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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended October 2, 2022
OR
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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
CIRCOR INTERNATIONAL, INC.
(Exact name of registrant as specified in its
charter)
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Delaware |
04-3477276 |
(State or Other Jurisdiction of
Incorporation or Organization) |
(I.R.S. Employer
Identification No.) |
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30 Corporate Drive, Suite 200 |
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Burlington, |
MA |
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01803-4238 |
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(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:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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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.
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Large accelerated filer |
☐ |
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Accelerated filer |
☒ |
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Emerging growth company |
☐ |
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Non-accelerated filer |
☐ |
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Smaller reporting company |
☐ |
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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, 2022,
there were
20,363,350
shares of the registrant’s Common Stock, par value $0.01 per share,
outstanding.
CIRCOR INTERNATIONAL, INC.
TABLE OF CONTENTS
PART I.
FINANCIAL INFORMATION
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ITEM 1. |
FINANCIAL STATEMENTS |
CIRCOR INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(UNAUDITED)
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October 2, 2022 |
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December 31, 2021 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
$ |
47,131 |
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$ |
59,924 |
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Trade accounts receivable, net |
95,407 |
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100,149 |
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Inventories |
137,411 |
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123,343 |
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Prepaid expenses and other current assets |
125,409 |
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110,749 |
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Total Current Assets |
405,358 |
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394,165 |
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PROPERTY, PLANT AND EQUIPMENT, NET |
130,442 |
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154,461 |
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OTHER ASSETS: |
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Goodwill |
117,542 |
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122,906 |
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Intangibles, net |
257,839 |
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303,476 |
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Lease right-of-use assets, net |
40,836 |
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21,139 |
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Deferred income taxes |
637 |
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756 |
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Other assets |
27,323 |
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22,395 |
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TOTAL ASSETS |
$ |
979,977 |
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$ |
1,019,298 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable |
$ |
71,601 |
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$ |
83,382 |
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Accrued expenses and other current liabilities |
73,505 |
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81,998 |
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Accrued compensation and benefits |
31,817 |
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26,551 |
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Short-term borrowings and current portion of long-term
debt |
— |
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1,611 |
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Total Current Liabilities |
176,923 |
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193,542 |
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LONG-TERM DEBT |
501,754 |
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511,694 |
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DEFERRED INCOME TAXES |
18,101 |
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21,721 |
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PENSION LIABILITY, NET |
104,438 |
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120,881 |
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LONG-TERM LEASE LIABILITIES |
37,155 |
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17,715 |
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OTHER NON-CURRENT LIABILITIES |
19,524 |
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20,029 |
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COMMITMENTS AND CONTINGENCIES (NOTE 9 AND 10) |
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SHAREHOLDERS’ EQUITY: |
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Preferred stock, $0.01 par value; 1,000,000 shares authorized; no
shares issued and outstanding at October 2, 2022 and December 31,
2021
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— |
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— |
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Common stock, $0.01 par value; 29,000,000 shares authorized;
21,735,838
and 21,633,131 issued at October 2, 2022 and December 31, 2021
respectively
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218 |
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217 |
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Additional paid-in capital |
455,208 |
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454,852 |
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Accumulated deficit |
(184,132) |
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(198,081) |
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Common treasury stock, at cost (1,372,488 shares at October 2,
2022 and December 31, 2021)
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(74,472) |
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(74,472) |
|
|
Accumulated other comprehensive loss, net of tax |
(74,740) |
|
|
(48,800) |
|
|
Total Shareholders’ Equity |
122,082 |
|
|
133,716 |
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
$ |
979,977 |
|
|
$ |
1,019,298 |
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
CIRCOR INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
October 2, 2022 |
|
As Restated
October 3, 2021 |
|
October 2, 2022 |
|
As Restated
October 3, 2021 |
|
Net revenues |
$ |
195,362 |
|
|
$ |
189,709 |
|
|
$ |
572,392 |
|
|
$ |
553,750 |
|
|
Cost of revenues |
128,116 |
|
|
131,898 |
|
|
391,660 |
|
|
387,943 |
|
|
Gross profit |
67,246 |
|
|
57,811 |
|
|
180,732 |
|
|
165,807 |
|
|
Selling, general and administrative expenses |
50,392 |
|
|
53,546 |
|
|
160,517 |
|
|
169,371 |
|
|
Special and restructuring (recoveries) charges, net |
(25,702) |
|
|
814 |
|
|
(22,430) |
|
|
6,808 |
|
|
Operating income (loss) |
42,556 |
|
|
3,451 |
|
|
42,645 |
|
|
(10,372) |
|
|
Other expense (income): |
|
|
|
|
|
|
|
|
Interest expense, net |
11,821 |
|
|
7,997 |
|
|
31,481 |
|
|
24,325 |
|
|
Other (income), net |
(2,396) |
|
|
(256) |
|
|
(5,321) |
|
|
(3,301) |
|
|
Total other expense, net |
9,425 |
|
|
7,741 |
|
|
26,160 |
|
|
21,024 |
|
|
Income (loss) from continuing operations before income
taxes |
33,131 |
|
|
(4,290) |
|
|
16,485 |
|
|
(31,396) |
|
|
Provision for income taxes |
1,661 |
|
|
850 |
|
|
2,536 |
|
|
3,206 |
|
|
Income (loss) from continuing operations, net of tax |
31,470 |
|
|
(5,140) |
|
|
13,949 |
|
|
(34,602) |
|
|
Income from discontinued operations, net of tax |
— |
|
|
2,510 |
|
|
— |
|
|
1,393 |
|
|
Net income (loss) |
$ |
31,470 |
|
|
$ |
(2,630) |
|
|
$ |
13,949 |
|
|
$ |
(33,209) |
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per common share: |
|
|
|
|
|
|
|
|
Basic from continuing operations |
$ |
1.55 |
|
|
$ |
(0.25) |
|
|
$ |
0.69 |
|
|
$ |
(1.72) |
|
|
Basic from discontinued operations |
$ |
— |
|
|
$ |
0.12 |
|
|
$ |
— |
|
|
$ |
0.07 |
|
|
Net income (loss) |
$ |
1.55 |
|
|
$ |
(0.13) |
|
|
$ |
0.69 |
|
|
$ |
(1.65) |
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per common share: |
|
|
|
|
|
|
|
|
Diluted from continuing operations |
$ |
1.54 |
|
|
$ |
(0.25) |
|
|
$ |
0.68 |
|
|
$ |
(1.72) |
|
|
Diluted from discontinued operations |
$ |
— |
|
|
$ |
0.12 |
|
|
$ |
— |
|
|
$ |
0.07 |
|
|
Net income (loss) |
$ |
1.54 |
|
|
$ |
(0.13) |
|
|
$ |
0.68 |
|
|
$ |
(1.65) |
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
Basic |
20,364 |
|
|
20,257 |
|
|
20,345 |
|
|
20,181 |
|
|
Diluted |
20,410 |
|
|
20,257 |
|
|
20,410 |
|
|
20,181 |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
CIRCOR INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)
(in thousands)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
October 2, 2022 |
|
As Restated
October 3, 2021 |
|
October 2, 2022 |
|
As Restated
October 3, 2021 |
|
Net income (loss) |
$ |
31,470 |
|
|
$ |
(2,630) |
|
|
$ |
13,949 |
|
|
$ |
(33,209) |
|
|
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
(13,948) |
|
|
(1,244) |
|
|
(25,398) |
|
|
(4,423) |
|
|
Interest rate swap adjustments (1) |
— |
|
|
1,644 |
|
|
(688) |
|
|
4,792 |
|
|
Pension adjustment |
49 |
|
|
50 |
|
|
146 |
|
|
161 |
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income, net of tax |
(13,899) |
|
|
450 |
|
|
(25,940) |
|
|
530 |
|
|
COMPREHENSIVE INCOME (LOSS) |
$ |
17,571 |
|
|
$ |
(2,180) |
|
|
$ |
(11,991) |
|
|
$ |
(32,679) |
|
|
|
|
|
|
|
|
(1) Net of an income tax effect of $(2.5) million and $0.0 million
for the nine months ended October 2, 2022 and October 3, 2021
respectively.
