal executive offices)
 
(Zip Code)
 
(781) 270-1200
(Registrant’s telephone number, including area code)
 
 
 
Securities registered pursuant to Section 12 (b) of the Act:
Common Stock, par value $0.01 per share (registered on the New York Stock Exchange)
Securities registered pursuant to Section 12 (g) of the Act: None
 
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  x    No  ¨
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes  ¨    No  x
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x    No  ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
 
Accelerated filer ¨ 
 
Non-accelerated filer ¨
 
Smaller reporting company ¨  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  x

The aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2013 was $882,656,431. The registrant does not have any non-voting common equity.

As of February 14, 2014, there were 17,611,451 shares of the registrant’s Common Stock outstanding.
 

DOCUMENTS INCORPORATED BY REFERENCE
 
Part III incorporates by reference certain portions of the information from the registrant’s definitive Proxy Statement for the 2013 Annual Meeting of Stockholders to be held on April 30, 2014. The definitive Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the close of the registrant’s year ended December 31, 2013.




Table of Contents
 
 
 
Page
Number
Part I
 
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
 
 
Part II
 
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
 
 
Part III
 
Item 10
Item 11
Item 12
Item 13
Item 14
 
 
Part IV
 
Item 15
 
 
 
 
 
 
 
 
 




Part I
 
Item 1.    Business
 
This annual report on Form 10-K (hereinafter, the “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 & 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, divestiture, restructuring, or simplification strategies, 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 repositioning 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. For a discussion of these risks, uncertainties and other factors, see Item 1A "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.
 
Overview
 
CIRCOR International, Inc. was incorporated under the laws of Delaware on July 1, 1999 and is a spin-off of our former parent, Watts Water Technologies, Inc., formerly known as Watts Industries, Inc. (“Watts”) as of October 18, 1999. As used in this report, the terms “we,” “us,” “our,” the “Company” and “CIRCOR” mean CIRCOR International, Inc. and its subsidiaries (unless the context indicates another meaning). The term “common stock” means our common stock, par value $0.01 per share.
 
We design, manufacture and market highly engineered products and sub-systems used in the Oil & Gas, power generation, aerospace, defense, and other industrial markets. Within our major product groups, we manage a portfolio of flow control and actuation products, sub-systems and technologies that enable us to fulfill our customers’ unique application needs. We have a global presence and operate 20 major manufacturing facilities that are located in the United States, Western Europe, Morocco, India, Brazil and the People’s Republic of China. We have two reporting segments: CIRCOR Energy ("Energy Segment" or "Energy") and CIRCOR Aerospace & Defense ("Aerospace & Defense Segment" or "Aerospace & Defense"). We sell our products through approximately 950 distributors or representatives and directly to end-use customers. As of December 31, 2013, we serviced more than 7,000 customers in over 100 countries around the world.

Strategies

Our objective is to enhance shareholder value by focusing on growth, margin expansion and strong free cash flow. We have a four-point strategy to achieve these objectives.
1) Grow Organically and Through Acquisitions. We leverage the power of our global design capabilities to develop innovative products that solve our customers’ most challenging and critical problems. New products will be an increasingly important part of our growth strategy going forward. In addition, we are positioning ourselves to grow in parts of our end markets where our products are under-represented. This could include establishing a presence in high-growth geographies where we have a limited presence today. It also could include taking products established in one end-market (e.g., power generation) and selling those solutions into other relevant end markets (e.g., Oil & Gas).
 
In addition to organic growth, we expect to acquire businesses over time. We are primarily focused on companies with differentiated technologies in complementary markets that we already understand; and where we expect substantial growth. In

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addition to strategic fit, the main criterion for an acquisition is return on invested capital.

2) Simplify CIRCOR. In 2013 we embarked on a long-term journey to simplify CIRCOR. While we made progress in 2013, CIRCOR continues to operate with significant complexity. We have a large number of properties and believe that simplifying this structure will not only expand our margins by reducing cost, but will help us improve our operations and controls.

3) Achieve World Class Operational Excellence. Our Global Operations and Sourcing organizations are focused on improving our quality, delivery, cost, safety and inventory performance. The primary tool for expanding performance at CIRCOR is 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 design, manufacturing, sales, procurement and office-related processes (“Lean”). We are focused on expanding our CIRCOR Business System that reaches well beyond the four walls of our existing manufacturing facilities. This program will include strong leadership at the top of CIRCOR, more effective training and standardization across the organization, robust processes and metrics, and clear lines of accountability. The CIRCOR Business System will be the foundation of our operational improvements in the future. Achieving operational and business process excellence will be one of the critical elements to our growth, margin expansion and improved working capital objectives.

4) Build the Best Team. Finally, we have a fundamental belief at CIRCOR that the best team wins. We are committed to attracting the most talented people in our industry and we are committed to investing, engaging, challenging and developing our employees. We believe the best people combined with robust process, appropriate metrics, and individual accountability will deliver extraordinary results.

Business Segments

During the fourth quarter of 2013, we consolidated our group structure from three segments to two. This change is in line with our focus on simplifying the way we manage CIRCOR and better aligns our businesses with the customers and end markets we serve. We now operate two business segments, Energy and Aerospace & Defense.

Energy

Energy is a global provider of highly engineered integrated flow control solutions and services in the expanding and evolving Oil & Gas and power generation industries. We specialize in valves and pipeline products and services.

We are focused on satisfying our customers’ mission-critical application needs by utilizing advanced technologies. Our flow control solutions can withstand extreme temperatures and pressures, including land-based and sub-sea applications. Energy is growing its product offering in the severe service sector, which includes applications such as process control, oil sands, pressure control, cryogenic, power steam generation systems and process systems.

We plan to grow Energy by expanding our capabilities in Oil & Gas - upstream, mid-stream and downstream, as well as focusing on the global power generation infrastructure build-out in emerging markets. We expect to grow organically and through acquisitions.

Energy is headquartered in Houston, Texas and has facilities in Oklahoma, Florida, South Carolina, California, New York, China, Canada, United Kingdom, Italy, India, Brazil, Germany and the Netherlands.

Markets and Applications

Energy serves an increasing range of energy-focused global markets. Key to our business strategy is targeting additional markets that can benefit from our innovative products and system solutions. Markets served today include Oil & Gas: upstream (on-shore and off-shore), mid-stream and downstream applications as well as power generation including steam/process applications in both commercial and industrial markets. The upstream and mid-stream markets are primarily served by our large international project, North American short cycle and pipeline businesses and downstream markets served primarily by our instrumentation and sampling businesses.

Upstream Oil & Gas markets commonly include all the equipment between the oil/gas reservoir and the outlet on the wellhead. It also incorporates all the activities associated with the installation of this equipment.

Mid-stream Oil & Gas: This market begins at the outlet of the wellhead and extends to the fence around the refinery or petrochemical plant. It includes all the ancillary equipment - such as oil field heaters that warm crude oil and are required to move the product through the gathering and pipeline systems to the processing plants - as well as the gas

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processing plants that prepare and purify the raw natural gas for entry into the major pipeline systems and Liquid Natural Gas (LNG) processes.

Downstream Oil & Gas: The downstream market includes the refining, distillation, stripping, degassing, dehydrating, desulpherizing, and purifying of the crude oil to its constituent components or the natural gas to methane.

Power Generation: The power generation market is comprised of electric utilities and industrial power producers. Utilities generate, transmit, and distribute electricity for sale in a local market, while industrial power plants generate electrical power for use within the industrial facility, such as a power plant within a steel mill or within a desalination plant. Utilities and industrial power plants can be categorized by fuel or by design such as Cogeneration, Combined Cycle, Coal Gasification, Super-Critical, Ultra-Critical, Nuclear, and Hydro-electric.

Brands

Energy provides its flow control solutions and services through the following significant brands:

KF Valves, Pibiviesse, Circle Seal Controls, Contromatics, CPC Cryolab, Dopak Sampling, GO Regulators, Hoke, Gyrolok, Hydroseal, Laurence, Leslie Controls, Mallard Control, Nicholson Steam Trap, Pipeline Engineering, Rockwood Swendeman, RTK, Sagebrush, SF Valvulas, Spence Engineering and Texas Sampling.

Products

Energy offers a range of flow control solutions (distributed and highly engineered) and services, including:

Valves (from 1/8 inch to 64 inches)
Severe Service and General Service Control Valves
Engineered Trunion and Floating Ball Valves
Gate, Globe and Check Valves
Instrumentation Fittings and Sampling Systems, including Sight Glasses & Gauge Valves
Pipeline systems including Pigging tools, flow control skids and pressure control skids
Liquid Level Controllers, Liquid Level Switches, Needle Valves, Pilot Operated Relief Valves, Plugs & Probes Pressure Controllers, Pressure Regulators, Safety Relief Valves.

For our manufactured valve products, we ensure compliance with federal, state and local regulations, as well as industrial standards including those issued by the American Petroleum Institute, International Organization for Standardization, Underwriters’ Laboratory, American National Standards Institute, American Society of Mechanical Engineers, European Pressure Equipment Directive, and the American National Standards Institute. In addition, we need to meet standards that qualify us to be on authorized supplier lists with the various global end users.

Customers

Energy’s products and services are sold to end-user customers, such as major oil companies, power generation, process industries and Engineering, Procurement and Construction companies, through sales channels that include direct sales, sales representatives, distributors, and agents.

Revenue and Backlog

Energy accounted for $661.0 million, $659.4 million and $620.7 million, or 77%, 78% and 75%, of our net revenues for the years ended December 31, 2013, 2012 and 2011, respectively. Energy’s backlog as of January 26, 2014 was $295.0 million compared with $271.9 million as of January 27, 2013. We expect to ship all but $33.1 million of the January 26, 2014 backlog by December 31, 2014.

Aerospace & Defense

Aerospace & Defense is a growing industry leader with primary focus areas of actuation systems, control systems (fluid, electromechanical, pneumatic) and landing gear systems.

Aerospace & Defense sub-systems, components and products are flying on many commercial and military aircraft, including

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single and twin-aisle air transport, business and regional jets, military transports and fighters, and commercial and military rotorcraft. Other markets include unmanned aircraft, shipboard applications, military ground vehicles and space.

We have significant Aerospace & Defense facilities in California, New York, United Kingdom, France and Morocco. Our Aerospace & Defense headquarters is in Corona, California.

Markets and Applications

Commercial Aerospace: The commercial aerospace market we serve includes systems and components to support the aviation industry, such as hydraulic, pneumatic, fuel and ground support equipment including maintenance, repair and overhaul (MRO).

Defense: The defense market we serve includes military and naval applications where controls or motion switches are needed. We support fixed wing aircraft, rotorcraft, missile systems, ground vehicles, weapon systems and weapon launch systems, ordinance, fire control, fuel systems, pneumatic controls, and hydraulic and dockside support equipment including maintenance, repair and overhaul (MRO).

Brands

Aerospace & Defense provides control solutions and services for critical aerospace and defense applications through the following brands: CIRCOR Aerospace, Circle Seal Controls, Aerodyne Controls, Cambridge Fluid Systems, CIRCOR Bodet, CIRCOR Industria, and Hale Hamilton.

Products
Aerospace & Defense primarily manufactures controls (fluid, electromechanical, pneumatic), landing gear, and actuation components and sub-systems. In the manufacture of our products, we must comply with certain certification standards, such as AS9100C, ISO 9001:2008, National Aerospace & Defense Contractors Accreditation Program, Federal Aviation Administration Certification and European Aviation Safety Agency.
Customers

Aerospace & Defense products and services are used by a range of customers, including those in the military and defense, commercial aerospace, and business and general aviation markets.

Revenue and Backlog

CIRCOR Aerospace and Defense accounted for $196.8 million, $186.2 million and $201.7 million, or 23%, 22% and 25%, of our net revenues for the years ended December 31, 2013, 2012 and 2011, respectively. Aerospace & Defense backlog as of January 26, 2014 was $171.9 million compared with $179.9 million as of January 27, 2013. We expect to ship all but $44.7 million of the January 26, 2014 backlog by December 31, 2014.

CIRCOR Consolidated

Competition

The domestic and international markets for our products are highly competitive. Some of our competitors have substantially greater financial, marketing, personnel and other resources than us. We consider product quality, performance, on-time delivery, customer service, price, distribution capabilities and breadth of product offerings to be the primary competitive factors in these markets. We believe that new product development and product engineering also are important to our success and that our position in the industry is attributable, in significant part, to our ability to develop innovative products and to adapt existing products to specific customer applications.

The primary competitors of our Energy segment include: Balon Corporation, Cameron International Corp., Curtiss-Wright Corporation, Flowserve Corporation, IMI plc, Pentair Ltd, PetrolValves, SPX Corporation, Swagelok Company, and Valvitalia S.p.A.
 
The primary competitors of our Aerospace & Defense segment include: Crane Co., Cobham PLC, Eaton Corporation, GE Aviation, Heroux Devtek Inc, Lee, Magnaghi, Marotta, Maxon, Meggitt PLC, Triumph.
 

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New Product Development

Our engineering differentiation comes from our ability to offer products, solutions and services that address high pressure, high temperature, and caustic flow. Our solutions offer the highest standards of reliability, safety and durability in applications requiring precision movement and zero leakage.

We continue to develop new and innovative products to enhance our market positions. Our product development capabilities include designing and manufacturing custom applications to meet high tolerance or close precision requirements. For example, our Energy segment operation can meet the tolerance requirements of sub-sea, cryogenic environments as well as critical service steam applications. Our Aerospace & Defense segment continues to expand its integrated systems design and testing capability to support bundled systems for aeronautics applications. These testing and manufacturing capabilities enable us to develop customer-specified applications. In many cases, the unique characteristics of our customer-specified technologies have been subsequently used in broader product offerings.

We have expanded our engineering capability and capacity for new designs by using our India organization as a global engineering and technology center. Our research and development expenditures for the years ended December 31, 2013, 2012 and 2011, were $6.5 million, $8.4 million and $6.1 million, respectively.

Customers

For the years ended December 31, 2013, 2012 and 2011, we did not have any customers with revenues that exceeded 5% of our consolidated revenues. Our businesses sell into both long term capital projects as well as short cycle rapid turn operators. As a result, we tend to experience fluctuations in revenues and operating results at various points across economic and business cycles. Our businesses, particularly those in the Energy segment, are cyclical in nature due to the fluctuation of the worldwide demand for oil and gas. When the worldwide demand for oil and gas is depressed, the demand for our products used in those markets decreases. These declines could have a material adverse effect on our business, financial condition and operations. Similarly, although not to the same extent as the Oil & Gas markets, the aerospace, military and maritime markets have historically experienced cyclical fluctuations in demand that also could have a material adverse effect on our business, financial condition and operations.

