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, 2019 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, 2019.
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 six months ended June 28, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 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).
COVID-19
In March 2020, the World Health Organization declared the outbreak of COVID-19, which continues to spread throughout the U.S. and the world, as a pandemic. The pandemic is having an impact on the global economy, resulting in rapidly changing market and economic conditions. As of March 29, 2020, the Company experienced a significant decline in its market capitalization below its consolidated book value. As a result, management concluded that there was a goodwill and an intangible asset impairment triggering event for the Company in the first quarter of 2020. Through its impairment analysis, the Company determined that goodwill in its Industrial segment was impaired and recognized a $116.2 million impairment. See Note 7, Goodwill and Intangible Assets, for additional information on the goodwill impairment.
The Company expects the effects of the COVID-19 pandemic to continue to negatively impact its results of operations, cash flows and financial position. The Company’s condensed consolidated financial statements presented herein reflect management's estimates and assumptions regarding the effects of COVID-19 as of the date of the condensed consolidated financial statements.
(2) Summary of Significant Accounting Policies
The significant accounting policies used in preparation of these condensed consolidated financial statements for the three and six months ended June 28, 2020 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, 2019, except as updated below with respect to newly adopted accounting standards.
The preparation of these financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying disclosures. Some of the more significant estimates, which are impacted by management's estimates and assumptions regarding the effects of COVID-19, relate to recoverability of goodwill and indefinite-lived trade names, estimated total costs for ongoing long-term
contracts accounted for as performance obligations where transfer of control occurs over time, inventory valuation, share-based compensation, amortization and impairment of long-lived assets, income taxes (including valuation allowance), penalty accruals for late shipments, other asset valuations, and product warranties. While management believes that the estimates and assumptions used in the preparation of the financial statements are appropriate, actual future results as estimated in the current period could differ materially from those estimates.
New Accounting Standards - Adopted
In December 2019, the FASB issued Accounting Standards Update ("ASU") No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, as part of its initiative to reduce complexity in the accounting standards. The amendments in ASU 2019-12 eliminate certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also clarifies and simplifies other aspects of the accounting for income taxes. The amendments in ASU 2019-12 are effective for the fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in any interim period. The Company has early adopted this amendment as of June 28, 2020. The adoption of the standard did not have a material impact to the Company’s condensed consolidated financial position and results of operations as well as related income tax disclosures
In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments. The new guidance, referred to as the current expected credit loss (“CECL”) model, requires the measurement of expected credit losses for financial assets (e.g., accounts receivable) held at the reporting date based on historical experience, current economic conditions, and reasonable and supportable forecasts which generally result in the more timely recognition of losses. The adoption of this new guidance on January 1, 2020 did not have a material impact on our condensed consolidated financial statements.
(3) Discontinued Operations
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 and 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. These actions were 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 meet the criteria of discontinued operations and are presented as such in the condensed consolidated financial statements for all periods presented.
During the quarter ended June 28, 2020, the Company’s wholly-owned subsidiary, CIRCOR Energy Products LLC ("CEP"), completed the disposition of the DV business to MS Valves GmbH (the “Purchaser”) pursuant to the Securities Purchase Agreement dated June 5, 2020 (the “Purchase Agreement”), for negative $8.25 million and a working capital adjustment of negative $2.0 million. The transaction is subject to an earnout of 50% of net profit (only if positive) from closing through December 31, 2022. The Company has agreed to provide certain transition services for six to twelve months, depending on the nature of the services. As part of the transaction, CEP retained certain supplier liabilities and responsibility for closing the Mexico manufacturing facility. As a result of completing the disposition, the Company recognized a loss on disposal of $21.0 million during the three and six months ended June 28, 2020, within discontinued operations. In addition, CEP recognized approximately $5 million in additional impairment losses or accelerated depreciation expense related to certain assets associated with the Mexico manufacturing facility that were not sold as part of the disposition.
The following table presents the summarized components of (loss) income from discontinued operations, for the DV business for the three and six months ended June 28, 2020 and June 30, 2019, and for the EV business for the three and six months ended June 30, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 28, 2020
|
|
June 30, 2019
|
|
June 28, 2020
|
|
June 30, 2019
|
Net revenues
|
$
|
3,818
|
|
|
$
|
23,839
|
|
|
$
|
10,055
|
|
|
$
|
55,379
|
|
Cost of revenues
|
15,040
|
|
|
27,228
|
|
|
26,398
|
|
|
59,313
|
|
Gross (loss) profit
|
(11,222
|
)
|
|
(3,389
|
)
|
|
(16,343
|
)
|
|
(3,934
|
)
|
Selling, general and administrative expenses
|
5,935
|
|
|
3,726
|
|
|
9,074
|
|
|
9,192
|
|
Special and restructuring charges, net
|
20,454
|
|
|
778
|
|
|
19,126
|
|
|
804
|
|
Operating (loss) income
|
(37,611
|
)
|
|
(7,893
|
)
|
|
(44,543
|
)
|
|
(13,930
|
)
|
Other (income) expense:
|
|
|
|
|
|
|
|
Interest (income), net
|
(7
|
)
|
|
(92
|
)
|
|
(14
|
)
|
|
(6
|
)
|
Other (income) expense, net
|
(5,191
|
)
|
|
(72
|
)
|
|
219
|
|
|
163
|
|
Total other (income) expense, net
|
(5,198
|
)
|
|
(164
|
)
|
|
205
|
|
|
157
|
|
(Loss) income from discontinued operations, before income taxes
|
(32,413
|
)
|
|
(7,729
|
)
|
|
(44,748
|
)
|
|
(14,087
|
)
|
Provision for (benefit from) income tax
|
11,434
|
|
|
9,427
|
|
|
(10,063
|
)
|
|
8,797
|
|
Loss from discontinued operations, net of tax
|
$
|
(43,847
|
)
|
|
$
|
(17,156
|
)
|
|
$
|
(34,685
|
)
|
|
$
|
(22,884
|
)
|
Assets Held for Sale
The Company completed the sale of the DV business during the quarter ended June 28, 2020. The Company completed the sale of its non-core Instrumentation and Sampling ("I&S") business during the quarter ended March 29, 2020. See Note 5, Special and Restructuring Charges (Recoveries), net for additional information on the I&S business divestiture. As of December 31, 2019, the DV and I&S businesses are reported as "held for sale" within the current assets and current liabilities section of our condensed consolidated balance sheet.