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
CIRCOR INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
OPERATING ACTIVITIES |
October 2, 2022 |
|
As Restated October 3, 2021 |
|
Net income (loss) |
$ |
13,949 |
|
|
$ |
(33,209) |
|
|
Income from discontinued operations, net of income
taxes |
— |
|
|
1,393 |
|
|
Income (loss) from continuing operations, net of tax |
13,949 |
|
|
(34,602) |
|
|
Adjustments to reconcile net income (loss) to net cash used in
operating activities: |
|
|
|
|
Depreciation |
15,012 |
|
|
17,505 |
|
|
Amortization |
27,704 |
|
|
31,929 |
|
|
Change in provision for bad debt expense |
(263) |
|
|
(383) |
|
|
Write down of inventory |
1,797 |
|
|
1,742 |
|
|
Compensation expense for share-based plans |
980 |
|
|
4,165 |
|
|
Loss on debt extinguishment |
4,977 |
|
|
— |
|
|
Amortization of debt issuance costs |
2,672 |
|
|
3,032 |
|
|
Deferred tax provision |
45 |
|
|
823 |
|
|
|
|
|
|
|
|
|
|
Loss on sale of businesses |
— |
|
|
1,308 |
|
|
Gain on sale of real estate |
(47,977) |
|
|
— |
|
|
Other impairment charges |
8,011 |
|
|
— |
|
|
Loss on deconsolidation charges |
4,675 |
|
|
— |
|
|
Changes in operating assets and liabilities, net of effects of
acquisitions and divestitures: |
|
|
|
|
Trade accounts receivable |
(1,116) |
|
|
8,686 |
|
|
Inventories |
(28,364) |
|
|
(11,621) |
|
|
Prepaid expenses and other assets |
(25,387) |
|
|
(26,686) |
|
|
Accounts payable, accrued expenses and other
liabilities |
(6,047) |
|
|
6,439 |
|
|
Net cash (used in) provided by continuing operating
activities |
(29,332) |
|
|
2,337 |
|
|
Net cash used in discontinued operating activities |
— |
|
|
(2,484) |
|
|
Net cash used in operating activities |
(29,332) |
|
|
(147) |
|
|
INVESTING ACTIVITIES |
|
|
|
|
Additions to property, plant and equipment |
(13,291) |
|
|
(10,579) |
|
|
Proceeds from the sale of property, plant and equipment |
82 |
|
|
2 |
|
|
Proceeds from the sale of real estate |
54,945 |
|
|
— |
|
|
Proceeds from beneficial interest of factored
receivables |
3,461 |
|
|
1,531 |
|
|
Proceeds from the sale of business |
— |
|
|
9,993 |
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
45,197 |
|
|
947 |
|
|
FINANCING ACTIVITIES |
|
|
|
|
Proceeds from long-term debt |
180,441 |
|
|
145,550 |
|
|
Payments of long-term debt |
(182,166) |
|
|
(148,450) |
|
|
Net change in short-term borrowings |
(1,573) |
|
|
(225) |
|
|
Proceeds from the exercise of stock options |
— |
|
|
151 |
|
|
Withholding tax payments on net share settlements on equity
awards |
(1,299) |
|
|
(4,154) |
|
|
Payment of debt issuance costs |
(16,701) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
(21,298) |
|
|
(7,128) |
|
|
Effect of exchange rate changes on cash, cash equivalents and
restricted cash |
(7,096) |
|
|
(2,834) |
|
|
DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH |
(12,529) |
|
|
(9,162) |
|
|
Cash, cash equivalents, and restricted cash at beginning of
period |
61,374 |
|
|
68,607 |
|
|
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF
PERIOD |
$ |
48,845 |
|
|
$ |
59,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
CIRCOR INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
SHAREHOLDERS’
EQUITY
(in thousands)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
Additional
Paid-in
Capital |
|
Accumulated
deficit |
|
Accumulated
Other
Comprehensive (Loss) |
|
Treasury Stock |
|
Total
Shareholders’
Equity |
|
Shares |
|
Amount |
|
|
Balance as of July 3, 2022 |
20,352 |
|
|
$ |
217 |
|
|
$ |
454,361 |
|
|
$ |
(215,602) |
|
|
$ |
(60,841) |
|
|
$ |
(74,472) |
|
|
$ |
103,663 |
|
|
Net income |
— |
|
|
— |
|
|
— |
|
|
31,470 |
|
|
— |
|
|
— |
|
|
31,470 |
|
|
Other comprehensive (loss), net of tax |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(13,899) |
|
|
— |
|
|
(13,899) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of restricted stock units |
12 |
|
|
1 |
|
|
243 |
|
|
— |
|
|
— |
|
|
— |
|
|
244 |
|
|
Share-based plan compensation |
— |
|
|
— |
|
|
604 |
|
|
— |
|
|
— |
|
|
— |
|
|
604 |
|
|
Balance as of October 2, 2022 |
20,364 |
|
|
$ |
218 |
|
|
$ |
455,208 |
|
|
$ |
(184,132) |
|
|
$ |
(74,740) |
|
|
$ |
(74,472) |
|
|
$ |
122,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of July 4, 2021 (As Restated) |
20,248 |
|
|
216 |
|
|
452,512 |
|
|
(167,023) |
|
|
(89,048) |
|
|
(74,472) |
|
|
122,185 |
|
|
Net (loss) |
— |
|
|
— |
|
|
— |
|
|
(2,630) |
|
|
— |
|
|
— |
|
|
(2,630) |
|
|
Other comprehensive income, net of tax |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
450 |
|
|
— |
|
|
450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of restricted stock units |
7 |
|
|
1 |
|
|
(13) |
|
|
— |
|
|
— |
|
|
— |
|
|
(12) |
|
|
Share-based plan compensation |
— |
|
|
— |
|
|
1,262 |
|
|
— |
|
|
— |
|
|
— |
|
|
1,262 |
|
|
Balance as of October 3, 2021 (As Restated) |
20,255 |
|
|
$ |
217 |
|
|
$ |
453,761 |
|
|
$ |
(169,652) |
|
|
$ |
(88,599) |
|
|
$ |
(74,472) |
|
|
$ |
121,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2021 |
20,261 |
|
|
$ |
217 |
|
|
$ |
454,852 |
|
|
$ |
(198,081) |
|
|
$ |
(48,800) |
|
|
$ |
(74,472) |
|
|
$ |
133,716 |
|
|
Net income |
— |
|
|
— |
|
|
— |
|
|
13,949 |
|
|
— |
|
|
— |
|
|
13,949 |
|
|
Other comprehensive (loss), net of tax |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(25,940) |
|
|
— |
|
|
(25,940) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of restricted stock units |
103 |
|
|
1 |
|
|
(623) |
|
|
— |
|
|
— |
|
|
— |
|
|
(622) |
|
|
Share-based plan compensation |
— |
|
|
— |
|
|
979 |
|
|
— |
|
|
— |
|
|
— |
|
|
979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 2, 2022 |
20,364 |
|
|
$ |
218 |
|
|
$ |
455,208 |
|
|
$ |
(184,132) |
|
|
$ |
(74,740) |
|
|
$ |
(74,472) |
|
|
$ |
122,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2020 (As Restated) |
20,001 |
|
|
214 |
|
|
452,728 |
|
|
(136,443) |
|
|
(89,129) |
|
|
(74,472) |
|
|
152,898 |
|
|
Net (loss) |
— |
|
|
— |
|
|
— |
|
|
(33,209) |
|
|
— |
|
|
— |
|
|
(33,209) |
|
|
Other comprehensive income, net of tax |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
530 |
|
|
— |
|
|
530 |
|
|
Stock options exercised |
24 |
|
|
— |
|
|
151 |
|
|
— |
|
|
— |
|
|
— |
|
|
151 |
|
|
Conversion of restricted stock units |
230 |
|
|
3 |
|
|
(3,283) |
|
|
— |
|
|
— |
|
|
— |
|
|
(3,280) |
|
|
Share-based plan compensation |
— |
|
|
— |
|
|
4,165 |
|
|
— |
|
|
— |
|
|
— |
|
|
4,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 3, 2021 (As Restated) |
20,255 |
|
|
$ |
217 |
|
|
$ |
453,761 |
|
|
$ |
(169,652) |
|
|
$ |
(88,599) |
|
|
$ |
(74,472) |
|
|
$ |
121,256 |
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
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” 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 unaudited 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 or any other
period.
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
includes interim financial statements for the three and nine months
ended October 3, 2021. The comparative financial statements
presented for the three and nine months ended October 3, 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 nine months ended October 2, 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.
Certain prior period amounts included in the condensed consolidated
balance sheet have been reclassified to conform with current period
presentation. Specifically, the Company reclassified
$21.1 million from Other Assets to the Lease Right-Of-Use
Asset balance and $20.0 million from Other Long-Term
Liabilities to Long-Term Lease Liabilities as of December 31,
2021.