Selling and Distribution

Across our businesses we utilize a variety of channels to market our products and solutions. Those channels include direct sales, distributors and commissioned representatives. Our distribution and representative networks typically offer technically trained sales forces with strong relationships in key markets.
 
We believe that our well-established sales and distribution channels constitute a competitive strength. We believe that we have good relationships with our representatives and distributors. We continue to implement marketing programs to enhance these relationships. Our ongoing distribution-enhancement programs include reducing lead times, introducing new products, and offering competitive pricing, application design, technical training, and literature.
 
Intellectual Property

We own patents that are scheduled to expire between 2016 and 2030 and trademarks that can be renewed as long as we continue to use them. We do not believe the vitality and competitiveness of any of our business segments as a whole depends on any one or more patents or trademarks. We own certain licenses such as software licenses, but we do not believe that our business as a whole depends on any one or more licenses.

Raw Materials

The raw materials used most often in our production processes are castings, forgings and bar stock of various materials, including stainless steel, carbon steel, bronze, copper, brass and aluminum. These materials are subject to price fluctuations that may adversely affect our results of operations. We purchase these materials from numerous suppliers and at times experience constraints on the supply of certain raw material as well as the inability of certain suppliers to respond to our increasing needs. Historically, increases in the prices of raw materials have been partially offset by higher sales prices, active materials management, project engineering programs and the diversity of materials used in our production processes.


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Employees and Labor Relations

As of January 27, 2014, our worldwide operations directly employed approximately 2,800 people. We have 45 employees in the United States who are covered by a single collective bargaining agreement. We also have approximately 241 employees in France, 211 in Italy, 115 in Brazil, 68 in the United Kingdom, 40 in the Netherlands and 34 in Morocco covered by governmental regulations or workers’ councils. We believe that our employee relations are good at this time.

Environmental Regulations and Proceedings

As a result of our manufacturing and assembly operations, our businesses are subject to federal, state, local and foreign laws, as well as other legal requirements relating to the generation, storage, transport and disposal of materials. These laws include, without limitation, the Resource Conservation and Recovery Act, the Clean Air Act, the Clean Water Act and the Comprehensive Environmental Response and Compensation and Liability Act, and foreign equivalents of such laws.

We currently do not anticipate any materially adverse effect on our business, financial condition or results of operations as a result of our compliance with federal, state, local and foreign environmental laws. However, risk of environmental liability and charges associated with maintaining compliance with environmental laws is inherent in the nature of our manufacturing operations and there is no assurance that material liabilities or charges could not arise. During the year ended December 31, 2013, we capitalized approximately $0.6 million and expensed $1.6 million related to environmental and safety control facilities. For the year ending December 31, 2014, we expect to capitalize $0.5 million and expense $1.5 million related to environmental and safety control facilities.

Available Information
 
We file reports on Form 10-Q with the Securities and Exchange Commission (“SEC”) on a quarterly basis, additional reports on Form 8-K from time to time, and a Definitive Proxy Statement and an annual report on Form 10-K on an annual basis. These and other reports filed by us, or furnished by us, to the SEC in accordance with section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge from the SEC on its website at http://www.sec.gov. Additionally, our Form 10-Q, Form 8-K, Definitive Proxy Statement and Form 10-K reports are available without charge, as soon as reasonably practicable after they have been filed with the SEC, from our Investor Relations website at http://investors.CIRCOR.com. The information on our website is not part of, or incorporated by reference in, this Annual Report.

Item 1A.    Risk Factors.
 
Certain Risk Factors That May Affect Future Results
 
Set forth below are certain risk factors that we believe are material to our stockholders. If any of the following risks occur, our business, financial condition, results of operations and reputation could be harmed. You should also consider these risk factors when you read “forward-looking statements” elsewhere in this report. You can identify forward-looking statements by terms such as “may,” “hope,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of those terms or other comparable terminology. Forward-looking statements are only predictions and can be adversely affected if any of the following risks occur:
 
Some of our end-markets are cyclical, which may cause us to experience fluctuations in revenues or operating results.
 
We have experienced, and expect to continue to experience, fluctuations in revenues and operating results due to economic and business cycles. We sell our products principally to aerospace, military, commercial aircraft, pharmaceutical, medical, analytical equipment, Oil & Gas exploration, transmission and refining, power generation, chemical processing and maritime markets. Although we serve a variety of markets to avoid a dependency on any one, a significant downturn in any one of these markets could cause a material reduction in our revenues that could be difficult to offset. In addition, decreased market demand typically results in excess manufacturing capacity among our competitors which, in turn, results in pricing pressure. As a consequence, a significant downturn in our markets can result in lower profit margins.

In particular, our energy businesses are cyclical in nature as the worldwide demand for oil and gas fluctuates. When worldwide demand for oil and gas is depressed, the demand for our products used in maintenance and repair of existing oil and gas applications, as well as exploration or new oil and gas project applications, is reduced. As a result, we historically have generated lower revenues and profits in periods of declining demand for petrochemical products. Therefore, results of operations for any particular period are not necessarily indicative of the results of operations for any future period. Future downturns or anticipated downturns in demand for oil and gas products could have a material adverse effect on our business,

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financial condition or results of operations. Similarly, although not to the same extent as the Oil & Gas markets, the aerospace, military, and maritime markets have historically experienced cyclical fluctuations in demand that also could have a material adverse effect on our business, financial condition or results of operations.
 
We face significant competition and, if we are not able to respond to competition, our revenues may decrease.
 
We face significant competition from a variety of competitors in each of our markets. Some of our competitors have substantially greater financial, marketing, personnel and other resources than we do. New competitors also could enter our markets. We consider product quality, performance, customer service, on-time delivery, price, distribution capabilities and breadth of product offerings to be the primary competitive factors in our markets. Our competitors may be able to offer more attractive pricing, duplicate our strategies, or develop enhancements to products that could offer performance features that are superior to our products. Competitive pressures, including those described above, and other factors could adversely affect our competitive position, involving a loss of market share or decreases in prices, either of which could have a material adverse effect on our business, financial condition or results of operations. In addition, some of our competitors are based in foreign countries and have cost structures and prices based on foreign currencies. The majority of our transactions are denominated in either U.S. dollar or Euro currency. Accordingly, currency fluctuations could cause our U.S. dollar and/or Euro priced products to be less competitive than our competitors’ products that are priced in other currencies.
 
If we cannot continue operating our manufacturing facilities at current or higher levels, our results of operations could be adversely affected.
 
We operate a number of manufacturing facilities for the production of our products. The equipment and management systems necessary for such operations may break down, perform poorly or fail, resulting in fluctuations in manufacturing efficiencies. Such fluctuations may affect our ability to deliver products to our customers on a timely basis, which could have a material adverse effect on our business, financial condition or results of operations. We have continuously enhanced and improved Lean manufacturing techniques as part of the CIRCOR Business System. We believe that this process produces meaningful reductions in manufacturing costs. However, continuous improvement of these techniques may cause short-term inefficiencies in production. If we ultimately are unable to continuously improve our processes, our results of operations may suffer.

Implementation of our acquisition, divestiture, restructuring, or simplification strategies may not be successful, which could affect our ability to increase our revenues or could reduce our profitability.
 
One of our continued strategies is to increase our revenues and expand our markets through acquisitions that will provide us with complementary Energy and Aerospace & Defense products and access to additional geographic markets. We expect to spend significant time and effort expanding our existing businesses and identifying, completing and integrating acquisitions. We expect to face competition for acquisition candidates that may limit the number of acquisition opportunities available to us and may result in higher acquisition prices. We cannot be certain that we will be able to identify, acquire or profitably manage additional companies or successfully integrate such additional companies without substantial costs, delays or other problems. Also, there can be no assurance that companies we acquire ultimately will achieve the revenues, profitability or cash flows, or generate the synergies upon which we justify our investment in them; as a result, any such under-performing acquisitions could result in impairment charges which would adversely affect our results of operations. In addition, acquisitions may involve a number of special risks, including: adverse effects on our reported operating results; use of cash; diversion of management’s attention; loss of key personnel at acquired companies; or unanticipated management or operational problems or legal liabilities.
 
We also continually review our current business and products to attempt to maximize our performance. We may in the future deem it appropriate to pursue the divestiture of product lines or businesses as conditions dictate. Any divestiture may result in a dilutive impact to our future earnings if we are unable to offset the dilutive impacts from the loss of revenue associated with the divested assets or businesses, as well as significant write-offs, including those related to goodwill and other intangible assets, which could have a material adverse effect on our results of operations and financial condition. A successful divestiture depends on various factors, including our ability to effectively transfer liabilities, contracts, facilities and employees to any purchaser, identify and separate the intellectual property to be divested from the intellectual property that we wish to retain, reduce fixed costs previously associated with the divested assets or business, and collect the proceeds from any divestitures. In addition, if customers of the divested business do not receive the same level of service from the new owners, this may adversely affect our other businesses to the extent that these customers also purchase other products offered by us. All of these efforts require varying levels of management resources, which may divert our attention from other business operations.

A recent focus of our Company is to simplify the way we are organized and the number of facilities we manage. We believe that such focus will reduce overhead structure, enhance operational synergies, and result in improved operating margins. Nevertheless,

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we may not achieve expected cost savings from restructuring and simplification activities and actual charges, costs and adjustments due to such activities may vary materially from our estimates. Our ability to realize anticipated cost savings, synergies, margin improvement, and revenue enhancements may be affected by a number of factors, including the following: our ability to effectively eliminate duplicative overhead, rationalize manufacturing capacity, synchronize information technology systems, consolidate warehousing and distribution facilities and shift production to more economical facilities; significant cash and non-cash integration and implementation costs or charges in order to achieve those cost savings, which could offset any such savings; and our ability to avoid labor disruption in connection with integration efforts or divestitures.

If we do not realize the expected benefits or synergies of any acquisition, divestiture, restructuring, or simplification activities, our business, financial condition, results of operations and cash flow could be negatively impacted.

If we are unable to continue operating successfully overseas or to successfully expand into new international markets, our revenues may decrease.
 
We derive a significant portion of our revenue from sales outside the United States. In addition, one of our key growth strategies is to sell our products in international markets not significantly served by us in portions of Europe, Latin America and Asia. We market our products and services through direct sales, distributors, and technically trained commissioned representatives. We may not succeed in our efforts to further penetrate these markets. Moreover, conducting business outside the United States is subject to additional risks, including currency exchange rate fluctuations, changes in regional, political or economic conditions, trade protection measures such as tariffs or import or export restrictions, and unexpected changes in regulatory requirements. One or more of these factors could prevent us from successfully expanding our presence in these international markets and could also have a material adverse effect on our current international operations.
 
If we cannot pass on higher raw material or manufacturing costs to our customers, we may become less profitable.
 
One of the ways we attempt to manage the risk of higher raw material and manufacturing costs is to increase selling prices to our customers. The markets we serve are extremely competitive and customers may not accept price increases or may look to alternative suppliers, which may negatively impact our profitability and revenues.
 
If our suppliers cannot provide us with adequate quantities of materials to meet our customers’ demands on a timely basis or if the quality of the materials provided does not meet our standards, we may lose customers or experience lower profitability.
 
Some of our customer contracts require us to compensate those customers if we do not meet specified delivery obligations. We rely on numerous suppliers to provide us with our required materials and in many instances these materials must meet certain specifications. In addition, we continue to increase our dependence on lower cost foreign sources of raw materials, components, and, in some cases, completed products. Managing a geographically diverse supply base inherently poses significant logistical challenges. While we believe that we also have improved our ability to effectively manage a global supply base, a risk nevertheless exists that we could experience diminished supplier performance resulting in longer than expected lead times and/or product quality issues. The occurrence of such factors could have a negative impact on our ability to deliver products to customers within our committed time frames and could result in reductions of our operating and net income in future periods.
 
Our international activities expose us to fluctuations in currency exchange rates that could adversely affect our results of operations and cash flows.
 
Our international manufacturing and sales activities expose us to changes in foreign currency exchange rates. Such fluctuations could result in our (i) paying higher prices for certain imported goods and services, (ii) realizing lower prices for any sales denominated in currencies other than U.S. dollars, (iii) realizing lower net income, on a U.S. dollar basis, from our international operations due to the effects of translation from weakened functional currencies, and (iv) realizing higher costs to settle transactions denominated in other currencies. Any of these risks could adversely affect our results of operations and cash flows. Our major foreign currency exposures involve the markets in Western Europe, Canada, Brazil and Asia.
 
We may use forward contracts to help manage the currency risk related to certain business transactions denominated in foreign currencies. We primarily utilize forward exchange contracts with maturities of less than eighteen months. To the extent these transactions are completed, the contracts do not subject us to significant risk from exchange rate fluctuations because they offset gains and losses on the related foreign currency denominated transactions. However, there can be no assurances that we will be able to effectively utilize these forward exchange contracts in the future to offset significant risk related to fluctuations in currency exchange rates.
 

8




If we experience delays in introducing new products or if our existing or new products do not achieve or maintain market acceptance, our revenues may decrease.
 
Our industries are characterized by: intense competition; changes in end-user requirements; technically complex products; and evolving product offerings and introductions.
 
We believe our future success will depend, in part, on our ability to anticipate or adapt to these factors and to offer, on a timely basis, products that meet customer demands. Failure to develop new and innovative products or to custom design existing products could result in the loss of existing customers to competitors or the inability to attract new business, either of which may adversely affect our revenues. The development of new or enhanced products is a complex and uncertain process requiring the anticipation of technological and market trends. We may experience design, manufacturing, marketing or other difficulties, such as an inability to attract a sufficient number of qualified engineers, which could delay or prevent our development, introduction or marketing of new products or enhancements and result in unexpected expenses.
 
We depend on our key personnel and the loss of their services may adversely affect our business.
 
We believe that our success will depend on our ability to hire new talent and the continued employment of our senior management team and other key personnel. If one or more members of our senior management team or other key personnel were unable or unwilling to continue in their present positions, our business could be seriously harmed. In addition, if any of our key personnel joins a competitor or forms a competing company, some of our customers might choose to use the services of that competitor or those of a new company instead of our own. Other companies seeking to develop capabilities and products similar to ours may hire away some of our key personnel. If we are unable to maintain our key personnel and attract new employees, the execution of our business strategy may be hindered and our growth limited.
 
We face risks from product liability lawsuits that may adversely affect our business.
 
