Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 2, 2017.
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             .
Commission File Number 001-14962
 
CIRCOR INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter) 
 
 
 
 
Delaware
 
04-3477276
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
c/o CIRCOR INTERNATIONAL, Inc.
30 Corporate Drive, Suite 200, Burlington, MA
 
01803-4238
(Address of principal executive offices)
 
(Zip Code)
(781) 270-1200
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
 
Accelerated filer
o
Emerging growth company
o
Non-accelerated filer
o
(Do not check if a smaller
reporting company)
Smaller reporting company
o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    Yes  o    No  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
As of July 24, 2017, there were 16,499,620 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.



CIRCOR INTERNATIONAL, INC.
TABLE OF CONTENTS


 
Page
 
Condensed Consolidated Balance Sheets as of July 2, 2017 and December 31, 2016
 
Condensed Consolidated Statements of Income for the Three and Six Months Ended July 2, 2017 and July 3, 2016
 
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended July 2, 2017 and July 3, 2016
 
Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 2, 2017 and July 3, 2016
 

2



PART I. FINANCIAL INFORMATION
ITEM 1.
 FINANCIAL STATEMENTS
CIRCOR INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(Unaudited)

 
July 2, 2017
 
December 31, 2016
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
77,272

 
$
58,279

Trade accounts receivable, less allowance for doubtful accounts of $4,761 and $5,056, respectively
121,161

 
133,046

Inventories
161,750

 
149,584

Prepaid expenses and other current assets
38,285

 
29,557

Total Current Assets
398,468

 
370,466

PROPERTY, PLANT AND EQUIPMENT, NET
98,428

 
99,713

OTHER ASSETS:
 
 
 
Goodwill
210,009

 
206,659

Intangibles, net
132,057

 
135,778

Other assets
10,283

 
8,140

TOTAL ASSETS
$
849,245

 
$
820,756

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
63,879

 
$
46,767

Accrued expenses and other current liabilities
45,388

 
50,707

Accrued compensation and benefits
16,593

 
20,249

Current portion of long-term debt
5,000

 

Total Current Liabilities
130,860

 
117,723

LONG-TERM DEBT
247,856

 
251,200

DEFERRED INCOME TAXES
10,731

 
13,657

OTHER NON-CURRENT LIABILITIES
21,701

 
33,766

COMMITMENTS AND CONTINGENCIES (NOTE 10)
 
 
 
SHAREHOLDERS’ EQUITY:
 
 
 
Preferred stock, $0.01 par value; 1,000,000 shares authorized; no shares issued and outstanding

 

Common stock, $0.01 par value; 29,000,000 shares authorized; 16,499,620 and 16,445,363 shares issued and outstanding at July 2, 2017 and December 31, 2016, respectively
179

 
178

Additional paid-in capital
292,619

 
289,423

Retained earnings
277,451

 
265,543

Common treasury stock, at cost (1,372,488 shares at July 2, 2017 and December 31, 2016)
(74,472
)
 
(74,472
)
Accumulated other comprehensive loss, net of tax
(57,680
)
 
(76,262
)
Total Shareholders’ Equity
438,097

 
404,410

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
849,245

 
$
820,756

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3



CIRCOR INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
July 2, 2017
 
July 3, 2016
 
July 2, 2017
 
July 3, 2016
Net revenues
$
151,231

 
$
146,392

 
$
296,439

 
$
297,190

Cost of revenues
103,563

 
99,961

 
202,139

 
205,526

     GROSS PROFIT
47,668

 
46,431

 
94,300

 
91,664

Selling, general and administrative expenses
38,218

 
36,490

 
78,305

 
74,289

Special and restructuring (recoveries) charges, net
(1,954
)
 
4,594

 
(2,763
)
 
6,533

     OPERATING INCOME
11,404

 
5,347

 
18,758

 
10,842

Other expense (income):
 
 
 
 
 
 
 
Interest expense, net
2,184

 
605

 
3,853

 
1,236

Other expense (income), net
974

 
(549
)
 
1,200

 
(1,077
)
     TOTAL OTHER EXPENSE, NET
3,158

 
56

 
5,053

 
159

INCOME BEFORE INCOME TAXES
8,246

 
5,291

 
13,705

 
10,683

(Benefit) provision for income taxes
(724
)
 
1,478

 
(37
)
 
2,998

NET INCOME
$
8,970

 
$
3,813

 
$
13,742

 
$
7,685

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.54

 
$
0.23

 
$
0.83

 
$
0.47

Diluted
$
0.54

 
$
0.23

 
$
0.82

 
$
0.46

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
16,497

 
16,424

 
16,478

 
16,403

Diluted
16,762

 
16,595

 
16,726

 
16,538

Dividends declared per common share
$
0.0375

 
$
0.0375

 
$
0.0750

 
$
0.0750

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4



CIRCOR INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
July 2, 2017
 
July 3, 2016
 
July 2, 2017
 
July 3, 2016
Net income
$
8,970

 
$
3,813

 
$
13,742

 
$
7,685

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 

Foreign currency translation adjustments
13,185

 
(7,121
)
 
18,581

 
1,173

Other comprehensive income (loss), net of tax
13,185

 
(7,121
)
 
18,581

 
1,173

COMPREHENSIVE INCOME (LOSS)
$
22,155

 
$
(3,308
)
 
$
32,323

 
$
8,858


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5



CIRCOR INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
Six Months Ended
 
July 2, 2017
 
July 3, 2016
OPERATING ACTIVITIES
 
 
 
Net income
$
13,742

 
$
7,685

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
7,345

 
6,476

Amortization
6,216

 
5,098

Bad debt recovery
(319
)
 
(853
)
Loss on write down of inventory
1,068

 
4,011

Compensation expense of share-based plans
1,386

 
2,909

Tax effect of share-based plan compensation

 
116

Change in fair value of contingent consideration
(12,200
)
 

(Gain) loss on sale of property, plant and equipment
(66
)
 
3,116

Loss on sale of business
5,300

 

Changes in operating assets and liabilities, net of effects of acquisition:
 
 
 
Trade accounts receivable
16,478

 
11,555

Inventories
(12,382
)
 
13,281

Prepaid expenses and other assets
(8,011
)
 
(3,480
)
Accounts payable, accrued expenses and other liabilities
305

 
(32,161
)
Net cash provided by operating activities
18,862

 
17,753

INVESTING ACTIVITIES
 
 
 
Purchases of property, plant and equipment
(5,504
)
 
(6,998
)
Proceeds from the sale of property, plant and equipment
318

 
1,138

Business acquisition, working capital adjustment
1,467

 

Net cash used in investing activities
(3,719
)
 
(5,860
)
FINANCING ACTIVITIES
 
 
 
Proceeds from long-term debt
333,021

 
65,939

Payments of long-term debt
(332,233
)
 
(58,890
)
Debt issuance costs
(450
)
 

Dividends paid
(1,251
)
 
(1,249
)
Proceeds from the exercise of stock options
707

 
180

Tax effect of share-based plan compensation

 
(116
)
Net cash (used in) provided by financing activities
(206
)
 
5,864

Effect of exchange rate changes on cash and cash equivalents
4,056

 
672

INCREASE IN CASH AND CASH EQUIVALENTS
18,993

 
18,429

Cash and cash equivalents at beginning of period
58,279

 
54,541

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
77,272

 
$
72,970

 
 
 
 
Non-cash investing activities:
 
 
 
Purchases of property and equipment included in accounts payable and accrued expenses
$
618

 
$
1,418

Non-cash financing activities:
 
 
 
Debt issuance costs included in accounts payable and accrued expenses
$
277

 
$

Debt issuance costs funded through New Credit Agreement
$
1,262

 
$

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6



CIRCOR INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1) Basis of Presentation

The accompanying unaudited, condensed consolidated financial statements have been prepared according to the rules and regulations of the United States (the "U.S.") Securities and Exchange Commission (“SEC”) and, in the opinion of management, reflect all adjustments necessary for a fair statement of the consolidated balance sheets, consolidated statements of income, consolidated statements of comprehensive income (loss) and consolidated statements of cash flows of CIRCOR International, Inc. (“CIRCOR”, the “Company”, “us”, “we” or “our”) for the periods presented. We prepare our interim financial information using the same accounting principles we use for our annual audited consolidated financial statements. Certain information and note disclosures normally included in the annual audited consolidated financial statements have been condensed or omitted in accordance with SEC rules. We believe that the disclosures made in our condensed consolidated financial statements and the accompanying notes are adequate to make the information presented not misleading.

The consolidated balance sheet at December 31, 2016 is as reported in our audited consolidated financial statements as of that date. Our accounting policies are described in the notes to our December 31, 2016 consolidated financial statements, which were included in our Annual Report on Form 10-K for the year ended December 31, 2016. We recommend that the financial statements included in our Quarterly Report on Form 10-Q be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2016.

