10-K 1 cir_10kx12312018xtobefiled.htm 10-K Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2018
OR
¨
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, 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)
 
 
 
Securities registered pursuant to Section 12 (b) of the Act:
Common Stock, par value $0.01 per share (registered on the New York Stock Exchange)
Securities registered pursuant to Section 12 (g) of the Act: None
 
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ¨    No  x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes  ¨    No  x
 
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  ¨
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  x    No  ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
 
Accelerated filer
o
Emerging growth company
o
Non-accelerated filer
o
 
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  ¨    No  ¨ 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  x

The aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2018 was $712,250,764. The registrant does not have any non-voting common equity.

As of February 22, 2019, there were 19,857,359 shares of the registrant’s Common Stock outstanding.
 

DOCUMENTS INCORPORATED BY REFERENCE
 
Part III incorporates by reference certain portions of the information from the registrant’s definitive Proxy Statement for the 2019 Annual Meeting of Stockholders to be held on May 9, 2019. The definitive Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the close of the registrant’s year ended December 31, 2018.




Table of Contents
 
 
 
Page
Number
Part I
 
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Mine Safety Disclosures
 
 
Part II
 
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
 
 
Part III
 
Item 10
Item 11
Item 12
Item 13
Item 14
 
 
Part IV
 
Item 15
Item 16
 
 
 
 
 
 
 
 
 




Part I
 
Item 1.    Business
 
This Annual Report on Form 10-K 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, including statements about our future performance, including realization of cost reductions of cost reductions from restructuring activities and expected synergies, involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, changes in the price of and demand for oil and gas in both domestic and international markets, our ability to successfully integrate acquired businesses, as contemplated, the possibility that expected benefits related to the FH acquisition may not materialize as expected, any adverse changes in governmental policies, variability of raw material and component pricing, changes in our suppliers’ performance, fluctuations in foreign currency exchange rates, changes in tariffs or other taxes related to doing business internationally, our ability to hire and retain key personnel, our ability to operate our manufacturing facilities at efficient levels including our ability to prevent cost overruns and reduce costs, our ability to generate increased cash by reducing our working capital, our prevention of the accumulation of excess inventory, our ability to successfully implement our restructuring or simplification strategies, fluctuations in interest rates, our ability 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, including as a result of natural disasters, terrorist attacks, current Middle Eastern conflicts and related matters. For a discussion of these risks, uncertainties and other factors, see Item 1A, "Risk Factors". We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Overview

CIRCOR International, Inc. was incorporated under the laws of Delaware on July 1, 1999. As used in this report, the terms “we,” “us,” “our,” the “Company” and “CIRCOR” mean CIRCOR International, Inc. and its subsidiaries (unless the context indicates another meaning). The term “common stock” means our common stock, par value $0.01 per share.

We design, manufacture and market differentiated technology products and sub-systems for markets including industrial, oil & gas, aerospace and defense, and commercial marine. CIRCOR has a diversified flow and motion control product portfolio with recognized, market-leading brands that fulfill its customers’ mission critical needs. The Company’s strategy is to grow organically and through complementary acquisitions; simplify CIRCOR’s operations; achieve world class operational excellence; and attract and retain top industry talent. We have a global presence and operate 28 major manufacturing facilities that are located in North America, Western Europe, Morocco, and India. The Company has the following reportable business segments: Industrial (“Industrial segment”), Energy ("Energy segment" or "Energy"), and Aerospace & Defense (“Aerospace & Defense segment”) . We sell our products through distributors, representatives, Engineering, Procurement and Construction ("EPC") companies, as well as directly to end-user customers and original equipment manufacturers (“OEMs”).

Strategies

Our objective is to enhance shareholder value by focusing on growth, margin expansion, strong free cash flow, and disciplined capital deployment. We have a four-point strategy to achieve these objectives.

1) Grow Organically and Through Acquisitions. We leverage the power of our global design capabilities to develop innovative products that solve our customers’ most challenging and critical problems. New products will be an increasingly important part of our growth strategy going forward. In addition, we are positioning ourselves to grow in parts of our end markets where our products are under-represented. This could include establishing a presence in higher growth geographies where we have a limited presence today. It also could include taking products established in one end-market and selling those solutions into other relevant end markets.


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In addition to organic growth, we expect to acquire businesses over time. We are primarily focused on companies with differentiated technologies in complementary markets that we already understand and where we expect substantial growth. In addition to strategic fit and differentiated technology, the main criterion for an acquisition is return on invested capital.

2) Simplify CIRCOR. In 2013, we embarked on a long-term journey to simplify CIRCOR. We have a large number of facilities relative to our size and believe that simplifying this structure will not only expand our margins by reducing cost, but will help us improve our customer service, operations, and controls. We obtain an in depth understanding of our customer needs and competitor capabilities in our end markets, and continue to simplify our product portfolio and the number of unique products we offer in the marketplace through active product management.

3) Achieve World Class Operational Excellence. Our Global Operations and Supply Chain organization is fully committed to achieving operational excellence in support of our customers’ expectations of perfect quality, on-time delivery and market competitiveness. We follow the CIRCOR Operating System ("COS") which creates a disciplined culture of continuous improvement for driving operational excellence including a sales and inventory operations plan that provides for world-class quality and delivery while maintaining an optimal level of working capital. COS is comprised of ten business process attributes designed to engage and empower our employees to recognize and eliminate waste, work real-time problem solving as part of their everyday job experience, and enhance our performance both in operations and business office processes. Under COS our employees participate in a regimented training program and receive regular prescriptive assessments / action plans to drive process maturity. Quantitative performance metrics define site certification levels to help attain and sustain a level of quality, productivity, inventory management and market competitiveness that delights our customers, shareholders, and employees.

4) Build the Best Team. Finally, we have a fundamental belief at CIRCOR that the best team wins. We are committed to attracting the most talented people in our industry and we are committed to investing, engaging, challenging and developing our employees. We believe the best people combined with robust process, appropriate metrics, and individual accountability will deliver extraordinary results.

Business Segments

Energy

Effective January 1, 2018, we realigned our business segments in order to simplify the business. The current and prior periods are reported under the new segment structure.

The Energy segment remained unchanged from the 2017 reporting structure except for the addition of the Reliability Services business ("Reliability Services"). We acquired the Reliability Services business as part of the Fluid Handling acquisition that took place in 2017 and subsequently sold the business in January 2019 Refer to Note 19, "Subsequent Event," of the consolidated financial statements included in this Annual report for additional information regarding this disposition.

Energy is a global provider of highly engineered integrated flow control solutions, valves and services for the Oil & Gas and Process Instrumentation markets.

We are focused on satisfying our customers’ mission-critical application needs by utilizing advanced technologies. Our flow control solutions can withstand extreme temperatures and pressures, and as such are used in the most critical and severe service applications. Our installations include land-based, topside, and sub-sea oil and gas production, refining and petrochemical process control, oil sand processing, critical pressure control and cryogenic applications.

We plan to grow Energy by expanding our capabilities in Oil & Gas both organically and inorganically across the Oil & Gas and Petrochemical markets.

Energy is headquartered in Houston, Texas and has manufacturing facilities in North America, the United Kingdom, Italy, and the Netherlands.


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Markets and Applications

Energy serves an increasing range of energy-focused global markets. Key to our business strategy is targeting additional markets that can benefit from our innovative products and system solutions. Markets served today include Oil & Gas: upstream (on-shore and off-shore), mid-stream and downstream, as well as petrochemical processing. The upstream and mid-stream markets are primarily served by our large international project and North American short-cycle businesses, and downstream and petrochemical markets are served primarily by our refinery valves, instrumentation and sampling businesses, and until its sale in January 2019, the Reliability Services business.

Upstream Oil & Gas: These markets commonly include all the equipment between the outlet on the wellhead to the mainline transmission pipeline and it also incorporates all the activities associated with the installation of this equipment. Our diverse portfolio covers all facets of oil and gas production, both topside and sub-sea, and includes short cycle standard valve products and custom engineered valves.

Mid-stream Oil & Gas: This market begins at the mainline transmission pipeline and extends to the fence around the refinery or petrochemical plant. It includes certain ancillary equipment, as well as the gas processing plants that prepare and purify raw natural gas for entry into the major pipeline systems and Liquid Natural Gas (LNG) liquefaction and transport processes. Our valves are used for flow control in the main transmission lines, gathering systems, and storage facilities. We also provide inspection and cleaning products and services to insure the integrity of transmission pipelines.

Downstream Oil & Gas: The downstream market includes the refining, distillation, stripping, degassing, dehydrating, desulphurizing, and purifying of the crude oil to its constituent components. In addition to flow control applications for feedstocks and process control across each downstream process unit, our refinery valves business provides highly specialized engineered solutions for coking and catalytic cracking that improve the safety and efficiency of operations within the refinery.

Petrochemical Processing: The petrochemical processing market includes the refining and manufacture of chemicals derived from oil and gas, such as polyethylene. This market requires specific instrumentation and ancillary equipment to monitor the quality and efficiency of production. Our instrumentation and sampling business provides products that are used to facilitate these activities with the highest degree of precision.

Brands

Energy provides its flow control solutions and services through the following significant brands:

Circle Seal Controls, CIRCOR Tech, CIRCOR Reliability Services, Contromatics, COT-Puritech, DeltaValve, Dopak Sampling, GO Regulators, Hoke-Gyrolok, Hydroseal, KF Valves, LSC, Mallard Control, Pibiviesse, Pipeline Engineering, SICELUB, TapcoEnpro, and Texas Sampling.

Products

Energy offers a range of flow control solutions (distributed and highly engineered) and services, including:

Valves (from 1/8 inch to 64 inches in diameter)
Engineered Trunion and Floating Ball Valves
Gate, Globe and Check Valves
Butterfly Valves
Instrumentation Fittings and Sampling Systems, including Sight Glasses & Gauge Valves
Liquid Level Controllers, Liquid Level Switches, Plugs & Probes Pressure Controllers, Pressure Regulators
Pipeline pigs, quick opening closure, pig signalers
Delayed coking unheading devices and fluid catalytic converter and isolation valves
Oil mist systems and preventative lubrication services

For our manufactured valve products, we are subject to applicable federal, state and local regulations. In addition, many of our customers require us to comply with certain industrial standards, including those issued by the American Petroleum Institute, International Organization for Standardization, Underwriters’ Laboratory, American National Standards Institute, American Society of Mechanical Engineers, and the European Pressure Equipment Directive. We also need to meet standards that qualify us to be on authorized supplier lists with various global end users. We are fully qualified and licensed for the API 6D, API 6DSS and API 6A PSL4.

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Customers
Energy’s products and services are sold to end-user customers, such as major oil companies, EPC companies, and distributors, through sales channels that include direct sales, sales representatives, and agents.

Revenue and Backlog

Energy accounted for $451.2 million, $339.6 million, and $305.9 million, or 38%, 51%, and 52% of our net revenues for the years ended December 31, 2018, 2017 and 2016, respectively. Energy’s backlog as of January 31, 2019 was $166.8 million compared with $190.1 million as of January 31, 2018. Energy backlog represents backlog orders we believe to be firm.

Aerospace & Defense

The Aerospace & Defense segment includes the Aerospace & Defense business from the 2017 Advanced Flow Solutions ("AFS") segment, along with the Pumps and Valves Defense business acquired as part of the FH acquisition.

Aerospace & Defense is a diversified flow control technology platform. Our primary product focus areas are valves, pumps, actuation, motors, switches, and high pressure pneumatic systems.

Aerospace & Defense products are mainly used in aerospace, defense, and general industrial markets.

We plan to grow Aerospace & Defense by increasing market share in existing and new markets through exceptional sales and customer service enabled by innovative, reliable and high quality solutions. Product portfolio expansion through acquisitions of differentiated technologies in current and adjacent applications is also a key part of our growth strategy.

We have Aerospace & Defense facilities in North America, the United Kingdom, France, Morocco, and India. Our Aerospace & Defense headquarters is in Corona, California.

Markets and Applications

Aerospace & Defense serves the aerospace and defense markets.

The commercial aerospace market that we serve includes systems and components on airliners and business jets, such as hydraulic, pneumatic, fuel and ground support equipment including maintenance, repair and overhaul (MRO). In addition, we serve the defense aerospace market, including military and naval applications where controls or motion switches are mission critical. We support fixed wing aircraft, rotorcraft, missile systems, ground vehicles, submarines, weapon systems and weapon launch systems, ordinance, fire control, fuel systems, pneumatic controls, and hydraulic and dockside support equipment including MRO.

The non-aerospace defense market that we serve is primarily focused on naval vessels, with our pumps and valves used across most naval platforms in a wide variety of onboard applications. We are a trusted supplier to many countries' navies, leveraging our engineering and manufacturing capabilities to work directly with our customers in developing targeted solutions for mission critical applications including very low acoustic signature pumps for submarines.

Brands

Aerospace & Defense manufactures and markets control valves, automatic recirculation valves, regulators, fluid controls, actuation systems, landing gear components, pneumatic controls, electro-mechanical controls, and other flow control products and systems. Aerospace & Defense provides actuation and fluid control systems and services through the following brands: CIRCOR Aerospace, Aerodyne Controls, CIRCOR Bodet, CIRCOR Industria, CIRCOR Motors, Hale Hamilton, Leslie Controls, Portland Valve, and Warren Pumps.


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Products

Aerospace & Defense offers a range of solutions, including:
Specialty Centrifugal, 2-Screw, and Propeller Pumps
Specialized control valves
MIL-Spec butterfly valves and actuators
Electromechanical, pneumatic and hydraulic, fluid and motion control systems
Actuation components and sub-systems

In the manufacture of our products, we must comply with certain certification standards, such as AS9100C, ISO 9001:2008, National Aerospace & Defense Contractors Accreditation Program, Federal Aviation Administration Certification and European Aviation Safety Agency as well as other customer qualification standards. Currently all of our manufacturing facilities comply with the applicable standards.

Customers

Aerospace & Defense products and services are used by a range of customers, including those in the military and defense, commercial aerospace, business and general aviation, and general industrial markets. Our customers include aircraft manufacturers (OEMs) and Tier 1 suppliers to these customers.

Revenue and Backlog

Aerospace & Defense accounted for $237.0 million, $183.0 million and $166.1 million, or 20%, 28% and 28% of our net revenues for the years ended December 31, 2018, 2017 and 2016, respectively. Aerospace & Defense backlog as of January 31, 2019 was $183.3 million compared with $142.0 million as of January 31, 2018.

Aerospace & Defense backlog represents orders we believe to be firm, including future customer demand requirements on long-term aerospace product platforms where we are the sole source provider. We determine the amount of orders to include in our backlog for such aircraft platforms based on 12 months demand published by our customers.

Industrial

The Industrial segment includes the businesses acquired as part of the FH acquisition (except for the businesses noted above that were moved to the Energy and Aerospace & Defense segments) as well as the Industrial Solutions and Power and Process businesses that were part of the Advance Flow Solutions segment in 2017.

Industrial is a global portfolio of highly engineered and differentiated fluid handling products and flow control products. Our primary products are positive displacement pumps, specialty centrifugal pumps, automatic recirculating valves, control valves, and harsh environment flow control products for steam and cryogenic applications.

Our technology is focused on moving the most difficult fluids with extremely high efficiency for critical applications in the general industrial, power, process, oil & gas, and commercial marine end markets.

We plan to grow the Industrial segment by expanding our share in existing markets with innovative solutions and new product offerings through our strong sales and service network, and leveraging our brand and commercial position.

Industrial is headquartered in Radolfzell, Germany, with primary manufacturing centers in North America, Germany, India, and China.

Markets and Applications

Industrial serves the industrial, commercial marine, oil & gas, and power and process markets.

The general industrial market includes a broad range of manufacturing operations for flow and energy control. Our products are used to handle viscous and critical fluids, automate and control plant utilities, increase energy efficiency in buildings and campuses, and safely regulate critical fluids such as industrial gases and cryogenic fluids used in manufacturing processes.