We, like other manufacturers, face an inherent risk of exposure to product liability claims in the event that the use of our products results in personal injury, property damage or business interruption to our customers. We may be subjected to various product liability claims, including, among others, that our products include inadequate or improper instructions for use or installation, or inadequate warnings concerning the effects of the failure of our products. Although we maintain strict quality controls and procedures, including the testing of raw materials and safety testing of selected finished products, we cannot be certain that our products will be completely free from defect. In addition, in certain cases, we rely on third-party manufacturers for our products or components of our products. Although we have liability insurance coverage, we cannot be certain that this insurance coverage will continue to be available to us at a reasonable cost or, if available, will be adequate to cover any such liabilities. For example, liability insurance typically does not afford coverage for a design or manufacturing defect unless such defect results in injury to person or property. We generally attempt to contractually limit liability to our customers to risks that are insurable but are not always successful in doing so. Similarly, we generally seek to obtain contractual indemnification from our third-party suppliers, and for us to be added as an additional insured party under such parties’ insurance policies. Any such indemnification or insurance is limited by its terms and, as a practical matter, is limited to the credit worthiness of the indemnifying or insuring party. In the event that we do not have adequate insurance or contractual indemnification, product liabilities could have a material adverse effect on our business, financial condition or results of operations.

We rely on information technology in our operations, and any material failure, inadequacy, interruption or security failure of that technology could harm our business, financial condition, results of operations and prospects.
 
We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and manage or support a variety of business processes, including financial transactions and records, personal identifying information, payroll data and workforce scheduling information. We purchase some of our information technology from vendors, on whom our systems depend. We rely on commercially available systems, software, tools and monitoring to provide security for the processing, transmission and storage of company and customer information. Although we have taken steps to protect the security of our information systems and the data maintained in those systems, it is possible that our safety and security measures will not prevent the systems' improper functioning or damage or the improper access or disclosure of personally identifiable information such as in the event of cyber-attacks. Security breaches, including physical or electronic break-ins, computer viruses, attacks by hackers and similar breaches can create system disruptions or shutdowns or the unauthorized disclosure of confidential information. If company, personal or otherwise protected information is improperly accessed, tampered with or distributed, we may incur significant costs to remediate possible injury to the affected parties and we may be subject to sanctions and civil or criminal penalties if we are found to be in violation of the privacy or security rules under federal, state, or international laws protecting confidential information. Any failure to maintain proper functionality and security of our information systems could interrupt our operations, damage our reputation, subject us to liability claims or

9




regulatory penalties and could have a material adverse effect on our business, financial condition, results of operations and prospects.
 
The trading price of our common stock continues to be volatile and investors in our common stock may experience substantial losses.
 
The trading price of our common stock may be, and, in the past, has been volatile. Our common stock could decline or fluctuate in response to a variety of factors, including, but not limited to: our failure to meet our performance estimates or performance estimates of securities analysts; changes in financial estimates of our revenues and operating results or buy/sell recommendations by securities analysts; the timing of announcements by us or our competitors concerning significant product line developments, contracts or acquisitions or publicity regarding actual or potential results or performance; fluctuation in our quarterly operating results caused by fluctuations in revenue and expenses; substantial sales of our common stock by our existing shareholders; general stock market conditions; or other economic or external factors. While we attempt in our public disclosures to provide forward-looking information in order to enable investors to anticipate our future performance, such information by its nature represents our good-faith forecasting efforts. In recent years, the unprecedented nature of credit and financial crises and economic recessions, together with the uncertain depth and duration of these crises, has rendered such forecasting more difficult. As a result, our actual results could differ materially from our forecasts which could cause further volatility in the value of our common stock.

For example, in recent years the stock market as a whole experienced dramatic price and volume fluctuations. In the past, securities class action litigation has often been instituted against companies following periods of volatility in the market price of their securities. This type of litigation could result in substantial costs and a diversion of management attention and resources.
 
If our internal control over financial reporting do not comply with the requirements of the Sarbanes-Oxley Act, our business and stock price could be adversely affected.
 
If either management or our independent registered public accounting firm identifies one or more material weaknesses in internal control over financial reporting that exist as of the end of our fiscal year, the material weakness(es) will be reported either by management in its self assessment or by our independent registered public accounting firm in its report or both, which may result in a loss of public confidence and could have an adverse affect on our business and our stock price. This could also result in significant additional expenditures responding to the Section 404 internal control audit and a diversion of management attention.
 
The costs of complying with existing or future governmental regulations on importing and exporting practices and of curing any violations of these regulations, could increase our expenses, reduce our revenues or reduce our profitability.
 
We are subject to a variety of laws and international trade practices including regulations issued by the United States Bureau of Industry and Security, the Department of Homeland Security, the Department of State and the Department of Treasury. We cannot predict the nature, scope or effect of future regulatory requirements to which our international trading practices might be subject or the manner in which existing laws might be administered or interpreted. Future regulations could limit the countries into which certain of our products may be sold or could restrict our access to, and increase the cost of obtaining products from, foreign sources. In addition, actual or alleged violations of such regulations could result in enforcement actions and/or financial penalties that could result in substantial costs.
 
Our debt agreements limit our ability to issue equity, make acquisitions, incur debt, pay dividends, make investments, sell assets, merge or raise capital.
 
Our revolving credit facility agreement, dated May 2, 2011, governs our indebtedness. This agreement includes provisions which place limitations on certain activities including our ability to: issue shares of our common stock; incur additional indebtedness; create any liens or encumbrances on our assets or make any guarantees; make certain investments; pay cash dividends above certain limits; or dispose of or sell assets or enter into a merger or a similar transaction.
 
Various restrictions and agreements could hinder a takeover of us which is not supported by our board of directors or which is leveraged.
 
Our amended and restated certificate of incorporation and amended and restated by-laws, as well as the Delaware General Corporation Law, contain provisions that could delay or prevent a change in control in a transaction that is not approved by our board of directors or that is on a leveraged basis or otherwise. These include provisions creating a staggered board, limiting the shareholders’ powers to remove directors, and prohibiting shareholders from calling a special meeting or taking action by

10




written consent in lieu of a shareholders’ meeting. In addition, our board of directors has the authority, without further action by the shareholders, to set the terms of and to issue preferred stock. Issuing preferred stock could adversely affect the voting power of the owners of our common stock, including the loss of voting control to others.
 
Delaying or preventing a takeover could result in our shareholders ultimately receiving less for their shares by deterring potential bidders for our stock or assets.
 
If we fail to manufacture and deliver high quality products, we may lose customers.
 
Product quality and performance are a priority for our customers since many of our product applications involve caustic or volatile chemicals and, in many cases, involve processes that require precise control of fluids. Our products are used in the aerospace, military, commercial aircraft, pharmaceutical, medical, analytical equipment, Oil & Gas exploration, transmission and refining, power generation, chemical processing and maritime industries. These industries require products that meet stringent performance and safety standards. If we fail to maintain and enforce quality control and testing procedures, our products will not meet these stringent performance and safety standards. Substandard products would seriously harm our reputation, resulting in both a loss of current customers to our competitors and damage to our ability to attract new customers, which could have a material adverse effect on our business, financial condition or results of operations.
 
A change in international governmental policies or restrictions could result in decreased availability and increased costs for certain components and finished products that we purchase from sources in foreign countries, which could adversely affect our profitability.
 
Like most manufacturers of fluid control products, we attempt, where appropriate, to reduce costs by seeking lower cost sources of certain components and finished products. Many such sources are located in developing countries such as the People’s Republic of China, India and Taiwan, where a change in governmental approach toward U.S. trade could restrict the availability to us of such sources. In addition, periods of war or other international tension could interfere with international freight operations and hinder our ability to purchase such components and products. A decrease in the availability of these items could hinder our ability to timely meet our customers’ orders. We attempt, when possible, to mitigate this risk by maintaining alternate sources for these components and products and by maintaining the capability to produce such items in our own manufacturing facilities. However, even when we are able to mitigate this risk, the cost of obtaining such items from alternate sources or producing them ourselves is often considerably greater, and a shift toward such higher cost production could therefore adversely affect our profitability.
 
We, along with our customers and vendors, face the uncertainty in the public and private credit markets and in general economic conditions in the United States and around the world.
 
In recent years there has been at times disruption and general slowdown of the public and private capital and credit markets in the United States and around the world. Such conditions can adversely affect our revenue, results of operations and overall financial growth. Our business can be affected by a number of factors that are beyond our control such as general geopolitical, economic and business conditions and conditions in the financial services market, which each could materially impact our business, financial condition, results of operations, cash flow, capital resources and liquidity. Additionally, many lenders and institutional investors, at times, have reduced funding to borrowers, including other financial institutions. Although we do not currently anticipate a need to access the credit markets for new financing in the short-term, a constriction on future lending by banks or investors could result in higher interest rates on future debt obligations or could restrict our ability to obtain sufficient financing to meet our long-term operational and capital needs or could limit our ability in the future to consummate strategic acquisitions. Any uncertainty in the credit markets could also negatively impact the ability of our customers and vendors to finance their operations which, in turn, could result in a decline in our sales and in our ability to obtain necessary raw materials and components, thus potentially having an adverse effect on our business, financial condition or results of operations.
 
A resurgence of terrorist activity and/or political instability around the world could cause economic conditions to deteriorate and adversely impact our businesses.
 
In the past, terrorist attacks have negatively impacted general economic, market and political conditions. In particular, the 2001 terrorist attacks, compounded with changes in the national economy, resulted in reduced revenues in the aerospace and general industrial markets in 2002 and 2003. Although economic conditions have improved considerably, additional terrorist acts, acts of war or political instability (wherever located around the world) could cause damage or disruption to our business, our facilities or our employees which could significantly impact our business, financial condition or results of operations. The potential for future terrorist attacks, the national and international responses to terrorist attacks, political instability, and other acts of war or hostility, including the recent and current conflicts in Iraq, Afghanistan and the Middle East, have created many economic and political uncertainties, which could adversely affect our business and results of operations in ways that cannot

11




presently be predicted. In addition, with manufacturing facilities located worldwide, including facilities located in the United States, Western Europe, the People’s Republic of China, Morocco, Brazil and India, we may be impacted by terrorist actions not only against the United States but in other parts of the world as well. In some cases, we are not insured for losses and interruptions caused by terrorist acts and acts of war.
 
The costs of complying with existing or future environmental regulations and curing any violations of these regulations could increase our expenses or reduce our profitability.
 
We are subject to a variety of environmental laws relating to the storage, discharge, handling, emission, generation, use and disposal of chemicals, solid and hazardous waste and other toxic and hazardous materials used to manufacture, or resulting from the process of manufacturing, our products. We cannot predict the nature, scope or effect of future regulatory requirements to which our operations might be subject or the manner in which existing or future laws will be administered or interpreted. Future regulations could be applied to materials, products or activities that have not been subject to regulation previously. The costs of complying with new or more stringent regulations, or with more vigorous enforcement of these or existing regulations could be significant.

Environmental laws require us to maintain and comply with a number of permits, authorizations and approvals and to maintain and update training programs and safety data regarding materials used in our processes. Violations of these requirements could result in financial penalties and other enforcement actions. We also could be required to halt one or more portions of our operations until a violation is cured. Although we attempt to operate in compliance with these environmental laws, we may not succeed in this effort at all times. The costs of curing violations or resolving enforcement actions that might be initiated by government authorities could be substantial.

New regulations related to “conflict minerals” may cause us to incur additional expenses and could limit the supply and increase the cost of certain metals used in manufacturing our products.
 
On August 22, 2012, the SEC adopted a new rule requiring disclosures by public companies of specified minerals, known as conflict minerals, that are necessary to the functionality or production of products manufactured or contracted to be manufactured. The new rule, became effective for 2013 and requires a disclosure report to be filed by May 31, 2014, requires companies to perform due diligence, disclose and report whether or not such minerals originate from the Democratic Republic of Congo or an adjoining country. The new rule could affect sourcing at competitive prices and availability in sufficient quantities of certain minerals used in the manufacture of our products, including tantalum, tin, gold and tungsten. The
number of suppliers who provide conflict-free minerals may be limited. In addition, there may be material costs associated with complying with the disclosure requirements, such as costs related to determining the source of certain minerals used in our products, as well as costs of possible changes to products, processes, or sources of supply as a consequence of such verification activities. As our supply chain is complex, we may not be able to sufficiently verify the origins of the relevant minerals used in our products through the due diligence procedures that we implement, which may harm our reputation. In addition, we may encounter challenges to satisfy those customers who require that all of the components of our products be certified as conflict-free, which could place us at a competitive disadvantage if we are unable to do so.
 
Item 1B.    Unresolved Staff Comments.
 
None.
 
Item 2.    Properties.
 
We maintain 20 major manufacturing facilities worldwide, including operations located in the United States, Western Europe, Morocco, India, Brazil and the People’s Republic of China. We also maintain sales offices or warehouses from which we ship finished goods to customers, distributors and commissioned representative organizations. Our executive office is located in Burlington, Massachusetts and is leased.
 
Our Energy segment has major manufacturing facilities located in the United States, Italy, the United Kingdom, Brazil, Germany, India, the Netherlands and the People’s Republic of China. Properties in Nerviano, Italy and Spartanburg, South Carolina are leased. Our Aerospace & Defense segment has major manufacturing facilities located in the United States, France, the United Kingdom and Morocco. Properties in Hauppauge, New York, Corona, California and Cambridge, United Kingdom are leased.

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Segment
Leased
 
Owned
 
Total
Energy
2

 
10

 
12

Aerospace & Defense
3

 
5

 
8

Total
5

 
15

 
20

 
In general, we believe that our properties, including machinery, tools and equipment, are in good condition, are well maintained, and are adequate and suitable for their intended uses. Our manufacturing facilities generally operate five days per week on one or two shifts. We believe our manufacturing capacity could be increased by working additional shifts and weekends and by successful implementation of our on-going Lean manufacturing initiatives. We believe that our current facilities in mature markets will meet our near-term production requirements without the need for additional facilities.

Item 3.    Legal Proceedings.
 
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. On January 24, 2014 we reached a settlement on the TMW arbitration where it was agreed that TMW would waive all rights to amounts due from us under a contingent consideration promissory note established at the time of acquisition, resulting in a gain of approximately $2.2 million during the first quarter of 2014.
In late 2013 our former parent, Watts Water Technologies, Inc. (“Watts”), notified us of a claim in the approximate aggregate amount of $4.2 million.  In its claim Watts contends, pursuant to the Distribution Agreement dated October 1, 1999 which governed the spinoff of CIRCOR from Watts, that we are partially responsible for retrospective insurance premium adjustments and deductibles paid by Watts to insurers under certain legacy insurance policies that covered both Watts and CIRCOR subsidiaries prior to our 1999 spinoff. The claim also includes both interest paid to insurers as well as attorneys’ fees spent by Watts in disputing its contractual obligations. We are vigorously contesting this claim and believe that any resolution of this matter will not have a material adverse effect on our financial condition or results of operations.
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 our financial condition, consolidated results of operations or liquidity of the Company.
We are currently involved in various other 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.
 
Item 4.    Mine Safety Disclosures.
 
