CIR_Q2_06.30.2013_10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2013.
OR
o
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)
 
 
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  o
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  o
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
o
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
As of July 25, 2013, there were 17,575,362 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.



CIRCOR INTERNATIONAL, INC.
TABLE OF CONTENTS


 
Page
 
 
 
 
 
 
Certifications
 

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Table of Contents

PART I FINANCIAL INFORMATION.
ITEM 1.
 FINANCIAL STATEMENTS
CIRCOR INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
 
June 30, 2013
 
December 31, 2012
 
(Unaudited)
 
 
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
60,831

 
$
61,738

Short-term investments
96

 
101

Trade accounts receivable, less allowance for doubtful accounts of $1,914 and $1,706, respectively
158,286

 
150,825

Inventories
199,764

 
198,005

Prepaid expenses and other current assets
17,661

 
16,510

Deferred income tax asset
15,431

 
15,505

Current income tax receivable
2,171

 

Assets held for sale
542

 
542

Total Current Assets
454,782

 
443,226

PROPERTY, PLANT AND EQUIPMENT, NET
104,477

 
105,903

OTHER ASSETS:
 
 
 
Goodwill
75,491

 
77,428

Intangibles, net
42,436

 
45,157

Deferred income tax asset
25,283

 
30,064

Other assets
6,957

 
8,203

TOTAL ASSETS
$
709,426

 
$
709,981

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
84,245

 
$
80,361

Accrued expenses and other current liabilities
59,240

 
67,235

Accrued compensation and benefits
25,596

 
26,540

Income taxes payable
3,996

 
393

Notes payable and current portion of long-term debt
7,206

 
7,755

Total Current Liabilities
180,283

 
182,284

LONG-TERM DEBT, NET OF CURRENT PORTION
52,345

 
62,729

DEFERRED INCOME TAXES
9,797

 
10,744

OTHER NON-CURRENT LIABILITIES
34,850

 
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; 17,575,362 and 17,445,687 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively
176

 
174

Additional paid-in capital
265,940

 
262,744

Retained earnings
177,748

 
158,509

Accumulated other comprehensive loss, net of taxes
(11,713
)
 
(3,180
)
Total Shareholders’ Equity
432,151

 
418,247

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
709,426

 
$
709,981

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

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Table of Contents

CIRCOR INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
2013
 
July 1,
2012
 
June 30,
2013
 
July 1,
2012
Net revenues
$
223,644

 
$
219,862

 
$
429,042

 
$
434,142

Cost of revenues
153,538

 
156,046

 
299,086

 
311,714

GROSS PROFIT
70,106

 
63,816

 
129,956

 
122,428

Selling, general and administrative expenses
47,596

 
45,337

 
93,168

 
90,249

Special charges
2,254

 

 
3,632

 

OPERATING INCOME
20,256

 
18,479

 
33,156

 
32,179

Other (income) expense:
 
 
 
 
 
 
 
Interest income
(79
)
 
(78
)
 
(122
)
 
(161
)
Interest expense
917

 
1,095

 
1,747

 
2,259

Other expense (income), net
626

 
184

 
1,239

 
322

TOTAL OTHER EXPENSE
1,464

 
1,201

 
2,864

 
2,420

INCOME BEFORE INCOME TAXES
18,792

 
17,278

 
30,292

 
29,759

Provision for income taxes
6,124

 
6,142

 
9,715

 
10,038

NET INCOME
$
12,668

 
$
11,136

 
$
20,577

 
$
19,721

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.72

 
$
0.64

 
$
1.17

 
$
1.14

Diluted
$
0.72

 
$
0.64

 
$
1.17

 
$
1.13

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
17,565

 
17,422

 
17,539

 
17,369

Diluted
17,607

 
17,451

 
17,569

 
17,421

Dividends paid per common share
$
0.0375

 
$
0.0375

 
$
0.0750

 
$
0.0750

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

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Table of Contents

CIRCOR INTERNATIONAL, INC.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
 
 
 
Three Months Ended
 
Six Months Ended
 
June 30, 2013
 
July 1, 2012
 
June 30, 2013
 
July 1, 2012
Net income
$
12,668

 
$
11,136

 
$
20,577

 
$
19,721

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
112

 
(12,548
)
 
(8,531
)
 
(6,867
)
Other comprehensive income (loss)
112

 
(12,548
)
 
(8,531
)
 
(6,867
)
COMPREHENSIVE INCOME (LOSS)
$
12,780

 
$
(1,412
)
 
$
12,046

 
$
12,854

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

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CIRCOR INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Six Months Ended
 
June 30,
2013
 
July 1,
2012
OPERATING ACTIVITIES
 
 
 
Net income
$
20,577

 
$
19,721

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
 
 
 
Depreciation
8,035

 
7,833

Amortization
1,509

 
1,887

Payment for Leslie bankruptcy settlement

 
(1,000
)
Compensation expense of share-based plans
2,156

 
2,317

Tax effect of share-based compensation
(422
)
 
499

(Gain) loss on property, plant and equipment
(129
)
 
133

Changes in operating assets and liabilities, net of effects from business acquisitions:
 
 
 
Trade accounts receivable
(9,406
)
 
(6,312
)
Inventories
(4,059
)
 
(5,340
)
Prepaid expenses and other assets
(2,412
)
 
(1,408
)
Accounts payable, accrued expenses and other liabilities
3,583

 
(9,559
)
Net cash provided by operating activities
19,432

 
8,771

INVESTING ACTIVITIES
 
 
 
Additions to property, plant and equipment
(8,808
)
 
(10,783
)
Proceeds from the sale of property, plant and equipment
314

 
31

Net cash used in investing activities
(8,494
)
 
(10,752
)
FINANCING ACTIVITIES
 
 
 
Proceeds from long-term debt
74,255

 
108,943

Payments of long-term debt
(84,679
)
 
(117,944
)
Dividends paid
(1,340
)
 
(1,331
)
Proceeds from the exercise of stock options
1,498

 
94

Tax effect of share-based compensation
422

 
(499
)
Net cash used in financing activities
(9,844
)
 
(10,737
)
Effect of exchange rate changes on cash and cash equivalents
(2,002
)
 
(723
)
DECREASE IN CASH AND CASH EQUIVALENTS
(907
)
 
(13,441
)
Cash and cash equivalents at beginning of period
61,738

 
54,855

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
60,831

 
$
41,414

Supplemental Cash Flow Information:
 
 
 
Cash paid during the period presented for:
 
 
 
Income taxes
$
3,464

 
$
9,673

Interest
$
1,054

 
$
1,842

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

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CIRCOR INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1) Basis of Presentation

The accompanying unaudited, consolidated financial statements have been prepared according to the rules and regulations of the United States Securities and Exchange Commission (“SEC”) and, in the opinion of management, reflect all adjustments, which include normal recurring adjustments, necessary for a fair presentation of the consolidated balance sheets, consolidated statements of income and consolidated statements of cash flows of CIRCOR International, Inc. (“CIRCOR”, the “Company”, “us”, “we” or “our”) for the periods presented. We prepare our interim financial information using the same accounting principles as we use for our annual audited financial statements. Certain information and note disclosures normally included in the annual audited financial statements have been condensed or omitted in accordance with prescribed SEC rules. We believe that the disclosures made in our consolidated financial statements and the accompanying notes are adequate to make the information presented not misleading.

The consolidated balance sheet at December 31, 2012 is as reported in our audited financial statements as of that date. Our accounting policies are described in the notes to our December 31, 2012 financial statements, which were included in our Annual Report filed on Form 10-K. We recommend that the financial statements included in our Quarterly Report on Form 10-Q be read in conjunction with the financial statements and notes included in our Annual Report filed on Form 10-K for the year ended December 31, 2012.

We operate and report financial information using a 52-week fiscal year ending December 31. The data periods contained within our Quarterly Reports on Form 10-Q reflect the results of operations for the 13-week, 26-week and 39-week periods which generally end on the Sunday nearest the calendar quarter-end date. Operating results for the three and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

(2) Summary of Significant Accounting Policies

The significant accounting policies used in preparation of these condensed consolidated financial statements for the three and six months ended June 30, 2013 are consistent with those discussed in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2012.

In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("AOCI"). The new ASU requires entities to disclose in a single location (either on the face of the financial statement that reports net income or in the notes) the effects of reclassifications out of accumulated other comprehensive income. For items reclassified out of AOCI in their entirety into net income, entities must disclose the effect of the reclassification on each affected net income item. For AOCI reclassification items that are not reclassified in their entirety into net income, entities must provide a cross reference to other required U.S. GAAP disclosures. The new disclosure requirements are effective for annual reporting after December 15, 2012, and interim periods within those years. No reclassifications out of AOCI were made by the Company for the three and six months ended June 30, 2013 or the three and six months ended July 1, 2012 and therefore no additional AOCI disclosure is presented in our Quarterly Report on Form 10-Q.

There were no additional new accounting pronouncements adopted during the six months ended June 30, 2013 that had a material impact on our financial statements.

