Quarterly Report (10-q)

Date : 11/13/2019 @ 9:58PM
Source : Edgar (US Regulatory)
Stock : CIRCOR International Inc (CIR)
Quote : 44.1  0.32 (0.73%) @ 10:14PM
After Hours
Last Trade
Last $ 44.10 ◊ 0.00 (0.00%)

Quarterly Report (10-q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number 001-14962
 
LOGOA02.JPG
CIRCOR INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter) 
 
 
 
 
 
 
 
 
 
 
 
 
 
Delaware
04-3477276
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
 
 
 
 
 
 
 
 
 
 
 
 
30 Corporate Drive, Suite 200

 
Burlington,
MA
                             
01803-4238
(Address of principal executive offices)
(Zip Code)
(781) 270-1200
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
CIR
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer," “smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
Emerging growth company
Non-accelerated filer
 
Smaller reporting company
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    Yes  ☐    No  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  ☒

As of November 8, 2019, there were 19,910,095 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.



CIRCOR INTERNATIONAL, INC.
TABLE OF CONTENTS

 
Page
3
Financial Statements (Unaudited)
3
 
3
 
4
 
5
 
6
 
7
 
9
27
40
40
40
41
41
Item 6.
41
43

2



PART I. FINANCIAL INFORMATION

ITEM 1.
 FINANCIAL STATEMENTS
CIRCOR INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(UNAUDITED)
 
September 29, 2019
 
December 31, 2018
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
69,225

 
$
68,517

Trade accounts receivable, less allowance for doubtful accounts of $4,342 and $5,884 at September 29, 2019 and December 31, 2018, respectively
141,117

 
167,181

Inventories
151,744

 
143,682

Prepaid expenses and other current assets
89,854

 
71,428

Assets held for sale
29,935

 
197,238

Total Current Assets
481,875

 
648,046

PROPERTY, PLANT AND EQUIPMENT, NET
177,936

 
189,672

OTHER ASSETS:
 
 
 
Goodwill
360,304

 
450,605

Intangibles, net
392,515

 
440,281

Deferred income taxes
24,449

 
19,906

Assets held for sale

 
30,374

Other assets
31,052

 
12,728

TOTAL ASSETS
$
1,468,131

 
$
1,791,612

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
90,293

 
$
94,715

Accrued expenses and other current liabilities
110,682

 
92,496

Accrued compensation and benefits
25,564

 
30,703

Current portion of long-term debt

 
7,850

Liabilities held for sale
17,674

 
58,298

Total Current Liabilities
244,213

 
284,062

LONG-TERM DEBT
640,884

 
778,187

DEFERRED INCOME TAXES
26,809

 
33,607

PENSION LIABILITY, NET
144,809

 
150,623

LIABILITIES HELD FOR SALE

 
861

OTHER NON-CURRENT LIABILITIES
36,028

 
15,279

COMMITMENTS AND CONTINGENCIES (NOTE 12)
 
 
 
SHAREHOLDERS’ EQUITY:
 
 
 
Preferred stock, $0.01 par value; 1,000,000 shares authorized; no shares issued and outstanding


 

Common stock, $0.01 par value; 29,000,000 shares authorized; 19,906,263
 and 19,845,205 shares issued and outstanding at September 29, 2019 and December 31, 2018, respectively
212

 
212

Additional paid-in capital
445,305

 
440,890

Retained earnings
97,728

 
232,102

Common treasury stock, at cost (1,372,488 shares at September 29, 2019 and December 31, 2018)
(74,472
)
 
(74,472
)
Accumulated other comprehensive loss, net of tax
(93,385
)
 
(69,739
)
Total Shareholders’ Equity
375,388

 
528,993

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
1,468,131

 
$
1,791,612

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

3



CIRCOR INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF (LOSS) INCOME
(in thousands, except per share data)
(UNAUDITED)
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2019
 
September 30, 2018
 
September 29, 2019
 
September 30, 2018
Net revenues
$
237,052

 
$
247,209

 
$
721,675

 
$
746,754

Cost of revenues
162,578

 
167,132

 
490,870

 
511,563

     Gross profit
74,474

 
80,077

 
230,805

 
235,191

Selling, general and administrative expenses
60,039

 
68,544

 
190,227

 
211,909

Special and restructuring charges, net
23,519

 
2,988

 
19,893

 
11,924

     Operating (loss), income
(9,084
)
 
8,545

 
20,685

 
11,358

Other expense (income):
 
 
 
 
 
 
 
Interest expense, net
11,804

 
14,137

 
37,846

 
39,711

Other income, net
(759
)
 
(1,580
)
 
(2,755
)
 
(7,079
)
     Total other expense, net
11,045

 
12,557

 
35,091

 
32,632

Loss from continuing operations before income taxes
(20,129
)
 