Not applicable.
 
Part II
 
Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Our common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “CIR.” Quarterly share prices and dividends declared and paid are incorporated herein by reference to Note 18 to the consolidated financial statements included in this Annual Report.

Our board of directors is responsible for determining our dividend policy. Although we currently intend to continue paying quarterly cash dividends, the timing and level of such dividends will necessarily depend on our board of directors’ assessments of earnings, financial condition, capital requirements and other factors, including restrictions, if any, imposed by our lenders.

13




See “Liquidity and Capital Resources” under the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further information.
 
As of February 14, 2014, there were 17,611,451 shares of our common stock outstanding and we had 70 holders of record of our common stock. We believe the number of beneficial owners of our common stock was substantially greater on that date.
 
Set forth below is a table and line graph comparing the percentage change in the cumulative total stockholder return on the Company’s common stock, based on the market price of the Company’s common stock with the total return of companies included within the Standard & Poor’s 500 Composite Index and both a current and former peer group of companies engaged in the valve, pump, fluid control and related industries for the five-year period commencing December 31, 2008 and ending December 31, 2013. The calculation of total cumulative return assumes a $100 investment in the Company’s common stock, the Standard & Poor’s 500 Composite Index and the peer groups on December 31, 2008 and the reinvestment of all dividends. The historical information set forth below is not necessarily indicative of future performance.

During early 2013, two of the companies previously listed in our peer group (Gardner Denver Inc. and Robbins & Meyers, Inc.) were acquired and ceased to be publicly listed. As a result, we engaged in an analysis to determine our most appropriate peer group. This analysis considered several factors including similarities in end markets, product lines, geographic coverage, and overlapping investment analyst coverage. Consequently, we have determined that the most appropriate peer group consists of those companies denominated below as “Current Peer Group.”

 
12/08
 
12/09
 
12/10
 
12/11
 
12/12
 
12/13
CIRCOR International, Inc.
100.00
%
 
92.15
%
 
155.42
%
 
130.36
%
 
146.82
%
 
300.39
%
S&P 500
100.00

 
126.46

 
145.51

 
148.59

 
172.37

 
228.19

Former Peer Group (1)
100.00

 
136.32

 
197.87

 
192.05

 
235.99

 
349.89

Current Peer Group (2)
100.00

 
161.96

 
202.64

 
193.85

 
243.05

 
337.51

 
 
 
 
 
 
 
 
 
 
 
 
(1) Former Peer Group companies include: Crane Co., Flowserve Corp, Gardner Denver Inc., Idex Corp., Moog Inc., Parker Hannifin Corp., Robbins & Myers Inc., and Roper Industries Inc. As Gardner Denver Inc. and Robbins & Meyers Inc. are no longer publicly listed, the stock performance data and chart for the Former Peer Group does not include these companies.
(2) Current Peer Group companies include: Cameron International Corporation, Crane Co., Curtiss-Wright Corporation, Flowserve Corporation, IMI plc, Pentair Ltd., SPX Corporation, and Woodward, Inc.
 

14





Item 6.    Selected Financial Data.
 
The following table presents certain selected financial data that has been derived from our audited consolidated financial statements and related notes and should be read along with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and notes included in this Annual Report.
 
The consolidated statements of income and consolidated statements of cash flows data for the years ended December 31, 2013, 2012 and 2011, and the consolidated balance sheet data as of December 31, 2013 and 2012 are derived from, and should be read in conjunction with, our audited consolidated financial statements and the related notes included in this Annual Report. The consolidated statements of income and consolidated statements of cash flows data for the years ended December 31, 2010 and 2009, and the consolidated balance sheet data as of December 31, 2011, 2010 and 2009, are derived from our audited consolidated financial statements not included in this report.


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Selected Financial Data
(In thousands, except per share data)
 
 
Years Ended December 31,
 
2013
 
2012
 
2011
 
2010
 
2009
Statement of Income Data (1):
 
 
 
 
 
 
 
 
 
Net revenues
$
857,808

 
$
845,552

 
$
822,349

 
$
685,910

 
$
642,622

Gross profit
267,601

 
241,543

 
225,395

 
197,269

 
194,579

Operating income (loss)
69,173

 
46,531

 
56,298

 
14,986

 
3,711

Income (loss) before interest and taxes
64,037

 
41,759

 
50,196

 
12,509

 
3,084

Net income (loss)
47,121

 
30,799

 
36,634

 
12,624

 
5,870

Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Total assets
$
726,650

 
$
709,981

 
$
722,523

 
$
616,195

 
$
562,053

Total debt (2)
49,638

 
70,484

 
105,123

 
1,535

 
7,479

Shareholders’ equity
476,887

 
418,247

 
384,085

 
356,820

 
350,408

Total capitalization
526,525

 
488,731

 
489,208

 
358,355

 
357,887

Other Financial Data:
 
 
 
 
 
 
 
 
 
Cash flow provided by (used in):
 
 
 
 
 
 
 
 
 
Operating activities
$
72,206

 
$
60,523

 
$
(48,833
)
 
$
36,844

 
$
46,552

Investing activities
(13,264
)
 
(17,629
)
 
(38,005
)
 
(27,781
)
 
(32,577
)
Financing activities
(19,235
)
 
(37,408
)
 
97,052

 
(8,615
)
 
(18,041
)
Net interest expense
3,161

 
4,259

 
3,930

 
2,516

 
1,068

Capital expenditures
17,328

 
18,170

 
17,901

 
14,913

 
11,032

Diluted earnings (loss) per common share
$
2.67

 
$
1.76

 
$
2.10

 
$
0.73

 
$
0.34

Diluted weighted average common shares outstanding
17,629

 
17,452

 
17,417

 
17,297

 
17,111

Cash dividends declared per common share
$
0.15

 
$
0.15

 
$
0.15

 
$
0.15

 
$
0.15

 
(1)
The statement of income data for the year ended December 31, 2013 includes inventory restructuring charges of $0.6 million, impairment charges of $6.9 million relating to indefinite lived intangible assets, and special charges, net of recoveries of $8.6 million. See Notes to consolidated Financial statements No. 4 & No. 7 for additional details. The statement of income data for the year ended December 31, 2012 includes inventory restructuring of $4.2 million, impairment charges of $10.3 million, and special charges of $5.3 million. No special or impairment charges were included in the statement of income data for the years ended December 31, 2011 and 2010. The statement of income data for the year ended December 31, 2009 includes special recoveries of $1.7 million relating to a 2007 asset sale within our Energy segment and impairment charges of $0.5 million consisting of the impairment of two trade names. The statement of income data for the years ended December 31, 2011, 2010, and 2009 include Leslie asbestos and bankruptcy costs of $0.7 million, $32.8 million, and $54.1 million, respectively, primarily within our Energy segment.

(2)
Includes capital leases obligations of: $0.3 million, $0.5 million, $0.6 million, $0.4 million and $0.6 million as of December 31, 2013, 2012, 2011, 2010 and 2009, respectively.

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
This annual report on Form 10-K (hereinafter, the “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 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 & Gas in both domestic and international markets, any adverse changes in governmental policies, variability of raw material and component pricing, changes in our suppliers’

16




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, divestiture, restructuring, or simplification strategies, fluctuations in 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 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. For a discussion of certain of these risks, uncertainties and other factors, see Item 1A "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 and sub-systems used in the Oil & Gas, power generation, aerospace, defense and industrial markets. Within our major product groups, we develop, manufacture, sell and service a portfolio of fluid-control products, sub-systems and technologies that enable us to fulfill our customers’ unique fluid-control application needs.
 
During the fourth quarter of 2013 we changed our organizational structure to simplify the way the Company is managed and better align our business with our end markets. As part of this organizational change, the Company announced that it would consolidate its segment and reporting structure from three to two. The first segment is Energy, which will include all of the businesses from the existing Energy segment and a majority of the former ‘Flow Technologies’ businesses. The primary markets served in the new Energy segment are Oil & Gas: upstream, mid-stream and downstream; as well as the global power generation market. The second segment is Aerospace & Defense, which will include all of the former Aerospace segment businesses plus the UK-based defense-oriented businesses from the former Flow Technologies segment.
 
Regarding our 2013 results, we had consolidated revenues of $857.8 million, with Energy representing 77% of total revenue and Aerospace & Defense representing 23%. Operating income increased 49% to $69.2 million inclusive of 2013 and 2012 inventory restructuring, impairment, and special charges of $16.1 million and $19.8 million respectively, which are associated with productivity benefits we expect to realize through 2014. Cash flow provided by operating activities for 2013 was $72.2 million.
As we look to 2014, we expect the North American and emerging markets to improve modestly and Europe to experience slow growth, with the exception of North Sea activities.  We believe that there will be improved growth in most of the Energy markets we serve specifically the power generation markets within Asia, and we believe Aerospace & Defense markets will experience modest growth.  We intend to continue focusing on both organic and acquisition growth opportunities and investing in technologies that help to solve our customers’ problems.  Attracting and retaining talented personnel, including the development of a global operations and supply chain management organization, will be an important part of our strategy during 2014.  In addition we expect to further simplify CIRCOR and improve Operational Excellence by aligning people, processes and technology and reducing complexity, facilities and suppliers.  We believe our cash flow from operations and financing capacity is adequate to support these activities.

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: Energy and Aerospace & Defense.
 
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

17




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 Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
 
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 with customers, representing less than 1% 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 $199.4 million as of December 31, 2013, compared to $198.0 million as of December 31, 2012. Our inventory allowance as of December 31, 2013 was $21.3 million, compared to $22.3 million as of December 31, 2012. Our provision for inventory obsolescence was $5.1 million, $8.3 million, and $4.2 million, for 2013, 2012, and 2011, respectively. Included in the inventory obsolescence charge for the twelve months ended December 31, 2013 is $0.3 million and $0.4 million of restructuring related inventory obsolescence charges for the Energy and Aerospace & Defense segments, respectively. We believe our inventory allowances remain adequate with the net realizable value of our inventory being higher than our current inventory cost after allowance.
 
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 excess or obsolete inventory.
 
Penalty Accruals
 
Some of our customer agreements, primarily in our project related businesses and large aerospace programs, 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 December 31, 2013 and 2012 were $10.3 million and $8.6 million, respectively. As we conclude performance under these agreements, the actual amount of consideration paid to our customers may vary 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 2013, 2012, and 2011, the Company did not experience any significant losses related to the collection of our accounts receivable. For the years ended December 31, 2013, 2012 and 2011, we had no customers from which we derived revenues that exceeded 5% of our consolidated revenues.
 

18




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, Commitments and Guarantees” in Note 14 of the accompanying consolidated financial statements as well as “Legal Proceedings” in Part I, Item 3 hereof.
 
Impairment Analysis

In accordance with Accounting Standard Codification ("ASC") 350, Intangibles-Goodwill and Other, we utilize each of our operating segments as our goodwill reporting units as we have discrete financial information that is regularly reviewed by operating segment management and the businesses within each segment have similar economic characteristics. For the year-ended December 31, 2013, the Company’s two reporting units were Energy and Aerospace & Defense with respective goodwill balances of $52.9 million and $22.9 million.

Goodwill is measured as the excess of the cost of acquisition over the sum of the amounts assigned to identifiable tangible and intangible assets acquired less liabilities assumed. Goodwill and indefinite-lived intangible assets are recorded at cost; intangible assets with definitive lives are amortized over their useful lives. For goodwill and intangible assets with indefinite lives, we perform an impairment assessment at the reporting unit level on an annual basis as of the end of our October month end or more frequently if circumstances warrant. Our annual impairment assessment is a two-step process. The first step requires a comparison of the implied fair value of each of our reporting units to the respective carrying value. If the carrying value of a reporting unit is higher than its fair value, there is an indication that impairment may exist and the second step of the evaluation must be performed. In the second step, the potential impairment is calculated by comparing the implied fair value of the reporting unit’s goodwill with the carrying value of the goodwill. If the carrying value of the reporting unit’s goodwill is greater than the implied fair value of its goodwill, an impairment loss will be recognized for the excess.

Determining the fair value of a reporting unit is subjective and requires the use of significant estimates and assumptions. With the assistance of an independent third-party appraisal firm, we estimate the fair value of our reporting units using an income approach based on the present value of future cash flows. We believe this approach yields the most appropriate evidence of fair value. We also utilize the comparable company multiples method and market transaction fair value method to validate the fair value amount we obtain using the income approach. The key assumptions utilized in our discounted cash flow model include our estimates of future cash flows from operating activities offset by estimated capital expenditures of the reporting unit, the estimated terminal value for each reporting unit, a discount rate based on a weighted average cost of capital, overall economic conditions, and our assessment of our current market capitalization. Any unfavorable material changes to these key assumptions could potentially impact our fair value determinations. As discussed elsewhere in this Form 10-K regarding risks and other factors that may cause our results to vary materially, some of our end markets are cyclical and we face significant competition. As such, we may experience fluctuations in revenues and operating results resulting in the non-achievement of our estimated growth rates, operating performance and working capital estimates utilized in our discounted cash flow models.

In fiscal year 2013 when we performed our step one analysis, the fair value of each of our reporting units exceeded the respective carrying amount, and no goodwill impairments were recorded. The fair values utilized for our 2013 goodwill assessment exceeded the carrying amounts by approximately 283% and 95% for our Energy and Aerospace & Defense reporting units, respectively. The growth rate assumptions utilized were consistent with growth rates within the markets that

19




we serve. Actual 2013 results were substantially consistent overall with estimates and assumptions made for purposes of our goodwill impairment analysis performed in October. If our results significantly vary from our estimates, related projections, or business assumptions in the future due to changes in industry or market conditions, we may be required to record impairment charges. By way of example, a 10% reduction in our Aerospace & Defense reporting unit projected cash flows would not result in the fair value being lower than the carrying value.

The goodwill recorded on the consolidated balance sheet as of December 31, 2013 was $75.9 million compared with $77.4 million as of December 31, 2012 with the only change being due to foreign currency fluctuations. Net intangible assets as of December 31, 2013 were $35.7 million compared to $45.2 million as of December 31, 2012. The total amount of non-amortizing assets, net of impairment was $17.0 million and $23.6 million, as of December 31, 2013 and 2012, respectively.

Indefinite-lived intangible assets, such as trade names, are generally recorded and valued in connection with a business acquisition. These assets are reviewed at least annually for impairment, or more frequently if facts and circumstances warrant. We also utilized a fair value calculation to evaluate these assets.

See Notes 2 and 7 of the accompanying consolidated financial statements for further information on our goodwill and annual impairment analysis.

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 development ("R&D") tax credits, domestic manufacturing deduction, state taxes and the tax impact of non-U.S. operations. Our effective tax rate was 26.4%, 26.2%, and 27.0% for the fiscal years ended December 31, 2013, 2012 and 2011, respectively.