We operate and report financial information using a fiscal year ending December 31. The data periods contained within our Quarterly Reports on Form 10-Q reflect the results of operations for the 13-week, 26-week and 39-week periods which generally end on the Sunday nearest the calendar quarter-end date. Operating results for the six months ended July 2, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

2) Summary of Significant Accounting Policies

The significant accounting policies used in preparation of these condensed consolidated financial statements for the six months ended July 2, 2017 are consistent with those discussed in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2016.

New Accounting Standards - Not yet Adopted

On May 10, 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award changes as a result of the change in terms or conditions. The amendments in this ASU also clarify that no new measurement date will be required if an award is not probable of vesting at the time a change is made and there is no change to the fair value, vesting conditions, and classification. The amendments in this ASU are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. We intend to adopt the standard prospectively after the effective date and have not yet determined its impact on our consolidated financial statements.

In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715), which improves the consistency, transparency, and usefulness of the service cost and net benefit cost financial information components. The amendments in this ASU amend presentation requirements of service cost and other components of net benefit cost in the income statement. In addition, the ASU allows only the service cost component of net benefit cost to be eligible for capitalization. The amendments in this ASU are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. We intend to adopt the standard prospectively after the effective date and have not yet determined its impact on our consolidated financial statements.


7



In March 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 outlines a model for lessees by recognizing all lease-related assets and liabilities on the balance sheet. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early application is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. We are still evaluating the requirements of ASU 2016-02 to determine the impact it will have on our consolidated financial statements but expect the standard to have a material impact on our assets and liabilities for the addition of right-of-use assets with corresponding lease liabilities. Based on our evaluation, we will adopt this new standard on January 1, 2019.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 provides for a single comprehensive model to use in accounting for revenue arising from contracts with customers and will replace most existing revenue recognition guidance in Generally Accepted Accounting Principles ("GAAP") when it becomes effective. ASU 2014-09 is effective for fiscal years and interim periods within those years, beginning after December 15, 2017. ASU 2014-09 allows for adoption either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized as an adjustment to the opening balance of retained earnings at the date of initial application. Subsequent to the issuance of the ASU 2014-09, the FASB issued additional updates relating to reporting revenue on a gross versus net basis, identifying performance obligations and licensing arrangements, narrow-scope improvements and practical expedients, technical corrections and improvements, and service concession arrangements.

In the first quarter of 2017, we established a cross-functional implementation team including representatives from general management, sales, legal, and finance. We deployed a detailed approach to analyze the impact of the standard on our customer contract portfolio by comparing our current accounting policies and practices to identify potential differences that would result from applying the new standard. In addition, we identified potential changes to our business processes and controls to support recognition and disclosure under the new standard.

In the second quarter of 2017, we made progress toward completing our evaluation of the potential changes from adopting the new standard on our future financial reporting and disclosures. Activities performed during the quarter included: reviewing and understanding our customer terms and conditions, drafting a new revenue recognition policy, and training our finance professionals in the new standard. We continue to closely monitor FASB activity related to the new standard, as well as working with advisors on specific interpretative issues. The implementation team has reported the findings and progress of the project to management and the Audit Committee of our Board of Directors. We continue to analyze our contracts under the new standard, especially for those contracts that could require revenue recognition over time, which would be a change to our current revenue recognition model. Based on our evaluation, we will adopt this new standard on January 1, 2018 and anticipate using the modified retrospective method.

(3) Inventories

Inventories consist of the following (in thousands):
 
July 2, 2017
 
December 31, 2016
Raw materials
$
63,001

 
$
54,359

Work in process
78,348

 
68,718

Finished goods
20,401

 
26,507

Total inventories
$
161,750

 
$
149,584



8



(4) Business Acquisition

On October 12, 2016, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among the Company, Downstream Holding, LLC, a Delaware limited liability company which does business as Critical Flow Solutions (“Downstream” or “CFS”), Downstream Acquisition LLC, a Delaware limited liability company and subsidiary of the Company, and Sun Downstream, LP, a Delaware limited partnership, to acquire all of the outstanding units of Downstream.

The consideration payable by the Company pursuant to the terms of the Merger Agreement is $195.0 million, subject to (i) up to an additional $15.0 million payable pursuant to an earn-out relating to achievement of a specified order bookings target by the acquired business in the twelve month period ending September 30, 2017, (ii) increase or decrease based on deviation, subject to certain limitations, from a working capital target, (iii) decrease for indebtedness and certain transaction expenses of CFS, (iv) increase for the amount of CFS cash as of the closing, and (v) a potential increase for certain transaction related tax benefits, net of certain adjustments, if and when realized by the Company. The total consideration paid at closing on October 13, 2016 was approximately $198.0 million in cash, net of cash acquired and including amounts paid at closing for estimated adjustments for CFS working capital, the repayment of CFS outstanding indebtedness and payment of certain transaction expenses. The Company funded the purchase price and payments at closing from borrowings under the Company’s existing credit agreement.

The estimated undiscounted range of outcomes for the contingent consideration will be in the range of zero to $15.0 million. If the minimum target is met, $7.5 million will be earned. The estimated fair value of the earn-out as of the acquisition date and as of December 31, 2016 was $12.2 million, based on a Monte Carlo simulation model. The Monte Carlo model calculates the probability of satisfying the target conditions stipulated in the award. The Company revised its forecasts during the three months ended April 2, 2017 and July 2, 2017, respectively. Based on actual performance to date as well as forecasts through the end of September 2017, achievement of the orders target in the specified timeframe is unlikely as projects have shifted out of the period. Accordingly, the revised fair value assessment indicates an earn-out of zero as of July 2, 2017. The fair value of the earn-out decreased $9.7 million and $12.2 million during the three and six months ended July 2, 2017, respectively and was recorded within Special and restructuring (recoveries) charges, net as a gain. The Company will continue to assess the probability that the target could be met by September 30, 2017 and at what level, and any subsequent changes in the estimated fair value of the liability will be reflected in earnings until the liability is fully settled.

During the six months ended July 2, 2017, the Company received $1.5 million as settlement for working capital adjustments. This reduction of purchase price was recorded as a reduction of goodwill.

The operating results of CFS have been included in our consolidated financial statements from the date of acquisition and reported within the Energy segment. The results for the three and six months ended July 2, 2017 include $20.3 million and $42.7 million of net revenue, and $13.3 million and $14.8 million of operating income, respectively.

The purchase price allocation is based upon a preliminary valuation of assets and liabilities that was prepared with assistance from a third party valuation specialist. The estimates and assumptions, including for the contingent consideration, are subject to change as we obtain additional information during the measurement period (up to one year from the acquisition date). The purchase accounting is expected to be finalized in the third quarter of 2017. The assets and liabilities pending finalization include the valuation of acquired intangible assets, certain operating liabilities, and the evaluation of deferred income taxes. Differences between the preliminary and final valuation could have a material impact on our future results of operations and financial position.


9



The following table summarizes the preliminary fair value of the assets acquired and the liabilities assumed, at the date of acquisition:
(in thousands)
 
Cash and cash equivalents
$
6,603

Accounts receivable
28,128

Unbilled receivable
10,786

Inventory
18,701

Prepaid and other current assets
4,380

Property, plant and equipment
21,214

Identifiable intangible assets
101,600

Accounts payable
(11,655
)
Accrued and other expenses
(8,644
)
Deferred revenue
(3,997
)
Deferred income taxes
(42,661
)
Total identifiable net assets
$
124,455

Goodwill
91,579

Total purchase price
$
216,034


The fair value of accounts receivable acquired approximates the contractual value of $28.1 million. The excess of purchase price paid over the fair value of CFS' net assets was recorded to goodwill, which is primarily attributable to projected future profitable growth, market penetration, as well as an expanded customer base for the Energy segment. Goodwill is not deductible for income tax purposes.

The CFS acquisition resulted in the identification of the following identifiable intangible assets:


Intangible assets acquired (in thousands)
 
Weighted average amortization period (in years)
Customer relationship
$
49,600

 
14
Existing technology
25,800

 
10
Trade name
24,100

 
Indefinite
Aftermarket backlog
2,100

 
1
Total intangible assets
$
101,600

 
 

The fair value of the intangible assets was based on variations of the income approach, which estimates fair value based on the present value of cash flows that the assets are expected to generate. These approaches included the relief-from-royalty method, incremental cash flow method, multi-period excess earnings method and direct cash flow method, depending on the intangible asset being valued. Customer relationships, aftermarket backlog, and existing technology are amortized on a cash flow basis which reflects the economic benefit consumed. The trade name was assigned an indefinite life based on the Company’s intention to keep the DeltaValve and TapcoEnpro names for an indefinite period of time. Refer to Note 5 for future expected amortization to be recorded.

