NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of CIRCOR International, Inc. (“CIRCOR” or the “Company”) have been prepared according to the rules and regulations of the United States (“U.S.”) Securities and Exchange Commission (“SEC”) for interim reporting, along with accounting principles generally accepted in the U.S. (“GAAP”). In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal and recurring items) necessary for a fair presentation of the Company’s results of operations, financial position and cash flows for the periods presented. The Company prepares its interim financial information using the same accounting principles it uses for its annual audited consolidated financial statements. Certain information and note disclosures normally included in the annual audited consolidated financial statements have been condensed or omitted in accordance with SEC rules. The Company believes that the disclosures made in its condensed consolidated financial statements and the accompanying notes are adequate to make the information presented not misleading.
The condensed consolidated balance sheet as of December 31, 2020 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, 2020.
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 3, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021 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).
COVID-19
In March 2020, the World Health Organization declared the outbreak of COVID-19, which continues to spread throughout the U.S. and the world, as a pandemic. The pandemic is having an impact on the global economy, resulting in rapidly changing market and economic conditions. As of March 29, 2020, the Company experienced a significant decline in its market capitalization below its consolidated book value. As a result, management concluded that there was a goodwill and an intangible asset impairment triggering event for the Company in the first quarter of 2020. Through its impairment analysis, the Company determined that goodwill in its Industrial segment was impaired and recognized a $116.2 million impairment charge. See Note 7, Goodwill and Intangibles, net, for additional information on the goodwill impairment.
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.
(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 3, 2021 are consistent with those discussed in Note 2 to the consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2020, except as updated below with respect to newly adopted accounting standards.
The preparation of these financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying disclosures. Some of the more significant estimates, which are impacted by management's estimates and assumptions regarding the effects of COVID-19, relate to recoverability of goodwill and indefinite-lived trade names, estimated total costs for ongoing long-term
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.
New Accounting Standards - Adopted
In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In January 2021, the FASB issued ASU 2021-01 which clarified the scope of Topic 848. Topic 848 contains optional expedients and exceptions for applying GAAP to contract modifications, hedging relationships, and other areas or transactions that are impacted by reference rate reform (i.e., by the transition of LIBOR and other interbank offered rates to alternative reference interest rates). The new standard was effective upon issuance and generally can be applied to contract modifications through December 31, 2022. The Company adopted this standard as of January 1, 2021, and intends to apply the provisions of this standard to contract modifications if and when applicable. During the interim period ended October 3, 2021, the adoption of the standard did not have a material impact on the Company’s condensed consolidated financial statements.
(3) Discontinued Operations
Discontinued Operations
During 2020, the Company’s wholly-owned subsidiary, CIRCOR Energy Products LLC (“CEP”), completed the disposition of its Distributed Valves (“DV”) business. The transaction is subject to an earn out of 50% of net profit (only if positive) from closing through December 31, 2022. As part of the transaction, CEP retained certain liabilities and responsibility for closing CEP's Mexico manufacturing facility. During the three and nine months ended October 3, 2021, the Company continued to settle certain retained liabilities. During the three months ended October 3, 2021, the Company recognized a gain of $2.7 million related to an extinguished liability for the lease settlement of the Mexico manufacturing facility.
The following table presents the summarized components of income (loss) from discontinued operations of the DV business for the three and nine months ended October 3, 2021 and September 27, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 3, 2021
|
|
September 27, 2020
|
|
October 3, 2021
|
|
September 27, 2020
|
Net revenues
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,055
|
|
Cost of revenues
|
—
|
|
|
—
|
|
|
—
|
|
|
26,399
|
|
Gross profit (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
(16,344)
|
|
Selling, general and administrative expenses
|
—
|
|
|
—
|
|
|
(84)
|
|
|
9,074
|
|
|
|
|
|
|
|
|
|
Special and restructuring charges (recoveries), net
|
(31)
|
|
|
(938)
|
|
|
17
|
|
|
18,189
|
|
Operating income (loss)
|
31
|
|
|
938
|
|
|
67
|
|
|
(43,607)
|
|
Other (income) expense:
|
|
|
|
|
|
|
|
Interest (income), net
|
—
|
|
|
—
|
|
|
—
|
|
|
(14)
|
|
Other (income) expense, net
|
(2,479)
|
|
|
763
|
|
|
(1,581)
|
|
|
981
|
|
Total other (income) expense, net
|
(2,479)
|
|
|
763
|
|
|
(1,581)
|
|
|
967
|
|
Income (loss) from discontinued operations, before income taxes
|
2,510
|
|
|
175
|
|
|
1,648
|
|
|
(44,574)
|
|
Provision for (benefit from) income tax
|
—
|
|
|
(166)
|
|
|
255
|
|
|
(10,229)
|
|
Income (loss) from discontinued operations, net of tax
|
$
|
2,510
|
|
|
$
|
341
|
|
|
$
|
1,393
|
|
|
$
|
(34,345)
|
|
(4) 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 3, 2021, the Company had $199.0 million of transaction price related to remaining performance obligations. The Company expects to recognize approximately 25% of its remaining performance obligations as revenue during the remainder of 2021, 59% in 2022, and the remaining 16% in 2023 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 balances outstanding at the beginning of the period until the revenue exceeds that balance. If additional advances are received on those contracts in subsequent periods, it assumes all revenue recognized in the reporting period first applies to the beginning contract liabilities as opposed to a portion applying to the new advances for the period. Revenue recognized during the nine months ended October 3, 2021 that was included in contract liabilities as of the beginning of the period amounted to $22.5 million.