For 2014, we expect an effective income tax rate of approximately 28.0%, which excludes any potential R&D benefit. On January 2, 2013, the President of the United States signed legislation that retroactively extended the R&D tax credit for two years, from January 1, 2012 through December 31, 2013. Furthermore, the Company utilized the 2013 R&D credit in 2013. Accordingly, the Company recorded the entire benefit of the R&D tax credit attributable to 2012 during 2013. 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 or if the R&D credit is not extended in future years. 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.
 
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.

In 2013, net deferred income tax assets decreased compared to 2012, primarily due to utilization of deferred tax assets of our Italian subsidiary. We maintained a total valuation allowance of $13.9 million and $13.5 million at December 31, 2013 and December 31, 2012, respectively, for deferred income tax assets due to uncertainties related to our ability to utilize these assets. Such deferred income tax assets consist of certain foreign tax credits, foreign deferred tax assets, 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 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 net deferred tax assets.


20




Except for the Company’s Dutch subsidiary, undistributed earnings of foreign subsidiaries are generally considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes has been recorded. No provision is required for the undistributed earnings of the Dutch subsidiary.
 
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. As of December 31, 2013 and December 31, 2012, accrued interest and penalties were $0.7 million and $0.9 million, respectively.
 
As of December 31, 2013, the liability for uncertain income tax positions was $1.6 million excluding interest of $0.7 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.

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 former 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.
 
As required in the recognition and disclosure provisions of ASC Topic 715, Compensation - Retirement Benefits, the Company recognizes the over-funded or under-funded status of defined benefit post-retirement plans in its balance sheet, 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 post-retirement benefit obligation for other post-retirement plans). The change in the funded status of the plan is recognized in the year in which the change occurs through other comprehensive income. These provisions also require plan assets and obligations to be measured as of the Company’s balance sheet date. See Note 13 of the accompanying consolidated financial statements for further information on our benefit plans.
 
Assets of our qualified pension plan are comprised of equity investments of companies in the United States with large and small market capitalizations, fixed income securities issued by the United States government, or its agencies, and certain international equities. There are no shares of our common stock in the plan assets.
 
The expected long-term rate of return on plan assets used to estimate pension expenses was 7.00% for 2013 and 2012. For the qualified plan, the discount rate used to estimate the net pension expense was 4.70% for 2013 and 3.85% for 2012. For the nonqualified plan, the discount rate used to estimate the net pension expenses for 2013 was 4.30% and for 2012 was 3.35%.
 
Unrecognized actuarial gains and losses in excess of the 10% corridor (defined as the threshold above which gains or losses need to be amortized) are being recognized over approximately a twenty-six year period for the qualified plan, and a twenty year period for the nonqualified plan, which represents the weighted average expected remaining life of the employee group. Unrecognized actuarial gains and losses arise from several factors including experience and assumption changes in the obligations and from the difference between expected returns and actual returns on plan assets.
 
The fair value of our defined benefit plans’ assets at December 31, 2013 was less than the estimated projected benefit obligations. The fair value of plan assets increased $4.7 million to $38.3 million as of December 31, 2013. The Company’s net pension liability decreased $9.6 million to $9.5 million as of December 31, 2013. See Note 13 of the accompanying consolidated financial statements for further information on our benefit plans.
 
During 2013, we made $1.6 million in cash contributions to our qualified defined benefit pension plan and $0.4 million of cash payments for our non-qualified supplemental plan. In 2014, we expect to make voluntary cash contributions of approximately $1.6 million to our qualified plan and $0.4 million in payments for our non-qualified plan, although global capital market and interest rate fluctuations and other future funding requirements may impact cash contribution amounts.
 
We will continue to evaluate our expected long-term rates of return on plan assets and discount rates at least annually and make adjustments as necessary; such adjustments could change the pension and post-retirement obligations and expenses in the future. If the actual operation of the plans differ from the assumptions, additional contributions by us may be required. If we are

21




required to make significant contributions to fund the defined benefit plans, reported results could be adversely affected and our cash flow available for other uses may be reduced. 

Results of Operations for the Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012

The following tables set forth the results of operations, percentage of net revenue and the period-to-period percentage change in certain financial data for the years ended December 31, 2013 and December 31, 2012:
 
 
Year Ended
 
 
 
December 31, 2013
 
December 31, 2012
 
% Change
 
(Dollars in thousands)
 
 
Net revenues
$
857,808

 
100.0
%
 
$
845,552

 
100.0
%
 
1.4
 %
Cost of revenues
590,207

 
68.8
%
 
604,009

 
71.4
%
 
(2.3
)%
Gross profit
267,601

 
31.2
%
 
241,543

 
28.6
%
 
10.8
 %
Selling, general and administrative expenses
182,954

 
21.3
%
 
179,382

 
21.2
%
 
2.0
 %
Impairment charges
6,872

 
0.8
%
 
10,348

 
1.2
%
 
(33.6
)%
Special charges, net
8,602

 
1.0
%
 
5,282

 
0.6
%
 
62.9
 %
Operating income
69,173

 
8.1
%
 
46,531

 
5.5
%
 
48.7
 %
Other expense:
 
 
 
 
 
 
 
 
 
Interest expense, net
3,161

 
0.4
%
 
4,259

 
0.5
%
 
(25.8
)%
Other expense, net
1,975

 
0.2
%
 
513

 
0.1
%
 
285.0
 %
Total other expense
5,136

 
0.6
%
 
4,772

 
0.6
%
 
7.6
 %
Income before income taxes
64,037

 
7.5
%
 
41,759

 
4.9
%
 
53.3
 %
Provision for income taxes
16,916

 
2.0
%
 
10,960

 
1.3
%
 
54.3
 %
Net income
$
47,121

 
5.5
%
 
$
30,799

 
3.6
%
 
53.0
 %

Net Revenues
 
Net revenues for the year ended December 31, 2013 increased by $12.3 million, or 1%, to $857.8 million from $845.6 million for the year ended December 31, 2012. The change in net revenues for the year ended December 31, 2013 was attributable to the following:
 
Year Ended
 
 
 
 
 
 
Segment
December 31,
2013
 
December 31,
2012
 
Total
Change
 
Operations
 
Foreign
Exchange
 
(Dollars In thousands)
Energy
$
660,970

 
$
659,382

 
$
1,588

 
$
(2,153
)
 
$
3,741

Aerospace & Defense
196,838

 
186,170

 
10,668

 
10,066

 
602

Total
$
857,808

 
$
845,552

 
$
12,256

 
$
7,913

 
$
4,343

 
Our Energy segment accounted for 77% of net revenues for the year ended December 31, 2013 compared to 78% for the year ended December 31, 2012 with the Aerospace & Defense segment accounting for the remainder.

Energy segment revenues increased slightly, for the year ended December 31, 2013 compared to the same period in 2012. The increase was primarily driven by a favorable foreign currency impact of $3.7 million partially offset by organic declines. Organic revenue decreases of 4% in the North American short-cycle business driven in large part by lower rig counts year over year, were partially offset by increases in large international projects (4%). Increased shipments from our power group and instrumentation and sampling businesses were offset by lower shipments from our Brazilian business. Energy segment orders decreased $22.5 million (3%) to $691.7 million for the twelve months ended December 31, 2013 compared to $714.2 million for the same period in 2012, primarily due to lower North American short-cycle orders (4%) driven in large part by lower rig counts in North America and higher inventory levels at our distribution customers partially offset by higher orders from our instrumentation and sampling business (1%).


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Aerospace & Defense segment revenues increased by $10.7 million (6%) for the year ended December 31, 2013 compared to the same period in 2012 primarily as a result of organic increases of $10.1 million plus favorable foreign currency fluctuations of $0.6 million. The organic increases were primarily due to higher sales across most of our businesses as we began delivering products for our new programs. Aerospace & Defense orders remained consistent at $189.6 million for the twelve months ended December 31, 2013 and the same period in 2012.

Operating Income (Loss)
 
The change in operating income (loss) for the year ended December 31, 2013 compared to the year ended December 31, 2012 was as follows:
 
Year Ended
 
Total
Change
 
Operations
 
Foreign
Exchange
 
Inventory Restructuring, Impairment, & Special Charges (1)
Segment
December 31, 2013
 
December 31, 2012
 
 
(Dollars In thousands)
 
 
Energy
$
90,786

 
$
67,761

 
$
23,025

 
$
19,264

 
$
1,148

 
$
2,613

Aerospace & Defense
6,177

 
4,774

 
1,403

 
2,063

 
(127
)
 
(533
)
Corporate
(27,790
)
 
(26,004
)
 
(1,786
)
 
(3,376
)
 

 
1,590

Total
$
69,173

 
$
46,531

 
$
22,642

 
$
17,951

 
$
1,021

 
$
3,670


Inventory restructuring, impairment, and special charges for the twelve months ended December 31, 2013 and December 31, 2012 were as follows:
 
Year Ended
 
Inventory Restructuring*
 
Impairment Charges
 
Special Charges
Segment
December 31, 2013
 
 
(in thousands)
Energy
$
2,518

 
$
296

 
$

 
$
2,222

Aerospace & Defense
12,459

 
351

 
6,872

 
5,236

Corporate
1,144

 

 

 
1,144

Total
$
16,121

 
$
647

 
$
6,872

 
$
8,602

 
 
 
 
 
 
 
 
 
Year Ended
 
Inventory Restructuring*
 
Impairment Charges
 
Special Charges
Segment
December 31, 2012
 
 
(in thousands)
Energy
$
5,131

 
$
924

 
$
2,156

 
$
2,051

Aerospace & Defense
11,926

 
3,237

 
8,193

 
496

Corporate
2,734

 

 

 
2,734

Total
$
19,791

 
$
4,161

 
$
10,349

 
$
5,281

* Inventory Restructuring charges are included in Cost of Revenues.

Impairment Charges

During fourth quarter of 2013, in connection with a change to our organizational structure to simplify the way the Company is managed as well as other evolving business factors, we determined that certain Aerospace & Defense trade name intangible assets had no future usage and should be impaired. This resulted in an indefinite-lived intangible asset impairment charge during the year ended December 31, 2013 of $6.9 million.

During the year ended December 31, 2012 we recorded intangible asset impairment charges of $2.2 million and $8.2 million for the Energy and Aerospace & Defense segments, respectively. These impairment charges were primarily a result of restructuring activities at operations in Brazil and California.

See Note 7 to the consolidated financial statements for further information on impairment of intangible assets.


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Special Charges / (Recoveries)

During the twelve months ended December 31, 2013 we incurred $8.6 million of special charges, net of recoveries. These charges of $5.4 million and $5.2 million for the Energy and Aerospace & Defense segments, respectively, were associated with restructuring actions that were announced in both 2013 and 2012. In addition we incurred $1.1 million of Corporate special compensation-related charges associated with the retirement of our former CFO. These special charges were offset by special recoveries associated with an arbitration recovery of $3.2 million in the Energy segment. For additional information on the special charges (recoveries) net, see note 4 of the accompanying consolidated financial statements.

During the twelve months ended December 31, 2012 we incurred $5.3 million in special charges; $2.5 million associated with our 2012 Announced Restructuring and $2.7 million associated with the separation of our former CEO.

Operating income increased 49%, or $22.6 million, to $69.2 million for the year ended December 31, 2013 compared to $46.5 million for the same period in 2012.
 
Operating income for our Energy segment increased $23.0 million, or 34%, to $90.8 million for the year ended December 31, 2013 compared to the same period in 2012. The increase in operating income was primarily driven by higher organic increases of $19.3 million, favorable foreign currency impacts of $1.1 million and lower inventory restructuring, impairment, and special charges of $2.6 million in 2013 compared to 2012. Operating margins improved 340 basis points to 13.7% on essentially flat revenue growth. Organic operating margins increased 280 basis points primarily driven by higher shipments and favorable pricing within our large international project business (approximately 290 basis points) and power businesses (approximately 90 basis points). These organic increases were partially offset by decreased revenue in the North American short cycle market (approximately 100 basis points) driven primarily by lower rig counts year over year.
 
Operating income for the Aerospace & Defense segment increased $1.4 million, or 29%, to $6.2 million for the year ended December 31, 2013 compared to the same period in 2012. Operating income improved primarily due to $2.1 million of operational improvements offset by higher inventory restructuring, impairment, and special charges of $0.5 million in 2013 compared to 2012. Organically operating income increased $1.0 million primarily due to increased shipments in our UK-based defense businesses, productivity from restructuring actions, partially offset by increased new program development and start- up costs and factory reorganization costs associated with landing gear production.

Corporate operating expenses increased $1.8 million, or 7%, to $27.8 million, for the year ended December 31, 2013 compared to the same period in 2012, primarily due to higher incentive and share based compensation and professional fees partially offset by lower special charges.

Interest Expense, Net
 
Interest expense, net, decreased $1.1 million to $3.2 million for the year ended 2013 compared to $4.3 million for the year ended December 31, 2012. This decrease in interest expense was primarily due to lower interest charges from lower international borrowings.

Other Expense, Net
 
Other expense, net, was $2.0 million for the year ended December 31, 2013 compared to $0.5 million in the same period of 2012 due largely as a result of unfavorable foreign exchange expenses associated with the remeasurement of foreign currency balances.
 
Provision for Income Taxes
 
The effective tax rate was 26.4% for the year ended December 31, 2013 compared to 26.2% for the same period of 2012. The primary driver of the lower 2012 tax rate was higher foreign source income which is taxed at a lower rate than U.S. income.

Net Income
 
Net income increased $16.3 million to $47.1 million for the year ended December 31, 2013, compared to $30.8 million for the same period in 2012.  