(4,012
)
 
(14,406
)
 
(21,274
)
Provision for (benefit from) income taxes
7,520

 
(45
)
 
13,513

 
(4,434
)
Loss from continuing operations, net of tax
(27,649
)
 
(3,967
)
 
(27,919
)
 
(16,840
)
Loss from discontinued operations, net of tax
(84,688
)
 
(2,874
)
 
(107,572
)
 
(1,540
)
Net loss
$
(112,337
)
 
$
(6,841
)
 
$
(135,491
)
 
$
(18,380
)
 
 
 
 
 
 
 
 
Basic loss per common share:
 
 
 
 
 
 
 
Basic from continuing operations
$
(1.39
)
 
$
(0.20
)
 
$
(1.40
)
 
$
(0.85
)
Basic from discontinued operations
$
(4.25
)
 
$
(0.14
)
 
$
(5.41
)
 
$
(0.08
)
Net loss
$
(5.64
)
 
$
(0.34
)
 
$
(6.81
)
 
$
(0.93
)
 
 
 
 
 
 
 
 
Diluted loss per common share:
 
 
 
 
 
 
 
Diluted from continuing operations
$
(1.39
)
 
$
(0.20
)
 
$
(1.40
)
 
$
(0.85
)
Diluted from discontinued operations
$
(4.25
)
 
$
(0.14
)
 
$
(5.41
)
 
$
(0.08
)
Net loss
$
(5.64
)
 
$
(0.34
)
 
$
(6.81
)
 
$
(0.93
)
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
19,916

 
19,843

 
19,898

 
19,829

Diluted
19,916

 
19,843

 
19,898

 
19,829

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

4



CIRCOR INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(UNAUDITED)
 
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2019
 
September 30, 2018
 
September 29, 2019
 
September 30, 2018
Net loss
$
(112,337
)
 
$
(6,841
)
 
$
(135,491
)
 
$
(18,380
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 

Foreign currency translation adjustments
(7,164
)
 
3,128

 
(16,882
)
 
(15,380
)
       Interest rate swap adjustments (1)
(1,206
)
 
2,224

 
(6,371
)
 
3,449

       Pension adjustment

 

 
(393
)
 

       Other

 
1

 

 
1

Other comprehensive income (loss), net of tax
(8,370
)
 
5,353

 
(23,646
)
 
(11,930
)
COMPREHENSIVE LOSS
$
(120,707
)
 
$
(1,489
)
 
$
(159,137
)
 
$
(30,311
)
 
 
 
 
 
(1) Net of an income tax effect of $(0.4) million and $1.7 million for the three and nine months ended September 29, 2019, respectively.

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

5



CIRCOR INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
 
Nine Months Ended
OPERATING ACTIVITIES
September 29, 2019
 
September 30, 2018
Net loss
$
(135,491
)
 
$
(18,380
)
     Loss from discontinued operations, net of income taxes
(107,572
)
 
(1,540
)
Loss from continuing operations
(27,919
)
 
(16,840
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation
16,618

 
20,096

Amortization
36,023

 
36,805

Provision for bad debt expense
(469
)
 
932

Loss on write down of inventory
301

 
2,556

Amortization of inventory fair value step-up

 
6,600

Compensation expense for share-based plans
4,200

 
4,146

Amortization of debt issuance costs
3,669

 
2,852

Loss on sale or write-down of property, plant and equipment
2,889

 
1,366

Loss on sale of businesses
2,707

 

Changes in operating assets and liabilities, net of effects of acquisition and disposition:
 
 
 
Trade accounts receivable
17,413

 
5,520

Inventories
(11,724
)
 
(2,903
)
Prepaid expenses and other assets
(20,546
)
 
(20,526
)
Accounts payable, accrued expenses and other liabilities
(6,488
)
 
(10,380
)
Net cash provided by continuing operating activities
16,674

 
30,224

Net cash used in discontinued operating activities
(17,585
)
 
(6,761
)
Net cash (used in) provided by operating activities
(911
)
 
23,463

INVESTING ACTIVITIES
 
 
 
Additions to property, plant and equipment
(9,519
)
 
(14,902
)
Proceeds from the sale of property, plant and equipment
99

 
137

Proceeds from the sale of business
163,056

 

Business acquisition, working capital consideration adjustment

 
6,300

Net cash provided by (used in) continuing investing activities
153,636

 
(8,465
)
Net cash provided by (used in) discontinued investing activities
(2,435
)
 
(2,058
)
Net cash provided by (used in) investing activities
151,201

 
(10,523
)
FINANCING ACTIVITIES
 
 
 
Proceeds from long-term debt
231,950

 
199,600

Payments of long-term debt
(379,897
)
 
