NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Description of Business
CIRCOR International, Inc. (“CIRCOR” or the “Company”) designs, manufactures and distributes a broad array of flow and motion control products and certain services to a variety of end-markets for use in a wide range of applications to optimize the efficiency and/or ensure the safety of flow control systems. CIRCOR has a global presence and operates major manufacturing facilities in North America, Western Europe, Morocco, India and China.
As of December 31, 2022, the Company organized its business segment reporting structure into two segments: CIRCOR Aerospace & Defense (“Aerospace & Defense”) and CIRCOR Industrial (“Industrial”). Refer to Note 18, Business Segment and Geographical Information, for further information about the segments.
In January 2020, the Company completed the sale of the non-core Instrumentation and Sampling (“I&S”) business to Crane Co. for $169.1 million in cash, net of working capital adjustments. The I&S business manufactured fittings, regulators, sampling systems and valves. The disposal group did not meet the criteria to be classified as a discontinued operation.
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 indefinite-lived 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 $138.1 million impairment. See Note 9, Goodwill and Other Intangibles Assets, for additional information on the goodwill impairment.
In June 2020, the Company completed the disposition of its Distributed Valves (“DV”) business at a cost of $10.8 million inclusive of working capital adjustments, while also retaining certain liabilities related to the business. The DV business was a long-cycle upstream oil and gas engineered valve business. This disposal group met the criteria to be classified as held for sale and a discontinued operation, and was recorded as such within the comparative consolidated financial statements for the year ended December 31, 2019. For more information on the discontinued operations and held for sale transactions, see Note 3, Discontinued Operations.
In December 2021, the Company refinanced its term loan and revolving line of credit facility. See Note 12, Financing Arrangements for additional information on the refinancing.
In the fourth quarter of 2021, the Company recorded a goodwill impairment charge in the amount of $10.5 million as a result of the Company's annual impairment assessment. See Note 9, Goodwill and Other Intangibles Assets, for additional information on the goodwill impairment.
Throughout this Annual Report on Form 10-K, unless otherwise indicated, amounts and activity are presented on a continuing operations basis.
As described in its Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on March 14, 2022, the Company announced that it had discovered accounting irregularities in its Pipeline Engineering business unit, and that the Audit Committee engaged external advisors to conduct a review into the irregularities.
As further described in the Explanatory Note in its 2021 Annual Report and Note 2 and Note 23 in Item 8 of the 2021 Annual Report, the discovery of accounting irregularities and investigation in its Pipeline Engineering business unit resulted in the Company restating its financial statements for prior periods. The restatement of prior period financial statements included the annual periods of 2020 and 2019, interim and year to date periods for 2020 and interim and year to date periods for the nine months ended October 3, 2021.
On April 14, 2022, the Company placed the Catterick, UK entity of the Pipeline Engineering business into Administration under the U.K. Insolvency Act of 1986 and the Insolvency (England and Wales) Rules 2016 (IR 2016). The loss of control triggered deconsolidation which effect is described in Note 5 Special and Restructuring (Recoveries) Charges, Net.
COVID-19
The COVID-19 pandemic continues to impact the global economy, resulting in rapidly changing market and economic conditions. The effects of the COVID-19 pandemic continue to negatively impact the Company’s results of operations, cash flows and financial position. The Company’s consolidated financial statements presented herein reflect management's estimates and assumptions regarding the effects of COVID-19 as of the date of the consolidated financial statements.
(2) Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The consolidated financial statements include the accounts of CIRCOR and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The results of companies acquired or divested are included in the consolidated financial statements from the date of acquisition or up to the date of disposal.
Use of Estimates
The preparation of these financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. Some of the more significant estimates, some of which are impacted by management’s estimates and assumptions regarding the effects of the COVID-19 pandemic, 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, allowance for credit losses, 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, 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.
Revenue Recognition
The Company recognizes revenue to depict the transfer of control to the Company’s customers in an amount reflecting what the Company expects to be entitled to in exchange for performance obligations. In order to apply this revenue recognition principle, the Company applies the following five step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when, or as, a performance obligation is satisfied. See Note 4, Revenue Recognition for further information.
Revenues relating to point in time contracts are recognized when the customer obtains control of the product, which is generally at the time of shipping. Revenues and costs on certain long-term contracts are recognized on the percentage-of-completion method measured on the basis of costs incurred to estimated total costs for each contract. This method is used because management considers it to be the best available measure of progress towards completion on these contracts. Revenues and costs on contracts are subject to changes in estimates throughout the duration of the contracts, and any required adjustments are made in the period in which a change in estimate becomes known. Unbilled receivables for net revenues recognized in excess of the amounts billed for active projects are recognized as contract assets on the balance sheet.
The Company provides for the estimated costs to fulfill customer warranty obligations upon the recognition of the related revenue. Shipping and handling costs invoiced to customers are recorded as components of revenues and the associated costs are recorded as cost of revenues. The Company recognizes revenue net of sales returns, rebates, penalties, and discounts. Accounts receivable allowances include sales returns and the allowance for credit losses. The Company monitors and tracks the amount of product returns and reduces revenue at the time of shipment for the estimated amount of such future returns, based on historical experience.
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. Account balances are charged off against the allowance when the Company believes it is probable the receivable will not be recovered.
The following table presents changes in the accounts receivables allowance for doubtful accounts for the years ended December 31 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Additions (Reductions) | | | | |
| Description | | Balance at
Beginning of
Period | | Charged to
Costs
and Expenses | | Charged to
Other
Accounts | | Deductions
(1) | | Balance at
End
of Period |
| | |
| Year ended | | | | | | | | | | |
| December 31, 2022 | | | | | | | | | | |
| Deducted from asset account: | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 10,781 | | | $ | (813) | | | $ | (881) | | | $ | (832) | | | $ | 8,255 | |
| Year ended | | | | | | | | | | |
| December 31, 2021 | | | | | | | | | | |
| Deducted from asset account: | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 10,596 | | | $ | 1,213 | | | $ | (608) | | | $ | (420) | | | $ | 10,781 | |
| Year ended | | | | | | | | | | |
| December 31, 2020 | | | | | | | | | | |
| Deducted from asset account: | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 3,948 | | | $ | 6,274 | | | $ | 999 | | | $ | (625) | | | $ | 10,596 | |
| (1) Uncollectible accounts written off, net of recoveries. | | | | | | | | | | |
During 2021 the Company recorded a charge for allowance against contract assets of $4.4 million which is also the ending balance of allowance against contract assets as of December 31, 2021.
Goodwill
Goodwill is measured as the excess of the cost of acquisition over the sum of the amounts assigned to identifiable tangible and intangible assets acquired less liabilities assumed. The Company performs an impairment assessment for goodwill at the reporting unit level on an annual basis as of the end of its October month end or more frequently if circumstances warrant. Its annual impairment assessment requires a comparison of the fair value of each of its reporting units to the respective carrying value. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying value of a reporting unit is greater than its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Additionally, the Company will consider the income tax effect from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss.
Determining the fair value of a reporting unit is subjective and requires the use of significant estimates and assumptions. With the assistance of an independent third-party appraisal firm, the Company estimates the fair value of its reporting units using an income approach based on the present value of future cash flows. It believes this approach yields the most appropriate evidence of fair value. The Company also utilizes the comparable company multiples method and market transaction fair value method to validate the fair value estimate using the income approach. The key assumptions utilized in its discounted cash flow model includes estimates of the rate of revenue growth and the discount rate based on a weighted average cost of capital. Any unfavorable material changes to these key assumptions could potentially impact its fair value determinations.
For additional information, see Note 9, Goodwill and Other Intangible Assets.
Cost of Revenues
Cost of revenues primarily reflects the costs of manufacturing and preparing products for sale and, to a much lesser extent, the costs of performing services. Cost of revenues is primarily comprised of the cost of materials, outside processing, inbound freight, production, direct labor and overhead including indirect labor, which are expenses that directly result from the level of production activity at a manufacturing site. Additional expenses that directly result from the level of production activity at a manufacturing site include purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs, utility expenses, property taxes, amortization of inventory step-up from revaluation at the date of acquisition, depreciation of production building and equipment assets, warranty costs, salaries and benefits paid to plant manufacturing management and maintenance supplies.
Inventories
Inventories are stated at the lower of cost or net realizable value. Where appropriate, standard cost systems are utilized for
purposes of determining cost; the standards are adjusted as necessary to ensure they approximate actual cost. Cost is generally determined on the first-in, first-out (“FIFO”) basis. The Company typically analyzes its inventory aging and projected future usage on a quarterly basis to assess the adequacy of its inventory valuation reserve, which primarily consists of obsolescence and net realizable value estimates. These estimates are measured either on an item-by-item basis or higher-level inventory grouping and determined based on the difference between the cost of the inventory and estimated net realizable value. The provision for inventory valuation reserves is a component of the Company's cost of revenues. Assumptions about future demand are among the primary factors utilized to estimate net realizable value. At the point of the loss recognition, a new, lower-cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. Only subsequent inventory transactions via sale or disposal would then release the established inventory reserve.
If there were to be a sudden and significant decrease in demand for its products, significant price reductions, or a higher incidence of inventory obsolescence for any reason, including a change in technology or customer requirements, the Company could be required to increase its inventory valuation reserves, which could adversely affect its gross profits.
Legal Contingencies
The Company is currently involved in various legal claims and legal proceedings, some of which may involve substantial dollar amounts. Periodically, the Company reviews the status of each significant matter and assesses its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be estimated, it accrues a liability for the estimated loss. The determination of probability and the determination as to whether exposure can be reasonably estimated requires management estimates. Because of uncertainties related to these matters, accruals are based on the best information available at the time. As additional information becomes available, the Company reassesses the potential liability related to its pending claims and litigation and may revise its estimates. Such revisions in the estimates of the potential liabilities could have a material adverse effect on its business, results of operations and financial position.
For more information see Note 16, Contingencies, Commitments and Guarantees.
Indefinite-Lived Intangible Assets
Indefinite-lived intangible assets, such as trade names, are generally recorded and valued in connection with a business acquisition. For these assets, the Company performs a qualitative assessment on an annual basis to determine if it is more likely than not the asset is impaired (“Step 0” test). These assets are reviewed at least annually for impairment as of the October month end, or more frequently if facts and circumstances warrant. For any that fail the Step 0 test, the Company performs an impairment assessment at the asset level utilizing a fair value calculation. The Company has the option to bypass the qualitative assessment for an indefinite lived intangible asset in any period and proceed directly to the quantitative impairment test. Determining the fair value is subjective and requires the use of significant estimates and assumptions. With the assistance of an independent third-party appraisal firm, the Company estimates the fair value using the relief from royalty method. The significant assumptions that are used to determine the estimated fair value for indefinite-lived intangible assets are forecasted revenue growth rates, the assumed royalty rates and the market-participant discount rates.
For more information see Note 9, Goodwill and Other Intangible Assets.
Other Long-Lived Assets
In accordance with ASC Topic 360, Plant, Property, and Equipment, the Company performs impairment analyses of long-lived asset groups whenever events and circumstances indicate impairment. If indicators are present, it performs a recoverability test by comparing the sum of the undiscounted future cash flows specific to the asset group to its carrying value. If the recoverability test fails (sum of undiscounted cash flows are less than the asset group's carrying value), it then determines the fair value of the asset group and recognizes an impairment loss if the carrying value exceeds the estimated fair value.
For more information, see Note 8, Property, Plant and Equipment.
Post-Retirement Benefits
Pensions and other post-retirement benefit obligations and net periodic benefit costs are actuarially determined and are affected by several assumptions including the discount rate, mortality, and the expected long-term return on plan assets. Changes in assumptions and differences from actual results will affect the amounts of net periodic benefit cost recognized in future periods. These assumptions may also effect the amount and timing of future cash contributions.
As required in the recognition and disclosure provisions of ASC Topic 715, Compensation - Retirement Benefits, the Company recognizes the over-funded or under-funded status of defined benefit post-retirement plans in its balance sheet, measured as the difference between the fair value of plan assets and the benefit obligations (the projected benefit obligation for pension plans and the accumulated post-retirement benefit obligation for other post-retirement plans). The change in the funded status is the net of the recognized net periodic benefit cost, cash contributions to the trust/benefits paid directly by the Company and recognized changes in other comprehensive income. Other comprehensive income changes are due to new actuarial gains and losses, new plan amendments and the amortizations of amounts in the net periodic benefit cost.
Unrecognized actuarial gains and losses in excess of the 10% corridor (defined as the threshold above which gains or losses need to be amortized) are being recognized for all plans over the weighted average expected remaining service period of the employee group unless substantially all participants are inactive in which case the average remaining lifetime of covered participants is used. Unrecognized actuarial gains and losses arise from several factors including changes in the benefit obligations from actuarial experience and assumption changes, as well as the difference between expected returns and actual returns on plan assets.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if the Company anticipates that it is more likely than not that it may not realize some or all of a deferred tax asset.
In accordance with the provisions of ASC Topic 740, Income Taxes, the Company initially recognizes the financial statement effect of a tax position when, based solely on its technical merits, it is more likely than not (a likelihood of greater than fifty percent) that the position will be sustained upon examination by the relevant taxing authority. Those tax positions failing to qualify for initial recognition are recognized in the first interim period in which they meet the more likely than not standard, are resolved through negotiation or litigation with the taxing authority, or upon expiration of the statute of limitations. De-recognition of a tax position that was previously recognized occurs when an entity subsequently determines that a tax position no longer meets the more likely than not threshold of being sustained.
If future results of operations exceed the Company's current expectations, its 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, the Company may need to establish additional tax valuation allowances for a portion or all of the gross deferred tax assets, which may have a material adverse effect on its results of operations.
Under ASC Topic 740, Income Taxes, only the portion of the liability that is expected to be paid within one year is classified as a current liability. As a result, liabilities expected to be resolved without the payment of cash (e.g., due to the expiration of the statute of limitations) or are not expected to be paid within one year are classified as non-current. It is the Company’s policy to record estimated interest and penalties as income tax expense, and tax credits as a reduction in income tax expense.
With respect to global intangible low-taxed income (“GILTI”), the Company has adopted a policy to account for this provision as a period cost.
For additional information, see Note 10, Income Taxes.
Share-Based Compensation
Share-based compensation costs are based on the grant date fair value estimated in accordance with the provisions of ASC Topic 718, Accounting for Share Based Payments, and these costs are recognized over the requisite vesting period. The Black-Scholes option pricing model is used to estimate the fair value of each stock option at the date of grant. Black-Scholes utilizes assumptions related to volatility, the risk-free interest rate, the dividend yield and employee exercise behavior. Expected volatilities utilized in the model are based on the historic volatility of the Company’s stock price. The risk-free interest rate is derived from the U.S. Treasury Yield curve in effect at the time of the grant. The model incorporates exercise and post-vesting service termination assumptions based on an analysis of historical data.
For additional information, see Note 13, Share-Based Compensation.