Disaggregation of Revenue. The Company determined that disaggregating revenue into these categories meets the disclosure objective in Topic 606 which is to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. The following tables present revenue disaggregated by major product line and geographical market (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 3, 2021
|
|
September 27, 2020
|
|
October 3, 2021
|
|
September 27, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace & Defense Segment
|
|
|
|
|
|
|
|
|
Commercial Aerospace & Other
|
$
|
21,096
|
|
|
$
|
19,142
|
|
|
$
|
67,197
|
|
|
$
|
70,657
|
|
|
Defense
|
40,388
|
|
|
43,107
|
|
|
115,050
|
|
|
119,326
|
|
|
Total
|
61,484
|
|
|
62,249
|
|
|
182,247
|
|
|
189,983
|
|
Industrial Segment
|
|
|
|
|
|
|
|
|
Valves
|
48,657
|
|
|
49,846
|
|
|
141,438
|
|
|
153,489
|
|
|
Pumps
|
80,641
|
|
|
74,545
|
|
|
238,098
|
|
|
221,448
|
|
|
Total
|
129,298
|
|
|
124,391
|
|
|
379,536
|
|
|
374,937
|
|
Net Revenues
|
$
|
190,782
|
|
|
$
|
186,640
|
|
|
$
|
561,783
|
|
|
$
|
564,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
October 3, 2021
|
|
September 27, 2020
|
|
October 3, 2021
|
|
September 27, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace & Defense Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA
|
$
|
15,097
|
|
|
$
|
13,936
|
|
|
$
|
43,946
|
|
|
$
|
42,996
|
|
|
|
|
|
|
North America
|
43,173
|
|
|
44,932
|
|
|
128,288
|
|
|
135,627
|
|
|
|
|
|
|
Other
|
3,214
|
|
|
3,381
|
|
|
10,013
|
|
|
11,360
|
|
|
|
|
|
|
Total
|
61,484
|
|
|
62,249
|
|
|
182,247
|
|
|
189,983
|
|
|
|
|
|
Industrial Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA
|
59,500
|
|
|
52,146
|
|
|
179,109
|
|
|
161,572
|
|
|
|
|
|
|
North America
|
35,194
|
|
|
40,765
|
|
|
106,019
|
|
|
128,610
|
|
|
|
|
|
|
Other
|
34,604
|
|
|
31,480
|
|
|
94,408
|
|
|
84,755
|
|
|
|
|
|
|
Total
|
129,298
|
|
|
124,391
|
|
|
379,536
|
|
|
374,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
$
|
190,782
|
|
|
$
|
186,640
|
|
|
$
|
561,783
|
|
|
$
|
564,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Balances. The Company’s contract assets and contract liabilities balances as of October 3, 2021 and December 31, 2020 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 3, 2021
|
|
December 31, 2020
|
|
Increase/(Decrease)
|
|
|
|
|
|
|
Contract assets:
|
|
|
|
|
|
Recorded within prepaid expenses and other current assets
|
$
|
85,132
|
|
|
$
|
67,352
|
|
|
$
|
17,780
|
|
Recorded within other non-current assets
|
12,036
|
|
|
10,824
|
|
|
1,212
|
|
|
$
|
97,168
|
|
|
$
|
78,176
|
|
|
$
|
18,992
|
|
|
|
|
|
|
|
Contract liabilities:
|
|
|
|
|
|
Recorded within accrued expenses and other current liabilities
|
$
|
19,187
|
|
|
$
|
23,585
|
|
|
$
|
(4,398)
|
|
Recorded within other non-current liabilities
|
5,983
|
|
|
9,412
|
|
|
(3,429)
|
|
|
$
|
25,170
|
|
|
$
|
32,997
|
|
|
$
|
(7,827)
|
|
|
|
|
|
|
|
Contract assets increased by $19.0 million during the nine months ended October 3, 2021, primarily due to unbilled revenue recognized during the period for over-time revenue contracts within the Defense and Refinery Valves businesses.
Contract liabilities decreased by $7.8 million during the nine months ended October 3, 2021, primarily due to recognition of revenue against customer advances within the Defense business in excess of advances received during the period, partially offset by customer advances received in excess of revenue recognized in the Industrial Pumps and Valves businesses.
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 3, 2021, there were no material changes in the allowance for credit losses including additional allowances, write-offs or recoveries. During the nine
months ended September 27, 2020, the Company recognized a $5.9 million charge for allowance against a customer receivable. Other than that there were no other material changes including additional allowances, write-offs or recoveries.
(5) Special and Restructuring Charges (Recoveries), net
Special and restructuring charges (recoveries), net
Special and restructuring charges (recoveries), net consist of restructuring costs (including costs to exit a product line or program) as well as certain special charges (recoveries) such as significant litigation settlements and other transactions (charges or recoveries) that are described below. All items described below are recorded in Special and restructuring charges (recoveries), net on the condensed consolidated statements of operations. Certain other special and restructuring charges (recoveries) such as inventory related items may be recorded in cost of revenues given the nature of the item.