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The power and process market is comprised of electric utilities, industrial power producers, and OEM power generating equipment providers. Our products and services are used across this segment in lubrication management for turbines and generators, as well as fuel delivery, heat transfer, and emissions reduction applications. We serve power generation facilities and processes fueled by natural gas, oil, hydro, solar, nuclear, and coal.

The Oil & Gas market is divided into three sub-segments: upstream, midstream, and downstream. In upstream, our products and services are used to manage equipment and fluids critical to the drilling of new wells, and also maximize, control, and maintain oil production from both new and existing wells. In midstream, our products are used in the transfer of oils and refined products via pipelines, ship vessels, railcars, and trucks. Our products and services are also used to manage and maintain storage terminals. In downstream, our products are used to support critical refining processes, both directly in the process and as part of integrated equipment supplied by OEMs.

The commercial marine market includes shipbuilders, OEM suppliers of onboard equipment, and shipping fleet operators. Our products and services are designed specifically to support all aspects of fluid systems, including propulsion, ballast handling, cooling water, bilge, fuel, power generation, and mechanical hydraulics.

In all of the markets we serve, we provide aftermarket components and, in limited applications, aftermarket services.

Brands

Industrial manufactures and markets products and services through the following brands:

Allweiler, Houttuin, IMO Pump, IMO AB, Nicholson Steam Trap, Rockwood Swendemann, Rosscor, RTK, Schroedahl, SES, Spence Engineering, Tushaco, and Zenith.

Products

Industrial offers a range of fluid handling products and services, including:

3 Screw Pumps
2 Screw Pumps
Progressing Cavity Pumps
Specialty Centrifugal Pumps
Gear Metering Pumps
Multiphase Pump Systems
Automatic Recircultaing Valves
Severe Service and General Service Control Valves

Our products must comply with certification standards applicable to many of our end markets. These standards include but are not limited to ISO 9001:2008, ANSI/ASQC Q 9001, API 676, and Mil-I-45208.

Customers

Industrial's products and services are sold directly to end-users, OEMs that supply specialized systems in their respective end markets, and EPC companies through a global network of direct and indirect sales channels.

Revenue and Backlog

Industrial accounted for $487.6 million, $139.1 million and $118.2 million or 41%, 21% and 20% of our net revenues for the years ended December 31, 2018, 2017 and 2016. Industrial backlog as of January 31, 2019 was $168.2 million.


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CIRCOR Consolidated

Competition

The domestic and international markets for our products are highly competitive. Some of our competitors have substantially greater financial, marketing, personnel and other resources than us. We consider product brand, quality, performance, on-time delivery, customer service, price, distribution capabilities and breadth of product offerings to be the primary competitive factors in these markets. We believe that new product development and product engineering also are important to our success and that our position in the industry is attributable, in significant part, to our ability to develop innovative products and to adapt existing products to specific customer applications.

The primary competitors of our Energy segment include: Balon Corporation, Crane Co., Emerson Electric Company, Flowserve Corporation, IMI plc, P.e.r.a.r S.p.A, PetrolValves S.p.A, Cameron division of Schlumberger Limited, SPX Flow, Inc., and Valvitalia S.p.A.

The primary competitors of our Aerospace & Defense segment include: Crane Co., Curtiss-Wright Corporation, Marrotta Controls, Moog, Inc., Parker Hannifin Corp., and Woodward Inc.

The primary competitors of our Industrial segment include: Leistritz AG, Curtiss-Wright Corporation, Netzsch GmbH, ITT Corporation, Seepex GmbH, and Naniwa Ltd.

New Product Development

Our engineering differentiation comes from our ability to offer products, solutions and services that address high pressure, high temperature, and caustic flow. Our solutions offer high standards of reliability, safety and durability in applications requiring precision movement and zero leakage.

We continue to develop new and innovative products to enhance our market positions. Our product development capabilities include designing and manufacturing custom applications to meet high tolerance or close precision requirements. For example, our Energy segment operation can meet the tolerance requirements of sub-sea, cryogenic environments as well as critical service steam applications. Our Aerospace & Defense segment continues to expand its integrated systems design and testing capability to support bundled sub-systems for aeronautics applications, as well as acoustically superior motors for marine applications. These testing and manufacturing capabilities enable us to develop customer-specified applications. In many cases, the unique characteristics of our customer-specified technologies have been subsequently used in broader product offerings. The Industrial segment provides unique fluid handling products for viscous and critical fluids with specific design and engineering capabilities, as well as highly differentiated smart technology for specific applications.

We maintain a Global Engineering Center of Excellence in India with a capable technology and engineering team that complements the engineering resources in a business unit.

Customers

For the years ended December 31, 2018, 2017, and 2016, we had no customers from which we derive revenues that exceed 10% of the Company’s consolidated revenues. Our businesses sell into both long-term capital projects as well as short-cycle demand. As a result, we tend to experience fluctuations in orders, revenues and operating results at various points across economic and business cycles. Our Energy businesses can be cyclical in nature due to the fluctuation of the worldwide price, supply and demand for oil and gas. When the worldwide demand for oil and gas is depressed, the demand for our products used in those markets decreases as our customers with higher production costs will cut back investment and reduce purchases from us. The number of active rigs and wells drilled in North American short-cycle Oil & Gas market is a strong indicator of demand especially for our distributed valves products. In addition, the level of capital expenditures by national oil companies or the oil majors in exploration and production activities drive demand for our long cycle, engineered valves products. Maintenance expenditures during refinery turnarounds drive demand for our refinery valve products. Similarly, although not to the same extent as the Oil & Gas markets, the aerospace, military and maritime markets have historically experienced cyclical fluctuations in demand.


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Selling and Distribution

Across our businesses we utilize a variety of channels to market our products and solutions. Those channels include direct sales, distributors, commissioned representatives, and our service centers. Our distribution and representative networks typically offer technically trained sales forces with strong relationships in key markets.

We believe that our well-established sales and distribution channels constitute a competitive strength. We believe that we have good relationships with our representatives and distributors. We continue to implement marketing programs to enhance these relationships. Our ongoing distribution-enhancement programs include reducing lead times, introducing new products, and offering competitive pricing, application design, technical training, and service.

Intellectual Property

We own patents that are scheduled to expire between 2019 and 2030 and trademarks that can be renewed as long as we continue to use them. We do not believe the vitality and competitiveness of any of our business segments as a whole depends on any one or more patents or trademarks. We own certain licenses such as software licenses, but we do not believe that our business as a whole depends on any one or more licenses.

Raw Materials

The raw materials used most often in our production processes are castings, forgings and bar stock of various materials, including stainless steel, carbon steel, bronze, copper, brass, titanium and aluminum. These materials are subject to price fluctuations that may adversely affect our results of operations. We purchase these materials from numerous suppliers and at times experience constraints on the supply of certain raw material as well as the inability of certain suppliers to respond to our needs. Historically, increases in the prices of raw materials have been partially offset by higher sales prices, active materials management, project engineering programs and the diversity of materials used in our production processes.

Employees and Labor Relations

As of January 31, 2019, our worldwide operations directly employed approximately 4,400 people. We have 96 employees in North America who are covered by two collective bargaining agreements. We also have the following employees covered by governmental regulations or workers' councils:

Germany - 1107 employees
France - 150 employees
Mexico - 108 employees
Italy - 85 employees
UK - 40 employees
Norway - 33 employees
Sweden - 10 employees

We believe that our employee relations are good at this time.

Available Information

We file reports on Form 10-Q with the Securities and Exchange Commission ("SEC") on a quarterly basis, additional reports on Form 8-K from time to time, and an annual report on Form 10-K on an annual basis. These and other reports filed by us, or furnished by us, to the SEC in accordance with section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge from the SEC on its website at http://www.sec.gov. Additionally, our Form 10-Q, Form 8-K, Form 10-K and amendments to those reports are available without charge, as soon as reasonably practicable after they have been filed with, or furnished to, the SEC, on our Investor Relations website at http://investors.CIRCOR.com. The information on our website is not part of, or incorporated by reference in, this Annual Report.


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Item 1A.    Risk Factors
 
Set forth below are certain risk factors that we believe are material to our stockholders. If any of the following risks occur, our business, financial condition, cash flows, results of operations and reputation could be harmed. You should also consider these risk factors when you read “forward-looking statements” elsewhere in this report. You can identify forward-looking statements by terms such as “may,” “hope,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of those terms or other comparable terminology. Forward-looking statements are only predictions and can be adversely affected if any of the following risks occur:
 
Some of our end-markets are cyclical, which cause us to experience fluctuations in revenues or operating results.
 
We have experienced, and expect to continue to experience, fluctuations in revenues and operating results due to economic and business cycles. Results of operations for any particular period are not necessarily indicative of the results of the operations for any future period. We sell our products principally to aerospace, military, commercial aircraft, Oil & Gas exploration, transmission and refining, power generation, chemical processing and maritime markets. Although we serve a variety of markets to reduce dependency on any one, a significant downturn in any one of these markets could cause a material reduction in our revenues that could be difficult to offset. In addition, decreased market demand typically results in excess manufacturing capacity among our competitors which, in turn, results in pricing pressure. As a consequence, a significant downturn in our markets can result in lower revenues and profit margins.

In particular, our Energy businesses are cyclical in nature as the worldwide demand for oil and gas fluctuates. Energy sector activity can fluctuate significantly in a short period of time, particularly in the United States, North Sea, the Middle East, Brazil and Australia, amongst other regions. When worldwide demand for oil and gas is depressed, the demand for our products used in maintenance and repair of existing oil and gas applications, as well as exploration or new oil and gas project applications, is reduced. A decline in oil price will have a similar impact on the demand for our products, particularly in markets, such as North America, where the cost of oil production is relatively higher. Demand for our products and services depends on a number of factors, including the number of oil & gas wells being drilled, the maintenance and condition of industry assets, the volume of exploration and production activities and the capital expenditures of asset owners and maintenance companies. The willingness of asset owners and operators to make capital expenditures to produce and explore for sources of energy will continue to be influenced by numerous factors over which we have no control, including:
    
the current and anticipated future prices for energy sources, including oil and natural gas, solar, wind and nuclear;
level of excess production capacity;
cost of exploring for and producing energy sources;
worldwide economic activity and associated demand for energy sources;
availability and access to potential hydrocarbon resources;
national government political priorities;
development of alternate energy sources; and
environmental regulations.

As a result, we historically have generated lower revenues and profits in periods of declining demand or prices for crude oil and natural gas. Any future downward pricing pressure on crude oil could have a material adverse effect on our business, financial condition, cash flows, or results of operations.
 
We face significant competition and, if we are not able to respond, our revenues may decrease.
 
We face significant competition from a variety of competitors in each of our markets. Some of our competitors have substantially greater financial, marketing, personnel and other resources than we do. New competitors also could enter our markets. We consider product quality, performance, customer service, on-time delivery, price, distribution capabilities and breadth of product offerings to be the primary competitive factors in our markets. Our competitors may be able to offer more attractive pricing, duplicate our strategies, or develop enhancements to products that could offer performance features that are superior to our products. Competitive pressures, including those described above, and other factors could adversely affect our competitive position, resulting in a loss of market share or decreases in prices, either of which could have a material adverse effect on our business, financial condition, cash flows or results of operations. In addition, some of our competitors are based in foreign countries and have cost structures and prices based on foreign currencies.


9




The majority of our transactions are denominated in either U.S. dollar or Euro currency. Accordingly, currency fluctuations could cause our U.S. dollar and/or Euro priced products to be less competitive than our competitors’ products that are priced in other currencies.

If we cannot continue operating our manufacturing facilities at current or higher levels, our results of operations could be adversely affected.
 
We operate a number of manufacturing facilities for the production of our products. The equipment and management systems necessary for such operations may break down, perform poorly or fail, resulting in fluctuations in manufacturing efficiencies. Such fluctuations may affect our ability to deliver products to our customers on a timely basis, which could have a material adverse effect on our business, financial condition, cash flows or results of operations. We have continuously enhanced and improved Lean manufacturing techniques as part of the CIRCOR Operating System. We believe that this process produces meaningful reductions in manufacturing costs. However, continuous improvement of these techniques may cause short-term inefficiencies in production. If we ultimately are unable to continuously improve our processes, our results of operations may suffer.

Our acquisition of the fluid handling business of Colfax Corporation (FH) and the integration of its business, operations and employees with our own may be more difficult, costly or time consuming than expected, and the anticipated benefits and cost savings of the acquisition may not be fully realized, which could adversely impact our business, financial condition, cash flows and results of operations.

We completed the acquisition of FH on December 11, 2017. The success of the acquisition, including the achievement of anticipated benefits and cost savings of the acquisition, is subject to a number of uncertainties and will depend, in part, on our ability to successfully combine and integrate FH's business into our business in an efficient and effective manner. Potential difficulties that we may encounter in the integration process include the following:

the inability to successfully integrate FH's business into our own in a manner that permits us to achieve the cost savings and operating synergies anticipated to result from the acquisition, which could result in the anticipated benefits of the acquisition not being realized partly or wholly in the time frame currently anticipated or at all;
loss of key management and technical personnel;
integrating personnel, IT systems and corporate, finance and administrative infrastructures of FH into our company while maintaining focus on providing consistent, high quality products and services;
coordinating and integrating our internal operations, compensation programs, policies and procedures, and corporate structures;
potential unknown liabilities and unforeseen or increased costs and expenses;
the possibility of faulty assumptions underlying expectations regarding potential synergies and the integration process;
incurring significant acquisition-related costs and expenses;
performance shortfalls as a result of the diversion of management’s attention caused by integrating operations; and
servicing the substantial debt that we have incurred in connection with the acquisition.

Any of these factors could result in us failing to realize the anticipated benefits of the acquisition, on the expected timeline or at all, and could adversely impact our business, financial condition, cash flows and results of operations.

Implementation of our acquisition strategy may not be successful, which could affect our ability to increase our revenues or could reduce our profitability.
 
One of our strategies is to increase our revenues and expand our markets through acquisitions that will provide us with complementary products and access to additional geographic markets. We expect to spend significant time and effort expanding our existing businesses and identifying, completing and integrating acquisitions. We expect to face competition for acquisition candidates that may limit the number of acquisition opportunities available to us and may result in higher acquisition prices. We cannot be certain that we will be able to identify, acquire or profitably manage additional companies or successfully integrate such additional companies without substantial costs, delays or other problems. Also, there can be no assurance that companies we acquire ultimately will achieve the revenues, profitability or cash flows, or generate the synergies upon which we justify our investment in them; as a result, any such under-performing acquisitions could result in impairment charges which would adversely affect our results of operations. In addition, acquisitions may involve a number of special risks, including: adverse effects on our reported operating results; use of cash; diversion of management’s attention; loss of key personnel at acquired companies; or unanticipated management or operational problems or legal liabilities.


10




Implementation of our divestiture, restructuring, or simplification strategies may not be successful, which could affect our ability to increase our revenues or could reduce our profitability.

We continually review our current business and products to attempt to maximize our performance. We may in the future deem it appropriate to pursue the divestiture of additional product lines or businesses as conditions dictate. Any divestiture may result in a dilutive impact to our future earnings if we are unable to offset the dilutive impacts from the loss of revenue associated with the divested assets or businesses, as well as significant write-offs, including those related to goodwill and other intangible assets, which could have a material adverse effect on our results of operations and financial condition. A successful divestiture depends on various factors, including our ability to effectively transfer liabilities, contracts, facilities and employees to any purchaser, identify and separate the intellectual property to be divested from the intellectual property that we wish to retain, reduce fixed costs previously associated with the divested assets or business, and collect the proceeds from any divestitures. In addition, if customers of the divested business do not receive the same level of service from the new owners, this may adversely affect our other businesses to the extent that these customers also purchase other products offered by us. All of these efforts require varying levels of management resources, which may divert our attention from other business operations.

