NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of CIRCOR International, Inc. (“CIRCOR” or the “Company”) 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 presentation of the Company’s results of operations, financial position and cash flows for the periods presented. The Company prepares its interim financial information using the same accounting principles it uses for its 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. The Company believes that the disclosures made in its condensed consolidated financial statements and the accompanying notes are adequate to make the information presented not misleading. The unaudited results of operations for interim periods reported are not necessarily indicative of the results for the full year.
The condensed consolidated balance sheet as of December 31, 2021 was derived from CIRCOR’s audited consolidated financial statements as of that date but does not include all of the information and notes required for annual financial statements. The Company recommends that the financial statements included in its Quarterly Report on Form 10-Q be read in conjunction with the consolidated financial statements and notes included in its Annual Report on Form 10-K for the year ended December 31, 2021 ("2021 Annual Report").
As further described in the Explanatory Note in its 2021 Annual Report and Note 2 and Note 23 in Item 8 of the 2021 Annual Report, the Company discovered accounting irregularities in its Pipeline Engineering business unit and restated its financial statements for prior periods. The restatement of prior period financial statements include interim financial statements for the three and six months ended July 4, 2021. The comparative financial statements presented for the three and six months ended July 4, 2021, are restated for the matters as further described in the 2021 Annual Report.
CIRCOR operates and reports financial information using a fiscal year ending December 31. The data periods contained within its 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 to the calendar quarter-end date. Operating results for the three and six months ended July 3, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022 or any future period.
Unless otherwise indicated, all financial information and statistical data included in these notes to the Company's condensed consolidated financial statements relate to its continuing operations, with dollar amounts expressed in thousands (except share and per-share data). As of July, 3, 2022, the Company's condensed consolidated financial statements reflect the deconsolidation of the Catterick, UK entity of the Pipeline Engineering business.
COVID-19
The COVID-19 pandemic continues to impact the global economy, resulting in rapidly changing market and economic conditions. The effects of the COVID-19 pandemic continue to negatively impact the Company’s results of operations, cash flows and financial position. The Company’s consolidated financial statements presented herein reflect management's estimates and assumptions regarding the effects of COVID-19 as of the date of the 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 July 3, 2022 are consistent with those discussed in Note 3 to the consolidated financial statements in the Annual Report.
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 revenue contracts where transfer of control occurs over time, inventory valuation, share-based compensation, amortization and impairment of long-lived assets, income taxes (including valuation allowance), fair value of disposal group, pension benefit obligations, acquisition accounting, penalty accruals for late shipments, asset valuations, and product warranties. While management believes that the estimates and assumptions used in the preparation of the financial statements are appropriate, actual results could differ materially from those estimates.
(3) Revenue Recognition
The Company's revenue is derived from a variety of contracts. A significant portion of 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. Contracts within the defense markets are primarily with U.S. military customers. These contracts typically are subject to the Federal Acquisition Regulations (“FAR”). The Company accounts 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.
For revenue that is recognized from products and services transferred to customers over-time, the Company uses 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. The Company uses the cost-to-cost measure of progress because it best depicts the transfer of control to the customer which occurs as it incurs costs on its contracts. Under the cost-to-cost measure of progress, revenue is recognized 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 July 3, 2022 the Company had $196.7 million of transaction price related to remaining performance obligations, of which, is invoiced and paid in accordance with terms of contractual agreements. The Company expects to recognize approximately 49% of its remaining performance obligations as revenue during the remainder of 2022, 40% in 2023, and the remaining 11% in 2024 and thereafter.
In order to determine revenue recognized during the period from contract liabilities at the beginning of the period, the Company first allocates revenue to the individual contract liabilities balance outstanding at the beginning of the period until the revenue exceeds that balance. If additional advances are received on those contracts in the subsequent periods, it assumes all revenue recognized in the reporting period first applies to the beginning contract liability as opposed to a portion applying to the new advances for the period. Revenue recognized during the six months ended July 3, 2022 that was included in contract liabilities at the beginning of the period amounted to $17.4 million.
Disaggregation of Revenue
The following tables present revenue disaggregated by major product line and geographical market (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 3, 2022 | | As Restated
July 4, 2021 | | July 3, 2022 | | As Restated
July 4, 2021 |
| | | | | | | | |
| | | | | | | | |
| Aerospace & Defense Segment | | | | | | | |
| Commercial Aerospace & Other | $ | 28,821 | | | $ | 23,689 | | | $ | 54,034 | | | $ | 43,490 | |
| Defense | 38,450 | | | 36,924 | | | 76,607 | | | 75,611 | |
| Total | 67,271 | | | 60,613 | | | 130,641 | | | 119,101 | |
| Industrial Segment | | | | | | | |
| Valves | 41,435 | | | 44,411 | | | 86,911 | | | 87,482 | |
| Pumps | 82,670 | | | 82,566 | | | 159,479 | | | 157,458 | |
| Total | 124,105 | | | 126,977 | | | 246,390 | | | 244,940 | |
| Net Revenues | $ | 191,376 | | | $ | 187,590 | | | $ | 377,031 | | | $ | 364,041 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended | | |
| July 3, 2022 | | As Restated
July 4, 2021 | | July 3, 2022 | | As Restated
July 4, 2021 | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Aerospace & Defense Segment | | | | | | | | | | | |
| EMEA | $ | 15,801 | | | $ | 13,634 | | | $ | 30,010 | | | $ | 28,849 | | | | | |
| North America | 46,963 | | | 43,321 | | | 92,160 | | | 83,453 | | | | | |
| Other | 4,507 | | | 3,658 | | | 8,471 | | | 6,799 | | | | | |
| Total | 67,271 | | | 60,613 | | | 130,641 | | | 119,101 | | | | | |
| Industrial Segment | | | | | | | | | | | |
| EMEA | 51,216 | | | 59,595 | | | 105,858 | | | 115,035 | | | | | |
| North America | 42,555 | | | 38,492 | | | 83,392 | | | 70,271 | | | | | |
| Other | 30,334 | | | 28,890 | | | 57,140 | | | 59,634 | | | | | |
| Total | 124,105 | | | 126,977 | | | 246,390 | | | 244,940 | | | | | |
| | | | | | | | | | | | |
| Net Revenues | $ | 191,376 | | | $ | 187,590 | | | $ | 377,031 | | | $ | 364,041 | | | | | |
| | | | | | | | | | | | |
Contract Balances
The Company’s contract assets and contract liabilities balances as of July 3, 2022 and December 31, 2021 are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| |
| July 3, 2022 | | December 31, 2021 | | Increase/(Decrease) |
| | | | | |
| Contract assets: | | | | | |
| Recorded within prepaid expenses and other current assets | $ | 93,741 | | | $ | 87,527 | | | $ | 6,214 | |
| Recorded within other non-current assets | 7,788 | | | 6,336 | | | 1,452 | |
| $ | 101,529 | | | $ | 93,863 | | | $ | 7,666 | |
| | | | | |
| Contract liabilities: | | | | | |
| Recorded within accrued expenses and other current liabilities | $ | 27,793 | | | $ | 26,870 | | | $ | 923 | |
| Recorded within other non-current liabilities | 5,380 | | | 4,847 | | | 533 | |
| $ | 33,173 | | | $ | 31,717 | | | $ | 1,456 | |
| | | | | |
Contract assets increased by $7.7 million during the six months ended July 3, 2022, primarily due to revenue recognized in excess of invoicing within the Defense and Refinery Valves businesses partially offset due to invoicing upon project completion milestones in excess of revenue recognized within Industrial Pumps and Valves business.