Subsequent events - Early in the third quarter of 2012 we commenced arbitration proceedings against the individuals from whom we purchased SF Valves in Brazil for breaches of certain representations and warranties made in the Stock Purchase Agreement dated February 4, 2011. On July 12, 2013 we reached a settlement on the SF Valves arbitration and have received a refund of a portion of the purchase price which will result in a gain of approximately $3.1 million during the third quarter of 2013.


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Table of Contents

(3) Share-Based Compensation

As of June 30, 2013, we have one share-based compensation plan. The Amended and Restated 1999 Stock Option and Incentive Plan (the “1999 Stock Plan”), which was adopted by our Board of Directors and approved by our shareholders, permits the granting of the following types of awards to our officers, other employees and non-employee directors: incentive stock options; non-qualified stock options; deferred stock awards; restricted stock awards; unrestricted stock awards; performance share awards; cash-based awards; stock appreciation rights and dividend equivalent rights. The 1999 Stock Plan provides for the issuance of up to 3,000,000 shares of common stock (subject to adjustment for stock splits and similar events). New options granted under the 1999 Stock Plan could have varying vesting provisions and exercise periods. Options granted vest in periods ranging from one year to five years and expire ten years after the grant date. Restricted stock units granted generally vest from three years to six years. Vested restricted stock units will be settled in shares of our common stock. As of June 30, 2013, there were 291,724 stock options (including the April 9, 2013 CEO stock option award noted below) and 297,606 restricted stock units outstanding. In addition, there were 377,844 shares available for grant under the 1999 Stock Plan as of June 30, 2013. As of June 30, 2013, there were no outstanding restricted stock units that contain rights to nonforfeitable dividend equivalents and are considered participating securities that are included in our computation of basic and fully diluted earnings per share. There is no difference in the earnings per share amounts between the two class method and the treasury stock method, which is why we continue to use the treasury stock method.

For all stock options granted prior to 2013, the fair value of each grant was estimated at the date of grant using the Black-Scholes option pricing model. Black-Scholes utilizes assumptions related to volatility, the risk-free interest rate, the dividend yield and employee exercise behavior. Expected volatilities utilized in the model are based on the historic volatility of the Company’s stock price. The risk free interest rate is derived from the U.S. Treasury Yield curve in effect at the time of the grant.

On April 9, 2013, the Company granted stock options to purchase 200,000 shares of common stock to its newly appointed President and Chief Executive Officer, Scott A. Buckhout, at an exercise price of $41.17 per share. This option award was not granted under the Company's 1999 Stock Plan and includes both a service period and a market vesting condition. The stock options will vest if the following stock price targets are met based on the stock price closing at or above these targets for 60 consecutive trading days:

Stock Price Target
Cumulative Vested portion of stock options (in shares)
$50.00
50,000
$60.00
100,000
$70.00
150,000
$80.00
200,000

Vested options may be exercised 25% at the time of vesting, 50% one year from the date of vesting and 100% two years from the date of vesting. This stock option award will be expensed utilizing a graded method, is subject to forfeiture in the event of employment termination (whether voluntary or involuntary) prior to vesting. To the extent that the market conditions above (stock price targets) are not met, the option will not vest and will forfeit 5 years from grant date. The Company used a Monte Carlo simulation option pricing model to value this option award with the following assumptions: 10 year term, expected life of 5.5 years, risk-free rate of 1.2%, expected volatility of 41.2%, and fair value of $14.46 per share at grant date. No other options were granted during the first six months of 2013.

We account for Restricted Stock Unit (“RSU”) Awards by expensing the weighted average fair value to selling, general and administrative expenses ratably over vesting periods generally ranging from three years to six years. During the six months ended June 30, 2013 and July 1, 2012, we granted 130,845 and 126,552 RSU Awards with approximate fair values of $41.96 and $33.53 per RSU Award, respectively.

The CIRCOR Management Stock Purchase Plan, which is a component of the 1999 Stock Plan, provides that eligible employees may elect to receive restricted stock units in lieu of all or a portion of their pre-tax annual incentive bonus and, in some cases, make after-tax contributions in exchange for restricted stock units (“RSU MSPs”). In addition, non-employee directors may elect to receive restricted stock units in lieu of all or a portion of their annual directors’ fees. Each RSU MSP represents a right to receive one share of our common stock after a three year vesting period. RSU MSPs are granted at a discount of 33% from the fair market value of the shares of our common stock on the date of grant. This discount is amortized

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as compensation expense, to selling, general and administrative expenses, over a four year period. A total of 28,463 and 34,534 RSUs with per unit discount amounts representing fair values of $13.90 and $10.81 were granted under the CIRCOR Management Stock Purchase Plan during the six months ended June 30, 2013 and July 1, 2012, respectively.

Compensation expense related to our share-based plans for the six month periods ended June 30, 2013, and July 1, 2012 was $2.3 million and $2.2 million, respectively, and was recorded as selling, general and administrative expense. As of June 30, 2013, there was $11.0 million of total unrecognized compensation costs related to our outstanding share-based compensation arrangements (inclusive of the April 9, 2013 CEO option award). That cost is expected to be recognized over a weighted average period of 2.5 years.

The weighted average contractual term for stock options outstanding and options exercisable as of June 30, 2013 was 9.0 years and 6.0 years, respectively. The aggregate intrinsic value of stock options exercised during the six months ended June 30, 2013 was $0.8 million and the aggregate intrinsic value of stock options outstanding and options exercisable as of June 30, 2013 was $3.6 million and $0.8 million, respectively.

The aggregate intrinsic value of RSU Awards settled during the six months ended June 30, 2013 was $3.4 million and the aggregate intrinsic value of RSU Awards outstanding and RSU Awards vested and deferred as of June 30, 2013 was $11.4 million and $0.0 million, respectively.

The aggregate intrinsic value of RSU MSPs settled during the six months ended June 30, 2013 was $0.6 million and the aggregate intrinsic value of RSU MSPs outstanding and RSU MSPs vested and deferred as of June 30, 2013 was $1.9 million and $0.0 million respectively.

(4) Inventories
Inventories consist of the following (In thousands):

 
June 30, 2013
 
December 31, 2012
Raw materials
$
57,073

 
$
63,104

Work in process
96,404

 
86,564

Finished goods
46,287

 
48,337

 
$
199,764

 
$
198,005


(5) Goodwill and Intangible Assets
The following table shows goodwill, by segment, as of June 30, 2013 (In thousands):
 
 
Energy
 
Aerospace
 
Flow
Technologies
 
Consolidated
Total
Goodwill as of December 31, 2012
$
51,526

 
$
22,121

 
$
3,781

 
$
77,428

Currency translation adjustments
(1,691
)
 
(23
)
 
(223
)
 
(1,937
)
Goodwill as of June 30, 2013
$
49,835

 
$
22,098

 
$
3,558

 
$
75,491

The table below presents gross intangible assets and the related accumulated amortization as of June 30, 2013 (In thousands):
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Patents
$
6,075

 
$
(5,656
)
Non-amortized intangibles (primarily trademarks and trade names)
23,093

 


Customer relationships
33,186

 
(17,098
)
Backlog
1,074

 
(1,074
)
Other
7,253

 
(4,417
)
Total
$
70,681

 
$
(28,245
)
Net carrying value of intangible assets
42,436

 
 

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The table below presents estimated remaining amortization expense for intangible assets recorded as of June 30, 2013 (In thousands):
 
 
2013
 
2014
 
2015
 
2016
 
2017
 
After 2017
Estimated amortization expense
$
1,506

 
$
2,980

 
$
2,958

 
$
2,676

 
$
2,541

 
$
6,683


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(6) Segment Information
The following table presents certain reportable segment information (In thousands):
 
Energy
 
Aerospace
 
Flow
Technologies
 
Corporate /
Eliminations
 
Consolidated
Total
Three Months Ended June 30, 2013
 
 
 
 
 
 
 
 
 
Net revenues
$
110,832

 
$
38,177

 
$
74,635

 
$

 
$
223,644

Inter-segment revenues
363

 
19

 
170

 
(552
)
 

Operating income (loss)
14,477

 
2,073

 
11,044

 
(7,338
)
 
20,256

Interest income
 
 
 
 
 
 
 
 
(79
)
Interest expense
 
 
 
 
 
 
 
 
917

Other expense, net
 
 
 
 
 
 
 
 
626

Income before income taxes
 
 
 
 
 
 
 
 
$
18,792

Identifiable assets
406,956

 
178,681

 
220,604

 
(96,815
)
 
709,426

Capital expenditures
2,227

 
753

 
1,029

 
93

 
4,102

Depreciation and amortization
1,657

 
1,204

 
1,557

 
360

 
4,778

 
 
 
 
 
 
 
 
 
 
Three Months Ended July 1, 2012
 
 
 
 
 
 
 
 
 
Net revenues
$
113,527

 
$
35,896

 
$
70,439

 
$

 
$
219,862

Inter-segment revenues
504

 
4

 
202

 
(710
)
 