(5) Goodwill and Intangibles, net

The following table shows goodwill by segment as of December 31, 2016 and July 2, 2017 (in thousands): 
 
Energy
 
Advanced Flow Solutions
 

Total
Goodwill as of December 31, 2016
$
144,405

 
$
62,254

 
$
206,659

Business acquisition, working capital adjustments
(1,467
)
 

 
(1,467
)
Currency translation adjustments
1,182

 
3,635

 
4,817

Goodwill as of July 2, 2017
$
144,120

 
$
65,889

 
$
210,009


10



The table below presents gross intangible assets and the related accumulated amortization as of July 2, 2017 (in thousands):
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Patents
$
5,399

 
$
(5,399
)
Non-amortized intangibles (primarily trademarks and trade names)
39,148

 

Customer relationships
102,663

 
(35,732
)
Order backlog
7,350

 
(7,036
)
Acquired technology
28,227

 
(3,194
)
Other
5,274

 
(4,643
)
Total
$
188,061

 
$
(56,004
)
Net carrying value of intangible assets
$
132,057

 
 

The table below presents estimated remaining amortization expense for intangible assets recorded as of July 2, 2017 (in thousands):
 
Remainder of 2017
 
2018
 
2019
 
2020
 
2021
 
After 2021
Estimated amortization expense
$
6,391

 
$
11,119

 
$
10,941

 
$
9,535

 
$
8,046

 
$
46,877



11



(6) Segment Information

The following table presents certain reportable segment information (in thousands):
 
Three Months Ended
 
Six Months Ended
 
July 2, 2017
 
July 3, 2016
 
July 2, 2017
 
July 3, 2016
Net revenues
 
 
 
 
 
 
 
Energy
$
82,586

 
$
80,736

 
$
162,721

 
$
164,145

Advanced Flow Solutions
68,645

 
65,656

 
133,718

 
133,045

Consolidated net revenues
151,231

 
146,392

 
296,439

 
297,190

 
 
 
 
 
 
 
 
Segment Income
 
 
 
 
 
 
 
Energy - Segment Operating Income
8,858

 
9,293

 
15,722

 
18,589

Advanced Flow Solutions - Segment Operating Income
8,587

 
8,064

 
16,297

 
16,516

Corporate expenses
(5,396
)
 
(5,431
)
 
(10,874
)
 
(11,919
)
Subtotal
12,049

 
11,926

 
21,145

 
23,186

Restructuring charges, net
3,566

 
3,259

 
5,025

 
4,422

Special (recoveries) charges, net
(5,520
)
 
1,335

 
(7,788
)
 
2,111

Special and restructuring (recoveries) charges, net
(1,954
)
 
4,594

 
(2,763
)
 
6,533

Restructuring related inventory charges

 
75

 

 
2,032

Acquisition amortization
2,599

 
1,910

 
5,150


3,779

Restructuring and other cost, net
2,599

 
1,985

 
5,150

 
5,811

Consolidated Operating Income
11,404

 
5,347

 
18,758

 
10,842

Interest Expense, net (a)
2,184

 
605

 
3,853

 
1,236

Other Expense (income), net (a)
974

 
(549
)
 
1,200

 
(1,077
)
Income from continuing operations before income taxes
$
8,246

 
$
5,291

 
$
13,705

 
$
10,683

 
 
 
 
 
 
 
 
Capital expenditures
 
 
 
 
 
 
 
Energy
$
706

 
$
633

 
$
1,496

 
$
1,555

Advanced Flow Solutions
1,646

 
2,670

 
2,604

 
4,892

Corporate
260

 
123

 
743

 
229

Consolidated capital expenditures
$
2,612

 
$
3,426

 
$
4,843

 
$
6,676

 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
 
 
 
 
 
Energy
$
3,113

 
$
1,508

 
$
6,184

 
$
3,034

Advanced Flow Solutions
3,211

 
3,941

 
6,682

 
7,882

Corporate
346

 
332

 
695

 
657

Consolidated depreciation and amortization
$
6,670

 
$
5,781

 
$
13,561

 
$
11,573

 
 
 
 
 
 
 
 
Identifiable assets
July 2, 2017
 
July 3, 2016
 
 
 
 
Energy
$
675,049

 
$
456,153

 
 
 
 
Advanced Flow Solutions
415,447

 
432,302

 
 
 
 
Corporate
(241,251
)
 
(230,980
)
 
 
 
 
Consolidated identifiable assets
$
849,245

 
$
657,475

 
 
 
 
 
 
 
 
 
 
 
 

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

12



reported in Corporate for Identifiable Assets. Corporate Identifiable Assets excluding intercompany assets were $53.8 million and $48.7 million as of July 2, 2017 and July 3, 2016, respectively.

(7) Earnings Per Common Share ("EPS")
 
(in thousands, except per share amounts)
Three Months Ended
 
July 2, 2017
 
July 3, 2016
 
Net
Income
 
Shares
 
Per Share
Amount
 
Net
Income
 
Shares
 
Per Share
Amount
Basic EPS
$
8,970

 
16,497

 
$
0.54

 
$
3,813

 
16,424

 
$
0.23

Dilutive securities, common stock options

 
265

 

 

 
171

 

Diluted EPS
$
8,970

 
16,762


$
0.54


$
3,813


16,595


$
0.23

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
 
July 2, 2017
 
July 3, 2016
 
Net
Income
 
Shares
 
Per Share
Amount
 
Net
Income
 
Shares
 
Per Share
Amount
Basic EPS
$
13,742

 
16,478

 
$
0.83

 
$
7,685

 
16,403

 
$
0.47

Dilutive securities, common stock options

 
248

 
(0.01
)
 

 
135

 
(0.01
)
Diluted EPS
$
13,742

 
16,726

 
$
0.82

 
$
7,685

 
16,538

 
$
0.46


Stock options, Restricted Stock Unit Awards (“RSU Awards”) and Restricted Stock Unit Management Stock Plans ("RSU MSPs") covering 173,840 and 136,041 shares of common stock, for the six months ended July 2, 2017 and July 3, 2016, respectively, were not included in the computation of diluted EPS because their effect would be anti-dilutive.

(8) Financial Instruments

Fair Value

The carrying amounts of cash and cash equivalents, trade receivables and trade payables approximate fair value because of the short maturity of these financial instruments. Cash equivalents are carried at cost which approximates fair value at the balance sheet date and are Level 1 financial instruments.

On May 11, 2017, we entered into a new five year secured Credit Agreement (the "New Credit Agreement"), that provides for a $400 million revolving line of credit and a $100 million term loan which was funded at closing in full. The New Credit Agreement replaced and terminated the Company’s prior Credit Agreement, dated as of July 31, 2014 (the "Prior Credit Agreement"). The term loan requires quarterly principal payments of 1.125% beginning June 30, 2017. The Company has mandatory debt repayment obligations of $5 million per year ($1.3 million per quarter) until 2022 under the New Credit Agreement. The outstanding principal amounts bear interest at a fluctuating rate per annum (generally the 30 day LIBOR rate) plus an applicable margin, with such margin being determined in accordance with the leverage ratio of the Company. As of July 2, 2017 and December 31, 2016, the outstanding balance of the Company’s debt approximated its fair value based on current rates available to the Company for debt of the same maturity and is a Level 2 financial instrument.

The Prior Credit Agreement, under which we had borrowings of approximately $254 million outstanding, was terminated, as of May 11, 2017 and replaced by the New Credit Agreement. Our New Credit Agreement is anticipated to be used to fund potential acquisitions, to support our operational growth initiatives and working capital needs, and for general corporate purposes. As of July 2, 2017, we had borrowings of $252.9 million outstanding under the New Credit Agreement and $40.1 million outstanding under letters of credit. The New Credit Agreement matures on May 11, 2022.

Contingent consideration obligations are measured at fair value and are based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The valuation of contingent consideration uses assumptions and estimates to forecast a range of outcomes and probabilities for the contingent consideration. Contingent consideration obligations are valued using a Monte Carlo simulation model. We assess these assumptions and estimates on a quarterly basis as additional data impacting the assumptions is obtained. Any changes in the fair value of contingent consideration related to updated assumptions and estimates will be recognized within the special and restructuring (recoveries) charges, net caption on our consolidated statements of income during the period in which the change occurs.

13




Our contingent consideration liability is related to the acquisition of CFS on October 12, 2016, which included an estimate of the contingent payment relating to achievement of specified business performance targets by the acquired business in the twelve month period ending September 30, 2017. The estimated fair value of the contingent consideration is zero as of July 2, 2017 based on actual performance to date and revised forecasts. See Note 4 for additional details related to the transaction.

Foreign Currency Contracts

The Company is exposed to certain risks relating to its ongoing business operations including foreign currency exchange rate risk and interest rate risk. The Company has used 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 us 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 our contracts are recognized as a component of other expense (income), net in our consolidated statements of income.

As of July 2, 2017, we had no forward contracts. As of December 31, 2016, we had four forward contracts. The fair value liability of the derivative forward contracts as of December 31, 2016 was $0.1 million and was included in accrued expenses and other current liabilities on our consolidated balance sheet. Our foreign currency forward contracts fall within Level 2 of the fair value hierarchy, in accordance with Accounting Standards Codification ("ASC") Topic 820.

