NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited, condensed consolidated financial statements have been prepared according to the rules and regulations of the United States (the "U.S.") Securities and Exchange Commission (“SEC”) and, in the opinion of management, reflect all adjustments necessary for a fair statement 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 we use for our annual audited consolidated financial statements. Certain information and note disclosures normally included in the annual audited consolidated financial statements have been condensed or omitted in accordance with prescribed SEC rules. We believe that the disclosures made in our condensed consolidated financial statements and the accompanying notes are adequate to make the information presented not misleading.
The consolidated balance sheet at
December 31, 2015
is as reported in our audited consolidated financial statements as of that date. Our accounting policies are described in the notes to our
December 31, 2015
consolidated financial statements, which were included in our Annual Report filed on Form 10-K for the year ended December 31, 2015. We recommend that the financial statements included in our Quarterly Report on Form 10-Q be read in conjunction with the consolidated financial statements and notes included in our Annual Report filed on Form 10-K for the year ended
December 31, 2015
.
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
months ended
April 3, 2016
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2016
.
The Company recorded additions to property, plant and equipment for which cash payments had not yet been made of $
1.0
million and
$0.5 million
in the
three
months ended
April 3, 2016
and
April 5, 2015
, respectively.
Revision of Prior Period Financial Statements
In the third quarter of fiscal 2015, the Company identified prior period errors related to the Company’s consolidated financial statements related to the Brazil operations for the fiscal quarter ended April 5, 2015. Specifically, the Company determined that accounts receivable and certain taxes (primarily the Value Added Tax Recoverable) related to the Company’s Brazil operations were not properly stated. The Company’s correction of these errors resulted in a decrease in Net Income from
$9.6
million to
$8.9
million and in Operating Income from
$13.1
million to
$12.3
million for the three months ended April 5, 2015.
In addition, during the same period, the Company identified that it incorrectly classified certain items on the statement of cash flows for the quarter ended April 5, 2015. This resulted in overstating operating cash flows, overstating investing cash flows, and understating financing cash flows by
$2.8 million
,
$0.6 million
, and
$3.4 million
, respectively. The Company has corrected these errors within the financial information for the fiscal quarter ended April 5, 2015.
The following table details the impact of the revision on the Company’s condensed consolidated balance sheet as of April 5, 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 5, 2015
|
|
As Reported
|
|
Adjustments
|
|
Revised
|
Trade accounts receivable, less allowance for doubtful accounts
|
$
|
140,752
|
|
|
$
|
474
|
|
|
$
|
141,226
|
|
Prepaid expenses and other current assets
|
21,731
|
|
|
(1,356
|
)
|
|
20,375
|
|
Total Current Assets
|
483,254
|
|
|
(882
|
)
|
|
482,372
|
|
TOTAL ASSETS
|
688,691
|
|
|
(882
|
)
|
|
687,809
|
|
Accrued expenses and other current liabilities
|
53,443
|
|
|
(162
|
)
|
|
53,281
|
|
Total Current Liabilities
|
157,983
|
|
|
(162
|
)
|
|
157,821
|
|
Retained earnings
|
259,599
|
|
|
(720
|
)
|
|
258,879
|
|
Total Shareholders’ Equity
|
463,103
|
|
|
(720
|
)
|
|
462,383
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$
|
688,691
|
|
|
$
|
(882
|
)
|
|
$
|
687,809
|
|
The following table details the impact of the revision on the Company’s condensed consolidated statement of operations for the three months ended April 5, 2015 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 5, 2015
|
|
As Reported
|
|
Adjustments
|
|
Revised
|
Selling, general and administrative expenses
|
$
|
38,088
|
|
|
$
|
720
|
|
|
$
|
38,808
|
|
OPERATING INCOME
|
13,050
|
|
|
(720
|
)
|
|
12,331
|
|
INCOME BEFORE INCOME TAXES
|
12,916
|
|
|
(720
|
)
|
|
12,196
|
|
NET INCOME
|
$
|
9,632
|
|
|
$
|
(720
|
)
|
|
$
|
8,913
|
|
Earnings per common share:
|
|
|
|
|
|
Basic
|
$
|
0.55
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.50
|
|
Diluted
|
$
|
0.54
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.50
|
|
The following table details the impact of the revision on the Company’s condensed consolidated statement of comprehensive (loss) income for the three months ended April 5, 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended April 5, 2015
|
|
As Reported
|
|
Adjustments
|
|
Revised
|
Net income
|
$
|
9,632
|
|
|
$
|
(720
|
)
|
|
$
|
8,913
|
|
COMPREHENSIVE INCOME (LOSS)
|
$
|
(16,147
|
)
|
|
$
|
(720
|
)
|
|
$
|
(16,866
|
)
|