Operating income (loss)
12,580

 
3,153

 
9,043

 
(6,297
)
 
18,479

Interest income
 
 
 
 
 
 
 
 
(78
)
Interest expense
 
 
 
 
 
 
 
 
1,095

Other expense, net
 
 
 
 
 
 
 
 
184

Income before income taxes
 
 
 
 
 
 
 
 
$
17,278

Identifiable assets
380,496

 
189,879

 
192,419

 
(50,417
)
 
712,377

Capital expenditures
1,020

 
695

 
3,414

 
1,532

 
6,661

Depreciation and amortization
1,845

 
1,190

 
1,373

 
340

 
4,748

 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2013
 
 
 
 
 
 
 
 
 
Net revenues
$
207,553

 
$
75,504

 
$
145,985

 
$

 
$
429,042

Inter-segment revenues
727

 
24

 
400

 
(1,151
)
 

Operating income (loss)
24,613

 
2,467

 
20,001

 
(13,925
)
 
33,156

Interest income
 
 
 
 
 
 
 
 
(122
)
Interest expense
 
 
 
 
 
 
 
 
1,747

Other expense, net
 
 
 
 
 
 
 
 
1,239

Income before income taxes
 
 
 
 
 
 
 
 
$
30,292

Identifiable assets
406,956

 
178,681

 
220,604

 
(96,815
)
 
709,426

Capital expenditures
4,077

 
2,242

 
2,301

 
188

 
8,808

Depreciation and amortization
3,293

 
2,421

 
3,091

 
739

 
9,544

 
 
 
 
 
 
 
 
 
 
Six Months Ended July 1, 2012
 
 
 
 
 
 
 
 
 
Net revenues
$
222,791

 
$
73,981

 
$
137,370

 
$

 
$
434,142

Inter-segment revenues
901

 
30

 
394

 
(1,325
)
 

Operating income (loss)
21,508

 
7,277

 
16,630

 
(13,236
)
 
32,179

Interest income
 
 
 
 
 
 
 
 
(161
)
Interest expense
 
 
 
 
 
 
 
 
2,259

Other expense, net
 
 
 
 
 
 
 
 
322

Income before income taxes
 
 
 
 
 
 
 
 
$
29,759

Identifiable assets
380,496

 
189,879

 
192,419

 
(50,417
)
 
712,377

Capital expenditures
1,750

 
1,577

 
5,744

 
1,712

 
10,783

Depreciation and amortization
3,833

 
2,439

 
2,804

 
644

 
9,720


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Each reporting segment is individually managed and has separate financial results that are reviewed by our chief operating decision-maker. Each segment contains related products and services particular to that segment. For further discussion of the products included in each segment refer to Note (1) of the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012.

In calculating operating income for each reporting segment, substantial administrative expenses incurred at the corporate level for the benefit of other reporting segments were allocated to the segments based upon specific identification of costs, employment related information or net revenues.

Corporate / Eliminations are reported on a net “after allocations” basis. Inter-segment intercompany transactions affecting net operating profit have been eliminated within the respective operating segments.

The operating loss reported in the Corporate / Eliminations column in the preceding table consists primarily of the following corporate expenses: compensation and fringe benefit costs for executive management and other corporate staff; corporate development costs (relating to mergers and acquisitions); human resource development and benefit plan administration expenses; legal, accounting and other professional and consulting fees; facilities, equipment and maintenance costs; and travel and various other administrative costs. The above costs are incurred in the course of furthering the business prospects of the Company and relate to activities such as: implementing strategic business growth opportunities; corporate governance; risk management; treasury; investor relations and shareholder services; regulatory compliance; and stock transfer agent costs.

The total assets for each operating segment have been reported as the Identifiable Assets for that segment, including inter-segment intercompany receivables, payables and investments in other CIRCOR businesses. Identifiable assets reported in Corporate / Eliminations include both corporate assets, such as cash, deferred taxes, prepaid and other assets, fixed assets, as well as the elimination of all inter-segment intercompany assets. The elimination of intercompany assets results in negative amounts reported in Corporate / Eliminations for Identifiable Assets for the periods ended June 30, 2013 and July 1, 2012. Corporate Identifiable Assets after elimination of intercompany assets were $32.2 million and $35.6 million as of June 30, 2013 and July 1, 2012, respectively.


(7) Earnings Per Common Share (In thousands, except per share amounts):
 
 
Three Months Ended
 
June 30, 2013
 
July 1, 2012
 
Net
Income
 
Shares
 
Per Share
Amount
 
Net
Income
 
Shares
 
Per Share
Amount
Basic Earnings Per Common Share ("EPS")
$
12,668

 
17,565

 
$
0.72

 
$
11,136

 
17,422

 
$
0.64

Dilutive securities, common stock options

 
42

 
0.00

 

 
29

 
0.00

Diluted EPS
$
12,668

 
17,607


$
0.72


$
11,136


17,451


$
0.64

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
 
June 30, 2013
 
July 1, 2012
 
Net
Income
 
Shares
 
Per Share
Amount
 
Net
Income
 
Shares
 
Per Share
Amount
Basic EPS
$
20,577

 
17,539

 
$
1.17

 
$
19,721

 
17,369

 
$
1.14

Dilutive securities, common stock options

 
30

 
0.00

 

 
52

 
(0.01
)
Diluted EPS
$
20,577

 
17,569

 
$
1.17

 
$
19,721

 
17,421

 
$
1.13


There were 209,319 and 430,860 anti-dilutive stock options and RSUs for the six months ended June 30, 2013 and July 1, 2012, respectively.

(8) Financial Instruments

Fair Value
The carrying amounts of cash and cash equivalents, trade receivables and trade payables approximate fair value because of the short maturity of these financial instruments. Short-term investments (principally guaranteed investment certificates) are

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carried at cost which approximates fair value at the balance sheet date. The fair value of our variable rate debt approximates its carrying amount.

Foreign Currency Exchange Risk
The Company is exposed to certain risks relating to its ongoing business operations including foreign currency exchange rate risk and interest rate risk. The Company currently uses derivative instruments to manage foreign currency risk on certain business transactions denominated in foreign currencies. To the extent the underlying transactions hedged are completed, these forward contracts do not subject us to significant risk from exchange rate movements because they offset gains and losses on the related foreign currency denominated transactions. These forward contracts do not qualify as hedging instruments and, therefore, do not qualify for fair value or cash flow hedge treatment. Any unrealized gains and losses on our contracts are recognized as a component of other expense in our consolidated statements of income.

As of June 30, 2013, we had nineteen forward contracts with total values as follows (in thousands):
 
Currency
Number
 
Contract Amount
 
Currency
Canadian Dollar/Euro
2
 
2,755
 
Canadian Dollars
U.S. Dollar/Euro
8
 
17,942
 
U.S. Dollars
Brazilian Real/Euro
9
 
0
 
Brazilian Reals

This compares to twelve forward contracts as of December 31, 2012. The fair value liability of the derivative forward contracts as of June 30, 2013 was approximately $0.5 million and was included in accrued expenses and other current liabilities on our balance sheet. This compares to a fair value asset of approximately $0.5 million that was included in prepaid expenses and other current assets on our balance sheet as of December 31, 2012. The unrealized foreign exchange gain (loss) for the six month periods ended June 30, 2013 and July 1, 2012 was less than $1.0 million and $0.5 million, respectively. Unrealized foreign exchange gains (losses) are included in other (income) expense in our consolidated statements of income.

We have determined that the majority of the inputs used to value our foreign currency forward contracts fall within Level 2 of the fair value hierarchy, found under Accounting Standards Codification (“ASC”) Topic 820. The credit valuation adjustments, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties are Level 3 inputs. However, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our foreign currency forward contracts and determined that the credit valuation adjustments are not significant to the overall valuation. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.


(9) Guarantees and Indemnification Obligations

As permitted under Delaware law, we have agreements whereby we indemnify certain of our officers and directors for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. However, we have directors’ and officers’ liability insurance policies that limit our exposure for events covered under the policies and should enable us to recover a portion of any future amounts paid. As a result of the coverage under these insurance policies, we believe the estimated fair value of these indemnification agreements based on Level 3 criteria as described under ASC Topic 820 is minimal and, therefore, we have no liabilities recorded from those agreements as of June 30, 2013.

We record provisions for the estimated cost of product warranties, primarily from historical information, at the time product revenue is recognized. While we engage in extensive product quality programs and processes, our warranty obligation is affected by product failure rates, utilization levels, material usage, service delivery costs incurred in correcting a product failure, and supplier warranties on parts delivered to us. Should actual product failure rates, utilization levels, material usage, service delivery costs or supplier warranties on parts differ from our estimates, revisions to the estimated warranty liability would be required.