(9) Guarantees and Indemnification Obligations

As permitted under Delaware law, we have agreements whereby we indemnify certain of our officers and directors for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. However, we have directors’ and officers’ liability insurance policies that insure us with respect to certain events covered under the policies and should enable us to recover a portion of any future amounts paid under the indemnification agreements. We have no liabilities recorded from those agreements as of July 2, 2017.

We record provisions for the estimated cost of product warranties, primarily from historical information, at the time product revenue is recognized. We also record provisions with respect to any significant individual warranty issues as they arise. While we engage in extensive product quality programs and processes, our warranty obligation is affected by product failure rates, utilization levels, material usage, service delivery costs incurred in correcting a product failure, and supplier warranties on parts delivered to us. Should actual product failure rates, utilization levels, material usage, service delivery costs or supplier warranties on parts differ from our estimates, revisions to the estimated warranty liability would be required.

The following table sets forth information related to our product warranty reserves for the six months ended July 2, 2017 (in thousands):
 
Balance beginning December 31, 2016
$
4,559

Provisions
2,050

Claims settled
(2,821
)
Currency translation adjustment
121

Balance ending July 2, 2017
$
3,909


Warranty obligations decreased $0.7 million from $4.6 million as of December 31, 2016 to $3.9 million as of July 2, 2017, primarily driven by claims settled within our Energy segment.


14



(10) Commitments and Contingencies

Asbestos-related product liability claims continue to be filed against two of our subsidiaries: Spence Engineering Company, Inc. (“Spence”), the stock of which we acquired in 1984; and CIRCOR Instrumentation Technologies, Inc. (f/k/a Hoke, Inc.) (“Hoke”), the stock of which we acquired in 1998. Due to the nature of the products supplied by these entities, the markets they serve and our historical experience in resolving these claims, we do not believe that these asbestos-related claims will have a material adverse effect on the financial condition, results of operations or liquidity of the Company.

We are subject to various legal proceedings and claims pertaining to matters such as product liability or contract disputes, including issues arising under certain customer contracts with aerospace and defense customers. We are also subject to other proceedings and governmental inquiries, inspections, audits or investigations pertaining to issues such as tax matters, patents and trademarks, pricing, business practices, governmental regulations, employment and other matters. Although the results of litigation and claims cannot be predicted with certainty, we believe 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 our business, financial condition, results of operations or liquidity.

We are involved in the preliminary stages of an environmental remediation at our China facility. Our estimate of the liability of total environmental remediation costs is $1.7 million, and $0.3 million was recorded as selling, general and administrative expenses during the twelve months ended December 31, 2016, with the remaining $1.4 million recorded as Special and restructuring (recoveries) charges, net during the six months ended July 2, 2017. Due to the complexity of environmental laws and regulations, the varying costs and effectiveness of alternative cleanup methods and technologies, the uncertainty of insurance coverage and the unresolved extent of our responsibility, it is difficult to determine the ultimate outcome of environmental matters. However, we do not expect any additional liability to have a material adverse effect on our financial position, results of operations or liquidity.

Standby Letters of Credit

We execute standby letters of credit, which include bid bonds and performance bonds, in the normal course of business to ensure our performance or payments to third parties. The aggregate notional value of these instruments was $40.1 million at July 2, 2017. We believe that the likelihood of demand for a significant payment relating to the outstanding instruments is remote. These instruments generally have expiration dates ranging from less than 1 month to 5 years from July 2, 2017.

The following table contains information related to standby letters of credit instruments outstanding as of July 2, 2017:
Term Remaining
Maximum Potential
Future  Payments
0–12 months
$
11,410

Greater than 12 months
28,680

Total
$
40,090


(11) Retirement Plans

We maintain two benefit pension plans, a qualified noncontributory defined benefit plan and a nonqualified, noncontributory defined benefit supplemental plan that provides benefits to certain retired highly compensated officers and employees. To date, the supplemental plan remains an unfunded plan. These plans include significant pension benefit obligations which are calculated based on actuarial valuations. Key assumptions are made in determining these obligations and related expenses, including expected rates of return on plan assets and discount rates. Benefits are based primarily on years of service and employees’ compensation.
As of July 1, 2006, we froze the pension benefits of our qualified noncontributory plan participants. Under the revised plan, such participants generally do not accrue any additional benefits under the defined benefit plan after July 1, 2006.
During the three and six months ended July 2, 2017, we made cash contributions of $0.4 million and $0.8 million, respectively, to our qualified noncontributory defined benefit pension plan. We expect to make cash contributions during the remainder of 2017 in the range of $0.4 million and $0.8 million.


15



The components of net periodic cost (benefit) of defined benefit pension plans are as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
July 2, 2017

 
July 3, 2016

 
July 2, 2017

 
July 3, 2016

Interest cost on benefits obligation
$
426

 
$
574

 
$
852

 
$
1,147

Estimated return on assets
(576
)
 
(664
)
 
(1,151
)
 
(1,327
)
Loss amortization
184

 
226

 
367

 
453

Net periodic cost of defined benefit pension plans
$
34

 
$
136

 
$
68

 
$
273


Additionally, substantially all of our U.S. employees are eligible to participate in a 401(k) savings plan. Under this plan, we match a specified percentage of employee contributions, and are able to make a discretionary core contribution, subject to certain limitations.

(12) Income Taxes

As of July 2, 2017 and December 31, 2016, we had $2.8 million and $3.0 million of unrecognized tax benefits, respectively, of which $2.7 million and $2.9 million, respectively, would affect our effective tax rate if recognized in any future period.

The Company files income tax returns in the U.S. federal, state and local jurisdictions and in foreign jurisdictions. The Company is no longer subject to examination by the Internal Revenue Service (the "IRS") for years prior to 2013 and is no longer subject to examination by the tax authorities in foreign and state jurisdictions prior to 2006. The Company is currently under examination for income tax filings in various foreign jurisdictions.

The Company has a net U.S. and a net foreign deferred tax liability. Due to uncertainties related to our ability to utilize certain U.S. domestic deferred income tax assets, primarily consisting of state net operating losses and state tax credits carried forward, we maintained a total valuation allowance of $2.7 million at July 2, 2017 and $3.0 million at December 31, 2016. The valuation allowance is based on estimates of income in each of the jurisdictions in which we operate and the period over which our deferred tax assets will be recoverable. If future results of operations exceed our current expectations, our existing tax valuation allowances may be adjusted, resulting in future tax benefits. Alternatively, if future results of operations are less than expected, future assessments may result in a determination that some or all of the deferred tax assets are not realizable. Consequently, we may need to establish additional tax valuation allowances for all or a portion of the deferred tax assets, which may have a material adverse effect on our business, results of operations and financial condition.

(13) Share-Based Compensation

As of July 2, 2017, there were 852,441 stock options and 229,467 RSU and RSU MSP Awards outstanding. In addition, there were 767,385 shares available for grant under the 2014 Stock Option and Incentive Plan (the "2014 Plan") as of July 2, 2017.

During the six months ended July 2, 2017, we granted 142,428 stock options compared with 210,633 stock options granted during the six months ended July 3, 2016.

The average fair value of stock options granted during the first six months of 2017 and 2016 was $19.36 and $11.91, respectively, and was estimated using the following weighted-average assumptions:

 
July 2, 2017
 
July 3, 2016
Risk-free interest rate
1.7
%
 
1.2
%
Expected life (years)
4.5

 
4.5

Expected stock volatility
35.1
%
 
36.2
%
Expected dividend yield
0.3
%
 
0.4
%

For additional information regarding the historical issuance of stock options, refer to our Form 10-K for the year ended December 31, 2016 filed with the SEC on February 21, 2017.


16



During the six months ended July 2, 2017 and July 3, 2016, we granted 55,445 and 85,901 RSU Awards with approximate fair values of $61.05 and $39.23 per RSU Award, respectively. During the first six months of 2017 and 2016, we granted performance-based RSUs as part of the overall mix of RSU Awards. These performance-based RSUs include metrics for achieving Return on Invested Capital and Adjusted Operating Margin with target payouts ranging from 0% to 200%. Of the 55,445 RSU Awards granted during the six months ended July 2, 2017, 31,369 are performance-based RSU Awards. This compares to 43,016 performance-based RSU Awards granted during the six months ended July 3, 2016.

RSU MSPs totaling 26,726 and 20,130 with per unit discount amounts representing fair values of $20.13 and $12.83 were granted during the six months ended July 2, 2017 and July 3, 2016, respectively.

Compensation expense related to our share-based plans for the six months ended July 2, 2017 and July 3, 2016 was $1.4 million and $2.9 million, respectively. The primary reason for lower expense during 2017 relates to a change in estimate of $1.1 million for anticipated below-threshold achievement of performance-based RSUs granted in both February 2015 and February 2016. Compensation expense for both periods was recorded as selling, general and administrative expenses. As of July 2, 2017, there was $9.1 million of total unrecognized compensation costs related to our outstanding share-based compensation arrangements. That cost is expected to be recognized over a weighted average period of 2.1 years.