The following table details the impact of the revision on the Company’s condensed consolidated statement of cash flows for the three months ended April 5, 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 5, 2015
|
|
As Reported
|
|
Adjustments
|
|
Revised
|
OPERATING ACTIVITIES
|
|
|
|
|
|
Net income
|
$
|
9,632
|
|
|
$
|
(720
|
)
|
|
$
|
8,913
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Trade accounts receivable, net
|
7,480
|
|
|
(474
|
)
|
|
7,006
|
|
Prepaid expenses and other assets
|
(4,787
|
)
|
|
1,356
|
|
|
(3,431
|
)
|
Accounts payable, accrued expenses and other liabilities
|
(15,298
|
)
|
|
(2,926
|
)
|
|
(18,224
|
)
|
Net cash used in operating activities
|
$
|
(16,432
|
)
|
|
$
|
(2,764
|
)
|
|
$
|
(19,195
|
)
|
INVESTING ACTIVITIES
|
|
|
|
|
|
Purchases of property, plant and equipment
|
(1,983
|
)
|
|
(627
|
)
|
|
(2,610
|
)
|
Net cash provided by investing activities
|
776
|
|
|
(627
|
)
|
|
149
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
Purchases of common stock
|
(16,682
|
)
|
|
3,391
|
|
|
(13,291
|
)
|
Net cash provided by financing activities
|
8,336
|
|
|
3,391
|
|
|
11,727
|
|
(2) Summary of Significant Accounting Policies
The significant accounting policies used in preparation of these condensed consolidated financial statements for the
three
months ended
April 3, 2016
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, 2015
.
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2016-02, Leases. ASU 2016-02 outlines a model of enhanced transparency for lessees by recognizing lease-related assets and liabilities on the balance sheet. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early application is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. We are currently evaluating the requirements of ASU 2016-02 and have not yet determined its impact on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, as part of its Simplification Initiative. The areas for simplification in this update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this ASU are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early application is permitted for all entities. We are currently evaluating the requirements of ASU 2016-09 and have not yet determined its impact on our consolidated financial statements.
(3) Inventories
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
April 3, 2016
|
|
December 31, 2015
|
Raw materials
|
$
|
50,554
|
|
|
$
|
51,439
|
|
Work in process
|
79,570
|
|
|
83,324
|
|
Finished goods
|
39,976
|
|
|
43,077
|
|
Total inventories
|
$
|
170,100
|
|
|
$
|
177,840
|
|
(4) Business Acquisition
On April 15, 2015, we acquired all of the outstanding equity interest of Germany-based Schroedahl GMBH ("Schroedahl"), a privately-owned manufacturer of safety and control valves primarily serving the power generation market. Founded in 1962 with customers in Asia, Europe and the Americas, Schroedahl designs and manufactures custom-engineered high-pressure auto-recirculation and control valves primarily for pump protection applications. We acquired Schroedahl for an aggregate purchase price of
$79.7 million
in cash, net of acquired cash. We acquired Schroedahl to further increase our penetration into the power generation market. The operating results of Schroedahl have been included in our consolidated financial statements from the date of acquisition reported within the Energy segment. Acquisition-related costs of
$0.4 million
primarily consisted of legal and financial advisory services and were expensed as incurred in general and administrative expenses during the three months ended April 5, 2015. We financed the acquisition of Schroedahl through cash on hand and net borrowings of approximately
$23.8 million
under our existing credit facility.
The purchase price allocation is based upon a valuation of assets and liabilities that was prepared with assistance from a third party valuation specialist. The purchase accounting was finalized during the first quarter of fiscal 2016. The assets and liabilities include the valuation of acquired intangible assets, certain operating liabilities, and the evaluation of deferred income taxes.
The following table summarizes the fair value of the assets acquired and the liabilities assumed, at the date of acquisition:
|
|
|
|
|
(in thousands)
|
|
Cash and cash equivalents
|
$
|
36,316
|
|
Other current assets
|
11,470
|
|
Property, plant and equipment
|
1,999
|
|
Intangible assets
|
32,829
|
|
Current liabilities
|
(5,452
|
)
|
Deferred tax liability
|
(7,285
|
)
|
Other non-current liabilities
|
(642
|
)
|
Total identifiable net assets
|
69,034
|
|
Goodwill
|
46,818
|
|
Total purchase price
|
$
|
116,053
|
|
The fair value of accounts receivable acquired approximates the contractual value of
$4.3 million
. The goodwill recognized is attributable primarily to projected future profitable growth, market penetration, as well as an expanded customer base for the Energy segment. The goodwill arising from the acquisition that is deductible for income tax purposes is
$13.2 million
.