A focus of our Company is to simplify the way we are organized and the number of facilities we manage. We believe that such focus will reduce overhead structure, enhance operational synergies, and result in improved operating margins and customer service. Nevertheless, we may not achieve expected cost savings from restructuring and simplification activities and actual charges, costs and adjustments due to such activities may vary materially from our estimates. Our ability to realize anticipated cost savings, synergies, margin improvement, and revenue enhancements may be affected by a number of factors, including the following: our ability to effectively eliminate duplicative overhead, rationalize manufacturing capacity, synchronize information technology systems, consolidate warehousing and distribution facilities and shift production to more economical facilities; significant cash and non-cash integration and implementation costs or charges in order to achieve those cost savings, which could offset any such savings; and our ability to avoid labor disruption in connection with integration efforts or divestitures.

If we do not realize the expected benefits or synergies of any divestiture, restructuring, or simplification activities, our business, financial condition, cash flows and results of operations could be negatively impacted.

If we are unable to continue operating successfully overseas or to successfully expand into new international markets, our revenues may decrease.
 
We derive a significant portion of our revenue from sales outside the United States. In addition, one of our key growth strategies is to sell our products in international markets not significantly served by us in portions of Europe, Latin America and Asia. We market our products and services outside of the United States through direct sales, distributors, and technically trained commissioned representatives. We may not succeed in our efforts to further penetrate these markets. Moreover, conducting business outside the United States is subject to additional risks, including currency exchange rate fluctuations; changes in regional, political or economic conditions, trade protection measures such as tariffs or import or export restrictions; and complex, varying and changing government regulations and legal standards and requirements, particularly with respect to price protection, competition practices, export control regulations and restrictions, customs and tax requirements, immigration, anti-boycott regulations, data privacy, intellectual property, anti-corruption and environmental compliance, including U.S. customs and export regulations and restrictions and the Foreign Corrupt Practices Act, and the occurrence of any of these factors could materially and adversely affect our operations.

If we cannot pass on higher raw material or manufacturing costs to our customers, we may become less profitable.
 
One of the ways we attempt to manage the risk of higher raw material and manufacturing costs is to increase selling prices to our customers. The markets we serve are extremely competitive and customers may not accept price increases or may look to alternative suppliers, which may negatively impact our profitability and revenues.
 

If our suppliers cannot provide us with adequate quantities of materials to meet our customers’ demands on a timely basis or if the quality of the materials provided does not meet our standards, we may lose customers or experience lower profitability.
 
Some of our customer contracts require us to compensate those customers if we do not meet specified delivery obligations. We rely on numerous suppliers to provide us with our required materials and in many instances these materials must meet certain specifications. In addition, we continue to increase our dependence on lower cost foreign sources of raw materials, components, and, in some cases, completed products. Managing a geographically diverse supply base inherently poses significant logistical

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challenges. While we believe that we also have improved our ability to effectively manage a global supply base, a risk nevertheless exists that we could experience diminished supplier performance resulting in longer than expected lead times and/or product quality issues. The occurrence of such factors could have a negative impact on our ability to deliver products to customers within our committed time frames and could adversely impact our results of operations, financial conditions and cash flows.

Our international activities expose us to fluctuations in currency exchange rates that could adversely affect our results of operations and cash flows.
 
Our international manufacturing and sales activities expose us to changes in foreign currency exchange rates. Our major foreign currency exposures involve the markets in Western Europe and Canada. Fluctuations in foreign currency exchange rates could result in our (i) paying higher prices for certain imported goods and services, (ii) realizing lower prices for any sales denominated in currencies other than U.S. dollars, (iii) realizing lower net income, on a U.S. dollar basis, from our international operations due to the effects of translation from weakened functional currencies, and (iv) realizing higher costs to settle transactions denominated in other currencies. Any of these risks could adversely affect our results of operations and cash flows. Our major foreign currency exposures involve the markets in Western Europe and Canada.
 
We may use forward contracts to help manage the currency risk related to certain business transactions denominated in foreign currencies. We primarily utilize forward exchange contracts with maturities of less than eighteen months. To the extent these transactions are completed, the contracts minimize our risk from exchange rate fluctuations because they offset gains and losses on the related foreign currency denominated transactions. However, there can be no assurances that we will be able to effectively utilize these forward exchange contracts in the future to offset significant risk related to fluctuations in currency exchange rates. In addition, there can be no assurances that counterparties to such contracts will perform their contractual obligations to us to realize the anticipated benefits of the contracts.
 
If we experience delays in introducing new products or if our existing or new products do not achieve or maintain market acceptance, our revenues may decrease.
 
Our industries are characterized by: intense competition; changes in end-user requirements; technically complex products; and evolving product offerings and introductions.
 
We believe our future success depends, in part, on our ability to anticipate or adapt to these factors and to offer, on a timely basis, products that meet customer demands. Failure to develop new and innovative products or to custom design existing products could result in the loss of existing customers to competitors or the inability to attract new business, either of which may adversely affect our revenues. The development of new or enhanced products is a complex and uncertain process requiring the anticipation of technological and market trends. We may experience design, manufacturing, marketing or other difficulties, such as an inability to attract a sufficient number of qualified engineers, which could delay or prevent our development, introduction or marketing of new products or enhancements and result in unexpected expenses.

If we fail to manufacture and deliver high quality products in accordance with industry standards, we may lose customers.

Product quality and performance are a priority for our customers since many of our product applications involve caustic or volatile chemicals and, in many cases, involve processes that require precise control of fluids. Our products are used in the aerospace, military, commercial aircraft, analytical equipment, Oil & Gas exploration, transmission and refining, power generation, chemical processing and maritime industries. These industries require products that meet stringent performance and safety standards, such as the standards of the American Petroleum Institute, International Organization for Standardization, Underwriters’ Laboratory, American National Standards Institute, American Society of Mechanical Engineers and the European Pressure Equipment Directive. If we fail to maintain and enforce quality control and testing procedures, our products will not meet these stringent performance and safety standards which are required by many of our customers. Non-compliance with the standards could result in a loss of current customers and damage our ability to attract new customers, which could have a material adverse effect on our business, financial condition, cash flows or results of operations.
 
We depend on our key personnel and the loss of their services may adversely affect our business.
 
We believe that our success depends on our ability to hire new talent and the continued employment of our senior management team and other key personnel. If one or more members of our senior management team or other key personnel were unable or unwilling to continue in their present positions, our business could be seriously harmed. In addition, if any of our key personnel joins a competitor or forms a competing company, some of our customers might choose to use the services of that competitor or

12




those of a new company instead of our own. Other companies seeking to develop capabilities and products similar to ours may hire away some of our key personnel. If we are unable to maintain our key personnel and attract new employees, the execution of our business strategy may be hindered and our growth limited.
 
We face risks from product liability lawsuits that may adversely affect our business.
 
We, like other manufacturers, face an inherent risk of exposure to product liability claims in the event that the use of our products results in personal injury, property damage or business interruption to our customers. We may be subjected to various product liability claims, including, among others, that our products include inadequate or improper instructions for use or installation, or inadequate warnings concerning the effects of the failure of our products. Although we maintain quality controls and procedures, including the testing of raw materials and safety testing of selected finished products, we cannot be certain that our products will be free from defect. In addition, in certain cases, we rely on third-party manufacturers for our products or components of our products. Although we have liability insurance coverage, we cannot be certain that this insurance coverage will continue to be available to us at a reasonable cost or, if available, will be adequate to cover any such liabilities. For example, liability insurance typically does not afford coverage for a design or manufacturing defect unless such defect results in injury to person or property. We generally attempt to contractually limit liability to our customers to risks that are insurable but are not always successful in doing so. Similarly, we generally seek to obtain contractual indemnification from our third-party suppliers, and for us to be added as an additional insured party under such parties’ insurance policies. Any such indemnification or insurance is limited by its terms and, as a practical matter, is limited to the credit worthiness of the indemnifying or insuring party. In the event that we do not have adequate insurance or contractual indemnification, product liabilities could have a material adverse effect on our business, financial condition, cash flows or results of operations.

We rely on information technology in our operations, and any material failure, inadequacy, interruption or security failure of that technology could harm our business, financial condition, cash flows and results of operations.
 
We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and manage or support a variety of business processes, including operational and financial transactions and records, personal identifying information, payroll data and workforce scheduling information. We purchase some of our information technology from vendors, on whom our systems depend. We rely on commercially available systems, software, tools and monitoring to provide security for the processing, transmission and storage of company and customer information. Although we have taken steps to protect the security of our information systems and the data maintained in those systems, no such measures can eliminate the possibility of the systems' improper functioning or the improper access or disclosure of confidential or personally identifiable information such as in the event of cyber-attacks. Security breaches, whether through physical or electronic break-ins, computer viruses, ransomware, impersonation of authorized users, attacks by hackers or other means, can create system disruptions or shutdowns or the unauthorized disclosure of confidential information. Additionally, outside parties frequently attempt to fraudulently induce employees, suppliers or customers to disclose sensitive information or take other actions, including making fraudulent payments or downloading malware, by using “spoofing” and “phishing” emails or other types of attacks. Our employees have been and likely will continue to be targeted by such fraudulent activities. Outside parties may also subject us to distributed denial of services attacks or introduce viruses or other malware through “trojan horse” programs to our users’ computers in order to gain access to our systems and the data stored therein. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and continuously become more sophisticated, often are not recognized until launched against a target and may be difficult to detect for a long time, we may be unable to anticipate these techniques or to implement adequate preventive or detective measures.

If company, personal or otherwise protected information is improperly accessed, tampered with or distributed, we may face significant financial exposure, including incurring significant costs to remediate possible injury to the affected parties. We may also be subject to sanctions and civil or criminal penalties if we are found to be in violation of the privacy or security rules under federal, state, or international laws protecting confidential information. Any failure to maintain proper functionality and security of our information systems could interrupt our operations, damage our reputation, subject us to liability claims or regulatory penalties and could have a material adverse effect on our business, financial condition, cash flows and results of operations.
 

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The trading price of our common stock continues to be volatile and investors in our common stock may experience substantial losses.
 
The trading price of our common stock may be, and, in the past, has been volatile. Our common stock could decline or fluctuate in response to a variety of factors, including, but not limited to: our failure to meet our performance estimates or performance estimates of securities analysts; changes in financial estimates of our revenues and operating results or buy/sell recommendations by securities analysts; the timing of announcements by us or our competitors concerning significant product line developments, contracts or acquisitions or publicity regarding actual or potential results or performance; fluctuation in our quarterly operating results caused by fluctuations in revenue and expenses; substantial sales of our common stock by our existing shareholders; general stock market conditions; and fluctuations in oil and gas prices or other economic or external factors. While we attempt in our public disclosures to provide forward-looking information in order to enable investors to anticipate our future performance, such information by its nature represents our good-faith forecasting efforts. In recent years, the unprecedented nature of oil prices, credit and financial crises and economic recessions, together with the uncertain depth and duration of these crises, has rendered such forecasting more difficult. As a result, our actual results have differed materially, and going forward could differ materially, from our forecasts, which could cause further volatility in the value of our common stock.

In recent years the stock market as a whole experienced dramatic price and volume fluctuations. In the past, securities class action litigation has often been instituted against companies following periods of volatility in the market price of their securities. This type of litigation could result in substantial costs and a diversion of management attention and resources.

The costs of complying with existing or future governmental regulations on importing and exporting practices and of curing any violations of these regulations, could increase our expenses, reduce our revenues or reduce our profitability.

We are subject to a variety of laws and international trade practices, including regulations issued by the United States Bureau of Industry and Security, the Department of Homeland Security, the Department of State and the Department of Treasury. We cannot predict the nature, scope or effect of future regulatory requirements to which our international trading practices might be subject or the manner in which existing laws might be administered or interpreted. Future regulations could limit the countries into which certain of our products may be sold or could restrict our access to, and increase the cost of obtaining products from, foreign sources. In addition, actual or alleged violations of such regulations could result in enforcement actions and/or financial penalties that could result in substantial costs.

If we incur higher costs as a result of trade policies, treaties, government regulations or tariffs, we may become less profitable.

There is currently significant uncertainty about the future relationship between the United States and China, including with respect to trade policies, treaties, government regulations and tariffs. The current U.S. administration has called for substantial changes to U.S. foreign trade policy and has implemented greater restrictions on international trade and significant increases in tariffs on goods imported into the U.S. Under the current status, we expect that tariff increases will primarily impact [our] Distributed Valves product lines. We are unable to predict whether or when additional tariffs will be imposed or the impact of any such future tariff increases.

If we are unable to generate sufficient cash flow, we may not be able to service our debt obligations, including making payments on our outstanding term loan.

Our ability to make payments of principal and interest on our indebtedness when due, including the significant indebtedness that we incurred in connection with the acquisition of FH, depends upon our future performance, which will be subject to general economic conditions, industry cycles and financial, business and other factors affecting our consolidated operations, many of which are beyond our control. If we are unable to generate sufficient cash flow from operations in the future to service our outstanding debt, we may be required to, among other things:

seek additional financing in the debt or equity markets;
refinance or restructure all or a portion of our indebtedness;
divert funds that would otherwise be invested in our operations;
sell selected assets; or
reduce or delay planned capital expenditures or operating expenditures.


14




Such measures might not be sufficient to enable us to service our debt, which could negatively impact our financial results. In addition, we may not be able to obtain any such financing, refinancing or complete a sale of assets on economically favorable terms. In the case of financing or refinancing, favorable interest rates will be dependent on the health of the debt capital markets.

Our significant existing indebtedness could also have the effect, among other things, of reducing our flexibility to respond to changing business and economic conditions, reducing funds available for working capital, capital expenditures, acquisitions and other general corporate purposes or creating competitive disadvantages relative to other companies with lower debt levels.

Our credit agreement requires that we maintain certain ratios and limits our ability to make acquisitions, incur debt, pay dividends, make investments, sell assets or merge.
 
Our credit agreement, dated December 11, 2017, governs our indebtedness. This agreement includes provisions which place limitations on certain activities, including our ability to: issue; incur additional indebtedness; create any liens or encumbrances on our assets or make any guarantees; make certain investments; pay cash dividends above certain limits; or dispose of or sell assets or enter into a merger or a similar transaction. These restrictions may limit our ability to operate our business and may prohibit or limit our ability to execute our business strategy, compete, enhance our operations, take advantage of potential business opportunities as they arise or meet our capital needs. Furthermore, future debt instruments or other contracts could contain more restrictive financial or other covenants. The breach of any of these covenants by us or the failure by us to meet any of these conditions or requirements could result in a default under any or all of our indebtedness. If we are unable to service our indebtedness, our business, financial condition, cash flows and results of operations would be materially adversely affected.
 
Various restrictions and agreements could hinder a takeover of us which is not supported by our board of directors or which is leveraged.
 
Our amended and restated certificate of incorporation and amended and restated by-laws, as well as the Delaware General Corporation Law, contain provisions that could delay or prevent a change in control in a transaction that is not approved by our board of directors or that is on a leveraged basis or otherwise. These include provisions creating a staggered board, limiting the shareholders’ powers to remove directors, and prohibiting shareholders from calling a special meeting or taking action by written consent in lieu of a shareholders’ meeting. In addition, our board of directors has the authority, without further action by the shareholders, to set the terms of and to issue preferred stock. Issuing preferred stock could adversely affect the voting power of the owners of our common stock, including the loss of voting control to others.

Delaying or preventing a takeover could result in our shareholders ultimately receiving less for their shares by deterring potential bidders for our stock or assets.
 
A change in international governmental policies or restrictions could result in decreased availability and increased costs for certain components and finished products that we purchase from sources in foreign countries, which could adversely affect our profitability.
 