The weighted average contractual term for stock options outstanding and options exercisable as of July 2, 2017 was 5.8 years and 5.1 years, respectively. The aggregate intrinsic value of stock options exercised during the six months ended July 2, 2017 was $0.4 million and the aggregate intrinsic value of stock options outstanding and options exercisable as of July 2, 2017 was $8.3 million and $4.7 million, respectively.

The aggregate intrinsic value of RSU Awards settled during the six months ended July 2, 2017 was $1.6 million and the aggregate intrinsic value of RSU Awards outstanding and RSU Awards vested and deferred as of July 2, 2017 was $9.3 million and $0.2 million, respectively.

The aggregate intrinsic value of RSU MSPs settled during the six months ended July 2, 2017 was $0.3 million and the aggregate intrinsic value of RSU MSPs outstanding as of July 2, 2017 was $1.8 million. There were no vested and deferred RSU MSPs as of July 2, 2017.

As of July 2, 2017, there were 29,848 Cash Settled Stock Unit Awards outstanding compared to 33,320 as of December 31, 2016. During the six months ended July 2, 2017, the aggregate cash used to settle Cash Settled Stock Unit Awards was $0.3 million. As of July 2, 2017, we had $0.9 million of accrued expenses in current liabilities associated with these Cash Settled Stock Unit Awards compared with $1.0 million as of December 31, 2016. Cash Settled Stock Unit Award related compensation expense for the six months ended July 2, 2017 and July 3, 2016 was $0.1 million and $0.5 million, respectively, and was recorded as selling, general, and administrative expenses.

(14) Accumulated Other Comprehensive Loss
The following table summarizes the changes in accumulated other comprehensive loss, net of tax, which is reported as a component of shareholders' equity, for the six months ended July 2, 2017 (in thousands):
 
Foreign Currency Translation Adjustments
 
Pension, net
 
Total
Balance as of December 31, 2016
$
(62,703
)
 
$
(13,558
)
 
$
(76,262
)
Other comprehensive income, net of tax
18,581

 

 
18,581

Balance as of July 2, 2017
$
(44,122
)
 
$
(13,558
)
 
$
(57,680
)


17



(15) Special & Restructuring (Recoveries) Charges, net

Special and Restructuring (Recoveries) Charges, net

Special and restructuring 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. All items described below are recorded in Special and restructuring (recoveries) charges, net in our condensed consolidated statements of income. 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 (in thousands) summarizes the amounts recorded within the special and restructuring (recoveries) charges, net line item on the condensed consolidated statements of income for the three and six months ended July 2, 2017 and July 3, 2016:
 
Special & Restructuring (Recoveries) Charges, net
 
For the three months ended
 
For the six months ended
 
July 2, 2017
 
July 3, 2016
 
July 2, 2017
 
July 3, 2016
Special (recoveries) charges, net
$
(5,520
)
 
$
1,335

 
(7,788
)
 
2,111

Restructuring charges, net
3,566

 
3,259

 
5,025

 
4,422

Total special and restructuring (recoveries) charges, net
$
(1,954
)
 
$
4,594

 
$
(2,763
)
 
$
6,533


Special (Recoveries) Charges, net

The table below (in thousands) outlines the special (recoveries) charges, net recorded for the three and six months ended July 2, 2017:
 
Special (Recoveries) Charges, net
 
For the three months ended July 2, 2017
 
Energy
 
Advanced Flow Solutions
 
Corporate
 

Total
Divestiture
$

 
$
3,748

 
$
101

 
$
3,849

Contingent consideration revaluation
(9,700
)
 

 

 
(9,700
)
Acquisition related charges

 

 
136

 
136

Brazil closure
195

 

 

 
195

Total special recoveries, net
$
(9,505
)
 
$
3,748

 
$
237

 
$
(5,520
)
 
Special (Recoveries) Charges, net
 
For the six months ended July 2, 2017
 
Energy
 
Advanced Flow Solutions
 
Corporate
 

Total
Divestiture
$

 
$
3,748

 
$
101

 
$
3,849

Contingent consideration revaluation
(12,200
)
 

 

 
(12,200
)
Acquisition related charges

 

 
136

 
136

Brazil closure
427

 

 

 
427

Total special recoveries, net
$
(11,773
)
 
$
3,748

 
$
237

 
$
(7,788
)

Divestiture: On July 7, 2017, we divested a non-core business as part of our simplification strategy. In connection with the sale, we recorded $5.3 million of special and restructuring charges. As of July 2, 2017, the business was held-for-sale and reported within the other current assets and liabilities captions on our condensed consolidated balance sheet. We measured the held-for-sale disposal group at its fair value less cost to sell, which was lower than its carrying value, and recorded a $3.8 million adjustment.


18



Contingent Consideration Revaluation: The fair value of the CFS earn-out decreased $9.7 million and $12.2 million during the three and six months ended July 2, 2017, respectively. The change in fair value was recorded as a special gain during the three and six months ended July 2, 2017. Accordingly, the revised fair value assessment indicates an earn-out of zero as of July 2, 2017.

Acquisition related charges: On October 12, 2016, we acquired CFS. In connection with our acquisition, we recorded $0.1 million of acquisition related professional fees during the three and six months ended July 2, 2017.

Brazil Closure: On November 3, 2015, the Board of Directors approved the closure and exit of our Brazil manufacturing operations due to the economic realities in Brazil and the ongoing challenges with our only significant end customer, Petrobras.
CIRCOR Brazil reported substantial operating losses every year since it was acquired in 2011 while the underlying market
conditions and outlook deteriorated. In connection with the closure, we recorded $0.2 million and $0.4 million of charges within the Energy segment during the three and six months ended July 2, 2017, respectively, which relates to losses incurred subsequent to our Q1 2016 closure of manufacturing operations. As of July 2, 2017, our remaining Brazil assets were $1.6 million, of which $0.9 million relates to assets held-for-sale, $0.5 million relates to cash, and $0.2 million relates to net third party accounts receivables. The Brazil assets held-for-sale as of July 2, 2017 are reported within the other current assets caption on our condensed consolidated balance sheet.

The table below (in thousands) outlines the special charges (recoveries), net recorded for the three and six months ended July 3, 2016:
 
Special Charges (Recoveries), net
 
For the three months ended July 3, 2016
 
Energy
 
Advanced Flow Solutions
 
Corporate
 

Total
Brazil Closure
$
1,383

 
$

 
$

 
$
1,383

Acquisition related recoveries

 
(48
)
 

 
(48
)
Total special charges (recoveries), net
$
1,383

 
$
(48
)
 
$

 
$
1,335


 
Special Charges (Recoveries), net
 
For the six months ended July 3, 2016
 
Energy
 
Advanced Flow Solutions
 
Corporate
 

Total
Brazil Closure
$
2,270

 
$

 
$
2

 
$
2,272

Acquisition related recoveries

 
(161
)
 

 
(161
)
Total special charges (recoveries), net
$
2,270

 
$
(161
)
 
$
2

 
$
2,111


Brazil Closure: In connection with the closure, we recorded $1.4 million and $2.3 million of charges within the Energy segment during the three and six months ended July 3, 2016, respectively, which primarily related to employee termination costs and losses incurred subsequent to our Q1 2016 closure of manufacturing operations.

Acquisition related charges: On April 15, 2015, we acquired Germany-based Schroedahl. In connection with our acquisition of Schroedahl, we recorded $0.1 million and $0.2 million of recoveries of acquisition related professional fees during the three months and six months ended July 3, 2016, respectively.


19



Restructuring Charges, net

The tables below (in thousands) outline the charges (or any recoveries) associated with restructuring actions recorded for the three and six months ended July 2, 2017 and July 3, 2016, respectively. A description of the restructuring actions is provided in the section titled "Restructuring Programs Summary" below.
 
Restructuring Charges / (Recoveries)
 
As of and for the three months ended July 2, 2017
 
Energy
 
Advanced Flow Solutions
 
Corporate
 

Total
Facility related expenses
$
1,144

 
$
225

 
$

 
$
1,369

  Employee related expenses
803

 
1,394

 

 
2,197

Total restructuring charges, net
$
1,947

 
$
1,619

 
$

 
$
3,566

 
 
 
 
 
 
 
 
Accrued restructuring charges as of April 3, 2017
 
 
 
 
 
 
$
1,418

Total year to date charges, net (shown above)
 
 
 
 
 
 
3,566

Charges paid / settled, net
 
 
 
 
 
 
(2,866
)
Accrued restructuring charges as of July 2, 2017
 
 
 
 
 
 
$
2,118


 
Restructuring Charges / (Recoveries)
 
As of and for the six months ended July 2, 2017
 
Energy
 
Advanced Flow Solutions
 
Corporate
 

Total
Facility related expenses
$
1,994

 
$
332

 
$

 
$
2,326

  Employee related expenses
975

 
1,724

 

 
2,699

Total restructuring charges, net
$
2,969

 
$
2,056

 
$

 
$
5,025

 
 
 
 
 
 
 
 
Accrued restructuring charges as of December 31, 2016
 
 
 
 
 
 
$
1,618

Total year to date charges, net (shown above)
 
 
 
 
 
 
5,025

Charges paid / settled, net
 
 
 
 
 
 
(4,525
)
Accrued restructuring charges as of July 2, 2017
 
 
 
 
 
 
$
2,118


We expect to make payment or settle half of the restructuring charges accrued as of July 2, 2017 during the second half of 2017, with the remaining settled in 2018.
 