Assets Held for Sale
The Company classifies assets and liabilities (disposal groups) to be sold as held for sale in the period in which all of the following criteria are met: management, having the authority to approve the action, commits to a plan to sell the disposal group; the disposal group is available for immediate sale in its present condition subject to terms customary for sales of such disposal groups; an active program to locate a buyer and other actions required to complete the plan to sell the disposal group have been initiated; the sale of the disposal group is probable, and transfer of the disposal group is expected to qualify for recognition as a completed sale within one year; the disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
The Company initially measures a disposal group that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Conversely, gains are not recognized on the sale of a disposal group until the date of sale. The Company assesses the fair value of a disposal group, less any costs to sell, each reporting period it remains classified as held for sale and reports any subsequent changes as an adjustment to the carrying value of the disposal group, as long as the new carrying value does not exceed the carrying value of the disposal group at the time it was initially classified as held for sale.
Upon determining that a disposal group meets the criteria to be classified as held for sale, the Company reports the assets and liabilities of the disposal group, if material, as separate line items on the consolidated statements of financial position.
Environmental Compliance and Remediation
Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to existing conditions caused by past operations, which do not contribute to current or future revenue generation, are expensed. Expenditures that meet the criteria of “Regulated Operations” are capitalized. Liabilities are recorded when environmental assessments and/or remedial efforts are probable and the costs can be reasonably estimated. In accordance with ASC Topic 450, Contingencies, estimated costs are based upon current laws and regulations, existing technology and the most probable method of remediation.
Foreign Currency and Foreign Currency Contracts
The Company's international subsidiaries operate and report their financial results using local functional currencies. Accordingly, all assets and liabilities of these operations are translated into United States (“U.S.”) dollars using exchange rates in effect at the end of the relevant periods. Income statement accounts such as revenues and cost of revenues are translated at the average rate of exchange prevailing during the period. The resulting translation adjustments are presented as a separate component of accumulated other comprehensive loss. The Company does not provide for U.S. income taxes on foreign currency translation adjustments since it does not provide for such taxes on undistributed earnings of foreign subsidiaries.
The Company is exposed to certain risks relating to its ongoing business operations including foreign currency exchange rate risk. From time to time the Company uses derivative instruments to manage foreign currency risk on certain business transactions denominated in foreign currencies. To the extent the underlying transactions hedged are completed, these forward contracts do not subject the Company to significant risk from exchange rate movements because they offset gains and losses on the related foreign currency denominated transactions. These forward contracts do not qualify as hedging instruments and, therefore, do not qualify for fair value or cash flow hedge treatment. Any gains and losses on the forward contracts are recognized as a component of other expense in its consolidated statements of operations.
The Company is subject to exchange rate related gains or losses resulting from foreign currency denominated transactions. Its net foreign exchange (gains) / losses recorded for the years ended December 31, 2022, 2021, and 2020 were $(2.2) million, $0.9 million, and $1.7 million, respectively and are included in other (income) expense in the consolidated statements of operations.
Earnings Per Common Share
Basic earnings per common share is calculated by dividing net income by the number of weighted average common shares outstanding. Diluted earnings per common share is calculated by dividing net income by the weighted average common shares outstanding and assumes the conversion of all dilutive securities when the effects of such conversion would not be anti-dilutive.
Earnings per common share and the weighted average number of shares used to compute net earnings per common share, basic and assuming full dilution, are reconciled below (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | Net
Income | | Shares | | Per Share
Amount | | Net
(Loss) | | Shares | | Per Share
Amount | | Net
(Loss) | | Shares | | Per Share
Amount |
| Basic EPS | $ | 19,388 | | | 20,350 | | | $ | 0.95 | | | $ | (61,638) | | | 20,201 | | | $ | (3.05) | | | $ | (218,614) | | | 19,982 | | | $ | (10.94) | |
| Dilutive securities, principally common stock awards | — | | | 77 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Diluted EPS | $ | 19,388 | | | 20,427 | | | $ | 0.95 | | | $ | (61,638) | | | 20,201 | | | $ | (3.05) | | | $ | (218,614) | | | 19,982 | | | $ | (10.94) | |
Certain stock options to purchase common shares and restricted stock units (“RSUs”) were anti-dilutive. There were 43,515 anti-dilutive stock options, RSUs, and RSU MSPs for the year ended December 31, 2022 with exercise (grant) prices ranging from $26.84 to $60.99. There were 596,753 anti-dilutive stock options, RSUs and RSU MSPs for the year ended December 31, 2021 with exercise prices ranging from $32.76 to $60.99. There were 663,986 anti-dilutive stock options and RSUs for the year ended December 31, 2020 with exercise prices ranging from $33.63 to $71.56.
Cash and Cash Equivalents
The Company's cash equivalents are invested in time deposits of financial institutions, and it has established guidelines relative to credit ratings, diversification and maturities that are intended to maintain safety and liquidity. Cash equivalents include highly liquid investments with maturity periods of three months or less when purchased.
Restricted Cash
Restricted cash represents cash that is legally restricted as to withdrawal or usage and includes amounts required to be maintained in relation to bank guarantees in certain jurisdictions. Restricted cash is classified within prepaid expenses and other current assets on the consolidated balance sheets.
Other Assets
Other assets in the accompanying consolidated balance sheets include deferred debt issuance costs associated with the Company's revolving credit facility, tax receivable, non-current contract assets and other certain assets.
Fair Value
ASC Topic 820, Fair Value Measurement, defines fair value and includes a framework for measuring fair value and disclosing fair value measurements in financial statements. Fair value is a market-based measurement rather than an entity-specific measurement. The fair value hierarchy makes a distinction between assumptions developed based on market data obtained from independent sources (observable inputs) and the reporting entity’s own assumptions (unobservable inputs). 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.
Fair value information for those assets and liabilities, including their classification in the fair value hierarchy, is included in: Note 12, Financing Arrangements along with Derivative Financial Instruments, and Note 15, Retirement Plans (for assets held in trust).
Certain pension plan asset investments are measured at fair value using the net asset value per share (or its equivalent) practical expedient (the “NAV”). The carrying amounts of cash and cash equivalents, restricted cash, 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 is a Level 1 financial instrument.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is generally provided on a straight-line basis over the estimated useful lives of the assets, which typically range from 3 to 40 years for buildings and improvements, 1 to 10 years for manufacturing machinery and equipment, and 3 to 7 years for computer equipment and software. Motor vehicles and furniture and fixtures are typically depreciated over 5 years. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or estimated useful life of the asset. Repairs and maintenance costs are expensed as incurred.
The Company reports depreciation of property, plant and equipment in cost of revenue and selling, general and administrative expenses based on the nature of the underlying assets. Depreciation primarily related to equipment used in the production of inventory is recorded in cost of revenues. Depreciation related to selling and administrative functions is reported in selling, general and administrative expenses.
See Note 8, Property, Plant and Equipment for additional information.
Research and Development
Research and development expenditures, including certain engineering costs, are expensed when incurred and are included in selling, general and administrative expenses. Research and development expenditures for the years ended December 31, 2022, 2021, and 2020 were $7.7 million, $7.6 million, and $8.4 million, respectively.
Sale of Receivables
The Company has an active receivables purchasing agreement with a bank whereby the Company can sell selected account receivables and receive between 90% to 100% of the purchase price upfront, net of applicable discount fee, and the residual amount as the receivables are collected.
During 2022, the Company sold a total of $46.6 million in receivables under the program, receiving $46.2 million in cash of which $0.9 million related to prior year. The outstanding purchase price component of $1.1 million was recorded in prepaid expenses and other current assets on the consolidated balance sheet at December 31, 2022. During 2021, the Company sold a total of $38.1 million in receivables under the program, receiving $38.0 million in cash of which $0.8 million related to prior year. The outstanding purchase price component of $0.9 million was recorded in prepaid expenses and other current assets on the consolidated balance sheet at December 31, 2021.
New Accounting Standards
Changes to U.S.GAAP are typically established by the Financial Accounting Standards Board ("FASB") in the form of Accounting Standards Updates (ASUs") to the FASB's Accounting Standards Codification ("ASC"). The Company considers the applicability and impact of all ASUs, and based on its assessment, determined that any recently issued or proposed ASUs not listed below are either not applicable to the Company or adoption will have minimal impact on its consolidated financial statements.
Recently Adopted Accounting Standards
In March 2020, the FASB issued Accounting Standards Update ("ASU") 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This guidance 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 applicable contract modifications through December 31, 2022. The Company adopted the standard as of January 1, 2021, and intends to apply the provisions of this standard to contract modifications if and when applicable. The adoption of the standard did not have a material impact on the Company’s consolidated financial statements..
(3) Discontinued Operations
During the second quarter of 2020, the Company completed the sale of its DV business to MS Valves GmbH for negative $8.3 million and a working capital adjustment of negative $2.0 million at the time of closing. The transaction is subject to an earnout of 50% of net profit (only if positive) from closing through December 31, 2022. The Company had agreed to provide certain transition services for six to twelve months, depending on the nature of the services. As part of transaction the Company retained certain supplier and lease liabilities and responsibility for shutting down DV’s Mexico manufacturing facility. The Company recognized a loss of $21.6 million in 2020 from the sale of DV, including costs to sell and working capital adjustments.
During 2021, the Company continued to settle certain retained liabilities related to the sale of its DV business. During the third quarter of 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, for the EV and DV businesses for the years ended December 31, 2022, 2021, and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended |
| | | | | December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
| Net revenues | | | | | $ | — | | | $ | — | | | $ | 10,055 | |
| Cost of revenues | | | | | — | | | — | | | 26,399 | |
| Net loss | | | | | — | | | — | | | (16,344) | |
| Selling, general and administrative expenses | | | | | — | | | (84) | | | 9,074 | |
| | | | | | | | | |
| Special and restructuring charges, net (1) | | | | | — | | | 17 | | | 17,831 | |
| Operating income (loss) | | | | | — | | | 67 | | | (43,249) | |
| Other (income) expense: | | | | | | | | | |
| Interest (income), net | | | | | — | | | — | | | (14) | |
| Other (income) expense, net | | | | | — | | | (1,581) | | | 614 | |
| Total other (income) expense, net | | | | | — | | | (1,581) | | | 600 | |
| Income (loss) from discontinued operations, pre tax | | | | | — | | | 1,648 | | | (43,849) | |
| (Benefit from) provision for income taxes | | | | | — | | | 242 | | | (8,709) | |
| Income (loss) from discontinued operations, net of tax | | | | | $ | — | | | $ | 1,406 | | | $ | (35,140) | |
(1) The year ended December 31, 2020, includes a loss on the sale of the DV business of $21.6 million. |
(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.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, control is transferred to the customer. Consistent with historical practice, the Company excludes from the transaction price amounts collected on behalf of third parties (e.g. taxes). Performance obligations are typically satisfied at a point in time and shipping and handling costs are treated as fulfillment costs. To determine the proper revenue recognition method for contracts for highly engineered, complex and severe environment products, which meet over-time revenue recognition criteria, the Company evaluates whether two or more contracts should be combined and whether the combined or single contract should be accounted for as more than one performance obligation. For most of the Company’s over-time revenue recognition contracts, the customer contracts with the Company to provide custom products which serve a single project or capability (even if that single project results in the delivery of multiple products) with enforceable right to payment. In circumstances where each distinct product in the contract transfers to the customer over time and the same method would be used to measure the entity’s progress toward complete satisfaction of the performance obligation to transfer each unit to the customer, the Company then applies the series guidance to account for the multiple products as a single performance obligation. In certain instances, the Company may promise to provide distinct goods or services within the over-time revenue recognition contract, in which case the Company separates the contract into more than one performance obligation. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using estimated standalone selling price of each distinct good or service in the contract when not directly observable. If at the inception of the contract the period between the transfer of control of the good or service to the customer and when the customer pays for that good or service is less than a year the Company applies the practical expedient for significant financing component. Certain long-term contracts result in contract assets for unbilled receivables or contract liabilities for customer advances or deposits. Such unbilled receivables or customer advances and deposits are not considered a significant financing component because they are protective in nature for the customer or the Company.
Certain of the Company’s contracts give rise to variable consideration, including penalties. The Company includes in its contract estimates a reduction to revenue for customer agreements, primarily in the large projects businesses, which contain late shipment penalty clauses whereby the Company is contractually obligated to pay consideration to customers if the Company does not meet specified shipment dates. Variable consideration is estimated using the most likely amount method or the expected value method depending on nature of the variability, and the method elected is consistently applied among performance obligations with similar uncertainties.
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. Accounting for over-time contracts requires reliable estimates in order to estimate total contract revenue and costs. For these contracts, management reviews the progress and execution of the Company's performance obligations at least quarterly. Management estimates the profit on a contract as the difference between the total estimated revenue and estimate at completion (“EAC”) costs and recognizes the resultant profit over the life of the contract, using the cost-to-cost EAC input method to measure progress toward complete satisfaction of a performance obligation. A change in one or more of these estimates could affect the profitability of the related contracts. Management recognizes adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance is recognized using the adjusted estimate. The impact of adjustments in contract estimates on our operating earnings may be reflected in cost of revenues and/or revenue.
On December 31, 2022, the Company had $236.7 million of transaction price related to remaining performance obligations. It expects to recognize approximately 66% of our remaining performance obligations as revenue during 2023, 26% in 2024, and 8% thereafter.
Contract Balances
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. The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the consolidated balance sheet. Contract assets include unbilled amounts typically resulting from over-time contracts when revenue recognized exceeds the amount billed to the customer, and right to payment is not just subject to the passage of time. Expected credit losses are considered and allowances recorded where applicable, which result in the net amount expected to be collected. Generally, payment terms are based on milestones or shipment and billing occurs subsequent to revenue recognition, resulting in contract assets for over-time revenue recognition products. However, the Company sometimes receives advances or deposits from its customers, before revenue is recognized, resulting in contract liabilities. These assets and liabilities are reported net on the consolidated balance sheet on a contract-by-contract basis at the end of each reporting period. The incremental costs of obtaining a contract are expensed when the amortization period for such contracts would have been one year or less.
In order to determine revenue recognized in the period from contract liabilities, 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 years ended December 31, 2022 and 2021, that was included in contract liabilities as of the beginning of each year amounted to 20.3 million and 24.5 million, respectively.
The Company’s contract assets and contract liabilities as of December 31, 2022 and 2021 are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | |
| | December 31, 2022 | | December 31, 2021 | | Increase/(Decrease) |
| Contract assets: | | | | | | |
| Recorded within prepaid expenses and other current assets | | $ | 98,406 | | | $ | 87,527 | | | $ | 10,879 | |
| Recorded within other non-current assets | | 7,677 | | | 6,336 | | | 1,341 | |
| Total | | $ | 106,083 | | | $ | 93,863 | | | $ | 12,220 | |
| | | | | | |
| Contract liabilities: | | | | | | |
| Recorded within accrued expenses and other current liabilities | | $ | 36,871 | | | $ | 26,870 | | | $ | 10,001 | |
| Recorded within other non-current liabilities | | 5,149 | | | 4,847 | | | 302 | |
| Total | | $ | 42,020 | | | $ | 31,717 | | | $ | 10,303 | |
Contract assets increased by $12.2 million during the year ended December 31, 2022, primarily due to unbilled revenue recognized during the period for over-time revenue contracts within the Defense partially offset by decreases in Refinery Valves, Commercial and Other businesses and allowances against contract assets.
