NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of CIRCOR International, Inc. ("CIRCOR", the "Company", "us", "we" or "our") have been prepared according to the rules and regulations of the United States ("U.S.") Securities and Exchange Commission (“SEC”) for interim reporting, along with accounting principles generally accepted in the U.S ("GAAP"). In the opinion of management, the unaudited, condensed consolidated financial statements reflect all adjustments (consisting only of normal and recurring items) necessary for a fair statement of the Company’s results of operations, financial position and cash flows 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 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 condensed consolidated balance sheet as of December 31, 2018 was derived from our audited consolidated financial statements as of that date but does not contain all of the footnote disclosures from the annual financial statements. 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 on Form 10-K for the year ended December 31, 2018.
We operate and report financial information using a 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 nine months ended September 29, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 or any future quarter.
We have reclassified certain prior year amounts, including the results of discontinued operations and reportable segment information, to conform to the current year presentation. Unless otherwise indicated, all financial information and statistical data included in these notes to our condensed consolidated financial statements relate to our continuing operations, with dollar amounts expressed in thousands (except per-share data).
(2) Summary of Significant Accounting Policies
The significant accounting policies used in preparation of these condensed consolidated financial statements for the three and nine months ended September 29, 2019 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, 2018, except as updated below with respect to newly adopted accounting standards.
New Accounting Standards - Adopted
On January 1, 2019, we adopted the Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 2016-02, Leases, and all related amendments ("ASC 842"), under the modified retrospective approach. Consequently, periods prior to January 1, 2019 are not restated for the adoption of ASC 842. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification.
Adoption of the new standard resulted in the recording of additional Right-of-Use ("ROU") assets and lease liabilities of $23.8 million and $24.1 million, respectively, as of January 1, 2019. ROU assets represent our right to use an underlying asset for the lease term, and the lease liabilities represent our obligation to make lease payments arising from the lease. The difference between the additional lease assets and lease liabilities was recorded as an adjustment to deferred rent and prepaid rent. The standard did not materially impact our consolidated net earnings. See Note 5, Leases for further information.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU simplifies how entities assess goodwill for impairment by eliminating Step 2 from the goodwill impairment test. The goodwill impairment test, as amended, will consist of one step comparing the fair value of a reporting unit to its carrying amount. The Company will record an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairments tests performed. The Company has elected to early-adopt this ASU in the current quarter ended September 29, 2019.
(3) Discontinued Operations
During the quarter ended September 29, 2019, the Company completed the disposition of its long-cycle upstream oil & gas Engineered Valves ("EV") business for $1.1 million (EUR 1 million), with an earn out of 50 percent of net income over seven years up to a maximum of $20.6 million (EUR 18 million). In addition, during the quarter the Company received approval from its Board of Directors to dispose of the Company’s Distributed Valves ("DV") business in a transaction or transfer to a third-party purchaser or purchasers. The Company has not yet secured a buyer for the DV business but has allocated internal resources to identify potential buyers and evaluate proposals. The Company anticipates completing the disposition within the next twelve months. These actions are consistent with the Company's strategic shift away from upstream oil and gas to focus on more attractive end markets.
The EV and DV businesses met the conditions for discontinued operations as of September 29, 2019 and are recorded as such in the condensed consolidated financial statements. All prior period comparative financial information has been reclassified to conform to this presentation. These businesses were previously part of the Energy segment.
The DV business met the held for sale requirements as of September 29, 2019. Upon classifying the DV business as held for sale, the Company was required in accordance with GAAP to measure the business at the lower of its carrying value or fair value less expected costs to sell. Through this process, the Company determined that the carrying value exceeded fair value as of September 29, 2019, and recognized a write-down of $64.0 million, consisting of goodwill impairment of $6.9 million, intangible asset impairment of $1.0 million and a valuation allowance of $56.1 million to adjust the remaining net assets of the business to its fair value less costs to sell.
The Company calculated fair value of the DV business using an income approach based on the present value of projected future cash flows. This approach incorporates several assumptions including future growth rates, discount rates, income tax rates, and market activity in assessing fair value. Changes in economic and operating conditions impacting these assumptions could result in additional valuation adjustments in the future.
The following table presents the summarized components of (loss) income from discontinued operations, for the EV and DV businesses for the three and nine-months ended September 29, 2019 and September 30, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 29, 2019
|
|
September 30, 2018
|
|
September 29, 2019
|
|
September 30, 2018
|
Net revenues
|
$
|
15,276
|
|
|
$
|
50,305
|
|
|
$
|
70,655
|
|
|
$
|
127,708
|
|
Cost of revenues
|
18,533
|
|
|
45,305
|
|
|
77,846
|
|
|
113,267
|
|
Gross (loss) profit
|
(3,257
|
)
|
|
5,000
|
|
|
(7,191
|
)
|
|
14,441
|
|
Selling, general and administrative expenses
|
2,271
|
|
|
5,562
|
|
|
11,464
|
|
|
17,433
|
|
Special and restructuring charges (recoveries), net
|
100,812
|
|
|
(233
|
)
|
|
101,614
|
|
|
5,278
|
|
Operating loss
|
(106,340
|
)
|
|
(329
|
)
|
|
(120,269
|
)
|
|
(8,270
|
)
|
Other (income):
|
|
|
|
|
|
|
|
Interest (income), net
|
(8
|
)
|
|
(37
|
)
|
|
(14
|
)
|
|
(55
|
)
|
Other (income), net
|
(237
|
)
|
|
—
|
|
|
(74
|
)
|
|
(122
|
)
|
Total other income, net
|
(245
|
)
|
|
(37
|
)
|
|
(88
|
)
|
|
(177
|
)
|
Loss from discontinued operations, pre tax
|
(106,095
|
)
|
|
(292
|
)
|
|
(120,181
|
)
|
|
(8,093
|
)
|
(Benefit from) provision for income tax
|
(21,407
|
)
|
|
2,582
|
|
|
(12,609
|
)
|
|
(6,553
|
)
|
Loss from discontinued operations, net of tax
|
$
|
(84,688
|
)
|
|
$
|
(2,874
|
)
|
|
$
|
(107,572
|
)
|
|
$
|
(1,540
|
)
|
Special and restructuring charges (recoveries), net for the three and nine months ended September 29, 2019 include a $36.7 million loss on sale of the EV business, a $6.9 million impairment of goodwill associated with the DV business, a $1.0 million impairment of other intangible assets of the DV business and a $56.1 million adjustment to adjust the carrying value of the DV business's assets held for sale to fair value less expected costs to sell.