24




Results of Operations for the Year Ended December 31, 2012 Compared to the Year Ended December 31, 2011

The following tables set forth the results of operations, percentage of net revenue and the period-to-period percentage change in certain financial data for the years ended December 31, 2012 and December 31, 2011:
 
Year Ended
 
 
 
December 31, 2012
 
December 31, 2011
 
% Change
 
(Dollars in thousands)
 
 
Net revenues
$
845,552

 
100.0
%
 
$
822,349

 
100.0
%
 
2.8
 %
Cost of revenues
604,009

 
71.4
%
 
596,954

 
72.6
%
 
1.2
 %
Gross profit
241,543

 
28.6
%
 
225,395

 
27.4
%
 
7.2
 %
Selling, general and administrative expenses
179,382

 
21.2
%
 
168,421

 
20.5
%
 
6.5
 %
Leslie asbestos and bankruptcy charges, net

 
0.0
%
 
676

 
0.1
%
 
N/A

Impairment charges
10,348

 
1.2
%
 

 
0.0
%
 
N/A

Special charges
5,282

 
0.6
%
 

 
0.0
%
 
N/A

Operating income
46,531

 
5.5
%
 
56,298

 
6.8
%
 
(17.3
)%
Other expense:
 
 
 
 
 
 
 
 
 
Interest expense, net
4,259

 
0.5
%
 
3,930

 
0.5
%
 
8.4
 %
Other expense, net
513

 
0.1
%
 
2,172

 
0.3
%
 
(76.4
)%
Total other expense
4,772

 
0.6
%
 
6,102

 
0.7
%
 
(21.8
)%
Income before income taxes
41,759

 
4.9
%
 
50,196

 
6.1
%
 
(16.8
)%
Provision for income taxes
10,960

 
1.3
%
 
13,562

 
1.6
%
 
(19.2
)%
Net income
$
30,799

 
3.6
%
 
$
36,634

 
4.5
%
 
(15.9
)%

Net Revenue
 
Net revenues for the year ended December 31, 2012 increased by $23.2 million, or 3%, to $845.6 million from $822.3 million for the year ended December 31, 2011. The change in net revenues for the year ended December 31, 2012 was attributable to the following:
 
Year Ended
 
 
 
 
 
 
 
 
Segment
December 31,
2012
 
December 31,
2011
 
Total
Change
 
Acquisitions
 
Operations
 
Foreign
Exchange
 
(in thousands)
Energy
$
659,382

 
$
620,682

 
$
38,700

 
$
1,525

 
$
55,045

 
$
(17,870
)
Aerospace & Defense
186,170

 
201,666

 
(15,496
)
 

 
(11,661
)
 
(3,835
)
Total
$
845,552

 
$
822,348

 
$
23,204

 
$
1,525

 
$
43,384

 
$
(21,705
)
 
Our Energy segment accounted for 78% of net revenues for the year ended December 31, 2012 compared to 75% for the year ended December 31, 2011.
 
Energy segment revenues increased by $38.7 million, or 6%, for the year ended December 31, 2012 compared to the same period in 2011. The increase was primarily driven by $55 million (9%) of organic growth across most markets with large increases in the short-cycle North American market (6%), large international project shipments (2%), and Brazil (1%), partially offset by lower pipeline shipments (1%). In addition, this year over year increase was due to $1.5 million in additional revenue from the first quarter 2011 acquisition of Valvulas S.F. Industria e Comercio Ltda. (“SF Valves”) located in Brazil. Partially offsetting the increase was unfavorable foreign currency fluctuations of $17.9 million (3%). Orders for this segment increased $93.5 million to $714.2 million for the year ended December 31, 2012 compared to $620.6 million for the year ended December 31, 2011 primarily due to improvements in North American short-cycle orders and large international projects. Backlog for our Energy segment has increased $46.3 million to $266.0 million as of December 31, 2012 compared to $219.7 million as of December 31, 2011. The increases in backlog were primarily due to higher order levels within our large international project business.

25




 
Aerospace & Defense segment revenues decreased by $15.5 million (8%) for the year ended December 31, 2012 compared to the same period in 2011. The decrease was primarily due to a net organic decline of $11.7 million (6%), primarily due to lower shipments to Light Emitting Diode ("LED") equipment producers (11%), offset by growth across most other Aerospace & Defense businesses with the exception of landing gear programs. Orders for this segment decreased $38.4 million to $189.6 million for the year ended December 31, 2012 compared to $227.9 million for the year ended December 31, 2011 primarily due to a $26.0 million multi-year military landing gear order placed in the third quarter of 2011 and lower LED orders. Order backlog increased $0.9 million to $181.1 million as of December 31, 2012 compared to $177.8 million as of December 31, 2011 primarily due to higher European commercial bookings, partially offset by landing gear overhaul decline as we exited this part of the business as part of our restructuring activities.

Operating Income
 
The change in operating income for the year ended December 31, 2012 compared to the year ended December 31, 2011 was as follows:
 
Year Ended
 
Total
Change
 
Acquisitions
 
Operations
 
Foreign
Exchange
 
Inventory Restructuring, Impairment, & Special Charges (1)
 
Leslie Asbestos
Segment
December 31, 2012
 
December 31, 2011
 
 
(Dollars In thousands)
 
 
 
 
Energy
$
67,761

 
$
51,509

 
$
16,252

 
$
(398
)
 
$
20,794

 
$
380

 
$
(5,132
)
 
$
608

Aerospace & Defense
4,774

 
22,816

 
(18,042
)
 

 
(5,872
)
 
(245
)
 
(11,925
)
 

Corporate
(26,004
)
 
(18,027
)
 
(7,977
)
 

 
(5,319
)
 
10

 
(2,734
)
 
68

Total
$
46,531

 
$
56,298

 
$
(9,767
)
 
$
(398
)
 
$
9,603

 
$
145

 
$
(19,791
)
 
$
676


The inventory restructuring, impairment, and special charges for the twelve months ended December 31, 2012 were as follows; there were no inventory restructuring, impairment, or special charges recorded in 2011:
 
Year Ended
 
Inventory Restructuring*
 
Impairment Charges
 
Special Charges
Segment
December 31, 2012
 
 
(in thousands)
Energy
$
5,132

 
$
925

 
$
2,156

 
$
2,051

Aerospace & Defense
11,925

 
3,237

 
8,192

 
496

Corporate
2,734

 

 

 
2,734

Total
$
19,791

 
$
4,162

 
$
10,348

 
$
5,281

* Inventory Restructuring charges are included in Cost of Revenues.

Leslie Asbestos and Bankruptcy Related Charges, Net
 
Asbestos and bankruptcy related charges are primarily associated with our subsidiary Leslie Controls, Inc. (“Leslie”) in the Energy segment.  There were no ongoing costs associated with Leslie’s asbestos litigation for the year ended December 31, 2012. The $0.7 million bankruptcy related charges for the year ended December 31, 2011 was comprised of bankruptcy related professional fees.

On April 28, 2011, Leslie emerged from Chapter 11 bankruptcy protection. Under the terms of the bankruptcy plan, all current and future asbestos related claims against Leslie, as well as all current and future derivative claims against CIRCOR, are now permanently channeled to a trust for which Leslie bears no further financial liability.  See “Item 3. Legal Proceedings” in our Annual Report on Form 10-K for the Fiscal Year ended December 31, 2012 for additional information.

Impairment Charges
 
Intangible impairment charges of $2.2 million and $8.2 million were recorded during the year ended December 31, 2012 in our Energy and Aerospace segments, respectively. The impairment charges were primarily the result of restructuring activities at operations in Brazil and California. We did not record any impairment charges during the year ended December 31, 2011. For additional information on the impairment charges, see Note 7 of the accompanying consolidated financial statements.

26





Special Charges
 
Special charges associated with restructuring actions of $2.0 million and $0.5 million were recorded during the year ended December 31, 2012 in our Energy and Aerospace & Defense segments, respectively. We also recorded $2.7 million of CEO separation costs as special charges in Corporate expenses during the year ended December 31, 2012. We did not record any special charges during the year ended December 31, 2011. For additional information on the special charges, see Note 4 of the accompanying consolidated financial statements.

Operating income decreased 17%, or $9.8 million, to $46.5 million for the year ended December 31, 2012 compared to $56.3 million for the same period in 2011.
 
Operating income for our Energy segment increased $16.3 million (32%) to $67.8 million for the year ended December 31, 2012 compared to the same period in 2011. Operating margins increased 200 basis points to 10.3% on a revenue increase of 6%, compared to 2011. The increase in operating income was primarily driven by improved pricing and favorable penalty reserve adjustments with respect to large international projects, increased revenue primarily in the North American short-cycle market, and foreign exchange. These items were partially offset by organic increases in selling, general and administrative expenses and restructuring related charges at our Brazil operations of $5.1 million.
 
Operating income for the Aerospace & Defense segment decreased $18.0 million (79%) to $4.8 million for the year ended December 31, 2012 compared to the same period in 2011. Operating income declined due to impairment charges and other restructuring related costs of $11.9 million at our California operations as well as inefficiencies at our California operations and higher costs supporting new programs, including initial production-related variances, totaling $6.7 million. In addition, operating income was negatively impacted by lower LED equipment market revenue (11%) partially offset by higher shipment volume across the other Aerospace & Defense businesses.

Corporate operating expenses increased $8.0 million (44%) to $26.0 million, for the year ended December 31, 2012 compared to the same period in 2011, largely due to CEO separation costs of $2.7 million, a favorable settlement of a long-standing litigation matter recognized as income in the third quarter of 2011 as well as higher professional fees and variable compensation for the year ended December 31, 2012.

Interest Expense, Net
 
Net interest expense increased $0.3 million to $4.3 million for the year ended 2012 compared to $3.9 million for the year ended 2011. This increase in interest expense was primarily due to higher interest charges from higher international borrowings.

Other Expense, Net
 
Other expense, net, was $0.5 million for the year ended December 31, 2012 compared to $2.2 million in the same period of 2011. The difference of $1.7 million was largely the result of lower foreign exchange expenses associated with the remeasurement of foreign currency balances.
 
Provision for Income Taxes
 
The effective tax rate was 26.2% for the year ended December 31, 2012 compared to 27.0% for the same period of 2011. The primary driver of the higher 2011 tax rate was higher U.S. income which is taxed at a higher rate than foreign source income.

Net Income
 
Net income decreased $5.8 million to $30.8 million for the year ended December 31, 2012, compared to $36.6 million for the same period in 2011. The decrease was primarily due to the restructuring activities that resulted in restructuring inventory charges of $4.2 million, impairment charges of $10.3 million, and special charges of $5.3 million. These 2012 inventory restructuring, impairment, and special charges were partially offset primarily by higher Energy segment operating income.

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

27




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 twelve month periods indicated (in thousands):
 
 
2013
 
2012
 
2011
Cash flow provided by (used in):
 
 
 
 
 
Operating activities
$
72,206

 
$
60,523

 
$
(48,833
)
Investing activities
(13,264
)
 
(17,629
)
 
(38,005
)
Financing activities
(19,235
)
 
(37,408
)
 
97,052

Effect of exchange rates on cash balances
735

 
1,397

 
(1,111
)
Increase in cash and cash equivalents
$
40,442

 
$
6,883

 
$
9,103

 
During the year ended December 31, 2013, we generated $72.2 million in cash flow from operating activities compared to $60.5 million during the twelve months ended December 31, 2012. The $11.7 million increase in cash generated from operating activities was primarily due to a $16.3 million increase in net income and $6.6 million decrease in deferred taxes primarily due to utilization of deferred tax assets of our Italian subsidiary. These increases were partially offset by lower 2013 intangible impairment charges of $3.5 million, a 2013 gain on return of acquisition price of $3.4 million, and an increase of $2.9 million used for operating assets and liabilities. During the twelve months ended December 31, 2013 we used approximately $7.2 million in cash from operating assets and liabilities compared to using $4.3 million during the same period in 2012.

During the year ended December 31, 2013, we used $13.3 million for investing activities as compared to $17.6 million during the twelve months ended December 31, 2012. The reduction of cash used for investing activities was directly related to the $3.4 million return of acquisition price. Financing activities used $19.2 million during the year ended December 31, 2013, which included a net $19.7 million of repayment of borrowings and $2.7 million in dividend payments to shareholders, partially offset by stock option exercise proceeds and tax effect of share-based compensation of $3.1 million.
 
As of December 31, 2013, total debt was $49.6 million compared to $70.5 million at December 31, 2012 due to repayments on existing borrowings including our credit facility. Total debt as a percentage of total shareholders’ equity was 10.4% as of December 31, 2013 compared to 16.9% as of December 31, 2012.
 
On May 2, 2011, we entered into a five year unsecured credit agreement (“2011 Credit Agreement”) that provides for a $300.0 million revolving line of credit. The 2011 Credit Agreement includes a $150.0 million accordion feature for a maximum facility size of $450.0 million. The 2011 Credit Agreement also allows for additional indebtedness not to exceed $80 million. We anticipate borrowing under the 2011 Credit Agreement to fund potential acquisitions, to support our organic growth initiatives and working capital needs, and for general corporate purposes. As of December 31, 2013, we had borrowings of $41.8 million outstanding under our credit facility and $42.4 million outstanding under letters of credit.
 
Certain of our loan agreements contain covenants that require, among other items, maintenance of certain financial ratios and also limit our ability to: enter into secured and unsecured borrowing arrangements; issue dividends to shareholders; acquire and dispose of businesses; invest in capital equipment; transfer assets among domestic and international entities; participate in certain higher yielding long-term investment vehicles; and issue additional shares of our stock. The two primary financial covenants are leverage ratio and interest coverage ratio. We were in compliance with all financial covenants related to our existing debt obligations at December 31, 2013 and we believe it is reasonably likely that we will continue to meet such covenants in the near future.
 
The ratio of current assets to current liabilities was 2.84:1 at December 31, 2013 compared to 2.43:1 at December 31, 2012. The increase in the current ratio was primarily due to increases in cash due to increased revenues year over year and reductions in accounts payable and other accrued expenses compared to December 31, 2012. As of December 31, 2013, cash and cash equivalents totaled $102.2 million, substantially all of which was held in foreign bank accounts. This compares to $61.7 million of cash and cash equivalents as of December 31, 2012 substantially all of which was held in foreign bank accounts. The cash and cash equivalents located at our foreign subsidiaries may not be repatriated to the United States or other jurisdictions without significant tax implications. We believe that our U.S. based subsidiaries, in the aggregate, will generate positive operating cash flows and in addition we may utilize our 2011 Credit Facility for U.S. based subsidiary cash needs. As a result, we believe that we will not need to repatriate cash from our foreign subsidiaries with earnings that are indefinitely reinvested.


28




In 2014, we expect to generate positive cash flow from operating activities sufficient to support our capital expenditures and pay dividends of approximately $2.7 million based on our current dividend practice of paying $0.15 per share annually. Based on our expected cash flows from operations and contractually available borrowings under our credit facility, we expect to have sufficient liquidity to fund working capital needs and future growth. We continue to search for strategic acquisitions; a larger acquisition may require additional borrowings and/or the issuance of our common stock.
 