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The following table sets forth information related to our product warranty reserves for the six months ended June 30, 2013 (In thousands):
 
Balance beginning December 31, 2012
$
3,322

Provisions
1,979

Claims settled
(1,262
)
Currency translation adjustment
(30
)
Balance ending June 30, 2013
$
4,009


(10) Contingencies and Commitments
Asbestos-related product liability claims continue to be filed against two of our subsidiaries-Spence Engineering Company, Inc. (“Spence”), the stock of which we acquired in 1984; and Circor Instrumentation Technologies, Inc. (f/k/a Hoke Incorporated) (“Hoke”), the stock of which we acquired in 1998. Due to the nature of the products supplied by these entities, the markets they serve and our historical experience in resolving these claims, we do not believe that these asbestos-related claims will have a material adverse effect on the financial condition, results of operations or liquidity of Spence or Hoke, or the financial condition, consolidated results of operations or liquidity of the Company.
During the third quarter of 2011, we commenced arbitration proceedings against T.M.W. Corporation (“TMW”), the seller from which we acquired the assets of Castle Precision Industries in August 2010, seeking to recover damages from TMW for breaches of certain representations and warranties made by TMW in the Asset Purchase Agreement dated August 3, 2010 relative to such acquisition. We currently are in the discovery phase of this arbitration and expect the actual hearings to occur in the third quarter of 2013 at the earliest.
We are currently involved in various legal claims and legal proceedings, some of which may involve substantial dollar amounts. Periodically, we review the status of each significant matter and assess our potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be estimated, we accrue a liability for the estimated loss. Significant judgment is required in both the determination of probability and the determination as to whether an exposure can be reasonably estimated. Because of uncertainties related to these matters, accruals are based on the best information available at the time. As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates. Such revisions in the estimates of the potential liabilities could have a material adverse effect on our business, results of operations and financial position.
Standby Letters of Credit
We execute standby letters of credit, which include bid bonds and performance bonds, in the normal course of business to ensure our performance or payments to third parties. The aggregate notional value of these instruments was $52.4 million at June 30, 2013. Our historical experience with these types of instruments has been good and no claims have been paid in the current or past five fiscal years. We believe that the likelihood of demand for payments relating to the outstanding instruments is remote. These instruments generally have expiration dates ranging from less than 1 month to 5 years from June 30, 2013.
The following table contains information related to standby letters of credit instruments outstanding as of June 30, 2013 (In thousands): 
Term Remaining
Maximum Potential
Future  Payments
0–12 months
$
43,682

Greater than 12 months
8,714

Total
$
52,396


(11) Defined Pension Benefit Plans

We maintain two pension benefit plans, a qualified noncontributory defined benefit plan and a nonqualified, noncontributory defined benefit supplemental plan that provides benefits to certain retired highly compensated officers and employees. To date, the supplemental plan remains an unfunded plan. These plans include significant pension benefit obligations which are calculated based on actuarial valuations. Key assumptions are made in determining these obligations and related expenses, including expected rates of return on plan assets and discount rates. Benefits are based primarily on years of service and employees’ compensation.

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As of July 1, 2006, in connection with a revision to our retirement plan, we froze the pension benefits of our qualified noncontributory plan participants. Under the revised plan, such participants generally do not accrue any additional benefits under the defined benefit plan after July 1, 2006.
During the three and six months ended June 30, 2013, we made cash contributions of $0.4 million and $0.8 million, respectively to our qualified defined benefit pension plan. Additionally, substantially all of our U.S. employees are eligible to participate in a 401(k) savings plan. Under this plan, we make a core contribution and match a specified percentage of employee contributions, subject to certain limitations.

The components of net pension benefit expense are as follows (In thousands):
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
2013
 
July 1,
2012
 
June 30,
2013
 
July 1,
2012
Service cost-benefits earned
$

 
$
52

 
$

 
$
105

Interest cost on benefits obligation
491

 
513

 
982

 
1,027

Estimated return on assets
(591
)
 
(531
)
 
(1,182
)
 
(1,063
)
Prior service cost amortization

 

 

 

Loss amortization
189

 
158

 
378

 
316

Net periodic cost of defined pension benefit plans
$
89

 
$
192

 
$
178

 
$
385


(12) Income Taxes
As required by the Income Tax Topic of the ASC, at June 30, 2013 and at December 31, 2012, we had $2.1 million and $2.0 million of unrecognized tax benefits, respectively, of which $1.3 million and $1.1 million, respectively, would affect our effective tax rate if recognized in any future period.
We recognize interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2013, we had approximately $1.0 million of accrued interest related to uncertain tax positions.
The Company files income tax returns in the U.S. federal jurisdiction and in various state, local and foreign jurisdictions. The Company is no longer subject to examination by the Internal Revenue Service for years prior to 2009 and is no longer subject to examination by the tax authorities in foreign and state jurisdictions prior to 2006. The Company is under examination for income tax filings in various state and foreign jurisdictions.

For 2013, we expect an effective income tax rate of approximately 29.0%. Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and vice versa. Changes in the valuation of our deferred tax assets or liabilities, or changes in tax laws or interpretations thereof may also adversely affect our future effective tax rate. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.

The Company has a net domestic deferred income tax asset and a net foreign deferred tax asset. With regard to deferred income tax assets, we maintained a total valuation allowance of $15.0 million at June 30, 2013 and $13.5 million at December 31, 2012 due to uncertainties related to our ability to utilize certain of these assets, primarily consisting of certain foreign tax credits, foreign and state net operating losses and state tax credits carried forward. The valuation allowance is based on estimates of taxable income in each of the jurisdictions in which we operate and the period over which our deferred tax assets will be recoverable. If market conditions improve and future results of operations exceed our current expectations, our existing tax valuation allowances may be adjusted, resulting in future tax benefits. Alternatively, if market conditions deteriorate or future results of operations are less than expected, future assessments may result in a determination that some or all of the deferred tax assets are not realizable. Consequently, we may need to establish additional tax valuation allowances for all or a portion of the gross deferred tax assets, which may have a material adverse effect on our business, results of operations and financial condition. The Company has had a history of domestic and foreign taxable income, is able to avail itself of federal tax carryback provisions, has future taxable temporary differences and projects future domestic and foreign taxable income. We believe that after considering all of the available objective evidence, it is more likely than not that the results of future operations will generate sufficient taxable income to realize the remaining deferred tax assets.


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(13) Special Charges
During the third quarter of 2012 we announced restructuring actions in the Energy, Aerospace, and Flow Technologies segments ("2012 Announced Restructuring") including actions to consolidate facilities, shift expenses to lower cost regions, and exiting some non-strategic product lines.
During the three and six months ended June 30, 2013 we incurred $2.3 million and $3.6 million , respectively, in special charges associated with these 2012 Announced Restructuring actions in the Energy, Aerospace, and Flow Technologies segments. During the three and six months ended July 1, 2012 we did not record any special charges. The following table summarizes our special charges by expense type and business segment (in thousands):
 
As of and for the three months ended June 30, 2013
 
Energy
 
Aerospace
 
Flow
Technologies
 

Total
Accrued special charges as of March 31, 2013
 
 
 
 
 
 
$
71

Facility and professional fee related expenses
$
455

 
$
1,299

 
$
3

 
1,757

Employee-related expenses
292

 
186

 
19

 
497

Total special charges
$
747

 
$
1,485

 
$
22

 
2,254

Special charges paid
 
 
 
 
 
 
1,733

Accrued special charges as of June 30, 2013
 
 
 
 
 
 
$
592

 
 
 
 
 
 
 
 
 
As of and for the six months ended June 30, 2013
 
Energy
 
Aerospace
 
Flow
Technologies
 

Total
Accrued special charges as of December 31, 2012
 
 
 
 
 
 
$
800

Facility and professional fee related expenses
$
811

 
$
1,838

 
$
27

 
$
2,676

Employee-related expenses
$
301

 
$
573

 
$
82

 
$
956

Total special charges
$
1,112

 
$
2,411

 
$
109

 
3,632

Special charges paid
 
 
 
 
 
 
3,840

Accrued special charges as of June 30, 2013
 
 
 
 
 
 
$
592

During the three and six months ended June 30, 2013, facility and professional fee related expenses included lease termination costs, as well as write-downs of fixed assets and other equipment.
The following table summarizes our special charges incurred from the third quarter of 2012 through June 30, 2013.
 
2012 Announced Restructurings Incurred as of June 30, 2013
 
Energy
 
Aerospace
 
Flow
Technologies
 

Total
Facility and professional fee related expenses - incurred to date
$
2,113

 
$
2,149

 
$
162

 
$
4,424

Employee-related expenses - incurred to date
$
806

 
$
759

 
$
191

 
$
1,756

Total special charges - incurred to date
$
2,919

 
$
2,908

 
$
353

 
$
6,180

On August 1, 2013 we announced additional restructuring actions ("2013 Announced Restructuring") associated with our Aerospace and Flow Technologies segments. We expect the costs associated with the 2013 Announced Restructurings will be incurred during the second half of 2013 and the first half of 2014.
We expect to record a special recovery of approximately $3.1 million during the third quarter of 2013 associated with the SF Valves settlement. In addition, we expect to incur additional restructuring related special charges between $4.5 million and $5.0 million during the second half of 2013 ($0.2 million for the Energy segment, between $1.5 million and $1.7 million for the Aerospace segment, and between $2.8 million and $3.1 million for the Flow Technologies segment). We expect to incur additional special charges between $4.3 million and $4.7 million during the first half of 2014 (between $0.3 million and $0.4 million for the Aerospace segment and between $4.0 million and $4.3 million for the Flow Technologies segment) to complete these restructuring actions. These restructuring activities are expected to be funded with cash generated from operations.