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 nine
months ended October 2, 2022 are consistent with those
discussed in Note 3 to the consolidated financial statements in the
2021 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 October 2, 2022 the Company had $215.0 million of
transaction price related to remaining performance obligations
which, is invoiced and paid in accordance with terms of contractual
agreements. The Company expects to recognize approximately 32% of
its remaining performance obligations as revenue during the
remainder of 2022, 55% in 2023, and the remaining 13% 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 nine
months ended October 2, 2022 that was included in contract
liabilities at the beginning of the period amounted to
$20.2 million.
Disaggregation of Revenue
The following tables present revenue disaggregated by major product
line and geographical market (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
October 2, 2022 |
|
As Restated
October 3, 2021 |
|
October 2, 2022 |
|
As Restated
October 3, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace & Defense Segment |
|
|
|
|
|
|
|
|
|
Commercial Aerospace & Other |
$ |
34,098 |
|
|
$ |
23,757 |
|
|
$ |
88,132 |
|
|
$ |
67,247 |
|
|
|
Defense |
38,121 |
|
|
39,704 |
|
|
114,728 |
|
|
115,315 |
|
|
|
Total |
72,219 |
|
|
63,461 |
|
|
202,860 |
|
|
182,562 |
|
|
Industrial Segment |
|
|
|
|
|
|
|
|
|
Valves |
45,061 |
|
|
45,630 |
|
|
131,973 |
|
|
133,107 |
|
|
|
Pumps |
78,082 |
|
|
80,618 |
|
|
237,559 |
|
|
238,081 |
|
|
|
Total |
123,143 |
|
|
126,248 |
|
|
369,532 |
|
|
371,188 |
|
|
Net Revenues |
$ |
195,362 |
|
|
$ |
189,709 |
|
|
$ |
572,392 |
|
|
$ |
553,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
|
October 2, 2022 |
|
As Restated
October 3, 2021 |
|
October 2, 2022 |
|
As Restated
October 3, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace & Defense Segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA |
$ |
15,906 |
|
|
$ |
15,097 |
|
|
$ |
45,916 |
|
|
$ |
43,945 |
|
|
|
|
|
|
|
North America |
51,295 |
|
|
45,151 |
|
|
143,455 |
|
|
128,604 |
|
|
|
|
|
|
|
Other |
5,018 |
|
|
3,213 |
|
|
13,489 |
|
|
10,013 |
|
|
|
|
|
|
|
Total |
72,219 |
|
|
63,461 |
|
|
202,860 |
|
|
182,562 |
|
|
|
|
|
|
Industrial Segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA |
46,419 |
|
|
56,907 |
|
|
152,277 |
|
|
171,942 |
|
|
|
|
|
|
|
North America |
45,180 |
|
|
34,841 |
|
|
128,572 |
|
|
105,112 |
|
|
|
|
|
|
|
Other |
31,544 |
|
|
34,500 |
|
|
88,683 |
|
|
94,134 |
|
|
|
|
|
|
|
Total |
123,143 |
|
|
126,248 |
|
|
369,532 |
|
|
371,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
$ |
195,362 |
|
|
$ |
189,709 |
|
|
$ |
572,392 |
|
|
$ |
553,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Balances
The Company’s contract assets and contract liabilities balances as
of October 2, 2022 and December 31, 2021 are as follows
(in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2, 2022 |
|
December 31, 2021 |
|
Increase/(Decrease) |
|
|
|
|
|
|
|
Contract assets: |
|
|
|
|
|
|
Recorded within prepaid expenses and other current
assets |
$ |
99,244 |
|
|
$ |
87,527 |
|
|
$ |
11,717 |
|
|
Recorded within other assets |
6,384 |
|
|
6,336 |
|
|
48 |
|
|
|
$ |
105,628 |
|
|
$ |
93,863 |
|
|
$ |
11,765 |
|
|
|
|
|
|
|
|
|
Contract liabilities: |
|
|
|
|
|
|
Recorded within accrued expenses and other current
liabilities |
$ |
27,013 |
|
|
$ |
26,870 |
|
|
$ |
143 |
|
|
Recorded within other non-current liabilities |
5,838 |
|
|
4,847 |
|
|
991 |
|
|
|
$ |
32,851 |
|
|
$ |
31,717 |
|
|
$ |
1,134 |
|
|
|
|
|
|
|
Contract assets increased by $11.8 million during the nine
months ended October 2, 2022, primarily
due to revenue recognized in excess of invoicing within the Defense
and Industrial Pumps and Valves businesses partially offset due to
invoicing upon project completion milestones in excess of revenue
recognized within Refinery Valves business.
Contract liabilities increased by $1.1 million during the nine
months ended October 2, 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 nine
months ended October 2, 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.
(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 (recoveries) charges, 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
nine months ended October 2, 2022 and October 3, 2021
(in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special & restructuring (recoveries) charges, net |
|
Three Months Ended |
|
Nine Months Ended |
|
October 2, 2022 |
|
October 3, 2021 |
|
October 2, 2022 |
|
October 3, 2021 |
|
Special (recoveries) charges, net |
$ |
(25,529) |
|
|
$ |
1,126 |
|
|
$ |
(33,399) |
|
|
$ |
2,779 |
|
|
Restructuring (recoveries) charges, net |
(173) |
|
|
(312) |
|
|
10,969 |
|
|
4,029 |
|
|
Total special and restructuring (recoveries) charges,
net |
$ |
(25,702) |
|
|
$ |
814 |
|
|
$ |
(22,430) |
|
|
$ |
6,808 |
|
Special (recoveries) charges, net
The table below details the special (recoveries) charges, net
recognized for the three and nine months ended October 2, 2022
(in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special (recoveries) charges, net |
|
|
|
Three Months Ended October 2, 2022 |
|
|
|
Aerospace & Defense |
|
Industrial |
|
Corporate |
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Pipeline Engineering investigation and restatement
costs |
|
$ |
— |
|
|
$ |
— |
|
|
141 |
|
|
$ |
141 |
|
|
|
Gain on real estate sales |
|
(25,969) |
|
|
— |
|
|
— |
|
|
(25,969) |
|
|
|
Strategic alternatives evaluation |
|
— |
|
|
— |
|
|
214 |
|
|
214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other special (recoveries) charges, net |
|
— |
|
|
(67) |
|
|
152 |
|
|
85 |
|
|
|
Total special (recoveries) charges, net |
|
$ |
(25,969) |
|
|
$ |
(67) |
|
|
507 |
|
|
(25,529) |
|
|
|
|
|
|
|
|
Special (recoveries) charges, net |
|
|
|
|
Nine Months Ended October 2, 2022 |
|
|
|
Aerospace & Defense |
|
Industrial |
|
Corporate |
|
Total
|
|
|
Pipeline Engineering investigation and restatement
costs |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
6,504 |
|
|
$ |
6,504 |
|
|
|
Gain on real estate sales |
|
(25,969) |
|
|
(22,008) |
|
|
— |
|
|
(47,977) |
|
|
|
Strategic alternatives evaluation |
|
— |
|
|
— |
|
|
1,159 |
|
|
1,159 |
|
|
|
Debt amendment charges |
|
— |
|
|
— |
|
|
4,977 |
|
|
4,977 |
|
|
|
Other special charges |
|
— |
|
|
898 |
|
|
1,040 |
|
|
1,938 |
|
|
|
Total special (recoveries) charges, net |
|
$ |
(25,969) |
|
|
$ |
(21,110) |
|
|
13,680 |
|
|
(33,399) |
|
|
Pipeline Engineering investigation and restatement costs: During
the three and nine months ended October 2, 2022, the Company
recognized special charges, net of $0.1 million and
$6.5 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 nine months ended
October 2, 2022, the Company recognized gains of
$26.0 million and $48.0 million on the sales of real
estate, respectively.
During the three and nine months ended October 2, 2022, within the
Aerospace and Defense segment, the Company recognized a gain on the
sale of real estate of $26.0 million located at Corona,
California. On September 6, 2022, the Company entered into a five
year operating lease on the Corona facility, at the market rate of
buildings of similar size and location, with a five year option to
renew. The Company recorded an initial $14.3 million of
operating right of use asset and lease liabilities.
During the nine months ended October 2, 2022, the Company
recognized a gain on the sale of real estate of $22.0 million
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 $0.2 million and $1.2 million for the three
and nine months ended October 2, 2022, respectively, related
to the evaluation of strategic alternatives for the
Company.
Debt amendment charges: The Company incurred special charges of
$5.0 million for the nine months ended October 2, 2022
related to the amendments of its credit agreements. See Note 8,
Financing Arrangements for amendment information.
Other special charges, net: During the three and nine months ended
October 2, 2022, the Company recognized other special charges,
net of $0.1 million and $1.9 million, respectively. Other
special charges, net within Corporate for the nine months ended
October 2, 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 nine months ended, October
2, 2022 the Company incurred other special (recoveries), net of
$0.1 million and $0.9 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 nine months ended October 3, 2021
(in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special charges, net |
|
|
Three Months Ended October 3, 2021 |
|
|
Aerospace & Defense |
|
Industrial |
|
Corporate |
|
Total
|
|
Heater & Control Valves divestiture |
|
$ |
— |
|
|
$ |
481 |
|
|
$ |
143 |
|
|
$ |
624 |
|
|
Other special charges, net |
|
— |
|
|
376 |
|
|
126 |
|
|
502 |
|
|
Total special charges, net |
|
$ |
— |
|
|
$ |
857 |
|
|
$ |
269 |
|
|
$ |
1,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Special charges (recoveries), net |
|
|
Nine Months Ended October 3, 2021 |
|
|
Aerospace & Defense |
|
Industrial |
|
Corporate |
|
Total
|
|
Cryo divestiture |
|
$ |
— |
|
|
$ |
(1,947) |
|
|
$ |
— |
|
|
$ |
(1,947) |
|
|
Heater & Control Valves divestiture |
|
— |
|
|
3,459 |
|
|
143 |
|
|
3,602 |
|
|
|
|
|
|
|
|
|
|
|
Other special charges (recoveries), net |
|
35 |
|
|
995 |
|
|
94 |
|
|
1,124 |
|
|
Total special charges (recoveries), net |
|
$ |
35 |
|
|
$ |
2,507 |
|
|
$ |
237 |
|
|
$ |
2,779 |
|
Heater & Control Valves divestiture: During the three and nine
months ended October 3, 2021, the Company recognized special
charges of $0.6 million and $3.6 million, respectively,
related to the sale of the Heater and Control Valve businesses. The
Company also recognized charges of $0.1 million in Corporate
associated with the divestiture during the three and nine months
ended October 3, 2021.
Cryo divestiture: During the nine months ended October 3, 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 $0.5 million and $1.1 million for the
three and nine months ended October 3, 2021, respectively. Included
in the charge recognized during the nine months ended October 3,
2021 is $0.9 million within the Industrial segment pertaining
to a contingency indemnification to the buyer of a previously
divested business within the Industrial segment. The Company also
recognized charges of $0.1 million in Corporate associated
with streamlining operations and reducing costs during the three
months ended October 3, 2021.
Restructuring charges, net
The tables below detail the charges associated with restructuring
actions recorded for the three and nine months ended
October 2, 2022 and October 3, 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 (recoveries), net |
|
|
Three Months Ended October 2, 2022
|
|
|
Aerospace & Defense |
|
Industrial |
|
Corporate |
|
Total
|
|
Facility and other related charges (recoveries), net |
|
$ |
5 |
|
|
$ |
(252) |
|
|
$ |
— |
|
|
$ |
(247) |
|
|
Employee related charges (recoveries), net |
|
— |
|
|
25 |
|
|
49 |
|
|
74 |
|
|
Total restructuring charges, net |
|
$ |
5 |
|
|
$ |
(227) |
|
|
$ |
49 |
|
|
$ |
(173) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges, net |
|
|
Nine Months Ended October 2, 2022
|
|
|
Aerospace & Defense |
|
Industrial |
|
Corporate |
|
Total
|
|
Facility related expenses |
|
$ |
8 |
|
|
$ |
9,830 |
|
|
$ |
— |
|
|
$ |
9,838 |
|
|
Employee related expenses, net |
|
15 |
|
|
740 |
|
|
376 |
|
|
1,131 |
|
|
Total restructuring charges, net |
|
$ |
23 |
|
|
$ |
10,570 |
|
|
$ |
376 |
|
|
$ |
10,969 |
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring charges as of December 31, 2021 |
|
|
|
|
|
|
|
$ |
1,839 |
|
|
Total charges, net (shown above) |
|
|
|
|
|
|
|
10,969 |
|
|
Charges paid/settled, written-off, net |
|
|
|
|
|
|
|
(12,168) |
|
|
Accrued restructuring charges as of October 2,
2022
|
|
|
|
|
|
|
|
$ |
640 |
|
The Company recorded restructuring charges of $11.0 million
during the nine months ended October 2, 2022. Of the
$11.0 million in total restructuring charges,
$10.4 million
related to the exit of the Pipeline Engineering business. The
$10.4 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.
Additionally, during the three and nine months ended October 2,
2022, the Company recognized $0.2 million of an incremental
recovery on the sale of Pipeline Engineering assets within facility
and other related charges (recoveries), net. The Company expects to
make payment or settle the majority of the restructuring charges
accrued as of October 2, 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 nine months ended October 2, 2022, the Company
recorded
$0.4 million
of employee related charges, not associated with the exit of the
Pipeline Engineering business.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges (recoveries), net |
|
|
Three Months Ended October 3, 2021
|
|
|
Aerospace & Defense |
|
Industrial |
|
Corporate |
|
Total |
|
Facility and other related charges (recoveries) |
|
$ |
24 |
|
|
$ |
(275) |
|
|
$ |
— |
|
|
$ |
(251) |
|
|
Employee related charges (recoveries) |
|
(69) |
|
|
8 |
|
|
— |
|
|
(61) |
|
|
Total restructuring charges (recoveries), net |
|
$ |
(45) |
|
|
$ |
(267) |
|
|
$ |
— |
|
|
$ |
(312) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges, net |
|
|
Nine Months Ended October 3, 2021
|
|
|
Aerospace & Defense |
|
Industrial |
|
Corporate |
|
Total |
|
Facility related expenses |
|
$ |
48 |
|
|
$ |
77 |
|
|
$ |
— |
|
|
$ |
125 |
|
|
Employee related expenses |
|
1,101 |
|
|
2,432 |
|
|
371 |
|
|
3,904 |
|
|
Total restructuring charges, net |
|
$ |
1,149 |
|
|
$ |
2,509 |
|
|
$ |
371 |
|
|
$ |
4,029 |
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring charges as of December 31, 2020 |
|
|
|
|
|
|
|
$ |
1,512 |
|
|
Total year to date charges, net (shown above) |
|
|
|
|
|
|
|
4,029 |
|
|
Charges paid/settled, written-off, net |
|
|
|
|
|
|
|
(3,353) |
|
|
Accrued restructuring charges as of October 3,
2021
|
|
|
|
|
|
|
|
$ |
2,188 |
|
The Company recorded restructuring recoveries of
$(0.3) million and charges of $4.0 million during the
three and nine months ended October 3, 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 $1.9 million of year to date charges in
connection with these plans as of October 3, 2021. 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 October 2, 2022 and
December 31, 2021 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2, 2022 |
|
December 31, 2021 |
|
Raw materials |
$ |
58,368 |
|
|
$ |
51,911 |
|
|
Work in process |
63,216 |
|
|
55,942 |
|
|
Finished goods |
15,827 |
|
|
15,490 |
|
|
Total inventories |
$ |
137,411 |
|
|
$ |
123,343 |
|
(6) Goodwill and Intangibles, net
The following table shows the movement in goodwill by segment from
December 31, 2021 to October 2, 2022 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace & Defense |
|
Industrial |
|
|
Total |
|
Goodwill as of December 31, 2021 |
|
$ |
57,360 |
|
|
$ |
65,546 |
|
|
|
$ |
122,906 |
|
|
|
|
|
|
|
|
|
|
Currency translation adjustments |
|
(209) |
|
|
(5,155) |
|
|
|
(5,364) |
|
|
Goodwill as of October 2, 2022 |
|
$ |
57,151 |
|
|
$ |
60,391 |
|
|
|
$ |
117,542 |
|
|
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 October 2, 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2, 2022 |
|
Gross
Carrying
Amount |
|
Accumulated
Amortization |
|
Net Carrying Value |
|
Patents |
$ |
5,368 |
|
|
$ |
(5,368) |
|
|
$ |
— |
|
|
Customer relationships |
276,637 |
|
|
(140,505) |
|
|
136,132 |
|
|
Acquired technology |
129,487 |
|
|
(77,732) |
|
|
51,755 |
|
|
|
|
|
|
|
|
Total Amortized Intangibles |
$ |
411,492 |
|
|
$ |
(223,605) |
|
|
$ |
187,887 |
|
|
|
|
|
|
|
|
|
Non-amortized intangibles (trademarks and trade names) |
$ |
69,952 |
|
|
$ |
— |
|
|
$ |
69,952 |
|
|
|
|
|
|
|
|
|
Net carrying value of intangible assets |
|
|
|
|
$ |
257,839 |
|
|
|
|
|
|
|
|
|
|
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
$27.7 million
and $42.3 million for the periods ended October 2, 2022 and
December 31, 2021, respectively.
The table below presents estimated remaining amortization expense
for intangible assets recorded as of October 2, 2022
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
2023 |
|
2024 |
|
2025 |
|
2026 |
|
After 2026 |
|
|
|
Estimated amortization expense |
$ |
8,652 |
|
|
$ |
30,340 |
|
|
$ |
26,677 |
|
|
$ |
23,366 |
|
|
$ |
20,348 |
|
|
$ |
78,504 |
|
|
|
(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 |
|
Nine Months Ended |
|
October 2, 2022 |
|
As Restated October 3, 2021 |
|
October 2, 2022 |
|
As Restated October 3, 2021 |
|
Net revenues |
|
|
|
|
|
|
|
|
Aerospace & Defense |
$ |
72,219 |
|
|
$ |
63,461 |
|
|
$ |
202,860 |
|
|
$ |
182,562 |
|
|
Industrial |
123,143 |
|
|
126,248 |
|
|
369,532 |
|
|
371,188 |
|
|
Net revenues |
$ |
195,362 |
|
|
$ |
189,709 |
|
|
$ |
572,392 |
|
|
$ |
553,750 |
|
|
|
|
|
|
|
|
|
|
Results from continuing operations before income taxes |
|
|
|
|
|
|
|
|
Aerospace & Defense - Segment Operating Income |
$ |
16,891 |
|
|
$ |
15,927 |
|
|
$ |
41,777 |
|
|
$ |
37,656 |
|
|
Industrial - Segment Operating Income |
15,717 |
|
|
7,124 |
|
|
31,059 |
|
|
20,195 |
|
|
Corporate expenses |
(5,301) |
|
|
(7,017) |
|
|
(18,557) |
|
|
(24,000) |
|
|
Subtotal |
27,307 |
|
|
16,034 |
|
|
54,279 |
|
|
33,851 |
|
|
Special (recoveries) charges, net |
(25,529) |
|
|
1,126 |
|
|
(33,399) |
|
|
2,779 |
|
|
Restructuring (recoveries) charges, net |
(173) |
|
|
(312) |
|
|
10,969 |
|
|
4,029 |
|
|
Special and restructuring (recoveries) charges, net |
(25,702) |
|
|
814 |
|
|
(22,430) |
|
|
6,808 |
|
|
Restructuring related inventory charges |
— |
|
|
(60) |
|
|
2,757 |
|
|
899 |
|
|
|
|
|
|
|
|
|
|
Acquisition amortization |
9,118 |
|
|
10,417 |
|
|
27,687 |
|
|
31,402 |
|
|
Acquisition depreciation |
1,335 |
|
|
1,412 |
|
|
3,620 |
|
|
5,114 |
|
|
Restructuring, impairment and other costs, net |
10,453 |
|
|
11,769 |
|
|
34,064 |
|
|
37,415 |
|
|
Consolidated operating income (loss) |
42,556 |
|
|
3,451 |
|
|
42,645 |
|
|
(10,372) |
|
|
Interest expense, net |
11,821 |
|
|
7,997 |
|
|
31,481 |
|
|
24,325 |
|
|
Other income, net |
(2,396) |
|
|
(256) |
|
|
(5,321) |
|
|
(3,301) |
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income
taxes |
$ |
33,131 |
|
|
$ |
(4,290) |
|
|
$ |
16,485 |
|
|
$ |
(31,396) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
October 2, 2022 |
|
As Restated October 3, 2021 |
|
October 2, 2022 |
|
As Restated October 3, 2021 |
|
Capital expenditures |
|
|
|
|
|
|
|
|
Aerospace & Defense |
$ |
1,616 |
|
|
$ |
999 |
|
|
$ |
4,483 |
|
|
$ |
3,151 |
|
|
Industrial |
2,613 |
|
|
3,767 |
|
|
7,873 |
|
|
7,247 |
|
|
Corporate |
143 |
|
|
(41) |
|
|
1,346 |
|
|
123 |
|
|
Consolidated capital expenditures |
$ |
4,372 |
|
|
$ |
4,725 |
|
|
$ |
13,702 |
|
|
$ |
10,521 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
Aerospace & Defense |
$ |
2,790 |
|
|
$ |
3,182 |
|
|
$ |
8,049 |
|
|
$ |
8,955 |
|
|
Industrial |
11,133 |
|
|
12,772 |
|
|
34,178 |
|
|
39,995 |
|
|
Corporate |
156 |
|
|
158 |
|
|
489 |
|
|
484 |
|
|
Consolidated depreciation and amortization |
$ |
14,079 |
|
|
$ |
16,112 |
|
|
$ |
42,716 |
|
|
$ |
49,434 |
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets |
October 2, 2022 |
|
December 31, 2021 |
|
|
|
|
|
Aerospace & Defense |
$ |
530,482 |
|
|
$ |
464,964 |
|
|
|
|
|
|
Industrial |
1,215,730 |
|
|
1,256,974 |
|
|
|
|
|
|
Corporate |
(766,235) |
|
|
(702,640) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated identifiable assets |
$ |
979,977 |
|
|
$ |
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, and the
amounts as of October 2, 2022 and December 31, 2021 are
summarized in the table below (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant Other Observable Inputs
Level 2 |
|
|
|
|
|
October 2, 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
October 2, 2022, the estimated fair value of the Company's
gross debt (before netting debt issuance costs)
was $486.4 million,
compared to carrying cost
of $523.0 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 October 2, 2022 and December 31, 2021, the Company
had restricted cash balances
of $1.7 million and $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 nine months ended October 2,
2022, the Company sold a total
of $10.2 million and $35.6 million, respectively,
of receivables under the program, receiving
$9.2 million and $32.0 million, respectively,
in upfront cash. During the three and nine months ended
October 3, 2021, the Company sold a total of
$10.7 million and $28.9 million respectively, of
receivables under the program, receiving $10.2 million and
$27.7 million, respectively in upfront cash. At
October 2, 2022 and October 3, 2021, a beneficial interest
balance
of $1.0 million and $0.5 million, respectively,
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.
The fair value of the interest rate swap was a net liability
position
of $0.0 million and
$2.2 million at October 2, 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
October 2, 2022 and December 31, 2021,
respectively.
The amount of gains (loss) recognized in other comprehensive income
(loss), net of tax (“OCI”) and reclassified from accumulated other
comprehensive loss (“AOCI”) to earnings are summarized below
(in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
|
|
October 2, 2022 |
|
|
October 2, 2022 |
|
Amount of (loss) recognized in OCI |
|
|
|
|
$ |
— |
|
|
|
$ |
(10) |
|
|
|
|
|
|
|
|
|
|
|
Amount of (loss) reclassified from AOCI to earnings (interest
expense, net of tax) |
|
|
|
|
$ |
— |
|
|
|
$ |
(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
$0.0 million and $7.5 million for the three and nine
months ended October 2, 2022 during which the hedge was in effect
for the partial term, respectively.
Debt
As of October 2, 2022, total debt (including short-term
borrowings and current portion of long-term debt)
was
$501.8 million
compared to $513.3 million as of December 31, 2021. Total
debt is net of unamortized term loan debt issuance costs of
$21.2 million
and $13.0 million at October 2, 2022 and
December 31, 2021, respectively. The Company made interest
payments of
$29.8 million and $23.3 million
during the nine months ended October 2, 2022, and
October 3, 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. During the second quarter 2022, 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) during the second quarter 2022 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 October 2, 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 nine months ended October 2, 2022
and October 3, 2021 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
October 2, 2022 |
|
October 3, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance beginning |
$ |
2,740 |
|
|
$ |
2,206 |
|
|
|
|
|
|
Provisions |
1,715 |
|
|
2,532 |
|
|
|
|
|
|
Claims settled |
(1,790) |
|
|
(2,116) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment |
(183) |
|
|
(47) |
|
|
|
|
|
|
Balance ending |
$ |
2,482 |
|
|
$ |
2,575 |
|
|
|
|
|
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 sub-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 October 2, 2022 was
$32.8 million of which $25.8 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 October 2, 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 |
|
Nine Months Ended |
|
|
October 2, 2022 |
|
October 3, 2021 |
|
October 2, 2022 |
|
October 3, 2021 |
|
Pension Benefits - U.S. Plans |
|
|
|
|
|
|
|
|
Interest cost |
$ |
1,000 |
|
|
$ |
772 |
|
|
$ |
3,000 |
|
|
$ |
2,318 |
|
|
Expected return on plan assets |
(2,150) |
|
|
(2,102) |
|
|
(6,450) |
|
|
(7,359) |
|
|
|
|
|
|
|
|
|
|
Amortization |
48 |
|
|
51 |
|
|
144 |
|
|
152 |
|
|
Net periodic benefit income |
$ |
(1,102) |
|
|
$ |
(1,279) |
|
|
$ |
(3,306) |
|
|
$ |
(4,889) |
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits - Non-U.S. Plans |
|
|
|
|
|
|
|
|
Service cost |
$ |
557 |
|
|
$ |
821 |
|
|
$ |
1,765 |
|
|
$ |
2,467 |
|
|
Interest cost |
324 |
|
|
242 |
|
|
1,034 |
|
|
735 |
|
|
Expected return on plan assets |
(178) |
|
|
(156) |
|
|
(571) |
|
|
(470) |
|
|
Amortization |
— |
|
|
175 |
|
|
— |
|
|
534 |
|
|
Net periodic benefit cost |
$ |
703 |
|
|
$ |
1,082 |
|
|
$ |
2,228 |
|
|
$ |
3,266 |
|
|
|
|
|
|
|
|
|
|
|
Other Post-Retirement Benefits |
|
|
|
|
|
|
|
|
Service cost |
$ |
1 |
|
|
$ |
1 |
|
|
$ |
3 |
|
|
$ |
3 |
|
|
Interest cost |
53 |
|
|
42 |
|
|
159 |
|
|
126 |
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
$ |
54 |
|
|
$ |
43 |
|
|
$ |
162 |
|
|
$ |
129 |
|
|
|
|
|
|
|
|
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 nine months ended
October 2, 2022 and October 3, 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 nine months ended October 2, 2022 and
October 3, 2021.
(12) Income Taxes
The provision for income taxes to income (loss) from continuing
operations is as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
|
October 2, 2022 |
|
As Restated October 3, 2021 |
|
October 2, 2022 |
|
As Restated October 3, 2021 |
|
|
Income (loss) from continuing operations before income
taxes |
|
$ |
33,131 |
|
|
$ |
(4,290) |
|
|
$ |
16,485 |
|
|
$ |
(31,396) |
|
|
|
Effective tax rate |
|
5.0 |
% |
|
(19.8) |
% |
|
15.4 |
% |
|
(10.2) |
% |
|
|
Provision for income taxes |
|
$ |
1,661 |
|
|
$ |
850 |
|
|
$ |
2,536 |
|
|
$ |
3,206 |
|
|
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 October 2,
2022, differed from the U.S. federal statutory rate of 21%
primarily due to adjustments to the domestic and foreign valuation
allowances, and the jurisdictional mix of earnings. The effective
tax rate for the three months ended October 3, 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.The Company recorded a full
valuation allowance in the U.S. and Germany, and 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 October 2, 2022 and December 31, 2021, the Company
had $1.3 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 October 2, 2022, the Company had
43,737 stock
options and
383,513 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
1,231,824 shares
available for grant as of October 2, 2022.
During the nine months ended October 2, 2022 and
October 3, 2021, there were no stock options
granted.
For additional information regarding the historical issuance of
stock options, refer to Note 14, Share-Based Compensation to the
consolidated financial statements included in the 2021 Annual
Report.
During the nine months ended October 2, 2022 and
October 3, 2021, the Company granted 261,285 and 243,650 RSU
Awards with approximate fair values of $19.09 and $40.58 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 2022. During the nine months ended October 2,
2022, the Company granted 42,272 performance-based RSU
Awards,
this compares to 70,933 performance-based RSU Awards granted during
the nine months ended October 3, 2021 with a per unit discount
of 33%. The performance-based RSU Awards granted in 2021 and 2022
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 and 2022 awards is 0% to 200% with a cap not to
exceed 600% of the target value on the grant date. The 2021 and
2022 performance-based RSUs were valued using a Monte Carlo
Simulation model to account for the market condition on grant
date.
There were
11,273 RSU
MSPs granted during the nine months ended October 2, 2022 with
a per unit discount of $6.51. This compares to 31,248 RSU MSPs
granted during the nine months ended October 3, 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 three and nine months ended October 2, 2022 and
October 3, 2021 was $0.6 million,
$1.0 million
and $1.3 million, $4.2 million, respectively. The significant
decrease in compensation cost in the nine months ended October 2,
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
nine months ended October 2, 2022 was recorded as follows:
$1.6 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
nine months ended October 3, 2021 was recorded entirely in
selling, general and administrative expenses. As of October 2,
2022, there were $6.6 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 2.2 years.
The weighted average contractual term for stock options outstanding
and exercisable as of October 2, 2022 was 1.6 years,
respectively.
The aggregate intrinsic value of RSU Awards settled during
the
nine months ended
October 2, 2022 was $3.2 million and the aggregate intrinsic
value of RSU Awards outstanding as of October 2, 2022 was $6.0
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 nine months ended October 2,
2022 and October 3, 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 |
(4,423) |
|
|
161 |
|
|
4,792 |
|
|
530 |
|
|
Balance as of October 3, 2021 (As Restated) |
$ |
(54,483) |
|
|
$ |
(33,198) |
|
|
$ |
(918) |
|
|
$ |
(88,599) |
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2021 |
$ |
(54,432) |
|
|
$ |
4,944 |
|
|
$ |
688 |
|
|
$ |
(48,800) |
|
|
Other comprehensive (loss) income |
(25,398) |
|
|
146 |
|
|
(688) |
|
|
(25,940) |
|
|
Balance as of October 2, 2022 |
$ |
(79,830) |
|
|
$ |
5,090 |
|
|
$ |
— |
|
|
$ |
(74,740) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15) Income (Loss) Per Common Share (“EPS”)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
October 2, 2022 |
|
October 3, 2021 |
|
October 2, 2022 |
|
October 3, 2021 |
|
Basic weighted average shares outstanding |
20,364 |
|
|
20,257 |
|
|
20,345 |
|
|
20,181 |
|
|
Effect of dilutive securities
(1)
|
46 |
|
|
— |
|
|
65 |
|
|
— |
|
|
Dilutive weighted average shares outstanding |
20,410 |
|
|
20,257 |
|
|
20,410 |
|
|
20,181 |
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes the effect of dilutive of stock options, RSUs and RSU
MSPs
|
|
|
|
|
|
|
|
For the three months ended October 2, 2022, there were 297,870
anti-dilutive stock options, RSUs, and RSU MSPs with exercise
prices ranging from $19.74 to $60.99. For the three months ended
October 3, 2021, there were 783,497 anti-dilutive stock
options, RSU Awards and RSU MSPs with exercise prices ranging from
$32.76 to $60.99.
(16) Subsequent Events
In preparing the consolidated interim financial statements as of
October 2, 2022 and for the three and nine months ended, the
Company evaluated subsequent events for recognition and measurement
purposes. The Company concluded that no events or transactions have
occurred that require disclosure in the accompanying consolidated
financial statements.
|
|
|
|
|
|
|
ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS |
This Quarterly Report on Form 10-Q contains certain statements that
are “forward-looking statements” as that term is defined under the
Private Securities Litigation Reform Act of 1995 (the “Act”). The
words “may,” “hope,” “should,” “expect,” “plan,” “anticipate,”
“intend,” “believe,” “estimate,” “predict,” “potential,”
“continue,” and other expressions, which are predictions of or
indicate future events and trends and which do not relate to
historical matters, identify forward-looking statements, although
not all forward-looking statements are accompanied by such words.
We believe that it is important to communicate our future
expectations to our stockholders, and we, therefore, make
forward-looking statements in reliance upon the safe harbor
provisions of the Act. However, there may be events in the future
that we are not able to accurately predict or control and our
actual results may differ materially from the expectations we
describe in our forward-looking statements. Forward-looking
statements, including statements about our future performance,
including the expected and potential direct and indirect impacts of
the COVID-19 pandemic on our business, the timing and potential
outcome, if any, of the Board of Director's review of strategic
alternatives, our ability to remediate the material weaknesses in
our internal control over financial reporting, the number of new
product launches and future cash flows from operating activities,
involve known and unknown risks, uncertainties and other factors,
which may cause our actual results, performance or achievements to
differ materially from anticipated future results, performance or
achievements expressed or implied by such forward-looking
statements. Factors that could cause or contribute to such
differences include, but are not limited to: the duration and scope
of the COVID-19 pandemic and its impact on the global economy; any
adverse changes in governmental policies; variability of raw
material and component pricing; changes in our suppliers’
performance; fluctuations in foreign currency exchange rates;
changes in tariffs or other taxes related to doing business
internationally; our ability to hire and retain key personnel; our
ability to operate our manufacturing facilities at efficient
levels, including our ability to prevent cost overruns and reduce
costs; our ability to generate increased cash by reducing our
working capital; our prevention of the accumulation of excess
inventory; fluctuations in interest rates; our ability to
successfully defend product liability actions; the outcome of
litigation or claims made against us; the inability to identify or
complete a strategic transaction;
as well as the uncertainty associated with the current worldwide
economic conditions and the continuing impact on economic and
financial conditions in the United States and around the world,
including as a result of the COVID-19 pandemic, rising inflation,
increasing interest rates, natural disasters, military conflicts,
including the conflict between Russia and Ukraine, terrorist
attacks and other similar matters.
We advise you to read further about these and other risk factors
set forth in Part I, Item 1A, “Risk Factors” of our Annual Report
on Form 10-K for the year ended December 31, 2021, which is
filed with the Securities and Exchange Commission
(“SEC”)
and is available on the SEC's website at
www.sec.gov.
We undertake no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information,
future events or otherwise.
Company Overview
CIRCOR is one of the world’s leading providers of mission critical
flow control products and services for the Industrial and Aerospace
& Defense markets. The Company has a product portfolio of
market-leading brands serving its customers’ most demanding
applications. CIRCOR markets its solutions directly and through
various sales and distribution partners to more than 14,000
customers in approximately 100 countries. The Company has a global
presence with approximately 3,100 employees and is headquartered in
Burlington, Massachusetts.
We
organize our reporting structure into two segments: Aerospace &
Defense and Industrial. Both the current and prior periods are
reported under these two segments.
The Company's Aerospace & Defense segment continues to
experience lingering effects of the COVD-19 pandemic, primarily in
our Commercial Aerospace end markets, and impacts from volatile
foreign exchange rates and interest rates. Commercial Aerospace
order rates improved in 2022 compared to 2021 as demand for OEM
components and aftermarket services increased with air framer
production rates and aircraft utilization. We expect that a
recovery to pre-pandemic levels of demand will not occur until the
end of 2023. While our Defense business has been less impacted by
the pandemic, we did experience a slowdown in government spending
on spare parts as well as some delays on key programs which
impacted our revenues in 2022. However, we expect a return to near
term and long term growth in this end market driven by our
positions on key U.S. defense programs, including the Joint Strike
Fighter and Columbia class submarines, strong backlog, and new
product introductions in close partnership with our customers. We
continue to focus on increasing our global aftermarket and
deploying value-based pricing across the segment, both of which
will contribute to growth and margin expansion.
The Company's Industrial reporting segment continues to experience
the lingering effects of the COVID-19 pandemic, the ongoing
conflict between Russia and Ukraine, and impacts driven by global
energy inflation and volatile foreign exchange rates and interest
rates. We exited 2021 with a strong backlog that positions the
Industrial segment well for revenue growth in 2022 and beyond. We
expect strong growth in our longer-cycle end markets, such as
Commercial Marine and Downstream Oil & Gas, as we deliver on
improved orders from 2021. Our General Industrial end market, which
includes products that serve power generation, chemical processing,
and other customers, is expected to experience moderate growth. We
continue to focus on increasing our global aftermarket, deploying
value-based pricing across the segment, and simplifying our
organizational structure to drive growth and margin
expansion.
In both reporting segments, the Company's results from operations
were, and continue to be, adversely impacted by global supply chain
constraints and rising inflation. In 2021 and into early 2022, we
faced unexpected difficulties in procuring certain raw material,
castings, and components, additional labor constraints due to
COVID-19 and a challenging labor market as well as inflation on
both material and logistics. These challenges have continued to
evolve in 2022, in particular with inflation levels, including
energy inflation, reaching multi-decade highs, and the
corresponding volatility in foreign exchange rates and interest
rates. In order to mitigate the impact of these factors on our
operations and financial position, we continue to implement actions
across the company including, but not limited to: list price
increases and surcharges, structural cost out actions, changes in
suppliers from which we procure material, and manufacturing
productivity through the implementation of the CIRCOR Operating
System and 80/20 across the company. Finally, continuing to attract
and retain diverse and talented personnel, including the
enhancement of our global sales, operations, product management and
engineering organizations, remains an important part of our
strategy during 2022.
Finally, we continue to monitor and evaluate additional sanctions
and export restrictions that may be imposed by the U.S. Government
and other governments along with any responses from Russia that
could directly affect our supply chain, business partners or
customers. Further tightening of sanctions or restrictions could
cause us to be unable to complete contractual commitments to end
customers, cause our end customers to fail to compensate us for
previously ordered or delivered products, or cause funds or
products to be subjected to legal holds. The aggregate revenue from
customers in Russia and Ukraine for each of the fiscal years ended
2021 and 2020 was less than 1% of consolidated net revenues,
primarily related to our Downstream Oil & Gas business in the
Industrial reporting segment. Currently we have a pending project
in Russia that could result in approximately $4.0 million reversal
of unbilled and other receivable if tighter sanctions or
restrictions prevented us from delivering the project and receiving
payment. Additionally, the conflict between Russia and Ukraine has
and continues to adversely impact demand in that region, increase
energy costs related to our operations, and negatively impact
material cost and availability.
Basis of Presentation
All significant intercompany balances and transactions have been
eliminated in consolidation.
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.
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 condensed consolidated financial statements
presented herein reflect management's estimates and assumptions
regarding the effects of COVID-19 as of the date of the condensed
consolidated financial statements.
Critical Accounting Estimates
Critical accounting policies are those that are both important to
the accurate portrayal of a company’s financial condition and
results and require subjective or complex judgments, often as a
result of the need to make estimates about the effect of matters
that are inherently uncertain. The critical accounting policies
used in preparation of our condensed consolidated financial
statements for the three and nine months ended October 2, 2022 are
consistent with those discussed in Note 3 to the consolidated
financial statements in the Company’s Annual Report on Form 10-K
for the year-ended December 31, 2021, except as updated by Note 2
to the condensed consolidated financial statements included in this
Quarterly Report on Form 10-Q with respect to newly adopted
accounting standards. The expenses and accrued liabilities or
allowances related to certain of our accounting policies are
initially based on our best estimates at the time of original entry
in our accounting records. Adjustments are recorded when our actual
experience, or new information concerning our expected experience,
differs from underlying initial estimates. These adjustments could
be material if our actual or expected experience were to change
significantly in a short period of time. We make frequent
comparisons of actual experience and expected experience in an
effort to mitigate the likelihood of material
adjustments.
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 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. Our critical
accounting estimates are more fully discussed in Item 7,
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" of our Annual Report on Form 10-K for the
year ended December 31, 2021.
Results of Operations
Three Months Ended October 2, 2022 Compared with Three Months Ended
October 3, 2021 (As Restated)
Consolidated Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
October 2, 2022 |
|
As Restated October 3, 2021
|
|
Total Change |
|
|
|
|
|
Operations |
|
Foreign
Exchange |
|
Net revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace & Defense |
$ |
72,219 |
|
|
$ |
63,461 |
|
|
$ |
8,758 |
|
|
|
|
|
|
$ |
11,423 |
|
|
$ |
(2,665) |
|
|
Industrial |
123,143 |
|
|
126,248 |
|
|
(3,105) |
|
|
|
|
|
|
7,910 |
|
|
(11,015) |
|
|
Net revenues |
$ |
195,362 |
|
|
$ |
189,709 |
|
|
$ |
5,653 |
|
|
|
|
|
|
$ |
19,333 |
|
|
$ |
(13,680) |
|
Net revenues for the three months ended October 2, 2022 were
$195.4 million, an increase of $5.7 million, or 3%, as compared to
the three months ended October 3, 2021, driven by operational
improvements partially offset by unfavorable foreign currency
fluctuations.