The following table presents the balance sheet information for assets and liabilities held for sale as of December 31, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
DV
|
I&S
|
Total
|
Trade accounts receivable, net
|
$
|
467
|
|
$
|
9,935
|
|
$
|
10,402
|
|
Inventories
|
55,521
|
|
13,878
|
|
69,399
|
|
Prepaid expenses and other current assets
|
2,867
|
|
616
|
|
3,483
|
|
Property, plant, and equipment, net
|
6,742
|
|
6,409
|
|
13,151
|
|
Goodwill
|
—
|
|
91,492
|
|
91,492
|
|
Deferred tax asset
|
778
|
|
1,089
|
|
1,867
|
|
Other assets
|
4,793
|
|
6,363
|
|
11,156
|
|
Valuation adjustment on classification to assets held for sale
|
(39,757
|
)
|
—
|
|
(39,757
|
)
|
Total assets held for sale
|
$
|
31,411
|
|
$
|
129,782
|
|
$
|
161,193
|
|
|
|
|
|
Accounts payable
|
$
|
8,708
|
|
$
|
5,997
|
|
$
|
14,705
|
|
Accrued and other current liabilities
|
5,834
|
|
2,192
|
|
8,026
|
|
Deferred income taxes
|
638
|
|
151
|
|
789
|
|
Other liabilities
|
13,931
|
|
5,838
|
|
19,769
|
|
Total liabilities held for sale
|
$
|
29,111
|
|
$
|
14,178
|
|
$
|
43,289
|
|
(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 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.
For revenue that is recognized from products and services transferred to customers over-time, we use 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 use the cost-to-cost measure of progress 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 June 28, 2020, we had $432.0 million of revenue related to remaining unfulfilled performance obligations. We expect to recognize approximately 58% of our remaining performance obligations as revenue during the remainder of 2020, 30% in 2021, and the remaining 12% in 2022 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 six months ended June 28, 2020.
Disaggregation of Revenue. The Company determined that disaggregating revenue into these categories meets the disclosure objective in Topic 606 which is to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The following tables present our revenue disaggregated by major product line and geographical market (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 28, 2020
|
|
June 30, 2019
|
|
June 28, 2020
|
|
June 30, 2019
|
Aerospace & Defense Segment
|
|
|
|
|
|
|
|
|
Commercial Aerospace & Other
|
$
|
25,195
|
|
|
$
|
27,980
|
|
|
$
|
51,515
|
|
|
$
|
56,686
|
|
|
Defense
|
37,046
|
|
|
36,714
|
|
|
76,219
|
|
|
69,248
|
|
|
Total
|
62,241
|
|
|
64,694
|
|
|
127,734
|
|
|
125,934
|
|
Industrial Segment
|
|
|
|
|
|
|
|
|
Valves
|
49,452
|
|
|
94,057
|
|
|
103,643
|
|
|
186,361
|
|
|
Pumps
|
74,373
|
|
|
87,017
|
|
|
146,902
|
|
|
172,328
|
|
|
Total
|
123,825
|
|
|
181,074
|
|
|
250,545
|
|
|
358,689
|
|
Net Revenue
|
$
|
186,066
|
|
|
$
|
245,768
|
|
|
$
|
378,279
|
|
|
$
|
484,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 28, 2020
|
|
June 30, 2019
|
|
June 28, 2020
|
|
June 30, 2019
|
Aerospace & Defense Segment
|
|
|
|
|
|
|
|
|
EMEA
|
$
|
14,254
|
|
|
$
|
16,834
|
|
|
$
|
29,061
|
|
|
$
|
34,566
|
|
|
North America
|
44,707
|
|
|
41,485
|
|
|
90,695
|
|
|
78,878
|
|
|
Other
|
3,280
|
|
|
6,375
|
|
|
7,978
|
|
|
12,490
|
|
|
Total
|
62,241
|
|
|
64,694
|
|
|
127,734
|
|
|
125,934
|
|
Industrial Segment
|
|
|
|
|
|
|
|
|
EMEA
|
52,420
|
|
|
63,265
|
|
|
109,426
|
|
|
139,008
|
|
|
North America
|
43,922
|
|
|
68,949
|
|
|
87,844
|
|
|
142,796
|
|
|
Other
|
27,483
|
|
|
48,860
|
|
|
53,275
|
|
|
76,885
|
|
|
Total
|
123,825
|
|
|
181,074
|
|
|
250,545
|
|
|
358,689
|
|
Net Revenue
|
$
|
186,066
|
|
|
$
|
245,768
|
|
|
$
|
378,279
|
|
|
$
|
484,623
|
|
Contract Balances. The Company’s contract assets and contract liabilities balances as of June 28, 2020 and December 31, 2019 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28, 2020
|
|
December 31, 2019
|
|
Increase/(Decrease)
|
Trade accounts receivables, net
|
$
|
117,131
|
|
|
$
|
125,422
|
|
|
$
|
(8,291
|
)
|
Contract assets (1)
|
67,465
|
|
|
52,781
|
|
|
14,684
|
|
Contract liabilities (2)
|
42,277
|
|
|
35,007
|
|
|
7,270
|
|
|
|
|
|
|
|
(1) Recorded within prepaid expenses and other current assets.
|
(2) Recorded within accrued expenses and other current liabilities.
|
(5) Special and Restructuring Charges (Recoveries), net
Special and restructuring charges (recoveries), net
Special and restructuring charges (recoveries), net consist of restructuring costs (including costs to exit a product line or program) as well as certain special charges (recoveries) 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 (recoveries), net on our condensed consolidated statements of operations. Certain other special and restructuring charges (recoveries) such as inventory related items may be recorded in cost of revenues given the nature of the item.