The following table presents the balance sheet information for assets and liabilities held for sale as of September 29, 2019 and December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
September 29, 2019
|
|
December 31, 2018
|
Trade accounts receivable, net
|
$
|
8,298
|
|
|
$
|
28,712
|
|
Inventories
|
57,768
|
|
|
76,740
|
Prepaid expenses and other current assets
|
2,570
|
|
|
20,833
|
Property, plant, and equipment, net
|
11,316
|
|
|
24,669
|
Goodwill
|
—
|
|
|
48,972
|
Intangibles
|
—
|
|
|
18,230
|
|
Deferred tax asset
|
—
|
|
|
9,380
|
|
Other assets
|
6,079
|
|
|
76
|
Valuation adjustment on classification to assets held for sale
|
(56,096
|
)
|
|
—
|
|
Total assets held for sale
|
$
|
29,935
|
|
|
$
|
227,612
|
|
|
|
|
|
Accounts payable
|
$
|
9,355
|
|
|
$
|
32,536
|
|
Accrued and other current liabilities
|
3,720
|
|
|
23,568
|
|
Other liabilities
|
4,599
|
|
|
3,055
|
|
Total liabilities held for sale
|
$
|
17,674
|
|
|
$
|
59,159
|
|
The balance sheet information for assets and liabilities held for sale as of December 31, 2018 includes the balances of the Reliability Services business, which the Company divested in the first quarter of 2019. Included in the table above are assets of $83.4 million and liabilities of $11.1 million related to this business.
(4) Revenue Recognition
Our revenue is derived from a variety of contracts. A significant portion of our revenues are from contracts associated with the design, development, manufacture or modification of highly engineered, complex and severe environment products with customers who are either in or service the energy, aerospace, defense and industrial markets. Our contracts within the defense markets are primarily with U.S. military customers. These contracts typically are subject to the Federal Acquisition Regulations (FAR). We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Contracts may be modified to account for changes in contract specifications and requirements. Contract modifications exist when the modification either creates new, or changes the existing, enforceable rights and obligations. Contract modifications for goods or services that are not distinct from the existing contract are accounted for as if they were part of that existing contract.
Revenue is recognized from products and services transferred to customers over-time using an input measure (e.g., costs incurred to date relative to total estimated costs at completion, known as the “cost-to-cost” method) to measure progress. We generally use the cost-to-cost measure of progress for our contracts because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, revenues are recorded proportionally as costs are incurred. Contract costs include labor, materials and subcontractors’ costs, other direct costs and an allocation of overhead, as appropriate.
As of September 29, 2019, we had $425.5 million of revenue related to remaining unfulfilled performance obligations. We expect to recognize approximately 42 percent of our remaining performance obligations as revenue during the remainder of 2019, 44 percent in 2020, and the remaining 14 percent in 2021 and thereafter.
In order to determine revenue recognized in the period from contract liabilities, we first allocate revenue to the individual contract liabilities balances outstanding at the beginning of the period until the revenue exceeds that balance. If additional advances are received on those contracts in subsequent periods, we assume all revenue recognized in the reporting period first applies to the beginning contract liabilities as opposed to a portion applying to the new advances for the period.
The impact of adjustments in contract estimates on our operating earnings can be reflected in either operating expenses or revenue. There have been no significant changes in estimates in the three and nine months ended September 29, 2019.
Disaggregation of Revenue. The following tables present our revenue disaggregated by major product line and geographical market (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 29, 2019
|
|
September 30, 2018
|
|
September 29, 2019
|
|
September 30, 2018
|
Energy Segment
|
|
|
|
|
|
|
|
|
Oil & Gas - Upstream, Midstream & Other
|
$
|
12,810
|
|
|
$
|
13,505
|
|
|
$
|
41,708
|
|
|
$
|
38,980
|
|
|
Oil & Gas - Downstream
|
43,025
|
|
|
57,213
|
|
|
142,756
|
|
|
167,110
|
|
|
Total
|
55,835
|
|
|
70,718
|
|
|
184,464
|
|
|
206,090
|
|
Aerospace & Defense Segment
|
|
|
|
|
|
|
|
|
Commercial Aerospace & Other
|
28,640
|
|
|
28,571
|
|
|
86,467
|
|
|
81,420
|
|
|
Defense
|
38,981
|
|
|
29,186
|
|
|
107,088
|
|
|
92,314
|
|
|
Total
|
67,621
|
|
|
57,757
|
|
|
193,555
|
|
|
173,734
|
|
Industrial Segment
|
|
|
|
|
|
|
|
|
Valves
|
30,124
|
|
|
29,404
|
|
|
90,993
|
|
|
87,544
|
|
|
Pumps
|
83,472
|
|
|
89,330
|
|
|
252,663
|
|
|
279,386
|
|
|
Total
|
113,596
|
|
|
118,734
|
|
|
343,656
|
|
|
366,930
|
|
Net Revenue
|
$
|
237,052
|
|
|
$
|
247,209
|
|
|
$
|
721,675
|
|
|
$
|
746,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 29, 2019
|
|
September 30, 2018
|
|
September 29, 2019
|
|
September 30, 2018
|
Energy Segment
|
|
|
|
|
|
|
|
|
EMEA
|
$
|
19,046
|
|
|
$
|
21,178
|
|
|
$
|
63,230
|
|
|
$
|
60,731
|
|
|
North America
|
24,343
|
|
|
38,885
|
|
|
94,248
|
|
|
110,431
|
|
|
Other
|
12,446
|
|
|
10,655
|
|
|
26,986
|
|
|
34,928
|
|
|
Total
|
55,835
|
|
|
70,718
|
|
|
184,464
|
|
|
206,090
|
|
Aerospace & Defense Segment
|
|
|
|
|
|
|
|
|
EMEA
|
$
|
18,309
|
|
|
$
|
17,288
|
|
|
$
|
52,875
|
|
|
$
|
48,144
|
|
|
North America
|
44,807
|
|
|
39,066
|
|
|
123,685
|
|
|
112,560
|
|
|
Other
|
4,505
|
|
|
1,403
|
|
|
16,995
|
|
|
13,030
|
|
|
Total
|
67,621
|
|
|
57,757
|
|
|
193,555
|
|
|
173,734
|
|
Industrial Segment
|
|
|
|
|
|
|
|
|
EMEA
|
$
|
53,297
|
|
|
$
|
56,090
|
|
|
$
|
159,473
|
|
|
$
|
179,379
|
|
|
North America
|
37,654
|
|
|
38,206
|
|
|
114,323
|
|
|
112,818
|
|
|
Other
|
22,645
|
|
|
24,438
|
|
|
69,860
|
|
|
74,733
|
|
|
Total
|
113,596
|
|
|
118,734
|
|
|
343,656
|
|
|
366,930
|
|
Net Revenue
|
$
|
237,052
|
|
|
$
|
247,209
|
|
|
$
|
721,675
|
|
|
$
|
746,754
|
|
Contract Balances. The Company’s contract assets and contract liabilities balances as of December 31, 2018 and September 29, 2019 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
September 29, 2019
|
|
Increase/(Decrease)
|
Trade accounts receivables, net
|
|
$
|
167,181
|
|
|
$
|
141,117
|
|
|
$
|
(26,064
|
)
|
Contract assets (1)
|
|
46,912
|
|
|
62,613
|
|
|
15,701
|
|
Contract liabilities (2)
|
|
41,951
|
|
|
45,174
|
|
|
3,223
|
|
|
|
|
|
|
|
|
(1) Recorded within prepaid expenses and other current assets.
|
(2) Recorded within accrued expenses and other current liabilities.
|
Trade accounts receivable, net decreased by $26.1 million as of September 29, 2019, primarily due to the timing of cash collections during the nine months ended September 29, 2019.