Segment Results
The following table presents certain reportable segment
information
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
(in thousands, except percentages) |
October 2, 2022 |
|
As Restated October 3, 2021
|
|
Net revenues |
|
|
|
|
Aerospace & Defense |
$ |
72,219 |
|
|
$ |
63,461 |
|
|
Industrial |
123,143 |
|
|
126,248 |
|
|
Net revenues |
$ |
195,362 |
|
|
$ |
189,709 |
|
|
|
|
|
|
|
Income (loss) from continuing operations before income
taxes |
|
|
|
|
Aerospace & Defense - Segment Operating Income |
$ |
16,891 |
|
|
$ |
15,927 |
|
|
Industrial - Segment Operating Income |
15,717 |
|
|
7,124 |
|
|
Corporate expenses |
(5,301) |
|
|
(7,017) |
|
|
Subtotal |
27,307 |
|
|
16,034 |
|
|
Restructuring (recoveries), net |
(173) |
|
|
(312) |
|
|
Special (recoveries) charges, net |
(25,529) |
|
|
1,126 |
|
|
Special and restructuring (recoveries) charges, net (1) |
(25,702) |
|
|
814 |
|
|
Restructuring related inventory (recoveries) |
— |
|
|
(60) |
|
|
|
|
|
|
Acquisition amortization (2) |
9,118 |
|
|
10,417 |
|
|
Acquisition depreciation (2) |
1,335 |
|
|
1,412 |
|
|
Restructuring, impairment and other costs, net |
10,453 |
|
|
11,769 |
|
|
Consolidated operating income |
42,556 |
|
|
3,451 |
|
|
Interest expense, net |
11,821 |
|
|
7,997 |
|
|
Other income, net |
(2,396) |
|
|
(256) |
|
|
Income (loss) from continuing operations before income
taxes |
$ |
33,131 |
|
|
$ |
(4,290) |
|
|
|
|
|
|
|
Consolidated Operating Margin |
21.8 |
% |
|
1.8 |
% |
|
|
|
|
|
|
(1) See Special and Restructuring (Recoveries) Charges, net in Note
4 to the condensed consolidated financial statements included in
this Quarterly Report on Form 10-Q for additional
details. |
|
(2) Acquisition amortization and depreciation is recorded in either
cost of revenues or selling, general, and administrative expenses
depending upon the nature of the underlying asset. |
Aerospace & Defense Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
(in thousands, except percentages) |
October 2, 2022 |
|
As Restated October 3, 2021
|
|
Change |
|
Net Revenues |
$ |
72,219 |
|
|
$ |
63,461 |
|
|
$ |
8,758 |
|
|
Segment Operating Income |
$ |
16,891 |
|
|
$ |
15,927 |
|
|
$ |
964 |
|
|
Segment Operating Margin |
23.4 |
% |
|
25.1 |
% |
|
|
|
Segment Orders |
$ |
90,486 |
|
|
$ |
54,028 |
|
|
$ |
36,458 |
|
Aerospace & Defense segment net revenues increased by $8.8
million, or 14%, to $72.2 million for the three months ended
October 2, 2022 as compared to the three months ended
October 3, 2021. The increase was driven by increases in our
Commercial business of 44% partially offset by a decrease in our
Defense business of 4% and unfavorable foreign currency
fluctuations of 4%.
Segment operating income increased $1.0 million, or 6% for the
three months ended October 2, 2022 as compared to the three
months ended October 3, 2021. The increase in operating income
was primarily driven by higher volumes partially offset by an
unfavorable foreign currency fluctuation of 4%.
Segment operating margin decreased from 25.1% in the three months
ended October 3, 2021 to 23.4% for the three months ended
October 2, 2022. The decreased operating margin reflects the
impact of increased operational costs largely driven by higher
freight combined with unfavorable foreign currency fluctuations.
Excluding the impact of foreign currency fluctuations the operating
margin would be 24.2%.
We define orders as a legally binding agreement for the Company to
provide goods at a determined price, on terms and conditions that
are firm enough to assure payment by the customer.
We use orders as a leading indicator of current business demand
from customers for products and service, and believe the
information is useful to investors for the same
reason.
Aerospace & Defense segment orders increased $36.5 million, or
67%, for the three months ended October 2, 2022 as compared to
the three months ended October 3, 2021, primarily driven by
increases in our Commercial and Defense businesses of 86% and 58%,
respectively, partially offset by unfavorable currency fluctuations
of 7%.
Industrial Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
(in thousands, except percentages) |
October 2, 2022 |
|
As Restated October 3, 2021
|
|
Change |
|
Net Revenues |
$ |
123,143 |
|
|
$ |
126,248 |
|
|
$ |
(3,105) |
|
|
Segment Operating Income |
$ |
15,717 |
|
|
$ |
7,124 |
|
|
$ |
8,593 |
|
|
Segment Operating Margin |
12.8 |
% |
|
5.6 |
% |
|
|
|
Segment Orders |
$ |
137,848 |
|
|
$ |
139,691 |
|
|
$ |
(1,843) |
|
Industrial segment net revenue decreased $3.1 million, or 2% for
the three months ended October 2, 2022 as compared to the
three months ended October 3, 2021, primarily due to
unfavorable foreign currency fluctuations of 9%. Excluding foreign
currency fluctuations segment revenues increased 6% driven by an
increases in our Pumps and Valves businesses of 7% and 5%,
respectively.
Segment operating income increased $8.6 million, or 121%, for the
three months ended October 2, 2022 as compared to the three
months ended October 3, 2021. The increase was primarily
driven by improved pricing and the reduction in losses driven by
the Pipeline Engineering business partially offset by an
unfavorable foreign currency fluctuation of 23%.
Industrial segment operating margin increased to 12.8% in the three
months ended October 2, 2022 from 5.6% for the three months
ended October 3, 2021.
The improved margin was primarily driven by improved pricing and
the reduction in losses driven by the Pipeline Engineering business
partially offset by unfavorable foreign currency fluctuations.
Excluding the impact of foreign currency fluctuations the operating
margin would be 14.1%.
Industrial segment orders decreased $1.8 million or 1%, for the
three months ended October 2, 2022 as compared to the three
months ended October 3, 2021, primarily due to unfavorable
foreign currency fluctuations of 9%, excluding foreign currency
fluctuations orders increased 8% driven by an increase in our Pumps
business of 17% offset by a decrease in our Valves business of
7%.
Corporate Expenses
Corporate expenses were $5.3 million for the three months ended
October 2, 2022 compared to $7.0 million for the three months
ended October 3, 2021, primarily driven by lower compensation
and benefit costs.
Special and Restructuring Charges (Recoveries), net
During the three months ended October 2, 2022 the Company
recorded Restructuring and Special net recoveries of $25.7 million
compared to net charges of $0.8 million during the three months
ended October 3, 2021. These amounts are recorded within our
condensed consolidated statements of operations caption “Special
and restructuring (recoveries) charges net”. These recoveries and
charges are described in further detail in Note 4 to the condensed
consolidated financial statements included in this Quarterly Report
on Form 10-Q.
Acquisition Amortization
During the three months ended October 2, 2022 and
October 3, 2021, the Company recorded amortization expense of
$9.1 million and $10.4 million, respectively, for intangibles
acquired in acquisitions completed subsequent to December 31, 2011.
These amortization expenses are recorded in either cost of revenues
or selling, general, and administrative expenses depending upon the
nature of the underlying asset.
Acquisition Depreciation
During the three months ended October 2, 2022 and
October 3, 2021, the Company recorded depreciation expense of
$1.3 million and $1.4 million, respectively, related to the step-up
to fair value of the plant, property, and equipment from the
acquisition of the fluid handling business of Colfax
Corporation.
Interest Expense, net
During the three months ended October 2, 2022 and
October 3, 2021, the Company recorded interest expense of
$11.8 million and $8.0 million, respectively. The increase in
interest expense was primarily due to higher debt balances and
higher interest rates.
Other Expense (Income), net
During the three months ended October 2, 2022, the Company
recorded other income, net of $2.4 million, as compared to other
income, net of $0.3 million for the three months ended
October 3, 2021. The year-over-year increase is driven
primarily by foreign currency fluctuations.
Provision for Income Taxes
The table below outlines the change in effective tax rate for the
three months ended October 2, 2022 and October 3, 2021
(in
thousands, except percentages).
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
October 2, 2022 |
|
As Restated October 3, 2021
|
|
Income (loss) from continuing operations before income
taxes |
$ |
33,131 |
|
|
$ |
(4,290) |
|
|
Effective tax rate |
5.0 |
% |
|
(19.8) |
% |
|
Provision for income taxes |
$ |
1,661 |
|
|
$ |
850 |
|
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 October 2,
2022, differed from the U.S. federal statutory rate of 21%
primarily due to adjustments to the domestic and foreign valuation
allowances and the jurisdictional mix of earnings. The effective
tax rate for the three months ended October 3, 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. The Company recorded a full
valuation allowance in the U.S. and Germany, and 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.
Nine Months Ended October 2, 2022 Compared with Nine Months Ended
October 3, 2021 (As Restated)
Consolidated Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
October 2, 2022 |
|
As
Restated October 3, 2021
|
|
Total Change |
|
|
|
|
|
Operations |
|
Foreign
Exchange |
|
Net revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace & Defense |
202,860 |
|
|
182,562 |
|
|
$ |
20,298 |