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ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This Quarterly Report on Form 10-Q contains certain statements that are “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995 (the “Act”) and releases issued by the SEC. The words “may,” “hope,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,” “continue,” and other expressions which are predictions of or indicate future events and trends and which do not relate to historical matters, identify forward-looking statements. We believe that it is important to communicate our future expectations to our stockholders, and we, therefore, make forward-looking statements in reliance upon the safe harbor provisions of the Act. However, there may be events in the future that we are not able to accurately predict or control and our actual results may differ materially from the expectations we describe in our forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the cyclicality and highly competitive nature of some of our end markets which can affect the overall demand for and pricing of our products, changes in the price of and demand for oil and gas in both domestic and international markets, any adverse changes in governmental policies, variability of raw material and component pricing, changes in our suppliers' performance, fluctuations in foreign currency exchange rates, our ability to hire and maintain key personnel, our ability to continue operating our manufacturing facilities at efficient levels including our ability to prevent cost overruns and continue to reduce costs, our ability to generate increased cash by reducing our inventories, our prevention of the accumulation of excess inventory, our ability to successfully implement our acquisition strategy, fluctuations in interest rates, our ability to continue to successfully defend product liability actions including asbestos-related claims, our ability to realize savings anticipated to result from the restructuring activities discussed herein, as well as the uncertainty associated with the current worldwide economic conditions and the continuing impact on economic and financial conditions in the United States and around the world as a result of terrorist attacks, current Middle Eastern conflicts and related matters. We advise you to read further about certain of these and other risk factors set forth in Part I, Item 1A, “Risk Factors” of our Annual Report filed on Form 10-K for the year ended December 31, 2012, together with subsequent reports we have filed with the SEC on Forms 10-Q and 8-K, which may supplement, modify, supersede, or update those risk factors. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
Company Overview

CIRCOR International, Inc. designs, manufactures and markets valves and other highly engineered products for markets including energy, oil & gas, power generation, and aerospace. Within our major product groups, we develop, manufacture, sell and service a portfolio of fluid-control products, subsystems and technologies that enable us to fulfill our customers’ unique fluid-control application needs.
 
We have organized our reporting structure into three segments: Energy, Aerospace, and Flow Technologies. Our Energy segment primarily serves large international energy projects, short-cycle North American energy, and the pipeline transmission equipment and services end-markets. Our Aerospace segment primarily serves the commercial and military aerospace end-markets. Our Flow Technologies segment serves our broadest variety of end-markets, including power generation, industrial and process markets, chemical and refining, and industrial and commercial HVAC/steam. The Flow Technologies segment also provides products specifically designed for U.S. and international Navy applications.
 
We have been enhancing both our domestic and our worldwide operations through the development of the CIRCOR Business System. The CIRCOR Business System is based on lean operating techniques designed to continuously improve product and work flow and drive waste out of our manufacturing, sales, procurement and office-related systems (“Lean”). Within the CIRCOR Business System, we are committed to attracting, developing and refining the best talent and pursuing continuous improvement in all aspects of our business and operations. The CIRCOR Business System promotes improved shareholder value through the enhancement of core competencies across all of our business units, including continuous improvement, talent acquisition, development and retention, acquisition integration and factory restructuring, global business and supply chain development and product innovation.

Our primary objective is to enhance shareholder value through improvement of operating margins on existing businesses as well as profitable growth of our diversified, multi-national company utilizing the CIRCOR Business System. We are working to accomplish these objectives by focusing on factory repositioning activities and by winning highly engineered project and product opportunities in key end-markets that have above average growth. These end-markets include the upstream and

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midstream oil and gas, power generation, process and aerospace markets. In capitalizing on these opportunities, we are using the CIRCOR Business System to excel at:
 
Lean Enterprise, Six Sigma and Continuous Improvement;
Talent Acquisition, Development and Retention;
Acquisition and Factory Restructuring;
Global Business and Supply Chain Development;
Customer Relationship Development; and
Product Innovation.
Through organic and acquisition-based growth our three to five year objectives are to gain significant market positions in our key end-markets and build a global capability in high-growth emerging markets while improving operating margins.

Basis of Presentation

All significant intercompany balances and transactions have been eliminated in consolidation. We monitor our business in three segments: Energy, Aerospace and Flow Technologies.

We operate and report financial information using a 52-week fiscal year ending December 31. The data periods contained within our Quarterly Reports on Form 10-Q reflect the results of operations for the 13-week, 26-week and 39-week periods which generally end on the Sunday nearest the calendar quarter-end date.

Critical Accounting Policies

The following discussion of accounting policies is intended to supplement the section “Summary of Significant Accounting Policies” presented in Note (2) to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012. These policies were selected because they are broadly applicable within our operating units. The expenses and accrued liabilities or allowances related to certain of these policies are initially based on our best estimates at the time of original entry in our accounting records. Adjustments are recorded when our actual experience, or new information concerning our expected experience, differs from underlying initial estimates. These adjustments could be material if our actual or expected experience were to change significantly in a short period of time. We make frequent comparisons of actual experience and expected experience in order to mitigate the likelihood of material adjustments.

There have been no significant changes from the methodology applied by management for critical accounting estimates previously disclosed in our most recent Annual Report on Form 10-K.

In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("AOCI"). The new ASU requires entities to disclose in a single location (either on the face of the financial statement that reports net income or in the notes) the effects of reclassifications out of accumulated other comprehensive income. For items reclassified out of AOCI in their entirety into net income, entities must disclose the effect of the reclassification on each affected net income item. For AOCI reclassification items that are not reclassified in their entirety into net income, entities must provide a cross reference to other required U.S. GAAP disclosures. The new disclosure requirements are effective for annual reporting after December 15, 2012, and interim periods within those years. No reclassifications out of AOCI were made by the Company for the three and six months ended June 30, 2013 or the three months and six months ended July 1, 2012 and therefore no additional AOCI disclosure is presented in our Quarterly Report on form 10Q.

Revenue Recognition
Revenue is recognized when products are delivered, title and risk of loss have passed to the customer, persuasive evidence of an arrangement exists, no significant post-delivery obligations remain, the price to the buyers is fixed or determinable and collection of the resulting receivable is reasonably assured. We have limited long-term arrangements, representing less than 2% of our revenue, requiring delivery of products or services over extended periods of time and revenue and profits on certain of these arrangements are recognized in accordance with the percentage of completion method of accounting. Shipping and handling costs invoiced to customers are recorded as components of revenues and the associated costs are recorded as cost of revenues.


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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 $199.8 million as of June 30, 2013, compared to $198.0 million as of December 31, 2012. Our inventory allowance as of June 30, 2013 was $22.0 million, compared with $22.3 million as of December 31, 2012. Our provision for inventory obsolescence was $2.4 million and $1.7 million for the first six months of 2013 and 2012, respectively.

If there were to be a sudden and significant decrease in demand for our products, significant price reductions, or if there were a higher incidence of inventory obsolescence for any reason, including a change in technology or customer requirements, we could be required to increase our inventory allowances and our gross profit could be adversely affected.
 
Inventory management remains an area of focus as we balance the need to maintain adequate inventory levels to ensure competitive lead times against the risk of inventory obsolescence.

Penalty Accruals
Some of our customer agreements, primarily in our project related businesses, contain late shipment penalty clauses whereby we are contractually obligated to pay consideration to our customers if we do not meet specified shipment dates. The accrual for estimated penalties is shown as a reduction of revenue and is based on several factors including historical customer settlement experience and management’s assessment of specific shipment delay information. Accruals related to these potential late shipment penalties as of June 30, 2013, and December 31, 2012 were $8.2 million and $8.6 million, respectively. As we conclude performance under these agreements, the actual amount of consideration paid to our customers may vary significantly from the amounts we currently have accrued.

Concentrations of Credit Risk
 Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash, cash equivalents, short-term investments and trade receivables. A significant portion of our revenue and receivables are from customers who are either in or service the energy, aerospace and industrial markets. We perform ongoing credit evaluations of our customers and maintain allowances for potential credit losses. During 2012, 2011, and 2010, the Company did not experience any significant losses related to the collection of our accounts receivable. For the years ended December 31, 2012, 2011 and 2010 we had no customers from which we derived revenues that exceeded 10% of our consolidated revenues.