The table below summarizes the amounts recorded within the special and restructuring charges (recoveries), net line item on the condensed consolidated statements of operations for the three and nine months ended October 3, 2021 and September 27, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special & restructuring charges (recoveries), net
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 3, 2021
|
|
September 27, 2020
|
|
October 3, 2021
|
|
September 27, 2020
|
Special charges (recoveries), net
|
$
|
1,126
|
|
|
$
|
436
|
|
|
$
|
2,779
|
|
|
$
|
(39,720)
|
|
Restructuring charges (recoveries), net
|
(312)
|
|
|
502
|
|
|
4,029
|
|
|
3,973
|
|
Total special and restructuring charges (recoveries), net
|
$
|
814
|
|
|
$
|
938
|
|
|
$
|
6,808
|
|
|
$
|
(35,747)
|
|
Special charges (recoveries), net
The table below details the special charges (recoveries), net recognized for the three and nine months ended October 3, 2021 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special charges (recoveries), net
|
|
|
|
Three Months Ended October 3, 2021
|
|
|
|
Aerospace & Defense
|
|
Industrial
|
|
Corporate
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Heater & Control Valve divestiture charges
|
|
$
|
—
|
|
|
$
|
481
|
|
|
$
|
143
|
|
|
$
|
624
|
|
|
|
|
|
|
|
|
|
|
|
|
Other special charges (recoveries), net
|
|
—
|
|
|
376
|
|
|
126
|
|
|
502
|
|
|
Total special charges (recoveries), net
|
|
$
|
—
|
|
|
$
|
857
|
|
|
$
|
269
|
|
|
$
|
1,126
|
|
|
|
|
|
|
|
Special charges (recoveries), net
|
|
|
|
Nine Months Ended October 3, 2021
|
|
|
|
Aerospace & Defense
|
|
Industrial
|
|
Corporate
|
|
Total
|
|
Cryo divestiture gain
|
|
$
|
—
|
|
|
$
|
(1,947)
|
|
|
$
|
—
|
|
|
$
|
(1,947)
|
|
|
Heater & Control Valve divestiture charges
|
|
—
|
|
|
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 Valve 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 within the Industrial segment is $0.9 million pertaining to a contingency indemnification to the buyer of a previously divested business. 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.
The table below details the special charges (recoveries), net recognized for the three and nine months ended September 27, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special charges (recoveries), net
|
|
|
Three Months Ended September 27, 2020
|
|
|
Aerospace & Defense
|
|
Industrial
|
|
Corporate
|
|
Total
|
I&S divestiture
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
249
|
|
|
$
|
249
|
|
Other special charges
|
|
—
|
|
|
—
|
|
|
187
|
|
|
187
|
|
Total special charges (recoveries), net
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
436
|
|
|
$
|
436
|
|
|
|
|
|
|
|
|
|
|
|
|
Special charges (recoveries), net
|
|
|
Nine Months Ended September 27, 2020
|
|
|
Aerospace & Defense
|
|
Industrial
|
|
Corporate
|
|
Total
|
I&S divestiture
|
|
$
|
—
|
|
|
$
|
(53,202)
|
|
|
$
|
(57)
|
|
|
$
|
(53,259)
|
|
Professional fees
|
|
—
|
|
|
—
|
|
|
6,925
|
|
|
6,925
|
|
Amortization of debt issuance fee
|
|
—
|
|
|
—
|
|
|
3,541
|
|
|
3,541
|
|
Other special charges
|
|
—
|
|
|
101
|
|
|
2,972
|
|
|
3,073
|
|
Total special charges (recoveries), net
|
|
$
|
—
|
|
|
$
|
(53,101)
|
|
|
$
|
13,381
|
|
|
$
|
(39,720)
|
|
I&S Divestiture: In 2020, the Company recorded net special charges of $0.2 million and a net special recovery of $(53.3) million for the three and nine months ended September 27, 2020, respectively, attributed to the sale of the I&S business in January 2020. During the quarter ended March 29, 2020, the Company received net cash proceeds of $169.8 million and recognized a pre-tax gain on sale of $54.6 million. The Industrial segment incurred $1.4 million of operating expenses associated with the I&S business for the three months ended March 29, 2020, which are presented net within the I&S divestiture line.
Professional fees: The Company incurred special charges of $6.9 million for the nine ended September 27, 2020 associated with the review and response to an unsolicited tender offer to acquire the Company and related corporate governance actions, and for other proxy-related matters.
Amortization of debt issuance fee: The Company incurred special charges of $3.5 million for the nine months ended September 27, 2020, for accelerated amortization of capitalized debt issuance costs in connection with the accounting for the paydown and refinancing of its term loan during the first quarter of 2020.
Other special charges: The Company incurred special charges of $0.2 million and $3.1 million for the three and nine months ended September 27, 2020, respectively, associated with projects to streamline operations and reduce costs.