The table below summarizes the amounts recorded within the special and restructuring charges (recoveries), net line item on the condensed consolidated statements of operations for the three and six months ended June 28, 2020 and June 30, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special & restructuring charges (recoveries), net
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 28, 2020
|
|
June 30, 2019
|
|
June 28, 2020
|
|
June 30, 2019
|
Special charges (recoveries), net
|
$
|
5,019
|
|
|
$
|
3,916
|
|
|
$
|
(40,156
|
)
|
|
$
|
(4,284
|
)
|
Restructuring charges, net
|
588
|
|
|
299
|
|
|
3,471
|
|
|
657
|
|
Total special and restructuring charges (recoveries), net
|
$
|
5,607
|
|
|
$
|
4,215
|
|
|
$
|
(36,685
|
)
|
|
$
|
(3,627
|
)
|
Special charges (recoveries), net
The table below details the special charges (recoveries), net recorded for the three and six months ended June 28, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special charges, net
|
|
Three Months Ended June 28, 2020
|
|
|
Aerospace & Defense
|
|
Industrial
|
|
Corporate
|
|
Total
|
I&S divestiture
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(306
|
)
|
|
$
|
(306
|
)
|
Professional fees
|
|
—
|
|
|
—
|
|
|
4,570
|
|
|
4,570
|
|
Other special charges
|
|
—
|
|
|
—
|
|
|
755
|
|
|
755
|
|
Total special charges, net
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,019
|
|
|
$
|
5,019
|
|
|
|
|
|
Special (recoveries) charges, net
|
|
|
Six Months Ended June 28, 2020
|
|
|
Aerospace & Defense
|
|
Industrial
|
|
Corporate
|
|
Total
|
I&S divestiture
|
|
$
|
—
|
|
|
$
|
(53,202
|
)
|
|
$
|
(306
|
)
|
|
$
|
(53,508
|
)
|
Professional fees
|
|
—
|
|
|
—
|
|
|
6,925
|
|
|
6,925
|
|
Amortization of debt issuance fee
|
|
—
|
|
|
—
|
|
|
3,541
|
|
|
3,541
|
|
Other special charges
|
|
—
|
|
|
101
|
|
|
2,785
|
|
|
2,886
|
|
Total special (recoveries) charges, net
|
|
$
|
—
|
|
|
$
|
(53,101
|
)
|
|
$
|
12,945
|
|
|
$
|
(40,156
|
)
|
I&S divestiture: The Company recorded net special recoveries of $(0.3) million and $(53.5) million for the three and six months ended June 28, 2020, respectively, attributed to the sale of the I&S business in January 2020. During the quarter ended March 29, 2020, we received net cash proceeds of $169.8 million and recognized a pre-tax gain on sale of $54.6 million. The Industrial segment incurred $1.4 million of operating expenses associated with the I&S business for the three months ended March 29, 2020, which are presented net within the I&S divestiture line.
Professional fees: The Company incurred special charges of $4.6 million and $6.9 million for the three and six months ended June 28, 2020, respectively, associated with the review and response to an unsolicited tender offer to acquire the Company and related corporate governance actions, and for other proxy-related matters.
Amortization of debt issuance fee: The Company incurred special charges of $3.5 million for the six months ended June 28, 2020, for accelerated amortization of capitalized debt issuance costs in connection with the accounting for the paydown and refinancing of its term loan during the first quarter of 2020. See Note 9, Financing Arrangements, for additional information on our debt repricing.
Other special charges: The Company incurred special charges of $0.8 million and $2.9 million for the three and six months ended June 28, 2020, respectively, associated with projects to streamline operations and reduce costs.
The table below details the special charges, net recorded for the three and six months ended June 30, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special charges, net
|
|
Three Months Ended June 30, 2019
|
|
|
Aerospace & Defense
|
|
Industrial
|
|
Corporate
|
|
Total
|
Reliability Services divestiture
|
|
$
|
—
|
|
|
$
|
1,105
|
|
|
$
|
286
|
|
|
$
|
1,391
|
|
Trapped cost
|
|
—
|
|
|
—
|
|
|
450
|
|
|
450
|
|
Professional fees to review and respond to an unsolicited tender offer to acquire the Company
|
|
—
|
|
|
—
|
|
|
2,075
|
|
|
2,075
|
|
Total special charges, net
|
|
$
|
—
|
|
|
$
|
1,105
|
|
|
$
|
2,811
|
|
|
$
|
3,916
|
|
|
|
|
|
|
|
|
|
|
|
Special (recoveries) charges, net
|
|
Six Months Ended June 30, 2019
|
|
|
Aerospace & Defense
|
|
Industrial
|
|
Corporate
|
|
Total
|
Reliability Services divestiture
|
|
$
|
—
|
|
|
$
|
(9,177
|
)
|
|
$
|
286
|
|
|
$
|
(8,891
|
)
|
Reliability Services 2019 operating expenses
|
|
—
|
|
|
1,450
|
|
|
—
|
|
|
1,450
|
|
Rosscor divestiture related charges
|
|
—
|
|
|
153
|
|
|
—
|
|
|
153
|
|
Trapped cost
|
|
—
|
|
|
—
|
|
|
929
|
|
|
929
|
|
Professional fees to review and respond to an unsolicited tender offer to acquire the Company
|
|
—
|
|
|
—
|
|
|
2,075
|
|
|
2,075
|
|
Total special (recoveries) charges, net
|
|
$
|
—
|
|
|
$
|
(7,574
|
)
|
|
$
|
3,290
|
|
|
$
|
(4,284
|
)
|
Reliability Services divestiture: During the first quarter of 2019, the Company sold its Reliability Services business, and recorded a gain of $10.3 million. During the three months ended June 30, 2019, the Company recorded a $1.4 million charge related to the divested business, for a net gain of $8.9 million for the six months ended June 30, 2019.