Like most manufacturers of flow control products, we attempt, where appropriate, to reduce costs by seeking lower cost sources of certain components and finished products. Many such sources are located in developing countries such as India and China, where a change in governmental approach toward U.S. trade could restrict the availability to us of such sources. In addition, periods of war or other international tension could interfere with international freight operations and hinder our ability to purchase such components and products. A decrease in the availability of these items could hinder our ability to timely meet our customers’ orders. We attempt, when possible, to mitigate this risk by maintaining alternate sources for these components and products and by maintaining the capability to produce such items in our own manufacturing facilities. However, even when we are able to mitigate this risk, the cost of obtaining such items from alternate sources or producing them ourselves is often considerably greater, and a shift toward such higher cost production could therefore adversely affect our profitability.
 
We, along with our customers and vendors, face the uncertainty in the public and private credit markets and in general economic conditions in the United States and around the world.
 
In recent years there has been at times disruption and general slowdown of the public and private capital and credit markets in the United States and around the world. Such conditions can adversely affect our revenue, results of operations and overall financial growth. Our business can be affected by a number of factors that are beyond our control such as general geopolitical, economic and business conditions and conditions in the financial services market, which each could materially impact our business, financial condition, cash flows and results of operations. Additionally, many lenders and institutional investors, at times, have reduced funding to borrowers, including other financial institutions. A constriction on future lending by banks or

15




investors could result in higher interest rates on future debt obligations or could restrict our ability to obtain sufficient financing to meet our long-term operational and capital needs or could limit our ability in the future to consummate strategic acquisitions. Any uncertainty in the credit markets could also negatively impact the ability of our customers and vendors to finance their operations which, in turn, could result in a decline in our sales and in our ability to obtain necessary raw materials and components, thus potentially having an adverse effect on our business, financial condition, cash flows or results of operations.

Terrorist activity and/or political instability around the world could cause economic conditions to deteriorate and adversely impact our businesses.
 
In the past, terrorist attacks have negatively impacted general economic, market and political conditions. Terrorist acts, acts of war or political instability (wherever located around the world) could cause damage or disruption to our business, our facilities or our employees which could significantly impact our business, financial condition or results of operations. The potential for future terrorist attacks, the national and international responses to terrorist attacks, political instability, and other acts of war or hostility, including the recent and current conflicts in Iraq, Afghanistan and the Middle East, have created many economic and political uncertainties, which could adversely affect our business and results of operations in ways that cannot presently be predicted. In addition, with manufacturing facilities located worldwide, including facilities located in North America, Western Europe, Morocco, and India, we may be impacted by terrorist actions not only against the United States but in other parts of the world as well. In some cases, we are not insured for losses and interruptions caused by terrorist acts and acts of war.
 
The costs of complying with existing or future environmental regulations and curing any violations of these regulations could increase our expenses or reduce our profitability.
 
We are subject to a variety of environmental laws relating to the storage, discharge, handling, emission, generation, use and disposal of chemicals, solid and hazardous waste and other toxic and hazardous materials used to manufacture, or resulting from the process of manufacturing, our products. We cannot predict the nature, scope or effect of future regulatory requirements to which our operations might be subject or the manner in which existing or future laws will be administered or interpreted. Future regulations could be applied to materials, products or activities that have not been subject to regulation previously. The costs of complying with new or more stringent regulations, or with more vigorous enforcement of these or existing regulations could be significant.

Environmental laws require us to maintain and comply with a number of permits, authorizations and approvals and to maintain and update training programs and safety data regarding materials used in our processes. Violations of these requirements could result in financial penalties and other enforcement actions. We also could be required to halt one or more portions of our operations until a violation is cured. Although we attempt to operate in compliance with these environmental laws, we may not succeed in this effort at all times. The costs of curing violations or resolving enforcement actions that might be initiated by government authorities could be substantial.

Regulations related to “conflict minerals” may cause us to incur additional expenses and could limit the supply and increase the cost of certain metals used in manufacturing our products.
 
Under the conflict minerals rule, public companies must disclose whether specified minerals, known as conflict minerals, are necessary to the functionality or production of products manufactured or contracted to be manufactured. The rule requires a disclosure report to be filed by May 31st of each year and requires companies to perform due diligence and disclose and report whether or not such minerals originate from the Democratic Republic of Congo or an adjoining country. The conflicts mineral rule could affect sourcing at competitive prices and availability in sufficient quantities of certain minerals used in the manufacture of our products, including tantalum, tin, gold and tungsten. The number of suppliers who provide conflict-free minerals may be limited. In addition, there may be material costs associated with complying with the disclosure requirements, such as costs related to determining the source of certain minerals used in our products, as well as costs of possible changes to products, processes, or sources of supply as a consequence of such verification activities. As our supply chain is complex, we may not be able to sufficiently verify the origins of the relevant minerals used in our products through the due diligence procedures that we implement, which may harm our reputation. In addition, we may encounter challenges to satisfy those customers who require that all of the components of our products be certified as conflict-free, which could place us at a competitive disadvantage if we are unable to do so.

We may be adversely affected by comprehensive tax reform

On December 22, 2017, the Tax Cuts and Jobs Act ("Tax Act") was signed into law. The Tax Act contains significant changes to corporate taxation, including reduction of the corporate tax rate from 35% to 21%, additional limitations on the tax deductibility of interest, substantial changes to the taxation of foreign earnings, immediate deductions for certain new

16




investments instead of deductions for depreciation expense over time, and modification or repeal of many business deductions and credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the Tax Act remains uncertain, and our results of operations, cash flows or financial condition, as well as the trading price of our Common Stock, could be adversely affected. In addition, it is uncertain how various states will respond to the Tax Act.

Item 1B. Unresolved Staff Comments

None.

Item 2.    Properties
 
We maintain 28 major manufacturing facilities worldwide, including operations located in North America, Western Europe, Morocco and India. We also maintain sales offices or warehouses from which we ship finished goods to customers, distributors and commissioned representative organizations. Our executive office is located in Burlington, Massachusetts and is leased.
 
Our Energy segment has major manufacturing facilities located in North America, Italy, United Kingdom, and the Netherlands. Properties in Nerviano, Italy and Spartanburg, South Carolina are leased. Our Aerospace & Defense segment has major manufacturing facilities located in North America, United Kingdom, Germany, France, India and Morocco. Properties in Hauppauge, New York and Corona, California are leased. Our Industrial segment has major facilities located in North America and Netherlands. Properties in Germany and India are leased.

Segment
Leased
 
Owned
 
Total
Energy
7

 
5

 
12

Aerospace & Defense
1

 
4

 
5

Industrial
4

 
7

 
11

Total
12

 
16

 
28

 
In general, we believe that our properties, including machinery, tools and equipment, are in good condition, are well maintained, and are adequate and suitable for their intended uses. Our manufacturing facilities generally operate five days per week on one or two shifts. We believe our manufacturing capacity could be increased by working additional shifts and weekends and by successful implementation of our CIRCOR Operating System. We also have low-cost sources for manufacturing in Mexico, India, and Morocco which have capacity to fulfill our manufacturing needs. We believe that our current facilities will meet our near-term production requirements without the need for additional facilities.


17




Item 3.    Legal Proceedings
 
For information regarding our legal proceedings refer to the first three paragraphs of Note 15, “Contingencies, Commitments and Guarantees”, to the consolidated financial statements included in this Annual Report, which disclosure is incorporated herein by reference.

Item 4.    Mine Safety Disclosures
Not applicable.
Part II
 

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Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Our common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “CIR.”

Our Board of Directors is responsible for determining our dividend policy. The timing and level of any dividends will necessarily depend on our Board of Directors’ assessments of earnings, financial condition, capital requirements and other factors, including restrictions, if any, imposed by our lenders. On February 28, 2018, we announced the suspension of our nominal dividend, as part of our capital deployment strategy.
 
As of February 22, 2019, there were 19,857,359 shares of our common stock outstanding and we had 57 holders of record of our common stock. We believe the number of beneficial owners of our common stock was substantially greater on that date.

The graph below compares the cumulative 5-Year total return provided shareholders on CIRCOR International, Inc.'s common stock relative to the cumulative total returns of the S&P 500 index, the Russell 2000 index, our previous peer group (“2017 Peer Group”) and our updated peer group (“2018 Peer Group”). The companies included in the 2017 Peer Group and the 2018 Peer Group are listed in footnotes 1 and 2 below, respectively. We revised our peer group to incorporate peers relevant to the businesses we acquired in the Fluid Handling acquisition. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock, in each index and in each of the peer groups on 12/31/2013 and its relative performance is tracked through 12/31/2018.

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item5chart.jpg
 
12/13
 
12/14
 
12/15
 
12/16
 
12/17
 
12/18
CIRCOR International, Inc.
100.00

 
74.77

 
52.44

 
80.96

 
60.91

 
26.65

S&P 500
100.00

 
113.69

 
115.26

 
129.05

 
157.22

 
150.33

Russell 2000
100.00

 
104.89

 
100.26

 
121.63

 
139.44

 
124.09

2017 Peer Group
100.00

 
87.21

 
71.19

 
96.87

 
105.44

 
86.94

2018 Peer Group
100.00

 
96.22

 
81.62

 
100.76

 
91.40

 
57.87


2017 Peer Group: There are six companies included in the company's 2017 Peer Group which are: Crane Co, Curtiss-Wright Corp, Flowserve Corp, Forum Energy Technologies Inc., SPX Flow Inc. and Woodward Inc.
2018 Peer Group: The three companies included in the company's 2018 Peer Group are: Dover Corp, IDEX Corp and Schlumberger NV.

20




Item 6.    Selected Financial Data
 
The following table presents certain selected financial data that has been derived from our audited consolidated financial statements and related notes and should be read along with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and notes included in this Annual Report.
 
The consolidated statements of (loss) income and consolidated statements of cash flows data for the years ended December 31, 2018, 2017 and 2016, and the consolidated balance sheet data as of December 31, 2018 and 2017 are derived from, and should be read in conjunction with, our audited consolidated financial statements and the related notes included in this Annual Report. The consolidated statements of income and consolidated statements of cash flows data for the years ended December 31, 2015 and 2014, and the consolidated balance sheet data as of December 31, 2016, 2015 and 2014, are derived from our consolidated financial statements not included in this Annual Report.

Selected Financial Data
(in thousands, except per share data)
 
 
Years Ended December 31,
 
2018 (3)
 
2017
 
2016
 
2015
 
2014
Statement of (Loss) Income Data (1):
 
 
 
 
 
 
 
 
 
Net revenues
$
1,175,825

 
$
661,710

 
$
590,259

 
$
656,267

 
$
841,446

Gross profit
341,650

 
200,820

 
183,115

 
199,332

 
257,020

Operating income
9,384

 
20,568

 
10,918

 
26,174

 
64,757

(Loss) Income before income taxes
(36,094
)
 
6,113

 
9,680

 
22,428

 
63,261

Net (loss) income
$
(39,384
)
 
$
11,789

 
$
10,101

 
$
9,863

 
$
50,386

Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Total assets
$
1,791,612

 
$
1,906,799

 
$
820,756

 
$
669,915

 
$
724,722

Total debt
786,037

 
795,208

 
251,200

 
90,500

 
13,684

Shareholders’ equity
528,993

 
601,974

 
404,410

 
400,777

 
494,093

Total capitalization
$
1,315,030

 
$
1,397,182

 
$
655,610

 
$
491,277

 
$
507,777

Other Financial Data:
 
 
 
 
 
 
 
 
 
Cash flow provided by (used in):
 
 
 
 
 
 
 
 
 
Operating activities
$
53,994

 
$
9,637

 
$
59,399

 
$
27,142

 
$
70,826

Investing activities
(16,877
)
 
(502,124
)
 
(210,481
)
 
(87,726
)
 
(1,842
)
Financing activities
(74,073
)
 
535,568

 
158,764

 
2,251

 
(37,724
)
Interest expense, net
52,913

 
10,777

 
3,310

 
2,844

 
2,652

Capital expenditures
23,588

 
14,541

 
14,692

 
12,711

 
12,810

Diluted earnings per common share
$
(1.99
)
 
$
0.70

 
$
0.61

 
$
0.58

 
$
2.84

Diluted weighted average common shares outstanding
19,834

 
16,849

 
16,536

 
16,913

 
17,768

Cash dividends declared per common share
$

 
$
0.15

 
$
0.15

 
$
0.15

 
$
0.15

(1) See Note 5, "Special and Restructuring charges, net," of the consolidated financial statements included in this Annual Report, for additional details on charges included in the twelve months ended December 31, 2018, December 31, 2017, and December 31, 2016 operating income above. The statement of income data for the year ended December 31, 2015 includes special and restructuring charges, net of $14.4 million. The statement of income data for the year ended December 31, 2014 includes special and restructuring charges, net of $12.7 million.
(2) On December 11, 2017 we acquired FH, on October 12, 2016 we acquired Critical Flow Solutions, and on April 15, 2015 we acquired Schroedahl.
(3) On January 1, 2018 the Company adopted ASU 2014-09, Revenue from Contracts, which had a material impact on revenues during FY'18. The Company discloses the impact of this change on revenue in Note 2, Summary of Significant Accounting Policies. On January 1, 2018 we adopted the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715), which had a material impact in the current year. Refer to Note 14, Retirement Plans
 



21




Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
See Item 1, Business, for additional detail on forward looking statements.
 
Company Overview
 
We design, manufacture and market differentiated technology products and sub-systems for markets including industrial, oil & gas, aerospace and defense, and commercial marine. CIRCOR has a diversified flow and motion control product portfolio with recognized, market-leading brands that fulfill its customers’ mission critical needs. See Part 1, Item 1, Business, for additional information regarding the description of our business.
 
We expect the trend in lower capital expenditures, as well as deferred maintenance spending, by many national oil companies, oil majors and refineries to continue in 2019 and impact our project businesses in engineered valves. However, we expect to see modest growth in other markets that we serve, including the short-cycle on-shore North American distributed valves market and petrochemical processing market. We received a number of large orders in 2018 for refinery valves, however, it is uncertain whether this trend will continue in 2019. Capital expenditures in the industrial end markets that we serve is expected to grow modestly, although there are some signs of a slowdown in Europe. We expect to experience lower demand for our products that serve the power generation markets. Aerospace and defense end markets are expected to grow as demand for commercial air travel continues to increase and funding on military programs in the U.S. improves in 2019. We do not expect an improvement in the commercial marine sector as global shipbuilding continues to be constrained.

We continue to implement actions to mitigate the impact on our earnings with the lower demand and increasingly competitive environment. In addition, we are investing in products and technologies designed to help solve our customers’ most difficult problems.  We expect to further simplify CIRCOR by standardizing technology, reducing facilities, consolidating suppliers and achieving world class operational excellence, including working capital management. We believe our cash flow from operations and financing capacity is adequate to support these activities. Finally, continuing to attract and retain talented personnel, including the enhancement of our global sales, operations, product management and engineering organizations, remains an important part of our strategy during 2019.

Basis of Presentation
 
All significant intercompany balances and transactions have been eliminated in consolidation. Effective January 1, 2018 we reorganized our segments by end market: Energy, Aerospace & Defense and Industrial. Prior year financial statements have been adjusted to reflect this new organization basis beginning in the first quarter of 2018.
 
We operate and report financial information using a 52-week fiscal year ending December 31. The data periods contained within our Quarterly Reports on Form 10-Q reflect the results of operations for the 13-week, 26-week and 39-week periods which generally end on the Sunday nearest the calendar quarter-end date.
 
Critical Accounting Policies
 
The Company’s discussion and analysis of its financial condition and results of operations is based upon its financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent liabilities. On an on-going basis, management evaluates its significant estimates, including those related to contracts accounted for under the percentage of completion method, bad debts, inventories, intangible assets and goodwill, purchase accounting, delivery penalties, income taxes, and contingencies including litigation. Management believes the most complex and sensitive judgments, because of their significance to the consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management bases its estimates on historical experience, current market and economic conditions and other assumptions that management believes are reasonable. The results of these estimates form the basis for judgments about the carrying value of assets and liabilities where the values are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

There have been no significant changes from the methodology applied by management for critical accounting estimates previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017. For information regarding our critical accounting policies, refer to Note 2, "Summary of Significant Accounting Policies," to the consolidated financial statements included in this Annual Report, which disclosure is incorporated by reference herein.