Contract assets increased by $15.7 million, or 33%, to $62.6 million primarily driven by unbilled revenue recognized during the nine months ended September 29, 2019 within our Pumps business (+21%), Refinery Valves business (+10%) and U.S. Defense business (+10%).
Contract liabilities increased by $3.2 million, or 8%, to $45.2 million as of September 29, 2019, primarily driven by timing of revenue recognized over time during the nine months ended September 29, 2019 within our U.S. Defense business (+23%) and Fluid Control business (+14%), offset by decreases within our Refinery Valves business (-22%).
(5) Leases
We lease certain office spaces, warehouses, vehicles and equipment. Leases with an initial term of 12-months or less have not been capitalized on the balance sheet. We recognize lease expense associated with these short-term leases on a straight-line basis over the lease term. For lease agreements entered into after the adoption of ASC 842, we combine lease and non-lease fixed components for real estate, vehicles and equipment leases. We do not combine lease and non-lease components for information technology leases. Variable lease costs were not included within the measurement of the lease liability as they were entirely variable or the difference between the portion captured within the lease liability and the actual cost will be expensed as incurred. Variable costs are contractually obligated and relate primarily to common area maintenance and taxes, which were not material to the financial statements.
We elected the package of practical expedients permitted under the transition guidance, which allowed us to carry forward the historical lease classification, not to reassess if existing contracts are or contain leases, and not to reassess indirect costs for existing leases.
We have elected not to recast the comparable periods and rather used the effective adoption date of the standard as the date of initial application.
Leases which contain a renewal option to extend an existing lease term, or a termination option to end a lease early are exercisable at our sole discretion. We evaluate such leases to determine if we are reasonably certain to exercise the option. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
Our lease agreements do not contain any material residual value guarantees.
In determining the present value of lease payments, we use the implicit borrowing rate in the lease, if available. In cases where a lease does not provide an implicit borrowing rate, we use the incremental borrowing rate based on available information at the commencement date. As of September 29, 2019, none of our existing leases provided an implicit borrowing rate. We give consideration to our debt issuances as well as publicly available data for instruments with similar characteristics when calculating our incremental borrowing rates. Additionally, we perform an entity-level financial assessment along with risk assessment by country or jurisdiction in the determination of our incremental borrowing rate. We will update our financial and risk assessments periodically. We will reassess lease classification and / or remeasure the lease liability in the event of the following: changes in assessment of renewal, termination or purchase option based on triggering events within our control, change in amounts probable of being owed under a residual guarantee, or contingency resolution.
The balance sheet impact at September 29, 2019 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
Leases
|
|
|
|
Assets
|
Operating
|
|
Finance
|
Gross ROU Assets (1)
|
$
|
20,221
|
|
|
$
|
2,842
|
|
Less: Accumulated Amortization
|
(3,557
|
)
|
|
(246
|
)
|
Net ROU Assets
|
$
|
16,664
|
|
|
$
|
2,596
|
|
|
|
|
|
Liabilities
|
Operating
|
|
Finance
|
Current (2)
|
$
|
3,910
|
|
|
$
|
403
|
|
Non-current (3)
|
12,984
|
|
|
2,252
|
|
Total Lease Liabilities
|
$
|
16,894
|
|
|
$
|
2,655
|
|
|
|
|
|
(1) Operating and Finance ROU Assets are included within other assets on the balance sheet.
|
(2) The current portion of operating and finance lease liabilities are recorded within accrued expenses and other current liabilities on the balance sheet.
|
(3) The non-current portion of operating and finance lease liabilities are recorded within other non-current liabilities on the balance sheet.
|
The components of lease costs are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
Lease Costs
|
September 29, 2019
|
|
September 29, 2019
|
Operating lease cost (1)
|
$
|
1,578
|
|
|
$
|
4,211
|
|
|
|
|
|
Finance lease cost
|
|
|
|
Amortization of leased assets (2)
|
78
|
|
|
174
|
|
Interest on lease liabilities (3)
|
15
|
|
|
25
|
|
Total finance lease costs
|
93
|
|
|
199
|
|
Total lease cost
|
$
|
1,671
|
|
|
$
|
4,410
|
|
|
|
|
|
(1) Operating lease costs are recorded within selling, general and administrative expenses or cost of revenue within the condensed consolidated statements of (loss) income depending upon the nature of the underlying lease.
|
(2) Finance lease amortization costs are recorded in selling, general and administrative expenses within the condensed consolidated statements of (loss) income.
|
(3) Finance lease interest costs are recorded in interest expense, net within the condensed consolidated statements of (loss) income.
|
Short-term lease expense and variable lease cost for the three and nine months ended September 29, 2019 were not significant.
The estimated future minimum lease payments only include obligations for which we are reasonably certain to exercise our renewal option. Such future payments are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity of Lease Liabilities
|
Operating
|
|
Finance
|
|
Total
|
2019
|
$
|
1,594
|
|
|
$
|
101
|
|
|
$
|
1,695
|
|
2020
|
4,403
|
|
|
404
|
|
|
4,807
|
|
2021
|
3,377
|
|
|
404
|
|
|
3,781
|
|
2022
|
2,521
|
|
|
392
|
|
|
2,913
|
|
2023
|
1,966
|
|
|
392
|
|
|
2,358
|
|
After 2023
|
5,158
|
|
|
1,187
|
|
|
6,345
|
|
Less: Interest
|
(2,125
|
)
|
|
(225
|
)
|
|
(2,350
|
)
|
Present value of lease liabilities
|
$
|
16,894
|
|
|
$
|
2,655
|
|
|
$
|
19,549
|
|
The weighted average remaining lease term and discount rates are as follows:
|
|
|
|
Lease Term and Discount Rate
|
September 29, 2019
|
|
Weighted average remaining lease term (years)
|
|
Operating leases
|
6.2
|
|
Finance leases
|
7.3
|
|
Weighted average discount rate (percentage)
|
|
Operating leases
|
4.4
|
%
|
Finance leases
|
2.0
|
%
|
Supplemental cash flow information related to leases are as follows (in thousands):
|
|
|
|
|
Other Information
|
September 29, 2019
|
|
Operating Activities
|
|
Noncash lease expense on operating ROU assets
|
$
|
(16,664
|
)
|
Amortization expense on finance ROU assets
|
174
|
|
Change in total operating lease liabilities
|
16,894
|
|
Principal paid on operating lease liabilities
|
(3,767
|
)
|
Total Operating Activities
|
$
|
(3,363
|
)
|
Financing Activities
|
|
Principal paid on finance lease liabilities
|
$
|
(183
|
)
|
Supplemental
|
|
Interest Paid on finance lease liabilities
|
$
|
24
|
|
As of September 29, 2019, the Company has not entered into any lease agreements with related parties.