The following table summarizes our significant contractual obligations and commercial commitments at December 31, 2013 that affect our liquidity:
 
Payments due by Period
 
Total
 
Less Than
1 Year
 
1 – 3
Years
 
3 – 5
Years
 
More than
5 years
Contractual Cash Obligations:
(in thousands)
Current portion of long-term debt
$
7,203

 
$
7,203

 
$

 
$

 
$

Total short-term borrowings
7,203

 
7,203

 

 

 

Long-term debt, less current portion
42,435

 

44

42,329

 
106

 

Interest payments on debt
4,065

 
1,769

 
2,293

 
3

 

Operating leases
26,330

 
6,595

 
10,522

 
5,629

 
3,584

Total contractual cash obligations
$
80,033

 
$
15,567

 
$
55,144

 
$
5,738

 
$
3,584

Other Commercial Commitments:
 
 
 
 
 
 
 
 
 
U.S. standby letters of credit
$
2,722

 
$
2,146

 
$
576

 
$
0

 
$
0

International standby letters of credit
39,690

 
29,295

 
6,953

 
2,110

 
1,332

Commercial contract commitments
93,622

 
75,949

 
17,654

 
19

 

Total commercial commitments
$
136,034

 
$
107,390

 
$
25,183

 
$
2,129

 
$
1,332

 
The interest on certain of our other debt balances, with scheduled repayment dates between 2013 and 2017 and interest rates ranging between 1.42% and 15.92%, have been included in the "Interest payments on debt" line within the Contractual Cash Obligations schedule. The most significant of our debt balances is the $41.8 million in outstanding borrowings under the 2011 Credit Agreement. Interest associated with this outstanding balance ranges from 1.42% to 3.75% as well as other fees. Capital lease obligations of $0.2 million and $0.2 million are included in the “Current portion of long-term debt” and “Long-term debt, less current portion” line items, respectively.
 
The most significant of our commercial contract commitments relate to approximately $92.1 million of commitments related to open purchase orders, $16.8 million of which extend to 2015 and beyond. The remaining $1.5 million in commitments primarily relate to loan commitment fees and employment agreements.

In 2013 and 2012, we contributed $1.6 million to our qualified defined benefit pension plan in addition to $0.4 million in payments to our non-qualified supplemental plan each year. In 2014, we expect to make plan contributions totaling $2.0 million, consisting of $1.6 million in contributions to our qualified plan and payments of $0.4 million for our non-qualified plan. The estimates for plan funding for future periods may change as a result of the uncertainties concerning the return on plan assets, the number of plan participants, and other changes in actuarial assumptions. We anticipate fulfilling these commitments through our generation of cash flow from operations.
 
Off-Balance Sheet Arrangements
 
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.
 
New Accounting Standards
 
None.


29




Item 7A.    Quantitative and Qualitative Disclosures About Market Risk.
 
Market Risk
 
The Oil & Gas markets historically have been subject to cyclicality depending upon supply and demand for crude oil, its derivatives and natural gas. When oil or gas prices decrease, expenditures on maintenance and repair decline rapidly and outlays for exploration and in-field drilling projects decrease and, accordingly, demand for valve products is reduced. However, when oil and gas prices rise, maintenance and repair activity and spending for facilities projects normally increase and we benefit from increased demand for valve products. However, oil or gas price increases may be considered temporary in nature or not driven by customer demand and, therefore, may result in longer lead times for increases in petrochemical sales orders. As a result, the timing and magnitude of changes in market demand for oil and gas valve products are difficult to predict. Similarly, although not to the same extent as the Oil & Gas markets, the general industrial, chemical processing, aerospace, military and maritime markets have historically experienced cyclical fluctuations in demand. These fluctuations may have a material adverse effect on our business, financial condition or results of operations.
 
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 December 31, 2013, we had fourteen forward contracts with amounts as follows (in thousands):
Currency
Number
 
Contract Amount
U.S. Dollar/Euro
9

 
3,104

 
U.S. Dollars
Brazilian Real/Euro
5

 

 
Brazilian Reals

This compares to twelve forward contracts as of December 31, 2012. The fair value asset of the derivative forward contracts as of December 31, 2013 and December 31, 2012 was approximately $0.1 million and $0.5 million, respectively and is included in prepaid expenses and other current assets on our balance sheet. The unrealized foreign exchange gains or losses for the year ended December 31, 2013, 2012 and 2011 are less than $0.5 million for each year and are included in other income or 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 ASC Topic 820.1, Fair Value Measurement. The credit valuation adjustments, such as estimates of current credit spreads to evaluate the likelihood of default by ourselves 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.
 
Item 8.    Financial Statements and Supplementary Data.

Our consolidated financial statements and the accompanying notes related thereto included in this annual report on Form 10-K are hereby incorporated by reference herein.

Item 9.    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
 
None.
 
Item 9A.    Controls and Procedures.
 
Evaluation of Disclosure Controls and Procedures
 
Our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively) have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and

30




15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this annual report on Form 10-K. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to give reasonable assurance that information we disclose in reports that we file or submit under the Securities and Exchange Act of 1934 is accumulated and communicated to management, including our principal executive and financial officers, to allow timely decisions regarding disclosure and that such information is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.
 
Changes in Internal Control Over Financial Reporting
 
There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2013 that could materially affect, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Management’s Report on Internal Control Over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 1992. Based on our evaluation under the framework in Internal Control – Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2013.
 
Our internal control over financial reporting as of December 31, 2013 has been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in their report which is included herein.
 
Item 9B.    Other Information.
 
None.
Part III
 
Item 10.    Directors, Executive Officers and Corporate Governance.
 
The information required under this item is incorporated by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2013.
 
Item 11.    Executive Compensation.
 
The information required under this item is incorporated by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2013.
 
Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
 
Except for the information required by Section 201(d) of Regulation S-K which is set forth below, the information required under this item is incorporated by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2013.
 

31




EQUITY COMPENSATION PLAN INFORMATION
 
Plan category
Number of securities
to be issued upon
exercise of
outstanding
options,
warrants and rights
 
 
Weighted-average
exercise price of
outstanding options,
warrants and rights
 
Number of securities
remaining available
for future issuance
under equity
compensation
plans (excluding
securities reflected
in column (a))
 
(a)
 
 
(b)
 
(c)
Equity Compensation plans approved by security holders
275,153

(1)
 
$
35.51

 
456,857

Inducement Award for New President and CEO
200,000

(2)
 
41.17

 
N/A

Inducement Awards for New Executive VP and CFO
118,908

(3)
 
79.33

 
N/A

Total
594,061

 
 
$
46.19

 
456,857

 
(1)
Reflects 55,081 stock options, and 220,072 restricted stock units under the Company’s Amended and Restated 1999 Stock Option and Incentive Plan.
(2)
Reflects stock options issued as an inducement equity award our CEO on April 9, 2013. This award was granted pursuant to the inducement award exemption under Section 303A.08 of the NYSE Listed Company Manual. Details of this grant, including vesting terms, are set forth in Footnote 11, Share-Based Compensation.
(3)
Reflects 100,000 stock options and 18,908 restricted stock units issued to our CFO on December 2, 2013. These awards were granted pursuant to the inducement award exemption under Section 303A.08 of the NYSE Listed Company Manual. Details of these grants are set forth in Footnote 11, Share-Based Compensation.

Item 13.    Certain Relationships and Related Transactions, and Director Independence.
 
The information required under this item is incorporated by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2013.

Item 14.    Principal Accounting Fees and Services.
 
The information required under this item is incorporated by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2013.
 
Part IV
 
Item 15.    Exhibits, Financial Statement Schedules.
 
(a)(1) Financial Statements
 
The financial statements filed as part of the report are listed in Part II, Item 8 of this report on the Index to Consolidated Financial Statements.
 
(a)(2) Financial Statement Schedules
 
 
All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are not material, and therefore have been omitted.
 
(a)(3) Exhibits
 
Exhibit
 
 
No.
  
Description and Location
2
  
Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession:

32




2.1
  
Distribution Agreement by and between Watts Industries, Inc. and CIRCOR International, Inc., dated as of October 1, 1999, is incorporated herein by reference to Exhibit 2.1 to Amendment No. 2 to CIRCOR International, Inc.’s Form 10-12B, File No. 000-26961 (“Form 10”), filed with the Securities and Exchange Commission on October 6, 1999
3
  
Articles of Incorporation and By-Laws:
3.1
  
Amended and Restated Certificate of Incorporation of CIRCOR International, Inc., is incorporated herein by reference to Exhibit 3.1 to CIRCOR International, Inc.’s Form 10-Q, File No. 001-14962, filed with the Securities and Exchange Commission on October 29, 2009
3.2
  
Amended and Restated By-Laws, as amended, of CIRCOR International, Inc., is incorporated herein by reference to Exhibit 3.1 to CIRCOR International, Inc.’s Form 10-Q, File No. 001-14962, filed with the Securities and Exchange Commission on October 31, 2013
10
  
Material Contracts:
10.1§
  
CIRCOR International, Inc. Amended and Restated 1999 Stock Option and Incentive Plan, is incorporated herein by reference to Exhibit 4.4 to CIRCOR International, Inc.’s Form S-8, File No. 333-125237, filed with the Securities and Exchange Commission on May 25, 2005
10.2§
  
First Amendment to CIRCOR International, Inc. Amended and Restated 1999 Stock Option and Incentive Plan, dated as of December 1, 2005, is incorporated herein by reference to Exhibit 10.1 to CIRCOR International, Inc.'s Form 8-K, File No. 001-14962, filed with the Securities and Exchange Commission on December 7, 2005
10.3§
  
Form of Non-Qualified Stock Option Agreement for Employees under the 1999 Stock Option and Incentive Plan (Five Year Graduated Vesting Schedule), is incorporated herein by reference to Exhibit 10.3 to Amendment No. 1 to the Form 10
10.4§
  
Form of Non-Qualified Stock Option Agreement for Independent Directors under the 1999 Stock Option and Incentive Plan, is incorporated herein by reference to Exhibit 10.5 to Amendment No. 1 to the Form 10
10.5§
  
Form of Non-Qualified Stock Option Agreement for Independent Directors under the 1999 Stock Option and Incentive Plan, is incorporated herein by reference to Exhibit 10.1 to CIRCOR International, Inc.'s Form 8-K, File No. 001-14962, filed with the Securities and Exchange Commission on February 22, 2005
10.6§
 
Form of Non-Qualified Stock Option Agreement for Employees under the 1999 Stock Option and Incentive Plan, is incorporated herein by reference to Exhibit 10.2 to CIRCOR International, Inc.'s Form 8-K, File No. 001-14962, filed with the Securities and Exchange Commission on February 22, 2005
10.7§
 
Form of Non-Qualified Stock Option Agreement for Employees under the 1999 Stock Option and Incentive Plan (Three Year Cliff Vesting), is incorporated herein by reference to Exhibit 10.1 to CIRCOR International, Inc.'s Form 10-Q, File No. 001-14962, filed with the Securities and Exchange Commission on May 5, 2010
10.8§
 
Form of Restricted Stock Unit Agreement for Employees and Directors under the 1999 Stock Option and Incentive Plan (Three Year Annual Vesting), is incorporated herein by reference to Exhibit 10.2 to CIRCOR International, Inc.'s Form 10-Q, File No. 001-14962, filed with the Securities and Exchange Commission on May 5, 2010
10.9§
 
Form of Restricted Stock Unit Agreement for Employees and Directors under the 1999 Stock Option and Incentive Plan, is incorporated herein by reference to Exhibit 10.3 to CIRCOR International, Inc.'s Form 8-K, File No. 001-14962, filed with the Securities and Exchange Commission on February 22, 2005.
10.10§
 
CIRCOR International, Inc. Management Stock Purchase Plan, is incorporated herein by reference to Exhibit 10.6 to Amendment No. 1 to the Form 10
10.11§
 
Form of CIRCOR International, Inc. Supplemental Employee Retirement Plan, is incorporated herein by reference to Exhibit 10.7 to Amendment No. 1 to the Form 10
10.12§
 
Credit Agreement among CIRCOR International, Inc., as borrower, certain subsidiaries of CIRCOR International, Inc. as guarantors, the lenders from time to time parties thereto, Suntrust Bank as administrative agent, swing line lender and letter of credit issuer, Suntrust Robinson Humphrey, Inc. as joint-lead arranger and joint-bookrunner, Keybank National Association as joint-lead arranger, joint-book runner and syndication agent, and Sovereign Bank as documentation agent, dated May 2, 2011, is incorporated herein by reference to Exhibit 10.1 to CIRCOR International, Inc.'s Form 10-Q, File No. 001-14962, filed with the Securities and Exchange Commission on May 5, 2011
10.13§
  
Form of Indemnification Agreement by and between CIRCOR International, Inc. and its Officers and Directors, dated November 6, 2002, is incorporated herein by reference to Exhibit 10.12 to CIRCOR International, Inc.’s Form 10-K, File No. 001-14962, filed with the Securities and Exchange Commission on March 12, 2003
10.14§
  
Executive Change of Control Agreement between CIRCOR, Inc. and John F. Kober III, dated September 16, 2005, is incorporated herein by reference to Exhibit 10.3 to CIRCOR International, Inc.’s Form 8-K, File No. 001-14962, filed with the Securities and Exchange Commission on September 20, 2005
10.15
 
Amendment to Executive Change of Control Agreement between CIRCOR, Inc. and John F. Kober III, dated December 23, 2008, is incorporated herein by reference to Exhibit 10.44 to CIRCOR International, Inc.'s Form 10-K, File No. 001-14962, filed with the Securities and Exchange Commission on February 26, 2009

33




10.16§
  
Second Amendment to Executive Change of Control Agreement between CIRCOR, Inc. and John F. Kober III, dated November 4, 2010, is incorporated by reference to Exhibit 10.5 to CIRCOR International, Inc.'s Form 8-K, File No. 001-14962, filed with the Securities and Exchange Commission on November 5, 2010
10.17§
  
Executive Change of Control Agreement between CIRCOR, Inc. and Alan J. Glass, dated August 8, 2000, is incorporated herein by reference to Exhibit 10.26 to CIRCOR International, Inc.’s Form 10-K405, File No. 001-14962, filed with the Securities and Exchange Commission on March 9, 2001
10.18§
 
First Amendment to Executive Change of Control Agreement between CIRCOR, Inc. and Alan J. Glass, dated December 7, 2001, is incorporated herein by reference to Exhibit 10.30 to CIRCOR International, Inc.’s Form 10-K405, File No. 001-14962, filed with the Securities and Exchange Commission on March 15, 2002
10.19§
 
Executive Change of Control Agreement between Hoke, Inc. and Wayne F. Robbins, dated March 21, 2006, is incorporated herein by reference to Exhibit 10.2 to CIRCOR International, Inc.’s Form 8-K, File No. 001-14962, filed with the Securities and Exchange Commission on March 24, 2006
10.20§
 
Amendment to Executive Change of Control Agreement between CIRCOR Instrumentation Technologies, Inc. and Wayne F. Robbins, dated December 23, 2008, is incorporated herein by reference to Exhibit 10.38 to CIRCOR International, Inc.’s Form 10-K, File No. 001-14962, filed with the Securities and Exchange Commission on February 26, 2009