22




For goodwill, we perform an impairment assessment at the reporting unit level on an annual basis as of our October month end or more frequently if circumstances warrant. In October 2018 when we performed our impairment assessment, the fair value of each of our reporting units exceeded the respective carrying amount, and no goodwill impairments were recorded. The fair values utilized for our 2018 goodwill assessment exceeded the carrying amounts by more than 20% for our Energy, Aerospace & Defense, and Industrial reporting units, respectively. The growth rate assumptions utilized were consistent with growth rates within the markets that we serve. If our results significantly vary from our estimates, related projections, or business assumptions in the future due to change in industry or market conditions, we may be required to record impairment charges.

Results of Operations

2018 Compared With 2017

Consolidated Operations

(in thousands)
2018
 
2017
 
Total
Change
 
Acquisitions
 
Operations
 
Foreign
Exchange
Net Revenues
 
 
 
 
 
 
 
 
 
 
 
Energy
$
451,232

 
$
339,617

 
$
111,615

 
$
57,290

 
$
51,918

 
$
2,407

Aerospace & Defense
237,017

 
182,983

 
54,034

 
46,929

 
4,669

 
2,436

Industrial
487,576

 
139,110

 
348,466

 
344,456

 
1,911

 
2,099

Consolidated Net Revenues
$
1,175,825

 
$
661,710

 
$
514,115

 
$
448,675

 
$
58,498

 
$
6,942

 
Net revenues in 2018 were $1.2 billion, an increase of $514.1 million from 2017 primarily driven by our December 2017 acquisition of the fluid handling business of Colfax Corporation ("FH") $448.7 million, along with operations increase of $58.5 million and favorable foreign exchange increase of $6.9 million.

Segment Results

The Chief Operating Decision Maker ("CODM") is the function that allocates the resources of the enterprise and assesses the performance of the Company's reportable operating segments. CIRCOR has determined that the CODM is solely comprised of its Chief Executive Officer ("CEO"), as the CEO has the ultimate responsibility for CIRCOR strategic decision-making and resource allocation.

Our CODM evaluates segment operating performance using segment operating income. Segment operating income is defined as generally accepted accounting principles ("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 facilitates a comparison of performance for determining incentive compensation achievement.

For information regarding our segment determination refer to Note 18, “Business Segment and Geographical Information," of the consolidated financial statements included in this Annual Report.

23




(in thousands)
2018
 
2017
 
Change
Net Revenues
 
 
 
 
 
Energy
$
451,232

 
$
339,617

 
$
111,615

Aerospace and Defense
237,017

 
182,983

 
54,034

Industrial
487,576

 
139,110

 
348,466

Consolidated Net Revenues
$
1,175,825

 
$
661,710

 
$
514,115

 
 
 
 
 
 
Operating Income
 
 
 
 
 
Energy - Segment Operating Income
$
33,496


$
30,131

 
$
3,365

A&D - Segment Operating Income
36,047


23,375

 
12,672

Industrial - Segment Operating Income
57,340

 
19,932

 
37,408

Corporate expenses
(30,299
)
 
(21,744
)
 
(8,555
)
Subtotal
96,584

 
51,694

 
44,890

Restructuring charges, net
12,752

 
6,062

 
6,690

Special charges, net
11,087

 
7,989

 
3,098

Special and restructuring charges, net (1)
23,839

 
14,051

 
9,788

Restructuring related inventory charges (1)
2,402

 

 
2,402

Amortization of inventory step-up
6,600

 
4,300

 
2,300

Acquisition amortization
47,310

 
12,542

 
34,768

Acquisition depreciation
7,049

 
233

 
6,816

Restructuring and other costs
63,361

 
17,075

 
46,286

Consolidated Operating Income
$
9,384

 
$
20,568

 
$
(11,184
)
 
 
 
 
 
 
Consolidated Operating Margin
0.8
%
 
3.1
%
 
 
 
 
 
 
 
 
(1) See Note 5 "Special and Restructuring charges, net" of the consolidated financial statements included in this Annual Report, for additional details.

Energy Segment
(in thousands)
2018
 
2017
 
Change
Orders
$
451,910

 
$
376,039

 
$
75,871

Net Revenues
$
451,232

 
$
339,617

 
$
111,615

Segment Operating Income
33,496

 
30,131

 
3,365

Segment Operating Margin
7.4
%
 
8.9
%
 



Energy segment orders increased $75.9 million, or 20%, to $451.9 million for 2018 compared to $376.0 million in 2017, primarily due to primarily driven by capital project and maintenance, repair, and overhaul orders within the Reliability Services business (+18%), Refinery Valves business (+16%) and Engineered Valves business (+3%), partially offset by declines in our Distributed Valves business (-17%).

Energy segment net revenues increased $111.6 million, or 33%, in 2018 compared to 2017. The increase was primarily driven by the addition of the Reliability Services business acquired with the FH acquisition (+17%), our Refinery Valves business (+11%), our North American Distributed Valves business (+3%), our Pipeline business (+2%) and our Instrumentation & Sampling business (+1%).

Segment operating income increased $3.4 million, or 11%, to $33.5 million for 2018 compared to $30.1 million in 2017. The increase in segment operating income was primarily due to operational improvements within our Refinery Valves business (+32%), and the acquisition of Reliability Services business (+17%), partially offset by operational losses within our North American Distributed Valves business (-24%) and Engineered Valves business (-14%).


24




QUARTERLY ENERGY SEGMENT INFORMATION
(in thousands, except percentages)
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
2017
2018
 
1ST QTR
2ND QTR
3RD QTR
4TH QTR
TOTAL
1ST QTR
2ND QTR
3RD QTR
4TH QTR
TOTAL
Orders
100,012
73,140
84,857
118,030
376,039
129,762
113,171
110,987
97,990
451,910
Net Revenues
76,210
78,276
88,570
96,561
339,617
99,972
112,804
121,023
117,433
451,232
Operating Income
6,407
8,170
6,936
8,618
30,131
5,696
9,242
9,163
9,396
33,497
Operating Margin
8.4%
10.4%
7.8%
8.9%
8.9%
5.7%
8.2%
7.6%
8.0%
7.4%
Backlog (1)
142,752
140,102
138,811
182,999
182,999
224,139
217,666
205,924
183,467
183,467
(1) at end of period.
 
 
 
 
 
 
 
 
 
 

Aerospace & Defense Segment

(in thousands)
2018
 
2017
 
Change
Orders
$
277,469

 
$
193,535

 
$
83,934

Net Revenues
$
237,017

 
$
182,983

 
$
54,034

Segment Operating Income
36,047

 
23,375

 
12,672

Segment Operating Margin
15.2
%
 
12.8
%
 
 

Aerospace & Defense segment orders increased $84.0 million, or 43%, to $277.5 million for 2018 compared to $193.5 million in 2017, primarily due to our Pumps Defense business (+36%) and our U.S. fluid control and actuation business (+7%).

Aerospace & Defense segment net revenues increased by $54.0 million, or 30%, in 2018 compared to 2017. The increase was primarily driven by the defense related business ("Pumps Defense") we acquired in the FH acquisition (+26%), price and volume increases in our United States ("U.S.") fluid control business (+5%) and our United Kingdom ("U.K.") defense business (+2%), partially offset by decreased revenues in our actuation business (-2%) and French business (-2%). The increase in our Pumps Defense business is attributed to the timing of orders received for the Joint Strike Fighter program.

Segment operating income increased $12.7 million, or 54%, to $36.0 million for 2018 compared to $23.4 million for 2017. The increase in operating income was primarily driven by our Pumps Defense business (+43%), lower headquarter costs (+23%), our U.S. fluid control business (+11%), and our U.K. defense business (+1%), partially offset by declines in our U.S. actuation business (-21%) and our French business (-4%).
 
 
 
 
 
 
 
 
 
 
 
 
QUARTERLY A&D SEGMENT INFORMATION
(in thousands, except percentages)
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
2017
2018
 
1ST QTR
2ND QTR
3RD QTR
4TH QTR
TOTAL
1ST QTR
2ND QTR
3RD QTR
4TH QTR
TOTAL
Orders
56,416
39,902
45,939
51,278
193,535
59,793
59,441
81,533
76,702
277,469
Net Revenues
41,601
43,304
41,117
56,961
182,983
58,477
57,500
57,757
63,283
237,017
Operating Income
3,784
4,374
4,333
10,884
23,375
8,931
6,992
8,709
11,415
36,047
Operating Margin
9.1%
10.1%
10.5%
19.1%
12.8%
15.3%
12.2%
15.1%
18.0%
15.2%
Backlog (1)
106,178
105,741
108,157
163,694
163,694
165,841
152,081
172,986
179,639
179,639
(1) At end of period.
 
 
 
 
 
 
 
 

25




Industrial Segment

(in thousands, except percentages)
2018
 
2017
 
Change
Orders
$
510,115

 
$
131,993

 
$
378,122

Net Revenues
$
487,576

 
$
139,110

348,466

$
348,466

Segment Operating Income
57,340

 
19,932

 
37,408

Segment Operating Margin
11.8
%
 
14.3
%
 
 

Industrial segment orders increased $378.1 million, or 286%, to $510.1 million for 2018 compared to $132.0 million in 2017, primarily due to the FH acquisition. The Pumps Businesses saw a significant increase in orders in the general industrial sector in Europe.  Demand in North America was largely driven by the timing of certain Navy orders, bookings in Oil & Gas end markets, and strength in general industrial sectors.

Industrial segment net revenues increased $348.5 million, or 250%, in 2018 compared to 2017. The increase was primarily driven by the European and North American Pumps businesses ("Pumps Businesses") we acquired in the FH acquisition (+248%), along with increases in the Valves EMEA business(+3%).

Segment operating income increased $37.4 million, or 187.6%, to 57.3 million for 2018 compared to $19.9 million primarily driven by the Pumps Businesses (+166%) and Valves businesses (+21%). The decrease in segment operating margin from 14.3% to 11.8% was driven by the addition of relatively lower margin acquired businesses.

 
 
 
 
 
 
 
 
 
 
 
QUARTERLY INDUSTRIAL SEGMENT INFORMATION
(in thousands, except percentages)
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
2017
2018
 
1ST QTR
2ND QTR
3RD QTR
4TH QTR
TOTAL
1ST QTR
2ND QTR
3RD QTR
4TH QTR
TOTAL
Orders
27,654
29,889
27,296
47,154
131,993
136,607
136,746
114,876
121,886
510,115
Net Revenues
27,397
29,651
30,006
52,056
139,110
117,131
131,064
118,734
120,647
487,576
Operating Income
4,384
4,901
5,675
4,972
19,932
12,948
15,037
14,609
14,746
57,340
Operating Margin
16.0%
16.5%
18.9%
9.6%
14.3%
11.1%
11.5%
12.3%
12.2%
11.8%
Backlog (1)
32,878
33,751
31,286
155,786
155,786
170,568
167,325
178,044
163,801
163,801
(1) At end of period.
 
 
 
 
 
 
 
 

Corporate Expenses

Corporate expenses increased $8.6 million to $30.3 million for 2018. This increase was primarily driven by higher variable compensation costs, professional fees and integration costs.

Special and Restructuring charges, net

During 2018, the Company recorded a total of $23.8 million of Special and restructuring charges. In our statement of operations, these charges are recorded in Special and restructuring charges, net. These costs are primarily related to our simplification and restructuring efforts. These restructuring charges and other special charges are described in further detail in Note 5, "Special and Restructuring charges, net," of the consolidated financial statements included in this Annual Report.

Restructuring and other costs

During 2018, the Company recorded a total of $63.4 million of Restructuring and other costs. These charges represent plant, property, and equipment depreciation related to the step-up in fair value as part of our FH acquisition, intangible amortization in connection with acquisitions subsequent to December 31, 2011, and step-up in fair value of inventory acquired as part of our FH acquisition. These charges are recorded in either selling, general, and administrative expenses or cost of revenues based upon the nature of the underlying asset.

26





Interest Expense, Net
 
Interest expense increased $42.1 million to $52.9 million for 2018. The change in interest expense was primarily due to higher outstanding debt balances as a result of our acquisition of FH during the fourth quarter of 2017.

Other Expense (Income), Net
 
Other expense, net, was $7.4 million for 2018 compared to other income, net of $3.7 million in 2017. The difference of $11.1 million primarily relates to net pension income for the retirement plans we acquired as part of the FH acquisition. Effective January 1, 2018 all pension gains and losses are to be recorded in the Other (Income) Expense, net caption on our condensed consolidated statement of (loss) income. In addition, we had gains related to changes in foreign currency in 2018 whereas in 2017 we had losses associated with foreign currency.

Comprehensive (Loss) Income

Comprehensive income decreased $123.7 million, from a comprehensive income position of $51.3 million for the year-ended December 31, 2017 to a comprehensive loss position of $72.4 million for the year-ended December 31, 2018, primarily driven
by $21.9 million in unfavorable foreign currency balance sheet remeasurements. These unfavorable foreign currency balance sheet remeasurements were driven by the Euro ($12.7 million).

As of December 31, 2018, we had a cumulative currency translation adjustment of $18.1 million regarding our Brazil entity. If we were to cease to have a controlling financial interest in the Brazil entity, we would incur a non-cash charge of $18.1 million, which would be included as a special charge within the results of operations.
 
(Benefit from) Provision for Income Taxes

On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act includes significant changes to the U.S. corporate income tax system including: a federal corporate rate reduction from 35% to 21%; limitations on the deductibility of interest expense and executive compensation; creation of the base erosion anti-abuse tax (“BEAT”), a new minimum tax; global intangible low-taxed income ("GILTI"); and the transition of U.S. international taxation from a worldwide tax system to a modified territorial tax system . The change to a modified territorial tax system resulted in a one-time U.S. tax liability on those earnings which have not previously been repatriated to the U.S. (the “Transition Tax”), with future distributions not subject to U.S. federal income tax when repatriated. A majority of the provisions in the Tax Act are effective January 1, 2018 and have been reflected in our financial statements. With respect to GILTI, the company has adopted a policy to account for this provision as a period cost.

In response to the Tax Act, the SEC staff issued guidance on accounting for the tax effects of the Tax Act. The guidance provided a one-year measurement period for companies to complete the accounting.

In connection with our initial analysis of the impact of the Tax Act, we had recorded a provisional estimate of $0.5 million net tax benefit for the period ended December 31, 2017. This benefit consists of provisional estimates of zero net expense for the Transition Tax liability, and $0.5 million benefit from the remeasurement of our deferred tax assets/liabilities due to the corporate rate reduction. On a provisional basis, the Company did not expect to owe the one-time Transition Tax liability, based on foreign tax pools that are in excess of U.S. tax rates. We have now finalized our accounting and these estimates did not change. The impact of the Tax Act resulted in a valuation allowance on a portion of our U.S. foreign tax credit carryforwards (deferred tax asset), in the amount of a $10.9 million expense, which was recorded in 2018.


27




The table below outlines the change in effective tax rate for 2018 and 2017 (in thousands, except percentages).