Operating Lease Commitments Disclosure under ASC 840
Minimum rental commitments due under non-cancelable operating leases, primarily for office and warehouse facilities, were as follows at December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
Minimum lease commitments
|
$
|
6,296
|
|
|
$
|
4,079
|
|
|
$
|
2,740
|
|
|
$
|
1,595
|
|
|
$
|
914
|
|
|
$
|
946
|
|
(6) Special and Restructuring Charges, net
Special and restructuring charges, net
Special and restructuring charges, net consist of restructuring costs (including costs to exit a product line or program) as well as certain special charges such as significant litigation settlements and other transactions (charges or recoveries) that are described below. All items described below are recorded in Special and restructuring charges, net on our condensed consolidated statements of (loss) income. Certain other special and restructuring charges such as inventory related items may be recorded in cost of revenues given the nature of the item.
The table below (in thousands) summarizes the amounts recorded within the special and restructuring charges, net line item on the condensed consolidated statements of (loss) income for the three and nine months ended September 29, 2019 and September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special & restructuring charges, net
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 29, 2019
|
|
September 30, 2018
|
|
September 29, 2019
|
|
|
September 30, 2018
|
|
Special charges, net
|
$
|
18,481
|
|
|
$
|
1,898
|
|
|
$
|
14,198
|
|
|
$
|
5,922
|
|
Restructuring charges, net
|
5,038
|
|
|
1,090
|
|
|
5,695
|
|
|
6,002
|
|
Total special and restructuring charges, net
|
$
|
23,519
|
|
|
$
|
2,988
|
|
|
$
|
19,893
|
|
|
$
|
11,924
|
|
Special charges (recoveries), net
The table below (in thousands) outlines the special charges (recoveries), net recorded for the three and nine months ended September 29, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special charges (recoveries), net
|
|
For the three months ended September 29, 2019
|
|
Energy
|
|
Aerospace & Defense
|
|
Industrial
|
|
Corporate
|
|
Total
|
Business sales
|
$
|
1,859
|
|
|
$
|
—
|
|
|
$
|
9,785
|
|
|
$
|
—
|
|
|
$
|
11,644
|
|
Professional fees to review and respond to an unsolicited tender offer to acquire the Company
|
—
|
|
|
—
|
|
|
—
|
|
|
3,953
|
|
|
3,953
|
|
Other cost savings initiatives
|
2,085
|
|
|
—
|
|
|
—
|
|
|
799
|
|
|
2,884
|
|
Total special charges (recoveries), net
|
$
|
3,944
|
|
|
$
|
—
|
|
|
$
|
9,785
|
|
|
$
|
4,752
|
|
|
$
|
18,481
|
|
|
|
|
|
|
|
|
|
|
|
|
Special charges (recoveries), net
|
|
For the nine months ended September 29, 2019
|
|
Energy
|
|
Aerospace & Defense
|
|
Industrial
|
|
Corporate
|
|
Total
|
Business sales
|
$
|
(5,868
|
)
|
|
$
|
—
|
|
|
$
|
9,938
|
|
|
$
|
286
|
|
|
$
|
4,356
|
|
Professional fees to review and respond to an unsolicited tender offer to acquire the Company
|
—
|
|
|
—
|
|
|
—
|
|
|
6,028
|
|
|
6,028
|
|
Other cost savings initiatives
|
2,085
|
|
|
—
|
|
|
—
|
|
|
1,729
|
|
|
3,814
|
|
Total special (recoveries) charges, net
|
$
|
(3,783
|
)
|
|
$
|
—
|
|
|
$
|
9,938
|
|
|
$
|
8,043
|
|
|
$
|
14,198
|
|
Business sales: The Company incurred net special charges of $11.6 million and $4.4 million for the three and nine months ended September 29, 2019, respectively, attributed to the sale of our Reliability Services, Spence Engineering and Rosscor businesses. The Company announced the divestitures of these businesses as follows: Spence Engineering Company ("Spence") and Leslie Controls ("Leslie") in August 2019, Reliability Services in January 2019, and our Rosscor B.V. and SES International B.V. subsidiaries (the "Delden Business" or "Rosscor") in November 2018. During the quarter ended September 29, 2019, we received cash proceeds of $84.6 million and recognized a loss on sale of $8.2 million related to the Spence
divestiture. The Energy segment incurred $1.5 million of 2019 operating expenses associated with the Reliability Services business, which are presented net within Energy's business sales recoveries line for the nine months ended September 29, 2019.
Professional fees: The Company incurred special charges of $4.0 million and $6.0 million for the three and nine months ended September 29, 2019, respectively, associated with the review and response to an unsolicited tender offer to acquire the Company.
Other cost savings initiatives: The Company incurred special charges of $2.9 million and $3.8 million for the three and nine months ended September 29, 2019, respectively, associated with projects to streamline operations and reduce costs.
The table below (in thousands) outlines the special charges, net recorded for the three and nine months ended September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special Charges, net
|
|
For the three months ended September 30, 2018
|
|
Energy
|
|
Aerospace & Defense
|
|
Industrial
|
|
Corporate
|
|
Total
|
Acquisition related charges
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,210
|
|
|
$
|
1,210
|
|
Other
|
490
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
490
|
|
Brazil closure
|
198
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
198
|
|
Total special charges, net
|
$
|
688
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,210
|
|
|
$
|
1,898
|
|
|
|
|
|
|
|
|
|
|
|
|
Special Charges, net
|
|
For the nine months ended September 30, 2018
|
|
Energy
|
|
Aerospace & Defense
|
|
Industrial
|
|
Corporate
|
|
Total
|
Acquisition related charges
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,665
|
|
|
$
|
4,665
|
|
Other
|
527
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
527
|
|
Brazil closure
|
730
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
730
|
|
Total special charges, net
|
$
|
1,257
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,665
|
|
|
$
|
5,922
|
|
Acquisition related charges:
|
|
•
|
On December 11, 2017, we acquired the fluid handing business of Colfax Corporation ("FH"). In connection with our acquisition, we recorded $1.2 million and $4.7 million during the three and nine months ended September 30, 2018, respectively, related to internal costs and external professional fees to separate the FH business from Colfax and integrate the FH business into our legacy structure.
|
|
|
•
|
Brazil closure: On November 3, 2015, our Board of Directors approved the closure and exit of our Brazil manufacturing operations due to the economic realities in Brazil and the ongoing challenges with our only significant end customer, Petrobras. CIRCOR Brazil reported substantial operating losses every year since it was acquired in 2011 while the underlying market conditions and outlook deteriorated. In connection with the closure, we recorded $0.2 million and $0.7 million of charges within the Energy segment during the three and nine months ended September 30, 2018, respectively, which relates to losses incurred subsequent to our closure of manufacturing operations during the first quarter of 2016.