Reliability Services 2019 operating expenses: The Company classified the 2019 operating expenses of the Reliability Services business as special given the business was held for sale as of 2018 and was sold in January 2019.
Rosscor divestiture: In November 2018, the Company sold its Rosscor B.V. and SES International B.V. subsidiaries (the “Delden Business”) for a nominal amount. During the first six months of 2019, the Company recorded a $0.2 million charge related to the divestiture.
Trapped cost: For the three and six months ended June 30, 2019, the Company has reclassified $.5 million and $.9 million, respectively, of Corporate costs previously allocated to businesses that were subsequently recorded as discontinued operations. Under GAAP, these costs did not meet the requirements of directly-attributable expenses of the discontinued operations.
Professional fees: The Company incurred special charges of $2.1 million for the three and six months ended June 30, 2019 associated with the review and response to an unsolicited tender offer to acquire the Company.
Restructuring charges, net
The tables below detail the charges associated with restructuring actions recorded for the three and six months ended June 28, 2020 and June 30, 2019 (in thousands). Accruals associated with the restructuring actions are recorded within Accrued expenses and other current liabilities on the condensed consolidated balance sheets. 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 June 28, 2020
|
|
|
Aerospace & Defense
|
|
Industrial
|
|
Corporate
|
|
Total
|
Facility related expenses
|
|
$
|
19
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
19
|
|
Employee related expenses, net
|
|
169
|
|
|
242
|
|
|
158
|
|
|
569
|
|
Total restructuring charges, net
|
|
$
|
188
|
|
|
$
|
242
|
|
|
$
|
158
|
|
|
$
|
588
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges, net
|
|
|
As of and for the six months ended June 28, 2020
|
|
|
Aerospace & Defense
|
|
Industrial
|
|
Corporate
|
|
Total
|
Facility related expenses
|
|
$
|
30
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30
|
|
Employee related expenses, net
|
|
169
|
|
|
2,932
|
|
|
340
|
|
|
3,441
|
|
Total restructuring charges, net
|
|
$
|
199
|
|
|
$
|
2,932
|
|
|
$
|
340
|
|
|
$
|
3,471
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring charges as of December 31, 2019
|
|
|
|
|
|
|
|
$
|
5,199
|
|
Total year to date charges, net (shown above)
|
|
|
|
|
|
|
|
3,471
|
|
Charges paid / settled, net
|
|
|
|
|
|
|
|
(5,560
|
)
|
Accrued restructuring charges as of June 28, 2020
|
|
|
|
|
|
|
|
$
|
3,110
|
|
We expect to make payment or settle the majority of the restructuring charges accrued as of June 28, 2020 during the third and fourth quarters of 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges, net
|
|
|
As of and for the three months ended June 30, 2019
|
|
|
Aerospace & Defense
|
|
Industrial
|
|
Corporate
|
|
Total
|
Facility related expenses
|
|
$
|
145
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
145
|
|
Employee related expenses
|
|
—
|
|
|
154
|
|
|
—
|
|
|
154
|
|
Total restructuring charges, net
|
|
$
|
145
|
|
|
$
|
154
|
|
|
$
|
—
|
|
|
$
|
299
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges, net
|
|
|
As of and for the six months ended June 30, 2019
|
|
|
Aerospace & Defense
|
|
Industrial
|
|
Corporate
|
|
Total
|
Facility related expenses
|
|
$
|
217
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
217
|
|
Employee related expenses
|
|
(3
|
)
|
|
443
|
|
|
—
|
|
|
440
|
|
Total restructuring charges, net
|
|
$
|
214
|
|
|
$
|
443
|
|
|
$
|
—
|
|
|
$
|
657
|
|
|
|
|
|
|
|
|
|
|
Restructuring Programs Summary
We recorded $0.6 million and $3.5 million of restructuring charges during the three months and six months ended June 28, 2020, respectively, to reduce expenses primarily through reductions in force and to close a sales location to consolidate operations.
During the three and six months ended June 30, 2019, we recorded $0.3 million and $0.7 million of restructuring charges, respectively, related to the program we initiated during 2018.
(6) Inventories
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 28, 2020
|
|
December 31, 2019
|
Raw materials
|
$
|
73,560
|
|
|
$
|
65,315
|
|
Work in process
|
50,076
|
|
|
53,891
|
|
Finished goods
|
24,747
|
|
|
18,103
|
|
Total inventories
|
$
|
148,383
|
|
|
$
|
137,309
|
|
(7) Goodwill and Intangibles, net
The following table shows goodwill by segment as of December 31, 2019 and June 28, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace & Defense
|
|
Industrial
|
|
Total
|
Goodwill as of December 31, 2019
|
|
$
|
57,385
|
|
|
$
|
214,508
|
|
|
$
|
271,893
|
|
Impairment
|
|
—
|
|
|
(116,182
|
)
|
|
(116,182
|
)
|
Currency translation adjustments
|
|
66
|
|
|
877
|
|
|
943
|
|
Goodwill as of June 28, 2020
|
|
$
|
57,451
|
|
|
$
|
99,203
|
|
|
$
|
156,654
|
|
We perform an impairment assessment for goodwill at the reporting unit level on an annual basis as of the end of our October month end or more frequently if circumstances warrant. At June 28, 2020, the Company performed a review and determined there were no triggering events requiring an impairment assessment. At March 29, 2020, the Company reorganized its reporting units (see Note 8, Segment Information) and had its stock price drop below book value, which the Company determined were triggering events requiring an assessment of its goodwill and indefinite-lived trade names.