 
2018
 
2017
 
Change
Income/ (Loss) Before Tax
$(36,094)
 
$6,113
 
$(42,207)
 
 
 
 
 
 
US tax rate
21.0%
 
35.0%
 
(14.0)%
State taxes
3.1%
 
0.3%
 
2.9%
US permanent differences
0.9%
 
2.5%
 
(1.6)%
Foreign tax rate differential
(3.7)%
 
(30.0)%
 
26.3%
Unbenefited foreign losses
(3.6)%
 
2.8%
 
(6.4)%
GILTI impact
(5.5)%
 
—%
 
(5.5)%
Intercompany financing
8.4%
 
(10.7)%
 
19.1%
Non-taxable CFS purchase consideration
$—
 
(69.3)%
 
69.3%
Foreign tax credit writeoff
(30.8)%
 
 
(30.8)%
Tax reserve
0.8%
 
(16.2)%
 
17.0%
Other
0.1%
 
(7.3)%
 
6.7%
Total
(9.1)%
 
(92.9)%
 
83.1%
 
 
 
 
 
 

Restructuring Actions

During 2018 and 2017, we initiated certain restructuring actions (the "2018 Actions" and "the 2017 Actions"), respectively. Under these restructurings, we reduced costs, primarily through reductions in workforce and closing a number of smaller facilities. In the fourth quarter of 2018, the Company announced the closure and discontinuance of manufacturing operations at the Energy Group's Oklahoma City site ("OKC Closure"), as manufacturing will move primarily to Monterrey, Mexico.

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
OKC Closure (Note 1)
$
1.0

 
$
1.0

 
Q4 2018 - Q4 2019
2018 Actions
8.2

 
8.2

 
Q2 2018 - Q3 2019
2017 Actions
6.9

 
6.9

 
Q2 2017 - Q4 2018
Total Savings
$
16.1

 
$
16.1

 
 
 
 
 
 
 
 
Note 1 - Savings figures above represent only the structural savings as a result of the closure and exit of the manufacturing facility at the Energy Group's Oklahoma City site. As part of this action, we expect margin expansion within our Energy Group primarily due to the lower labor rates in Mexico as we deliver on the volume. The savings amounts above do not include the benefit from the anticipated margin expansion.

As shown in the table above, our projected cumulative restructuring savings are aligned with our cumulative planned savings amounts. The expected periods of realization of the restructuring savings are fairly consistent with our original plans. Our restructuring actions are funded by cash generated by operations.

We expect to incur restructuring related special charges between $0.1 million and $0.2 million to complete the 2018 Actions during the first quarter of 2019. We expect to incur net restructuring related charges between $1.0 million and $1.5 million to complete the OKC Closure ending by the first half of 2019. The OKC Closure net restructuring charge projection does not contemplate the potential benefit of selling the facility. The 2017 Actions were finalized during the fourth quarter of 2017.


28




Results of Operations

2017 Compared With 2016

Consolidated Operations
(in thousands)
2017
 
2016
 
Total
Change
 
Acquisitions
 
Operations
 
Foreign
Exchange
Net Revenues
 
 
 
 
 
 
 
 
 
 
 
Energy
$
339,617

 
$
305,939

 
$
33,678

 
$
51,381

 
$
(19,074
)
 
$
1,371

Aerospace & Defense
182,983

 
166,127

 
16,856

 
2,689

 
14,638

 
(471
)
Industrial
$
139,110

 
$
118,193

 
20,917

 
$
25,482

 
$
(5,625
)
 
$
1,060

Consolidated Net Revenues
$
661,710

 
$
590,259

 
$
71,451

 
$
79,552

 
$
(10,061
)
 
$
1,960


Net revenues in 2017 were $661.7 million, an increase of $71.5 million from 2016. The increase in net revenue was primarily driven through our acquisitions of Critical Flow Solutions ("CFS") in October 2016 ($43.1 million), our December 2017 acquisition of Fluid Handling ($36.5M), along with favorable F/X gains for $2.0 million, partially offset by operating losses of $(10.1 million) in aggregate.

Segment Results

The Company uses this measure because it helps management understand and evaluate the segments’ core operating results and facilitates a comparison of performance for determining incentive compensation achievement.

29





(in thousands)
2017
 
2016
 
Change
Net Revenues
 
 
 
 
 
Energy
$
339,617

 
$
305,939

 
$
33,678

Aerospace & Defense
182,983

 
166,127

 
16,856

Industrial
$
139,110

 
$
118,193

 
20,917

Consolidated Net Revenues
$
661,710

 
$
590,259

 
$
71,451

 
 
 
 
 
$

Operating Income
 
 
 
 

Energy - Segment Operating Income
30,131


$
32,651

 
$
(2,520
)
A&D - Segment Operating Income
23,375


15,368

 
8,007

Industrial - Segment Operating Income
19,932

 
20,056

 
(124
)
Corporate expenses
(21,744
)
 
(25,672
)
 
3,928

Subtotal
51,694

 
42,403

 
9,291

Restructuring charges, net
6,062

 
8,975

 
(2,913
)
Special charges, net
7,989

 
8,196

 
(207
)
Special and restructuring charges, net (1)
14,051

 
17,171

 
(3,120
)
Restructuring related inventory charges (1)

 
2,846

 
(2,846
)
Amortization of inventory step-up
4,300

 
1,366

 
2,934

Impairment charges

 
208

 
(208
)
Acquisition amortization
12,542

 
9,901

 
2,641

Acquisition depreciation
233

 

 
233

Brazil restatement impact

 

 

Restructuring and other cost, net
17,075

 
14,321

 
2,754

Consolidated Operating Income
$
20,568

 
$
10,911

 
$
9,657

 
 
 
 
 
 
Consolidated Operating Margin
3.1
%
 
1.8
%
 
 
 
 
 
 
 
 
(1) See Note 5 "Special and Restructuring charges, net" of the consolidated financial statements, for additional details.

Energy Segment
(in thousands)
2017
 
2016
 
Change
Net Revenues
$
339,617

 
$
305,939

 
$
33,678

Segment Operating Income
30,131

 
32,651

 
(2,520
)
Segment Operating Margin
8.9
%
 
10.7
%
 
 

Energy segment net revenues increased $33.7 million, or 11%, in 2017 compared to 2016. The increase was primarily driven by our Refinery Valves business (+21%), our North American short-cycle business (+12%) and the Reliability Services business (3%), partially offset by declines in our large international projects business (-20%) and other oil & gas business (-4%).

Segment operating income decreased $(2.5) million, or 7.7%, from 2016 to 2017 to $30.1 million for 2017 compared to $32.7 million. The decrease in segment operating income was primarily due to the significant revenue decline in the large international projects business (-62%), along with revenue decline in our instrumentation & sampling (-17%), and our other oil & gas business (-11%) partially offset by increased shipment volumes within our North American short-cycle business (+30%), our Refinery Valves business (+25%), the Reliability Services business (+5%) and our Pipeline business (+5%).

30




Energy segment orders increased $121.3 million, or 48%, to $376.0 million for 2017 compared to $254.8 million in 2016, primarily due to CFS, along with increased orders in our North American short-cycle business due to improved demand and higher production activity in the U.S. shale plays, partially offset by lower orders in our large international projects business due to a significant reduction in capital expenditures for exploration and production by the major oil companies resulting in fewer projects.

 
 
 
 
 
 
 
 
 
 
 
QUARTERLY ENERGY SEGMENT INFORMATION
(in thousands, except percentages)
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
2016
2017
 
1ST QTR
2ND QTR
3RD QTR
4TH QTR
TOTAL
1ST QTR
2ND QTR
3RD QTR
4TH QTR
TOTAL
Orders
67,221
54,506
51,508
81,511
254,746
100,012
73,140
84,857
118,030
376,039
Net Revenues
79,509
76,418
65,073
84,939
305,939
76,210
78,276
88,570
96,561
339,617
Operating Income
8,756
8,794
6,392
8,716
32,658
6,407
8,170
6,936
8,618
30,131
Operating Margin
11.0%
11.5%
9.8%
10.3%
10.7%
8.4%
10.4%
7.8%
8.9%
8.9%
Backlog (1)
118,508
93,894
80,613
119,551
119,551
142,752
140,102
138,811
182,999
182,999
(1) at end of period.
 
 
 
 
 
 
 
 
 
 

Aerospace & Defense Segment

(in thousands)
2017
 
2016
 
Change
Net Revenues
$
182,983

 
$
166,127

 
$
16,856

Segment Operating Income
23,375

 
15,368

 
8,007

Segment Operating Margin
12.8
%
 
9.3
%
 
 

Aerospace & Defense segment net revenues increased by $16.9 million, or 10 %, in 2017 compared to 2016. The increase was primarily driven by increases in our U.S. Fluid Control businesses (+5%), our U.K. defense business (+3%) and our U.S. defense business (+2%). The increase in net revenues is due to higher production rates on a number of large platforms, and improved pricing on certain programs.

Segment operating income increased $8.0 million, or 52%, to $23.4 million for 2017 compared to $15.4 million for 2016. The increase in operating income was primarily as a result of improved pricing and operational efficiencies within our fluid and actuation businesses (+54%), our U.K. defense business (+20%), and our French business (6%), partially offset by declines due to operational inefficiencies in our Aerospace & Defense headquarters (-28%).
Aerospace & Defense segment orders increased $28.8 million, or 17%, to $193.6 million for 2017 compared to $164.7 million in 2016, primarily due to our aerospace and defense businesses.
 
 
 
 
 
 
 
 
 
 
 
QUARTERLY A&D SEGMENT INFORMATION
(in thousands, except percentages)
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
2016
2017
 
1ST QTR
2ND QTR
3RD QTR
4TH QTR
TOTAL
1ST QTR
2ND QTR
3RD QTR
4TH QTR
TOTAL
Orders
41,144
51,518
36,402
35,663
164,727
56,416
39,902
45,939
51,278
193,535
Net Revenues
42,078
40,033
38,863
45,153
166,127
41,601
43,304
41,117
56,961
182,983
Operating Income
3,703
3,242
3,499
4,925
15,369
3,784
4,374
4,333
10,884
23,375
Operating Margin
8.8%
8.1%
9.0%
10.9%
9.3%
9.1%
10.1%
10.5%
19.1%
12.8%
Backlog (1)
96,559
106,207
103,259
90,477
90,477
106,178
105,741
108,157
163,694
163,694
(1) At end of period.
 
 
 
 
 
 
 
 

31






Industrial Segment

(in thousands)
2017
 
2016
 
Change
Net Revenues
$
139,110

 
$
118,193

 
$
20,917

Segment Operating Income
19,932

 
20,056

 
(124
)
Segment Operating Margin
14.3
%
 
17.0
%
 
 

Industrial segment net revenues increased by $20.9 million, or 18 %, in 2017 compared to 2016. The increase was primarily driven by increases in the Pumps Businesses that we acquired in the FH acquisition (+22%), partially offset by decreases in our Valves North America business (-5%).

Segment operating income remained stagnant, with a decrease of $0.1 million, or 1%, to $19.9 million for 2017 compared to $20.1 million for 2016. The decrease in operating income was primarily driven by our Valves EMEA business (-31%), partially offset by increases in the Pumps Businesses (+19%), and our Valves North America business (+12%).

Industrial segment orders increased $25.7 million, or 24%, to $132.0 million for 2017 compared to $106.3 million in 2016. The change in segment orders is primarily attributed to the Pumps Businesses acquired in the FH acquisition during 2017.

 
 
 
 
 
 
 
 
 
 
 
QUARTERLY INDUSTRIAL SEGMENT INFORMATION
(in thousands, except percentages)
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
2016
2017
 
1ST QTR
2ND QTR
3RD QTR
4TH QTR
TOTAL
1ST QTR
2ND QTR
3RD QTR
4TH QTR
TOTAL
Orders
28,418
29,293
23,408
25,143
106,262
27,654
29,889
27,296
47,154
131,993
Net Revenues
29,211
29,941
30,897
28,144
118,193
27,397
29,651
30,006
52,056
139,110
Operating Income
5,289
5,321
4,871
4,574
20,055
4,384
4,901
5,675
4,972
19,932
Operating Margin
18.1%
17.8%
15.8%
16.3%
17.0%
16.0%
16.5%
18.9%
9.6%
14.3%
Backlog (1)
44,996
43,948
36,384
32,366
32,366
32,878
33,751
31,286
155,786
155,786
(1) at end of period.
 
 
 
 
 
 
 
 

Corporate Expenses

Corporate expenses decreased $3.9 million to $21.7 million for 2017. This decrease was primarily driven by lower variable compensation costs and reduced professional fees.

Special and Restructuring charges, net and other charges

During 2017, the Company recorded a total of $14.1 million of Special and restructuring charges. In our statement of operations, these charges are recorded in Special and restructuring charges, net. These costs are primarily related to our simplification and restructuring efforts. These restructuring charges and other special charges are described in further detail in Note 5, "Special and Restructuring charges, net", of the consolidated financial statements included in this Annual Report.
 
Interest Expense, Net
 
Interest expense increased $7.5 million to $10.8 million for 2017. This change in interest expense was primarily due to higher outstanding debt balances during the period as a result of the FH acquisition.


32




Other (Income) Expense, Net
 
Other expense, net, was $3.7 million for 2017 compared to other income, net of $2.1 million in 2016. The difference of $5.8 million was primarily due to the impact of foreign currency fluctuations.
 
Comprehensive (Loss) Income

Comprehensive income increased $51.5 million, from a comprehensive loss of $0.2 million for the year-ended December 31, 2016 to comprehensive income of $51.3 million for the year-ended December 31, 2017, primarily driven by an increase of $47.6 million in favorable foreign currency balance sheet remeasurement. These favorable foreign currency balance sheet remeasurement were driven by the Euro ($40.6 million).

(Benefit from) Provision for Income Taxes
 
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the “Tax Act”). A majority of the provisions in the Tax Act are effective January 1, 2018.
In response to the Tax Act, the SEC staff issued guidance on accounting for the tax effects of the Tax Act. The guidance provides a one-year measurement period for companies to complete the accounting. We reflected the income tax effects of those aspects of the Tax Act for which the accounting is complete. To the extent our accounting for certain income tax effects of the Tax Act is incomplete but we are able to determine a reasonable estimate, we recorded a provisional estimate in the financial statements. For items that we could not determine a provisional estimate to be included in the financial statements, we continued to apply the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
In connection with our initial analysis of the impact of the Tax Act, we recorded a provisional estimate of $0.5 million net tax benefit for the period ended December 31, 2017. This benefit consists of provisional estimates of zero net expense for the Transition Tax liability, and $0.5 million benefit from the remeasurement of our deferred tax assets/liabilities due to the corporate rate reduction. On a provisional basis, the Company did not expect to owe the one-time Transition Tax liability, based on foreign tax pools that are in excess of U.S. tax rates. We were in process of determining the impact of the Tax Act on our U.S. foreign tax credit carryforwards (deferred tax asset), and were unable to record a provisional estimate at December 31, 2017.
We have not completed our accounting for the income tax effects of certain elements of the Tax Act. The Tax Act creates a new requirement that certain income, such as Global Intangible Low-Taxed Income (“GILTI”), earned by a controlled foreign corporation must be included in the gross income of its U.S. shareholder. Because of the complexity of the new GILTI and BEAT tax rules, we are continuing to evaluate the impact of these provisions and whether taxes due on future U.S. inclusions related to GILTI or BEAT should be recorded as a current period expense when incurred, or factored into the measurement of deferred taxes. As a result, we have not included an estimate of the tax expense or benefit related to these items for the period ended December 31, 2017. 
The effective tax rate was -93% for 2017 compared to -4% for 2016. The primary drivers for the lower tax rate in 2017 included non-taxable income from reduction of an acquisition-related earnout (-69%), the establishment of a valuation allowance in 2016 for certain state net operating loss carryforwards (-19%), change in tax reserves (-15%), reduced foreign losses in 2017 with no tax benefit (-12%), provisional revaluation of certain U.S. deferred tax assets and liabilities under the Tax Act (-8%), as described in more detail in Note 8, "Income Taxes", of the consolidated financial statements included in this Annual Report, and mix of lower taxed foreign earnings to U.S. earnings (-5%). This was partially offset by the tax benefit associated with the repatriation of foreign earnings which we completed in 2016 (+27%), state income taxes (+5%), and nondeductible transaction costs (+5%).