Contract liabilities increased by $10.3 million during the year ended December 31, 2022, primarily due to customer advances received in excess of revenue recognition in the Defense and Industrial businesses.
Disaggregation of Revenue
The Company determined that disaggregating revenue into the categories shown in the table below meets the disclosure objective in ASC 606, Revenue from Contacts with Customers, 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 the revenue disaggregated by major product line and geographical market (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Year Ended |
| Revenue by Major Product Line | | | | | December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
| Industrial Segment | | | | | | | | | |
| Valves | | | | | $ | 183,997 | | | $ | 185,044 | | | $ | 199,715 | |
| Pumps | | | | | 320,207 | | | 321,082 | | | 299,494 | |
| Total | | | | | $ | 504,204 | | | $ | 506,126 | | | $ | 499,209 | |
| Aerospace & Defense Segment | | | | | | | | | |
| Commercial Aerospace & Other | | | | | $ | 125,492 | | | $ | 92,059 | | | $ | 90,835 | |
| Defense | | | | | 157,223 | | | 160,482 | | | 175,175 | |
| Total | | | | | 282,715 | | | 252,541 | | | 266,010 | |
| Net Revenue | | | | | $ | 786,919 | | | $ | 758,667 | | | $ | 765,219 | |
| | | | | | | | | | | | | | | | | | |
| | Year Ended |
| Revenue by Geographical Market | December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
| Industrial Segment | | | | | |
| Europe, Middle East, Africa, "EMEA" | $ | 202,063 | | | $ | 230,176 | | | $ | 217,853 | |
| North America | 177,728 | | | 146,307 | | | 170,301 | |
| Other | 124,413 | | | 129,643 | | | 111,055 | |
| Total | $ | 504,204 | | | $ | 506,126 | | | $ | 499,209 | |
| Aerospace & Defense Segment | | | | | |
| EMEA | $ | 67,320 | | | $ | 59,242 | | | $ | 61,726 | |
| North America | 195,190 | | | 179,589 | | | 188,817 | |
| Other | 20,205 | | | 13,710 | | | 15,467 | |
| Total | $ | 282,715 | | | $ | 252,541 | | | $ | 266,010 | |
| Net Revenue | $ | 786,919 | | | 758,667 | | | 765,219 | |
(5) Special and Restructuring (Recoveries) Charges, net
Special and Restructuring (Recoveries) Charges, net
Special and restructuring (recoveries) charges, net consist of restructuring costs (including costs to exit a product line or program) as well as certain special charges such as significant litigation settlements and other transactions (charges or recoveries) that are described below, as well as gain or loss on sale of businesses not classified as discontinued operations. All items described below are recorded in Special and restructuring (recoveries) charges, net on the Company's consolidated statements of operations. Certain other special and restructuring charges such as inventory related items may be recorded in cost of revenues given the nature of the item.
The table below summarizes the amounts recorded within the special and restructuring (recoveries) charges, net line item on the consolidated statements of operations for the years ended December 31, 2022, 2021, and 2020 (in thousands):
| | | | | | | | | | | | | | | | | |
| Special and Restructuring (Recoveries) Charges, net |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Special (recoveries) charges, net | $ | (30,079) | | | $ | 20,038 | | | $ | (39,248) | |
| Restructuring charges, net | 11,066 | | | 4,234 | | | 4,945 | |
| Total special and restructuring (recoveries) charges, net | $ | (19,013) | | | $ | 24,272 | | | $ | (34,303) | |
| | | | | |
Special (Recoveries) Charges, net
The table below outlines the special charges (recoveries), net recorded for the year ended December 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Special (Recoveries) Charges, net |
| | Year Ended December 31, 2022 |
| | Aerospace & Defense | | Industrial | | Corporate | |
Total |
| Pipeline Engineering investigation and restatement costs | | $ | — | | | $ | — | | | $ | 7,040 | | | $ | 7,040 | |
| Gain on real estate sales | | (25,969) | | | (22,008) | | | — | | | (47,977) | |
| Incremental loss allowance | | — | | | 500 | | — | | | 500 | |
| Strategic alternatives evaluation | | — | | | — | | 2,987 | | | 2,987 | |
| Debt amendment charges | | — | | | — | | | 4,977 | | | 4,977 | |
| Other special charges | | — | | | 988 | | | 1,406 | | | $ | 2,394 | |
| Total special (recoveries) charges, net | | $ | (25,969) | | | $ | (20,520) | | | $ | 16,410 | | | $ | (30,079) | |
Pipeline Engineering investigation and restatement costs: During the twelve months ended December 31, 2022, the Company recognized special charges of $7.0 million, related to the investigation into accounting irregularities at the Company's Pipeline Engineering businesses and incremental professional services charges incurred due to the restatement.
Gain on real estate sales: During the twelve months ended December 31, 2022, the Company recognized gains of $48.0 million on the sales of real estate.
In September 2022, the Company recognized a gain on the sale of real estate of $26.0 million located at Corona, California within the Aerospace and Defense segment. On September 6, 2022, the Company entered into a five year operating lease on the Corona facility, at the market rate of buildings of similar size and location, with a five year option to renew. The Company recorded an initial $14.3 million of operating right of use asset and lease liabilities.
In June 2022, the Company recognized a gain on the sale of real estate of $22.0 million located at Walden, New York and Tampa, Florida within the Industrial segment. The Company recognized a gain of $6.4 million and $15.6 million on each building, respectively. On April 8, 2022, the Company entered into a five year operating lease on the Tampa facility, at the market rate of buildings of similar size and location, with a five year option to renew. The Company recorded an initial $9.3 million of operating right of use asset and lease liability.
Incremental loss allowance: The Company incurred special charges of $0.5 million for the year ended December 31, 2022, related to a contract assumed as part of the Fluid Handling acquisition. The charges relates to incremental loss allowance for a receivable, contract asset and sub-contractor claims.
Strategic alternatives evaluation: The Company incurred special charges of $3.0 million for the twelve months ended December 31, 2022, related to the evaluation of strategic alternatives for the Company.
Debt amendment charges: The Company incurred special charges of $5.0 million for the twelve months ended December 31, 2022 related to the amendments of its credit agreements. See Note 12, Financing Arrangements for amendment information.
Other special charges, net: During the twelve months ended December 31, 2022, the Company recognized other special charges, net of $2.4 million. Other special charges, net within Corporate for the twelve months ended December 31, 2022 include a net $0.9 million for severance related to the former CEO, comprised of $1.7 million severance, partially offset by the accounting effects of forfeitures for certain unvested CEO stock based compensation awards. Additionally, for the twelve months ended, December 31, 2022 the Company incurred other special charges of $0.3 million at Corporate related to retention agreements and $1.0 million within Industrial related to severance and contract termination costs, and other special charges.
The table below outlines the special charges (recoveries), net recorded for the year ended December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Special Charges (Recoveries), net |
| | |
| | for the year ended December 31, 2021 |
| | Aerospace & Defense | | | Industrial | | Corporate | | Total |
| Cryo divestiture gain | | $ | — | | | | $ | (1,947) | | | $ | — | | | $ | (1,947) | |
| Heater & Control Valve divestiture charges | | — | | | | 3,459 | | | 407 | | | 3,866 | |
| Debt refinancing charge | | — | | | | — | | | 8,693 | | | 8,693 | |
| Incremental loss allowance | | — | | | | 7,943 | | | — | | | 7,943 | |
| Other special charges, net | | $ | 39 | | | | $ | 1,105 | | | $ | 339 | | | $ | 1,483 | |
| Total special charges (recoveries), net | | $ | 39 | | | | $ | 10,560 | | | $ | 9,439 | | | $ | 20,038 | |
Cryo divestiture: 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.
Heater & Control Valve divestiture: The Company recognized special charges of $3.9 million for the year ended December 31, 2021, related to the sale of the Heater and Control Valve businesses.
Debt refinancing charges: The Company incurred special charges of $8.7 million for the year ended December 31, 2021, related to the refinancing of the credit agreement.
Incremental loss allowance: The Company incurred special charges of $7.9 million for the year ended December 31, 2021, related to a contract assumed as part of the Fluid Handling acquisition. The charges relate to incremental loss allowance for a receivable, contract asset and sub-contractor claims.
Other special charges, net: The Company recognized special charges of $1.5 million for the year ended December 31, 2021. Included in the $1.1 million charge recognized within the Industrial segment was a contingency indemnification to the buyer of a previously divested business. The Company also recognized charges of $0.3 million in Corporate associated with streamlining operations and reducing costs.
The table below outlines the special charges, net recorded for the year ending December 31, 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Special Charges (Recoveries), net |
| for the year ended December 31, 2020 |
| | Aerospace & Defense | | | Industrial | | Corporate | |
Total |
| Divestiture- related | | $ | — | | | | $ | (53,203) | | | $ | 46 | | | $ | (53,157) | |
| Professional fees to review and respond to an unsolicited tender offer to acquire the Company | | — | | | | — | | | 6,937 | | | 6,937 | |
| Amortization debt issuance costs | | — | | | | — | | | 3,541 | | | 3,541 | |
| Other cost savings initiatives | | 19 | | | | 371 | | | 3,041 | | | 3,431 | |
| Total special charges, net | | $ | 19 | | | | $ | (52,832) | | | $ | 13,565 | | | $ | (39,248) | |
Divestiture-related: The Company recovered net special recoveries of $53.2 million for the year ended December 31, 2020 due to the gain on sale of the I&S business in the Industrial segment.
Professional fees: The Company incurred special charges of $6.9 million for the year ended December 31, 2020, associated with milestones reached subsequent to its response to an unsolicited tender offer to acquire the Company in the prior year.
Amortization of debt issuance costs: During the first quarter of 2020, the Company amended its term loan agreement in place at that time. As part of this amendment, the Company accelerated amortization of $3.5 million in debt issuance costs.
Restructuring Charges, Net
The tables below outline the charges associated with restructuring actions recorded for the years ended December 31, 2022, 2021, and 2020 (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Restructuring Charges |
| | as of and for the year ended December 31, 2022 |
| | Aerospace & Defense | | Industrial | | Corporate | |
Total |
| Facility related expenses | | $ | 8 | | | $ | 9,664 | | | $ | — | | | $ | 9,672 | |
| Employee related expenses | | 15 | | | 986 | | | 393 | | | 1,394 | |
| Total restructuring charges, net | | $ | 23 | | | $ | 10,650 | | | $ | 393 | | | $ | 11,066 | |
| | | | | | | | |
| Accrued restructuring charges as of December 31, 2021 | | | | | | | | $ | 1,839 | |
| Total year to date charges, net (shown above) | | | | | | | | 11,066 | |
| Charges paid / settled, net | | | | | | | | (12,068) | |
| Accrued restructuring charges as of December 31, 2022 | | | | | | | | $ | 837 | |
The Company recorded restructuring charges of $11.1 million during the twelve months ended December 31, 2022. Of the $11.1 million in total restructuring charges, $10.4 million related to the exit of the Pipeline Engineering business. The $10.4 million charge consists of $5.3 million in impairments, $0.6 million of termination benefits and $4.7 million of deconsolidation charges. Impairments of $5.3 million included $3.8 million related to the write downs of Property, Plant and Equipment, Right of Use Assets and Intangibles, which is a level three fair value measurement based on the expected cash proceeds from dispositions of the assets. In addition, the Company recorded $1.5 million in charges for write downs of working capital accounts, including primarily $1.0 million for accounts receivables. Included in the Industrial employee related expenses is $0.6 million in severance and termination benefits related to the exit of the Pipeline Engineering business. Additionally, during the twelve months ended December 31, 2022, the Company recognized $0.2 million of an incremental recovery on the sale of Pipeline Engineering assets within facility and other related charges (recoveries), net. The Company expects to make payment or settle the majority of the restructuring charges accrued as of December 31, 2022, during the remainder of 2023.
On April 14, 2022, the Company placed the Catterick, UK entity of the Pipeline Engineering business into Administration under the U.K. Insolvency Act of 1986 and the Insolvency (England and Wales) Rules 2016 (IR 2016). The loss of control triggered deconsolidation and recognition into earnings of the related cumulative translation adjustment out of accumulated other comprehensive loss in the amount of $5.3 million. The deconsolidation also resulted in a gain within restructuring of $0.6 million related to the write down of net assets through deconsolidation. The Company determined the loss of control did not qualify for reporting as a discontinued operation as it did not represent a strategic shift that has a major effect on the Company's operations and financial results.
In addition, the Company recorded a charge of $2.8 million for write down of inventories related to the exit of the Pipeline Engineering business classified within cost of revenues on the condensed consolidated statements of operations.
During the twelve months ended December 31, 2022, the Company recorded $0.4 million of employee related severance charges, not associated with the exit of the Pipeline Engineering business.
The Company expects to make payment or settle the majority of the restructuring charges accrued as of December 31, 2022 during 2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Restructuring Charges |
| | as of and for the year ended December 31, 2021 |
| | Aerospace & Defense | | Industrial | | Corporate | |
Total |
| Facility related expenses | | $ | 181 | | | $ | 118 | | | $ | — | | | $ | 299 | |
| Employee related expenses | | 1,126 | | | 2,438 | | | 371 | | | 3,935 | |
| Total restructuring charges, net | | $ | 1,307 | | | $ | 2,556 | | | $ | 371 | | | $ | 4,234 | |
| | | | | | | | |
| Accrued restructuring charges as of December 31, 2020 | | | | | | | | $ | 1,512 | |
| Total year to date charges, net (shown above) | | | | | | | | 4,234 | |
| Charges paid / settled, net | | | | | | | | (3,907) | |
| Accrued restructuring charges as of December 31, 2021 | | | | | | | | $ | 1,839 | |
The Company made payment or settled the majority of the restructuring charges accrued as of December 31, 2021 during 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Restructuring Charges |
| | as of and for the year ended December 31, 2020 |
| | Aerospace & Defense | | | Industrial | | Corporate | |
Total |
| Facility related expenses | | $ | 18 | | | | $ | 246 | | | 1 | | | $ | 265 | |
| Employee related expenses | | 343 | | | | 3,822 | | | 515 | | | 4,680 | |
| Total restructuring charges, net | | $ | 361 | | | | $ | 4,068 | | | $ | 516 | | | $ | 4,945 | |
| | | | | | | | | |
| Accrued restructuring charges as of December 31, 2019 | | | | | | | | | $ | 5,199 | |
| Total year to date charges, net (shown above) | | | | | | | | | 4,945 | |
| Charges paid / settled, net | | | | | | | | | (8,632) | |
| Accrued restructuring charges as of December 31, 2020 | | | | | | | | | $ | 1,512 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
The Company made payment or settled the majority of the restructuring charges accrued as of December 31, 2020 during 2021.