(186,874
)
Proceeds from the exercise of stock options
106

 
690

Return of cash to Fluid Handling Seller

 
(61,201
)
Net cash used in continuing financing activities
(147,841
)
 
(47,785
)
Net cash used in discontinued financing activities

 

Net cash used in financing activities
(147,841
)
 
(47,785
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(1,753
)
 
(5,154
)
INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
696

 
(39,999
)
Cash, cash equivalents, and restricted cash at beginning of period
69,525

 
112,293

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD
$
70,221

 
$
72,294

Non-cash investing activities:
 
 
 
Purchases of property and equipment included in accounts payable and accrued expenses
$
1,236

 
$
1,574

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

6



CIRCOR INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
(UNAUDITED)

 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury Stock
 
Total
Shareholders’
Equity
 
Shares
 
Amount
 
Balance as of June 30, 2019
19,902

 
$
212

 
$
444,109

 
$
210,065

 
$
(85,015
)
 
$
(74,472
)
 
$
494,899

Net loss

 

 

 
(112,337
)
 

 

 
(112,337
)
Other comprehensive income, net of tax

 

 

 

 
(8,370
)
 

 
(8,370
)
Conversion of restricted stock units
4

 

 
(64
)
 

 

 

 
(64
)
Stock options exercised

 

 
63

 

 

 

 
63

Share-based plan compensation

 

 
1,229

 

 

 

 
1,229

Other

 

 
(32
)
 

 

 

 
(32
)
Balance as of September 29, 2019
19,906

 
$
212

 
$
445,305

 
$
97,728

 
$
(93,385
)
 
$
(74,472
)
 
$
375,388

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury Stock
 
Total
Shareholders’
Equity
 
Shares

 
Amount

 
Balance as of July 1, 2018
19,836

 
$
212

 
$
442,318

 
$
259,947

 
$
(54,013
)
 
$
(74,472
)
 
$
573,992

Net loss

 

 

 
(6,841
)
 

 

 
(6,841
)
Other comprehensive income, net of tax
 

 

 

 
 
 
5,353

 
 
 
5,353

Conversion of restricted stock units
2

 

 
(21
)
 

 

 

 
(21
)
Stock options exercised
6

 

 
250

 

 

 

 
250

Share-based plan compensation

 

 
1,437

 

 

 

 
1,437

Other

 

 

 
1

 

 

 
1

Balance as of September 30, 2018
19,844

 
$
212

 
$
443,984

 
$
253,107

 
$
(48,660
)
 
$
(74,472
)
 
$
574,171



7



 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury Stock
 
Total
Shareholders’
Equity
 
Shares
 
Amount
 
Balance as of December 31, 2018
19,845

 
$
212

 
$
440,890

 
$
232,102

 
$
(69,739
)
 
$
(74,472
)
 
$
528,993

Net loss

 

 

 
(135,491
)
 

 

 
(135,491
)
Other comprehensive income, net of tax

 

 

 

 
(23,646
)
 
 
 
(23,646
)
Cumulative effect adjustment related to adoption of lease standard (ASC 842)

 

 

 
1,113

 

 

 
1,113

Conversion of restricted stock units
58

 

 
(20
)
 

 

 

 
(20
)
Stock options exercised
3

 

 
106

 

 

 

 
106

Share-based plan compensation

 

 
4,361

 

 
 
 
 
 
4,361

Other

 

 
(32
)
 
4

 

 

 
$
(28
)
Balance as of September 29, 2019
19,906

 
$
212

 
$
445,305

 
$
97,728

 
$
(93,385
)
 
$
(74,472
)
 
$
375,388

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury Stock
 
Total
Shareholders’
Equity
 
Shares
 
Amount
 
Balance as of December 31, 2017
19,785

 
$
212

 
$
438,721

 
$
274,243

 
$
(36,730
)
 
$
(74,472
)
 
$
601,974

Net loss

 

 

 
(18,380
)
 

 

 
(18,380
)
Other comprehensive income, net of tax
 

 

 

 

 
(11,930
)
 

 
(11,930
)
Cumulative effect adjustment related to adoption of new revenue recognition standard (ASU 2014-09)

 

 

 
(2,756
)
 

 

 
(2,756
)
Conversion of restricted stock units
41

 

 
270

 

 

 

 
270

Stock options exercised
18

 

 
690

 

 

 

 
690

Share-based plan compensation

 

 
4,303

 

 

 

 
4,303

Balance as of September 30, 2018
19,844

 
$
212

 
$
443,984

 
$
253,107

 
$
(48,660
)
 
$
(74,472
)
 
$
574,171



8



CIRCOR INTERNATIONAL, INC.
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.

9




(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.



10




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.


11



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



12



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.

13



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.

14




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




15



(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

16



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.

17



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