The Schroedahl acquisition resulted in the identification of the following identifiable intangible assets:
|
|
|
|
|
|
|
|
Intangible assets acquired (in thousands)
|
|
Weighted average amortization period (in years)
|
Customer relationships
|
$
|
22,185
|
|
|
7
|
Order backlog
|
3,993
|
|
|
1
|
Acquired technology
|
2,260
|
|
|
10
|
Trade name
|
4,391
|
|
|
Indefinite
|
Total intangible assets
|
$
|
32,829
|
|
|
|
The fair value of the intangible assets was based on variations of the income approach, which estimates fair value based on the present value of cash flows that the assets are expected to generate which included the relief-from-royalty method, incremental cash flow method, multi-period excess earnings method and direct cash flow method, depending on the intangible asset being valued. Customer relationships, order backlog, and acquired technology are amortized on a cash flow basis. The trade name was assigned an indefinite life based on the Company’s intention to keep the Schroedahl name for an indefinite period of time. Refer to Note 5 for future expected amortization to be recorded.
Schroedahl's results for the three months ended April 3, 2016 include
$6.1 million
of net revenue, and
$0.3 million
of operating income, respectively. Operating income includes
$0.6 million
of intangible amortization. Pro forma results of
operations for the acquisition have not been presented because the effects of the acquisition are not material to the Company's consolidated financial results.
(5) Goodwill and Intangibles, net
The following table shows goodwill by segment as of
April 3, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
|
|
Aerospace & Defense
|
|
Consolidated
Total
|
Goodwill as of December 31, 2015
|
$
|
93,175
|
|
|
$
|
22,277
|
|
|
$
|
115,452
|
|
Adjustments to preliminary purchase price allocation
|
196
|
|
|
—
|
|
|
196
|
|
Currency translation adjustments
|
2,464
|
|
|
58
|
|
|
2,522
|
|
Goodwill as of April 3, 2016
|
$
|
95,835
|
|
|
$
|
22,335
|
|
|
$
|
118,170
|
|
The table below presents gross intangible assets and the related accumulated amortization as of
April 3, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
Patents
|
$
|
6,042
|
|
|
$
|
(5,779
|
)
|
Non-amortized intangibles (primarily trademarks and trade names)
|
15,582
|
|
|
—
|
|
Customer relationships
|
53,982
|
|
|
(25,783
|
)
|
Order backlog
|
5,279
|
|
|
(4,607
|
)
|
Acquired technology
|
2,419
|
|
|
(575
|
)
|
Other
|
5,570
|
|
|
(4,610
|
)
|
Total
|
$
|
88,874
|
|
|
$
|
(41,354
|
)
|
Net carrying value of intangible assets
|
$
|
47,520
|
|
|
|
The table below presents estimated remaining amortization expense for intangible assets recorded as of
April 3, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
After 2020
|
Estimated amortization expense
|
$
|
7,593
|
|
|
$
|
8,064
|
|
|
$
|
6,252
|
|
|
$
|
4,603
|
|
|
$
|
2,951
|
|
|
$
|
2,475
|
|
(6) Segment Information
The following table presents certain reportable segment information (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
|
|
Aerospace & Defense
|
|
Corporate /
Eliminations
|
|
Consolidated
Total
|
Three Months Ended April 3, 2016
|
|
|
|
|
|
|
|
Net revenues
|
$
|
112,620
|
|
|
$
|
38,178
|
|
|
$
|
—
|
|
|
$
|
150,798
|
|
Inter-segment revenues
|
194
|
|
|
47
|
|
|
(241
|
)
|
|
—
|
|
Operating income (loss)
|
9,903
|
|
|
2,082
|
|
|
(6,490
|
)
|
|
5,495
|
|
Interest expense, net
|
|
|
|
|
|
|
631
|
|
Other income, net
|
|
|
|
|
|
|
(528
|
)
|
Income before income taxes
|
|
|
|
|
|
|
$
|
5,392
|
|
Identifiable assets
|
724,540
|
|
|
186,681
|
|
|
(240,124
|
)
|
|
671,097
|
|
Capital expenditures
|
2,068
|
|
|
1,076
|
|
|
106
|
|
|
3,250
|
|
Depreciation and amortization
|
4,106
|
|
|
1,361
|
|
|
325
|
|
|
5,792
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 5, 2015
|
|
|
|
|
|
|
|
Net revenues
|
$
|
127,586
|
|
|
$
|
38,274
|
|
|
$
|
—
|
|
|
$
|
165,860
|
|
Inter-segment revenues
|
250
|
|
|
82
|
|
|
(332
|
)
|
|
—
|
|
Operating income (loss)
|
15,932
|
|
|
2,852
|
|
|
(6,454
|
)
|
|
12,331
|
|
Interest expense, net
|
|
|
|
|
|
|
641
|
|
Other income, net
|
|
|
|
|
|
|
(506
|
)
|
Income before income taxes
|
|
|
|
|
|
|
$
|
12,196
|
|
Identifiable assets
|
592,145
|
|
|
189,850
|
|
|
(94,186
|
)
|
|
687,809
|
|
Capital expenditures
|
1,316
|
|
|
475
|
|
|
192
|
|
|
1,983
|
|
Depreciation and amortization
|
2,432
|
|
|
1,531
|
|
|
268
|
|
|
4,231
|
|
|
|
|
|
|
|
|
|
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.