Restructuring Charges / (Recoveries)
 
As of and for the three months ended July 3, 2016
 
Energy
 
Advanced Flow Solutions
 
Corporate
 

Total
Facility related expenses (recoveries)
$
(113
)
 
$
2,068

 
$

 
$
1,955

  Employee related expenses
638

 
666

 

 
1,304

Total restructuring charges, net
$
525

 
$
2,734

 
$

 
$
3,259

 
 
 
 
 
 
 
 
Accrued restructuring charges as of April 3, 2016
 
 
 
 
 
 
$
652

Total year to date charges, net (shown above)
 
 
 
 
 
 
3,259

Charges paid / settled, net
 
 
 
 
 
 
(3,220
)
Accrued restructuring charges as of July 3, 2016
 
 
 
 
 
 
$
691



20



 
Restructuring Charges / (Recoveries)
 
As of and for the six months ended July 3, 2016
 
Energy
 
Advanced Flow Solutions
 
Corporate
 

Total
Facility related expenses (recoveries)
$
(489
)
 
$
3,468

 
$

 
$
2,979

  Employee related expenses
736

 
707

 

 
1,443

Total restructuring charges, net
$
247

 
$
4,175

 
$

 
$
4,422

 
 
 
 
 
 
 
 
Accrued restructuring charges as of December 31, 2015
 
 
 
 
 
 
$
663

Total year to date charges, net (shown above)
 
 
 
 
 
 
4,422

Charges paid / settled, net
 
 
 
 
 
 
(4,394
)
Accrued restructuring charges as of July 3, 2016
 
 
 
 
 
 
$
691


Restructuring Programs Summary

As specific restructuring programs are announced, the amounts associated with that particular action may be recorded in periods other than when announced to comply with the applicable accounting rules. For example, 2016 Action’s total cost may be recorded in 2016 and 2017. The amounts shown below reflect the total cost for that restructuring program.

During 2017, we initiated certain restructuring activities, under which we continued to simplify our business ("2017 Actions"). Under these restructurings, we reduced expenses, primarily through reductions in force and closing a number of smaller facilities.

 
2017 Actions Restructuring Charges / (Recoveries), net as of July 2, 2017
 
Energy
 
Advanced Flow Solutions
 
Total
Facility related expenses - incurred to date
$

 
$
210

 
$
210

Employee related expenses - incurred to date
463

 
1,554

 
2,017

Total restructuring related special charges - incurred to date
$
463

 
$
1,764

 
$
2,227


During 2016, we initiated certain restructuring activities, under which we continued to simplify our business ("2016 Actions"). Under these restructurings, we reduced expenses, primarily through reductions in force and closing a number of smaller facilities.
 
2016 Actions Restructuring Charges / (Recoveries), net as of July 2, 2017
 
Energy
 
Advanced Flow Solutions
 
Total
Facility related expenses - incurred to date
$
2,701

 
$
256

 
$
2,957

Employee related expenses - incurred to date
2,970

 
1,347

 
4,317

Total restructuring related special charges - incurred to date
$
5,671

 
$
1,603

 
$
7,274



21



In July 2015, we announced the closure of one of the two Corona, California manufacturing facilities ("California Restructuring"). Under this restructuring, we are reducing certain general, manufacturing and facility related expenses. Charges with this action were finalized in the fourth quarter of 2016.
 
California Restructuring Charges, net as of July 2, 2017
 
Advanced Flow Solutions
Facility related expenses - incurred to date
$
3,700

Employee related expenses - incurred to date
800

Total restructuring related special charges - incurred to date
$
4,500


Additional Restructuring Charges

During the first and second quarters of 2016, we recorded restructuring related inventory charges of $1.9 million and $0.1 million, respectively, associated with the closure of manufacturing operations and the exit of the gate, globe and check valves product line in Brazil. As of July 2, 2017, no inventory amounts remain on our balance sheet for the gate, globe and check valves product line.

During the first quarter of 2016, in connection with the restructuring of certain structural landing gear product lines, we recorded inventory related charges of less than $0.1 million within the Advanced Flow Solutions segment. As of July 2, 2017, our remaining structural landing gear product line inventory balance is $0.4 million, which we believe is recoverable based upon our net realizable value analysis.

The inventory restructuring charges described above are recorded in the cost of revenues caption on our condensed consolidated statement of income.

(16) Subsequent Events

On July 7, 2017 we divested our French non-core aerospace build-to-print business within our Advanced Flow Solutions segment as part of our simplification strategy. We considered this business as non-core because the products or services did not fit our strategy and the long-term profitable growth prospects were below our expectations. Divestiture of this non-core business enables us to focus resources on businesses where there is greater opportunity to achieve sales growth, higher margins, and market leadership. In connection with the sale, we recorded $5.3 million of special and restructuring charges related to this divestiture. As of July 2, 2017, the business was held-for-sale and reported within the other current assets and liabilities captions on our condensed consolidated balance sheet. We measured the held-for-sale disposal group, which was lower than its carrying value, and recorded a $3.8 million adjustment as a special charge.


22



ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains certain statements that are “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995 (the “Act”). The words “may,” “hope,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,” “continue,” and other expressions which are predictions of or indicate future events and trends and which do not relate to historical matters, identify forward-looking statements. We believe that it is important to communicate our future expectations to our stockholders, and we, therefore, make forward-looking statements in reliance upon the safe harbor provisions of the Act. However, there may be events in the future that we are not able to accurately predict or control and our actual results may differ materially from the expectations we describe in our forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include changes in the price of and demand for Oil & Gas in both domestic and international markets, our ability to successfully integrate acquired businesses, as contemplated, any adverse changes in governmental policies, variability of raw material and component pricing, changes in our suppliers’ performance, fluctuations in foreign currency exchange rates, changes in tariffs or other taxes related to doing business internationally, our ability to hire and maintain key personnel, our ability to continue operating our manufacturing facilities at efficient levels including our ability to prevent cost overruns and continue to reduce costs, our ability to generate increased cash by reducing our working capital, our prevention of the accumulation of excess inventory, our ability to successfully implement our restructuring or simplification strategies, fluctuations in interest rates, our ability to continue to successfully defend product liability actions, as well as the uncertainty associated with the current worldwide economic conditions and the continuing impact on economic and financial conditions in the United States and around the world as a result of terrorist attacks, current Middle Eastern conflicts and related matters. We advise you to read further about these and other risk factors set forth in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2016, which is filed with the SEC and is available on the SEC's website at www.sec.gov. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Company Overview

CIRCOR International, Inc. designs, manufactures and markets flow control solutions and other highly engineered products and sub-systems for markets including Oil & Gas, Aerospace, power and process, and industrial solutions. CIRCOR has a diversified product portfolio with recognized, market-leading brands that fulfill its customers’ unique application needs.

We have organized our reporting structure into two segments: CIRCOR Energy ("Energy segment" or "Energy") and CIRCOR Advanced Flow Solutions ("Advanced Flow Solutions segment" or "AFS"). The primary markets served by our Energy segment are Oil & Gas: upstream, mid-stream and downstream. The Advanced Flow Solutions segment primarily serves aerospace, defense, power and process, and general industrial markets.

Basis of Presentation

All significant intercompany balances and transactions have been eliminated in consolidation.

We operate and report financial information using a fiscal year ending December 31. The data periods contained within our Quarterly Reports on Form 10-Q reflect the results of operations for the 13-week, 26-week and 39-week periods which generally end on the Sunday nearest the calendar quarter-end date.

Critical Accounting Policies

Critical accounting policies are those that are both important to the accurate portrayal of a company’s financial condition and results and require subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. There have been no significant changes from the methodology applied by management for critical accounting estimates previously disclosed in our most recent Annual Report on Form 10-K. The expenses and accrued liabilities or allowances related to certain of our accounting policies are initially based on our best estimates at the time of original entry in our accounting records. Adjustments are recorded when our actual experience, or new information concerning our expected experience, differs from underlying initial estimates. These adjustments could be material if our actual or expected experience were to change significantly in a short period of time. We make frequent comparisons of actual experience and expected experience in order to mitigate the likelihood of material adjustments.