For the assessment of goodwill as of March 29, 2020, we estimated the fair value of our two reporting units, Industrial and Aerospace & Defense, using an income approach based on the present value of future cash flows. We also utilized the implied market value method under the market approach to validate the fair value amount we obtained using a discounted cash flow model income approach which indicated a control premium. Management believes this approach was the best approximation of fair value of its reporting units in the current economic environment considering the uncertainty caused by the COVID-19 pandemic. The key assumptions utilized in our discounted cash flow model include our estimates of the rate of revenue growth, including the rate of growth used in terminal year value, the assumption of a control premium, and the discount rate based on a weighted average cost of capital. The relevant inputs, estimates and assumptions used in the implied market value method include our market capitalization as of March 29, 2020, and selection of a control premium. The Company believes its assumptions used to determine the fair value of its reporting unit are reasonable and consistent with market conditions at the time of estimation. Actual operating results and the related cash flows of the reporting units could differ from the estimated operating results and related cash flows.
Based on our impairment assessment as of March 29, 2020, we concluded that our goodwill in the Industrial reporting unit was impaired and, accordingly, recorded a goodwill impairment charge of $116.2 million. There was no impairment identified with respect to the Company's indefinite-lived trade name assets.
Due to the presence of impairment indicators, we also performed an impairment test of each reporting unit’s long-lived assets. This impairment evaluation was based on expectations of future undiscounted cash flows compared to the carrying value of the long-lived assets. The Company’s cash flow estimates were consistent with those used in the goodwill impairment test discussed above. Based on this analysis, the undiscounted cash flows of our long-lived assets were in excess of their carrying value and thus deemed to not be impaired. The Company believes its procedures for estimating future cash flows were reasonable and consistent with market conditions at the time of estimation. As such, management determined that its long-lived assets other than goodwill were not impaired and that the long-lived assets did not suffer a decline in utility requiring a reassessment of their useful lives.
The table below presents gross intangible assets and the related accumulated amortization as of June 28, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying Value
|
Patents
|
$
|
5,368
|
|
|
$
|
(5,368
|
)
|
|
$
|
—
|
|
Customer relationships
|
298,942
|
|
|
(95,348
|
)
|
|
203,594
|
|
Backlog
|
13,427
|
|
|
(12,465
|
)
|
|
962
|
|
Acquired technology
|
134,574
|
|
|
(51,000
|
)
|
|
83,574
|
|
Total Amortized Intangibles
|
$
|
452,311
|
|
|
$
|
(164,181
|
)
|
|
$
|
288,130
|
|
|
|
|
|
|
|
Non-amortized intangibles (primarily trademarks and trade names)
|
$
|
74,957
|
|
|
$
|
—
|
|
|
$
|
74,957
|
|
Total Non-Amortized Intangibles
|
$
|
74,957
|
|
|
$
|
—
|
|
|
$
|
74,957
|
|
Net carrying value of intangible assets
|
|
|
|
|
|
$
|
363,087
|
|
The table below presents estimated remaining amortization expense for intangible assets recorded as of June 28, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
After 2024
|
Estimated amortization expense
|
$
|
22,126
|
|
|
$
|
41,264
|
|
|
$
|
36,266
|
|
|
$
|
31,796
|
|
|
$
|
27,939
|
|
|
$
|
128,739
|
|
(8) Segment Information
Our Chief Operating Decision Maker (the "CODM") 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.
During the quarter ended March 29, 2020, we divested our I&S business, which was previously part of the Energy segment. See Note 5, Special and Restructuring Charges (Recoveries), net for additional information on this divestiture. In light of this divestiture, effective March 29, 2020, we realigned our segments by eliminating the Energy segment and moving the remaining businesses into the Industrial segment. The new reporting segments are Industrial and Aerospace & Defense, which is the level at which the CODM regularly reviews operating results. The current and prior periods are reported under this new segment structure.
The following table presents certain reportable segment information (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 28, 2020
|
|
June 30, 2019
|
|
June 28, 2020
|
|
June 30, 2019
|
Net revenues
|
|
|
|
|
|
|
|
Aerospace & Defense
|
$
|
62,241
|
|
|
$
|
64,694
|
|
|
$
|
127,734
|
|
|
$
|
125,934
|
|
Industrial
|
123,825
|
|
|
181,074
|
|
|
250,545
|
|
|
358,689
|
|
Consolidated net revenues
|
$
|
186,066
|
|
|
$
|
245,768
|
|
|
$
|
378,279
|
|
|
$
|
484,623
|
|
Results from continuing operations before income taxes
|
|
|
|
|
|
|
|
Aerospace & Defense - Segment Operating Income
|
$
|
13,142
|
|
|
$
|
10,443
|
|
|
$
|
25,636
|
|
|
$
|
19,817
|
|
Industrial - Segment Operating Income
|
12,406
|
|
|
26,174
|
|
|
17,575
|
|
|
48,754
|
|
Corporate expenses
|
(9,664
|
)
|
|
(8,028
|
)
|
|
(16,252
|
)
|
|
(16,550
|
)
|
Segment Operating Income
|
15,884
|
|
|
28,589
|
|
|
26,959
|
|
|
52,021
|
|
Restructuring charges, net
|
588
|
|
|
299
|
|
|
3,471
|
|
|
657
|
|
Special charges (recoveries), net
|
5,019
|
|
|
3,916
|
|
|
(40,156
|
)
|
|
(4,284
|
)
|
Special and restructuring charges (recoveries), net
|
5,607
|
|
|
4,215
|
|
|
(36,685
|
)
|
|
(3,627
|
)
|
Restructuring related inventory charges
|
—
|
|
|
—
|
|
|
(602
|
)
|
|
325
|
|
Amortization of inventory step-up
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Impairment charges
|
—
|
|
|
—
|
|
|
116,182
|
|
726
|
|
—