|
Restructuring charges, net
The tables below (in thousands) outline the charges associated with restructuring actions recorded for the three and nine months ended September 29, 2019 and September 30, 2018. A description of the restructuring actions is provided in the section titled "Restructuring Programs Summary" below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges, net
|
|
As of and for the three months ended September 29, 2019
|
|
Energy
|
|
Aerospace & Defense
|
|
Industrial
|
|
Corporate
|
|
Total
|
Facility related expenses
|
$
|
209
|
|
|
$
|
62
|
|
|
$
|
749
|
|
|
$
|
—
|
|
|
$
|
1,020
|
|
Employee related expenses, net
|
—
|
|
|
—
|
|
|
4,018
|
|
|
—
|
|
|
4,018
|
|
Total restructuring charges, net
|
$
|
209
|
|
|
$
|
62
|
|
|
$
|
4,767
|
|
|
$
|
—
|
|
|
$
|
5,038
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring charges as of June 30, 2019
|
|
|
|
|
|
|
|
|
$
|
491
|
|
Total quarter to date charges, net (shown above)
|
|
|
|
|
|
|
|
|
5,038
|
|
Charges paid / settled, net
|
|
|
|
|
|
|
|
|
(707
|
)
|
Accrued restructuring charges as of September 29, 2019
|
|
|
|
|
|
|
|
|
$
|
4,822
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges, net
|
|
As of and for the nine months ended September 29, 2019
|
|
Energy
|
|
Aerospace & Defense
|
|
Industrial
|
|
Corporate
|
|
Total
|
Facility related expenses
|
$
|
312
|
|
|
$
|
279
|
|
|
$
|
749
|
|
|
$
|
—
|
|
|
$
|
1,340
|
|
Employee related expenses, net
|
17
|
|
|
(3
|
)
|
|
4,341
|
|
|
—
|
|
|
4,355
|
|
Total restructuring charges, net
|
$
|
329
|
|
|
$
|
276
|
|
|
$
|
5,090
|
|
|
$
|
—
|
|
|
$
|
5,695
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring charges as of December 31, 2018
|
|
|
|
|
|
|
|
|
$
|
874
|
|
Total year to date charges, net (shown above)
|
|
|
|
|
|
|
|
|
5,695
|
|
Charges paid / settled, net
|
|
|
|
|
|
|
|
|
(1,747
|
)
|
Accrued restructuring charges as of September 29, 2019
|
|
|
|
|
|
|
|
|
$
|
4,822
|
|
We expect to make payment or settle the majority of the restructuring charges accrued as of September 29, 2019 during the fourth quarter of 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges, net
|
|
As of and for the three months ended September 30, 2018
|
|
Energy
|
|
Aerospace & Defense
|
|
Industrial
|
|
Corporate
|
|
Total
|
Facility related expenses
|
$
|
619
|
|
|
$
|
60
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
679
|
|
Employee related expenses
|
131
|
|
|
—
|
|
|
280
|
|
|
—
|
|
|
411
|
|
Total restructuring charges, net
|
$
|
750
|
|
|
$
|
60
|
|
|
$
|
280
|
|
|
$
|
—
|
|
|
$
|
1,090
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring charges as of July 1, 2018
|
|
|
|
|
|
|
|
|
$
|
785
|
|
Total quarter to date charges, net (shown above)
|
|
|
|
|
|
|
|
|
1,090
|
|
Charges paid / settled, net
|
|
|
|
|
|
|
|
|
(1,345
|
)
|
Accrued restructuring charges as of September 30, 2018
|
|
|
|
|
|
|
|
|
$
|
530
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges, net
|
|
As of and for the nine months ended September 30, 2018
|
|
Energy
|
|
Aerospace & Defense
|
|
Industrial
|
|
Corporate
|
|
Total
|
Facility related expenses
|
$
|
(2,812
|
)
|
|
$
|
190
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(2,622
|
)
|
Employee related expenses
|
7,135
|
|
|
—
|
|
|
1,489
|
|
|
—
|
|
|
8,624
|
|
Total restructuring charges, net
|
$
|
4,323
|
|
|
$
|
190
|
|
|
$
|
1,489
|
|
|
$
|
—
|
|
|
$
|
6,002
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring charges as of December 31, 2017
|
|
|
|
|
|
|
|
|
$
|
883
|
|
Total year to date charges, net (shown above)
|
|
|
|
|
|
|
|
|
6,002
|
|
Charges paid / settled, net
|
|
|
|
|
|
|
|
|
(6,355
|
)
|
Accrued restructuring charges as of September 30, 2018
|
|
|
|
|
|
|
|
|
$
|
530
|
|
(7) Inventories
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
September 29, 2019
|
|
December 31, 2018
|
Raw materials
|
$
|
73,568
|
|
|
$
|
66,391
|
|
Work in process
|
53,127
|
|
|
58,911
|
|
Finished goods
|
25,049
|
|
|
18,380
|
|
Total inventories
|
$
|
151,744
|
|
|
$
|
143,682
|
|
(8) Goodwill and Intangibles, net
The following table shows goodwill by segment as of December 31, 2018 and September 29, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
|
|
Aerospace & Defense
|
|
Industrial
|
|
Total
|
Goodwill as of December 31, 2018
|
$
|
96,272
|
|
|
$
|
57,418
|
|
|
$
|
296,915
|
|
|
$
|
450,605
|
|
Spence divestiture
|
—
|
|
|
—
|
|
|
(85,474
|
)
|
|
(85,474
|
)
|
Currency translation adjustments
|
(6,794
|
)
|
|
(67
|
)
|
|
2,034
|
|
|
(4,827
|
)
|
Goodwill as of September 29, 2019
|
$
|
89,478
|
|
|
$
|
57,351
|
|
|
$
|
213,475
|
|
|
$
|
360,304
|
|
The table below presents gross intangible assets and the related accumulated amortization as of September 29, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying Value
|
Patents
|
$
|
5,399
|
|
|
$
|
(5,399
|
)
|
|
$
|
—
|
|
Customer relationships
|
295,833
|
|
|
(72,217
|
)
|
|
223,616
|
|
Backlog
|
22,407
|
|
|
(22,312
|
)
|
|
95
|
|
Acquired technology
|
133,348
|
|
|
(39,183
|
)
|
|
94,165
|
|
Other
|
398
|
|
|
(398
|
)
|
|
—
|
|
Total Amortized Assets
|
$
|
457,385
|
|
|
$
|
(139,509
|
)
|
|
$
|
317,876
|
|
|
|
|
|
|
|
Non-amortized intangibles (primarily trademarks and trade names)
|
$
|
74,639
|
|
|
$
|
—
|
|
|
$
|
74,639
|
|
Total Non-Amortized Intangibles
|
$
|
74,639
|
|
|
$
|
—
|
|
|
$
|
74,639
|
|
Net carrying value of intangible assets
|
|
|
|
|
|
$
|
392,515
|
|
The table below presents estimated remaining amortization expense for intangible assets recorded as of September 29, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
After 2023
|
Estimated amortization expense
|
$
|
11,919
|
|
|
$
|
43,242
|
|
|
$
|
41,525
|
|
|
$
|
36,534
|
|
|
$
|
32,026
|
|
|
$
|
152,630
|
|
(9) Segment Information
Our Chief Operating Decision Maker evaluates segment operating performance using segment operating income. Segment operating income is defined as GAAP operating income excluding intangible amortization and amortization of fair value step-ups of inventory and fixed assets from acquisitions completed subsequent to December 31, 2011, the impact of restructuring related inventory write-offs, impairment charges and special charges or gains. The Company also refers to this measure as adjusted operating income. The Company uses this measure because it helps management understand and evaluate the segments’ core operating results and serves as the basis for determining incentive compensation achievement.