Acquisition Accounting
In connection with our acquisitions, we assess and formulate a plan related to the future integration of the acquired entity. This process begins during the due diligence phase and is concluded within twelve months of the acquisition. We account for business combinations under the purchase method, and accordingly, the assets and liabilities of the acquired businesses are recorded at their estimated fair value on the acquisition date with the excess of the purchase price over their estimated fair value recorded as goodwill. We determine acquisition related asset and liability fair values through established valuation techniques for industrial manufacturing companies and utilize third party valuation firms to assist in the valuation of certain tangible and intangible assets.

Legal Contingencies
We are currently involved in various legal claims and legal proceedings, some of which may involve substantial dollar amounts. Periodically, we review the status of each significant matter and assess our potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be estimated, we accrue a liability for the estimated loss. Significant judgment is required in both the determination of probability and the determination as to whether an exposure can be reasonably estimated. Because of uncertainties related to these matters, accruals are based on the best information available at the time. As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates. Such revisions in the estimates of the potential liabilities could have a material adverse effect on our business, results of operations and financial position. For more information related to our

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outstanding legal proceedings, see “Contingencies and Commitments” in Note 10 of the accompanying unaudited consolidated financial statements as well as “Legal Proceedings” in Part II, Item 1 hereof.

Impairment Analysis
As required by ASC Topic 350, “Intangibles - Goodwill and Other,” we perform an annual assessment as to whether there was an indication that goodwill and certain intangible assets are impaired. We also perform impairment analyses whenever events and circumstances indicate that goodwill or certain intangibles may be impaired. In assessing the fair value of goodwill, we use our best estimates of future cash flows of operating activities and capital expenditures of the reporting unit, the estimated terminal value for each reporting unit and a discount rate based on the weighted average cost of capital.

If our estimates or related projections change in the future due to changes in industry and market conditions, we may be required to record additional impairment charges. The goodwill recorded on the consolidated balance sheet as of June 30, 2013 decreased $1.9 million to $75.5 million compared to $77.4 million as of December 31, 2012 due to foreign currency fluctuations. There were no impairment triggering events as of June 30, 2013.

Income Taxes
See Income Taxes footnote.

Pension Benefits
We maintain two pension benefit plans, a qualified noncontributory defined benefit plan and a nonqualified, noncontributory defined benefit supplemental plan that provides benefits to certain highly compensated officers and employees. To date, the supplemental plan remains an unfunded plan. These plans include significant pension benefit obligations which are calculated based on actuarial valuations. Key assumptions are made in determining these obligations and related expenses, including expected rates of return on plan assets and discount rates. Benefits are based primarily on years of service and employees’ compensation.

As of July 1, 2006, in connection with a revision to our retirement plan, we froze the pension benefits of our qualified noncontributory plan participants. Under the revised plan, such participants generally do not accrue any additional benefits under the defined benefit plan after July 1, 2006 and instead receive enhanced benefits associated with our defined contribution 401(k) plan in which substantially all of our U.S. employees are eligible to participate.

During the three and six months ended June 30, 2013, we made cash contributions of $0.4 million and $0.8 million, respectively to our qualified defined benefit pension plan. For the remainder of 2013, we expect to make voluntary cash contributions of approximately $0.8 million to our qualified defined benefit pension plan, although global capital market and interest rate fluctuations may impact future funding requirements.


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Table of Contents

Results of Operations for the Three Months Ended June 30, 2013 Compared to the Three Months Ended July 1, 2012

The following tables set forth the results of operations, percentage of net revenues and the period-to-period percentage change in certain financial data for the three months ended June 30, 2013 and July 1, 2012:

 
Three Months Ended
 
Three Months Ended
 
 
 
June 30, 2013
 
July 1, 2012
 
% Change
 
(Dollars in thousands)
Net revenues
$
223,644

 
100.0
%
 
$
219,862

 
100.0
%
 
1.7
 %
Cost of revenues
153,538

 
68.7
%
 
156,046

 
71.0
%
 
(1.6
)%
Gross profit
70,106

 
31.3
%
 
63,816

 
29.0
%
 
9.9
 %
Selling, general and administrative expenses
47,596

 
21.3
%
 
45,337

 
20.6
%
 
5.0
 %
Special charges
2,254

 
1.0
%
 

 
0.0
%
 
N/A

Operating income
20,256

 
9.1
%
 
18,479

 
8.4
%
 
9.6
 %
Other expense:
 
 
 
 
 
 
 
 
 
Interest expense, net
838

 
0.4
%
 
1,017

 
0.5
%
 
(17.6
)%
Other expense, net
626

 
0.3
%
 
184

 
0.1
%
 
240.2
 %
Total other expense
1,464

 
0.7
%
 
1,201

 
0.5
%
 
21.9
 %
Income before income taxes
18,792

 
8.4
%
 
17,278

 
7.9
%
 
8.8
 %
Provision for income taxes
6,124

 
2.7
%
 
6,142

 
2.8
%
 
(0.3
)%
Net income
$
12,668

 
5.7
%
 
$
11,136

 
5.1
%
 
13.8
 %

Net Revenues
Net revenues for the three months ended June 30, 2013 increased by $3.8 million, or 2%, to $223.6 million from $219.9 million for the three months ended July 1, 2012. The change in net revenues for the three months ended June 30, 2013 was attributable to the following:
 
 
Three Months Ended
 
Total Change
 
Operations
 
Foreign
Exchange
Segment
June 30,
2013
 
July 1,
2012
 
 
(In thousands)
Energy
$
110,832

 
$
113,527

 
$
(2,695
)
 
$
(3,083
)
 
$
388

Aerospace
38,177

 
35,896

 
2,281

 
2,078

 
203

Flow Technologies
74,635

 
70,439

 
4,196

 
4,467

 
(271
)
Total
$
223,644

 
$
219,862

 
$
3,782

 
$
3,462

 
$
320


The Energy segment accounted for approximately 50% of net revenues for the three months ended June 30, 2013 compared to 52% for the three months ended July 1, 2012. The Aerospace segment accounted for 17% of net revenues for the three months ended June 30, 2013 compared to 16% for the three months ended July 1, 2012. The Flow Technologies segment accounted for 33% of net revenues for the three months ended June 30, 2013 compared to 32% for the three months ended July 1, 2012.

Energy segment revenues decreased by $2.7 million, or 2%, for the three months ended June 30, 2013 compared to the three months ended July 1, 2012. The decrease was driven by $3.1 million (2.7%) of organic declines primarily due to reductions in the short-cycle North American market as rig counts are down year over year partially offset by growth in large international projects. This net year over year organic decrease was also offset by favorable foreign currency fluctuations of $0.4 million. Energy segment orders decreased $21.0 million to $107.2 million for the three months ended June 30, 2013 compared to $128.2 million for the same period in 2012 primarily due to lower large international projects. Backlog for our Energy segment has increased $16.3 million to $213.7 million as of June 30, 2013 compared to $197.4 million as of July 1, 2012 primarily due to our large international project and pipeline businesses.
 
Aerospace segment revenues increased by $2.3 million, or 6%, for the three months ended June 30, 2013 compared to the same period in 2012. The revenue increase was due to net organic increases of $2.1 million (5.8%) primarily at to our California

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fluid control and our French businesses as well as favorable foreign currency fluctuations of $0.2 million. Orders for this segment decreased $1.6 million to $26.9 million for the three months ended June 30, 2013 compared to $28.5 million for the same period in 2012 primarily due to declines in France partially offset by growth in California fluid control orders. Order backlog increased $1.3 million to $151.9 million as of June 30, 2013 compared to $150.6 million as of July 1, 2012.

Flow Technologies segment revenues increased by $4.2 million, or 6%, for the three months ended June 30, 2013 compared to the same period in 2012. The revenue increase was due to net organic increases of $4.5 million (6.3%) with contribution from most of the markets, including power, sampling, and instrumentation, partially offset by unfavorable foreign currency fluctuations of $0.3 million. This segment’s customer orders decreased $4.5 million to $66.0 million for the three months ended June 30, 2013 compared to $70.5 million for the same period in 2012. Order backlog decreased $6.4 million to $67.9 million as of June 30, 2013 compared to $74.3 million as of July 1, 2012, driven primarily by lower maritime orders partially offset by increases in our sampling systems businesses.

Gross Profit
Consolidated gross profit increased $6.3 million, or 10%, to $70.1 million for the three months ended June 30, 2013 compared to $63.8 million for the three months ended July 1, 2012. Consolidated gross margin increased 230 basis points to 31.3% for the three months ended June 30, 2013 from 29.0% for the three months ended July 1, 2012.

 
Three Months Ended
 
Total Change
 
Operations
 
Foreign
Exchange
 
Inventory restructuring
Segment
June 30,
2013
 
July 1,
2012
 
 
(In thousands)
 
 
Energy
$
32,109

 
$
29,475

 
$
2,634

 
$
2,453

 
$
226

 
$
(47
)
Aerospace
11,824

 
10,906

 
918

 
561

 
69

 
288

Flow Technologies
26,173

 
23,435

 
2,738

 
2,851

 
(112
)
 

Total
$
70,106

 
$
63,816

 
$
6,290

 
$
5,865

 
$
183

 
$
241


Gross profit for the Energy segment increased $2.6 million, or 9%, for the three months ended June 30, 2013 compared to the same period in 2012. The gross profit increase was primarily due to $2.5 million (8.3%) of net organic increases and $0.2 million in favorable foreign currency fluctuations. Gross margins improved 300 basis points to 29.0% for the three months ended June 30, 2013 compared to 26.0% for the same period in 2012. This increase was primarily driven by improved order mix and pricing within our large international project business, and Brazil restructuring benefits, partially offset by lower shipment volume and associated margin.

Gross profit for the Aerospace segment increased $0.9 million, or 8%, for the three months ended June 30, 2013 compared to the three months ended July 1, 2012. The gross profit increase was primarily due to organic growth of $0.6 million (5.1%), favorable inventory restructuring adjustments $0.3 million, and favorable foreign currency fluctuations of $0.1 million. Gross margins improved by 60 basis points to 31.0% for the three months ended June 30, 2013 from 30.4% for the three months ended July 1, 2012 due primarily to increased volume, savings associated with the California restructuring offset primarily by unfavorable product mix and investments and start-up costs for new programs.

Gross profit for the Flow Technologies segment increased $2.7 million, or 12%, for the three months ended June 30, 2013 compared to the three months ended July 1, 2012. The gross profit increase was primarily due to $2.9 million (12.2%) of net organic increases, partially offset by $0.1 million in unfavorable foreign currency fluctuations. Gross margins improved 180 basis points to 35.1% for the three months ended June 30, 2013 from 33.3% for the three months ended July 1, 2012 primarily due to improved volume, associated margin and productivity.

Special Charges
Special charges associated with restructuring actions of $0.7 million, $1.5 million, and $0.0 million were recorded during the three months ended June 30, 2013 in our Energy, Aerospace and Flow Technologies segments, respectively. We did not record any special charges during the three months ended July 1, 2012. For additional information on the special charges, see Note 13 of the accompanying unaudited consolidated financial statements.

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Table of Contents

Operating Income (Loss)
The change in operating income for the three months ended June 30, 2013 compared to the three months ended July 1, 2012 was as follows:
 
 
Three Months Ended
 
Total
Change
 
Operations
 
Foreign
Exchange
 
Special and restructuring (1)
Segment
June 30, 2013
 
July 1, 2012
 
 
(In thousands)
 
 
Energy
$
14,477

 
$
12,580

 
$
1,897

 
$
2,459

 
$
231

 
$
(794
)
Aerospace
2,073

 
3,153

 
(1,080
)
 
86

 
31

 
(1,197
)
Flow Technologies
11,044

 
9,043

 
2,001

 
2,085

 
(62
)
 
(21
)
Corporate
(7,338
)
 
(6,297
)
 
(1,041
)
 
(1,040
)
 
(1
)
 

Total
$
20,256

 
$
18,479

 
$
1,777

 
$
3,590

 
$
199

 
$
(2,012
)
(1) Includes inventory and special charges associated with restructuring activities - see table below

The restructuring related charges for the three months ended June 30, 2013 were as follows:
 
Three Months Ended
 
Inventory restructuring
 
Special and restructuring
Segment
June 30, 2013
 
 
(In thousands)
 
 
 
Energy
$
794

$
47

 
$
747

Aerospace
1,197

 
(288
)
 
1,485

Flow Technologies
21

 

 
21

Total
$
2,012

 
$
(241
)
 
$
2,253


Operating income increased 10%, or $1.8 million, to $20.3 million for the three months ended June 30, 2013 compared to $18.5 million for the same period in 2012.

Operating income for our Energy segment increased $1.9 million, or 15%, to $14.5 million for the three months ended June 30, 2013, compared to the same period in 2012. The increase in operating income was primarily driven by net organic increases of $2.4 million (19.5%) and favorable foreign currency fluctuations $0.2 million, offset by $0.8 million of restructuring related charges. Operating margins improved 200 basis points to 13.1% compared to the same period in 2012 primarily driven by improved order mix and pricing within our large international project business, as well as Brazil restructuring benefits, partially offset by special and restructuring charges and margin associated with lower shipment volume.

Operating income for the Aerospace segment decreased $1.1 million, or 34%, to $2.1 million for the three months ended June 30, 2013 compared to the same period in 2012. The decrease in operating income was primarily driven by of $1.5 million of special charges, offset by $0.3 million of favorable inventory adjustments. Operating margins declined 340 basis points to 5.4% compared to the same period in 2012 due primarily to $1.5 million of special charges, unfavorable mix and start-up costs for new programs partially offset by increased volume, savings associated with the California restructuring of $0.6 million and favorable inventory restructuring.

Operating income for the Flow Technologies segment increased $2.0 million, or 22%, to $11.0 million for the three months ended June 30, 2013 compared to the same period in 2012. The increase in operating income was primarily driven by net organic increases of $2.1 million (23.1%). Operating margins improved by 200 basis points to 14.8% compared to the same period in 2012 primarily due to improved volume, associated margin and productivity.

Corporate operating expenses increased $1.0 million, or 17%, to $7.3 million for the three months ended June 30, 2013 compared to the same period in 2012, primarily due to higher variable compensation.
 
Interest Expense, Net
Interest expense, net, decreased $0.2 million to $0.8 million for the three months ended June 30, 2013 compared to the three months ended July 1, 2012. This change in interest expense was primarily due to lower outstanding debt balances.


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Other Expense, Net
Other expense, net, was $0.6 million for the three months ended June 30, 2013 compared to $0.2 million in the same period of 2012. The difference of $0.4 million was largely the result of higher foreign exchange losses associated with the remeasurement of foreign currency balances.

Provision for Taxes
The effective tax rate was 32.6% for the quarter ended June 30, 2013 compared to 35.6% for the same period of 2012. The primary driver of the lower 2013 tax rate was a smaller loss in 2013 versus 2012 for one of our international subsidiaries, which was not tax-benefited in either period, partially offset by discrete tax benefits recognized in the quarter ended June 30, 2012.

Net Income
Net income increased approximately $1.5 million to $12.7 million for the quarter ended June 30, 2013 compared to $11.1 million for the same period in 2012. The increase was primarily due to organic growth and savings associated with our restructuring partially offset by restructuring related charges.

Results of Operations for the Six Months Ended June 30, 2013 Compared to the Six Months Ended July 1, 2012

The following tables set forth the results of operations, percentage of net revenues and the period-to-period percentage change in certain financial data for the six months ended June 30, 2013 and July 1, 2012:

 
 
Six Months Ended
 
Six Months Ended
 
 
 
June 30, 2013
 
July 1, 2012
 
% Change
 
(Dollars in thousands)
Net revenues
$
429,042

 
100.0
%
 
$
434,142

 
100.0
%
 
(1.2
)%
Cost of revenues
299,086

 
69.7
%
 
311,714

 
71.8
%
 
(4.1
)%
Gross profit
129,956

 
30.3
%
 
122,428

 
28.2
%
 
6.1
 %
Selling, general and administrative expenses
93,168

 
21.7
%
 
90,249

 
20.8
%
 
3.2
 %
Special charges
3,632

 
0.8
%
 

 
0.0
%
 
N/A

Operating income
33,156

 
7.7
%
 
32,179

 
7.4
%
 
3.0
 %
Other expense:
 
 
 
 
 
 
 
 
 
Interest expense, net
1,625

 
0.4
%
 
2,098

 
0.5
%
 
(22.5
)%
Other expense, net
1,239

 
0.3
%
 
322

 
0.1
%
 
284.8
 %
Total other expense
2,864

 
0.7
%
 
2,420

 
0.6
%
 
18.3
 %
Income before income taxes
30,292

 
7.1
%
 
29,759

 
6.9
%
 
1.8
 %
Provision for income taxes
9,715

 
2.3
%
 
10,038

 
2.3
%
 
(3.2
)%
Net income
$
20,577

 
4.8
%
 
$
19,721

 
4.5
%
 
4.3
 %

Net Revenues
Net revenues for the six months ended June 30, 2013 decreased by $5.1 million, or 1%, to $429.0 million from $434.1 million for the six months ended July 1, 2012. The change in net revenues for the six months ended June 30, 2013 was attributable to the following:
 
 
Six Months Ended
 
Total Change
 
Operations
 
Foreign
Exchange
Segment
June 30,
2013
 
July 1,
2012
 
 
(In thousands)
Energy
$
207,553

 
$
222,791

 
$
(15,238
)
 
$
(14,583
)
 
$
(655
)
Aerospace
75,503

 
73,981

 
1,522

 
1,453

 
69

Flow Technologies
145,986

 
137,370

 
8,616

 
9,404

 
(789
)
Total
$
429,042

 
$
434,142

 
$
(5,100
)
 
$
(3,726
)
 
$
(1,375
)

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Table of Contents


The Energy segment accounted for 48% of net revenues for the six months ended June 30, 2013 compared to 51% for the six months ended July 1, 2012. The Aerospace segment accounted for 18% of net revenues for the six months ended June 30, 2013 compared to 17% for the six months ended July 1, 2012. The Flow Technologies segment accounted for 34% of net revenues for the six months ended June 30, 2013 compared to 32% for the six months ended July 1, 2012.