|
|
Acquisition amortization
|
10,681
|
|
|
11,248
|
|
|
20,898
|
|
|
23,324
|
|
Acquisition depreciation
|
980
|
|
|
1,106
|
|
|
1,955
|
|
|
2,229
|
|
Acquisition amortization and other costs, net
|
11,661
|
|
|
12,354
|
|
|
138,433
|
|
|
25,878
|
|
Consolidated Operating (Loss) Income
|
(1,384
|
)
|
|
12,020
|
|
|
(74,789
|
)
|
|
29,770
|
|
Interest expense, net
|
8,486
|
|
|
12,947
|
|
|
17,497
|
|
|
26,041
|
|
Other (income) expense, net
|
2,144
|
|
|
153
|
|
|
(536
|
)
|
|
(1,995
|
)
|
(Loss) income from continuing operations before income taxes
|
$
|
(12,014
|
)
|
|
$
|
(1,080
|
)
|
|
$
|
(91,750
|
)
|
|
$
|
5,724
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 28, 2020
|
|
June 30, 2019
|
|
June 28, 2020
|
|
June 30, 2019
|
Capital expenditures
|
|
|
|
|
|
|
|
Aerospace & Defense
|
$
|
686
|
|
|
$
|
591
|
|
|
$
|
1,327
|
|
|
$
|
1,378
|
|
Industrial
|
2,241
|
|
|
1,604
|
|
|
4,557
|
|
|
3,279
|
|
Corporate
|
132
|
|
|
269
|
|
|
330
|
|
|
656
|
|
Consolidated capital expenditures
|
$
|
3,059
|
|
|
$
|
2,464
|
|
|
$
|
6,214
|
|
|
$
|
5,313
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
Aerospace & Defense
|
$
|
3,087
|
|
|
$
|
2,775
|
|
|
$
|
6,180
|
|
|
$
|
5,448
|
|
Industrial
|
12,742
|
|
|
14,406
|
|
|
25,161
|
|
|
29,605
|
|
Corporate
|
105
|
|
|
167
|
|
|
230
|
|
|
331
|
|
Consolidated depreciation and amortization
|
$
|
15,934
|
|
|
$
|
17,348
|
|
|
$
|
31,571
|
|
|
$
|
35,384
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
June 28, 2020
|
|
June 30, 2019
|
|
|
|
|
Aerospace & Defense
|
$
|
429,197
|
|
|
$
|
419,692
|
|
|
|
|
|
Industrial
|
1,421,404
|
|
|
1,985,979
|
|
|
|
|
|
Corporate
|
(590,234
|
)
|
|
(692,974
|
)
|
|
|
|
|
Consolidated identifiable assets
|
$
|
1,260,367
|
|
|
$
|
1,712,697
|
|
|
|
|
|
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 $49.8 million and $20.9 million as of June 28, 2020 and June 30, 2019, respectively.
(9) Financing Arrangements
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 aggregate fair value of the Company's interest rate swap and cross-currency swap as of June 28, 2020 are summarized in the table below (in thousands):
|
|
|
|
|
|
Level 2 - Significant Other Observable Inputs
|
Derivative assets
|
$
|
2,729
|
|
Derivative liabilities
|
$
|
(11,308
|
)
|
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 June 28, 2020, the fair value of our gross debt (before netting debt issuance costs) was $565.4 million, or $26.6 million below our carrying cost of $592 million and is a Level 2 financial instrument.
Financial Instruments
As of June 28, 2020 and December 31, 2019, the Company had restricted cash balances of $1.0 million and $1.2 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.
The Company has a receivable purchasing agreement with a bank whereby the Company can sell selected accounts receivable and obtain between 90% and 100% of the purchase price upfront, net of applicable discount fee, and the residual amount as the receivables are collected. The Company services the collection of the outstanding receivables. During the three and six months ended June 28, 2020, the Company sold a total of $14.7 million and $29.2 million, respectively, of receivables under the program, receiving $13.8 million and $27.4 million, respectively, in upfront cash. No receivables were sold during the six months ended June 30, 2019. At June 28, 2020, a beneficial interest balance of $0.9 million was recorded in prepaid expenses and other current assets on the condensed consolidated balance sheet.
The Company has a 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 International Swaps and Derivatives Association ("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 2.4% and a maturity date of July 12, 2022. At
inception, the cross-currency swap was designated as a net investment hedge. This hedging agreement mitigates 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 an interest rate swap pursuant to an ISDA Master Agreement with Citizens Bank, National Association. The four-year interest rate swap has a fixed notional value of $400.0 million with a 1% LIBOR floor and a maturity date of April 12, 2022. The fixed rate of interest paid by the Company is comprised of our current credit spread of 325 basis points plus 2.6475% for a total interest rate of 5.8975%. The ISDA Master Agreement, together with its related schedules, contains customary representations, warranties, and covenants.
We have 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 $(8.6) million. These balances are recorded in other long-term liabilities of $4.9 million, accrued expenses and other current liabilities of $6.4 million, and other current assets of $2.7 million on our condensed consolidated balance sheet as of June 28, 2020. In addition, the Company recorded long-term deferred tax assets of $2.5 million associated with its hedge instruments as of June 28, 2020.
The amount of gains (loss) recognized in other comprehensive (loss) income ("OCI") and reclassified from accumulated other comprehensive (loss) income ("AOCI") to income are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Six Months Ended
|
|
June 28, 2020
|
June 28, 2020
|
Amount of loss recognized in OCI
|
$
|
(682
|
)
|
$
|
(4,788
|
)
|
Amount of loss reclassified from AOCI into income
|
$
|
(1,664
|
)
|
$
|
(2,757
|
)
|
The realized losses of $1.7 million and $2.8 million were reclassified from other comprehensive loss to interest expense and accrued on the swap during the three and six months ended June 28, 2020, respectively. Amounts expected to be reclassified from other comprehensive income into interest expense in the coming 12 months is a loss of $6.3 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 $6.0 million and $12.0 million for the three and six months ended June 28, 2020, respectively.