(6) Leases
The Company leases certain office spaces, warehouses, vehicles and equipment under operating leases. Leases with an initial term of 12-months or less are not recorded on the consolidated balance sheets. The Company recognizes lease expense for these leases on a straight-line basis over the lease term.
For lease agreements entered into after the adoption of ASC Topic 842, Leases, which was adopted on January 1, 2019, the Company combines lease and non-lease fixed components for real estate, vehicles and equipment leases. It does not combine lease and non-lease components for information technology leases. Variable lease costs are not included within the measurement of the lease liability as they are entirely variable or the difference between the portion captured within the lease liability and the actual cost will be expensed as incurred. Variable costs are contractually obligated and relate primarily to common area maintenance and taxes, which are not material to the financial statements.
The Company elected the package of practical expedients permitted under the transition guidance, which allowed it to carry forward the historical lease classification, not reassess if existing contracts are or contain leases, and not reassess indirect costs for existing leases. It has elected not to recast the comparable periods and rather used the effective adoption date of the standard as the date of initial application.
In determining the present value of lease payments, the Company uses the implicit borrowing rate in the lease, if available. In cases where a lease does not provide an implicit borrowing rate, it uses the incremental borrowing rate based on available information at the lease commencement date. As of December 31, 2022, none of its existing leases provided an implicit borrowing rate. The Company gives consideration to its debt issuances as well as publicly available data for instruments with similar characteristics when calculating its incremental borrowing rates. Additionally, it performs an entity-level financial assessment along with risk assessment by country or jurisdiction in the determination of the incremental borrowing rate. It updates its financial and risk assessments periodically. The Company reassesses lease classification and / or remeasures the lease liability in the event of the following: changes in assessment of renewal, termination or purchase option based on triggering events within our control, change in amounts probable of being owed under a residual guarantee, or contingency resolution.
Certain leases include one or more options to renew or terminate a lease early. The exercise of these options is at the Company’s sole discretion. There are currently no renewal periods included in any of the leases’ respective lease terms as they are not reasonably certain of being exercised. The Company does not have any material purchase options.
Certain of our lease agreements have rental payments that are adjusted periodically for inflation or that are based on usage. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Supplemental balance sheet information related to our leases is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Assets | Operating | | Finance | | Operating | | Finance |
| Gross Right-of-Use Assets (1) | $ | 46,009 | | | $ | 5,600 | | | $ | 26,657 | | | $ | 5,461 | |
| Less: Accumulated Amortization | (8,571) | | | (547) | | | (9,605) | | | (1,374) | |
| Net Right-of-Use Assets | $ | 37,438 | | | $ | 5,053 | | | $ | 17,052 | | | $ | 4,087 | |
| | | | | | | |
| Liabilities | Operating | | Finance | | Operating | | Finance |
| Current (2) | $ | 5,246 | | | $ | 856 | | | $ | 3,682 | | | $ | 867 | |
| Non-current (3) | 34,218 | | | 4,262 | | | 14,471 | | | 3,243 | |
| Total Lease Liabilities | $ | 39,464 | | | $ | 5,118 | | | $ | 18,153 | | | $ | 4,110 | |
| | | | | | | |
(1) Operating and Finance Right-of-Use assets are included within lease, right-of-use assets, net on the consolidated balance sheets. |
(2) The current portion of operating and finance lease liabilities are recorded within accrued expenses and other current liabilities on the consolidated balance sheets. |
(3) The non-current portion of operating and finance lease liabilities are recorded within long-term lease liabilities on the consolidated balance sheets. |
The components of lease costs are as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended |
| Lease Costs | | | December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
| Operating lease cost (1) | | | $ | 7,060 | | | $ | 5,912 | | | $ | 6,794 | |
| | | | | | | |
| Finance lease cost | | | | | | | |
| Amortization of leased assets (2) | | | 866 | | | 611 | | | 568 | |
| Interest on lease liabilities (3) | | | 181 | | | 93 | | | 70 | |
| Total finance lease costs | | | 1,047 | | | 704 | | | 638 | |
| | | | | | | |
| Total lease cost | | | $ | 8,107 | | | $ | 6,616 | | | $ | 7,432 | |
| | | | | | | |
| (1) Operating lease costs are recorded within selling, general and administrative expenses or cost of revenues within the consolidated statements of operations depending upon the nature of the underlying lease. |
| (2) Finance lease amortization costs are recorded in cost of revenues, as well as selling, general and administrative expenses within the consolidated statements of operations. |
| (3) Finance lease interest costs are recorded in interest expense, net within the consolidated statements of operations. |
| | | | |
| | | | |
Short-term lease expense and variable lease cost for the years ended December 31, 2022, 2021, and 2020 were not significant.
The estimated future minimum lease payments only include obligations for which the Company is reasonably certain it will exercise its renewal option. Such future payments are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Maturity of Lease Liabilities | Operating | | Finance | | Total |
2023 | $ | 7,881 | | | $ | 1,353 | | | $ | 9,234 | |
2024 | 7,387 | | | 1,346 | | | 8,733 | |
2025 | 6,285 | | | 1,330 | | | 7,615 | |
2026 | 5,817 | | | 1,273 | | | 7,090 | |
2027 | 5,028 | | | 828 | | | 5,856 | |
After 2027 | 19,161 | | | — | | | 19,161 | |
| Less: Interest | (12,095) | | | (1,012) | | | (13,107) | |
| Total | $ | 39,464 | | | $ | 5,118 | | | $ | 44,582 | |
The weighted average remaining lease term and discount rates are as follows:
| | | | | | | | | | | | | | | | | |
| Lease Term and Discount Rate | December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
| Weighted average remaining lease term (years) | | | | | |
| Operating leases | 7.8 | | 5.9 | | 6.3 |
| Finance leases | 4.6 | | 5.6 | | 6.2 |
| Weighted average discount rate (percentage) | | | | | |
| Operating leases | 7.7 | % | | 4.5 | % | | 6.8 | % |
| Finance leases | 8.9 | % | | 2.0 | % | | 4.8 | % |
Supplemental cash flow information related to leases are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended |
| Other Information | December 31, 2022 | | December 31, 2021 | | December 31, 2020 |
| Operating Activities | | | | | |
| Noncash Right-of-Use assets arising from entering into new operating lease obligations | $ | 27,135 | | | $ | 303 | | | $ | 268 | |
| | | | | |
| | | | | |
| Cash paid for operating lease liabilities | 8,129 | | | 5,256 | | | 5,013 | |
| Total Operating Activities | $ | 35,264 | | | $ | 5,559 | | | $ | 5,281 | |
| Financing Activities | | | | | |
| Principal paid on finance lease liabilities | $ | (353) | | | $ | (654) | | | $ | (557) | |
| | | | | |
| Supplemental | | | | | |
| Interest paid on finance lease liabilities | $ | 181 | | | $ | 93 | | | $ | 70 | |
| | | | | |
As of December 31, 2022, the Company has not entered into any lease agreements with related parties.
(7) Inventories
Inventories consisted of the following (in thousands):
| | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
| Raw materials | $ | 59,431 | | | $ | 51,911 | |
| Work in process | 63,846 | | | 55,942 | |
| Finished goods | 16,509 | | | 15,490 | |
| Inventories | $ | 139,786 | | | $ | 123,343 | |
The Company regularly reviews inventory quantities on hand and records a provision to write-down excess and obsolete inventory to its estimated net realizable value, if less than cost, based primarily on estimated forecast of product demand. Once inventory value is written-down a new cost basis has been established. For the years ended December 31, 2022, 2021, and 2020, charges for excess and obsolete inventory and net realizable value reserves totaled $2.6 million, $3.4 million, and $4.3 million, respectively.
(8) Property, Plant and Equipment
Property, plant and equipment consisted of the following (in thousands):
| | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
| Land | $ | 25,813 | | | $ | 31,377 | |
| Buildings and improvements | 60,000 | | | 84,846 | |
| Manufacturing machinery and equipment (1) | 133,921 | | | 127,692 | |
| Computer equipment and software | 37,773 | | | 39,111 | |
| Furniture and fixtures | 13,329 | | | 13,477 | |
| | | |
| | | |
| Vehicles | 753 | | | 797 | |
| Construction in progress (1) | 14,364 | | | 10,769 | |
| Property, plant and equipment, at cost | 285,953 | | | 308,069 | |
| Less: Accumulated depreciation | (144,812) | | | (153,608) | |
| Property, plant and equipment, net | $ | 141,141 | | | $ | 154,461 | |
(1) For the period ended December 31, 2021, the Company recast $4.7 million from Construction in progress to Manufacturing machinery and equipment to conform with current period presentation. | | | |
Depreciation expense for the years ended December 31, 2022, 2021, and 2020 was $19.7 million, $22.9 million, and $20.4 million, respectively.
The Company recorded additions to property, plant and equipment of $2.5 million and $1.5 million in the years ended December 31, 2022 and December 31, 2021, respectively, for which cash payments had not yet been made.
(9) Goodwill and Other Intangible Assets
The following table shows goodwill by segment as of December 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Aerospace & Defense | | Industrial | | Consolidated
Total |
Goodwill as of December 31, 2021 | | $ | 57,360 | | | $ | 65,546 | | | $ | 122,906 | |
| | | | | | |
| | | | | | |
| Currency translation adjustments | | 21 | | | (3,080) | | | (3,059) | |
| Goodwill as of December 31, 2022 | | $ | 57,381 | | | $ | 62,466 | | | $ | 119,847 | |
| | | | | | | | | | | | | | | | | | | | | |
| | Aerospace & Defense | | Industrial | | | Consolidated
Total |
| Goodwill as of December 31, 2020 | | $ | 57,468 | | | $ | 79,455 | | | | $ | 136,923 | |
| Impairment | | — | | | (10,500) | | | | (10,500) | |
| Reclassification of Cryo to assets held for sale | | — | | | (755) | | | | (755) | |
| Currency translation adjustments | | (108) | | | (2,654) | | | | (2,762) | |
| Goodwill as of December 31, 2021 | | $ | 57,360 | | | $ | 65,546 | | | | $ | 122,906 | |
The Company performs an impairment assessment for goodwill at the reporting unit level on an annual basis as of the end of our October month end or more frequently if the Company believes indicators of impairment exist.
For the annual goodwill impairment assessment during the fourth quarter of 2022, the Company estimated the fair value of its reporting units, using an income approach based on the present value of future cash flows. The Company believes this approach was the best approximation of fair value of its reporting units and incorporates assumptions market participants would use in estimating the fair value of reporting units. The Company also utilized the implied market value method under the market approach to validate the fair value amount it obtained using a discounted cash flow model income approach which indicated a control premium. The key assumptions utilized in our discounted cash flow model included an estimated rate of revenue growth and the discount rate based on a weighted average cost of capital. The estimated fair values using a discounted cash flow model were reconciled to the value indicated by the market capitalization including an assessment of the implied control premium. The relevant inputs, estimates and assumptions used in the implied market value method included our market capitalization as of the end of October 2022, and selection of a control premium.
The Company also performed its annual impairment testing of indefinite-lived assets during the fourth quarter of 2022. This impairment evaluation was performed using the relief from royalty valuation method. Based on this analysis, the fair value of the indefinite-lived assets exceeded their carrying values and the assets were deemed to be not impaired. The Company believes its procedures for estimating fair value were reasonable and consistent with market conditions at the time of estimation.
As part of the 2022 annual impairment assessment, the Company determined that the fair value for the RV reporting unit was less than its carrying value. While the RV reporting unit had no goodwill as of the date of the assessment, the Company determined this was an impairment indicator, and performed an impairment assessment of the asset group using an undiscounted cash flow model. The Company concluded that there was no impairment related to RV asset group for the year ended December 31, 2022.
As part of its annual goodwill impairment assessment during the fourth quarter of 2021, the Company reassessed the aggregation criteria for its reporting units and determined that the Refinery Valves component in the Industrial segment no longer satisfied criteria for aggregation with the Industrial reporting unit and was identified as a separate reporting unit. Accordingly, goodwill of the previously aggregated Industrial reporting unit was reassigned on a relative fair value basis between the Refinery Valves and Industrial reporting units. The reassignment resulted in $10.5 million of goodwill reassigned from the aggregated Industrial reporting unit to the Refinery Valves reporting unit. The Company performed its goodwill impairment assessment immediately before and after the change in reporting units, on the aggregated Industrial reporting unit and disaggregated Refinery Values and Industrial reporting units.
The fair value of the aggregated and disaggregated Industrial reporting unit immediately prior to and following the change in reporting units, exceeded its carrying value and its goodwill was not impaired. The fair value of the Refinery Valves reporting unit was less than its carrying value in 2021. The Company recorded goodwill impairment charge of all of the Refinery Valves reporting unit goodwill in the amount of $10.5 million. The Refinery Valves long-lived asset group was not impaired and did not suffer a decline in utility requiring a reassessment of the long-lived assets in the asset group.
The fair value of the Aerospace & Defense reporting unit exceeded its carrying value and its goodwill was not impaired.
At March 29, 2020, the Company reorganized its reporting units (see Note 18, Business Segment and Geographical Information) and had its stock price drop below book value, which the Company determined were triggering events requiring an assessment of its goodwill and indefinite-lived trade names. The Company's asset groups did not experience a triggering event, and its long-lived assets did not suffer a decline in utility requiring a reassessment of their useful lives. Through its assessment, management determined that its long-lived assets other than goodwill were not impaired.
For the assessment of goodwill as of March 29, 2020, the Company estimated the fair value of its two reporting units, Industrial and Aerospace & Defense, using an income approach based on the present value of future cash flows. The Company also utilized the implied market value method under the market approach to validate the fair value amount it obtained using a discounted cash flow model income approach which indicated a control premium. Management believes this approach was the best approximation of fair value of its reporting units given the environment and considering the uncertainty caused by the COVID-19 pandemic. The key assumptions utilized in discounted cash flow model included an estimated rate of revenue growth and the discount rate based on a weighted average cost of capital. The estimated fair values using a discounted cash flow model were reconciled to the value indicated by the market capitalization including an assessment of the implied control premium. The relevant inputs, estimates and assumptions used in the implied market value method included our market capitalization as of March 29, 2020, and selection of a control premium.
Based on the impairment assessment as of March 29, 2020, the Company determined that goodwill in the Industrial reporting unit had been impaired and, accordingly, resulted in a goodwill impairment charge of $138.1 million during the first quarter of 2020.
Goodwill impairment was measured at fair value on a nonrecurring basis using future discounted cash flows and other observable inputs (Level 3).