Contract liabilities increased by $1.5 million during the six months ended July 3, 2022, primarily due to customer advances received in excess of revenue recognized in the Defense and Refinery Valves businesses, partially offset by recognition of revenue against customer advances within Industrial Pumps and Valves business.
Revenue on over time contracts is recognized as the Company, in accordance with the terms of the applicable contract, transfers control in the underlying products or services to the customer, which occurs as it incurs costs on its contracts under the cost-to-cost measure of progress. Revenue on over time contracts may be recognized before or after payments, advances or progress billings from customers are received. Recognition of revenue on over time contracts before the Company can invoice the customer can result in contract assets. Receipt of progress billings or advances from customers in advance of recognizing revenue can result in contract liabilities. Contract assets and contract liabilities amounts presented above are determined at the contract level unit of account. At the contract level it is determined whether the contract is in a net contract asset or net contract liability position.
Contract assets are generally classified between current (one year or less) and non-current (more than one year) based on factors such as when payments are due. Contract liabilities are generally classified between current and non-current based on factors such as expected timing of satisfaction of performance obligation.
Allowance for Credit Losses
The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses or doubtful accounts based upon expected losses, its historical experience, expectation of changes in risk of loss and any specific customer collection issues that it has identified. During the six months ended July 3, 2022, there were no material changes in the allowance for credit losses including additional allowances, write-offs or recoveries other than charges in the amount of $1.5 million for the Pipeline Engineering business as described further in Note 4, Special and restructuring (recoveries) charges, net. During the six months ended July 4, 2021, there were no material changes to the allowance for credit losses including additional allowances, write-offs or recoveries.
(4) Special and Restructuring (Recoveries) Charges, net
Special and restructuring (recoveries) charges, net
Special and restructuring (recoveries) charges, net consist of restructuring costs (including costs to exit a product line or program) as well as certain special (recoveries) 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 (recoveries), net on the condensed consolidated statements of operations. Certain other special and restructuring (recoveries) charges 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 (recoveries) charges, net line item on the condensed consolidated statements of operations for the three and six months ended July 3, 2022 and July 4, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Special & restructuring (recoveries) charges, net |
| Three Months Ended | | Six Months Ended |
| July 3, 2022 | | July 4, 2021 | | July 3, 2022 | | July 4, 2021 |
| Special (recoveries) charges, net | $ | (10,425) | | | $ | 4,522 | | | $ | (7,870) | | | $ | 1,654 | |
| Restructuring charges, net | 4,695 | | | 2,281 | | | 11,142 | | | 4,341 | |
| Total special and restructuring (recoveries) charges, net | $ | (5,730) | | | $ | 6,803 | | | $ | 3,272 | | | $ | 5,995 | |
Special (recoveries) charges, net
The table below details the special (recoveries) charges, net recognized for the three and six months ended July 3, 2022 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Special (recoveries) charges, net | |
| | Three Months Ended July 3, 2022 | |
| | Aerospace & Defense | | Industrial | | Corporate | |
Total | |
| | | | | | | | | |
| Pipeline Engineering investigation and restatement costs | | $ | — | | | $ | — | | | $ | 5,022 | | | $ | 5,022 | | |
| Gain on real estate sales | | | | (22,008) | | | — | | | (22,008) | | |
| Strategic alternatives evaluation | | — | | | — | | | 945 | | | 945 | | |
| Debt amendment charges | | — | | | — | | | 4,977 | | | 4,977 | | |
| Other special charges (recoveries), net | | — | | | 829 | | | (190) | | | 639 | | |
| Total special (recoveries) charges, net | | $ | — | | | $ | (21,179) | | | 10,754 | | | (10,425) | | |
| | |
| | Special (recoveries) charges, net | |
| | Six Months Ended July 3, 2022 | |
| | Aerospace & Defense | | Industrial | | Corporate | |
Total | |
| Pipeline Engineering investigation and restatement costs | | $ | — | | | $ | — | | | $ | 6,363 | | | $ | 6,363 | | |
| Gain on real estate sales | | — | | | (22,008) | | | — | | | (22,008) | | |
| Strategic alternatives evaluation | | — | | | — | | | 945 | | | 945 | | |
| Debt amendment charges | | — | | | — | | | 4,977 | | | 4,977 | | |
| Other special charges | | — | | | 965 | | | 888 | | | 1,853 | | |
| Total special (recoveries) charges, net | | $ | — | | | $ | (21,043) | | | 13,173 | | | (7,870) | | |
Pipeline Engineering investigation and restatement costs: During the three and six months ended July 3, 2022, the Company recognized special charges, net of $5.0 million and $6.4 million, respectively, related to the investigation into accounting irregularities at the Company's Pipeline Engineering businesses and incremental professional services charges incurred due to the restatement.
Gain on real estate sales: During the three and six months ended July 3, 2022, the Company recognized a gain of $22.0 million on the sale of real estate within the Industrial segment located at Walden, New York and Tampa, Florida. The Company recognized a gain of $6.4 million and $15.6 million on each building, respectively. On April 8, 2022, the Company entered into a five year operating lease on the Tampa facility, at the market rate of buildings of similar size and location, with a five year option to renew. The Company recorded an initial $9.3 million of operating right of use asset and lease liability.