Debt
As of June 28, 2020, total debt was $578.6 million compared to $636.3 million as of December 31, 2019. Total debt is net of unamortized term loan debt issuance costs of $13.4 million and $17.6 million at June 28, 2020 and December 31, 2019, respectively. The Company made interest payments of $17.2 million and $24.9 million during the six months ended June 28, 2020, and June 30, 2019, respectively.
During the six months ended June 28, 2020, the Company paid down $161.8 million on its term loan from proceeds received through the sale of the I&S business. On March 20, 2020, the Company drew down $80.0 million on its line of credit due to concerns about possible disruptions to global capital markets stemming from COVID-19.
During the first quarter of 2020, the Company amended its term loan to lower the interest rate associated with the applicable margin calculation. The new terms lower the interest rate on the Company's term loan from LIBOR plus an applicable margin of 3.5% to LIBOR plus an applicable margin of 3.25%, based on its existing corporate family rating from Moody's. The applicable margin reduces to LIBOR plus an applicable margin of 3.00%, with a corporate family rating from Moody's of B1 or better.
As part of the debt repricing, the Company's outstanding loan balance was reallocated amongst the lender group. The Company evaluated the changes in outstanding loan balance for each individual lender to determine the amount of capitalized debt issuance costs that required adjustment. Through this exercise, the Company determined that certain creditors under the original term loan did not participate in this refinancing transaction and ceased being creditors of the Company. As a result, the Company recorded a debt extinguishment loss of $3.5 million in the first quarter of during Q1 2020 which was recorded to Special and restructuring charges (recoveries), net, on the condensed consolidated statement of operations. For the remainder of the creditors, this transaction was accounted for as a modification. The Company accounted for the amendment pursuant to
ASC 470, subtopic 50-40, and third-party costs of $0.2 million related to this transaction were expensed and $0.3 million of lender fees were recorded as a reduction to debt representing deferred issuance costs.
(10) 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 June 28, 2020.
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 six months ended June 28, 2020 (in thousands):
|
|
|
|
|
Balance beginning December 31, 2019
|
$
|
1,642
|
|
Provisions
|
1,001
|
|
Claims settled
|
(1,126
|
)
|
Currency translation adjustment
|
(10
|
)
|
Balance ending June 28, 2020
|
$
|
1,507
|
|
Warranty obligations are recorded within Accrued expenses and other current liabilities on the condensed consolidated balance sheets.
(11) 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.
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. The Hoke subsidiary was divested in January 2020 through our sale of the I&S business. However, the Company has indemnified the buyer for asbestos-related claims that are made against Hoke. 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 $35.3 million at June 28, 2020. 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 June 28, 2020.
The following table contains information related to standby letters of credit instruments outstanding as of June 28, 2020 (in thousands):
|
|
|
|
|
Term Remaining
|
Maximum Potential
Future Payments
|
0–12 months
|
$
|
22,123
|
|
Greater than 12 months
|
13,207
|
|
Total
|
$
|
35,330
|
|
(12) 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
|
|
Six Months Ended
|
|
June 28, 2020
|
|
June 30, 2019
|
|
June 28, 2020
|
|
June 30, 2019
|
Pension Benefits - U.S. Plans
|
|
|
|
|
|
|
|
Interest cost
|
$
|
1,396
|
|
|
$
|
1,967
|
|
|
$
|
2,795
|
|
|
$
|
3,934
|
|
Expected return on plan assets
|
(2,746
|
)
|
|
(2,742
|
)
|
|
(5,493
|
)
|
|
(5,484
|
)
|
Amortization
|
42
|
|
|
129
|
|
|
85
|
|
|
259
|
|
Net periodic benefit income
|
$
|
(1,308
|
)
|
|
$
|
(646
|
)
|
|
$
|
(2,613
|
)
|
|
$
|
(1,291
|
)
|
|
|
|
|
|
|
|
|
Pension Benefits - Non-U.S. Plans
|
|
|
|
|
|
|
|
Service cost
|
$
|
667
|
|
|
$
|
688
|
|
|
$
|
1,359
|
|
|
$
|
1,382
|
|
Interest cost
|
321
|
|
|
549
|
|
|
660
|
|
|
1,104
|
|
Expected return on plan assets
|
(175
|
)
|
|
(244
|
)
|
|
(370
|
)
|
|
(491
|
)
|
Amortization
|
(31
|
)
|
|
5
|
|
|
—
|
|
|
9
|
|
Net periodic benefit cost
|
$
|
782
|
|
|
$
|
998
|
|
|
$
|
1,649
|
|
|
$
|
2,004
|
|
|
|
|
|
|
|
|
|
Other Post-Retirement Benefits
|
|
|
|
|
|
|
|
Interest cost
|
$
|
66
|
|
|
$
|
93
|
|
|
$
|
132
|
|
|
$
|
187
|
|
Net periodic benefit cost
|
$
|
66
|
|
|
$
|
93
|
|
|
$
|
132
|
|
|
$
|
187
|
|
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 operations for the three months ended June 28, 2020 and June 30, 2019, respectively.
There were no employer contributions to the Company's U.S. and non- U.S. based pension plans during the three and six months ended June 28, 2020.
(13) Income Taxes
As of June 28, 2020 and December 31, 2019, we had $1.1 million and $0.6 million, respectively, of unrecognized tax benefits, all of which 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 2015, except for Germany which is under examination from 2006 to 2015. 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 $14.3 million at June 28, 2020 and December 31, 2019. 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. On July 9, 2020, the US Department of the Treasury (Treasury) and Internal Revenue Service (IRS) released Final Regulations (Final Regulations) that provide guidance on the section 250 deduction for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI). In addition, on July 20, 2020, Treasury released Proposed Regulations concerning GILTI. We are evaluating these Regulations and the impact to the realizability of our US deferred tax assets. It is possible that this evaluation could result in the recording of a valuation allowance against all or a portion of US deferred tax assets, ranging up to approximately $50 million, which would be recorded in the third quarter results of 2020.