In calculating operating income for each reporting segment, certain 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; Board of Director compensation; 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 as of
April 3, 2016
and
April 5, 2015
. Corporate Identifiable Assets after elimination of intercompany assets were
$41.1 million
and
$39.7 million
as of
April 3, 2016
and
April 5, 2015
, respectively.
(7) Earnings Per Common Share ("EPS")
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts)
|
Three Months Ended
|
|
April 3, 2016
|
|
April 5, 2015
|
|
Net
Income
|
|
Shares
|
|
Per Share
Amount
|
|
Net
Income
|
|
Shares
|
|
Per Share
Amount
|
Basic EPS
|
$
|
3,872
|
|
|
16,381
|
|
|
$
|
0.24
|
|
|
$
|
8,913
|
|
|
17,662
|
|
|
$
|
0.50
|
|
Dilutive securities, common stock options
|
—
|
|
|
100
|
|
|
(0.01
|
)
|
|
—
|
|
|
50
|
|
|
—
|
|
Diluted EPS
|
$
|
3,872
|
|
|
16,481
|
|
|
$
|
0.23
|
|
|
$
|
8,913
|
|
|
17,712
|
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options, Restricted Stock Unit Awards (“RSU Awards”) and Restricted Stock Unit Management Stock Plans ("RSU MSPs") covering
511,220
and
362,261
shares of common stock, for the
three
months ended
April 3, 2016
and
April 5, 2015
, respectively, were not included in the computation of diluted EPS because their effect would be anti-dilutive.
(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. Cash equivalents are carried at cost which approximates fair value at the balance sheet date and is a Level 1 financial instrument. As of April 3, 2016 and December 31, 2015, the outstanding balance of the Company’s debt approximated its fair value based on current rates available to the Company for debt of the same maturity and is a Level 2 financial instrument.
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 gains and losses on our contracts are recognized as a component of other expense in our condensed consolidated statements of income.
As of
April 3, 2016
, we had
eleven
forward contracts:
eight
U.S. Dollar/Euro contracts with a notional amount of
$26.9 million
and
three
Brazilian Real/Euro contracts with a notional amount of less than
$0.1 million
. This compares to
thirteen
forward contracts as of
December 31, 2015
. The fair value asset of the derivative forward contracts as of
April 3, 2016
was
$0.9 million
and was included in prepaid expenses and other current assets on our condensed consolidated balance sheet. This compares to a fair value liability of
$0.2 million
that was included in accrued expenses and other current liabilities on our consolidated balance sheet as of
December 31, 2015
. Our foreign currency forward contracts fall within Level 2 of the fair value hierarchy, in accordance with Accounting Standards Codification (“ASC”) Topic 820. For the three month period ended
April 3, 2016
, the unrealized foreign exchange gain associated with these forward contracts was approximately
$1.2 million
. This compares to an unrealized foreign exchange loss of
$0.4 million
for the three month period ended
April 5, 2015
, respectively.
(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 insure us with respect to certain events covered under the policies and should enable us to recover a portion of any future amounts paid under the indemnification agreements. We have
no
liabilities recorded from those agreements as of April 3, 2016.
We record provisions for the estimated cost of product warranties, primarily from historical information, at the time product revenue is recognized. We also record provisions with respect to any significant individual warranty issues as they arise. While we engage in extensive product quality programs and processes, our warranty obligation is affected by product failure rates, utilization levels, material usage, service delivery costs incurred in correcting a product failure, and supplier warranties on parts delivered to us. Should actual product failure rates, utilization levels, material usage, service delivery costs or supplier warranties on parts differ from our estimates, revisions to the estimated warranty liability would be required.
The following table sets forth information related to our product warranty reserves for the
three
months ended
April 3, 2016
(in thousands):
|
|
|
|
|
Balance beginning December 31, 2015
|
$
|
4,551
|
|
Provisions
|
582
|
|
Claims settled
|
(929
|
)
|
Currency translation adjustment
|
97
|
|
Balance ending April 3, 2016
|
$
|
4,301
|
|
Warranty obligations decreased
$0.3 million
from
$4.6 million
as of
December 31, 2015
to
$4.3 million
as of
April 3, 2016
, primarily related to higher claims settled within our engineered valves and California businesses (
$0.9 million
), offset in part by our standard provisions during the period of
$0.6 million
.
(10) Contingencies and Commitments
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.
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, Inc.) (“Hoke”), the stock of which we acquired in 1998. Due to the nature of the products supplied by these entities, the markets they serve and our historical experience in resolving these claims, we do not believe that these asbestos-related claims will have a material adverse effect on the financial condition, results of operations or liquidity of Spence or Hoke, or our financial condition, consolidated results of operations or liquidity of the Company.
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
$55.8 million
at
April 3, 2016
. 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 a significant payment relating to the outstanding instruments is remote. These instruments generally have expiration dates ranging from less than
1 month
to
5 years
from
April 3, 2016
.
The following table contains information related to standby letters of credit instruments outstanding as of
April 3, 2016
(in thousands):
|
|
|
|
|
Term Remaining
|
Maximum Potential
Future Payments
|
0–12 months
|
$
|
29,587
|
|
Greater than 12 months
|
26,169
|
|
Total
|
$
|
55,756
|
|
(11) Defined Benefit Pension Plans
We maintain two benefit pension plans, a qualified noncontributory defined benefit plan and a nonqualified, noncontributory defined benefit supplemental plan that provides benefits to certain retired highly compensated officers and employees. To date, the supplemental plan remains an unfunded plan. These plans include significant pension benefit obligations which are calculated based on actuarial valuations. Key assumptions are made in determining these obligations and related expenses, including expected rates of return on plan assets and discount rates. Benefits are based primarily on years of service and employees’ compensation.
As of July 1, 2006, in connection with a revision to our retirement plan, we froze the pension benefits of our qualified noncontributory plan participants. Under the revised plan, such participants generally do not accrue any additional benefits under the defined benefit plan after July 1, 2006.
During the
three
months ended
April 3, 2016
, we made a cash contribution of
$0.4 million
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 periodic cost (benefit) of defined benefit pension plans are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 3,
2016
|
|
April 5,
2015
|
Interest cost on benefits obligation
|
$
|
574
|
|
|
$
|
548
|
|
Estimated return on assets
|
(664
|
)
|
|
(723
|
)
|
Loss amortization
|
226
|
|
|
210
|
|
Net periodic cost of defined benefit pension plans
|
$
|
136
|
|
|
$
|
35
|
|
(12) Income Taxes
As of
April 3, 2016
and
December 31, 2015
, we had
$3.0 million
and
$2.9 million
of unrecognized tax benefits, respectively, of which
$2.6 million
and
$2.7 million
, respectively, would affect our effective tax rate if recognized in any future period.
The Company files income tax returns in the U.S. federal, state and local jurisdictions and in foreign jurisdictions. The
Company is no longer subject to examination by the Internal Revenue Service (the "IRS") for years prior to
2012
and is no longer subject to examination by the tax authorities in foreign and state jurisdictions prior to
2006
. The Company is currently under examination for income tax filings in various foreign jurisdictions.
The Company has a net U.S. domestic deferred income tax asset and a net foreign deferred tax liability. Due to uncertainties related to our ability to utilize certain of these U.S. domestic deferred income tax assets, primarily consisting of state net operating losses and state tax credits carried forward, we maintained a total valuation allowance of
$0.9 million
at
April 3, 2016
and
December 31, 2015
. The valuation allowance is based on estimates of income in each of the jurisdictions in which we operate and the period over which our deferred tax assets will be recoverable. If future results of operations exceed our current expectations, our existing tax valuation allowances may be adjusted, resulting in future tax benefits. Alternatively, if 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 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 income, is able to avail itself of federal tax carryback provisions, has future
taxable temporary differences and projects future domestic and foreign 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 income to realize the remaining net deferred income tax asset.
(13) Share-Based Compensation
As of
April 3, 2016
, we have two share-based compensation plans. The 2014 Stock Option and Incentive Plan (the "2014 Plan") was adopted by our Board of Directors on February 12, 2014 and approved by our shareholders at the Company's annual meeting held on April 30, 2014. As of April 30, 2014, no new awards may be granted under the existing Amended and Restated 1999 Stock Option and Incentive Plan (the “1999 Plan”). As a result, any shares subject to outstanding awards under the 1999 Plan that expire, are canceled or otherwise terminate, or are withheld to satisfy tax withholding obligations will not be available for award grant purposes under the 2014 Plan. Both plans permit the grant 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 ("SARs") and dividend equivalent rights. The 2014 Plan provides for the issuance of up to
1,700,000
shares of common stock (subject to adjustment for stock splits and similar events). Under the 2014 Plan, shares issued for awards other than stock options or SARs count against the aggregate share limit as
1.9
shares for every share actually issued. New options granted under the 2014 Plan could have varying vesting provisions and exercise periods. Options previously granted under the 1999 Plan vest in periods ranging from
one year
to
five years
and expire either
seven years
or
ten years
after the grant date. Restricted stock units granted under the 1999 Plan generally vest within
three years
. Vested restricted stock units will be settled in shares of our common stock.
As of
April 3, 2016
, there were
771,388
stock options (including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") stock option awards noted below) and
234,310
restricted stock units outstanding. In addition, there were
1,013,423
shares available for grant under the 2014 Plan as of
April 3, 2016
.
The Black-Scholes option pricing model was used to estimate the fair value of each stock option grant at the date of grant excluding the 2013 and 2014 CEO and CFO stock option awards which were valued using the Monte Carlo option pricing model. Black-Scholes utilizes assumptions related to volatility, the risk-free interest rate, the dividend yield and employee exercise behavior. Expected volatility utilized in the model are based on the historic volatility of the Company’s stock price at the date of the grant. The risk-free interest rate is derived from the U.S. Treasury Yield curve in effect at the time of the grant.
During the
three
months ended
April 3, 2016
, we granted
210,633
stock options compared with
118,992
stock options granted during the
three
months ended April 5,
2015
.
The average fair value of stock options granted during the first
three
months of
2016
and
2015
was
$11.91
and
$17.88
, respectively, and was estimated using the following weighted-average assumptions:
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Risk-free interest rate
|
1.2
|
%
|
1.4
|
%
|
Expected life (years)
|
4.5
|
|
4.5
|
|
Expected stock volatility
|
36.2
|
%
|
40.4
|
%
|
Expected dividend yield
|
0.4
|
%
|
0.3
|
%
|
For additional information regarding the historical issuance of stock options including awards to our CEO and CFO, refer to our Form 10-K for the year ended December 31, 2015 filed on February 23, 2016.
We account for RSU Awards by expensing the weighted average fair value to selling, general and administrative expenses ratably over vesting periods generally ranging up to
three
years. During the
three
months ended
April 3, 2016
and
April 5, 2015
, we granted
84,578
and
54,702
RSU Awards with approximate fair values of
$38.89
and
$51.92
per RSU Award, respectively. During the first
three
months of
2016
and
2015
, we granted performance-based RSUs as part of the overall mix of RSU Awards. These performance-based RSUs include metrics for achieving Return on Invested Capital and Adjusted Operating Margin with target payouts ranging from
0%
to
200%
. Of the
84,578
RSUs granted during the
three
months ended
April 3, 2016
,
43,016
are performance-based RSU awards. This compares to
26,094
performance-based RSU awards granted during the
three
months ended
April 5, 2015
.
The CIRCOR Management Stock Purchase Plan, which is a component of both the 2014 Plan and the 1999 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 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 common stock on the date of grant. This discount is amortized as compensation expense, to selling, general and administrative expenses, over a
four
year period. RSU MSPs totaling
20,130
and
38,965
with per unit discount amounts representing fair values of
$12.83
and
$17.11
were granted under the CIRCOR Management Stock Purchase Plan during the
three
months ended
April 3, 2016
and
April 5, 2015
, respectively.
Compensation expense related to our share-based plans for the
three
month periods ended
April 3, 2016
and
April 5, 2015
was
$1.5 million
and
$2.2 million
, respectively. For the
three
month period ended
April 3, 2016
,
$1.5 million
of compensation expense was recorded as selling, general and administrative expenses. For the
three
month period ended
April 5, 2015
,
$1.8 million
was recorded as selling, general and administrative expense and
$0.4 million
was recorded as a special charge related to the retirement of one of our executive officers. As of
April 3, 2016
, there was
$11.2 million
of total unrecognized compensation costs related to our outstanding share-based compensation arrangements. That cost is expected to be recognized over a weighted average period of
2.2
years.
The weighted average contractual term for stock options outstanding and options exercisable as of
April 3, 2016
was
6.8
years and
6.1
years, respectively. The aggregate intrinsic value of stock options exercised during the
three
months ended
April 3, 2016
was less than
$0.1 million
and the aggregate intrinsic value of stock options outstanding and options exercisable as of
April 3, 2016
was
$3.4 million
and
$1.2 million
, respectively.
The aggregate intrinsic value of RSU Awards settled during the
three
months ended
April 3, 2016
was
$1.4 million
and the aggregate intrinsic value of RSU Awards outstanding and RSU Awards vested and deferred as of
April 3, 2016
was
$7.5 million
and less than
$0.1 million
, respectively.
The aggregate intrinsic value of RSU MSPs settled during the
three
months ended
April 3, 2016
was
$0.2 million
and the aggregate intrinsic value of RSU MSPs outstanding and RSU MSPs vested and deferred as of
April 3, 2016
was
$0.9 million
and less than
$0.1 million
, respectively.