Restructuring charges (recoveries), net
The tables below detail the charges associated with restructuring actions recorded for the three and nine months ended October 3, 2021 and September 27, 2020. 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 3, 2021
|
|
|
Aerospace & Defense
|
|
Industrial
|
|
Corporate
|
|
Total
|
Facility related charges (recoveries), net
|
|
$
|
24
|
|
|
$
|
(275)
|
|
|
$
|
—
|
|
|
$
|
(251)
|
|
Employee related charges (recoveries), net
|
|
(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, net
|
|
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 charges, net (shown above)
|
|
|
|
|
|
|
|
4,029
|
|
Charges paid / settled, net
|
|
|
|
|
|
|
|
(3,353)
|
|
Accrued restructuring charges as of October 3, 2021
|
|
|
|
|
|
|
|
$
|
2,188
|
|
The Company expects to make payment or settle the majority of the restructuring charges accrued as of October 3, 2021 during the next six months.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges, net
|
|
|
Three Months Ended September 27, 2020
|
|
|
Aerospace & Defense
|
|
Industrial
|
|
Corporate
|
|
Total
|
Facility related charges
|
|
$
|
7
|
|
|
$
|
154
|
|
|
$
|
—
|
|
|
$
|
161
|
|
Employee related charges
|
|
173
|
|
|
151
|
|
|
17
|
|
|
341
|
|
Total restructuring charges, net
|
|
$
|
180
|
|
|
$
|
305
|
|
|
$
|
17
|
|
|
$
|
502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges, net
|
|
|
Nine Months Ended September 27, 2020
|
|
|
Aerospace & Defense
|
|
Industrial
|
|
Corporate
|
|
Total
|
Facility related expenses
|
|
$
|
37
|
|
|
$
|
154
|
|
|
$
|
—
|
|
|
$
|
191
|
|
Employee related expenses
|
|
342
|
|
|
3,084
|
|
|
356
|
|
|
3,782
|
|
Total restructuring charges, net
|
|
$
|
379
|
|
|
$
|
3,238
|
|
|
$
|
356
|
|
|
$
|
3,973
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring charges as of December 31, 2019
|
|
|
|
|
|
|
|
$
|
5,199
|
|
Total year to date charges, net (shown above)
|
|
|
|
|
|
|
|
3,973
|
|
Charges paid / settled, net
|
|
|
|
|
|
|
|
(6,664)
|
|
Accrued restructuring charges as of September 27, 2020
|
|
|
|
|
|
|
|
$
|
2,508
|
|
Descriptions of the restructuring actions is provided in the section titled “Restructuring Programs Summary” that follows.
Restructuring Programs Summary
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.
During the three and nine months ended September 27, 2020, the Company recorded $0.5 million and $4.0 million of restructuring charges, respectively, to reduce expenses primarily through reductions in force in manufacturing and administrative operations.
(6) Inventories
Inventories consisted of the following as of October 3, 2021 and December 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
October 3, 2021
|
|
December 31, 2020
|
Raw materials
|
$
|
51,209
|
|
|
$
|
63,255
|
|
Work in process
|
60,543
|
|
|
45,867
|
|
Finished goods
|
20,490
|
|
|
19,962
|
|
Total inventories
|
$
|
132,242
|
|
|
$
|
129,084
|
|
(7) Goodwill and Intangibles, net
The following table shows the movement in goodwill by segment from December 31, 2020 to October 3, 2021 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace & Defense
|
|
Industrial
|
|
|
Total
|
Goodwill as of December 31, 2020
|
|
$
|
57,574
|
|
|
$
|
101,370
|
|
|
|
$
|
158,944
|
|
Business divestiture
|
|
—
|
|
|
(755)
|
|
|
|
(755)
|
|
Currency translation adjustments
|
|
(78)
|
|
|
(2,372)
|
|
|
|
(2,450)
|
|
Goodwill as of October 3, 2021
|
|
$
|
57,496
|
|
|
$
|
98,243
|
|
|
|
$
|
155,739
|
|
|
The movement in goodwill for business divestiture relates to the allocation of goodwill to the carrying value of the Heater and Control Valve businesses divested in the second quarter of 2021.
The Company performs an impairment assessment for goodwill at the reporting unit level on an annual basis during the fourth quarter, or more frequently if circumstances warrant. At October 3, 2021, the Company performed a review and determined there were no triggering events requiring an impairment assessment.
The table below presents gross intangible assets and the related accumulated amortization as of October 3, 2021 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying Value
|
Patents
|
$
|
5,368
|
|
|
$
|
(5,368)
|
|
|
$
|
—
|
|
Customer relationships
|
304,227
|
|
|
(131,633)
|
|
|
172,594
|
|
Acquired technology
|
136,480
|
|
|
(69,757)
|
|
|
66,723
|
|
|
|
|
|
|
|
Total Amortized Intangibles
|
$
|
446,075
|
|
|
$
|
(206,758)
|
|
|
$
|
239,317
|
|
|
|
|
|
|
|
Non-amortized intangibles (trademarks and trade names)
|
$
|
76,135
|
|
|
$
|
—
|
|
|
$
|
76,135
|
|
Total Non-Amortized Intangibles
|
$
|
76,135
|
|
|
$
|
—
|
|
|
$
|
76,135
|
|
Net carrying value of intangible assets
|
|
|
|
|
$
|
315,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below presents estimated remaining amortization expense for intangible assets recorded as of October 3, 2021 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025
|
|
After 2025
|
|
|
Estimated amortization expense
|
$
|
10,385
|
|
|
$
|
36,861
|
|
|
$
|
32,317
|
|
|
$
|
28,396
|
|
|
$
|
24,840
|
|
|
$
|
106,518
|
|
|
|
(8) 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.
During the quarter ended March 29, 2020, the Company divested its I&S business, which was previously part of the Energy segment. See Note 5, Special and Restructuring Charges (Recoveries), net for additional information on this divestiture. In light of this divestiture, effective March 29, 2020, the Company realigned its segments by eliminating the Energy segment and moving the remaining businesses into the Industrial segment. Following the realignment the new reporting segments are Industrial and Aerospace & Defense, which is the level at which the CODM regularly reviews operating results.