On March 27, 2020, the United States enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act as a result of the COVID-19 pandemic, which contains among other things, numerous income tax provisions. Some of these tax provisions are expected to be effective retroactively for years ending before the date of enactment. The Company has evaluated the current legislation and at this time, does not anticipate the CARES Act to have a material impact on its financial statements.
During the six months ended June 28, 2020 and June 30, 2019, the Company paid income taxes of $3.5 million and $5.1 million, respectively.
(14) Share-Based Compensation
As of June 28, 2020, the Company had 680,753 stock options and 780,433 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 434,593 shares available for grant as of June 28, 2020.
During the six months ended June 28, 2020, there were no stock options granted as compared with 153,726 stock options granted during the six months ended June 30, 2019.
The average fair value of stock options granted during the first six months of 2019 was $11.84 per share, and was estimated using the following weighted-average assumptions:
|
|
|
|
|
June 30, 2019
|
Risk-free interest rate
|
2.6
|
%
|
Expected life (years)
|
4.4
|
|
Expected stock volatility
|
38.1
|
%
|
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, 2019.
During the six months ended June 28, 2020 and June 30, 2019, we granted 606,679 and 196,231 RSU Awards with approximate fair values of $12.60 and $32.60 per RSU Award, respectively. During the first six months of 2020 and 2019, we granted performance-based RSU Awards as part of the overall mix of RSU Awards. Of the 606,679 RSU Awards granted during the six months ended June 28, 2020, 109,278 are performance-based RSU Awards. This compares to 67,362 performance-based RSU Awards granted during the six months ended June 30, 2019. In 2020, these performance-based RSU Awards include metrics for achieving Adjusted Operating Margin and Adjusted Measurement Cash Flow with target payouts ranging from 0% to 200%. In 2019, the performance-based RSU Awards include metrics for achieving Adjusted Operating Margin and Adjusted Free Cash Flow with the same target payout ranges. Of the different performance-based RSU tranches, the Company anticipates approximately 27% overall achievement and probability to vest.
There were no RSU MSPs granted during the six months ended June 28, 2020 whereas RSU MSPs totaling 56,379 with per unit discount amount representing a fair value of $11.10 per share were granted during the six months ended June 30, 2019.
Compensation expense related to our share-based plans for the six months ended June 28, 2020 and June 30, 2019 was $2.5 million and $3.1 million, respectively. The decrease in costs in the current period is primarily related to lower forecasted
achievement of performance-based RSU metrics. Compensation expense for six months ended June 28, 2020 was recorded as follows: $2.2 million in selling, general and administrative expenses, $0.1 million in special charges related to the sale of our I&S business, and $0.2 million in discontinued operations related to the sale of our DV business. The special charges and discontinued operations costs relate to the accelerated vesting of awards as a result of the sale transactions. Compensation expense for the six months ended June 30, 2019 was recorded in selling, general and administrative expenses. As of June 28, 2020, there were $8.9 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 1.8 years.
The weighted average contractual term for stock options outstanding and options exercisable as of June 28, 2020 was 3.6 years and 3.2 years, respectively. The aggregate intrinsic value of stock options exercised during the six months ended June 28, 2020 was insignificant. The aggregate intrinsic value of stock options outstanding and exercisable as of June 28, 2020 were insignificant.
The aggregate intrinsic value of RSU Awards settled during the six months ended June 28, 2020 was $1.7 million and the aggregate intrinsic value of RSU Awards outstanding and RSU Awards vested and deferred as of June 28, 2020 was $16.2 million and $0.0 million, respectively.
The aggregate intrinsic values of RSU MSPs settled, outstanding, and vested and deferred during the six months ended June 28, 2020 were insignificant.
The majority of international participants are issued Cash Settled Stock Unit Awards. As of June 28, 2020, there were 51,693 Cash Settled Stock Unit Awards outstanding compared to 45,681 as of December 31, 2019. During the six months ended June 28, 2020, the aggregate cash used to settle Cash Settled Stock Unit Awards was $0.7 million. As of June 28, 2020, we had $0.3 million of accrued expenses in other non-current liabilities associated with these Cash Settled Stock Unit Awards compared with $0.9 million as of December 31, 2019. Cash Settled Stock Unit Award related compensation costs for the six months ended June 28, 2020 and June 30, 2019 were $0.1 million and $0.8 million, respectively. The decrease in cost is due primarily to a lower stock price as of June 28, 2020 compared to June 30, 2019. For the six months ended June 28, 2020, $0.1 million was recorded as special charges related to the sale of our I&S business. The special charge amount related to the accelerated vesting of awards as a result of the transaction. For the six months ended June 30, 2019, compensation costs for Cash Settled Stock Unit Awards were recorded entirely in selling, general, and administrative expense.
(15) 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 six months ended June 28, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments
|
|
Pension, net
|
|
Derivative
|
|
Total
|
Balance as of December 31, 2019
|
$
|
(53,848
|
)
|
|
$
|
(19,513
|
)
|
|
$
|
(6,906
|
)
|
|
$
|
(80,267
|
)
|
Other comprehensive (loss) income
|
(6,235
|
)
|
|
82
|
|
|
(1,565
|
)
|
|
(7,718
|
)
|
Balance as of June 28, 2020
|
$
|
(60,083
|
)
|
|
$
|
(19,431
|
)
|
|
$
|
(8,471
|
)
|
|
$
|
(87,985
|
)
|
(16) (Loss) Income Per Common Share ("EPS")
For the three months ended June 28, 2020, the calculation of diluted EPS included the dilutive effect of securities totaling 299,034 shares, consisting of 248,227 shares of RSU Awards and 50,807 shares of RSU MSPs. Stock options, RSU Awards, and RSU MSPs covering 773,708 and 447,764 shares of common stock for the six months ended June 28, 2020 and June 30, 2019, respectively, were not included in the computation of diluted EPS because their effect would be anti-dilutive.