33




Liquidity and Capital Resources
 
Our liquidity needs arise primarily from capital investment in machinery, equipment and the improvement of facilities, funding working capital requirements to support business growth initiatives, acquisitions, and debt service costs. We have historically generated cash from operations and remain in a strong financial position, with resources available for reinvestment in existing businesses, strategic acquisitions and managing our capital structure on a short and long-term basis.

We completed the acquisition of FH on December 11, 2017. The total consideration paid to acquire FH consisted of $542 million in cash, 3,283,424 unregistered shares of our common stock and the assumption of net pension and post-retirement liabilities of FH. We financed the cash consideration through a combination of committed debt financing and cash on hand. Refer to Note 4, “Business Acquisitions,” of the consolidated financial statements included in this Annual Report, for details. As a result of the transaction we incurred significant debt, including secured indebtedness, as described below.
 
The following table summarizes our cash flow activities for the year-ended indicated (in thousands):
 
 
2018
 
2017
 
2016
Cash flow provided by (used in):
 
 
 
 
 
Operating activities
$
53,994

 
$
9,637

 
$
59,399

Investing activities
$
(16,877
)
 
$
(502,124
)
 
$
(210,481
)
Financing activities
(74,073
)
 
535,568

 
158,764

Effect of exchange rate changes on cash and cash equivalents
(5,812
)
 
8,996

 
(3,944
)
Increase (decrease) in cash and cash equivalents (1)
$
(42,768
)
 
$
52,077

 
$
3,738

 
 
 
 
 
 
(1) Pursuant to the terms of the FH purchase agreement, $64.5 million of the cash balance as of December 31, 2017 was due back to Colfax Corporation (“Colfax”), which has been reflected as a current liability within the December 31, 2017, balance sheet. Amounts were fully settled during 2018.
 
Cash Flow Activities for the Year Ended December 31, 2018 Compared to the Year Ended December 31, 2017

During the year ended December 31, 2018, we generated $54.0 million in cash flow from operating activities compared to $9.6 million during the year ended December 31, 2017. The $44.4 million increase in operating cash was primarily driven by $26.9 million of working capital changes primarily due to improved management of inventory and cash collection on outstanding trade receivables and higher cash related earnings of $17.5 million.

During the year ended December 31, 2018, we used $16.9 million for investing activities as compared to $502.1 million during the year ended December 31, 2017. The $485.2 million year over year decrease in cash used was primarily driven by our purchase of the FH business in December of 2017.

During the year ended December 31, 2018, we used $74.1 million from financing activities as compared to cash generated of $535.6 million during the year ended December 31, 2017. The $609.6 million year over year decrease in cash generated from financing activities was primarily related to our purchase of the FH business. On December 11, 2017, we borrowed $785.0 million under a new term loan and entered into a new $150.0 million revolving line of credit on which we drew $40.0 million. Proceeds from these borrowings were used to fund the acquisition of FH and repay $97.5 million and $176.0 million of outstanding debt under our previous term loan and revolving line of credit, respectively.

As of December 31, 2018, total debt (including current portion) was $786.0 million compared to $795.2 million at December 31, 2017. Total debt is net of unamortized term loan debt issuance costs of $21.0 million and $23.7 million at December 31, 2018 and 2017, respectively. Total debt as a percentage of total shareholders’ equity was 149% as of December 31, 2018 compared to 132% as of December 31, 2017. As of December 31, 2018, we had available capacity to borrow an additional $84.5 million under our revolving credit facility.

As a result of a significant portion of our cash balances being denominated in Euros, the strengthening of the U.S. Dollar resulted in a $5.8 million increase in reported cash balances.
 
We entered into a secured Credit Agreement, dated as of December 11, 2017 (" Credit Agreement"), which provides for a $150.0 million revolving line of credit with a five year maturity and a $785.0 million term loan with a seven year maturity

34




which was funded at closing of the FH acquisition in full. We entered into the Credit Agreement to fund acquisitions, such as the acquisition of FH, to support our operational growth initiatives and working capital needs, and for general corporate purposes. As of December 31, 2018, we had borrowings of $786.0 million outstanding under our credit facility and $70.7 million outstanding under letters of credit.
 
The Credit Agreement contains covenants that require, among other items, maintenance of certain financial ratios and also limits our ability to: enter into secured and unsecured borrowing arrangements; issue dividends to shareholders; acquire and dispose of businesses; invest in capital equipment; transfer assets among domestic and international entities; participate in certain higher yielding long-term investment vehicles; and issue additional shares of our stock which limits our ability to borrow under the credit facility. The primary financial covenant is first lien net leverage, a ratio of total secured debt (less cash and cash equivalents) to total earnings before interest expense, taxes, depreciation, and amortization based on the 12 months ended at the testing period. We were in compliance with all financial covenants related to our existing debt obligations at December 31, 2018 and we believe it is likely that we will continue to meet such covenants for at least the next twelve months from date of issuance of the financial statements.
 
The ratio of current assets to current liabilities was 2.3:1 at December 31, 2018 compared to 2.0:1 at December 31, 2017. As of December 31, 2018, cash and cash equivalents totaled $68.5 million and was substantially all held in foreign bank accounts. This compares to $110.4 million of cash and cash equivalents as of December 31, 2017, of which $65.3 million was payable to Colfax Corporation with balances all substantially held in foreign bank accounts. The cash and cash equivalents located at our foreign subsidiaries may not be repatriated to the United States or other jurisdictions without significant tax implications. On a provisional basis, the Company does not expect to owe the one-time Transition Tax liability, based on foreign tax pools that are in excess of U.S. tax rates.  We believe that our U.S. based subsidiaries, in the aggregate, will generate positive operating cash flows and in addition we may utilize our Credit Agreement for U.S. based cash needs.

In 2019, we expect to generate positive cash flow from operating activities sufficient to support our capital expenditures and service our debt. Based on our expected cash flows from operations and contractually available borrowings under our credit facility, we expect to have sufficient liquidity to fund working capital needs and future growth over at least the next twelve months from date of filing the 2018 financial statements. In February 2018, we announced the suspension of our nominal dividend, as part of our overall capital deployment strategy.

Cash Flow Activities for the Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016

During the year ended December 31, 2017, we generated $9.6 million in cash flow from operating activities compared to $59.4 million during the year ended December 31, 2016. The $49.8 million decrease in operating cash was primarily driven by working capital changes including increased inventory purchases of $55.6 million primarily related to the demand ramp-up in our North American distributed valves business, partially offset by operating cash increases of $8.4 million due to the timing of vendor payments.
During the year ended December 31, 2017, we used $502.1 million for investing activities as compared to $210.5 million during the year ended December 31, 2016. The $291.6 million year over year increase in cash used was primarily driven by our purchase of the FH business in December 2017.
During the year ended December 31, 2017, we generated $535.6 million from financing activities as compared to cash generated of $158.8 million during the year ended December 31, 2016. The $376.8 million year over year increase in cash generated from financing activities was primarily related to our purchase of the FH business in December 2017. On December 11, 2017, we borrowed $785.0 million under a new term loan and entered into a new $150.0 million revolving line of credit on which we drew $40.0 million. Proceeds from these borrowings were used to fund the acquisition of FH and repay $97.5 million and $176.0 million of outstanding debt under our previous term loan and revolving line of credit, respectively.
As of December 31, 2017, total debt (including current portion) was $795.2 million compared to $251.2 million at December 31, 2016 due to borrowings from the Credit Agreement related to the acquisition of Fluid Handling. Total debt as a percentage of total shareholders’ equity was 131% as of December 31, 2017 compared to 62% as of December 31, 2016. As of December 31, 2017, we had available capacity to borrow an additional $86.1 million under our revolving credit facility.
As a result of a significant portion of our cash balances being denominated in Euros and Canadian Dollars, the strengthening of the U.S. Dollar resulted in a $9.0 million increase in reported cash balances.
As of December 31, 2017, we had borrowings of $795.2 million outstanding under our credit facility and $77.7 million outstanding under letters of credit. We were in compliance with all financial covenants related to our existing debt obligations at December 31, 2017.

35




The ratio of current assets to current liabilities was 2.0:1 at December 31, 2017 compared to 3.1:1 at December 31, 2016. As of December 31, 2017, cash and cash equivalents totaled $110.4 million, of which $65.3 million was payable back to Colfax Corporation. These cash and cash equivalent balances were substantially all held in foreign bank accounts. This compares to $58.3 million of cash and cash equivalents as of December 31, 2016 substantially all of which was also held in foreign bank accounts.

Significant Contractual Obligations and Commercial Commitments

The following table summarizes our significant contractual obligations and commercial commitments at December 31, 2018 that affect our liquidity:
 
Payments due by Period
 
Total (1)
 
Less Than
1 Year
 
1 – 3
Years
 
3 – 5
Years
 
More than
5 years
Contractual Cash Obligations:
(in thousands)
Long-term debt, less current portion
$
807,050

 
$
7,850

 
$

 
$
29,900

 
$
769,300

Interest payments on debt
227,434

 
49,928

 
85,983

 
66,082

 
25,441

Operating leases
32,274

 
9,481

 
10,875

 
5,886

 
6,032

Total contractual cash obligations
$
1,066,758

 
$
67,259

 
$
96,858

 
$
101,868

 
$
800,773

Commercial Commitments:
 
 
 
 
 
 
 
 
 
U.S. standby letters of credit
$
35,621

 
$
26,064

 
$
8,612

 
$
945

 
$

International standby letters of credit
35,047

 
22,676

 
8,541

 
2,320

 
1,510

Commercial contract commitments
127,566

 
119,179

 
6,230

 
1,907

 
250

Total commercial commitments
$
198,234

 
$
167,919

 
$
23,383

 
$
5,172

 
$
1,760


In the table above total operating leases exclude $3.5 million related to the Reliability Services Business which the company divested in January 2019. Refer to Note 19, Subsequent Event, for further details of the divestiture.
 
In accordance with the authoritative guidance for accounting for uncertainty in income taxes, as of December 31, 2018, we had unrecognized tax benefits of $0.6 million, including $0.0 million of accrued interest. The Company does not expect the unrecognized tax benefits to change over the next 12 months.

Our commercial contract commitments primarily relate to open purchase orders of $118.3 million, $2.7 million of which extend to 2019 and beyond.

In 2018, 2017, and 2016, we contributed $0.0 million, $0.8 million, and $1.0 million to our qualified defined benefit U.S. pension plan, respectively. In addition, we made $0.4 million in payments to our nonqualified supplemental plan for 2018, 2017 and 2016 and we made $0.2 million in payments to our non-U.S. plans in 2017. In connection with a lump sum cash payout option to terminated and vested pension plan participants, during the fourth quarter of 2016 we incurred a $4.5 million pension settlement charge included in net periodic benefit cost which has been recorded within the Special and restructuring charges, net line item. In addition, we made $1.8 million, $2.0 million, $1.5 million in payments to our 401(k) savings plan for 2018, 2017 and 2016, respectively.

In 2019, we expect to make defined benefit plan contributions based on the minimum required funding in accordance with statutory requirements. 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. We anticipate fulfilling these commitments through our generation of cash flow from operations.

Off-Balance Sheet Arrangements

Through December 31, 2018, we have not entered into any off-balance sheet arrangements or material transactions with unconsolidated entities or other persons that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.
 

36




Item 7A.    Quantitative and Qualitative Disclosures About Market Risk
 
Market Risk

Business performance in the Oil & Gas refining sector is largely tied to refining margins, which are also driven by the market price of crude oil and gasoline demand.  Seasonal factors such as hurricanes and peak gasoline demand in the summer months may also drive high crack spread margins.  During periods when high crack spread margins exist, refineries prefer to operate continuously at full capacity.  Refiners may decide to delay planned maintenance (commonly called “unit turnarounds”) during these periods to maximize their returns.  Refining crack spread margins moderated in 2018, which resulted in unit turnarounds. As a result, the timing of major capital projects in our severe service refinery valves business were impacted.  While planned maintenance and unit turnarounds are necessary for safe and efficient operation of the refineries, project timing driven by these factors may continue to create fluctuations in our performance.

The commercial marine market experienced a historically unprecedented decade-long increase in new ship builds beginning in 2004 to meet the increase in global trade demand.  This created an over-supply of capacity that resulted in a slowdown of new ship contracts between 2015 to 2018.  The pumps that we supply to the commercial marine market are first supplied during commissioning of a new vessel, with aftermarket business over the lifetime of that vessel.  While we have experienced increased aftermarket business during the past decade as the global shipping fleet has expanded, the downturn in new ship builds starting in 2015 has negatively impacted our new equipment commercial marine business.  Any extended downturn in the commercial marine market could have a material adverse effect on our business.

Foreign Currency Exchange Risk
 
The Company is exposed to certain risks relating to its ongoing business operations including foreign currency exchange rate risk and interest rate risk. For additional information regarding our foreign currency exchange risk refer to Note 16, "Fair Value", of the consolidated financial statements included in this Annual Report.

We performed a sensitivity analysis as of December 31, 2018 based on scenarios in which market spot rates are hypothetically changed in order to produce a potential net exposure loss. The hypothetical change was based on a 10 percent strengthening or weakening in the U.S. dollar, whereby all other variables are held constant. The sensitivity analysis indicates that a hypothetical 10 percent adverse movement in foreign currency exchange rates would result in a foreign exchange gain of approximately $0.5 million at December 31, 2018.

Interest Rate Risk

Loans under our credit facility bear interest at variable rates which reset every 30 to 180 days depending on the rate and period selected by the Company. These loans are subject to interest rate risk as interest rates will be adjusted at each rollover date to the extent such amounts are not repaid. As of December 31, 2018, the annual rates on the revolving loans were 5.9%. If there was a hypothetical 100 basis point change in interest rates, the annual net impact to earnings and cash flows would be $8.1 million. This hypothetical change in cash flows and earnings has been calculated based on the borrowings outstanding at December 31, 2018 and a 100 basis point per annum change in interest rate applied over a one-year period. We are evaluating entering into a potential fixed rate interest swap arrangement which would result in an increase in interest costs. The Company entered into a hedging agreement to mitigate the inherent rate risk associated with our outstanding debt. Refer to Note 17, "Fair Value", of the consolidated financial statements included in this Annual Report.

Item 8.    Financial Statements and Supplementary Data

Our consolidated financial statements and the related notes thereto are listed in Item 15(a)(1) on the Index to Consolidated Financial Statements.

Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

None.
 

37




Item 9A.    Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") (our principal executive officer and principal financial officer, respectively), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered by this Annual Report on Form 10-K. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, our CEO and CFO concluded that, as of December 31, 2018, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information we disclose in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to management, including our principal executive and financial officers, to allow timely decisions regarding disclosure and that such information is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework titled "Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on our evaluation under this framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2018.

Our internal control over financial reporting as of December 31, 2018 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2018 that could materially affect, or are reasonably likely to materially affect, our internal control over financial reporting.


Item 9B. Other Information

None.


38




Part III
 
Item 10.    Directors, Executive Officers and Corporate Governance
 
The information required under this item is incorporated by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission no later than 120 days after the close of the Company’s fiscal year ended December 31, 2018.

Code of Ethics

The Company has implemented and regularly monitors compliance with a comprehensive Code of Conduct & Business Ethics (the "Code of Conduct"), which applies uniformly to all directors, executive officers, and employees. Among other things, the Code of Conduct addresses conflicts of interest, confidentially, fair dealing, protection and proper use of Company assets, compliance with applicable law (including insider trading and anti-bribery laws), and reporting of illegal or unethical behavior. The Code of Conduct is available on the Company's website at www.CIRCOR.com under the "Investors" sub link and hardcopy will be provided by the Company to any stockholder who requests it by writing to the Company's Secretary at the Company's headquarters. In addition, we intend to post on our website all disclosures that are required by SEC regulations or NYSE listing standards with respect to amendments to, or waivers from, any provision of the Code of Conduct.
 