Strategic alternatives evaluation: The Company incurred special charges of $0.9 million for the three and six months ended July 3, 2022 related to the evaluation of strategic alternatives for the Company.
Debt amendment charges: The Company incurred special charges of $5.0 million for the three and six months ended July 3, 2022 related to the amendments of its credit agreements. See Note 8, Financing Arrangements for amendment information.
Other special charges, net: During the six months ended July 3, 2022, the Company recognized other special charges, net of $1.9 million. Other special charges, net within Corporate for the six months ended July 3, 2022 include a net $0.9 million for severance related to the former CEO, comprised of $1.7 million severance, partially offset by the accounting effects of forfeitures for certain unvested CEO stock based Compensation awards. Additionally, for the three and six months ended, July 3, 2022 the Company incurred other special charges of $0.8 million and $1.0 million, respectively within Industrial related to severance and contract termination costs, and other special charges.
The table below details the special charges (recoveries), net recognized for the three and six months ended July 4, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Special charges, net |
| | Three Months Ended July 4, 2021 |
| | Aerospace & Defense | | Industrial | | Corporate | |
Total |
| Heater & Control Valves divestiture | | $ | — | | | $ | 2,978 | | | $ | — | | | $ | 2,978 | |
| Other special charges, net | | 19 | | | 1,248 | | | 277 | | | 1,544 | |
| Total special charges, net | | $ | 19 | | | $ | 4,226 | | | $ | 277 | | | $ | 4,522 | |
| | | | | | | | |
| | Special charges (recoveries), net |
| | Six Months Ended July 4, 2021 |
| | Aerospace & Defense | | Industrial | | Corporate | |
Total |
| Cryo divestiture | | $ | — | | | $ | (1,947) | | | $ | — | | | $ | (1,947) | |
| Heater & Control Valves divestiture | | — | | | 2,978 | | | — | | | 2,978 | |
| | | | | | | | |
| Other special charges (recoveries), net | | 35 | | | 619 | | | (31) | | | 623 | |
| Total special charges (recoveries), net | | $ | 35 | | | $ | 1,650 | | | $ | (31) | | | $ | 1,654 | |
Heater & Control Valves divestiture: During the three months ended July 4, 2021, the Company received cash proceeds of $2.8 million and recognized a pre-tax loss of $3.0 million on the sale of the Heater & Control Valve businesses.
Cryo divestiture: During the six months ended July 4, 2021, the Company recognized a net special recovery of $1.9 million from the sale of the Cryo business. The Company received cash proceeds of $7.2 million and recognized a pre-tax gain on sale of $1.9 million.
Other special charges (recoveries), net: The Company recognized special charges of $1.5 million and $0.6 million for the three and six months ended July 4, 2021, respectively. Included in the charge recognized during the three months ended July 4, 2021 is $0.9 million pertaining to a contingency indemnification to the buyer of a previously divested business within the Industrial segment. The Company also recognized charges of $0.3 million in Corporate associated with streamlining operations and reducing costs during the three months ended July 4, 2021.
Restructuring charges, net
The tables below detail the charges associated with restructuring actions recorded for the three and six months ended July 3, 2022 and July 4, 2021. Accruals associated with the restructuring actions are recorded within Accrued expenses and other current liabilities on the condensed consolidated balance sheets (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Restructuring charges, net |
| | Three Months Ended July 3, 2022 |
| | Aerospace & Defense | | Industrial | | Corporate | |
Total |
| Facility and other related charges, net | | $ | 3 | | | $ | 4,650 | | | $ | — | | | $ | 4,653 | |
| Employee related charges (recoveries), net | | 15 | | | (6) | | | 33 | | | 42 | |
| Total restructuring charges, net | | $ | 18 | | | $ | 4,644 | | | $ | 33 | | | $ | 4,695 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | Restructuring charges, net |
| | Six Months Ended July 3, 2022 |
| | Aerospace & Defense | | Industrial | | Corporate | |
Total |
| Facility related expenses | | $ | 3 | | | $ | 10,082 | | | $ | — | | | $ | 10,085 | |
| Employee related expenses, net | | 15 | | | 715 | | | 327 | | | 1,057 | |
| Total restructuring charges, net | | $ | 18 | | | $ | 10,797 | | | $ | 327 | | | $ | 11,142 | |
| | | | | | | | |
| Accrued restructuring charges as of December 31, 2021 | | | | | | | | $ | 1,839 | |
| Total charges, net (shown above) | | | | | | | | 11,142 | |
| Charges paid/settled, written-off, net | | | | | | | | (12,041) | |
Accrued restructuring charges as of July 3, 2022 | | | | | | | | $ | 940 | |
The Company recorded restructuring charges of $11.1 million during the six months ended July 3, 2022. Of the $11.1 million in total restructuring charges, $10.6 million related to the exit of the Pipeline Engineering business. The $10.6 million charge consists of $5.3 million in impairments, $0.6 million of termination benefits and $4.7 million of deconsolidation charges. Impairments of $5.3 million included $3.8 million related to the write downs of Property, Plant and Equipment, Right of Use Assets and Intangibles, which is a level three fair value measurement based on the expected cash proceeds from dispositions of the assets. In addition, the Company recorded $1.5 million in charges for write downs of working capital accounts, including primarily $1.0 million for accounts receivables. Included in the Industrial employee related expenses is $0.6 million in severance and termination benefits related to the exit of the Pipeline Engineering business. The Company expects to make payment or settle the majority of the restructuring charges accrued as of July 3, 2022, during the remainder of 2022.
On April 14, 2022, the Company placed the Catterick, UK entity of the Pipeline Engineering business into Administration under the U.K. Insolvency Act of 1986 and the Insolvency (England and Wales) Rules 2016 (IR 2016). The loss of control triggered deconsolidation and recognition into earnings of the related cumulative translation adjustment out of accumulated other comprehensive loss in the amount of $5.3 million during the three and six months ended July 3, 2022. The deconsolidation also resulted in a gain within restructuring of $0.6 million related to the write down of net assets through deconsolidation. The Company determined the loss of control did not qualify for reporting as a discontinued operation as it did not meet the held-for-sale criteria and did not represent a strategic shift that has a major effect on the Company's operations and financial results.