We organize our reporting structure into three segments: Energy, Aerospace & Defense and Industrial.
The following table presents certain reportable segment information (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 29, 2019
|
|
September 30, 2018
|
|
September 29, 2019
|
|
|
September 30, 2018
|
|
Net revenues
|
|
|
|
|
|
|
|
Energy
|
$
|
55,835
|
|
|
$
|
70,718
|
|
|
$
|
184,464
|
|
|
$
|
206,090
|
|
Aerospace & Defense
|
67,621
|
|
|
57,757
|
|
|
193,555
|
|
|
173,734
|
|
Industrial
|
113,596
|
|
|
118,734
|
|
|
343,656
|
|
|
366,930
|
|
Consolidated net revenues
|
$
|
237,052
|
|
|
$
|
247,209
|
|
|
$
|
721,675
|
|
|
$
|
746,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results from continuing operations before income taxes
|
|
|
|
|
|
|
|
Energy - Segment Operating Income
|
$
|
5,286
|
|
|
$
|
9,726
|
|
|
$
|
23,607
|
|
|
$
|
26,044
|
|
Aerospace & Defense - Segment Operating Income
|
13,564
|
|
|
8,709
|
|
|
33,382
|
|
|
24,631
|
|
Industrial - Segment Operating Income
|
13,953
|
|
|
14,609
|
|
|
40,878
|
|
|
42,592
|
|
Corporate expenses
|
(7,209
|
)
|
|
(8,034
|
)
|
|
(20,250
|
)
|
|
(22,284
|
)
|
Segment Operating Income
|
25,594
|
|
|
25,010
|
|
|
77,617
|
|
|
70,983
|
|
Restructuring charges, net
|
5,038
|
|
|
1,090
|
|
|
5,695
|
|
|
6,002
|
|
Special charges, net
|
18,481
|
|
|
1,898
|
|
|
14,198
|
|
|
5,922
|
|
Special and restructuring charges, net
|
23,519
|
|
|
2,988
|
|
|
19,893
|
|
|
11,924
|
|
Restructuring related inventory charges
|
(1,145
|
)
|
|
—
|
|
|
(819
|
)
|
|
488
|
|
Amortization of inventory step-up
|
—
|
|
|
—
|
|
|
—
|
|
|
6,600
|
|
Acquisition amortization
|
11,202
|
|
|
11,734
|
|
|
34,527
|
|
|
35,299
|
|
Acquisition depreciation
|
1,102
|
|
|
1,743
|
|
|
3,331
|
|
|
5,314
|
|
Acquisition amortization and other costs, net
|
11,159
|
|
|
13,477
|
|
|
37,039
|
|
|
47,701
|
|
Consolidated Operating (Loss) Income
|
(9,084
|
)
|
|
8,545
|
|
|
20,685
|
|
|
11,358
|
|
Interest expense, net
|
11,804
|
|
|
14,137
|
|
|
37,846
|
|
|
39,711
|
|
Other income, net
|
(759
|
)
|
|
(1,580
|
)
|
|
(2,755
|
)
|
|
(7,079
|
)
|
Loss from continuing operations before income taxes
|
$
|
(20,129
|
)
|
|
$
|
(4,012
|
)
|
|
$
|
(14,406
|
)
|
|
$
|
(21,274
|
)
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 29, 2019
|
|
|
September 30, 2018
|
|
|
September 29, 2019
|
|
|
September 30, 2018
|
|
Capital expenditures
|
|
|
|
|
|
|
|
Energy
|
$
|
487
|
|
|
$
|
1,842
|
|
|
$
|
1,686
|
|
|
$
|
4,724
|
|
Aerospace & Defense
|
1,826
|
|
|
1,320
|
|
|
3,204
|
|
|
3,161
|
|
Industrial
|
1,602
|
|
|
910
|
|
|
3,968
|
|
|
6,760
|
|
Corporate
|
222
|
|
|
187
|
|
|
877
|
|
|
574
|
|
Consolidated capital expenditures
|
$
|
4,137
|
|
|
$
|
4,259
|
|
|
$
|
9,735
|
|
|
$
|
15,219
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
Energy
|
$
|
2,755
|
|
|
$
|
3,390
|
|
|
$
|
8,440
|
|
|
$
|
10,364
|
|
Aerospace & Defense
|
3,145
|
|
|
2,716
|
|
|
8,579
|
|
|
8,244
|
|
Industrial
|
11,149
|
|
|
12,337
|
|
|
35,033
|
|
|
37,158
|
|
Corporate
|
131
|
|
|
171
|
|
|
416
|
|
|
592
|
|
Consolidated depreciation and amortization
|
$
|
17,180
|
|
|
$
|
18,614
|
|
|
$
|
52,468
|
|
|
$
|
56,358
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
September 29, 2019
|
|
September 30, 2018
|
|
|
|
|
Energy
|
$
|
499,463
|
|
|
$
|
905,708
|
|
|
|
|
|
Aerospace & Defense
|
436,120
|
|
|
642,431
|
|
|
|
|
|
Industrial
|
1,391,897
|
|
|
1,020,849
|
|
|
|
|
|
Corporate
|
(859,349
|
)
|
|
(756,138
|
)
|
|
|
|
|
Consolidated identifiable assets
|
$
|
1,468,131
|
|
|
$
|
1,812,850
|
|
|
|
|
|
The total assets for each reportable segment have been reported as the Identifiable Assets for that segment, including inter-segment intercompany receivables, payables and investments in other CIRCOR companies. Identifiable assets reported in Corporate 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 for
Identifiable Assets. Corporate Identifiable Assets excluding intercompany assets were $12.8 million and $28.2 million as of September 29, 2019 and September 30, 2018, respectively.
(10) Financial Instruments
Fair Value
The company utilizes fair value measurement guidance prescribed by accounting standards to value its financial instruments. The guidance establishes a fair value hierarchy based on the inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:
|
|
•
|
Level One: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.
|
|
|
•
|
Level Two: Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
|
|
|
•
|
Level Three: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
|
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
The fair value measurements of the Company's financial instruments as of September 29, 2019 are summarized in the table below (in thousands):
|
|
|
|
|
|
Significant Other Observable Inputs
|
Derivative assets
|
$
|
4,345
|
|
Derivative liabilities
|
$
|
(10,160
|
)
|
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 September 29, 2019 and December 31, 2018, the outstanding balance of the Company’s debt approximated fair value based on current rates available to the Company for debt of the same maturity and is a Level 2 financial instrument.
As of September 29, 2019 and December 31, 2018, the Company had restricted cash balances of $1.0 million and $2.3 million, respectively. These balances are recorded within prepaid and other current assets on the condensed consolidated balance sheets, and are included within cash, cash equivalents and restricted cash in the condensed consolidated statements of cash flows.
During the third quarter of 2019, the Company entered into a receivables purchasing agreement with a bank whereby the Company can sell selected account receivables and receive 90% of the purchase price upfront, net of applicable discount fee, and the remaining 10% as the receivables are collected. During the quarter, the Company sold a total of $13.5 million in receivables under the program, receiving $12.1 million in cash. The outstanding purchase price component of $1.4 million was recorded in prepaid expenses and other current assets on the condensed consolidated balance sheet at September 29, 2019.
Effective July 12, 2019, the Company entered into a cross-currency swap ("cross-currency swap") agreement to hedge its net investment in non-U.S. subsidiaries against future volatility in exchange rates between the U.S. dollar and the Euro. The cross-currency swap agreement is pursuant to an ISDA Master Agreement with Deutsche Bank AG. The three-year cross-currency swap has a fixed notional value of $100.0 million at an annual rate of 2.4065% and a maturity date of July 12, 2022. At inception, the cross-currency swap was designated as a net investment hedge. This hedging agreement was entered into to mitigate foreign currency exchange rate exposure, and is not for speculative trading purposes. The net investment hedge was deemed effective as of quarter-end.
The Company has designated the interest rate swap as a qualifying hedging instrument and is treating it as a cash flow hedge for accounting purposes pursuant to ASC 815, Derivatives and Hedging. The aggregate net fair value of the interest rate swap and
cross-currency swap was $(5.8) million. These balances are recorded in other long-term liabilities of $6.5 million, accrued expenses and other current liabilities of $3.7 million, other current assets of $2.6 million and long-term deferred tax asset of $1.7 million on our condensed consolidated balance sheet as of September 29, 2019. The unrealized gains or (losses) recognized in other comprehensive income (loss), net of tax, were $2.2 million and $(5.0) million for the three and nine months ended September 29, 2019, respectively. The realized loss of $0.4 million and $0.8 million was reclassified from other comprehensive income (loss) to interest expense as interest expense was accrued on the swap during the three and nine months ended September 29, 2019, respectively. Amounts expected to be reclassified from other comprehensive income into interest expense in the coming 12 months is a loss of $3.7 million. Interest expense (including the effects of the cash flow hedges) related to the portion of the Company's term loan subject to the aforementioned interest-rate swap agreement was $6.2 million and $18.6 million for the three and nine months ended September 29, 2019, respectively.
(11) 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 September 29, 2019.
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 nine months ended September 29, 2019 (in thousands):
|
|
|
|
|
Balance beginning December 31, 2018
|
$
|
2,980
|
|
Provisions
|
2,204
|
|
Claims settled
|
(2,361
|
)
|
Currency translation adjustment
|
(54
|
)
|
Balance ending September 29, 2019
|
$
|
2,769
|
|
Warranty obligations were $3.0 million as of December 31, 2018 and $2.8 million as of September 29, 2019, as net claims settled and quarterly provisions within our Industrial and Energy operating segments largely offset.
(12) Commitments and Contingencies
We are subject to various legal proceedings and claims pertaining to matters such as product liability or contract disputes, including issues arising under certain customer contracts with aerospace and defense customers. We are also subject to other proceedings and governmental inquiries, inspections, audits or investigations pertaining to issues such as tax matters, patents and trademarks, pricing, business practices, governmental regulations, employment and other matters. Although the results of litigation and claims cannot be predicted with certainty, we expect that the ultimate disposition of these matters, to the extent not previously provided for, will not have a material adverse effect, individually or in the aggregate, on our business, financial condition, results of operations or liquidity.
On February 21, 2018, the Company entered into a mediated settlement regarding a wage and hour action in California by a former employee. In October 2016, the plaintiff alleged non-compliance with California State labor law, including missed or late meal breaks, for hourly employees of CIRCOR Aerospace, Inc. in Corona, California. The total settlement amount of $2.4 million was initially recorded as a liability as of December 31, 2017. This settlement resolves all wage/hour claims by all potentially affected employees through the settlement date and was approved by the California Superior Court during 2018. The Company made the payment during the third quarter of 2019.
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 expect that these asbestos-related claims will have a material adverse effect on the financial condition, 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 $44.5 million at September 29, 2019. 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 September 29, 2019.
The following table contains information related to standby letters of credit instruments outstanding as of September 29, 2019 (in thousands):
|
|
|
|
|
Term Remaining
|
Maximum Potential
Future Payments
|
0–12 months
|
$
|
33,175
|
|
Greater than 12 months
|
11,281
|
|
Total
|
$
|
44,456
|
|
(13) Retirement Plans
The following table sets forth the components of total net periodic benefit cost (income) of the Company’s defined benefit pension plans and other post-retirement employee benefit plans (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 29, 2019
|
|
September 30, 2018
|
|
September 29, 2019
|
|
September 30, 2018
|
Pension Benefits - U.S. Plans
|
|
|
|
|
|
|
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
1,967
|
|
|
1,762
|
|
|
5,901
|
|
|
5,285
|
|
Expected return on plan assets
|
(2,742
|
)
|
|
(3,771
|
)
|
|
(8,226
|
)
|
|
(11,313
|
)
|
Amortization
|
129
|
|
|
146
|
|
|
388
|
|
|
439
|
|
Net periodic benefit income
|
$
|
(646
|
)
|
|
$
|
(1,863
|
)
|
|
$
|
(1,937
|
)
|
|
$
|
(5,589
|
)
|
|
|
|
|
|
|
|
|
Pension Benefits - Non-U.S. Plans
|
|
|
|
|
|
|
|
Service cost
|
$
|
680
|
|
|
$
|
736
|
|
|
$
|
2,062
|
|
|
$
|
2,271
|
|
Interest cost
|
539
|
|
|
523
|
|
|
1,643
|
|
|
1,617
|
|
Expected return on plan assets
|
(235
|
)
|
|
(243
|
)
|
|
(726
|
)
|
|
(755
|
)
|
Amortization
|
4
|
|
|
—
|
|
|
13
|
|
|
—
|
|
Net periodic benefit cost
|
$
|
988
|
|
|
$
|
1,016
|
|
|
$
|
2,992
|
|
|
$
|
3,133
|
|
|
|
|
|
|
|
|
|
Other Post-Retirement Benefits
|
|
|
|
|
|
|
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
Interest cost
|
93
|
|
|
86
|
|
|
280
|
|
|
259
|
|
Amortization
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net periodic benefit cost
|
$
|
93
|
|
|
$
|
86
|
|
|
$
|
280
|
|
|
$
|
260
|
|
The periodic benefit service costs are included in the selling, general, and administrative costs, while the remaining net periodic benefit costs are included in other (income) expense, net in our condensed consolidated statements of (loss) income for the three months ended September 29, 2019 and September 30, 2018, respectively.
There were no employer contributions to the Company's U.S. and non- U.S. based pension plans during the three and nine months ended September 29, 2019.
(14) Income Taxes
As of September 29, 2019 and December 31, 2018, we had $0.6 million and $0.6 million, respectively, of unrecognized tax benefits, of which $0.5 million and $0.5 million, respectively, would affect our effective tax rate if recognized in any future period.