23



Results of Operations

Second Quarter 2017 Compared With Second Quarter 2016

Consolidated Operations

 
Three Months Ended
 
 
 
 
 
 
 
 
(in thousands)
July 2, 2017
 
July 3, 2016
 
Total Change
 
Acquisitions
 
Operations
 
Foreign Exchange
Net Revenues
 
 
 
 
 
 
 
 
 
 
 
Energy
$
82,586

 
$
80,736

 
$
1,850

 
$
20,269

 
$
(17,750
)
 
$
(669
)
Advanced Flow Solutions
68,645

 
65,656

 
2,989

 

 
4,267

 
(1,279
)
Consolidated Net Revenues
$
151,231

 
$
146,392

 
$
4,839

 
$
20,269


$
(13,483
)
 
$
(1,948
)

Net revenues for the three months ended July 2, 2017 were $151.2 million, an increase of $4.8 million. The unfavorable effects of currency translation resulted in a decrease in revenues of $1.9 million as compared to the three months ended July 3, 2016. Net revenues increased $20.3 million due to the acquisition of Critical Flow Solutions. Aside from the effects of currency translation and acquisitions, revenues decreased $13.5 million (-9%) primarily due to decreased demand in our large international projects business.

Segment Results

The Company’s management evaluates segment operating performance using "segment operating income" which we define as operating income before restructuring charges (including inventory-related restructuring), special charges, impairment charges, amortization from acquisitions subsequent to 2011, and amortization expense related to the step-up in fair value of the inventory acquired through business acquisitions. The Company uses this measure because it helps management understand and evaluate the segments’ operating results and facilitates a comparison of performance for determining compensation. Accordingly, the following segment data is reported on this basis.

24




 
Three Months Ended
 
 
(in thousands, except percentages)
July 2, 2017
 
July 3, 2016
 
Change
Net Revenues
 
 
 
 
 
Energy
$
82,586

 
$
80,736

 
$
1,850

Advanced Flow Solutions
68,645

 
65,656

 
2,989

Consolidated net revenues
$
151,231

 
$
146,392

 
$
4,839

Operating Income
 
 
 
 

Energy - Segment Operating Income
$
8,858

 
$
9,293

 
$
(435
)
Advanced Flow Solutions - Segment Operating Income
8,587

 
8,064

 
523

Corporate expenses
(5,396
)
 
(5,431
)
 
35

Subtotal
12,049

 
11,926

 
123

Restructuring charges, net
3,566

 
3,259

 
307

Special (recoveries) charges, net
(5,520
)
 
1,335

 
(6,855
)
Special and restructuring (recoveries) charges, net (1)
(1,954
)
 
4,594

 
(6,548
)
Restructuring related inventory charges (1)

 
75

 
(75
)
Acquisition amortization (2)
2,599

 
1,911

 
688

Restructuring and other cost, net
2,599

 
1,985

 
614

Consolidated Operating Income
$
11,404

 
$
5,347

 
$
6,057

 
 
 
 
 
 
Consolidated Operating Margin
7.5
%
 
3.7
%
 
 
 
 
 
 
 
 
(1) See Special & Restructuring (Recoveries) Charges, net in Note 15 to the condensed consolidated financial statements, for additional details.
(2) Acquisition amortization is recorded in either cost of revenues or selling, general, and administrative expenses depending upon the nature of the underlying intangible asset.

Energy Segment
 
Three Months Ended
 
 
(in thousands, except percentages)
July 2, 2017
 
July 3, 2016
 
Change
Net Revenues
$
82,586

 
$
80,736

 
$
1,850

Segment Operating Income
8,858

 
9,293

 
(435
)
Segment Operating Margin
10.7
%
 
11.5
%
 



Energy segment net revenues increased $1.9 million, or 2%, for the three months ended July 2, 2017 compared to the three months ended July 3, 2016. The increase was primarily driven by the acquisition of CFS (+25%) and our North American short-cycle business (+10%), offset by substantially lower shipment volumes in our large international projects business (-26%), other oil and gas businesses (-6%) and unfavorable foreign currency fluctuations (-1%). Energy segment orders increased $19.0 million, or 31%, to $77.9 million in the three months ended July 2, 2017 compared to $58.9 million in 2016, primarily due to higher distributor stocking orders within our North American distributed valves business as a result of higher rig counts and completion of previously drilled wells (+21%) and recently acquired CFS business (+26%). The increases were offset by lower bookings in our large international projects business (-11%) and our downstream instrumentation business (-6%). Higher orders in our North American distributed valves business reflect the restocking of our distributors in anticipation of higher production activity overall. Our long-cycle, large international projects business was impacted by reduced capital expenditures for exploration and production of oil and gas as well as project deferrals.

Segment operating income decreased $0.4 million, or 5%, to $8.9 million for the three months ended July 2, 2017 compared to $9.3 million in the three months ended July 3, 2016. The decrease in segment operating income was primarily due to lower shipment volumes from our large international projects business (-50%), other oil and gas businesses (-17%) and foreign exchange impact (-1%). This decline was partially offset by the CFS acquisition (+27%) and the North American distributed valves business (+34%).

25



Advanced Flow Solutions Segment

 
Three Months Ended
 
 
(in thousands, except percentages)
July 2, 2017
 
July 3, 2016
 
Change
Net Revenues
$
68,645

 
$
65,656

 
$
2,989

Segment Operating Income
8,587

 
8,064

 
523

Segment Operating Margin
12.5
%
 
12.3
%
 
 

Advanced Flow Solutions segment net revenues increased by $3.0 million, or 5%, for the three months ended July 2, 2017 compared to the three months ended July 3, 2016. The increase was primarily driven by our fluid control business (+5%) and UK defense business (+4%), partially offset by our actuation business (-2%) and unfavorable foreign currency fluctuations (-2%). Advanced Flow Solutions segment orders decreased $11.4 million, or 15%, to $65.1 million for the three months ended July 2, 2017 compared to $76.5 million in the three months ended July 3, 2016, primarily due to timing of military-related bookings in our aerospace business (-9%) for platforms such as the Joint Strike Fighter and the Multi-Mission Maritime Aircraft programs, our actuation business (-4%) and our UK defense business (-1%).

Segment operating income increased $0.5 million, or 6%, to $8.6 million for the three months ended July 2, 2017 compared to $8.1 million in the three months ended July 3, 2016. The increase in operating income was a result of higher revenues from our UK defense business (+13%) offset by operational inefficiencies within our French fluid control businesses (-8%).

Corporate Expenses

Corporate expenses were $5.4 million for both the three months ended July 2, 2017 and July 3, 2016, respectively.

Special and Restructuring (Recoveries) Charges, net

During the three months ended July 2, 2017 and July 3, 2016, the Company recorded a net gain of $2.0 million and a net charge of $4.6 million, respectively, within our condensed consolidated statements of income caption Special and restructuring (recoveries) charges, net. These special and restructuring (recoveries) charges are described in further detail in Note 15.

Interest Expense, Net
 
Interest expense increased $1.6 million to $2.2 million in the three months ended July 2, 2017 compared to the three months ended July 3, 2016. This change in interest expense was primarily due to higher outstanding debt balances, interest rates increase, and higher leverage during the period as a result of our new five year secured Credit Agreement (the "New Credit Agreement") and CFS acquisition.

Other Expense (Income), Net
 
Other expense, net, was $1.0 million in the three months ended July 2, 2017 compared to other income, net of $0.5 million in the three months ended July 3, 2016. The difference of $1.5 million was primarily due to foreign currency fluctuations impact.

Comprehensive Income (Loss)

Comprehensive income (loss) increased from a $3.3 million comprehensive loss in the three months ended July 3, 2016 to $22.2 million comprehensive income in the three months ended July 2, 2017, primarily driven by favorable foreign currency balance sheet remeasurements, primarily by the Euro ($17.6 million) and UK Pound ($2.3 million).

As of July 2, 2017, we have a cumulative currency translation adjustment of $17.2 million regarding our Brazil entity. If we were to cease to have a controlling financial interest in the Brazil legal entity, we would incur a non-cash charge of $17.2 million, which would be included as a special charge within the results of operations.

(Benefit) Provision for Income Taxes
 
The effective tax rate was (8.8)% in the three months ended July 2, 2017 compared to 27.9% in the three months ended July 3, 2016. The primary drivers for the lower tax rate in 2017 includes reduced foreign losses in 2017 with no tax benefit (-7%) and non-taxable income related to acquisition consideration (-40.2%). This was partially offset by the impact on the effective tax rate of lower taxed foreign earnings compared to US earnings (6.3%).

26




First Six Months of 2017 Compared With First Six Months of 2016

Consolidated Operations

 
Six Months Ended
 
 
 
 
 
 
 
 
(in thousands)
July 2, 2017
 
July 3, 2016
 
Total Change
 
Acquisitions
 
Operations
 
Foreign Exchange
Net Revenues
 
 
 
 
 
 
 
 
 
 
 
Energy
$
162,721

 
$
164,145

 
$
(1,424
)
 
$
42,719

 
$
(42,703
)
 
$
(1,440
)
Advanced Flow Solutions
133,718

 
133,045

 
673

 

 
3,713

 
(3,040
)
Consolidated Net Revenues
$
296,439

 
$
297,190

 
$
(751
)
 
$
42,719

 
$
(38,990
)
 
$
(4,480
)

Net revenues for the six months ended July 2, 2017 were $296.4 million, a decrease of $0.8 million. The unfavorable effects of currency translation resulted in a decrease in revenues of $4.5 million as compared to the six months ended July 3, 2016. Net revenues increased $42.7 million due to the acquisition of CFS. Aside from the effects of currency translation and acquisitions, revenues decreased $39.0 million (-13%) primarily due to decreased demand in our large international projects business.