We also grant Cash Settled Stock Unit Awards to certain international employee participants. These Cash Settled Stock Unit Awards typically cliff-vest in
three
years and are settled in cash based on the Company's closing stock price at the time of vesting. As of
April 3, 2016
, there were
34,128
Cash Settled Stock Unit Awards outstanding compared to
28,660
as of December 31, 2015. During the
three
months ended
April 3, 2016
, the aggregate cash used to settle Cash Settled Stock Unit Awards was
$0.4 million
. As of
April 3, 2016
, we had
$0.5 million
of accrued expenses in current liabilities associated with these Cash Settled Stock Unit Awards compared with
$0.7 million
as of December 31, 2015. Cash Settled Stock Unit Awards related compensation costs for the
three
month periods ended
April 3, 2016
and
April 5, 2015
was
$0.2 million
and
$0.2 million
, respectively, and was recorded as selling, general, and administrative expense.
(14) Accumulated Other Comprehensive Loss
The following table summarizes the changes in accumulated other comprehensive loss, net of tax, which is reported as a component of shareholder's equity, for the
three
months ended
April 3, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments
|
|
Pension, net
|
|
Total
|
Balance as of December 31, 2015
|
$
|
(36,725
|
)
|
|
$
|
(29,263
|
)
|
|
$
|
(65,988
|
)
|
Other comprehensive income, net of tax
|
8,294
|
|
|
—
|
|
|
8,294
|
|
Balance as of April 3, 2016
|
$
|
(28,431
|
)
|
|
$
|
(29,263
|
)
|
|
$
|
(57,694
|
)
|
Amounts reclassified from accumulated other comprehensive loss, net of tax, to net income were immaterial for the
three
months ended
April 3, 2016
.
(15) Special Charges, net
General Background
The nature of Special Charges, net include restructuring costs, costs to exit a product line or program, litigation settlements and other special charges or gains that are generally not reflective of our on-going operational results.
On November 3, 2015, the Board of Directors approved the closure and exit of our Brazil manufacturing operations ("Brazil Closure") due to the economic realities in Brazil and the ongoing challenges with our only significant end customer, Petrobras. CIRCOR Brazil has reported substantial operating losses every year since it was acquired in 2011 while the underlying market conditions and outlook have deteriorated. In connection with the closure, we recorded
$0.9 million
in special charges within the Energy Segment during the three months ended
April 3, 2016
which primarily related to employee termination costs. As of
April 3, 2016
, our remaining Brazil assets were
$4.8 million
of which
$1.1 million
relates to net third party accounts receivables,
$0.9 million
relates to net property, plant & equipment,
$0.7 million
relates to cash, and
$0.6 million
relates to inventory.
In July 2015, we announced the closure of one of the two Corona, California manufacturing facilities ("California Restructuring"). Under this restructuring, we are reducing certain general, manufacturing and facility related expenses.
On April 15, 2015, we acquired Germany-based Schroedahl, a privately-owned manufacturer of safety and control valves primarily in the power generation market. In connection with our acquisition of Schroedahl, we recorded certain acquisition related professional fees ("Acquisition related charges") as special charges.
On February 18, 2015, we announced additional restructuring actions ("2015 Announced Restructurings"), under which we continued to simplify our businesses. Under this restructuring, we reduced certain general, administrative and manufacturing related expenses primarily personnel related. Charges with this action were finalized in the fourth quarter of 2015. Refer to Note 4, "Special Charges, net" of our Annual Report filed on Form 10-K for the year ended December 31, 2015 for further details regarding these charges.
During the first quarter of 2015, we recorded special charges of
$0.4 million
associated with the retirement of our Energy President ("Executive retirement charges"). These charges primarily related to equity award modification charges.
On January 6, 2015 we announced the divestiture of two of our non-core businesses ("Divestitures") as part of our simplification strategy. During the fourth quarter of 2014, we recorded
$3.4 million
of special charges associated with losses related to these divestitures. The Energy divestiture was substantially completed in the fourth quarter of 2014. During the first quarter of 2015, the Aerospace & Defense divestiture was substantially completed and we recorded a special gain of
$1.0 million
.
On April 22, 2014, we announced additional restructuring actions ("2014 Announced Restructurings"), under which we continued to simplify our businesses. Under this restructuring, we reduced certain general and administrative expenses, including the reduction of certain management layers, and closing a number of smaller facilities. The savings from these restructuring actions were utilized for growth investments. Charges with this action were finalized in the second quarter of 2015. Refer to Note 4, "Special Charges, net" of our Annual Report filed on Form 10-K for the year ended December 31, 2015 for further details regarding these charges.
The special charges described above are recorded in the special charges, net caption on our condensed consolidated statements of income.