10.21§
 
Second Amendment to Executive Change of Control Agreement between CIRCOR Instrumentation Technologies, Inc. and Wayne F. Robbins, dated November 4, 2010, is incorporated by reference to Exhibit 10.7 to CIRCOR International, Inc.’s Form 8-K, File No. 001-14962, filed with the Securities and Exchange Commission on November 5, 2010

10.22§
  
Second Amendment to Executive Change of Control Agreement between CIRCOR, Inc. and Alan J. Glass, dated December 23, 2008, is incorporated herein by reference to Exhibit 10.41 to CIRCOR International, Inc.'s Form 10-K, File No. 001-14962, filed with the Securities and Exchange Commission on February 26, 2009 

10.23§
 
Executive Change of Control Agreement between CIRCOR, Inc. and Arjun Sharma, dated September 1, 2009, is incorporated herein by reference to Exhibit 10.2 to CIRCOR International, Inc.’s Form 10-Q, File No. 001-14962, filed with the Securities and Exchange Commission on October 29, 2009
10.24§
 
Amendment to Executive Change of Control Agreement between CIRCOR, Inc. and Arjun Sharma, dated November 4, 2010, is incorporated by reference to Exhibit 10.8 to CIRCOR International, Inc.’s Form 8-K, File No. 001-14962, filed with the Securities and Exchange Commission on November 5, 2010
10.25§
  
Executive Change of Control Agreement between CIRCOR, Inc. and Michael Ross Dill, dated August 2, 2011, is incorporated by reference to Exhibit 10.1 to CIRCOR International, Inc.’s Form 10-Q, File No. 001-14962, filed with the Securities and Exchange Commission on November 3, 2011
10.26§
  
Executive Change of Control Agreement between CIRCOR, Inc. and Lisa Ryan, dated November 29, 2012, is incorporated by reference to Exhibit 10.39 to CIRCOR International, Inc.'s Form 10-K, File No. 001-14962, filed with the Securities and Exchange Commission on February 28, 2013
10.27§
  
Restricted Stock Unit Agreement, dated as of April 9, 2013, between CIRCOR International, Inc. and Scott A Buckhout, is incorporated herein by reference to Exhibit 10.1 to CIRCOR International, Inc.'s Form 8-K, File No. 001-14962, filed with the Securities and Exchange Commission on April 15, 2013
10.28§
  
Performance-Based Restricted Stock Unit Agreement, dated as of April 9, 2013, between CIRCOR International, Inc. and Scott A Buckhout, is incorporated herein by reference to Exhibit 10.2 to CIRCOR International, Inc.'s Form 8-K, File No. 001-14962, filed with the Securities and Exchange Commission on April 15, 2013
10.29§
  
Stock Option Inducement Award Agreement, dated as of April 9, 2013, between CIRCOR International, Inc. and Scott A Buckhout, is incorporated herein by reference to Exhibit 10.3 to CIRCOR International, Inc.'s Form 8-K, File No. 001-14962, filed with the Securities and Exchange Commission on April 15, 2013
10.30§
  
Severance Agreement, dated as of April 9, 2013, between CIRCOR International, Inc. and Scott A Buckhout, is incorporated herein by reference to Exhibit 10.4 to CIRCOR International, Inc.'s Form 8-K, File No. 001-14962, filed with the Securities and Exchange Commission on April 15, 2013
10.31§
  
Executive Change of Control Agreement, dated as of April 9, 2013, between CIRCOR International, Inc. and Scott A Buckhout, is incorporated herein by reference to Exhibit 10.5 to CIRCOR International, Inc.'s Form 8-K, File No. 001-14962, filed with the Securities and Exchange Commission on April 15, 2013
10.32§
  
Third Amendment to Executive Change of Control Agreement, dated as of November 4, 2010, between CIRCOR, Inc. and Alan J. Glass, is incorporated herein by reference to Exhibit 10.4 to CIRCOR International, Inc.'s Form 8-K, File No. 001-14962, filed with the Securities and Exchange Commission on November 5, 2010
10.33§
  
Form of Retention Agreement entered into between the Company and the Following Individuals: Wayne Robbins, Alan Glass, Lisa Ryan, Brian Young, Arjun Sharma, Michael Dill, Mahesh Joshi, and John F. Kober, is incorporated herein by reference to Exhibit 10.1 to CIRCOR International, Inc.'s Form 10-Q, File No. 001-14962, filed with the Securities and Exchange Commission on August 1, 2013
10.34§
  
Agreement, dated as of July 31, 2013, between Circor International, Inc. and Frederic M. Burditt, is incorporated herein by reference to Exhibit 10.1 to CIRCOR International, Inc.'s Form 10-Q, File No. 001-14962, filed with the Securities and Exchange Commission on October 31, 2013

34




10.35§*
  
Inducement Restricted Stock Unit Agreement, dated as of December 2, 2013, between CIRCOR International, Inc. and Rajeev Bhalla
10.36§*
  
Stock Option Inducement Award Agreement, dated as of December 2, 2013, between CIRCOR International, Inc. and Rajeev Bhalla
10.37§*
 
Severance Agreement, dated as of December 2, 2013, between CIRCOR International, Inc. and Rajeev Bhalla
10.38§*
 
Executive Change of Control Agreement, dated as of December 2, 2013, between CIRCOR International, Inc. and Rajeev Bhalla
21*
  
Schedule of Subsidiaries of CIRCOR International, Inc.
23.1*
  
Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm
31.1*
  
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
  
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**
  
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
  
The following financial statements from CIRCOR International, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission on February 27, 2014, formatted in XBRL (eXtensible Business Reporting Language), as follows:

(i)
  
Consolidated Balance Sheets as of December 31, 2013 and 2012
(ii)
  
Consolidated Statements of Income for the years ended December 31, 2013, 2012 and 2011
(iii)
  
Statements of Consolidated Comprehensive Income for the years ended December 31, 2012, 2011 and 2010
(iv)
  
Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011
(v)
  
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2013, 2012 and 2011
(vi)
  
Notes to the Consolidated Financial Statements
*
Filed with this report.
**
Furnished with this report.
§
Indicates management contract or compensatory plan or arrangement.


35




SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
CIRCOR INTERNATIONAL, INC.
 
 
 
 
By:
/s/ Scott A. Buckhout
 
 
Scott A. Buckhout
President and Chief Executive Officer
 
 
 
 
Date:
February 27, 2014
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
Signature
Title
Date
/s/ Scott A. Buckhout
President and Chief Executive Officer (Principal Executive Officer)
February 27, 2014
Scott A. Buckhout
 
 
/s/ Rajeev Bhalla
Executive Vice President, Chief Financial Officer (Principal Financial Officer)
February 27, 2014
Rajeev Bhalla
 
 
/s/ John F. Kober
Vice President, Corporate Controller and Treasurer (Principal Accounting Officer)
February 27, 2014
John F. Kober
 
 
/s/ David F. Dietz
Chairman of the Board of Directors
February 27, 2014
David F. Dietz
 
 
/s/ Jerome D. Brady
Director
February 27, 2014
Jerome D. Brady
 
 
/s/ Douglas M. Hayes
Director
February 27, 2014
Douglas M. Hayes
 
 
/s/ Norman E. Johnson
Director
February 27, 2014
Norman E. Johnson
 
 
/s/ John A. O'Donnell
Director
February 27, 2014
John A. O’Donnell
 
 
/s/ Peter M. Wilver
Director
February 27, 2014
Peter M. Wilver
 
 


36




Report of Independent Registered Public Accounting Firm

 
To the Board of Directors and Shareholders of CIRCOR International, Inc.:

We have audited the accompanying consolidated balance sheets of CIRCOR International, Inc. ( a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2013. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CIRCOR International, Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2013, based on criteria established in the 1992 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 27, 2014 expressed an unqualified opinion.

 /s/ Grant Thornton LLP
 
Boston, Massachusetts
February 27, 2014


37




Report of Independent Registered Public Accounting Firm
 

To the Board of Directors and Shareholders of CIRCOR International, Inc.:
 
We have audited the internal control over financial reporting of CIRCOR International, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2013, based on criteria established in the 1992 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in the 1992 Internal Control-Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended December 31, 2013, and our report dated February 27, 2014 expressed an unqualified opinion on those financial statements.
 
/s/ Grant Thornton LLP
 
Boston, Massachusetts
February 27, 2014


38




CIRCOR INTERNATIONAL, INC.
Consolidated Balance Sheets
(In thousands, except share data)
 
 
December 31,
 
2013
 
2012
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
102,180

 
$
61,738

Short-term investments
95

 
101

Trade accounts receivable, less allowance for doubtful accounts of $2,449 and $1,706, respectively
144,742

 
150,825

Inventories, net
199,404

 
198,005

Prepaid expenses and other current assets
19,815

 
17,052

Deferred income tax asset
17,686

 
15,505

Total Current Assets
483,922

 
443,226

PROPERTY, PLANT AND EQUIPMENT, NET
107,724

 
105,903

OTHER ASSETS:
 
 
 
Goodwill
75,876

 
77,428

Intangibles, net
35,656

 
45,157

Deferred income tax asset
18,579

 
30,064

Other assets
4,893

 
8,203

TOTAL ASSETS
$
726,650

 
$
709,981

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
70,589

 
$
80,361

Accrued expenses and other current liabilities
57,507

 
67,235

Accrued compensation and benefits
31,289

 
26,540

Income taxes payable
3,965

 
393

Notes payable and current portion of long-term debt
7,203

 
7,755

Total Current Liabilities
170,553

 
182,284

LONG-TERM DEBT, NET OF CURRENT PORTION
42,435

 
62,729

DEFERRED INCOME TAXES
9,666

 
10,744

OTHER NON-CURRENT LIABILITIES
27,109

 
35,977

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; 17,610,526 and 17,445,687 shares issued and outstanding at December 31, 2013 and 2012, respectively
176

 
174

Additional paid-in capital
269,884

 
262,744

Retained earnings
202,930

 
158,509

Accumulated other comprehensive gain (loss), net of taxes
3,897

 
(3,180
)
Total Shareholders’ Equity
476,887

 
418,247

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
726,650

 
$
709,981

 
The accompanying notes are an integral part of these consolidated financial statements.

39




CIRCOR INTERNATIONAL, INC.
Consolidated Statements of Income
(In thousands, except per share data)
 
 
Year Ended December 31,
 
2013
 
2012
 
2011
Net revenues
$
857,808

 
$
845,552

 
$
822,349

Cost of revenues
590,207

 
604,009

 
596,954

GROSS PROFIT
267,601

 
241,543

 
225,395

Selling, general and administrative expenses
182,954

 
179,382

 
168,421

Leslie asbestos and bankruptcy charges

 

 
676

Impairment charges
6,872

 
10,348

 

Special charges, net
8,602

 
5,282

 

OPERATING INCOME
69,173

 
46,531

 
56,298

Other (income) expense:
 
 
 
 
 
Interest expense, net
3,161

 
4,259

 
3,930

Other expense, net
1,975

 
513

 
2,172

TOTAL OTHER EXPENSE
5,136

 
4,772

 
6,102

INCOME BEFORE INCOME TAXES
64,037

 
41,759

 
50,196

Provision for income taxes
16,916

 
10,960

 
13,562

NET INCOME
$
47,121

 
$
30,799

 
$
36,634

Earnings per common share:
 
 
 
 
 
Basic
$
2.68

 
$
1.77

 
$
2.12

Diluted
$
2.67

 
$
1.76

 
$
2.10

Weighted average common shares outstanding:
 
 
 
 
 
Basic
17,564

 
17,405

 
17,240

Diluted
17,629

 
17,452

 
17,417

Dividends paid per common share
$
0.15

 
$
0.15

 
$
0.15

 
The accompanying notes are an integral part of these consolidated financial statements.

40




CIRCOR INTERNATIONAL, INC.
Statements of Consolidated Comprehensive Income
(in thousands)
 
 
 
Year Ended December 31,
 
2013
 
2012
 
2011
Net income
$
47,121

 
$
30,799

 
$
36,634

Other comprehensive income (loss), net of tax:
 
 
 
 
 
Foreign currency translation adjustments
2,147

 
3,924

 
(5,639
)
Other changes in plan assets - amortization of actuarial gains (losses) (1)
4,456

 
(2,826
)
 
(5,349
)
Net periodic pension costs amortization (loss) gain (2)
474

 
391

 
212

Other comprehensive income (loss)
7,077

 
1,490

 
(10,776
)
COMPREHENSIVE INCOME
54,198

 
32,289

 
25,858

 
(1)
Net of an income tax effect of $2.7 million, $(1.7) million and $(3.3) million for the years ended December 31, 2013, 2012 and 2011, respectively.
(2)
Net of an income tax effect of $0.3 million, $0.2 million and $0.1 million for the years ended December 31, 2013, 2012 and 2011, respectively.

The accompanying notes are an integral part of these consolidated financial statements.


41




CIRCOR INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
(In thousands)
 
Year Ended December 31,
 
2013
 
2012
 
2011
OPERATING ACTIVITIES
 
 
 
 
 
Net income
$
47,121

 
$
30,799

 
$
36,634

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation
16,034

 
15,732

 
15,085

Amortization
3,039

 
3,596

 
4,351

Intangible impairment charges
6,872

 
10,348

 

Payment provision for Leslie bankruptcy settlement

 
(1,000
)
 
(76,625
)
Compensation expense of stock-based plans
5,056

 
4,374

 
3,807

Tax effect of share-based compensation
(732
)
 
642

 
(673
)
Deferred income taxes
5,778

 
(832
)
 
307

(Gain) loss on disposal of property, plant and equipment
(322
)
 
1,135

 
(69
)
Gain on return of acquisition purchase price
(3,400
)
 

 

Changes in operating assets and liabilities:
 
 
 
 
 
Trade accounts receivable, net
8,203

 
7,063

 
(17,862
)
Inventories, net
(311
)
 
6,592

 
(38,588
)
Prepaid expenses and other assets
160

 
(2,422
)
 
(22,918
)
Accounts payable, accrued expenses and other liabilities
(15,292
)
 
(15,504
)
 
47,718

Net cash provided by (used in) operating activities
72,206

 
60,523

 
(48,833
)
INVESTING ACTIVITIES
 
 
 
 
 
Additions to property, plant and equipment
(17,328
)
 
(18,170
)
 
(17,901
)
Proceeds from the sale of property, plant and equipment
664

 
541

 
117

Business acquisitions, return of purchase price
3,400

 

 

Business acquisitions, net of cash acquired

 

 
(20,221
)
Net cash used in investing activities
(13,264
)
 
(17,629
)
 
(38,005
)
FINANCING ACTIVITIES
 
 
 
 
 
Proceeds from long-term debt
146,578

 
186,409

 
279,346

Payments of long-term debt
(166,239
)
 
(220,918
)
 
(178,905
)
Debt issuance costs

 

 
(2,001
)
Dividends paid