The Company files income tax returns in 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 2016 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. deferred tax asset and a net foreign deferred tax liability. Due to uncertainties related to our ability to utilize certain U.S. and foreign deferred income tax assets, we maintained a valuation allowance of $17.5 million at September 29, 2019 and $17.6 million at December 31, 2018. 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.
(15) Share-Based Compensation
As of September 29, 2019, the Company had 722,683 stock options and 402,591 Restricted Stock Unit Awards ("RSU Awards") and Restricted Stock Unit Management Stock Plan Awards ("RSU MSPs") outstanding. On May 9, 2019, our shareholders approved the 2019 Stock Option and Incentive Plan (the "2019 Plan") at the Company's annual meeting which was adopted, subject to shareholder approval, by the Company's board of directors on February 20, 2019. The 2019 Plan authorizes issuance of up to 1,000,000 shares of common stock (subject to adjustment for stock splits and similar events). Under the 2019 Plan, there were 955,522 shares available for grant as of September 29, 2019.
During the nine months ended September 29, 2019, we granted 153,726 stock options compared with 127,704 stock options granted during the nine months ended September 30, 2018.
The average fair value of stock options granted during the first nine months of 2019 and 2018 was $11.84 and $14.68 per share, respectively, and was estimated using the following weighted-average assumptions:
|
|
|
|
|
|
|
|
September 29, 2019
|
|
September 30, 2018
|
Risk-free interest rate
|
2.6
|
%
|
|
2.5
|
%
|
Expected life (years)
|
4.4
|
|
|
4.4
|
|
Expected stock volatility
|
38.1
|
%
|
|
37.2
|
%
|
Expected dividend yield
|
—
|
%
|
|
—
|
%
|
For additional information regarding the historical issuance of stock options, refer to Note 12 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.
During the nine months ended September 29, 2019 and September 30, 2018, we granted 201,313 and 160,604 RSU Awards with approximate fair values of $32.73 and $43.11 per RSU Award, respectively. During the first nine months of 2019 and 2018, we granted performance-based RSU Awards as part of the overall mix of RSU Awards. Of the 201,313 RSU Awards granted during the nine months ended September 29, 2019, 67,362 are performance-based RSU Awards. This compares to 48,080 performance-based RSU Awards granted during the nine months ended September 30, 2018. In 2019, these performance-based RSU Awards include metrics for achieving Adjusted Operating Margin and Adjusted Free Cash Flow with target payouts ranging from 0% to 200%. In 2018 and prior years, the performance-based RSU Awards include metrics for achieving Return on Invested Capital and Adjusted Operating Margin with the same target payout ranges. Of the different performance-based RSU tranches, the Company anticipates approximately 80% overall achievement and probability to vest.
RSU MSPs totaling 56,379 and 34,937 with per unit discount amounts representing fair values of $11.10 and $14.06 per share were granted during the nine months ended September 29, 2019 and September 30, 2018, respectively.
Compensation expense related to our share-based plans for the nine months ended September 29, 2019 and September 30, 2018 was $4.2 million and $4.1 million, respectively. Compensation expense for both periods was recorded in selling, general and administrative expenses. As of September 29, 2019, there were $10.0 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 2.0 years.
The weighted average contractual term for stock options outstanding and options exercisable as of September 29, 2019 was 4.3 years and 3.5 years, respectively. The aggregate intrinsic value of stock options exercised during the nine months ended September 29, 2019 was $0.0 million and the aggregate intrinsic value of stock options outstanding and options exercisable as of September 29, 2019 was $0.6 million and $0.0 million, respectively.
The aggregate intrinsic value of RSU Awards settled during the nine months ended September 29, 2019 was $1.9 million and the aggregate intrinsic value of RSU Awards outstanding and RSU Awards vested and deferred as of September 29, 2019 was $11.0 million and $0.2 million, respectively.
The aggregate intrinsic value of RSU MSPs settled during the nine months ended September 29, 2019 was less than $0.1 million and the aggregate intrinsic value of RSU MSPs outstanding and RSU MSPs vested and deferred as of September 29, 2019 was $1.1 million and $0.0 million, respectively.
International participants are issued Cash Settled Stock Unit Awards. As of September 29, 2019, there were 47,997 Cash Settled Stock Unit Awards outstanding compared to 50,907 as of December 31, 2018. During the nine months ended September 29, 2019, the aggregate cash used to settle Cash Settled Stock Unit Awards was $0.9 million. As of September 29, 2019, we had $0.7 million of accrued expenses in other non-current liabilities associated with these Cash Settled Stock Unit Awards compared with $0.6 million as of December 31, 2018. Cash Settled Stock Unit Award related compensation costs for the nine months ended September 29, 2019 and September 30, 2018 were $1.1 million and $0.6 million, respectively. For the nine months ended September 29, 2019, $0.7 million was recorded as selling, general, and administrative expenses and $0.3 million was recorded as special charges related to the sale of our Pibiviesse Srl entity. The special charge amount related to the accelerated vesting of awards as a result of the transaction. For the nine months ended September 30, 2018, compensation costs for Cash Settled Stock Unit Awards were recorded entirely in selling, general, and administrative expense.
(16) Accumulated Other Comprehensive Loss
The following table summarizes the changes in accumulated other comprehensive loss, net of tax, which is reported as a component of shareholders' equity, for the nine months ended September 29, 2019 (in thousands):
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Foreign Currency Translation Adjustments
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Pension, net
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Derivative
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Total
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Balance as of December 31, 2018
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$
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(49,109
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)
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$
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(19,114
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)
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$
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(1,516
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)
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$
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(69,739
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)
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Other comprehensive loss
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(16,882
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)
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(393
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)
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(6,371
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)
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(23,646
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)
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Balance as of September 29, 2019
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$
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(65,991
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)
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$
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(19,507
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)
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$
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(7,887
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)
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$
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(93,385
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)
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During the first quarter of 2019, an immaterial error was identified in the Company's calculation of currency translation adjustments related to goodwill, intangible assets and property, plant and equipment acquired in the FH acquisition. This error impacts other comprehensive income. Specifically, other comprehensive income (loss) was overstated by $5.4 and $2.2 million for the first quarter and fiscal 2018, respectively, and was understated by $2.2 million for first quarter of 2019. The Company has determined that these adjustments were not material to the current or prior periods, or the forecasted 2019 results. These items were immaterial and were adjusted for during the first quarter of 2019. The quarterly impact ($ in millions) in 2018 was:
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Q1
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Q2
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Q3
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Q4
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2018
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Overstated (understated) comprehensive income
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$
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5.4
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$
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(5.1
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)
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$
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(0.2
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)
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$
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2.1
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|
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$
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2.2
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(17) Loss Per Common Share ("EPS")
Stock options, RSU Awards, and RSU MSPs covering 440,780 and 371,017 shares of common stock for the nine months ended September 29, 2019 and September 30, 2018, respectively, were not included in the computation of diluted EPS because their effect would be anti-dilutive.