Item 11.    Executive Compensation
 
The information required under this item is incorporated by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission no later than 120 days after the close of the Company’s fiscal year ended December 31, 2018.
 
Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
Except for the information required by Section 201(d) of Regulation S-K which is set forth below, the information required under this item is incorporated by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission no later than 120 days after the close of the Company’s fiscal year ended December 31, 2018.
 
EQUITY COMPENSATION PLAN INFORMATION
 
Plan category
 
Number of securities
to be issued upon
exercise of
outstanding
options,
warrants and rights
 
Weighted-average
exercise price of
outstanding options,
warrants and rights
 
Number of securities
remaining available
for future issuance
under equity
compensation
plans (excluding
securities reflected
in column (a))
 
 
(a)
 
(b)
 
(c)
Equity compensation plans approved by security holders
 
891,454

(1)
$
41.95

(3)
493,811

Equity compensation plans not approved by security holders
 
150,000

(2)
8.32

(3)
N/A

Total
 
1,041,454

 
$
35.15

 
493,811

(1)
Reflects 40,249 stock options and 1,050 restricted stock units granted under the Company’s Amended and Restated 1999 Stock Option and Incentive Plan and 552,409 stock options and 297,746 restricted stock units granted under the Company's 2014 Stock Option and Incentive Plan.
(2)
Reflects stock options issued as an inducement equity award to our President and CEO on April 9, 2013. This award was granted pursuant to the inducement award exemption under Section 303A.08 of the NYSE Listed Company Manual. Details of this grant, including vesting terms, are set forth in Note 11, "Share-Based Compensation", of the consolidated financial statements included in this Annual Report.
(3)
The weighted-average exercise price does not take into account the shares issuable upon vesting of outstanding restricted stock units, which have no exercise price.


39




Item 13.    Certain Relationships and Related Transactions, and Director Independence
 
The information required under this item is incorporated by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission no later than 120 days after the close of the Company’s fiscal year ended December 31, 2018.

Item 14.    Principal Accounting Fees and Services
 
The information required under this item is incorporated by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission no later than 120 days after the close of the Company’s fiscal year ended December 31, 2018.
 
Part IV
 
Item 15.    Exhibits, Financial Statement Schedules
 
(a)(1) Financial Statements
 

Report of PricewaterhouseCoopers LLP dated March 1, 2019 on the Company’s financial statements filed as a part hereof for the fiscal year ended December 31, 2018 and on the Company’s internal control over financial reporting as of December 31, 2018 is included in this Annual Report on Form 10-K. The independent registered public accounting firm’s consent with respect to this report appears in Exhibit 23.1 of this Annual Report on Form 10-K.

(a)(2) Financial Statement Schedules
 
 
Other than our Allowance for Doubtful Accounts Rollforward included in Schedule II Valuation and Qualifying Accounts, all other schedules are omitted because they are not applicable or not required, or because the required information is included either in the consolidated financial statements or in the notes thereto.

(a)(3) Exhibits

Unless otherwise indicated, references to exhibits in the table below being incorporated by reference are made in each case with respect to filings of the Company, SEC File No. 001-14962.
Exhibit
 
 
No.
  
Description and Location
  
Share Purchase Agreement, dated April 15, 2015, between the Company and affiliates and Schroedahl-ARAPP Spezialarmaturen GmbH & Co. KG and affiliates, incorporated herein by reference to Exhibit 2.1 to the Company’s Form 8-K filed with the SEC on April 15, 2015
 
Agreement and Plan of Merger dated October 12, 2016 by and among the Company, Downstream Holding, LLC, Downstream Acquisition LLC, and Sun Downstream, LP., incorporated herein by reference to Exhibit 2.1 to the Company’s Form 8-K filed with the SEC on October 14, 2016

40




 
Purchase Agreement, dated as of September 24, 2017, by and between Colfax Corporation and the Company, incorporated herein by reference to Exhibit 2.1 to the Company's Form 8-K filed with the SEC on September 25, 2017
3
  
Articles of Incorporation and By-Laws:
  
Amended and Restated Certificate of Incorporation of the Company, incorporated herein by reference to Exhibit 3.1 to the Company’s Form 10-Q, filed with the SEC on October 29, 2009
  
Amended and Restated By-Laws, as amended, of the Company, incorporated herein by reference to Exhibit 3.1 to the Company’s Form 10-Q, filed with the SEC on October 31, 2013
10.1
  
Material Contracts:
 
Credit Agreement, dated as of December 11, 2017, by and among the Company, as borrower, certain subsidiaries of the Company, as guarantors, the lenders from time to time party thereto, Deutsche Bank AG New York Branch, as term loan administrative agent and collateral agent, SunTrust Bank, as revolver administrative agent, swing line lender and a letter of credit issuer, Deutsche Bank Securities Inc. and SunTrust Robinson Humphrey, Inc., as joint-lead arrangers and joint-bookrunners, and Citizens Bank, N.A. and HSBC Securities (USA) Inc. as co-managers incorporated herein by reference to Exhibit 10.2 to the Company's Form 8-K, filed with the SEC on December 12, 2017
 
CIRCOR International, Inc. Amended and Restated 1999 Stock Option and Incentive Plan (as amended, the “1999 Stock Option and Incentive Plan ”), incorporated herein by reference to Exhibit 4.4 to the Company’s Form S-8, File No. 333-125237, filed with the SEC on May 25, 2005
 
First Amendment to the 1999 Stock Option and Incentive Plan, dated as of December 1, 2005, incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K, filed with the SEC on December 7, 2005
 
Second Amendment to the 1999 Stock Option and Incentive Plan, dated as of February 12, 2014, incorporated herein by reference to Exhibit 10.6 to the Company's Form 10-K, filed with the SEC on March, 1 2018
 
Form of Non-Qualified Stock Option Agreement for Employees (Three Year Cliff Vesting) under the 1999 Stock Option and Incentive Plan , incorporated herein by reference to Exhibit 10.1 to the Company’s Form 10-Q, filed with the SEC on May 10, 2010
 
CIRCOR International, Inc. Amended and Restated Management Stock Purchase Plan dated as of January 1, 2017, incorporated hereinby reference to Exhibit 10.8 to the Company's Form 10-K, filed with the SEC on March1, 2018
 
Form of Indemnification Agreement entered into by the Company and its directors and certain of its officers incorporated herein by reference to Exhibit 10.12 to the Company’s Form 10-K, filed with the SEC on March 12, 2003
 
Executive Change of Control Agreement between CIRCOR, Inc. and Arjun Sharma, dated September 1, 2009, incorporated herein by reference to Exhibit 10.2 to the Company’s Form 10-Q, filed with the SEC on October 29, 2009
 
Amendment to Executive Change of Control Agreement between CIRCOR, Inc. and Arjun Sharma, dated November 4, 2010, incorporated by reference to Exhibit 10.8 to the Company’s Form 8-K, filed with the SEC on November 5, 2010
  
Restricted Stock Unit Agreement, dated as of April 9, 2013, between the Company and Scott A Buckhout incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K, filed with the SEC on April 15, 2013
  
Performance-Based Restricted Stock Unit Agreement, dated as of April 9, 2013, between the Company and Scott A Buckhout, incorporated herein by reference to Exhibit 10.2 to the Company’s Form 8-K, filed with the SEC on April 15, 2013
  
Stock Option Inducement Award Agreement, dated as of April 9, 2013, between the Company and Scott A Buckhout, incorporated herein by reference to Exhibit 10.3 to the Company’s Form 8-K, filed with the SEC on April 15, 2013
  
Severance Agreement, dated as of April 9, 2013, between the Company and Scott A Buckhout, incorporated herein by reference to Exhibit 10.4 to the Company’s Form 8-K, filed with the SEC on April 15, 2013
 
Amended Performance-Based Restricted Stock Unit Agreement, dated as of April 9, 2013, between the Company and Scott A. Buckhout, incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q, filed with the SEC on April 28, 2015
 
Executive Change of Control Agreement, dated as of April 9, 2013, between the Company and Scott A Buckhout, incorporated herein by reference to Exhibit 10.5 to the Company’s Form 8-K, filed with the SEC on April 15, 2013
 
Performance-Based Stock Option Award Agreement, dated as of March 5, 2014, between the Company and Scott A. Buckhout, incorporated herein by reference to Exhibit 10.1 to the Company’s Form 8-K, filed with the SEC on March 11, 2014

41




 
CIRCOR International, Inc. 2014 Stock Option and Incentive Plan 201 (the "2014 Stock Option and Incentive Plan") incorporated herein by reference to Exhibit A to the Company’s Definitive Proxy Statement, filed with the SEC on March 21
 
First Amendment to 2014 Stock Option and Incentive Plan, dated February 12, 2014, incorporated herein by reference to Exhibit 10.36 to the Company’s Form 10-K, filed with the SEC on February 18, 2015
 
Executive Change of Control Agreement, dated as of March 5, 2015, between the Company and Erik Wiik, incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q, filed with the SEC on April 28, 2015
 
Executive Change of Control Agreement, dated as of June 10, 2015, between the Company and Andrew Farnsworth, incorporated herein by reference to Exhibit 10.1 to the Company’s Form 10-Q filed with the SEC on July 29, 2015
 
Executive Change of Control Agreement, dated as of January 8, 2016, between the Company and David Mullen, incorporated herein by reference to Exhibit 10.29 the Company’s Form 10-K filed with the SEC on February 23, 2016
 
Inducement Restricted Stock Unit Agreement, dated as of December 2, 2013, between the Company and Rajeev Bhalla, incorporated herein by reference to Exhibit 10.35 to the Company’s Form 10-K, filed with the SEC on February 27, 2014
 
Stock Option Inducement Award Agreement, dated as of December 2, 2013, between the Company and Rajeev Bhalla, incorporated herein by reference to Exhibit 10.36 to the Company’s Form 10-K, filed with the SEC on February 27, 2014
 
Severance Agreement, dated as of December 2, 2013, between the Company and Rajeev Bhalla, incorporated herein by reference to Exhibit 10.37 to the Company’s Form 10-K, filed with the SEC on February 27, 2014
 
Executive Change of Control Agreement, dated as of December 2, 2013, between the Company and Rajeev Bhalla, incorporated herein by reference to Exhibit 10.38 to the Company’s Form 10-K, filed with the SEC on February 27, 2014
 
Form of Performance-Based Restricted Stock Unit Agreement For Employees and Directors under the 1999 Stock Option and Incentive Plan, incorporated herein by reference to Exhibit 10.29 of the Company's Form 10-K, filed with the SEC on February 21, 2017
 
Form of Restricted Stock Unit Agreement For Employees and Directors under the 1999 Stock Option and Incentive Plan, incorporate herein by reference to Exhibit 10.30 of the Company's Form 10-K, filed with the SEC on February 21, 2017
 
Form of Restricted Stock Unit Agreement For Directors under the 2014 Stock Option and Incentive Plan, incorporated herein by reference to Exhibit 10.31 of the Company's Form 10-K, filed with the SEC on February 21, 2017
 
Form of Performance-Based Restricted Stock Unit Agreement For Employees and Directors under the 2014 Stock Option and Incentive Plan, incorporated herein by reference to Exhibit 10.32 of the Company's Form 10-K, filed with the SEC on February 21, 2017
 
Form of Management Stock Purchase Plan Restricted Stock Unit Agreement For Employees and Directors under the 2014 Stock Option and Incentive Plan, incorporated herein by reference to Exhibit 10.33 of the Company's Form 10-K, filed with the SEC on February 21, 2017
 
Form of Non-Qualified Stock Option Agreement for Employees under the 2014 Stock Option and Incentive Plan, incorporated herein by reference to Exhibit 10.34 of the Company's Form 10-K, filed with the SEC on February 21, 2017
 
Form of Restricted Stock Unit Agreement For Employees under the 2014 Stock Option and Incentive Plan, incorporated herein by reference to Exhibit 10.35 of the Company's Form 10-K, filed with the SEC on February 21, 2017
 
Executive Change of Control Agreement, dated as of 2016, between the Company and Sumit Mehrotra, incorporated herein by reference to Exhibit 10.37 of the Company's Form 10-K, filed with the SEC on February 21, 2017
 
Severance Agreement, dated as of December 9, 2016, between the Company and Sumit Mehrotra, incorporated herein by reference to Exhibit 10.39 of the Company's Form 10-K, filed with the SEC on February 21, 2017
 
Stockholders Agreement, dated December 11, 2017, between the Company and Colfax Corporation, incorporated herein by reference to Exhibit 10.1 to the Company's Form 8-K, filed with the SEC on December 12, 2017
 
Severance Agreement, dated as of April 21, 2017, between the Company and Arjun Sharma, incorporated herein by reference to Exhibit 10.1 to the Company's Form 10-Q, filed with the SEC on April 28, 2017
 
Severance Agreement, dated as of April 25, 2017, between the Company and Erik Wiik, incorporated herein by reference to Exhibit 10.2 to the Company's Form 10-Q, filed with the SEC on April 28, 2017
 
Executive Change of Control Agreement between CIRCOR, International Inc. and Chadi Chahine, dated January 7, 2019.

42




 
Severance Agreement, dated January 7, 2019, between the Company and Chadi Chahine.
 
Executive Change of Control Agreement between CIRCOR, Inc. and Lane Walker, dated October 10, 2018.
 
Severance Agreement, dated October 10, 2018, between the Company and Lane Walker.
 
Schedule of Subsidiaries of CIRCOR International, Inc.
 
Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm
  
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
  
The following financial statements from CIRCOR International, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on March 1, 2019, formatted in XBRL (eXtensible Business Reporting Language), as follows:
(i)
 
Consolidated Balance Sheets as of December 31, 2018 and 2017
(ii)
 
Consolidated Statements of Income for the years ended December 31, 2018, 2017 and 2016
(iii)
 
Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2018, 2017 and 2016
(iv)
  
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016
(v)
  
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2018, 2017 and 2016
(vi)
  
Notes to the Consolidated Financial Statements
    
*
The Company hereby agrees to provide the Commission, upon request, copies of any omitted exhibits or schedules to this exhibit required by Item 601(b)(2) of Regulation S-K.
**
Filed with this report.
***
Furnished with this report.
§
Indicates management contract or compensatory plan or arrangement.

Item 16.    Form 10-K Summary
Not applicable.

43




SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
CIRCOR INTERNATIONAL, INC.
 
 
 
 
By:
/s/ Scott A. Buckhout
 
 
Scott A. Buckhout
President and Chief Executive Officer
 
 
 
 
Date:
March 1, 2019
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
Signature
Title
Date
/s/ Scott A. Buckhout
President and Chief Executive Officer (Principal Executive Officer)
March 1, 2019
Scott A. Buckhout
 
 
/s/ Chadi Chahine
Senior Vice President, Chief Financial Officer (Principal Financial Officer)
March 1, 2019
Chadi Chahine
 
 
/s/ David F. Mullen
Senior Vice President and Corporate Controller (Principal Accounting Officer)
March 1, 2019
David F. Mullen
 
 
/s/ David F. Dietz
Chairman of the Board of Directors
March 1, 2019
David F. Dietz
 
 
/s/ Tina M. Donikowski
Director
March 1, 2019
Tina M. Donikowski
 
 
/s/ Helmuth Ludwig
Director
March 1, 2019
Helmuth Ludwig
 
 
/s/ Samuel Chapin
Director
March 1, 2019
Samuel Chapin
 
 
/s/ John A. O'Donnell
Director
March 1, 2019
John A. O’Donnell
 
 
/s/ Peter M. Wilver
Director
March 1, 2019
Peter M. Wilver
 
 


44




Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of CIRCOR International, Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of CIRCOR International, Inc. and its subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of (loss) income, comprehensive (loss) income, shareholders’ equity and cash flows for the each of the three years in the period ended December 31, 2018, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for revenue from contracts with customers in 2018.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated