NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited, condensed consolidated financial statements have been prepared according to the rules and regulations of the United States (the "U.S.") Securities and Exchange Commission (“SEC”) and, in the opinion of management, reflect all adjustments necessary for a fair statement of the consolidated balance sheets, consolidated statements of income (loss), consolidated statements of comprehensive income (loss) and consolidated statements of cash flows of CIRCOR International, Inc. (“CIRCOR”, the “Company”, “us”, “we” or “our”) for the periods presented. We prepare our interim financial information using the same accounting principles we use for our annual audited consolidated financial statements. Certain information and note disclosures normally included in the annual audited consolidated financial statements have been condensed or omitted in accordance with prescribed SEC rules. We believe that the disclosures made in our condensed consolidated financial statements and the accompanying notes are adequate to make the information presented not misleading.
The consolidated balance sheet at
December 31, 2015
is as reported in our audited consolidated financial statements as of that date. Our accounting policies are described in the notes to our
December 31, 2015
consolidated financial statements, which were included in our Annual Report filed on Form 10-K for the year ended December 31, 2015. We recommend that the financial statements included in our Quarterly Report on Form 10-Q be read in conjunction with the consolidated financial statements and notes included in our Annual Report filed on Form 10-K for the year ended
December 31, 2015
.
We operate and report financial information using a 52-week fiscal year ending December 31. The data periods contained within our Quarterly Reports on Form 10-Q reflect the results of operations for the 13-week, 26-week and 39-week periods which generally end on the Sunday nearest the calendar quarter-end date. Operating results for the
nine
months ended
October 2, 2016
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2016
.
The Company recorded additions to property, plant and equipment for which cash payments had not yet been made of
$0.8 million
and
$1.1 million
in the
nine
months ended
October 2, 2016
and
October 4, 2015
, respectively.
(2) Summary of Significant Accounting Policies
The significant accounting policies used in preparation of these condensed consolidated financial statements for the
nine
months ended
October 2, 2016
are consistent with those discussed in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended
December 31, 2015
.
New Accounting Standards
In August 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2016-15, Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 reduces the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. This ASU addresses eight specific cash flow issues with the objective of enhancing consistency in presentation and classification. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. We are currently evaluating the requirements of ASU 2016-15 and have not yet determined its impact on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 outlines a model for lessees by recognizing lease-related assets and liabilities on the balance sheet. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early application is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. We are currently evaluating the requirements of ASU 2016-02 and have not yet determined its impact on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, as part of its Simplification Initiative. The areas for simplification in this update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this ASU are effective for fiscal years beginning after
December 15, 2016, and interim periods within those fiscal years. Early application is permitted for all entities. We are currently evaluating the requirements of ASU 2016-09 and have not yet determined its impact on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will replace most existing revenue recognition guidance in generally accepted accounting principles ("GAAP") when it becomes effective. ASU 2014-09 is effective for fiscal years and interim periods within those years beginning after December 15, 2017. Early adoption is permitted but not earlier than the original effective date of December 15, 2016. An entity should apply ASU 2014-09 either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized as an adjustment to the opening balance of retained earnings at the date of initial application. In March, April and May 2016, the FASB issued additional updates to the new revenue standard relating to reporting revenue on a gross versus net basis, identifying performance obligations and licensing arrangements, and narrow-scope improvements and practical expedients, respectively. We are currently evaluating the requirements of ASU 2014-09 and have not yet determined its impact on our consolidated financial statements.
(3) Inventories
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
October 2, 2016
|
|
December 31, 2015
|
Raw materials
|
$
|
50,304
|
|
|
$
|
51,439
|
|
Work in process
|
73,505
|
|
|
83,324
|
|
Finished goods
|
29,661
|
|
|
43,077
|
|
Total inventories
|
$
|
153,470
|
|
|
$
|
177,840
|
|
(4) Business Acquisition
On April 15, 2015, we acquired all of the outstanding equity interest of Germany-based Schroedahl GmbH ("Schroedahl"), a privately-owned manufacturer of safety and control valves primarily serving the power generation market. Founded in 1962 with customers in Asia, Europe and the Americas, Schroedahl designs and manufactures custom-engineered high-pressure auto-recirculation and control valves primarily for pump protection applications. We acquired Schroedahl for an aggregate purchase price of
$79.7 million
in cash, net of acquired cash. We acquired Schroedahl to further increase our penetration into the power generation market. The operating results of Schroedahl have been included in our consolidated financial statements from the date of acquisition and reported within the Energy segment. Acquisition-related costs of
$0.9 million
primarily consisted of legal and financial advisory services and were expensed as incurred in general and administrative expenses during the nine months ended October 4, 2015. We financed the acquisition of Schroedahl through cash on hand and net borrowings of approximately
$23.8 million
under our existing credit facility.
The purchase price allocation is based upon a valuation of assets and liabilities that was prepared with assistance from a third party valuation specialist. The purchase accounting was finalized during the first quarter of 2016. The assets and liabilities include the valuation of acquired intangible assets, certain operating liabilities, and the evaluation of deferred income taxes.
The following table summarizes the fair value of the assets acquired and the liabilities assumed, at the date of acquisition:
|
|
|
|
|
(in thousands)
|
|
Cash and cash equivalents
|
$
|
36,316
|
|
Other current assets
|
11,470
|
|
Property, plant and equipment
|
1,999
|
|
Intangible assets
|
32,829
|
|
Current liabilities
|
(5,452
|
)
|
Deferred tax liability
|
(7,285
|
)
|
Other non-current liabilities
|
(642
|
)
|
Total identifiable net assets
|
69,235
|
|
Goodwill
|
46,818
|
|
Total purchase price
|
$
|
116,053
|
|
The fair value of accounts receivable acquired approximates the contractual value of
$4.3 million
. The goodwill recognized is attributable primarily to projected future profitable growth, market penetration, as well as an expanded customer base for the Energy segment. The goodwill arising from the acquisition that is deductible for income tax purposes is
$13.2 million
.
The Schroedahl acquisition resulted in the identification of the following identifiable intangible assets:
|
|
|
|
|
|
|
|
Intangible assets acquired (in thousands)
|
|
Weighted average amortization period (in years)
|
Customer relationships
|
$
|
22,185
|
|
|
7
|
Order backlog
|
3,993
|
|
|
1
|
Acquired technology
|
2,260
|
|
|
10
|
Trade name
|
4,391
|
|
|
Indefinite
|
Total intangible assets
|
$
|
32,829
|
|
|
|
The fair value of the intangible assets was based on variations of the income approach, which estimates fair value based on the present value of cash flows that the assets are expected to generate which included the relief-from-royalty method, incremental cash flow method, multi-period excess earnings method and direct cash flow method, depending on the intangible asset being valued. Customer relationships, order backlog, and acquired technology are amortized on a cash flow basis. The trade name was assigned an indefinite life based on the Company’s intention to keep the Schroedahl name for an indefinite period of time. Refer to Note 5 for future expected amortization to be recorded.
Schroedahl's results for the nine months ended October 2, 2016 include
$19.4 million
of net revenue and
$0.9 million
of operating income, respectively. Operating income includes
$5.7 million
of intangible amortization. Pro forma results of operations for the acquisition have not been presented because the effects of the acquisition are not material to the Company's consolidated financial results.
(5) Goodwill and Intangibles, net
The following table shows goodwill by segment as of
October 2, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
|
|
Aerospace & Defense
|
|
Consolidated
Total
|
Goodwill as of December 31, 2015
|
$
|
93,175
|
|
|
$
|
22,277
|
|
|
$
|
115,452
|
|
Adjustments to preliminary purchase price allocation
|
132
|
|
|
—
|
|
|
132
|
|
Currency translation adjustments
|
1,537
|
|
|
46
|
|
|
1,583
|
|
Goodwill as of October 2, 2016
|
$
|
94,844
|
|
|
$
|
22,323
|
|
|
$
|
117,167
|
|
The table below presents gross intangible assets and the related accumulated amortization as of
October 2, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
Patents
|
$
|
5,399
|
|
|
$
|
(5,377
|
)
|
Non-amortized intangibles (primarily trademarks and trade names)
|
14,957
|
|
|
—
|
|
Customer relationships
|
52,389
|
|
|
(29,081
|
)
|
Order backlog
|
5,154
|
|
|
(4,854
|
)
|
Acquired technology
|
2,393
|
|
|
(820
|
)
|
Other
|
5,287
|
|
|
(4,494
|
)
|
Total
|
$
|
85,579
|
|
|
$
|
(44,626
|
)
|
Net carrying value of intangible assets
|
$
|
40,953
|
|
|
|
The table below presents estimated remaining amortization expense for intangible assets recorded as of
October 2, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remainder of 2016
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
After 2020
|
Estimated amortization expense
|
$
|
2,456
|
|
|
$
|
7,849
|
|
|
$
|
6,074
|
|
|
$
|
4,456
|
|
|
$
|
2,860
|
|
|
$
|
2,301
|
|
(6) Segment Information
The following table presents certain reportable segment information (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
|
|
Aerospace & Defense
|
|
Corporate /
Eliminations
|
|
Consolidated
Total
|
Three Months Ended October 2, 2016
|
|
|
|
|
|
|
|
Net revenues
|
$
|
99,798
|
|
|
$
|
35,035
|
|
|
$
|
—
|
|
|
$
|
134,833
|
|
Inter-segment revenues
|
315
|
|
|
22
|
|
|
(337
|
)
|
|
—
|
|
Operating income (loss)
|
7,690
|
|
|
2,345
|
|
|
(6,522
|
)
|
|
3,513
|
|
Interest expense, net
|
|
|
|
|
|
|
605
|
|
Other expense, net
|
|
|
|
|
|
|
163
|
|
Income before income taxes
|
|
|
|
|
|
|
$
|
2,745
|
|
Identifiable assets
|
711,012
|
|
|
176,637
|
|
|
(230,984
|
)
|
|
656,665
|
|
Capital expenditures
|
1,821
|
|
|
787
|
|
|
582
|
|
|
3,190
|
|
Depreciation and amortization
|
4,166
|
|
|
1,125
|
|
|
335
|
|
|
5,626
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 4, 2015
|
|
|
|
|
|
|
|
Net revenues
|
$
|
122,905
|
|
|
$
|
36,353
|
|
|
$
|
—
|
|
|
$
|
159,258
|
|
Inter-segment revenues
|
183
|
|
|
75
|
|
|
(258
|
)
|
|
—
|
|
Operating (loss) income
|
(685
|
)
|
|
3,234
|
|
|
(6,078
|
)
|
|
(3,529
|
)
|
Interest expense, net
|
|
|
|
|
|
|
828
|
|
Other income, net
|
|
|
|
|
|
|
(587
|
)
|
Loss before income taxes
|
|
|
|
|
|
|
$
|
(3,770
|
)
|
Identifiable assets
|
824,182
|
|
|
191,100
|
|
|
(300,921
|
)
|
|
714,361
|
|
Capital expenditures
|
3,353
|
|
|
501
|
|
|
96
|
|
|
3,950
|
|
Depreciation and amortization
|
4,938
|
|
|
1,492
|
|
|
302
|
|
|
6,732
|
|
|
|
|
|
|
|
|
|
Nine Months Ended October 2, 2016
|
|
|
|
|
|
|
|
Net revenues
|
$
|
323,096
|
|
|
$
|
108,927
|
|
|
$
|
—
|
|
|
$
|
432,023
|
|
Inter-segment revenues
|
674
|
|
|
113
|
|
|
(787
|
)
|
|
—
|
|
Operating income (loss)
|
27,718
|
|
|
5,080
|
|
|
(18,443
|
)
|
|
14,355
|
|
Interest expense, net
|
|
|
|
|
|
|
1,841
|
|
Other income, net
|
|
|
|
|
|
|
(914
|
)
|
Income before income taxes
|
|
|
|
|
|
|
$
|
13,428
|
|
Identifiable assets
|
711,012
|
|
|
176,637
|
|
|
(230,984
|
)
|
|
656,665
|
|
Capital expenditures
|
5,389
|
|
|
3,666
|
|
|
811
|
|
|
9,866
|
|
Depreciation and amortization
|
12,406
|
|
|
3,802
|
|
|
992
|
|
|
17,200
|
|
|
|
|
|
|
|
|
|
Nine Months Ended October 4, 2015
|
|
|
|
|
|
|
|
Net revenues
|
$
|
377,721
|
|
|
$
|
114,302
|
|
|
$
|
—
|
|
|
$
|
492,023
|
|
Inter-segment revenues
|
685
|
|
|
176
|
|
|
(861
|
)
|
|
—
|
|
Operating income (loss)
|
24,417
|
|
|
7,484
|
|
|
(18,009
|
)
|
|
13,892
|
|
Interest expense, net
|
|
|
|
|
|
|
2,274
|
|
Other income, net
|
|
|
|
|
|
|
(1,197
|
)
|
Income before income taxes
|
|
|
|
|
|
|
12,816
|
|
Identifiable assets
|
824,182
|
|
|
191,100
|
|
|
(300,921
|
)
|
|
714,361
|
|
Capital expenditures
|
6,777
|
|
|
2,150
|
|
|
643
|
|
|
9,570
|
|
Depreciation and amortization
|
12,021
|
|
|
4,513
|
|
|
885
|
|
|
17,419
|
|
Each reporting segment is individually managed and has separate financial results that are reviewed by our chief operating decision-maker. Each segment contains related products and services particular to that segment.
In calculating operating income for each reporting segment, certain administrative expenses incurred at the corporate level for the benefit of other reporting segments were allocated to the segments based upon specific identification of costs, employment related information or net revenues.
Corporate / Eliminations are reported on a net “after allocations” basis. Inter-segment intercompany transactions affecting net operating profit have been eliminated within the respective operating segments.
The operating loss reported in the Corporate / Eliminations column in the preceding table consists primarily of the following corporate expenses: compensation and fringe benefit costs for executive management and other corporate staff; Board of Director compensation; corporate development costs (relating to mergers and acquisitions); human resource development and benefit plan administration expenses; legal, accounting and other professional and consulting fees; facilities, equipment and maintenance costs; and travel and various other administrative costs. The above costs are incurred in the course of furthering the business prospects of the Company and relate to activities such as: implementing strategic business growth opportunities; corporate governance; risk management; treasury; investor relations and shareholder services; regulatory compliance; strategic tax planning; and stock transfer agent costs.
The total assets for each operating segment have been reported as the Identifiable Assets for that segment, including inter-segment intercompany receivables, payables and investments in other CIRCOR businesses. Identifiable assets reported in Corporate / Eliminations 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 / Eliminations for Identifiable Assets as of
October 2, 2016
and
October 4, 2015
. Corporate Identifiable Assets after elimination of intercompany assets were
$55.5 million
and
$25.6 million
as of
October 2, 2016
and
October 4, 2015
, respectively.
(7) Earnings (Loss) Per Common Share ("EPS")
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts)
|
Three Months Ended
|
|
October 2, 2016
|
|
October 4, 2015
|
|
Net
Income
|
|
Shares
|
|
Per Share
Amount
|
|
Net
(Loss)
|
|
Shares
|
|
Per Share
Amount
|
Basic EPS
|
$
|
4,418
|
|
|
16,427
|
|
|
$
|
0.27
|
|
|
$
|
(8,078
|
)
|
|
16,485
|
|
|
$
|
(0.49
|
)
|
Dilutive securities, common stock options
|
—
|
|
|
202
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Diluted EPS
|
$
|
4,418
|
|
|
16,629
|
|
|
$
|
0.27
|
|
|
$
|
(8,078
|
)
|
|
16,485
|
|
|
$
|
(0.49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
October 2, 2016
|
|
October 4, 2015
|
|
Net
Income
|
|
Shares
|
|
Per Share
Amount
|
|
Net
Income
|
|
Shares
|
|
Per Share
Amount
|
Basic EPS
|
$
|
12,103
|
|
|
16,411
|
|
|
$
|
0.74
|
|
|
$
|
2,707
|
|
|
16,989
|
|
|
$
|
0.16
|
|
Dilutive securities, common stock options
|
—
|
|
|
157
|
|
|
(0.01
|
)
|
|
—
|
|
|
40
|
|
|
—
|
|
Diluted EPS
|
$
|
12,103
|
|
|
16,568
|
|
|
$
|
0.73
|
|
|
$
|
2,707
|
|
|
17,029
|
|
|
$
|
0.16
|
|
Stock options, Restricted Stock Unit Awards (“RSU Awards”) and Restricted Stock Unit Management Stock Plans ("RSU MSPs") covering
130,259
and
479,390
shares of common stock, for the
nine
months ended
October 2, 2016
and
October 4, 2015
, respectively, were not included in the computation of diluted EPS because their effect would be anti-dilutive.
(8) Financial Instruments
Fair Value
The carrying amounts of cash and cash equivalents, trade receivables and trade payables approximate fair value because of the short maturity of these financial instruments. Cash equivalents are carried at cost which approximates fair value at the balance sheet date and are Level 1 financial instruments. As of
October 2, 2016
and December 31, 2015, the outstanding balance of the Company’s debt approximated its fair value based on current rates available to the Company for debt of the same maturity and is a Level 2 financial instrument.
(9) Guarantees and Indemnification Obligations
As permitted under Delaware law, we have agreements whereby we indemnify certain of our officers and directors for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. However, we have directors’ and officers’ liability insurance policies that insure us with respect to certain events covered under the policies and should enable us to recover a portion of any future amounts paid under the indemnification agreements. We have
no
liabilities recorded from those agreements as of
October 2, 2016
.
We record provisions for the estimated cost of product warranties, primarily from historical information, at the time product revenue is recognized. We also record provisions with respect to any significant individual warranty issues as they arise. While we engage in extensive product quality programs and processes, our warranty obligation is affected by product failure rates, utilization levels, material usage, service delivery costs incurred in correcting a product failure, and supplier warranties on parts delivered to us. Should actual product failure rates, utilization levels, material usage, service delivery costs or supplier warranties on parts differ from our estimates, revisions to the estimated warranty liability would be required.
The following table sets forth information related to our product warranty reserves for the
nine
months ended
October 2, 2016
(in thousands):
|
|
|
|
|
Balance beginning December 31, 2015
|
$
|
4,551
|
|
Provisions
|
1,722
|
|
Claims settled
|
(2,326
|
)
|
Currency translation adjustment
|
69
|
|
Balance ending October 2, 2016
|
$
|
4,016
|
|
Warranty obligations decreased
$0.6 million
from
$4.6 million
as of
December 31, 2015
to
$4.0 million
as of
October 2, 2016
, primarily related to higher claims settled within our engineered valves and Aerospace and Defense (California) businesses for
$2.3 million
, offset in part by our standard provisions during the period of
$1.7 million
.
(10) Contingencies and Commitments
We are currently involved in various legal claims and legal proceedings, some of which may involve substantial dollar amounts. Periodically, we review the status of each significant matter and assess our potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be estimated, we accrue a liability for the estimated loss. Significant judgment is required in both the determination of probability and the determination as to whether an exposure can be reasonably estimated. Because of uncertainties related to these matters, accruals are based on the best information available at the time. As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates. Such revisions in the estimates of the potential liabilities could have a material adverse effect on our business, results of operations and financial position.
Asbestos-related product liability claims continue to be filed against two of our subsidiaries: Spence Engineering Company, Inc. (“Spence”), the stock of which we acquired in 1984; and CIRCOR Instrumentation Technologies, Inc. (f/k/a Hoke, Inc.) (“Hoke”), the stock of which we acquired in 1998. Due to the nature of the products supplied by these entities, the markets they serve and our historical experience in resolving these claims, we do not believe that these asbestos-related claims will have a material adverse effect on the financial condition, results of operations or liquidity of our financial condition, consolidated results of operations or liquidity of the Company.
Standby Letters of Credit
We execute standby letters of credit, which include bid bonds and performance bonds, in the normal course of business to ensure our performance or payments to third parties. The aggregate notional value of these instruments was
$44.8 million
at
October 2, 2016
. Our historical experience with these types of instruments has been good and no claims have been paid in the current or past five fiscal years. We believe that the likelihood of demand for a significant payment relating to the outstanding instruments is remote. These instruments generally have expiration dates ranging from less than
1 month
to
5 years
from
October 2, 2016
.
The following table contains information related to standby letters of credit instruments outstanding as of
October 2, 2016
(in thousands):
|
|
|
|
|
Term Remaining
|
Maximum Potential
Future Payments
|
0–12 months
|
$
|
17,365
|
|
Greater than 12 months
|
27,439
|
|
Total
|
$
|
44,804
|
|
(11) Retirement Plans
We maintain two benefit pension plans, a qualified noncontributory defined benefit plan and a nonqualified, noncontributory defined benefit supplemental plan that provides benefits to certain retired highly compensated officers and employees. To date, the supplemental plan remains an unfunded plan. These plans include significant pension benefit obligations which are calculated based on actuarial valuations. Key assumptions are made in determining these obligations and related expenses, including expected rates of return on plan assets and discount rates. Benefits are based primarily on years of service and employees’ compensation.
As of July 1, 2006, in connection with a revision to our retirement plan, we froze the pension benefits of our qualified noncontributory plan participants. Under the revised plan, such participants generally do not accrue any additional benefits under the defined benefit plan after July 1, 2006.
During the
nine
months ended
October 2, 2016
, we made cash contributions of
$0.8 million
to our qualified noncontributory defined benefit pension plan. We made no cash contributions during the three months ended
October 2, 2016
. We expect to make cash contributions during the fourth quarter 2016 in the amount of
$0.2 million
. Additionally, substantially all of our U.S. employees are eligible to participate in a 401(k) savings plan. Under this plan, we match a specified percentage of employee contributions, and are able to make a discretionary core contribution, subject to certain limitations.
In Q3 2016, management offered a lump sum cash payout option to terminated and vested pension plan participants. In connection with this action, the window for participants who opt to avail themselves of this program closed on September 2016. Based on the number of participants, we would expect to incur a non-cash settlement charge between
$4.5 million
and
$5.0 million
. This special charge is to be recorded when payment occurs, which is expected to be in November 2016.
The components of net periodic cost (benefit) of defined benefit pension plans are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 2,
2016
|
|
October 4,
2015
|
|
October 2,
2016
|
|
October 4,
2015
|
Interest cost on benefits obligation
|
$
|
574
|
|
|
$
|
548
|
|
|
$
|
1,721
|
|
|
$
|
1,645
|
|
Estimated return on assets
|
(664
|
)
|
|
(723
|
)
|
|
(1,991
|
)
|
|
(2,169
|
)
|
Loss amortization
|
226
|
|
|
210
|
|
|
679
|
|
|
632
|
|
Net periodic cost of defined benefit pension plans
|
$
|
136
|
|
|
$
|
35
|
|
|
$
|
409
|
|
|
$
|
108
|
|
(12) Income Taxes
As of
October 2, 2016
and
December 31, 2015
, we had
$2.8 million
and
$2.9 million
of unrecognized tax benefits, respectively, of which
$2.5 million
and
$2.7 million
, respectively, would affect our effective tax rate if recognized in any future period.
In the quarter ended October 2, 2016, the Company determined that a portion of its foreign earnings are not permanently reinvested within the meaning of ASC 740-30-25-17. The Company estimates that approximately $34 million will be repatriated to the US in the fourth quarter of 2016, resulting in a tax benefit of
$1.8 million
in the quarter ended October 2, 2016.
The Company files income tax returns in the U.S. federal, state and local jurisdictions and in foreign jurisdictions. The Company is no longer subject to examination by the Internal Revenue Service (the "IRS") for years prior to
2013
and is no
longer subject to examination by the tax authorities in foreign and state jurisdictions prior to
2006
. The Company is currently under examination for income tax filings in various foreign jurisdictions.
The Company has a net U.S. domestic deferred income tax asset and a net foreign deferred tax liability. Due to uncertainties related to our ability to utilize certain of these U.S. domestic deferred income tax assets, primarily consisting of state net operating losses and state tax credits carried forward, we maintained a total valuation allowance of
$0.9 million
at
October 2, 2016
and
December 31, 2015
. The valuation allowance is based on estimates of income in each of the jurisdictions in which we operate and the period over which our deferred tax assets will be recoverable. If future results of operations exceed our current expectations, our existing tax valuation allowances may be adjusted, resulting in future tax benefits. Alternatively, if future results of operations are less than expected, future assessments may result in a determination that some or all of the deferred tax assets are not realizable. Consequently, we may need to establish additional tax valuation allowances for all or a portion of the deferred tax assets, which may have a material adverse effect on our business, results of operations and financial condition. The Company has had a history of domestic and foreign income, is able to avail itself of federal tax carryback provisions, has future taxable temporary differences and projects future domestic and foreign income. We believe that after considering all of the available objective evidence, it is more likely than not that the results of future operations will generate sufficient income to realize the remaining net deferred income tax asset.
(13) Share-Based Compensation
As of
October 2, 2016
, there were
756,179
stock options and
215,132
RSU Awards outstanding. In addition, there were
1,024,829
shares available for grant under the 2014 Stock Option and Incentive Plan (the "2014 Plan") as of
October 2, 2016
.
During the
nine
months ended
October 2, 2016
, we granted
210,633
stock options compared with
118,992
stock options granted during the
nine
months ended October 4,
2015
.
The average fair value of stock options granted during the first
nine
months of
2016
and
2015
was
$11.91
and
$17.88
, respectively, and was estimated using the following weighted-average assumptions:
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Risk-free interest rate
|
1.2
|
%
|
1.4
|
%
|
Expected life (years)
|
4.5
|
|
4.5
|
|
Expected stock volatility
|
36.2
|
%
|
40.4
|
%
|
Expected dividend yield
|
0.4
|
%
|
0.3
|
%
|
For additional information regarding the historical issuance of stock options, refer to our Form 10-K for the year ended December 31, 2015 filed with the SEC on February 23, 2016.
During the
nine
months ended
October 2, 2016
and
October 4, 2015
, we granted
87,629
and
60,090
RSU Awards with approximate fair values of
$39.61
and
$51.85
per RSU Award, respectively. During the first
nine
months of
2016
and
2015
, we granted performance-based RSUs as part of the overall mix of RSU Awards. These performance-based RSUs include metrics for achieving Return on Invested Capital and Adjusted Operating Margin with target payouts ranging from
0%
to
200%
. Of the
87,629
RSU Awards granted during the
nine
months ended
October 2, 2016
,
43,016
are performance-based RSU Awards. This compares to
26,094
performance-based RSU Awards granted during the
nine
months ended
October 4, 2015
.
RSU MSPs totaling
20,130
and
38,965
with per unit discount amounts representing fair values of
$12.83
and
$17.11
were granted during the
nine
months ended
October 2, 2016
and
October 4, 2015
, respectively.
Compensation expense related to our share-based plans for the
nine
month periods ended
October 2, 2016
and
October 4, 2015
was
$4.2 million
and
$5.8 million
, respectively. For the
nine
month period ended
October 2, 2016
,
$4.2 million
of compensation expense was recorded as selling, general and administrative expenses. For the
nine
month period ended
October 4, 2015
,
$5.4 million
was recorded as selling, general and administrative expense and
$0.4 million
was recorded as a special charge related to the retirement of one of our executive officers. As of
October 2, 2016
, there was
$8.1 million
of total unrecognized compensation costs related to our outstanding share-based compensation arrangements. That cost is expected to be recognized over a weighted average period of
1.9
years.
The weighted average contractual term for stock options outstanding and options exercisable as of
October 2, 2016
was
6.3
years and
5.7
years, respectively. The aggregate intrinsic value of stock options exercised during the
nine
months ended
October 2, 2016
was
insignificant
and the aggregate intrinsic value of stock options outstanding and options exercisable as of
October 2, 2016
was
$9.2 million
and
$3.6 million
, respectively.
The aggregate intrinsic value of RSU Awards settled during the
nine
months ended
October 2, 2016
was
$2.2 million
and the aggregate intrinsic value of RSU Awards outstanding and RSU Awards vested and deferred as of
October 2, 2016
was
$8.4 million
and
$0.2 million
, respectively.
The aggregate intrinsic value of RSU MSPs settled during the
nine
months ended
October 2, 2016
was
$0.3 million
and the aggregate intrinsic value of RSU MSPs outstanding as of
October 2, 2016
was
$1.8 million
. The RSU MSPs vested and deferred amount was
insignificant
.
As of
October 2, 2016
, there were
34,002
Cash Settled Stock Unit Awards outstanding compared to
28,660
as of December 31, 2015. During the
nine
months ended
October 2, 2016
, the aggregate cash used to settle Cash Settled Stock Unit Awards was
$0.5 million
. As of
October 2, 2016
, we had
$0.8 million
of accrued expenses in current liabilities associated with these Cash Settled Stock Unit Awards compared with
$0.6 million
as of December 31, 2015. Cash Settled Stock Unit Awards related compensation costs for the
nine
month periods ended
October 2, 2016
and
October 4, 2015
was
$0.7 million
and
$0.2 million
, respectively, and was recorded as selling, general, and administrative expenses.
(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 shareholder's equity, for the
nine
months ended
October 2, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments
|
|
Pension, net
|
|
Total
|
Balance as of December 31, 2015
|
$
|
(36,725
|
)
|
|
$
|
(29,263
|
)
|
|
$
|
(65,988
|
)
|
Other comprehensive income, net of tax
|
1,292
|
|
|
—
|
|
|
1,292
|
|
Balance as of October 2, 2016
|
$
|
(35,433
|
)
|
|
$
|
(29,263
|
)
|
|
$
|
(64,696
|
)
|
(15) Special Charges, net
General Background
Special Charges, net generally includes restructuring costs, costs to exit a product line or program, litigation settlements and other special charges or gains that are generally not reflective of our core-business operational results.
During 2016, we have initiated certain restructuring activities, under which we continue to simplify our business ("2016 Actions"). Under these restructurings, we will reduce expenses, primarily through reductions in force and closing a number of smaller facilities.
On November 3, 2015, the Board of Directors approved the closure and exit of our Brazil manufacturing operations ("Brazil Closure") due to the economic realities in Brazil and the ongoing challenges with our only significant end customer, Petrobras. CIRCOR Brazil has reported substantial operating losses every year since it was acquired in 2011 while the underlying market conditions and outlook have deteriorated. In connection with the closure, we recorded
$2.7 million
in special charges within the Energy Segment during the nine months ended
October 2, 2016
, which primarily related to employee termination costs and losses incurred subsequent to our Q1 2016 closure of manufacturing operations. As of
October 2, 2016
, our remaining Brazil assets were
$2.2 million
of which
$1.0 million
relates to cash,
$0.9 million
relates to assets held for sale, and
$0.2 million
relates to net third party accounts receivables. The Brazil assets held for sale as of
October 2, 2016
are reported within the other current assets caption on our condensed consolidated balance sheet.
In July 2015, we announced the closure of one of the two Corona, California manufacturing facilities ("California Restructuring"). Under this restructuring, we are reducing certain general, manufacturing and facility related expenses.
On April 15, 2015, we acquired Germany-based Schroedahl, a privately-owned manufacturer of safety and control valves primarily in the power generation market. In connection with our acquisition of Schroedahl, we recorded certain acquisition related professional fees ("Acquisition related charges") as special charges.
During the first quarter of 2015, we recorded special charges of
$0.4 million
associated with the retirement of our Energy President ("Executive retirement charges"). These charges primarily related to equity award modification charges.
On January 6, 2015, we announced the divestiture of two of our non-core businesses ("Divestitures") as part of our simplification strategy. The Energy divestiture was substantially completed in the fourth quarter of 2014. During the first quarter of 2015, the Aerospace & Defense divestiture was substantially completed and we recorded a special gain of
$1.0 million
.
The special charges described above are recorded in the special charges, net caption on our condensed consolidated statements of income (loss).
Inventory Restructuring
During the first and second quarters of 2016, we recorded restructuring related inventory charges of $
1.9 million
and
$0.1 million
, respectively, associated with the closure of manufacturing operations and the exit of the gate, globe and check valves product line in Brazil. As of
October 2, 2016
, all remaining inventory in our Brazilian operations has been fully reserved.
During the first quarter of 2016, in connection with the restructuring of certain structural landing gear product lines, we recorded inventory related charges of less than
$0.1 million
within the Aerospace & Defense segment. As of
October 2, 2016
, our remaining structural landing gear product line inventory balance is
$1.2 million
, which we believe is recoverable based upon our net realizable value analysis.
The inventory restructuring charges described above are recorded in the cost of revenues caption on our condensed consolidated statement of income.
Intangible Impairments
During the three months ended October 2, 2016, we recorded a
$0.2 million
impairment charge for a China patent deemed to no longer have economic value. The impairment charge is included in the impairment charge line on our consolidated statement of income (loss).
Q3 2016
The tables below (in thousands) show the non-inventory restructuring related and non-impairment special charges, net of recoveries, for the three and nine months ending
October 2, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special Charges / (Recoveries)
|
|
As of and for the three months ended October 2, 2016
|
|
Energy
|
|
Aerospace & Defense
|
|
Corporate
|
|
Total
|
Facility related expenses, net
|
401
|
|
|
389
|
|
|
—
|
|
|
790
|
|
Employee related expenses
|
790
|
|
|
672
|
|
|
—
|
|
|
1,462
|
|
Total restructuring charges, net
|
$
|
1,191
|
|
|
$
|
1,061
|
|
|
$
|
—
|
|
|
$
|
2,252
|
|
Brazil Closure
|
379
|
|
|
—
|
|
|
—
|
|
|
379
|
|
Total special charges, net
|
$
|
1,570
|
|
|
$
|
1,061
|
|
|
$
|
—
|
|
|
$
|
2,631
|
|
|
|
|
|
|
|
|
|
Accrued special and restructuring charges as of July 3, 2016
|
|
|
|
|
|
|
$
|
4,493
|
|
Total quarterly special charges, net (shown above)
|
|
|
|
|
|
|
2,631
|
|
Special charges paid / settled, net
|
|
|
|
|
|
|
(2,177
|
)
|
Accrued special and restructuring charges as of October 2, 2016
|
|
|
|
|
|
|
$
|
4,947
|
|
|
|
|
|
|
|
|
|
|
Special Charges / (Recoveries)
|
|
As of and for the nine months ended October 2, 2016
|
|
Energy
|
|
Aerospace & Defense
|
|
Corporate
|
|
Total
|
Facility related expenses, net
|
287
|
|
|
3,482
|
|
|
—
|
|
|
3,769
|
|
Employee related expenses
|
1,526
|
|
|
1,379
|
|
|
—
|
|
|
2,905
|
|
Total restructuring charges, net
|
$
|
1,813
|
|
|
$
|
4,861
|
|
|
$
|
—
|
|
|
$
|
6,674
|
|
Acquisition related recoveries
|
(161
|
)
|
|
—
|
|
|
—
|
|
|
(161
|
)
|
Brazil Closure
|
2,650
|
|
|
—
|
|
|
2
|
|
|
2,652
|
|
Total special charges, net
|
$
|
4,302
|
|
|
$
|
4,861
|
|
|
$
|
2
|
|
|
$
|
9,165
|
|
|
|
|
|
|
|
|
|
Accrued special and restructuring charges as of December 31, 2015
|
|
|
|
|
|
|
$
|
4,664
|
|
Total year to date special charges, net (shown above)
|
|
|
|
|
|
|
9,165
|
|
Special charges paid / settled, net
|
|
|
|
|
|
|
(8,882
|
)
|
Accrued special and restructuring charges as of October 2, 2016
|
|
|
|
|
|
|
$
|
4,947
|
|
The restructuring charges incurred to date that remain accrued as of
October 2, 2016
primarily relate to Brazil closure charges recorded in 2015 for supplier cancellation penalties for fixed purchase commitments, customer cancellation penalties, and litigation claims that we deem probable of loss. We expect to make payment or settle the majority of Brazil related obligations accrued as of
October 2, 2016
during 2017. We expect to make payment or settle the majority of the non-Brazil related obligations accrued as of
October 2, 2016
during the fourth quarter of 2016.
Q3 2015
The tables below (in thousands) show the non-inventory restructuring related and non-impairment special charges, net of recoveries, for the three and nine months ending October 4, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special Charges / (Recoveries)
|
|
As of and for the three months ended October 4, 2015
|
|
Energy
|
|
Aerospace & Defense
|
|
Corporate
|
|
Total
|
Facility related expenses, net
|
(260
|
)
|
|
—
|
|
|
—
|
|
|
(260
|
)
|
Employee related expenses
|
539
|
|
|
63
|
|
|
—
|
|
|
602
|
|
Total restructuring charges, net
|
$
|
279
|
|
|
$
|
63
|
|
|
$
|
—
|
|
|
$
|
342
|
|
Acquisition related charges
|
59
|
|
|
—
|
|
|
—
|
|
|
59
|
|
Brazil Closure
|
7,876
|
|
|
—
|
|
|
—
|
|
|
7,876
|
|
Total special charges, net
|
$
|
8,214
|
|
|
$
|
63
|
|
|
$
|
—
|
|
|
$
|
8,277
|
|
|
|
|
|
|
|
|
|
Accrued special and restructuring charges as of July 5, 2015
|
|
|
|
|
|
|
$
|
8,327
|
|
Total quarterly special charges, net (shown above)
|
|
|
|
|
|
|
8,277
|
|
Special charges paid / settled, net
|
|
|
|
|
|
|
(5,579
|
)
|
Accrued special and restructuring charges as of October 4, 2015
|
|
|
|
|
|
|
$
|
11,025
|
|
|
|
|
|
|
|
|
|
|
Special Charges / (Recoveries)
|
|
As of and for the nine months ended October 4, 2015
|
|
Energy
|
|
Aerospace & Defense
|
|
Corporate
|
|
Total
|
Facility related expenses, net
|
121
|
|
|
257
|
|
|
—
|
|
|
378
|
|
Employee related expenses
|
3,319
|
|
|
1,284
|
|
|
—
|
|
|
4,603
|
|
Total restructuring charges, net
|
$
|
3,440
|
|
|
$
|
1,541
|
|
|
$
|
—
|
|
|
$
|
4,981
|
|
Divestitures
|
(2
|
)
|
|
(1,042
|
)
|
|
—
|
|
|
(1,044
|
)
|
Acquisition related charges
|
865
|
|
|
—
|
|
|
—
|
|
|
865
|
|
Brazil Closure
|
7,876
|
|
|
—
|
|
|
—
|
|
|
7,876
|
|
Executive retirement charges
|
—
|
|
|
—
|
|
|
420
|
|
|
420
|
|
Total special charges, net
|
$
|
12,179
|
|
|
$
|
499
|
|
|
$
|
420
|
|
|
$
|
13,098
|
|
|
|
|
|
|
|
|
|
Accrued special and restructuring charges as of December 31, 2014
|
|
|
|
|
|
|
$
|
9,133
|
|
Total year to date special charges, net (shown above)
|
|
|
|
|
|
|
13,098
|
|
Special charges paid / settled
|
|
|
|
|
|
|
(11,206
|
)
|
Accrued special and restructuring charges as of October 4, 2015
|
|
|
|
|
|
|
$
|
11,025
|
|
Inception to Date
The following table (in thousands) summarizes our California Restructuring related special charges for the period ended
October 2, 2016
:
|
|
|
|
|
|
California Restructuring Charges, net as of October 2, 2016
|
|
Aerospace & Defense
|
Facility related expenses - incurred to date
|
$
|
3,481
|
|
Employee related expenses - incurred to date
|
800
|
|
Total restructuring related special charges - incurred to date
|
$
|
4,281
|
|
The following table (in thousands) summarizes the restructuring charges for our 2016 Actions through
October 2, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 Actions Restructuring Charges / (Recoveries), net as of October 2, 2016
|
|
Energy
|
|
Aerospace & Defense
|
|
Total
|
Facility related expenses - incurred to date
|
$
|
203
|
|
|
$
|
94
|
|
|
$
|
297
|
|
Employee related expenses - incurred to date
|
1,609
|
|
|
471
|
|
|
2,080
|
|
Total restructuring related special charges - incurred to date
|
$
|
1,812
|
|
|
$
|
565
|
|
|
$
|
2,377
|
|
The California Restructuring was completed during the third quarter of 2016. The 2016 Actions are expected to be completed in the fourth quarter of 2016.
(16) Subsequent Events
Critical Flow Solutions Acquisition
On October 12, 2016, the Company, entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Downstream Holding, LLC, a Delaware limited liability company (“Downstream”), Downstream Acquisition LLC, a Delaware limited liability company and subsidiary of the Company, and Sun Downstream, LP, a Delaware limited partnership to acquire all of the outstanding units of Downstream for
$210 million
. Subsidiaries of Downstream, which do business as Critical Flow Solutions ("CFS"), manufacture critical severe service equipment for refining operations. This acquisition diversifies CIRCOR’s revenue base by providing further penetration into the downstream refining market. CFS brings a portfolio of high technology valves and automation equipment for severe-service applications. Under its DeltaValve brand, CFS offers solutions for the delayed coking process in refineries, and under its TapcoEnpro brand, the company provides solutions for the fluid catalytic cracking process in refineries. CFS has a total of approximately
200
employees at its Salt Lake City, Utah headquarters, Houston, Texas facilities and Barnsley, England service center.
The consideration payable by the Company pursuant to the terms of the Merger Agreement is
$195 million
, subject to (i) up to an additional
$15 million
payable pursuant to an earn-out relating to achievement of specified business performance targets by the acquired business in the twelve month period ended September 30, 2017, (ii) increase or decrease based on deviation, subject to certain limitations, from a working capital target, (iii) decrease for indebtedness and certain transactions expenses of Downstream, (iv) increase for the amount of Downstream’s cash as of the closing, and (v) a potential increase for certain transaction related tax benefits, net of certain adjustments, if and when realized by the Company. The total consideration paid at closing on October 13, 2016 was approximately
$198 million
in cash, net of cash acquired and including amounts paid at closing for estimated adjustments for Downstream’s working capital, the repayment of Downstream’s outstanding indebtedness and payment of certain transaction expenses. The Company funded the purchase price and payments at closing from borrowings under the Company’s existing credit agreement.
Segment Realignment
On October 28, 2016, the Company announced it is realigning its organizational structure which will result in two reportable business segments: Energy and Advanced Flow Solutions. The Energy segment will include all of the businesses from the existing Energy segment and Critical Flow Solutions and exclude certain businesses that operate in the industrial, power, and process markets (also referred to as the Control Valves businesses). The Advanced Flow Solutions segment will include all of the businesses from the existing Aerospace & Defense segment and the Control Valve businesses previously reported within the Energy segment. We intend to begin reporting the new two segments during the fourth quarter of 2016. All previously reported segment information will be adjusted on a retrospective basis to reflect this change beginning in the fourth quarter of 2016.