The tables below present gross intangible assets and the related accumulated amortization (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Gross Carrying
Amount | | | | | | | | Accumulated
Amortization | | Net Carrying Value |
| Patents | $ | 5,368 | | | | | | | | | $ | (5,368) | | | $ | — | |
| Customer relationships | 285,910 | | | | | | | | | (151,258) | | | 134,652 | |
| Acquired technology | 132,601 | | | | | | | | | (82,898) | | | 49,703 | |
| Total Amortized Assets | $ | 423,879 | | | | | | | | | $ | (239,524) | | | $ | 184,355 | |
| | | | | | | | | | | |
| Non-amortized intangibles (primarily trademarks and trade names) | $ | 71,983 | | | | | | | | | $ | — | | | $ | 71,983 | |
| | | | | | | | | | | |
| Net Carrying Value of Intangible assets | | | | | | | | | | | $ | 256,338 | |
| | | | | | | | | | | | | | | | | |
| |
| | December 31, 2021 |
| | Gross Carrying
Amount | | Accumulated
Amortization | | Net Carrying Value |
| Patents | $ | 5,368 | | | $ | (5,368) | | | $ | — | |
| Customer relationships | 302,358 | | | (137,861) | | | 164,497 | |
| | | | | |
| Acquired technology | 135,972 | | | (72,708) | | | 63,264 | |
| Total Amortized Assets | $ | 443,698 | | | $ | (215,937) | | | $ | 227,761 | |
| | | | | |
| Non-amortized intangibles (primarily trademarks and trade names) | $ | 75,715 | | | $ | — | | | $ | 75,715 | |
| | | | | |
| Net Carrying Value of Intangible assets | | | | | $ | 303,476 | |
Amortization of intangible assets was $36.3 million, $42.3 million and $43.7 million for the years ended December 31, 2022, 2021 and 2020, respectively.
The table below presents estimated future amortization expense for intangible assets recorded as of December 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | After 2027 |
| Estimated amortization expense | $ | 31,320 | | | $ | 27,512 | | | $ | 24,018 | | | $ | 20,890 | | | $ | 16,716 | | | $ | 63,899 | |
For the year ended December 31, 2022 the Company recorded $1.6 million of trade name impairment related to the exit of Pipeline Engineering business. No goodwill impairment was recorded for the year ended December 31, 2022.
(10) Income Taxes
The significant components of our deferred income tax liabilities and assets were as follows (in thousands):
| | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| Deferred income tax (liabilities): | | | |
| | | |
| | | |
| Fixed Assets | (9,390) | | | (12,315) | |
| Intangible Assets | (32,839) | | | (41,425) | |
| Right of Use Lease | (9,461) | | | (3,175) | |
| Other | (5,030) | | | (3,957) | |
| | | |
| | | |
| | | |
| Total deferred income tax liabilities | (56,720) | | | (60,872) | |
| Deferred income tax assets: | | | |
| Accrued Expenses | 5,184 | | | 4,937 | |
| Bad Debt | 2,217 | | | 2,375 | |
| Equity Compensation | 869 | | | 3,191 | |
| Right of Use Lease | 9,941 | | | 3,457 | |
| R&D Capitalization | 5,014 | | | — | |
| Inventory | 4,342 | | | 4,768 | |
| Other | 4,037 | | | 6,804 | |
| Net operating loss and credit carry-forward | 81,849 | | | 96,511 | |
| Pension | 14,018 | | | 23,727 | |
| Interest | 31,404 | | | 22,329 | |
| Goodwill | 7,506 | | | 10,813 | |
| Total deferred income tax assets | 166,381 | | | 178,912 | |
| Valuation allowance | (127,387) | | | (139,005) | |
| Deferred income tax asset, net of valuation allowance | 38,994 | | | 39,907 | |
| Deferred income tax liability | $ | (17,726) | | | $ | (20,965) | |
The (benefit from) provision for income taxes is based on the following pre-tax (loss) income (in thousands):
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | |
| | 2022 | | 2021 | | 2020 | | |
| Domestic | $ | (26,430) | | | $ | (55,752) | | | $ | (168,988) | | | |
| Foreign | 50,097 | | | (2,110) | | | 41,416 | | | |
| Income (loss) before income taxes | $ | 23,667 | | | $ | (57,862) | | | $ | (127,572) | | | |
The provision for income taxes consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Current provision: | | | | | |
| Federal - U.S. | $ | 253 | | | $ | — | | | $ | 165 | |
| Foreign | 7,233 | | | 7,942 | | | 8,415 | |
| State -U.S. | 502 | | | 232 | | | 548 | |
| Total current provision | $ | 7,988 | | | $ | 8,174 | | | $ | 9,128 | |
| Deferred expense (benefit): | | | | | |
| Federal - U.S. | $ | (2,070) | | | $ | 130 | | | $ | 39,293 | |
| Foreign | (1,371) | | | (3,052) | | | 5,033 | |
| State -U.S. | (268) | | | (70) | | | 2,448 | |
| Total expense (benefit) deferred | (3,709) | | | (2,992) | | | 46,774 | |
| Total provision for income taxes | $ | 4,279 | | | $ | 5,182 | | | $ | 55,902 | |
Actual income taxes reported from operations were different from those that would have been computed by applying the federal statutory tax rate to (loss) income before income taxes. The expense for income taxes differed from the U.S. statutory rate due to the following:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Expected federal income tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State income taxes, net of federal tax benefit | (10.3) | | | (0.3) | | | (2.1) | |
| Impairment | — | | | — | | | (6.5) | |
| U.S. permanent differences | 2.3 | | | (1.7) | | | — | |
| Foreign tax rate differential | (4.8) | | | 3.7 | | | 2.8 | |
| Maturity of Interest Rate Swap | (10.7) | | | — | | | — | |
| Tax reserve | (1.5) | | | (2.6) | | | (0.6) | |
| Rate Change | — | | | (1.7) | | | (0.1) | |
| GILTI | 5.3 | | | — | | | — | |
| | | | | |
| | | | | |
| | | | | |
| Prior period adjustment | 6.2 | | | 0.2 | | | 1.4 | |
| Dispositions | — | | | (1.0) | | | (0.7) | |
| Valuation Allowance | 11.9 | | | (24.7) | | | (59.1) | |
| | | | | |
| Other, net | 1.3 | | | (5.2) | | | 0.3 | |
| Equity compensation | 0.6 | | | 2.0 | | | (0.3) | |
| Research and development | (3.2) | | | 1.3 | | | — | |
| Effective tax rate | 18.1 | % | | (9.0) | % | | (43.8) | % |
ASC 740, Income Taxes, requires a valuation allowance to reduce deferred tax assets ("DTAs") if, based on the weight of available evidence, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. The weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, (a) the more positive evidence is necessary and (b) the more difficult it is to support a conclusion that a valuation allowance is not needed for some portion, or all, of the deferred tax asset. Should there be a cumulative loss in recent years it is considered a significant piece of negative evidence that is difficult to overcome in assessing the need for a valuation allowance.
The Company recognized a valuation allowance for the German and the U.S. net DTAs to the extent of reversing DTLs during the year ended December 31, 2020. The Company continued to maintain a valuation allowance against its deferred tax assets in Germany and the U.S. as both jurisdictions remain in a cumulative three year loss position at December 31, 2022. The Company concluded that the negative evidence associated with the history of losses outweighed any positive evidence as of December 31, 2022. Therefore, the Company has not relied on projections of future taxable income in our assessment of the realization of deferred tax assets at December 31, 2022. The Company calculated the valuation allowance based on the reversal of temporary differences. The Company maintained a valuation allowance related to the German deferred tax assets of $3.9 million and $13.2 million, as of December 31, 2022 and December 31, 2021, respectively. The Company maintained a valuation allowance related to the U.S. deferred tax assets of $82.5 million and $73.1 million, as of December 31, 2022 and December 31, 2021, respectively. For other jurisdictions there are no temporary differences to consider for the valuation allowance.
As of December 31, 2022, and 2021, the Company maintained a total valuation allowance of $127.4 million and $139 million, respectively, relating to foreign, federal, and state deferred tax assets. This decrease is partially due to the removal of the United Kingdom deferred tax asset of $8.7 million related to Pipeline UK and the deconsolidation. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth.
The following table provides a summary of the changes in the deferred tax valuation allowance for the years ended December 31, 2022, 2021, and 2020 (in thousands): | | | | | | | | | | | | | | | | | |
| December 31, |
| | 2022 | | 2021 | | 2020 |
| Deferred tax valuation allowance at January 1 | $ | 139,005 | | | $ | 138,689 | | | $ | 46,967 | |
| Additions | 10,236 | | | 9,329 | | | 91,866 | |
| Acquired | — | | | — | | | — | |
| Deductions | (21,854) | | | (9,013) | | | (144) | |
| | | | | |
| Deferred tax valuation allowance at December 31 | $ | 127,387 | | | $ | 139,005 | | | $ | 138,689 | |
The Company files income tax returns in the US federal, state and local jurisdictions and in foreign jurisdictions. The Company is no longer subject to examination by the Internal Revenue Service (“IRS”) and state jurisdictions for years prior to 2019 and is no longer subject to examination by the tax authorities in foreign jurisdictions prior to 2007, with the exception of net operating loss carryforwards. The Company is currently under examination for income tax filings in various foreign jurisdictions.
As of December 31, 2022, the Company had U.S. federal net operating losses of $33.2 million, U.S. tax credits of $21.5 million, foreign net operating losses of $152.8 million, state net operating losses of $181.9 million and state tax credits of $3.6 million. As of December 31, 2021, the Company had U.S. federal net operating losses of $55.6 million, U.S. tax credits of $21.4 million, foreign net operating losses of $202.0 million, state net operating losses of $151.2 million and state tax credits of $4.0 million. The U.S. tax credits, if not utilized, will expire in 2026 through 2038. A portion of the foreign net operating losses $90.3 million expire at various dates through 2037; the remaining $62.5 million have an unlimited carryforward period. The federal net operating losses have an unlimited carryforward period. The state net operating losses and state tax credits, if not utilized, will expire at various dates through 2042.
As of December 31, 2022, the liability for uncertain income tax positions was approximately $2.1 million. Approximately $1.5 million as of December 31, 2022 represents the amount that if recognized would affect the Company’s effective income tax rate in future periods. The Company does not expect the unrecognized tax benefits to change over the next 12 months. The table below does not include interest and penalties of $0.1 million and $0.2 million as of December 31, 2022 and 2021, respectively.
The following is a reconciliation of the Company’s liability for uncertain income tax positions for the years ended December 31, 2022, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 | | 2020 |
| Balance beginning January 1 | $ | 2,578 | | | $ | 1,078 | | | $ | 630 | |
| Additions/(reductions) for tax positions of prior years | (461) | | | 1,529 | | | 448 | |
| Additions/(reductions) based on tax positions related to current year | 311 | | | 212 | | | — | |
| | | | | |
| Tax Audit Settlement | (269) | | | (200) | | | — | |
| | | | | |
| Currency movement | (44) | | | (41) | | | — | |
| Balance ending December 31 | $ | 2,115 | | | $ | 2,578 | | | $ | 1,078 | |
Undistributed earnings of our foreign subsidiaries amounted to $87.8 million and $86.0 million at December 31, 2022 and December 31, 2021, respectively. The undistributed earnings of our foreign subsidiaries (except for one of our China subsidiaries and a $1.5 million dividend that has been approved but not yet distributed from an Indian subsidiary. $0.2 million of withholding tax has been accrued on this dividend) are considered to be indefinitely reinvested unless earnings can be repatriated in a tax efficient manner and accordingly, no provision for income taxes has been recorded (except for withholding taxes related to the forementioned China and India subsidiaries). Determination of the amount of unrecognized deferred tax liability on these undistributed earnings is not practicable because of the complexity of laws and regulations, the varying tax treatment of alternative repatriation scenarios, and the variation due to multiple potential assumptions relating to the timing of any future repatriation.
(11) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
| | | | | | | | | | | | |
| | December 31, |
| 2022 | | | 2021 |
| Contract liabilities | $ | 36,871 | | | | $ | 26,870 | |
| Commissions payable and sales incentive | 2,853 | | | | 3,594 | |
| Warranty reserve | 2,521 | | | | 2,739 | |
| Professional fees | 1,774 | | | | 2,529 | |
| Taxes other than income tax | 3,342 | | | | 3,091 | |
| Income tax payable | 2,051 | | | | 3,075 | |
| Short term pension liability and other post-employment benefits (OPEB) | 4,789 | | | | 4,560 | |
| Operating lease liability | 5,246 | | | | 3,682 | |
| Other | 25,063 | | | | 31,858 | |
| Total accrued expenses and other current liabilities | $ | 84,510 | | | | $ | 81,998 | |
(12) Financing Arrangements
Debt
Long-term debt consisted of the following (in thousands):
| | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
Term Loan at interest rates ranging from 5.0%-9.9% in 2022 and 4.3%-5.0% in 2021 | $ | 489,575 | | | $ | 525,000 | |
Line of Credit at interest rates ranging from 6.8%-11.3% in 2022 and 3.6%-6.8% in 2021 | 27,350 | | | — | |
| Short-Term Borrowings | — | | | 1,311 | |
| Total Principal Debt Outstanding | 516,925 | | | 526,311 | |
| Less: Unamortized Discount and Debt Issuance Costs | 20,391 | | | 13,006 | |
| Less: Short-Term Borrowings and Current Portion of Long-Term Debt | — | | | 1,611 | |
| Total Long-Term Debt, net | $ | 496,534 | | | $ | 511,694 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter |
| Minimum principal payments | $ | — | | | $ | — | | | $ | — | | | $ | 27,350 | | | $ | — | | | $ | 489,575 | |
As of December 31, 2022, the Company had gross borrowings of $516.9 million outstanding under the Credit Agreement compared to $525.0 million as of December 31, 2021. In addition, the Company had $0.0 million and $1.3 million in other short-term borrowings as of December 31, 2022 and December 31, 2021, respectively.
On December 20, 2021, the Company entered into a secured credit agreement (the " Credit Agreement”), which provides for a $100.0 million revolving line of credit with a five year maturity and a $530.0 million term loan with a seven year maturity which was funded in full at closing. As of December 31, 2022, we had available capacity to borrow an additional $48.3 million under our revolving credit facility. The Credit Agreement replaced and terminated the Company’s prior credit agreement, dated as of December 11, 2017 (the “Prior Credit Agreement”). .
The term loan requires quarterly principal payments of 0.25% of initial aggregate principal amount until maturity. The Company has mandatory debt repayment obligations of $5.3 million per year until 2028 under the Credit Agreement. However, since the Company made a $5.0 million prepayment on its term loan in December 2021, and $35.4 million in prepayments in April and September 2022 from sale-leaseback proceeds, there are no further repayment obligations until the term loan matures in December 2028.
On April 8, 2022, the Company entered into Amendment No. 1 to the Credit Agreement (the “First Amendment”). The First Amendment makes certain changes to the Credit Agreement, including (i) extending the deadline for the Company to deliver its annual financial statements for the fiscal year ended December 31, 2021, (ii) increasing the interest rate margins for (a) the term loan facility to 5.50% with respect to Eurodollar loans, (b) the revolving facility to 4.75% with respect to Eurodollar loans and (c) the swing line facility to 3.75%, (iii) in the event of a step-down in the debt ratings of the facilities, increasing the interest rate margins for the term loan facility by an additional 0.50% during any such step-down period, (iv) decreasing certain debt, lien, investment, restricted payment and affiliate transaction baskets and negative covenant thresholds by 15%, (v) further decreasing or eliminating the use of certain debt, lien, investment and restricted payment baskets during the period until the date on which the Company delivers the annual financial statements for the fiscal year ended December 31, 2021 (such period, the “Restricted Period”), (vi) eliminating the minimum threshold and reinvestment rights with respect to mandatory prepayments of the term loans with the net cash proceeds of sale-leaseback transactions, subject to certain exceptions, (vii) restricting the Company’s ability to borrow swing loans or revolving loans if the aggregate amount of cash and cash equivalents of the Company and its domestic subsidiaries exceeds $10.0 million and creating a requirement to prepay outstanding swing loans and revolving loans with any such excess, in each case, during the Restricted Period, (viii) resetting the “soft call” prepayment premium for an additional 12 months, and (ix) requiring the Company to hold private-side lender calls twice upon request of the Administrative Agent during the Restricted Period and promptly after the delivery of all quarterly and annual financial statements. In connection with the execution of the First Amendment, the Company paid approximately $12.5 million in customary arranger and lender consent fees, attorney fees, and reasonable and documented expenses of the Administrative Agent.
Per the First Amendment, additional loans may be made available up to the greater of $85.0 million or 80% of total earnings before interest, taxes, depreciation, and amortization plus the amount of certain voluntary prepayments and plus an amount subject to compliance with a first lien net leverage ratio of 4.5 to 1.00 or less upon request by the Company subject to specified terms and conditions. The Company may repay any borrowings under the Credit Agreement at any time, subject to certain limited and customary restrictions stated; provided, however, that if the Company prepays all or any portion of the term loan in connection with a repricing transaction on or prior to the 12-month anniversary of the First Amendment, the Company must pay a prepayment premium of 1.0% of the aggregate principal amount of the term loan so prepaid.
On May 27, 2022, the Company entered into Amendment No. 2 to the Credit Agreement (the “Second Amendment”). The Second Amendment makes certain changes to the Credit Agreement, including, to extend the deadline for the Company to deliver its annual financial statements for the fiscal year ended December 31, 2021 and its quarterly financial statements for the fiscal quarters ended April 3, 2022 and July 3, 2022. In addition, the Company is required to hold private-side lender calls at least once per month upon request, and promptly after the delivery of all quarterly and annual financial statements. In connection with the execution of the Second Amendment, the Company paid approximately $4.2 million in customary arranger and lender consent fees, attorney fees, and reasonable and documented expenses of the Administrative Agent.
Prior to Amendments No.1 and No. 2, the Company had $12.6 million of unamortized debt discount and debt issuance costs associated with its term loan and $1.5 million unamortized deferred financing fees associated with its revolver as of April 3, 2022. Per Amendments No. 1 and No. 2, the Company incurred an additional $15.5 million of debt discount and issuance costs associated with the term loan and $1.2 million of fees associated with the revolver. The Company evaluated the accounting for this transaction under ASC 470 to determine modification versus extinguishment accounting on a creditor-by-creditor basis. During the second quarter 2022, the Company accounted for a combination of old and new debt discount and issuance costs totaling $23.1 million as a modification (recorded as a debt discount and issuance costs on the consolidated balance sheet) and accounted for $5.0 million as a debt extinguishment (included in special charges on the consolidated statements of operations). For the revolving credit facility, $1.2 million was rolled into the existing Credit Agreement (included in other assets) during the second quarter 2022 based on the borrowing capacity with the underlying banks. As of December 31, 2022, there was $20.4 million of debt issuance costs recorded as a debt discount and issuance costs on the consolidated balance sheet and $2.3 million recorded in other assets associated with the Company's revolving credit facility.
The Company had $24.4 million and $24.7 million in letters of credit issued under the Credit Agreement as of December 31, 2022 and December 31, 2021, respectively. The Company recorded non-cash interest expense of $3.6 million, $3.9 million, and $4.1 million for the years ended December 31, 2022, 2021 and 2020, respectively, related to the amortization of its deferred financing costs. The Credit Agreement revolving line of credit facility matures on December 20, 2026 whereas the term loan facility matures on December 20, 2028.
The Company's outstanding debt balances are characterized as Level 2 financial instruments. As of December 31, 2022, the estimated fair value of its gross debt (before netting debt issuance costs) was $502.7 million, or $14.2 million under its carrying value of $516.9 million. This compares to an estimated fair value of $524.3 million, or $2.0 million under its carrying value of $526.3 million as of December 31, 2021.
Financial Instruments
As of December 31, 2022 and December 31, 2021, the Company had restricted cash balances of $2.4 million and $1.4 million, respectively. These balances are recorded within prepaid expenses and other current assets on the consolidated balance sheets, and are included within cash, cash equivalents and restricted cash in the consolidated statements of cash flows.
Effective April 2018, the Company entered into an interest rate swap pursuant to an ISDA Master Agreement with Citizens Bank, National Association. The four-year interest rate swap has a fixed notional value of $400.0 million with a 1% LIBOR floor and a maturity date of April 12, 2022. The interest rate swap was a qualifying hedging instrument and was accounted for as a cash flow hedge pursuant to ASC Topic 815, Derivatives and Hedging. The interest rate swap was settled upon its maturity during the second quarter of 2022. As of December 31, 2022 and December 31, 2021, the interest rate swap had a fair value liability of $0.0 million and $2.2 million, respectively.
The aggregate net fair value of the interest rate swap and cross-currency swap as of December 31, 2022 and December 31, 2021 are summarized in the table below (in thousands):
| | | | | | | | | | | |
| Significant Other Observable Inputs |
| Level 2 |
| 2022 | | 2021 |
| Derivative asset | $ | — | | | $ | — | |
| Derivative liabilities | $ | — | | | $ | (2,187) | |
Derivative liabilities of $(2.2) million were recorded in accrued expenses and other current liabilities on the Company's consolidated balance sheet as of December 31, 2021. There were no Derivative assets or liabilities as of December 31, 2022.
The amount of gain (loss) recognized in other comprehensive (loss) income (“OCI”) and reclassified from accumulated other comprehensive (loss) income (“AOCI”) to earnings are summarized below (in thousands):
| | | | | | | | | | | | | | | |
| | | | | Year Ended |
| | | | | December 31, 2022 | | December 31, 2021 |
| Amount of (loss) recognized in OCI | | | | | $ | (10) | | | $ | (284) | |
| | | | | | | |
| Amount of (loss) reclassified from AOCI to earnings (interest expense, net) | | | | | $ | (1,849) | | | $ | (6,682) | |
|
Interest expense, net (including the effects of the cash flow hedge) related to the portion of the Company's term loan subject to the interest-rate swap agreement was $7.5 million for the year ended December 31, 2022 and $24.0 million for the year ended December 31, 2021. The significant decrease in interest expense when compared to 2021 was due to the hedge being in effect for only a partial term in 2022.
(13) Share-Based Compensation
The Company has two share-based compensation plans as of December 31, 2022: (1) the 2019 Stock Option and Incentive Plan (the “2019 Plan”) and (2) the 2014 Stock Option and Incentive Plan (the “2014 Plan”). The 2019 Plan was adopted by its Board of Directors (subject to shareholder approval) on February 20, 2019 and approved by its shareholders at the Company's annual meeting on May 9, 2019. On May 25, 2021 at the Company's annual meeting, the Company's shareholders approved an amendment to the 2019 Plan increasing the number of shares available for issuance from 1,000,000 to 2,000,000 shares (subject to adjustment for stock splits and similar events). As of May 9, 2019, no new awards will be granted under the 2014 Plan. As a result, any shares subject to outstanding awards under the 2014 Plan that expire, are canceled or otherwise terminate, or are withheld to satisfy tax withholding obligations will not be available for award grant purposes under the 2019 Plan. Both plans permit the grant of the following types of awards to its officers, other employees and non-employee directors: incentive stock options, nonqualified stock options, deferred stock awards, restricted stock awards, restricted stock unit (“RSU”) awards, unrestricted stock awards, performance share awards, cash-based awards, stock appreciation rights (“SARs”) and dividend equivalent rights. Under the 2019 Plan, shares issued for all awards count against the aggregate share limit as 1.0 share for every share actually issued. All stock options and RSUs granted under the 2014 Plan are either 100% vested or have been terminated. RSUs granted under both plans generally vest within three years. RSUs will be settled in shares of the Company's common stock. As of December 31, 2022, there were 1,247,421 shares available for grant under the 2019 Plan.
As of December 31, 2022, there were 41,310 stock options and 366,321 RSUs outstanding.
The Company measures the cost of all share-based payments, including stock options, at fair value on the grant date and recognizes this cost in the consolidated statements of operations, net of actual forfeitures. Compensation expense related to its share-based plans for the years ended December 31, 2022, 2021, and 2020 was $1.9 million, $5.3 million and $5.5 million, respectively. The significant decrease in compensation cost in 2022 relates primarily to forfeitures associated with the departure of the Company's former CEO in January 2022 as well as the delay in granting annual equity awards. During 2022, expenses related to share-based compensation were recorded as follows: $2.5 million as selling, general and administrative expenses and $(0.6) million as special charges due mainly to the Company's former CEO departure. In 2021, expenses related to share-based compensation were recorded entirely in selling, general and administrative expenses. During 2020, $0.2 million of share based compensation expense was classified in discontinued operations related to the sale of the DV business and is not included in the expense of $5.5 million which relates to continuing operations. As of December 31, 2022, there was $5.4 million of total unrecognized compensation cost related to the Company's outstanding share-based compensation arrangements. This cost is expected to be recognized over a weighted average period of 1.8 years. This compares to $7.4 million for 2021 and $5.4 million for 2020, respectively.
Stock Options
During the years ended December 31, 2022, December 31, 2021, and December 31, 2020 there were no stock option awards granted for the purchase of shares of the Company's common stock.
Restricted Stock Units (RSUs)
The Company accounts for RSU awards by expensing the weighted average fair value to selling, general and administrative expenses ratably over vesting periods generally ranging up to three years. During the years ended December 31, 2022, December 31, 2021, and December 31, 2020, the Company granted 263,490, 245,345 and 616,612 RSUs, respectively, with weighted average fair values of $19.15, $40.53, and $12.88 per RSU award, respectively.
During 2022, 2021, and 2020, the Company granted performance-based RSUs as part of the overall mix of RSU awards. In 2022 and 2021, these performance-based RSU awards 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 is 0% to 200% with a cap not to exceed 600% of the target value on grant date. The 2022 and 2021 performance-based RSUs are valued using a Monte Carlo Simulation model to account for the market condition on grant date. In 2020, these performance-based RSU Awards included 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 0% overall achievement and probability to vest. Of the 263,490 RSUs granted during 2022, 42,272 are performance-based RSU awards. This compares to 70,933 and 109,278 performance-based RSU awards granted in 2021 and 2020, respectively.
The CIRCOR Management Stock Purchase Plan (“MSPP”), which is a component of all three of the Company's share-based compensation plans, provides that eligible employees may elect to receive RSUs in lieu of all or a portion of their pre-tax annual incentive bonus and, in some cases, make after-tax contributions in exchange for RSUs (“RSU MSPs”). Each RSU MSP represents a right to receive one share of the Company's common stock after a three-year vesting period. RSU MSPs are granted at a discount of 33% from the fair market value of the shares of common stock on the date of grant. This discount is amortized as compensation expense, to selling, general and administrative expenses, over a four-year period. During 2022, RSU MSPs totaling 11,273 were granted with per unit discount amounts representing fair values of $6.51. RSU MSPs totaling 31,248 with per unit discount amounts representing fair values of $13.14 were granted during 2021. There were no RSU MSPs granted under the MSPP during the year ended December 31, 2020.
A summary of the status of all stock options and RSU awards granted to employees and non-employee directors as of December 31, 2022 and changes during the year are presented in the table below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Stock Options | | RSU Awards | | RSU MSPs |
| | Shares | | Weighted
Average
Exercise Price | | Shares | | Weighted
Average
Price | | Shares | | Weighted
Average
Price |
| Options and awards outstanding at beginning of period | 596,753 | | | $ | 42.58 | | | 445,396 | | | $ | 27.81 | | | 62,251 | | | $ | 24.35 | |
| Granted | — | | | $ | — | | | 263,490 | | | $ | 19.15 | | | 11,273 | | | $ | 13.23 | |
| Exercised/Settled | — | | | $ | — | | | (129,077) | | | $ | 27.83 | | | (28,170) | | | $ | 20.98 | |
| | | | | | | | | | | |
| Forfeited | (188,711) | | | $ | 39.62 | | | (233,770) | | | $ | 26.23 | | | (25,072) | | | $ | 25.27 | |
| Expired | (366,732) | | | $ | 43.88 | | | — | | | $ | — | | | — | | | $ | — | |
| Options and awards outstanding at end of period | 41,310 | | | $ | 44.62 | | | 346,039 | | | $ | 22.29 | | | 20,282 | | | $ | 19.55 | |
| Options and awards exercisable at end of period | 41 | | | $ | 44.62 | | | 2,092 | | | $ | 35.30 | | | — | | | $ | — | |
The aggregate intrinsic value of stock options exercised during the years ended December 31, 2022, 2021 and 2020 was immaterial. The aggregate fair value of stock-options vested during the years ended December 31, 2022, 2021, and 2020 was $0.0 million, $1.1 million, and $1.7 million, respectively. As of December 31, 2022, there was no unrecognized compensation cost related to stock options.
The aggregate intrinsic value of RSU awards settled during the years ended December 31, 2022, 2021, and 2020 was $3.2 million, $12.2 million, and $1.9 million, respectively. The aggregate fair value of RSU awards vested during the 12 months ended December 31, 2022, 2021 and 2020 was $3.6 million, $6.0 million, and $3.0 million, respectively. The aggregate intrinsic value of RSU awards outstanding as of December 31, 2022 was $8.3 million. As of December 31, 2022, there was $5.2 million of total unrecognized compensation cost related to RSU awards that is expected to be recognized over a weighted average period of 1.7 years.
There were no RSU MSPs exercisable as of December 31, 2022 and December 31, 2021, and 1,469 as of December 31, 2020. The aggregate intrinsic value of RSU MSPs settled during the years ended December 31, 2022, 2021, and 2020 was $0.0 million, $0.2 million, and $0.0 million, respectively. The aggregate fair value of RSU MSPs vested during the years ended December 31, 2022, 2021, and 2020 was $0.3 million, $0.4 million, and $0.4 million, respectively. The aggregate intrinsic value of RSU MSPs outstanding as of December 31, 2022 was $0.1 million. As of December 31, 2022, there was $0.1 million of total unrecognized compensation costs related to RSU MSPs that is expected to be recognized over a weighted average period of 2.0 years.
The following table summarizes information about equity awards outstanding at December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Equity Awards Outstanding | | Equity Awards Exercisable | | |
| (aggregate intrinsic value in thousands) | Awards | | Average Share Price * | | Aggregate Intrinsic Value | | Remaining Term ** | | Awards | | Average Share Price * | | Aggregate Intrinsic Value | | Remaining Term ** | | | | |
| Stock Options | 41,310 | | | $ | 44.62 | | | $ | — | | | 1.4 | | 41 | | | $ | 44.62 | | | $ | — | | | 1.4 | | | | |
| RSU Awards | 346,039 | | | $ | 22.29 | | | $ | 8,291 | | | 1.6 | | 2,092 | | | $ | 35.30 | | | $ | 50 | | | N/A | | | | |
| RSU MSPs | 20,282 | | | $ | 19.55 | | | $ | 115 | | | 2.0 | | — | | | $ | — | | | $ | — | | | N/A | | | | |
| * Weighted-average exercise price per share for options and weighted- average grant date price for RSUs. |
| ** Weighted-average contractual remaining term in years. | | | | |
The Company also grants cash settled stock unit awards to some of its international employee participants. These cash settled awards generally vest ratably over a three-year period based on the closing price of the Company's common stock at the time of vesting. As of December 31, 2022, there were 34,981 cash settled stock unit awards outstanding compared with 33,454 cash settled stock unit awards outstanding as of December 31, 2021. During 2022, the aggregate cash used to settle cash settled stock unit awards was $0.4 million. As of December 31, 2022, the Company had $0.3 million in accrued expenses and other current liabilities for cash settled stock unit awards compared with $0.4 million as of December 31, 2021. Cash settled stock unit award related compensation costs for the year ended December 31, 2022 totaled $0.4 million and were recorded entirely in selling, general and administrative expense. In 2021, cash settled stock unit award-related compensation costs totaled $0.6 million and were recorded entirely in selling, general and administrative expense. In 2020, cash settled stock unit award-related compensation costs totaled $0.7 million and were recorded as follows: $0.6 million as selling, general and administrative expense and $0.1 million as special charges related to the sale of the I&S business. The special charge amount related to the accelerated vesting of awards as a result of the transaction.
(14) Concentrations of Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, short-term investments, trade receivables and contract assets. A significant portion of Company's revenue, receivables and contract assets are from customers associated with the aerospace, defense, and industrial markets. The Company performs ongoing credit evaluations of its customers including obtaining advance payments or other security when appropriate and maintains allowances for potential credit losses. For the years ended December 31, 2022, 2021, and 2020, the Company had no customers that accounted for more than 10% of its consolidated revenues.
(15) Retirement Plans
U.S. Contribution Plan
The Company offers a savings plan to eligible U.S. employees. The plan is intended to qualify under Section 401(k) of the Internal Revenue Code. Substantially all of its U.S. employees are eligible to participate in the 401(k) savings plan. Participating employees may defer a portion of their pre-tax compensation, as defined, but not more than statutory limits. Under this plan, the Company matches a specified percentage of employee contributions, and are able to make a discretionary core contribution, subject to certain limitations. The Company contributes 100% of the amount contributed by the employee, up to a maximum of 4% of the employee's earnings. Matching contributions under the updated 401(k) benefit plan vest 0% after one year, 50% after two years, and full vesting after three years of service. In the first quarter of 2020, the Company temporarily suspended the 401(k) match for certain employee populations for the year. In the first quarter of 2021 the Company reinstated the temporarily suspended 401(k) match.
The cost of the Company's 401(k) plan is outlined below (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Cost of 401(k) plan | $ | 3,926 | | | $ | 4,226 | | | $ | 458 | |
Pension & Other Post-Retirement Benefit Obligations
The Company also sponsors various defined benefit plans, and other post-retirement benefits plans, including health and life insurance, for former employees of an acquired business. These plans include significant benefit obligations which are calculated based on actuarial valuations. Key assumptions are made in determining these obligations and related net periodic benefit costs, including discount rates, mortality, and expected long-term return on plan assets.
The Company maintains a qualified noncontributory defined benefit pension plan, a nonqualified, noncontributory defined benefit supplemental pension plan, and other post-retirement benefit plans, including health and life insurance in the U.S. which are frozen. To date, the supplemental and the other post-retirement benefits plans remain unfunded. Outside of the U.S., the Company sponsors various funded and unfunded defined benefit plans. The obligations are primarily attributed to a partially funded plan in Germany and a fully funded plan in the U.K.
During fiscal year 2022, the Company made cash contributions of approximately $0.9 million to its U.S. plans and $3.9 million to its foreign plans. In 2023, it expects to make defined benefit plan contributions based on the minimum required funding in accordance with statutory requirements (approximately $1.0 million in the U.S. and approximately $3.8 million for its foreign plans). The estimates for plan funding for future periods may change as a result of the uncertainties concerning the return on plan assets, the number of plan participants, and other changes in actuarial assumptions. The Company anticipates fulfilling these commitments through the generation of cash flow from operations.
The components of net periodic benefit cost for the postretirement plans were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Post-retirement Benefits |
| | Year Ended December 31, | | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| Components of net periodic benefit cost: | | | | | | | | | | | |
| Service cost | $ | 2,351 | | | $ | 3,235 | | | $ | 2,812 | | | $ | 3 | | | $ | 3 | | | $ | 3 | |
| Interest cost | 5,352 | | | 4,019 | | | 6,958 | | | 210 | | | 160 | | | 262 | |
| Expected return on assets | (9,352) | | | (10,094) | | | (11,737) | | | — | | | — | | | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Net periodic benefit cost | (1,649) | | | (2,840) | | | (1,967) | | | 213 | | | 163 | | | 265 | |
| Net loss amortization | 198 | | | 912 | | | 279 | | | — | | | — | | | — | |
| Prior service cost amortization | 15 | | | 17 | | | 15 | | | — | | | — | | | — | |
| Total amortization | 213 | | | 929 | | | 294 | | | — | | | — | | | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Net periodic benefit cost | $ | (1,436) | | | $ | (1,911) | | | $ | (1,673) | | | $ | 213 | | | $ | 163 | | | $ | 265 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
The weighted average assumptions used in determining the net periodic benefit cost and benefit obligations for the post-retirement plans are shown below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Post-retirement Benefits |
| | Year Ended December 31, | | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| Net periodic benefit cost: | | | | | | | | | | | |
| Discount rate – U.S. | 2.41% | | 1.93% | | 2.83% | | 2.65 | % | | 2.65% | | 3.05% |
| Discount rate – Foreign | 1.30% | | 0.82% | | 1.24% | | — | | — | | — |
| Expected return on plan assets - U.S. | 4.00% | | 4.50% | | 5.50% | | — | | — | | — |
| Expected return on plan assets - Foreign | 2.85% | | 2.20% | | 2.95% | | — | | — | | — |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Rate of compensation increase - Foreign | 3.20% | | 3.20% | | 3.20% | | — | | — | | — |
| Benefit obligations: | | | | | | | | | | | |
| Discount rate – U.S. | 4.86% | | 2.41% | | 1.93% | | 4.96 | % | | 2.26% | | 2.26% |
| Discount rate – Foreign | 3.83% | | 1.30% | | 0.82% | | — | | — | | — |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Rate of compensation increase - Foreign | 3.25% | | 3.20% | | 3.20% | | — | | — | | — |
| | | | | | | | | | | |
|
|
The amounts reported for net periodic benefit cost and the respective benefit obligation amounts are dependent upon the actuarial assumptions used. The Company reviews historical trends, future expectations, current market conditions, and external data to determine the assumptions. The actuarial assumptions used to determine the net periodic pension cost are based upon the prior year’s assumptions used to determine the benefit obligation.
Assumed health care cost trend rates pre-65 trend at December 31, 2022 and 2021 were 7.5% and 7.5%, respectively. The rate to which the cost trend rate is assumed to decline (the ultimate trend rate) for December 31, 2022 and 2021 were 4.1% and 4.5%, respectively, and the years that the rate reaches the ultimate trend rate were 2075 and 2034, respectively. Assumed health care cost trend rates post-65 trend at December 31, 2022 and 2021 were 7.5% and 7.5%, respectively. The rate to which the cost trend rate is assumed to decline (the ultimate trend rate) for December 31, 2022 and 2021 were 4.1% and 4.5%, respectively, and the year that the rate reaches the ultimate trend rate were 2075 and 2034, respectively.
In selecting the expected long-term return on assets for the qualified and foreign plans, the Company considered the average rate of earnings expected on the funds invested or to be invested to provide for the benefits of these plans. It, with input from the plans’ professional investment managers and actuaries, also considered the average rate of earnings expected on the funds invested or to be invested to provide plan benefits. This process included determining expected returns for the various asset classes that comprise the plans’ target asset allocation. This basis for selecting the long-term return on assets is consistent with the prior year. Using generally accepted diversification techniques, the plans’ assets, in aggregate and at the individual portfolio level, are invested so that the total portfolio risk exposure and risk-adjusted returns best meet the plans’ long-term benefit obligations to employees. Plan asset allocations are reviewed periodically and rebalanced to achieve target allocation among the asset categories when necessary. This included considering the pension asset allocation and the expected returns likely to be earned over the life of the plans.
The funded status of the defined benefit post-retirement plans and amounts recognized in the consolidated balance sheets, measured as of December 31, 2022 and December 31, 2021 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Post-retirement Benefits |
| | December 31, | | December 31, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Change in projected benefit obligation: | | | | | | | |
| Balance at beginning of year | $ | 363,810 | | | $ | 412,834 | | | $ | 10,244 | | | $ | 10,893 | |
| Service cost | 2,351 | | | 3,235 | | | 3 | | 3 | |
| Interest cost | 5,352 | | | 4,019 | | | 210 | | 160 | |
| | | | | | | |
| Actuarial (gain) loss (1) | (75,022) | | | (24,873) | | | (2,684) | | | (382) | |
| Exchange rate (gain) loss | (9,985) | | | (9,597) | | | — | | | — | |
| Benefits paid | (20,768) | | | (21,808) | | | (525) | | | (430) | |
| | | | | | | |
| Balance at end of year | $ | 265,738 | | | $ | 363,810 | | | $ | 7,248 | | | $ | 10,244 | |
| Change in fair value of plan assets: | | | | | | | |
| Balance at beginning of year | $ | 252,777 | | | $ | 247,821 | | | $ | — | | | $ | — | |
| Actual return on assets | (51,480) | | | 22,375 | | | — | | | — | |
| Exchange rate (loss) gain | (3,065) | | | (305) | | | — | | | — | |
| | | | | | | |
| | | | | | | |
| Benefits paid | (20,768) | | | (21,808) | | | (525) | | | (430) | |
| | | | | | | |
| Employer contributions | 4,246 | | | 4,694 | | | 525 | | | 430 | |
| Fair value of plan assets at end of year (2) | $ | 181,710 | | | $ | 252,777 | | | $ | — | | | $ | — | |
| Funded status: | | | | | | | |
| Excess of benefit obligation over the fair value of plan assets | $ | (84,028) | | | $ | (111,033) | | | $ | (7,248) | | | $ | (10,244) | |
| Pension plan accumulated benefit obligation (“ABO”) | $ | 265,738 | | | $363,810 | | — | | — |
| | | | | | | |
| (1) The changes in benefit obligations were primarily drive by changes in discount rates in both U.S. and foreign obligations. |
| (2) Refer to table below for further disclosure regarding the fair value of plan assets. |
The fair values of the Company’s pension plan assets as of December 31, 2022 and 2021 utilizing the fair value hierarchy were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2022 | | December 31, 2021 |
| | Measured at Net Asset Value (1) | Level 1 | Level 2 | Level 3 | Total | | Measured at Net Asset Value (1) | Level 1 | Level 2 | Level 3 | Total |
| U.S. Plans: | | | | | | | | | | | | |
| Cash Equivalents: | | | | | | | | | | | | |
| Money Market Funds | | $ | 22 | | $ | 1,686 | | $ | — | | $ | — | | $ | 1,708 | | | $ | 21 | | $ | 867 | | $ | — | | $ | — | | $ | 888 | |
| Mutual Funds: | | | | | | | | | | | | |
| Bond Funds | | 35,880 | | — | | — | | — | | 35,880 | | | 46,956 | | — | | — | | — | | 46,956 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Comingled Pools: | | | | | | | | | | | | |
| Opportunistic | | 5,821 | | — | | — | | — | | 5,821 | | | 5,930 | | — | | — | | — | | 5,930 | |
| Investment Grade | | 73,603 | | — | | — | | — | | 73,603 | | | 105,217 | | — | | — | | — | | 105,217 | |
| Non-U.S. Equity | | 5,453 | | — | | — | | — | | 5,453 | | | 20,596 | | — | | — | | — | | 20,596 | |
| U.S. Equity | | 36,070 | | — | | — | | — | | 36,070 | | | 43,067 | | — | | — | | — | | 43,067 | |
| Global Low Volatility | | 1,837 | | — | | — | | — | | 1,837 | | | — | | — | | — | | — | | — | |
| Insurance Contracts | | — | | — | | 820 | — | | 820 | | | — | | — | | 815 | | — | | 815 | |
| Foreign Plans: | | | | | | | | | | | | |
| Cash | | — | | 4,030 | | — | | — | | 4,030 | | | — | | 245 | — | | — | | 245 | |
| Equity | | — | | — | | — | | — | | — | | | — | | 11,733 | | — | | — | | 11,733 | |
| Non-U.S. government and corporate bonds | | — | | 16,306 | | — | | — | | 16,306 | | | — | | 17,050 | | — | | — | | 17,050 | |
| Insurance Contracts | | — | | — | | — | | 182 | | 182 | | | — | | — | | — | | 280 | | 280 | |
| | | | | | | | | | | | |
| Total Fair Value | | $ | 158,686 | | $ | 22,022 | | $ | 820 | | $ | 182 | | $ | 181,710 | | | $ | 221,787 | | $ | 29,895 | | $ | 815 | | $ | 280 | | $ | 252,777 | |
| (1) Certain investments that are measured at fair value using NAV have not been classified in the fair value hierarchy. These investments, consisting of common/collective trusts, are valued using the NAV provided by the Trustee. The NAV is based on the underlying investments held by the fund that are traded in an active market, less its liabilities. These investments are able to be redeemed in the near-term. |
The following information is presented as of December 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Post-retirement Benefits |
| 2022 | | 2021 | | 2022 | | 2021 |
| Funded status, end of year: | | | | | | | |
| Fair value of plan assets | $ | 181,710 | | | $ | 252,777 | | | $ | — | | | $ | — | |
| Projected benefit obligation | (265,738) | | | (363,810) | | | (7,248) | | | (10,244) | |
| Net pension liability | $ | (84,028) | | | $ | (111,033) | | | $ | (7,248) | | | $ | (10,244) | |
| Post-retirement amounts recognized in the balance sheet consists of: | | | | | | | |
| Non-current asset | $ | 6,133 | | | $ | 13,799 | | | $ | — | | | $ | — | |
| Current liability | (4,193) | | | (3,951) | | | (596) | | | (609) | |
| Non-current liability | (85,968) | | | (120,881) | | | (6,652) | | | (9,635) | |
| Total | $ | (84,028) | | | $ | (111,033) | | | $ | (7,248) | | | $ | (10,244) | |
| Amounts recognized in accumulated other comprehensive loss consist of: | | | | | | | |
| Net (gains) losses | $ | (8,713) | | | $ | 6,375 | | | $ | (3,121) | | | $ | (437) | |
| Prior service cost | 261 | | 308 | | | — | | | — | |
| Total | $ | (8,452) | | | $ | 6,683 | | | $ | (3,121) | | | $ | (437) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
As of December 31, 2022, the benefit payments expected to be paid in each of the next five years and the aggregate for the five fiscal years thereafter were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter |
| Pension Benefits - All Plans | $ | 21,644 | | | $ | 21,287 | | | $ | 20,780 | | | $ | 20,314 | | | $ | 19,757 | | | $ | 89,726 | |
| Other Post-retirement Benefits | 596 | | 568 | | 552 | | 530 | | 505 | | 2,232 | |
| Expected benefit payments | $ | 22,240 | | | $ | 21,855 | | | $ | 21,332 | | | $ | 20,844 | | | $ | 20,262 | | | $ | 91,958 | |
(16) Contingencies, Commitments and Guarantees
Legal Proceedings
The Company is subject to various legal proceedings and claims pertaining to matters such as product liability or contract disputes. The Company is also subject to other proceedings and governmental inquiries, inspections, audits or investigations pertaining to issues such as tax matters, patents and trademarks, pricing, contractual issues, business practices, governmental regulations, employment and other matters. Although the results of litigation and claims cannot be predicted with certainty, the Company expects that the ultimate disposition of these matters, to the extent not previously provided for, will not have a material adverse effect, individually or in the aggregate, on its business, financial condition, results of operations or liquidity.
