| CIRCOR INTERNATIONAL INC 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 |
| Those 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 oil, gas, petrochemical, process, power, aerospace, military, heating, ventilation and air conditioning (“HVAC”), maritime, pharmaceutical, and medical and instrumentation 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 particular, our petrochemical business is 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 in demand for petrochemical products could have a material adverse effect on our business, financial condition or results of operations |
| Similarly, although not to the same extent as the oil and 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 the continuing impact on economic and financial conditions in the United States and around the world as well as current tensions in Iraq and the rest of the Middle East |
| Terrorist attacks have negatively impacted general economic, market and political conditions |
| In particular, terrorist attacks, compounded with changes in the national economy, resulted in reduced revenues in the aerospace and general industrial markets in years 2002 and 2003 |
| Although economic conditions appear to be improving, additional terrorist acts or acts of war (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, and other acts of war or hostility, including the current tensions in Iraq 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 presently be predicted |
| In addition, with manufacturing facilities located worldwide, including facilities located in the United States, Canada, Western Europe and the People’s Republic of China, we may be impacted by terrorist actions not only against the United States but in other parts of the world as well |
| We are not insured for losses and interruptions caused by terrorist acts and acts of war for our aviation products |
| 12 ______________________________________________________________________ [42]Table of Contents 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 |
| Commencing in 2005, we embarked on a company wide program to implement lean manufacturing techniques |
| We believe that this process will produce meaningful reductions in manufacturing costs |
| However, implementation of these techniques may cause short-term inefficiencies in production |
| If we ultimately are unable to successfully implement these processes our anticipated profitability may suffer |
| We face significant competition in our markets and, if we are not able to respond to competition in our markets, 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, 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 |
| Accordingly, currency fluctuations could cause our US dollar-priced products to be less competitive than our competitors’ products that are priced in other currencies |
| 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 |
| Implementation of our acquisition strategy 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 instrumentation and thermal fluid controls and energy 13 ______________________________________________________________________ [43]Table of Contents products |
| We expect to spend significant time and effort in 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 in the future will achieve revenues, profitability or cash flows that justify our investment in them |
| In addition, acquisitions may involve a number of special risks, including: adverse short-term effects on our reported operating results; diversion of management’s attention; loss of key personnel at acquired companies; or unanticipated management or operational problems or legal liabilities |
| Some or all of these special risks could have a material adverse effect on our business, financial condition or results of operations |
| 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 also are used in the aerospace, military, commercial aircraft, pharmaceutical, medical, analytical equipment, oil and gas exploration, transmission and refining, 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 |
| 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 market our products in international markets not currently served by us in portions of Europe, Latin America and Asia |
| We may not succeed in marketing, selling and distributing our products in these new 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 into new international markets and could also have a material adverse effect on our current international operations |
| If we can not 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 |
| 14 ______________________________________________________________________ [44]Table of Contents If our suppliers can not 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 them 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 |
| During 2004 and 2005 we experienced diminished supplier performance that negatively impacted our operating and net income |
| The diminished supplier performance was the result of: the closure suppliers, problems with new supplier on-time delivery reliability as well as lower than expected new supplier qualification acceptance |
| We are in the process of remediating or have taken steps to remediate these lower supplier performance issues and believe the diminished impact on profitability may be alleviated |
| A continuation of these factors could have a negative impact on our ability to deliver our products to our customers within our committed time frames and could result in continued reductions of our operating and net income in future periods |
| A change in international governmental policies or restrictions could result in decreased availability and increased costs for certain components and finished products that we outsource, 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 US 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 take delivery of 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 |
| 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 15 ______________________________________________________________________ [45]Table of Contents 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 |
| 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 Customs and Border Protection, the Bureau of Export Administration, the Department of State, 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 |
| If our internal controls 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 their 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 |
| We face risks from product liability lawsuits that may adversely affect our business |
| We, like other manufacturers and distributors of products designed to control and regulate fluids and chemicals, 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 |
| 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 16 ______________________________________________________________________ [46]Table of Contents 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 |
| The costs associated with the defense of asbestos-related claims and the payment of any judgments or settlements with respect to such claims are subject to a number of uncertainties |
| As such, we cannot guarantee that such claims ultimately will not have an adverse effect on our financial statements, results of operations or cash flows |
| Like many other manufacturers of fluid control products, we have been named as defendants in a growing number of product liability actions brought on behalf of individuals who seek compensation for their alleged exposure to airborne asbestos fibers |
| In general, any components containing asbestos formerly used in our products were entirely internal to the product and, we believe, would not give rise to ambient asbestos dust during normal operation or during normal inspection and maintenance |
| As such, we have no basis on which to conclude that these cases will have a material adverse effect on our financial condition, results of operations or cash flow |
| However, due to the nature and number of variables associated with asbestos related claims, such as the rate at which new claims may be filed; the availability of insurance policies to continue to recover certain of our costs relating to the defense and payment of these claims; the impact of bankruptcies of other companies currently or historically defending asbestos claims; the uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case; the impact of potential changes in legislative or judicial standards; the type and severity of the disease alleged to be suffered by each claimant; and increases in the expense of medical treatment, we are unable to reliably estimate the ultimate costs of these claims |
| 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 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 |
| Nonetheless, 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 |
| 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, the Delaware General Corporation Law and our shareholder rights plan 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 17 ______________________________________________________________________ [47]Table of Contents taking action by 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 |
| Additionally, we have adopted a shareholder rights plan providing for the issuance of rights that will cause substantial dilution to a person or group of persons that acquires 15prca or more of our shares of common stock, unless the rights are redeemed |
| 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 |
| Our debt agreements limit our ability to issue equity, make acquisitions, incur debt, pay dividends, make investments, sell assets, merge or raise capital |
| Our senior note purchase agreement, dated October 19, 1999, outstanding industrial revenue bonds, and our revolving credit facility agreement, dated December 20, 2005, govern our indebtedness to our lenders |
| The debt agreements include 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 |
| The trading price of our common stock may be volatile and investors in our common stock may experience substantial losses |
| The trading price of our common stock may be volatile |
| Our common stock could decline or fluctuate in response to a variety of factors, including, but not limited to: our failure to meet the 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 |
| In addition, the stock market as a whole has in the past experienced 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 |
| 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 US dollars, (iii) realizing lower net income, on a US 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 18 ______________________________________________________________________ [48]Table of Contents operations and cash flows |
| Our major foreign currency exposures involve the markets in Western Europe, Canada and Asia |
| We use forward contracts to manage the currency risk related to 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 |