Inventory Restructuring
During the first quarter of 2016, we recorded restructuring related inventory charges of $
1.9 million
associated with the closure of manufacturing operations and the exit of the gate, globe and check valves product line in Brazil. As of
April 3, 2016
, our remaining Brazil inventory balance is
$0.6 million
which we believe is recoverable based upon our net realizable value calculations.
During the first quarter of 2016, in connection with the restructuring of certain structural landing gear product lines, we recorded inventory related charges of less than
$0.1 million
within the Aerospace & Defense segment. As of
April 3, 2016
, our remaining structural landing gear product line inventory balance is
$1.9 million
which we believe is recoverable based upon our net realizable value analysis.
The inventory restructuring charges described above are recorded in the cost of revenues caption on our condensed consolidated statement of income.
Q1 2016
The tables below (in thousands) show the non-inventory restructuring related and special charges, net of recoveries, for the quarter ending
April 3, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special Charges / (Recoveries)
|
|
As of and for the quarter ended April 3, 2016
|
|
Energy
|
|
Aerospace & Defense
|
|
Corporate
|
|
Total
|
Facility related expenses (recoveries)
|
$
|
(376
|
)
|
|
$
|
1,400
|
|
|
$
|
—
|
|
|
$
|
1,024
|
|
Employee related expenses
|
98
|
|
|
41
|
|
|
—
|
|
|
139
|
|
Total restructuring charges, net
|
$
|
(278
|
)
|
|
$
|
1,441
|
|
|
$
|
—
|
|
|
$
|
1,163
|
|
Acquisition related recoveries
|
(113
|
)
|
|
—
|
|
|
—
|
|
|
(113
|
)
|
Brazil Closure
|
887
|
|
|
—
|
|
|
2
|
|
|
889
|
|
Total special charges, net
|
$
|
496
|
|
|
$
|
1,441
|
|
|
$
|
2
|
|
|
$
|
1,939
|
|
|
|
|
|
|
|
|
|
Accrued special and restructuring charges as of December 31, 2015
|
|
|
|
|
|
|
$
|
4,664
|
|
Total quarterly special charges, net (shown above)
|
|
|
|
|
|
|
1,939
|
|
Special charges paid / settled, net
|
|
|
|
|
|
|
(3,139
|
)
|
Accrued special and restructuring charges as of April 3, 2016
|
|
|
|
|
|
|
$
|
3,464
|
|
The restructuring charges incurred to date that remain as of
April 3, 2016
relate to Brazil closure charges recorded in 2015 for supplier cancellation penalties for fixed purchase commitments, customer cancellation penalties, and litigation claims that we deem probable of loss. We expect to make payment or settle the majority of the restructuring obligations accrued at April 3, 2016 during the second half of 2016.
Q1 2015
The tables below (in thousands) show the non-inventory restructuring related and special charges, net of recoveries, for the quarter ending April 5, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special Charges / (Recoveries)
|
|
As of and for the quarter ended April 5, 2015
|
|
Energy
|
|
Aerospace & Defense
|
|
Corporate
|
|
Total
|
Facility related expenses
|
$
|
19
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
32
|
|
Employee related expenses
|
324
|
|
|
1,156
|
|
|
—
|
|
|
1,480
|
|
Total restructuring charges
|
$
|
343
|
|
|
$
|
1,169
|
|
|
$
|
—
|
|
|
$
|
1,512
|
|
Divestiture expenses (recoveries)
|
26
|
|
|
(977
|
)
|
|
—
|
|
|
(951
|
)
|
Acquisition related charges
|
530
|
|
|
—
|
|
|
—
|
|
|
530
|
|
Executive retirement charges
|
—
|
|
|
—
|
|
|
420
|
|
|
420
|
|
Total special charges, net
|
$
|
899
|
|
|
$
|
192
|
|
|
$
|
420
|
|
|
$
|
1,511
|
|
|
|
|
|
|
|
|
|
Accrued special and restructuring charges as of December 31, 2014
|
|
|
|
|
|
|
$
|
9,133
|
|
Total quarterly special charges, net (shown above)
|
|
|
|
|
|
|
1,511
|
|
Special charges paid / settled, net
|
|
|
|
|
|
|
|
|
|
(1,700
|
)
|
Accrued special and restructuring charges as of April 5, 2015
|
|
|
|
|
|
|
|
|
|
$
|
8,944
|
|
Inception to Date
The following table (in thousands) summarizes our California Restructuring related special charges to date as of
April 3, 2016
:
|
|
|
|
|
|
|
California Restructuring Charges / (Recoveries), net as of April 3, 2016
|
|
|
Aerospace & Defense
|
Facility related expenses - incurred to date
|
|
$
|
1,400
|
|
Employee related expenses - incurred to date
|
|
31
|
|
Total restructuring related special charges - incurred to date
|
|
$
|
1,431
|
|
This restructuring action is expected to be completed in the second half of 2016.