Asbestos-related product liability claims continue to be filed against two of the Company's subsidiaries: CIRCOR Instrumentation Technologies, Inc. (f/k/a Hoke, Inc.) (“Hoke”), the stock of which the Company acquired in 1998 and Spence Engineering Company, Inc., the stock of which the Company acquired in 1984. The Hoke subsidiary was divested in January 2020 through the sale of the I&S business. However, the Company has indemnified the buyer for asbestos-related claims that are made against Hoke. Due to the nature of the products supplied by these entities, the markets they serve and the Company's historical experience in resolving these claims, the Company does not expect that these asbestos-related claims will have a material adverse effect on the financial condition, results of operations or liquidity of the Company.
During the second quarter of 2021 the Company was notified of a contract termination by one of its Industrial segment customers. The basis for termination is under dispute and the ultimate outcome of this matter is uncertain. During the fourth quarter of 2021 the Company recorded a full allowance against the outstanding receivables resulting in a charge of $6.3 million. The Company also has outstanding guarantees of its performance under the contract in the aggregate amount of $3.4 million. Further, the Company is exposed to claims from sub-contractors for contract termination. During the fourth quarter of 2022, a settlement agreement was reached resulting in a total of $4.5 million to be paid in the first half of 2023. The Company has accrued the unpaid portion of the settlement amount as of December 31, 2022.
Standby Letters of Credit
The Company executes standby letters of credit, which include bank guarantees, bid bonds, and performance bonds, in the normal course of business to ensure its performance or payments to third parties. The aggregate notional value of these instruments was $32.4 million at December 31, 2022 of which $24.4 million were syndicated under the Credit Agreement and $32.5 million at December 31, 2021 of which $24.7 million were syndicated under the Credit Agreement. Based on the Company's historical experience with these types of instruments the Company does not expect potential obligations to be material to its financial position. These instruments generally have expiration dates ranging from less than 1 month to 5 years from December 31, 2022.
During May 2022, a Russian customer drew on a letter of credit related to an equipment system in the amount of $3.9 million, which the Company funded. The Company is contesting the draw and is pursuing actions to recover this amount from the customer.
Commercial Contract Commitments
As of December 31, 2022, the Company had approximately $157.0 million of commercial contract commitments related to open purchase orders.
Insurance
The Company maintains insurance coverage of a type and with such limits as it believes are customary and reasonable for the risks it faces and in the industries in which it operates. While many of its policies do contain a deductible, the amount of such deductible is typically not material. The accruals for insured liabilities are not discounted and take into account these deductibles and are based on claims filed and reported as well as estimates of claims incurred but not yet reported.
Restatement of Prior Period Financial Statements and Non-Timely Filing of Financial Statements
As described in Note 2, Restatement of Previously Issued Consolidated Financial Statements, of the Company's Annual Report on Form 10-K for the year ended 2021, filed with the SEC on July 26, 2022, the Company discovered accounting irregularities in its Pipeline Engineering business going back to 2017. The Company conducted an investigation into the accounting irregularities at the Pipeline Engineering business and restated its consolidated financial statements for the annual periods of 2020 and 2019, interim and year to date periods for 2020 and interim and year to date periods for the nine months ended October 3, 2021.
The Company was unable to timely file its Annual Report on Form 10-K for 2021 and Quarterly Report on Form 10-Q for the first and second quarters of 2022 with the Securities and Exchange Commission ("the SEC"). The discovery of accounting irregularities, restatement of prior period financial statements and non-timely filing of financial statements could expose the Company to future claims and losses. The Company has self-reported the identified accounting irregularities at the Pipeline Engineering business to the SEC and the Company continues to respond to requests for information from the SEC.
(17) Guarantees and Indemnification Obligations
As permitted under Delaware law, the Company has agreements whereby it indemnifies 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 the Company could be required to make under these indemnification agreements is unlimited. However, the Company has directors and officers liability insurance policies that limit our exposure for events covered under the policies and should enable us to recover a portion of any future amounts paid. As a result of the coverage under these insurance policies, the Company believes the estimated fair value of these indemnification agreements is minimal and, therefore, have no liabilities recorded from those agreements as of December 31, 2022.
The Company records provisions for the estimated cost of product warranties, primarily from historical information, at the time product revenue is recognized. While the Company engages 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. Our warranty liabilities are included in accrued expenses and other current liabilities on our consolidated balance sheets.
The following table sets forth information related to our product warranty reserves for the years ended December 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| Balance beginning January 1 | $ | 2,739 | | | $ | 2,206 | |
| Provisions | 2,181 | | | 3,629 | |
| Claims settled | (2,302) | | | (3,040) | |
| Currency translation adjustment | (97) | | | (56) | |
| Balance ending December 31 | $ | 2,521 | | | $ | 2,739 | |
For the year ended December 31, 2022, decreases in warranty obligations were primarily driven by provisions and claims within our Refinery Valves, Industrial Pumps North America, and Industrial Pumps EMEA businesses.
(18) Business Segment and Geographical Information
The Company's reportable segments have been identified in accordance with ASC Topic 280-10-50 through its evaluation of how it engages in business activities to earn revenues and incur expenses, which operating results are regularly reviewed by its chief operating decision maker (“CODM”) to assess performance and make decisions about resources to be allocated, and the availability of discrete financial information. CIRCOR’s reportable segments are generally organized based upon the end markets it sells its products and services into. No individual operating segments have been aggregated for purposes of determining the reportable segments. The reporting segments are Industrial and Aerospace & Defense.
Each reporting segment is individually managed, as each requires different technology and marketing strategies, and has separate financial results that are reviewed by the Company's CODM. The CODM evaluates segment performance and determines how to allocate resources utilizing, among other data, segment operating income. Segment operating income excludes special and restructuring charges, net. In addition, certain administrative expenses incurred at the corporate level for the benefit of the reporting segments are allocated to the segments based upon specific identification of costs, employment related information or net revenues. Each segment contains related products and services particular to that segment.
Corporate is reported on a net “after allocations” basis. Inter-segment intercompany transactions affecting net operating profit have been eliminated within the respective reportable segments.
The amounts reported in the Corporate expenses line item in the following table consists primarily of the following: 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 costs; facilities, equipment and maintenance costs; and travel and various other administrative costs related to the corporate office and respective functions. 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; tax; treasury; investor relations and shareholder services; regulatory compliance; strategic tax planning; and stock transfer agent costs.
The Company's 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 facilitate comparison of performance for determining incentive compensation achievement.
The following table presents certain reportable segment information (in thousands):
| | | | | | | | | | | | | | | | | |
| As of and for the year ended December 31, |
| 2022 | | 2021 | | 2020 |
| Net revenues | | | | | |
| Industrial | $ | 504,204 | | | $ | 506,126 | | | $ | 499,209 | |
| Aerospace & Defense | 282,715 | | | 252,541 | | | 266,010 | |
| | | | | |
| | | | | |
| Consolidated revenues | $ | 786,919 | | | $ | 758,667 | | | $ | 765,219 | |
| | | | | |
| Segment income | | | | | |
| | | | | |
| Aerospace & Defense - Segment Operating Income | 63,584 | | | 56,073 | | | 58,379 | |
| Industrial - Segment Operating Income | 49,302 | | | 28,896 | | | 27,025 | |
| Corporate expenses | (25,384) | | | (30,638) | | | (30,378) | |
| Subtotal | 87,502 | | | 54,331 | | | 55,026 | |
| Special restructuring charges, net | 11,066 | | | 4,234 | | | 4,945 | |
| Special other (recoveries) charges, net | (30,079) | | | 20,038 | | | (39,248) | |
| Special and restructuring (recoveries) charges, net | (19,013) | | | 24,272 | | | (34,303) | |
| Restructuring related inventory charges (recoveries), net | 2,757 | | | 599 | | | (251) | |
| | | | | |
| Acquisition amortization | 36,338 | | | 41,772 | | | 42,463 | |
| Acquisition depreciation | 4,614 | | | 6,511 | | | 3,986 | |
| Goodwill impairment charges | — | | | 10,500 | | | 138,078 | |
| Restructuring, impairment and other cost, net | 43,709 | | | 59,382 | | | 184,276 | |
| Consolidated operating income (loss) | 62,806 | | | (29,323) | | | (94,947) | |
| Interest expense, net | 44,886 | | | 32,365 | | | 34,219 | |
| Other income, net | (5,747) | | | (3,826) | | | (1,594) | |
| Income (loss) from continuing operations before income taxes | $ | 23,667 | | | $ | (57,862) | | | $ | (127,572) | |
| Identifiable assets | | | | | |
| Industrial | $ | 1,261,996 | | | $ | 1,256,974 | | | $ | 1,328,179 | |
| Aerospace & Defense | 557,018 | | | 464,964 | | | 451,612 | |
| Corporate | (806,327) | | | (702,640) | | | (696,934) | |
| Consolidated identifiable assets | $ | 1,012,687 | | | $ | 1,019,298 | | | $ | 1,082,857 | |
| | | | | |
| Capital expenditures | | | | | |
| Industrial | $ | 14,304 | | | $ | 9,502 | | | $ | 6,928 | |
| Aerospace & Defense | 6,704 | | | 4,608 | | | 4,400 | |
| Corporate | 2,007 | | | 467 | | | 466 | |
| Consolidated capital expenditures | $ | 23,015 | | | $ | 14,577 | | | $ | 11,794 | |
| | | | | |
| Depreciation and amortization | | | | | |
| Industrial | $ | 44,914 | | | $ | 52,532 | | | $ | 50,961 | |
| Aerospace & Defense | 10,477 | | | 11,973 | | | 12,492 | |
| Corporate | 660 | | | 653 | | | 610 | |
| Consolidated depreciation and amortization | $ | 56,051 | | | $ | 65,158 | | | $ | 64,063 | |
| | | | | |
|
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 companies. 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. Corporate Identifiable Assets after elimination of intercompany assets were $8.8 million, $13.6 million, and $12.1 million as of December 31, 2022, 2021, and 2020, respectively.
The following tables present net revenue and long-lived assets by geographic area. The net revenue amounts are based on shipments to each of the respective areas (in thousands).
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| Net revenues by geographic area | 2022 | | 2021 | | 2020 |
| United States | $ | 349,296 | | | $ | 309,475 | | | $ | 340,705 | |
| Germany | 86,381 | | | 90,407 | | | 81,315 | |
| France | 39,830 | | | 38,777 | | | 36,616 | |
| China | 34,709 | | | 36,759 | | | 27,036 | |
| United Kingdom | 29,661 | | | 32,341 | | | 33,439 | |
| Canada | 23,622 | | | 16,421 | | | 18,413 | |
| Norway | 10,175 | | | 10,391 | | | 12,765 | |
| Saudi Arabia | 6,214 | | | 5,375 | | | 5,628 | |
| Russia | 418 | | | 5,179 | | | 4,893 | |
| Rest of Europe | 76,952 | | | 85,107 | | | 82,417 | |
| Rest of Asia-Pacific | 95,067 | | | 89,186 | | | 80,112 | |
| Other | 34,594 | | | 39,249 | | | 41,880 | |
| Total net revenues | $ | 786,919 | | | $ | 758,667 | | | $ | 765,219 | |
| | | | | | | | | | | |
| | December 31, |
| Long-lived assets by geographic area | 2022 | | 2021 |
| United States | $ | 67,329 | | | $ | 78,472 | |
| Germany | 51,851 | | | 48,228 | |
| UK | 5,701 | | | 9,781 | |
| India | 6,558 | | | 7,196 | |
| | | |
| | | |
| France | 3,414 | | | 3,621 | |
| | | |
| Other | 6,288 | | | 7,163 | |
| Total long-lived assets | $ | 141,141 | | | $ | 154,461 | |
(19) Other (Income) Expense, Net
The following table outlines other (income) expense, net (in thousands):
| | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | | 2021 | | 2020 |
| Pension - Interest cost | $ | 5,352 | | | | $ | 4,019 | | | $ | 6,958 | |
| Pension - Expected return on assets | (9,352) | | | | (10,094) | | | (11,737) | |
| Foreign Currency Translations | (2,236) | | | | 898 | | | 1,745 | |
| Other | 489 | | | | 1,351 | | | 1,440 | |
| Other income, net | $ | (5,747) | | | | $ | (3,826) | | | $ | (1,594) | |
(20) 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 total shareholders' equity, for the years ended December 31, 2022, 2021, and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Foreign Currency Translation Adjustments (1) | | Pension, net | | Derivative | | Total |
| Balance as of December 31, 2019 | $ | (54,526) | | | $ | (19,513) | | | $ | (6,906) | | | $ | (80,945) | |
| Other comprehensive income (loss) | 4,466 | | | (13,846) | | | 1,196 | | | (8,184) | |
Balance as of December 31, 2020 | (50,060) | | | (33,359) | | | (5,710) | | | (89,129) | |
| Other comprehensive income (loss) | (4,372) | | | 38,303 | | | 6,398 | | | 40,329 | |
Balance as of December 31, 2021 | (54,432) | | | 4,944 | | | 688 | | | (48,800) | |
| Other comprehensive income (loss) | (12,455) | | | 17,834 | | | (688) | | | 4,691 | |
Balance as of December 31, 2022 | $ | (66,887) | | | $ | 22,778 | | | $ | — | | | $ | (44,109) | |
(1) The Foreign Currency Translation Adjustment activity as of December 31, 2022 includes the deconsolidation and recognition into earnings of the related cumulative translation adjustment out of accumulated other comprehensive loss in the amount of $5.3 million related to the Catterick, UK entity of the Pipeline Engineering business placed into Administration under UK Insolvency Act of 1986 and the Insolvency (England and Wales) Rules 2016 (IR 2016). |