Energy segment revenues decreased by $15.2 million, or 7%, for the six months ended June 30, 2013 compared to the six months ended July 1, 2012. The decrease was primarily driven by $14.6 million (6.5%) of organic declines primarily due to reductions in the North America short-cycle markets as rig counts are down year over year and unfavorable foreign currency fluctuations of $0.7 million. Energy segment orders decreased $46.5 million to $217.4 million for the six months ended June 30, 2013 compared to $263.9 million for the same period in 2012, primarily due to lower large international projects and North American short-cycle orders.

Aerospace segment revenues increased by $1.5 million, or 2%, for the six months ended June 30, 2013 compared to the same period in 2012. The increase was due to organic growth of $1.5 million (2.0%) across most areas with the exception of California landing gear. Orders for this segment increased $0.4 million to $69.1 million for the six months ended June 30, 2013 compared to $68.7 million for the same period in 2012.

Flow Technologies segment revenues increased by $8.6 million, or 6%, for the six months ended June 30, 2013 compared to the same period in 2012. The revenue increase was due to net organic growth of $9.4 million (6.8%), offset by unfavorable foreign currency fluctuations of $0.8 million. The organic revenue growth was primarily due to increased process, power, and oil & gas areas. This segment’s customer orders decreased $3.0 million to $140.4 million for the six months ended June 30, 2013 compared to $143.4 million for the same period in 2012 driven by lower maritime orders.

Gross Profit
Consolidated gross profit increased $7.5 million, or 6%, to $130.0 million for the six months ended June 30, 2013 compared to $122.4 million for the six months ended July 1, 2012. Consolidated gross margin increased 210 basis points to 30.3% for the six months ended June 30, 2013 from 28.2% for the six months ended July 1, 2012.

 
Six Months Ended
 
Total Change
 
Operations
 
Foreign
Exchange
 
Inventory restructuring
Segment
June 30,
2013
 
July 1,
2012
 
 
(In thousands)
 
 
Energy
$
58,685

 
$
53,805

 
$
4,880

 
$
5,119

 
$
56

 
$
(296
)
Aerospace
20,906

 
22,938

 
(2,032
)
 
(2,334
)
 
15

 
287

Flow Technologies
50,365

 
45,686

 
4,679

 
5,019

 
(339
)
 

Total
$
129,956

 
$
122,429

 
$
7,527

 
$
7,804

 
$
(268
)
 
$
(9
)

Gross profit for the Energy segment increased $4.9 million, or 9%, for the six months ended June 30, 2013 compared to the same period in 2012. The gross profit increase was primarily due to $5.1 million (9.5%) of organic increases and $0.1 million in favorable foreign exchange rates compared to the U.S. dollar. Favorable results were partially offset by $0.3 million of inventory restructuring charges. Gross margins improved 410 basis points to 28.3% for the six months ended June 30, 2013 compared to 24.2% for the same period in 2012. This increase was primarily driven by favorable pricing and mix within our large international project business partially offset by lower North American short cycle shipment volume and associate margin.

Gross profit for the Aerospace segment decreased $2.0 million, or 9%, for the six months ended June 30, 2013 compared to the six months ended July 1, 2012. This gross profit decrease was primarily due to $2.3 million (10.2%) in organic decreases, offset by a favorable inventory restructuring adjustment of $0.3 million at our California operations. Gross margins declined by 330 basis points to 27.7% for the six months ended June 30, 2013 from 31.0% for the six months ended July 1, 2012 primarily due to the large future program expenses including those related to manufacturing capabilities and product development, partially offset by higher volume, associated margin and savings associated with the California restructuring.

Gross profit for the Flow Technologies segment increased $4.7 million, or 10%, for the six months ended June 30, 2013 compared to the six months ended July 1, 2012. The increase was primarily due to organic growth of $5.0 million (11.0%), offset by unfavorable foreign currency fluctuations of $0.3 million. Gross margins improved 120 basis points to 34.5% for the

25

Table of Contents

six months ended June 30, 2013 from 33.3% for the six months ended July 1, 2012 primarily due to improved volume and associated margin.

Special Charges
Special charges associated with restructuring actions of $1.1 million, $2.4 million, and $0.1 million were recorded during the six months ended June 30, 2013 in our Energy, Aerospace, and Flow Technologies segments, respectively. We did not record any special charges during the six months ended July 1, 2012. For additional information on the special charges, see Note 13 of the accompanying unaudited consolidated financial statements.
Operating Income (Loss)
The change in operating income for the six months ended June 30, 2013 compared to the six months ended July 1, 2012 was as follows:
 
 
Six Months Ended
 
Total
Change
 
Operations
 
Foreign
Exchange
 
Special and restructuring (1)
Segment
June 30, 2013
 
July 1, 2012
 
 
(Dollars In thousands)
 
 
Energy
$
24,614

 
$
21,508

 
$
3,106

 
$
4,237

 
$
276

 
$
(1,408
)
Aerospace
2,467

 
7,277

 
(4,810
)
 
(2,680
)
 
(6
)
 
(2,124
)
Flow Technologies
20,001

 
16,630

 
3,371

 
3,671

 
(191
)
 
(108
)
Corporate
(13,926
)
 
(13,235
)
 
(691
)
 
(680
)
 
(10
)
 

Total
$
33,156

 
$
32,180

 
$
976

 
$
4,548

 
$
69

 
$
(3,640
)
(1) Includes inventory and special charges associated with restructuring activities - see table below

The restructuring related charges for the six months ended June 30, 2013 were as follows:

 
Six Months Ended
 
Inventory restructuring
 
Special and restructuring
Segment
June 30, 2013
 
 
(In thousands)
Energy
$
1,408

 
$
296

 
$
1,112

Aerospace
2,124

 
(288
)
 
2,412

Flow Technologies
108

 

 
108

Total
$
3,640

 
$
8

 
$
3,632


Operating income increased 3%, or $1.0 million, to $33.2 million for the six months ended June 30, 2013 compared to $32.2 million for the same period in 2012.

Operating income for our Energy segment increased $3.1 million, or 14%, to $24.6 million for the six months ended June 30, 2013, compared to the same period in 2012. Operating margins improved 220 basis points to 11.9% on a revenue decrease of 7%, compared to the first six months in 2012. The increase in operating income was primarily driven by favorable pricing and mix within our large international business, partially offset by lower North American short-cycle shipment volume and restructuring related charges at our Brazil operations.

Operating income for the Aerospace segment decreased $4.8 million, or 66%, to $2.5 million for the six months ended June 30, 2013 compared to the same period in 2012. Operating income was lower primarily due to restructuring related charges, large future program expenses, partially offset by higher volume, associated margin and savings from the California restructuring.

Operating income for the Flow Technologies segment increased $3.4 million, or 20%, to $20.0 million for the six months ended June 30, 2013 compared to the same period in 2012. Operating income was higher primarily due to increased shipment volume and associated margin.

Corporate operating expenses increased $0.7 million, or 5%, to $13.9 million for the six months ended June 30, 2013 compared to the same period in 2012, primarily due to higher variable compensation.


26

Table of Contents

Interest Expense, Net
Interest expense, net, decreased $0.5 million to $1.6 million for the six months ended June 30, 2013 compared to the six months ended July 1, 2012. This change in interest expense was primarily due to lower interest charges from lower borrowings associated with our revolving credit facility and other borrowings.

Other Expense, Net
Other expense, net, was $1.2 million for the six months ended June 30, 2013 compared to $0.3 million in the same period of 2012. The difference of $0.9 million was largely the result of the remeasurement of foreign currency balances.

Provision for Taxes
The effective tax rate was 32.1% for the six months ended June 30, 2013 compared to 33.7% for the same period of 2012. The primary driver of the lower 2013 tax rate was a smaller loss for one of our international subsidiaries, which was not tax-benefited in either period.

Net Income
Net income increased $0.9 million to $20.6 million for the six months ended June 30, 2013 compared to $19.7 million for the same period in 2012.

Liquidity and Capital Resources

Our liquidity needs arise primarily from capital investment in machinery, equipment and the improvement of facilities, funding working capital requirements to support business growth initiatives, acquisitions, dividend payments, pension funding obligations and debt service costs. We have historically generated cash from operations and remain in a strong financial position, with resources available for reinvestment in existing businesses, strategic acquisitions and managing our capital structure on a short and long-term basis.

The following table summarizes our cash flow activities for the six months ended June 30, 2013 (In thousands):
 
Cash flow provided by (used in):
 
Operating activities
$
19,432

Investing activities
(8,494
)
Financing activities
(9,844
)
Effect of exchange rates on cash and cash equivalents
(2,002
)
Decrease in cash and cash equivalents
$
(907
)

During the six months e