The following table presents certain reportable segment information (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 3, 2021
|
|
September 27, 2020
|
|
October 3, 2021
|
|
September 27, 2020
|
Net revenues
|
|
|
|
|
|
|
|
Aerospace & Defense
|
$
|
61,484
|
|
|
$
|
62,249
|
|
|
$
|
182,247
|
|
|
$
|
189,983
|
|
Industrial
|
129,298
|
|
|
124,391
|
|
|
379,536
|
|
|
374,937
|
|
Net revenues
|
$
|
190,782
|
|
|
$
|
186,640
|
|
|
$
|
561,783
|
|
|
$
|
564,920
|
|
|
|
|
|
|
|
|
|
Results from continuing operations before income taxes
|
|
|
|
|
|
|
|
Aerospace & Defense - Segment Operating Income
|
$
|
14,868
|
|
|
$
|
14,782
|
|
|
$
|
37,668
|
|
|
$
|
40,418
|
|
Industrial - Segment Operating Income
|
11,268
|
|
|
9,807
|
|
|
31,403
|
|
|
27,383
|
|
Corporate expenses
|
(6,878)
|
|
|
(7,244)
|
|
|
(22,726)
|
|
|
(23,496)
|
|
Subtotal
|
19,258
|
|
|
17,345
|
|
|
46,345
|
|
|
44,305
|
|
Special charges (recoveries), net
|
1,126
|
|
|
436
|
|
|
2,779
|
|
|
(39,720)
|
|
Restructuring charges (recoveries), net
|
(312)
|
|
|
502
|
|
|
4,029
|
|
|
3,973
|
|
Special and restructuring charges (recoveries), net
|
814
|
|
|
938
|
|
|
6,808
|
|
|
(35,747)
|
|
Restructuring related inventory charges (recoveries), net
|
(60)
|
|
|
351
|
|
|
899
|
|
|
(250)
|
|
Impairment charges
|
—
|
|
|
—
|
|
|
—
|
|
|
116,182
|
|
Acquisition amortization
|
10,416
|
|
|
10,625
|
|
|
31,402
|
|
|
31,523
|
|
Acquisition depreciation
|
1,412
|
|
|
1,011
|
|
|
5,114
|
|
|
2,965
|
|
Restructuring, impairment and other costs, net
|
11,768
|
|
|
11,987
|
|
|
37,415
|
|
|
150,420
|
|
Consolidated Operating Income (loss)
|
6,676
|
|
|
4,420
|
|
|
2,122
|
|
|
(70,368)
|
|
Interest expense, net
|
7,997
|
|
|
8,202
|
|
|
24,325
|
|
|
25,699
|
|
Other expense (income), net
|
134
|
|
|
765
|
|
|
(2,543)
|
|
|
229
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
$
|
(1,455)
|
|
|
$
|
(4,547)
|
|
|
$
|
(19,660)
|
|
|
$
|
(96,296)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 3, 2021
|
|
September 27, 2020
|
|
October 3, 2021
|
|
September 27, 2020
|
Capital expenditures
|
|
|
|
|
|
|
|
Aerospace & Defense
|
$
|
999
|
|
|
$
|
1,236
|
|
|
$
|
3,151
|
|
|
$
|
2,562
|
|
Industrial
|
3,767
|
|
|
1,085
|
|
|
7,247
|
|
|
5,642
|
|
Corporate
|
—
|
|
|
31
|
|
|
123
|
|
|
361
|
|
Consolidated capital expenditures
|
$
|
4,766
|
|
|
$
|
2,352
|
|
|
$
|
10,521
|
|
|
$
|
8,565
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
Aerospace & Defense
|
$
|
3,182
|
|
|
$
|
3,142
|
|
|
$
|
8,955
|
|
|
$
|
9,322
|
|
Industrial
|
12,772
|
|
|
12,500
|
|
|
39,996
|
|
|
37,661
|
|
Corporate
|
158
|
|
|
85
|
|
|
483
|
|
|
316
|
|
Consolidated depreciation and amortization
|
$
|
16,112
|
|
|
$
|
15,727
|
|
|
$
|
49,434
|
|
|
$
|
47,299
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
October 3, 2021
|
|
December 31, 2020
|
|
|
|
Aerospace & Defense
|
$
|
453,372
|
|
|
$
|
450,597
|
|
|
|
|
|
Industrial
|
1,339,809
|
|
|
1,378,710
|
|
|
|
|
|
Corporate
|
(702,906)
|
|
|
(698,779)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated identifiable assets
|
$
|
1,090,275
|
|
|
$
|
1,130,528
|
|
|
|
|
|
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.
(9) Financing Arrangements
Fair Value
The Company utilizes fair value measurement guidance prescribed by accounting standards to value its financial instruments. The guidance establishes a fair value hierarchy based on the inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:
•Level One: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.
•Level Two: Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
•Level Three: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
The aggregate net fair value of the Company’s interest rate swap, cross-currency swap, and foreign currency forward contract as of October 3, 2021 and December 31, 2020 are summarized in the table below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant Other Observable Inputs
Level 2
|
|
|
|
|
|
October 3, 2021
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
|
|
$
|
545
|
|
|
$
|
2,359
|
|
|
|
Derivative liabilities
|
|
|
$
|
(6,617)
|
|
|
$
|
(17,139)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 3, 2021, the estimated fair value of the Company's gross debt (before netting debt issuance costs) was $517.4 million, compared to carrying cost of $517.0 million. At December 31, 2020 the estimated fair value of the Company’s gross debt (before netting debt issuance costs) was $517.3 million, compared to carrying cost of $519.9 million. The Company’s outstanding debt balances are characterized as Level 2 financial instruments.
Financial Instruments
As of October 3, 2021 and December 31, 2020, the Company had restricted cash balances of $1.3 million and $1.2 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 between 90% and 100% 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 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. During the three and nine months ended September 27, 2020, the Company sold a total of $12.6 million and $41.8 million, respectively, of receivables under the program, receiving $11.9 million and $39.3 million, respectively, in upfront cash.
At October 3, 2021, a beneficial interest balance of $0.5 million was recorded in prepaid expenses and other current assets on the condensed consolidated balance sheet.
The Company has a cross-currency swap agreement to hedge its net investment in non-U.S. subsidiaries against future volatility in exchange rates between the U.S. dollar and the Euro. The cross-currency swap agreement is pursuant to an International Swaps and Derivatives Association (“ISDA”) Master Agreement with Deutsche Bank AG. Should the counterparty cease to be part of the Company’s secured lender group, the cross-currency agreement could be terminated early if acceptable substitute collateral arrangements (such as cash) are not put in place. The three-year cross-currency swap has a fixed notional value of $100.0 million at an annual rate of 2.4065% and a maturity date of July 12, 2022. At inception, the cross-currency swap was designated as a net investment hedge. This hedging agreement mitigates foreign currency exchange rate exposure on the Company’s net investment in Euro denominated subsidiaries and is not for speculative trading purposes. The net investment hedge was deemed effective as of quarter-end. As of October 3, 2021 and December 31, 2020, the cross-currency swap had a fair value liability of $2.3 million and $6.2 million, respectively.
The Company has an interest rate swap pursuant to an ISDA Master Agreement with Citizens Bank, National Association. The four-year interest rate swap has a fixed notional value of $400.0 million with a 1% LIBOR floor (in line with the Company's credit agreement) and a maturity date of April 12, 2022. The fixed rate of interest paid by the Company is comprised of the current credit spread of 325 basis points plus 2.6475% for a total interest rate of 5.8975%. The ISDA Master Agreement, together with its related schedules, contains customary representations, warranties, and covenants. The Company has designated the interest rate swap as a qualifying hedging instrument and is treating it as a cash flow hedge for accounting purposes pursuant to ASC 815, Derivatives and Hedging. As of October 3, 2021 and December 31, 2020, the interest rate swap had a fair value liability of $3.8 million and $8.6 million, respectively.
As of October 3, 2021, the Company had one EUR/SEK foreign currency forward contract with a notional value of EUR 7.6 million. There were no open forward contracts as of December 31, 2020. The fair value of the derivative forward contract at October 3, 2021 was immaterial. The Company’s forward hedge contract falls within Level 2 of the fair value hierarchy, in accordance with ASC Topic 820. For the three months ended October 3, 2021, the realized and unrealized loss associated with this contract was $0.1 million. For the nine months ended October 3, 2021, the realized and unrealized loss was $0.4 million. The intent of the foreign currency forward contract is to mitigate the risk of foreign exchange gains and losses on Euro-denominated balances at one of the Company’s non-Euro denominated functional currency entities. The forward contracts does not qualify for hedge accounting treatment. Any gains and losses are recognized as a component of other expense (income) in the condensed consolidated statements of operations.
The aggregate net fair value of the interest rate swap, cross-currency swap, and foreign currency forward contract was a net liability position of $6.1 million and $14.8 million at October 3, 2021 and December 31, 2020, respectively. These balances are recorded in accrued expenses and other current liabilities of $6.6 million, and prepaid expenses and other current assets of $0.5 million on the condensed consolidated balance sheet as of October 3, 2021. As of December 31, 2020, these balances are recorded in other non-current liabilities of $10.6 million, accrued expenses and other current liabilities of $6.5 million, and prepaid expenses and other current assets of $2.4 million on the consolidated balance sheet.
The amount of gains (loss) recognized in other comprehensive loss (“OCI”) and reclassified from accumulated other comprehensive loss (“AOCI”) to earnings are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
|
|
|
October 3, 2021
|
|
October 3, 2021
|
|
Amount of (loss) recognized in OCI
|
|
|
|
|
$
|
(21)
|
|
|
$
|
(260)
|
|
|
|
|
|
|
|
|
|
|
|
Amount of (loss) reclassified from AOCI to earnings (interest expense, net)
|
|
|
|
|
$
|
(1,665)
|
|
|
$
|
(5,052)
|
|
|
Amounts expected to be reclassified from AOCI into interest expense, net in the next 12 months is a loss of $3.4 million. 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 $6.0 million and $18.1 million for the three and nine months ended October 3, 2021, respectively.
Debt
As of October 3, 2021, total debt was $507.1 million compared to $507.9 million as of December 31, 2020. Total debt is net of unamortized term loan debt issuance costs of $9.9 million and $12.0 million at October 3, 2021 and December 31, 2020, respectively. The Company made interest payments of $23.3 million and $25.6 million during the nine months ended October 3, 2021, and September 27, 2020, respectively.
On March 20, 2020, the Company drew down $80 million on its line of credit due to concerns about possible disruptions to global capital markets stemming from COVID-19. The Company has since paid down its revolving credit facility balance by $55.0 million for a current balance of $25.0 million as of October 3, 2021.
(10) 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, it 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 3, 2021.
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 3, 2021 and September 27, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
October 3, 2021
|
|
September 27, 2020
|
|
|
|
|
|
|
|
|
Balance beginning
|
|
|
|
|
$
|
2,206
|
|
|
$
|
1,642
|
|
Provisions
|
|
|
|
|
2,532
|
|
|
1,895
|
|
Claims settled
|
|
|
|
|
(2,116)
|
|
|
(1,813)
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment
|
|
|
|
|
(47)
|
|
|
6
|
|
Balance ending
|
|
|
|
|
$
|
2,575
|
|
|
$
|
1,730
|
|
Warranty obligations are recorded within Accrued expenses and other current liabilities on the condensed consolidated balance sheets.
(11) 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, 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 the Company’s financial condition, results of operations or liquidity. During the nine months ended October 3, 2021, the Company recognized recoveries for a business interruption insurance claim in the amount of $0.8 million, which is classified in the selling, general and administrative expenses on the condensed consolidated statement of operations.
Asbestos-related product liability claims continue to be filed against two of the Company's subsidiaries: Spence Engineering Company, Inc. (“Spence”), the stock of which the Company acquired in 1984; and CIRCOR Instrumentation Technologies, Inc. (f/k/a Hoke, Inc.) (“Hoke”), the stock of which it acquired in 1998. 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 this termination is under dispute and the ultimate outcome of this matter is uncertain. The Company has a net receivable in the amount of $4.6 million as of October 3, 2021 relating to this contract. Further, the Company has outstanding guarantees of its performance under the contract in the aggregate amount of $3.4 million. Should the negotiation or settlement process be unfavorable for the Company, the Company is exposed to risk of loss for some or all of the net receivable under the contract, performance guarantees 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 3, 2021 was $31.0 million of which $23.4 million was syndicated under the Company’s credit agreement. This compares with aggregate notional value of $39.3 million of which $30.4 million was syndicated under the credit agreement as of December 31, 2020. These instruments generally have expiration dates ranging from less than 1 month to 5 years from October 3, 2021.
(12) 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 3, 2021
|
|
September 27, 2020
|
|
October 3, 2021
|
|
September 27, 2020
|
Pension Benefits - U.S. Plans
|
|
|
|
|
|
|
|
Interest cost
|
$
|
772
|
|
|
$
|
1,398
|
|
|
$
|
2,318
|
|
|
$
|
4,194
|
|
Expected return on plan assets
|
(2,102)
|
|
|
(2,747)
|
|
|
(7,359)
|
|
|
(8,241)
|
|
|
|
|
|
|
|
|
|
Amortization
|
51
|
|
|
43
|
|
|
152
|
|
|
129
|
|
Net periodic benefit income
|
$
|
(1,279)
|
|
|
$
|
(1,306)
|
|
|
$
|
(4,889)
|
|
|
$
|
(3,918)
|
|
|
|
|
|
|
|
|
|
Pension Benefits - Non-U.S. Plans
|
|
|
|
|
|
|
|
Service cost
|
$
|
821
|
|
|
$
|
692
|
|
|
$
|
2,467
|
|
|
$
|
2,076
|
|
Interest cost
|
242
|
|
|
339
|
|
|
735
|
|
|
1,017
|
|
Expected return on plan assets
|
(156)
|
|
|
(194)
|
|
|
(470)
|
|
|
(582)
|
|
Amortization
|
175
|
|
|
31
|
|
|
534
|
|
|
93
|
|
Net periodic benefit cost
|
$
|
1,082
|
|
|
$
|
868
|
|
|
$
|
3,266
|
|
|
$
|
2,604
|
|
|
|
|
|
|
|
|
|
Other Post-Retirement Benefits
|
|
|
|
|
|
|
|
Service cost
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
Interest cost
|
42
|
|
|
66
|
|
|
126
|
|
|
198
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
$
|
43
|
|
|
$
|
66
|
|
|
$
|
129
|
|
|
$
|
198
|
|
|
|
|
|
|
|
|
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 3, 2021 and September 27, 2020.
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 3, 2021 and September 27, 2020.
(13) Income Taxes
The provision for (benefit from) for income taxes to income (loss) from continuing operations is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
October 3, 2021
|
|
September 27, 2020
|
|
October 3, 2021
|
|
September 27, 2020
|
|
Loss from continuing operations before income taxes
|
|
$
|
(1,455)
|
|
|
$
|
(4,547)
|
|
|
$
|
(19,660)
|
|
|
$
|
(96,296)
|
|
|
Effective tax rate
|
|
6.3
|
%
|
|
(1,194.8)
|
%
|
|
(16.6)
|
%
|
|
(42.5)
|
%
|
|
(Benefit from) provision for income taxes
|
|
$
|
(92)
|
|
|
$
|
54,318
|
|
|
$
|
3,268
|
|
|
$
|
40,923
|
|
|
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 3, 2021, differed from the U.S. federal statutory rate of 21% primarily due to adjustments to the domestic and foreign valuation allowances and unbenefited losses. The effective tax rate for the three months ended September 27, 2020, differed from the U.S. federal statutory rate primarily due to adjustments to the domestic and foreign valuation allowances, unbenefited losses and intercompany financing. The effective tax rate for the nine months ended October 3, 2021 differed from the U.S. federal statutory rate of 21% primarily due to adjustments to the domestic and foreign valuation allowances and an adjustment related to stock compensation. The effective tax rate for the nine months ended September 27, 2020 differed from the U.S. statutory tax rate of 21% primarily due to adjustments to the domestic and foreign valuation allowances and unbenefited losses. In 2020 the Company recorded a full valuation allowance in the U.S. and Germany. The Company intends to continue maintaining valuation allowances on these deferred tax assets until there is sufficient evidence to support the release of all or some portion of these allowances.