Segment Results
 
Six Months Ended
 
 
(in thousands, except percentages)
July 2, 2017
 
July 3, 2016
 
Change
Net Revenues
 
 
 
 
 
Energy
$
162,721

 
$
164,145

 
$
(1,424
)
Advanced Flow Solutions
133,718

 
133,045

 
673

Consolidated net revenues
$
296,439

 
$
297,190

 
$
(751
)
Operating Income
 
 
 
 

Energy - Segment Operating Income
$
15,722

 
$
18,589

 
$
(2,867
)
Advanced Flow Solutions - Segment Operating Income
16,298

 
16,516

 
(218
)
Corporate expenses
(10,875
)
 
(11,919
)
 
1,044

Subtotal
21,145

 
23,186

 
(2,041
)
Restructuring charges, net
5,025

 
4,422

 
603

Special (recoveries) charges, net
(7,788
)
 
2,111

 
(9,899
)
Special and restructuring (recoveries) charges, net (1)
(2,763
)
 
6,533

 
(9,296
)
Restructuring related inventory charges (1)

 
2,032

 
(2,032
)
Acquisition amortization (2)
5,151

 
3,778

 
1,373

Restructuring and other cost, net
5,151

 
5,811

 
(660
)
Consolidated Operating Income
$
18,758

 
$
10,842

 
$
7,916

 
 
 
 
 
 
Consolidated Operating Margin
6.3
%
 
3.6
%
 
 
 
 
 
 
 
 
(1) See Special & Restructuring (Recoveries) Charges, net in Note 15 to the condensed consolidated financial statements, for additional details.
(2) Acquisition amortization is recorded in either cost of revenues or selling, general, and administrative expenses depending upon the nature of the underlying intangible asset.


27



Energy Segment
 
Six Months Ended
 
 
(in thousands, except percentages)
July 2, 2017
 
July 3, 2016
 
Change
Net Revenues
$
162,721

 
$
164,145

 
$
(1,424
)
Segment Operating Income
15,722

 
18,589

 
(2,867
)
Segment Operating Margin
9.7
%
 
11.3
%
 



Energy segment net revenues decreased $1.4 million, or 1% in the six months ended July 2, 2017 compared to the six months ended July 3, 2016. The decrease was primarily driven by large international projects (-26%) and foreign exchange fluctuations (-1%), offset by recently acquired CFS business (+26%). Energy segment orders increased $51.4 million, or 39%, to $181.7 million in the six months ended July 2, 2017 compared to $130.3 million in the six months ended July 3, 2016, primarily due to higher distributor stocking orders within our North American distributed valves business as a result of higher rig counts and completion of previously drilled wells (+27%) and recently acquired CFS business (+24%). The increases were offset by lower bookings in our large international projects business (-10%) due to low capital spend within the upstream exploration and production market. Higher orders in our North American distributed valves business reflect the restocking of our distributors in the anticipation of higher production activity overall. Our long-cycle, large international projects business was impacted by reduced capital expenditures for exploration and production of oil and gas as well as project deferrals.

Segment operating income decreased $2.9 million, or 15%, to $15.7 million for the six months ended July 2, 2017 compared to $18.6 million in the six months ended July 3, 2016. The decrease in segment operating income was primarily due to lower shipment volumes from our large international projects business (-61%), other oil and gas (-14%) and foreign exchange fluctuations (-1%). This decline was offset by CFS (+28%), the North American distributed valves business (+27%) and other oil and gas (+4%).

Advanced Flow Solutions Segment

 
Six Months Ended
 
 
(in thousands, except percentages)
July 2, 2017
 
July 3, 2016
 
Change
Net Revenues
$
133,718

 
$
133,045

 
$
673

Segment Operating Income
16,298

 
16,516

 
(218
)
Segment Operating Margin
12.2
%
 
12.4
%
 
 

Advanced Flow Solutions segment net revenues increased by $0.7 million, or 1%, in the six months ended July 2, 2017 compared to the six months ended July 3, 2016. The increase was primarily driven by our fluid controls businesses (+3%) offset by foreign exchange fluctuations (-2%). Advanced Flow Solutions segment orders increased $3.5 million, or 2%, to $145.3 million for the six months ended July 2, 2017 compared to $141.8 million in the six months ended July 3, 2016, primarily due to our UK defense business (+2%).

Segment operating income decreased $0.2 million, or 1%, to $16.3 million for the six months ended July 2, 2017 compared to $16.5 million in the six months ended July 3, 2016. The decrease in operating income was primarily a result of sales mix impact from our fluid controls businesses (-2%).

Corporate Expenses

Corporate expenses decreased $1.0 million to $10.9 million in the six months ended July 2, 2017. This decrease was primarily driven by lower compensation costs of $0.8 million.

Special and Restructuring (Recoveries) Charges, net and other charges

During the six months ended July 2, 2017 and 2016, the Company recorded a net gain of $2.8 million and net charge of $6.5 million, respectively, within our condensed consolidated statements of income caption Special and restructuring (recoveries) charges, net. These special and restructuring (recoveries) charges are described in further detail in Note 15.


28



Interest Expense, Net
 
Interest expense increased $2.6 million to $3.9 million in the six months ended July 2, 2017. This change in interest expense was primarily due to higher outstanding debt balances and interest rates during the period as a result of the CFS acquisition.

Other Expense (Income), Net
 
Other expense, net, was $1.2 million in the six months ended July 2, 2017 compared to other income, net of $1.1 million in the six months ended July 3, 2016. The difference of $2.3 million was primarily due to the impact of foreign currency fluctuations.

Comprehensive Income (Loss)

Comprehensive income increased from $8.9 million in the six months ended July 3, 2016 to $32.3 million in the six months ended July 2, 2017, primarily driven by favorable foreign currency balance sheet remeasurements, primarily by the Euro ($14.7 million) and UK Pound ($1.8 million).

As of July 2, 2017, we have a cumulative currency translation adjustment of $17.2 million regarding our Brazil entity. If we were to cease to have a controlling financial interest in the Brazil legal entity, we would incur a non-cash charge of $17.2 million, which would be included as a special charge within the results of operations.

(Benefit) Provision for Income Taxes

The effective tax rate was (0.3)% in the six months ended July 2, 2017 compared to 28.1% in the six months ended July 3, 2016. The primary drivers for the lower tax rate in 2017 includes reduced foreign losses in 2017 with no tax benefit (-11.2%) and non-taxable income related to acquisition consideration (-30.9%). This was partially offset by the impact on the effective tax rate of lower taxed foreign earnings compared to US earnings (8.1%).

Restructuring Actions

Our announced restructuring actions which result in future savings are summarized as follows:

During 2016 and 2017, we initiated certain restructuring activities, under which we continue to simplify our business ("2016 Actions" and "2017 Actions", respectively). Under these restructurings, we reduced expenses, primarily through reductions in force and closing a number of smaller facilities.

In July 2015, we announced the closure of one of the two Corona, California manufacturing facilities ("California
Restructuring"). Under this restructuring, we reduced certain general, manufacturing and facility related expenses.

The table below (in millions) outlines the cumulative effects on past and future earnings resulting from our announced restructuring plans.
 
Cumulative Planned Savings
 
Cumulative Projected Savings
 
Expected Periods of Savings Realization
2017 Actions
$
6.9

 
$
6.9

 
Q2 2017 - Q2 2018
2016 Actions
14.1

 
13.3

 
Q2 2016 - Q4 2017
California Restructuring
3.0

 
3.0

 
Q3 2016 - Q4 2017
Total Savings
$
24.0

 
$
23.2

 
 

As shown in the table above our projected cumulative restructuring savings are lower than our original planned savings
amounts. This is primarily attributed to reducing lower than planned general, administrative and manufacturing related expenses. The expected periods of realization of the restructuring savings are consistent with our original plans. Our restructuring actions are funded by cash generated by operations.

We expect to incur restructuring related special charges between $0.3 million and $0.4 million to complete our 2016 and 2017 actions. These restructuring actions are expected to be funded with cash generated from operations. Our California Restructuring has been completed and, as such, no additional restructuring charges are expected to be incurred in connection with this action.


29



Liquidity and Capital Resources

Our liquidity needs arise primarily from acquisitions, capital investment in new machinery, IT systems, the improvement of facilities, funding working capital requirements to support business growth initiatives, restructuring actions, dividend payments, pension funding obligations and debt service costs. We have historically generated cash from operations and believe we have resources available for reinvestment in existing businesses, strategic acquisitions and managing our capital structure - on a short and long-term basis.

The following table summarizes our cash flow activities for the six month periods indicated (in thousands):