In addition, the Company recorded a charge of $2.8 million for write down of inventories related to the exit of the Pipeline Engineering business classified within cost of revenues on the condensed consolidated statements of operations.
During the six months ended July 3, 2022, the Company recorded $0.3 million of employee related charges, not associated with the exit of the Pipeline Engineering business.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Restructuring charges, net |
| | Three Months Ended July 4, 2021 |
| | Aerospace & Defense | | Industrial | | Corporate | |
Total |
| Facility and other related charges | | $ | 16 | | | $ | 427 | | | $ | — | | | $ | 443 | |
| Employee related charges | | 337 | | | 1,448 | | | 53 | | | 1,838 | |
| Total restructuring charges, net | | $ | 353 | | | $ | 1,875 | | | $ | 53 | | | $ | 2,281 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | Restructuring charges, net |
| | Six Months Ended July 4, 2021 |
| | Aerospace & Defense | | Industrial | | Corporate | |
Total |
| Facility related expenses | | $ | 24 | | | $ | 352 | | | $ | — | | | $ | 376 | |
| Employee related expenses | | 1,170 | | | 2,424 | | | 371 | | | 3,965 | |
| Total restructuring charges, net | | $ | 1,194 | | | $ | 2,776 | | | $ | 371 | | | $ | 4,341 | |
| | | | | | | | |
| Accrued restructuring charges as of December 31, 2020 | | | | | | | | $ | 1,512 | |
| Total year to date charges, net (shown above) | | | | | | | | 4,341 | |
| Charges paid/settled, written-off, net | | | | | | | | (2,453) | |
Accrued restructuring charges as of July 4, 2021 | | | | | | | | $ | 3,400 | |
The Company recorded $2.3 million and $4.3 million of restructuring charges during the three and six months ended July 4, 2021, respectively, to reduce expenses, primarily through reductions in force across both administrative functions and manufacturing operations. The Company initiated plans in Q2 2021 to restructure employees at certain sites, and recognized $2.2 million of charges in connection with these plans in the current quarter. The Company incurred additional charges of $0.1 million, to restructure operations in the current quarter, from plans initiated in 2020. Included in cost of revenues on the condensed consolidated statements of operations is $0.9 million for inventory write downs related to the exit of businesses and consolidation of facilities in the Industrial segment.
(5) Inventories
Inventories consisted of the following as of July 3, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | |
| July 3, 2022 | | December 31, 2021 |
| Raw materials | $ | 54,293 | | | $ | 51,911 | |
| Work in process | 62,739 | | | 55,942 | |
| Finished goods | 17,215 | | | 15,490 | |
| Total inventories | $ | 134,247 | | | $ | 123,343 | |
(6) Goodwill and Intangibles, net
The following table shows the movement in goodwill by segment from December 31, 2021 to July 3, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | Aerospace & Defense | | Industrial | | |
Total |
| Goodwill as of December 31, 2021 | | $ | 57,360 | | | $ | 65,546 | | | | $ | 122,906 | |
| | | | | | | |
| Currency translation adjustments | | (119) | | | (3,037) | | | | (3,156) | |
| Goodwill as of July 3, 2022 | | $ | 57,241 | | | $ | 62,509 | | | | $ | 119,750 | |
|
The Company performs an impairment assessment for goodwill at the reporting unit level and its indefinite-life intangible assets on an annual basis during the fourth quarter, or more frequently if circumstances warrant. At July 3, 2022, the Company performed a review and determined there were no indicators of impairment requiring interim assessment.
The table below presents gross intangible assets and the related accumulated amortization (in thousands):
| | | | | | | | | | | | | | | | | |
| July 3, 2022 |
| Gross
Carrying
Amount | | Accumulated
Amortization | | Net Carrying Value |
| Patents | $ | 5,368 | | | $ | (5,368) | | | $ | — | |
| Customer relationships | 285,252 | | | (138,958) | | | 146,294 | |
| Acquired technology | 132,006 | | | (76,509) | | | 55,497 | |
| | | | | |
| Total Amortized Intangibles | $ | 422,626 | | | $ | (220,835) | | | $ | 201,791 | |
| | | | | |
| Non-amortized intangibles (trademarks and trade names) | $ | 71,685 | | | $ | — | | | $ | 71,685 | |
| | | | | |
| Net carrying value of intangible assets | | | | | $ | 273,476 | |
| | | | | |
| December 31, 2021 |
| Gross
Carrying
Amount | | Accumulated
Amortization | | Net Carrying Value |
| Patents | $ | 5,368 | | | $ | (5,368) | | | $ | — | |
| Customer relationships | 302,358 | | | (137,861) | | | 164,497 | |
| Acquired technology | 135,972 | | | (72,708) | | | 63,264 | |
| Total Amortized Intangibles | $ | 443,698 | | | $ | (215,937) | | | $ | 227,761 | |
| | | | | |
| Non-amortized intangibles (trademarks and trade names) | $ | 75,715 | | | $ | — | | | $ | 75,715 | |
| | | | | |
| Net carrying value of intangible assets | | | | | $ | 303,476 | |
| | | | | |
| | | | | |
Amortization of intangible assets was $18.6 million and $42.3 million for the periods ended July 3, 2022 and December 31, 2021, respectively.
The table below presents estimated remaining amortization expense for intangible assets recorded as of July 3, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | After 2026 | | |
| Estimated amortization expense | $ | 17,735 | | | $ | 31,110 | | | $ | 27,348 | | | $ | 23,949 | | | $ | 20,857 | | | $ | 80,792 | | | |
(7) Segment Information
The Company's 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.
The following table presents certain reportable segment information (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 3, 2022 | | As Restated July 4, 2021 | | July 3, 2022 | | As Restated July 4, 2021 |
| Net revenues | | | | | | | |
| Aerospace & Defense | $ | 67,271 | | | $ | 60,613 | | | $ | 130,641 | | | $ | 119,101 | |
| Industrial | 124,105 | | | 126,977 | | | 246,390 | | | 244,940 | |
| Net revenues | $ | 191,376 | | | $ | 187,590 | | | $ | 377,031 | | | $ | 364,041 | |
| | | | | | | |
| Results from continuing operations before income taxes | | | | | | | |
| Aerospace & Defense - Segment Operating Income | $ | 13,566 | | | $ | 11,741 | | | $ | 24,886 | | | $ | 21,729 | |
| Industrial - Segment Operating Income | 8,484 | | | 7,237 | | | 15,341 | | | 13,071 | |
| Corporate expenses | (5,485) | | | (7,950) | | | (13,255) | | | (16,984) | |
| Subtotal | 16,565 | | | 11,028 | | | 26,972 | | | 17,816 | |
| Special (recoveries) charges, net | (10,425) | | | 4,522 | | | (7,870) | | | 1,654 | |
| Restructuring charges, net | 4,695 | | | 2,281 | | | 11,142 | | | 4,341 | |
| Special and restructuring (recoveries) charges, net | (5,730) | | | 6,803 | | | 3,272 | | | 5,995 | |
| Restructuring related inventory charges | — | | | 958 | | | 2,757 | | | 958 | |
| | | | | | | |
| Acquisition amortization | 9,178 | | | 10,498 | | | 18,569 | | | 20,985 | |
| Acquisition depreciation | 1,239 | | | 1,326 | | | 2,285 | | | 3,702 | |
| Restructuring, impairment and other costs, net | 10,417 | | | 12,782 | | | 23,611 | | | 25,645 | |
| Consolidated operating income (loss) | 11,878 | | | (8,557) | | | 89 | | | (13,824) | |
| Interest expense, net | 10,203 | | | 7,957 | | | 19,659 | | | 16,327 | |
| Other income, net | (1,638) | | | (1,267) | | | (2,924) | | | (3,048) | |
| | | | | | | |
| Income (loss) from continuing operations before income taxes | $ | 3,313 | | | $ | (15,247) | | | $ | (16,646) | | | $ | (27,103) | |
| | | | | | | |
| | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 3, 2022 | | As Restated July 4, 2021 | | July 3, 2022 | | As Restated July 4, 2021 |
| Capital expenditures | | | | | | | |
| Aerospace & Defense | $ | 1,581 | | | $ | 867 | | | $ | 2,867 | | | $ | 2,152 | |
| Industrial | 3,597 | | | 1,457 | | | 5,260 | | | 3,481 | |
| Corporate | 851 | | | 10 | | | 1,203 | | | 164 | |
| Consolidated capital expenditures | $ | 6,029 | | | $ | 2,334 | | | $ | 9,330 | | | $ | 5,797 | |
| | | | | | | |
| Depreciation and amortization | | | | | | | |
| Aerospace & Defense | $ | 2,737 | | | $ | 2,949 | | | $ | 5,258 | | | $ | 5,773 | |
| Industrial | 11,340 | | | 13,020 | | | 23,046 | | | 27,224 | |
| Corporate | 162 | | | 147 | | | 332 | | | 326 | |
| Consolidated depreciation and amortization | $ | 14,239 | | | $ | 16,116 | | | $ | 28,636 | | | $ | 33,323 | |
| | | | | | | |
| Identifiable assets | July 3, 2022 | | December 31, 2021 | | | | |
| Aerospace & Defense | $ | 486,160 | | | $ | 464,964 | | | | | |
| Industrial | 1,231,817 | | | 1,256,974 | | | | | |
| Corporate | (728,557) | | | (702,640) | | | | | |
| | | | | | | |
| Consolidated identifiable assets | $ | 989,420 | | | $ | 1,019,298 | | | | | |
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 subsidiaries. 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.
(8) 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 net fair value of the Company’s interest rate swap, which is recorded within accrued expenses and other current liabilities was settled during the second quarter of 2022, as of July 3, 2022 and December 31, 2021 are summarized in the table below (in thousands):
| | | | | | | | | | | | | | | |
| | | Significant Other Observable Inputs
Level 2 | | |
| | | July 3, 2022 | | December 31, 2021 | | |
| | | | | | | |
| | | | | | | |
| Derivative liabilities | | | $ | — | | | $ | (2,187) | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
The carrying amounts of cash and cash equivalents, restricted cash, trade receivables and trade payables approximate fair value because of the short term 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 July 3, 2022, the estimated fair value of the Company's gross debt (before netting debt issuance costs) was $505.1 million, compared to carrying cost of $543.1 million. At December 31, 2021, the estimated fair value of the Company’s gross debt (before netting debt issuance costs) was $524.3 million, compared to carrying cost of $526.3 million. The Company’s outstanding debt balances are characterized as Level 2 financial instruments.
Financial Instruments
As of both July 3, 2022 and December 31, 2021, the Company had restricted cash balances of $1.4 million, respectively. These balances are recorded within prepaid expenses 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 90% of the purchase price upfront, net of applicable discount fee, and the residual amount as the receivables are collected. During the three and six months ended July 3, 2022, the Company sold a total of $11.3 million and $25.3 million, respectively, of receivables under the program, receiving $10.1 million and $22.8 million, respectively, in upfront cash. During the three and six months ended July 4, 2021, the Company sold a total of $9.8 million and $18.2 million respectively, of receivables under the program, receiving $9.3 million and $17.5 million, respectively in upfront cash. At July 3, 2022, a beneficial interest balance of $1.1 million was recorded in prepaid expenses and other current assets on the condensed consolidated balance sheet.
Effective April 2018, the Company entered into an interest rate swap pursuant to an ISDA Master Agreement with Citizens Bank, National Association. The four-year interest rate swap had a fixed notional value of $400.0 million with a 1% LIBOR floor and matured on April 12, 2022. The interest rate swap was a qualifying hedging instrument and was accounted for as a cash flow hedge pursuant to ASC 815, Derivatives and Hedging. The interest rate swap was settled upon its maturity during the second quarter of 2022.
There were no open forward contracts as of July 3, 2022 and December 31, 2021, respectively.
The fair value of the interest rate swap was a net liability position of $0.0 million and $2.2 million at July 3, 2022 and December 31, 2021, respectively. These balances are recorded in accrued expenses and other current liabilities of $0.0 million and $2.2 million on the condensed consolidated balance sheet as of July 3, 2022 and December 31, 2021, respectively.
The amount of gains (loss) recognized in other comprehensive loss, net of tax (“OCI”) and reclassified from accumulated other comprehensive loss (“AOCI”) to earnings are summarized below (in thousands):
| | | | | | | | | | | | | | | | |
| | | | | Three Months Ended | | | Six Months Ended |
| | | | | July 3, 2022 | | | July 3, 2022 |
| Amount of (loss) recognized in OCI | | | | | $ | (1) | | | | $ | (10) | |
| | | | | | | | |
| Amount of (loss) reclassified from AOCI to earnings (interest expense, net of tax) | | | | | $ | 2,381 | | | | $ | (1,849) | |
Interest expense, net (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 $0.6 million and $7.5 million for the three and six months ended July 3, 2022 during which the hedge was in effect for the partial term, respectively.
Debt
As of July 3, 2022, total debt (including short-term borrowings and current portion of long-term debt) was $521.0 million compared to $513.3 million as of December 31, 2021. Total debt is net of unamortized term loan debt issuance costs of $22.1 million and $13.0 million at July 3, 2022 and December 31, 2021, respectively. The Company made interest payments of $18.4 million and $15.6 million during the six months ended July 3, 2022, and July 4, 2021, respectively.
In April 2022, the Company entered into Amendment No. 1 to the Credit Agreement (the “First Amendment”). The First Amendment makes certain changes to the Original Credit Agreement, including (i) extending the deadline for the Company to deliver its annual financial statements for the fiscal year ended December 31, 2021, (ii) increasing the interest rate margins for (a) the term loan facility to 5.50% with respect to Eurodollar loans, (b) the revolving facility to 4.75% with respect to Eurodollar loans and (c) the swing line facility to 3.75%, (iii) in the event of a step-down in the debt ratings of the facilities, increasing the interest rate margins for the term loan facility by an additional 0.50% during any such step-down period, (iv) decreasing certain debt, lien, investment, restricted payment and affiliate transaction baskets and negative covenant thresholds by 15%, (v) further decreasing or eliminating the use of certain debt, lien, investment and restricted payment baskets during the period until the date on which the Company delivers the annual financial statements for the fiscal year ended December 31, 2021 (such period, the “Restricted Period”), (vi) eliminating the minimum threshold and reinvestment rights with respect to mandatory prepayments of the term loans with the net cash proceeds of sale-leaseback transactions, subject to certain exceptions, (vii) restricting the Company’s ability to borrow swing loans or revolving loans if the aggregate amount of cash and cash equivalents of the Company and its domestic subsidiaries exceeds $10.0 million and creating a requirement to prepay outstanding swing loans and revolving loans with any such excess, in each case, during the Restricted Period, (viii) resetting the “soft call” prepayment premium for an additional 12 months, and (ix) requiring the Company to hold private-side lender calls twice upon request of the Administrative Agent during the Restricted Period and promptly after the delivery of all quarterly and annual financial statements. In connection with the execution of the First Amendment, the Company paid approximately $12.5 million in customary arranger and lender consent fees, attorney fees, and reasonable and documented expenses of the Administrative Agent.
In May 2022, the Company entered into Amendment No. 2 to the Credit Agreement (the “Second Amendment”). The Second Amendment makes certain changes to the Credit Agreement, including, to extend the deadline for the Company to deliver its annual financial statements for the fiscal year ended December 31, 2021 and its quarterly financial statements for the fiscal quarters ended April 3, 2022 and July 3, 2022. In addition, the Company is required to hold private-side lender calls at least once per month upon request, and promptly after the delivery of all quarterly and annual financial statements. In connection with the execution of the Second Amendment, the Company paid approximately $4.2 million in customary arranger and lender consent fees, attorney fees, and reasonable and documented expenses of the Administrative Agent.
Prior to Amendments No.1 and No. 2, the Company had $12.6 million of unamortized debt discount and debt issuance costs associated with its term loan and $1.5 million unamortized deferred financing fees associated with its revolver as of April 3, 2022. Per Amendments No. 1 and No. 2, the Company incurred an additional $15.5 million of debt discount and issuance costs associated with the term loan and $1.2 million of fees associated with the revolver. The Company evaluated the accounting for this transaction under ASC 470 to determine modification versus extinguishment accounting on a creditor-by-creditor basis. As a result, the Company accounted for a combination of old and new debt discount and issuance costs totaling $23.1 million as a modification (recorded as a debt discount and issuance costs on the consolidated balance sheet) and accounted for $5.0 million as a debt extinguishment (included in special charges on the consolidated statements of operations). For the revolving credit facility, $1.2 million was rolled into the existing Credit Agreement (included in other assets) based on the borrowing capacity with the underlying banks.
(9) Guarantees and Indemnification Obligations
As permitted under Delaware law, the Company has agreements whereby it indemnifies certain of its officers and directors for certain events or occurrences while the officer or director is, or was, serving at its 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 the Company could be required to make under these indemnification agreements is unlimited. However, the Company has directors’ and officers’ liability insurance policies that insure it with respect to certain events covered under the policies and should enable it to recover a portion of any future amounts paid under the indemnification agreements. The Company has no liabilities recorded from those agreements as of July 3, 2022.
The Company records provisions for the estimated cost of product warranties, primarily from historical information, at the time product revenue is recognized. The Company also records provisions with respect to any significant individual warranty issues as they arise. While the Company engages in extensive product quality programs and processes, its 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 the Company’s estimates, revisions to the estimated warranty liability would be required.
The following table sets forth information related to product warranty reserves for the six months ended July 3, 2022 and July 4, 2021 (in thousands):
| | | | | | | | | | | | | | | |
| Six Months Ended | | |
| July 3, 2022 | | July 4, 2021 | | | | |
| | | | | | | |
| Balance beginning | $ | 2,740 | | | $ | 2,206 | | | | | |
| Provisions | 835 | | | 1,888 | | | | | |
| Claims settled | (1,043) | | | (1,531) | | | | | |
| | | | | | | |
| Currency translation adjustment | (102) | | | (19) | | | | | |
| Balance ending | $ | 2,430 | | | $ | 2,544 | | | | | |
Warranty obligations are recorded within Accrued expenses and other current liabilities on the condensed consolidated balance sheets.
(10) Commitments and Contingencies
The Company is subject to various legal proceedings and claims pertaining to matters such as product liability or contract disputes. The Company is also subject to other proceedings and governmental inquiries, inspections, audits or investigations pertaining to issues such as tax matters, patents and trademarks, pricing, contractual issues, business practices, governmental regulations, employment and other matters. Although the results of litigation and claims cannot be predicted with certainty, the Company expects 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 its business, financial condition, results of operations or liquidity.
Asbestos-related product liability claims continue to be filed against two of the Company's subsidiaries: CIRCOR Instrumentation Technologies, Inc. (f/k/a Hoke, Inc.) (“Hoke”), the stock of which the Company acquired in 1998, and Spence Engineering Company, Inc., the stock of which the Company acquired in 1984. The Hoke subsidiary was divested in January 2020 through the 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 the Company's historical experience in resolving these claims, the Company does 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.
During the second quarter of 2021, the Company was notified of a contract termination by one of its Industrial segment customers. The basis for termination is under dispute and the ultimate outcome of this matter is uncertain. During the fourth quarter of 2021 the Company recorded a full allowance against the outstanding receivables resulting in a charge of $6.3 million. The Company also has outstanding guarantees of its performance under the contract in the aggregate amount of $3.4 million. Further, the Company is exposed to claims from sub-contractors for contract termination. The Company has received claims from sub-contractors and has accrued an additional $1.6 million in charges during the fourth quarter of 2021 as its best estimate of probable loss. Should the negotiations or settlement process be unfavorable for the Company, the Company may be unable to collect the outstanding receivables, be exposed to risk of loss on the outstanding performance guarantees, additional claims from sub-contractors, losses in excess of amounts accrued on claims from subs-contractors and potential future claims should any be asserted.
Standby Letters of Credit
The Company executes standby letters of credit, which include bid bonds and performance bonds, in the normal course of business to ensure performance or payments to third parties. The aggregate notional value of these instruments at July 3, 2022 was $32.9 million of which $26.5 million was syndicated under the Credit Agreement. This compares with aggregate notional value of $32.5 million of which $24.7 million was syndicated under the Credit Agreement as of December 31, 2021. These instruments generally have expiration dates ranging from less than 1 month to 5 years from July 3, 2022.
During May 2022, a Russian customer drew on a letter of credit related to an equipment system in the amount of $3.9 million, which the Company funded. The Company is contesting the draw and is pursuing actions to recover this amount from the customer.
Restatement of Prior Period Financial Statements and Non-Timely Filing of Financial Statements
As described in Note 1, Basis of Presentation, the Company discovered accounting irregularities in its Pipeline Engineering business going back to 2017. The Company conducted an investigation into the accounting irregularities at the Pipeline Engineering business and restated its consolidated financial statements for the annual periods of 2020 and 2019, interim and year to date periods for 2020 and interim and year to date periods for the nine months ended October 3, 2021.
The Company was unable to timely file its 2021 Annual Report and Quarterly Report on Form 10-Q for the first and second quarters of 2022 with the SEC. The discovery of accounting irregularities, restatement of prior period financial statements and non-timely filing of financial statements could expose the Company to future claims and losses. The Company has self-reported the identified accounting irregularities at the Pipeline Engineering business to the SEC and the Company continues to respond to requests for information from the SEC.
(11) Retirement Plans
The following table sets forth the components of total net periodic benefit (income) cost of the Company’s defined benefit pension plans and other post-retirement employee benefit plans (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | July 3, 2022 | | July 4, 2021 | | July 3, 2022 | | July 4, 2021 |
| Pension Benefits - U.S. Plans | | | | | | | |
| Interest cost | $ | 1,000 | | | $ | 773 | | | $ | 2,000 | | | $ | 1,545 | |
| Expected return on plan assets | (2,150) | | | (2,628) | | | (4,300) | | | (5,256) | |
| | | | | | | |
| Amortization | 48 | | | 50 | | | 96 | | | 101 | |
| Net periodic benefit income | $ | (1,102) | | | $ | (1,805) | | | $ | (2,204) | | | $ | (3,610) | |
| | | | | | | |
| Pension Benefits - Non-U.S. Plans | | | | | | | |
| Service cost | $ | 587 | | | $ | 823 | | | $ | 1,208 | | | $ | 1,646 | |
| Interest cost | 344 | | | 246 | | | 710 | | | 493 | |
| Expected return on plan assets | (190) | | | (158) | | | (393) | | | (314) | |
| Amortization | — | | | 180 | | | — | | | 359 | |
| Net periodic benefit cost | $ | 741 | | | $ | 1,091 | | | $ | 1,525 | | | $ | 2,184 | |
| | | | | | | |
| Other Post-Retirement Benefits | | | | | | | |
| Service cost | $ | 1 | | | $ | 1 | | | $ | 2 | | | $ | 2 | |
| Interest cost | 53 | | | 42 | | | 106 | | | 84 | |
| | | | | | | |
| Net periodic benefit cost | $ | 54 | | | $ | 43 | | | $ | 108 | | | $ | 86 | |
| | | | |
|
|
The periodic benefit service costs are included in both costs of revenues, as well as selling, general, and administrative expenses, while the remaining net periodic benefit costs are included in other expense (income), net in the condensed consolidated statements of operations for the three and six months ended July 3, 2022 and July 4, 2021.
The Company did not make any employer contributions to the Company’s U.S. or non-U.S. based defined benefit pension plans during the three and six months ended July 3, 2022 and July 4, 2021.
(12) Income Taxes
The (benefit from) provision for income taxes to income (loss) from continuing operations is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | |
| | July 3, 2022 | | As Restated July 4, 2021 | | July 3, 2022 | | As Restated July 4, 2021 | |
| Income (loss) from continuing operations before income taxes | | $ | 3,313 | | | $ | (15,247) | | | $ | (16,646) | | | $ | (27,103) | | |
| Effective tax rate | | (19.5) | % | | (17.4) | % | | (5.3) | % | | (8.7) | % | |
| (Benefit from) provision for income taxes | | $ | (647) | | | $ | 2,659 | | | $ | 875 | | | $ | 2,360 | | |
The Company is required to compute income tax expense in each jurisdiction in which it operates. This process requires the Company to project its current tax liability and estimate its deferred tax assets and liabilities, including net operating loss (“NOL”) and tax credit carryforwards. In assessing the ability to realize the net deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the net deferred tax assets will not be realized.
The effective tax rate for the three months ended July 3, 2022, differed from the U.S. federal statutory rate of 21% primarily due to adjustments to the domestic and foreign valuation allowances, and the expiration of the Company's interest rate swap which resulted in a $2.5 million tax benefit. The effective tax rate for the three months ended July 4, 2021, differed from the U.S. federal statutory rate primarily due to adjustments to the domestic and foreign valuation allowances and adjustments related to uncertain tax positions. In 2020 the Company recorded a full valuation allowance in the U.S. and Germany. The Company intends to continue maintaining valuation allowances on these deferred tax assets until there is sufficient evidence to support the release of all or some portion of these allowances.
As of July 3, 2022 and December 31, 2021, the Company had $1.9 million and $2.0 million, respectively, of unrecognized tax benefits including penalty and interest, all of which would affect the Company's effective tax rate if recognized in any future period.
(13) Share-Based Compensation
As of July 3, 2022, the Company had 46,149 stock options and 180,455 Restricted Stock Unit Awards (“RSU Awards”) and Restricted Stock Unit Management Stock Plan Awards (“RSU MSPs”) outstanding. On May 25, 2021 at the Company’s annual meeting, the Company’s shareholders approved an amendment to the 2019 Stock Option and Incentive Plan (the “2019 Plan”) to increase the number of shares available for issuance by 1,000,000 shares. The 2019 Plan now authorizes issuance of up to 2,000,000 shares of common stock (subject to adjustment for stock splits and similar events). Under the 2019 Plan, there were 1,457,237 shares available for grant as of July 3, 2022.
During the six months ended July 3, 2022 and July 4, 2021, there were no stock options granted.
For additional information regarding the historical issuance of stock options, refer to Note 14, Shared-Based Compensation to the consolidated financial statements included in the 2021 Annual Report.
During the six months ended July 3, 2022 and July 4, 2021, the Company granted 1,009 and 239,320 RSU Awards with approximate fair values of $26.60 and $40.78 per RSU Award, respectively. Due to the delay in filing of the 2021 Annual Report, the grant of annual equity awards, which typically takes place during the first quarter of each fiscal year, was postponed until August 15, 2022. During the six months ended July 3, 2022, the Company did not grant any performance-based RSU Awards. This compares to 70,933 performance-based RSU Awards granted during the six months ended July 4, 2021. The performance-based RSU Awards granted in 2021 include a market condition based on the Company's total shareholder return relative to a subset of the S&P 600 SmallCap Industrial Companies over a three year performance period. The target payout range for the 2021 awards is 0% to 200% with a cap not to exceed 600% of the target value on the grant date. The 2021 performance-based RSUs were valued using a Monte Carlo Simulation model to account for the market condition on grant date.
There were no RSU MSPs granted during the six months ended July 3, 2022. This compares to 31,248 RSU MSPs granted during the six months ended July 4, 2021, which had a per unit discount of $13.14 per share representing fair value.
Compensation expense related to the Company’s share-based plans for the six months ended July 3, 2022 and July 4, 2021 was $0.4 million and $2.9 million, respectively. The significant decrease in compensation cost in the six months ended July 3, 2022 relates primarily to forfeitures associated with the departure of the Company's former CEO in January 2022 as well as the delay in granting annual equity awards in 2022. Compensation expense for the six months ended July 3, 2022 was recorded as follows: $1.0 million in selling, general and administrative expenses and $(0.6) million in special charges. Special charges recoveries, net relate to forfeitures associated with the departure of the Company's former CEO, partially offset by certain equity accelerations for the Company's former CEO and other Corporate staff whose positions were eliminated. Compensation expense for the six months ended July 4, 2021 was recorded entirely in selling, general and administrative expenses. As of July 3, 2022, there were $2.8 million of total unrecognized compensation costs related to the Company’s outstanding share-based compensation arrangements. That cost is expected to be recognized over a weighted average period of 1.6 years.
The weighted average contractual term for stock options outstanding and options exercisable as of July 3, 2022 was 1.8 years and 1.8 years, respectively.
The aggregate intrinsic value of RSU Awards settled during the six months ended July 3, 2022 was $3.1 million and the aggregate intrinsic value of RSU Awards outstanding as of July 3, 2022 was $2.5 million.
(14) Accumulated Other Comprehensive Loss
The following table summarizes the changes in accumulated other comprehensive loss, net of tax, which is reported as a component of shareholders’ equity, for the six months ended July 3, 2022 and July 4, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Foreign Currency Translation Adjustments | | Pension, net | | Derivative | | Total |
| Balance as of December 31, 2020 (As Restated) | $ | (50,060) | | | $ | (33,359) | | | $ | (5,710) | | | $ | (89,129) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Other comprehensive (loss) income | (3,178) | | | 111 | | | 3,148 | | | 81 | |
| Balance as of July 4, 2021 (As Restated) | $ | (53,238) | | | $ | (33,248) | | | $ | (2,562) | | | $ | (89,048) | |
| | | | | | | |
| Balance as of December 31, 2021 | $ | (54,432) | | | $ | 4,944 | | | $ | 688 | | | $ | (48,800) | |
| Other comprehensive (loss) income | (11,450) | | | 97 | | | (688) | | | (12,041) | |
| Balance as of July 3, 2022 | $ | (65,882) | | | $ | 5,041 | | | $ | — | | | $ | (60,841) | |
| | | | | | | |
| | | | | | | |
(15) Income (Loss) Per Common Share (“EPS”)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 3, 2022 | | July 4, 2021 | | July 3, 2022 | | July 4, 2021 |
| Basic weighted average shares outstanding | 20,361 | | | 20,230 | | | 20,336 | | | 20,143 | |
Effect of dilutive securities (1) | 67 | | | — | | | — | | | — | |
| Dilutive weighted average shares outstanding | 20,428 | | | 20,230 | | | 20,336 | | | 20,143 | |
| | | | | | | |
(1) Includes the dilutive of stock options, RSUs and RSU MSPs | | | | | | | |
For the three months ended July 3, 2022, there were 102,869 anti-dilutive stock options, RSUs, and RSU MSPs with exercise prices ranging from $31.52 to $60.99. For the three months ended July 4, 2021, there were 811,422 anti-dilutive stock options, RSU Awards and RSU MSPs with exercise prices ranging from $33.63 to $60.99 .
(16) Subsequent Events
On September 6, 2022, the Company completed a sale-leaseback transaction for its Corona, California facility. For the sale of the land and building the Company received net proceeds of $28.5 million in cash. Concurrent with the sale, the Company leased back the facility at market rate for an initial lease term of 5 years with an option to renew for an additional term of 5 years. The Company will account for the transaction during the third quarter of 2022.