As of October 3, 2021 and December 31, 2020, the Company had $0.9 million and $1.1 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.
(14) Share-Based Compensation
As of October 3, 2021, the Company had 610,691 stock options and 558,750 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 1,260,268 shares available for grant as of October 3, 2021.
During the nine months ended October 3, 2021 and September 27, 2020, there were no stock options granted.
For additional information regarding the historical issuance of stock options, refer to Note 13 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
During the nine months ended October 3, 2021 and September 27, 2020, the Company granted 243,650 and 612,094 RSU Awards with approximate fair values of $40.58 and $12.76 per RSU Award, respectively. During the nine months ended October 3, 2021 and September 27, 2020, the Company granted performance-based RSU Awards as part of the overall mix of RSU Awards. Of the 243,650 RSU Awards granted during the nine months ended October 3, 2021, 70,933 are performance-based RSU Awards. This compares to 109,278 performance-based RSU Awards granted during the nine months ended September 27, 2020. The performance-based RSU Awards granted in 2021 include a market condition based on the Company's total shareholder return relative to a subset of the S&P 600 SmallCap Industrial Companies over a three year performance period. The target payout range for the 2021 awards is 0% to 200% with a cap not to exceed 600% of the target value on the grant date. The 2021 performance-based RSUs are valued using a Monte Carlo Simulation model to account for the market
condition on grant date. The performance-based RSUs granted in 2020 include metrics for achieving Adjusted Operating Margin and Adjusted Measurement Cash Flow with target payouts ranging from 0% to 200%. Of the different performance-based RSU tranches without a market condition, the Company anticipates approximately 5% overall achievement and probability to vest.
There were 31,248 RSU MSPs granted during the nine months ended October 3, 2021. RSU MSPs granted during the nine months ended October 3, 2021 had a per unit discount of $13.14 per share representing fair value. No RSU MSPs were granted during the nine months ended September 27, 2020.
Compensation expense related to the Company’s share-based plans for the nine months ended October 3, 2021 and September 27, 2020 was $4.2 million and $4.3 million, respectively. Compensation expense for nine months ended October 3, 2021 was recorded entirely in selling, general and administrative expenses. Compensation expense for the nine months ended September 27, 2020 was recorded as follows: $4.0 million in selling, general and administrative expenses, $0.1 million in special charges related to the sale of the Company’s I&S business, and $0.2 million in discontinued operations related to the sale of the Company’s DV business. The special charges relate to the accelerated vesting of awards as a result of the sale transactions. As of October 3, 2021, there were $9.4 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 2.1 years.
The weighted average contractual term for stock options outstanding and options exercisable as of October 3, 2021 was 2.4 years and 2.3 years, respectively.
The aggregate intrinsic value of RSU Awards settled and outstanding during the nine months ended October 3, 2021 was $12.1 million and $16.8 million, respectively. The aggregate intrinsic value of RSU MSP Awards settled and outstanding during the nine months ended October 3, 2021 was $0.2 million and $0.6 million, respectively.
The Company also grants cash settled stock unit awards to some of its international employee participants. Cash settled stock unit award related compensation cost for the nine months ended October 3, 2021 was $0.6 million which compares with $0.3 million for the same period ended September 27, 2020. The increase in cost is related to a higher stock price in 2021.
(15) Accumulated Other Comprehensive Loss
The following table summarizes the changes in accumulated other comprehensive loss, net of tax, which is reported as a component of shareholders’ equity, for the nine months ended October 3, 2021 and September 27, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments
|
|
Pension, net
|
|
Derivative
|
|
Total
|
Balance as of December 31, 2020
|
$
|
(46,899)
|
|
|
$
|
(33,359)
|
|
|
$
|
(5,710)
|
|
|
$
|
(85,968)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income
|
(5,951)
|
|
|
161
|
|
|
4,792
|
|
|
(998)
|
|
Balance as of October 3, 2021
|
$
|
(52,850)
|
|
|
$
|
(33,198)
|
|
|
$
|
(918)
|
|
|
$
|
(86,966)
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2019
|
$
|
(53,848)
|
|
|
$
|
(19,513)
|
|
|
$
|
(6,906)
|
|
|
$
|
(80,267)
|
|
Other comprehensive (loss) income
|
(3,418)
|
|
|
126
|
|
|
(192)
|
|
|
(3,484)
|
|
Balance as of September 27, 2020
|
$
|
(57,266)
|
|
|
$
|
(19,387)
|
|
|
$
|
(7,098)
|
|
|
$
|
(83,751)
|
|
(16) Income (Loss) Per Common Share (“EPS”)
For the three and nine months ended October 3, 2021, and September 27, 2020, outstanding stock options, RSU Awards and RSU MSPs were not included in the calculation of dilutive EPS because to do so would be anti-dilutive. For the three months ended October 3, 2021, there were 783,497 anti-dilutive stock options, RSUs, and RSU MSPs with exercise prices ranging from $32.76 to $60.99. For the three months ended September 27, 2020, there were 674,306 anti-dilutive stock options, RSU Awards and RSU MSPs with exercise prices ranging from $31.05 to $71.56.