Business Acquisitions

12 Months Ended

Dec. 31, 2019

Discontinued Operations and Disposal Groups [Abstract]

Business Acquisitions

Discontinued Operations and Assets Held for Sale

Discontinued Operations

During the third quarter of 2019, the Company instituted a strategic shift to exit the upstream oil and gas valves market to focus on more attractive end markets. In line with that shift, during the third quarter of 2019 the Company sold its EV business and classified its DV business as held for sale. These businesses were previously part of the Energy segment.

In accordance with ASC Topic 205-20, Presentation of Financial Statements - Discontinued Operations, the Company determined that the EV and DV businesses represented a strategic shift that has or will have a major effect on the Company's operations and financial results. As a result, these businesses met the conditions for discontinued operations and are recorded as such in the consolidated financial statements. All prior period comparative financial information has been reclassified to conform to this presentation. We report financial results for discontinued operations separately from continuing operations in order to distinguish the financial impact of the disposal transactions from ongoing operations.

Upon classifying the DV business as held for sale, the Company was required to measure the disposal group at the lower of its carrying value or fair value less expected costs to sell. The Company calculated fair value of the DV business using an income

approach based on the present value of projected future cash flows. This approach incorporates several key assumptions which include the rate of revenue growth including the rate of growth used in the terminal year value, the projected operating margin, as well as the discount rate based on a weighted average cost of capital. Any unfavorable material changes to these key assumptions could potentially impact our fair value determinations. Through this process, the Company determined that the carrying value exceeded fair value and recognized a goodwill impairment of $6.9 million and an intangible asset impairment of $1.0 million. At December 31, 2019, the Company recognized a valuation allowance of $39.8 million to adjust the carrying value of the disposal group to its fair value less expected costs to sell.

The following table presents the summarized components of (loss) income from discontinued operations, for the EV and DV businesses for the twelve months ended December 31, 2019, 2018 and 2017 (in thousands):

	Twelve Months Ended
	December 31, 2019			December 31, 2018			December 31, 2017
Net revenues	$	79,848		$	162,355		$	156,218
Cost of revenues	105,132			145,908			128,072
Gross (loss) profit	(25,284		)	16,447			28,146
Selling, general and administrative expenses	15,487			23,786			19,723
Special and restructuring charges, net (1)	85,603			4,930			4,162
Operating (loss) income	(126,374		)	(12,269		)	4,261
Other (income) expense:
Interest (income), net	(8		)	(62		)	(64		)
Other (income) expense, net	(378		)	(9		)	1,852
Total other (income) expense, net	(386		)	(71		)	1,788
(Loss) income from discontinued operations, pre tax	(125,988		)	(12,198		)	2,473
(Benefit from) provision for income tax	(16,821		)	(6,161		)	1,535
(Loss) income from discontinued operations, net of tax	$	(109,167	)	$	(6,037	)	$	938
(1) For the year ended December 31, 2019, includes a valuation allowance of $39.8 million for the DV business, loss on sale of the EV business of $37.9 million, and goodwill and intangible asset impairments related to the DV business of $7.9 million.

Assets Held for Sale

In addition to its businesses classified as discontinued operations, the Company has other disposal groups that meet the requirements of ASC 360-10 to be classified as held for sale in its consolidated balance sheets. In December 2019, the Company entered into a definitive agreement to dispose of its I&S business. The disposal group met the requirements to be classified as held for sale in the Company's consolidated balance sheet as of December 31, 2019. In accordance with ASC 360-10, prior period results have not been restated to reflect the I&S business as held for sale.

In January 2019, the Company sold its RS business. This disposal group met the requirements for classification as held for sale in the Company's consolidated balance sheet as of December 31, 2018.

The following table presents the balance sheet information for assets and liabilities held for sale as of December 31, 2019 and December 31, 2018 (in thousands):

	December 31, 2019								December 31, 2018
	Discontinued Operations (1)			Other Held for Sale (2)		Total			Discontinued Operations (1)		Other Held for Sale (2)		Total
Trade accounts receivable, net	$	467		$	9,935	$	10,402		$	16,371	$	12,341	$	28,712
Inventories	55,521			13,878		69,399			73,696		3,044		76,740
Prepaid expenses and other current assets	2,867			616		3,483			19,230		1,602		20,832
Property, plant, and equipment, net	6,742			6,409		13,151			12,127		12,542		24,669
Goodwill	—			91,492		91,492			8,600		40,372		48,972
Intangibles	—			—		—			1,021		17,209		18,230
Deferred tax asset	778			1,089		1,867			8,556		824		9,380
Other assets	4,793			6,363		11,156			70		7		77
Valuation adjustment on classification to assets held for sale	(39,757		)	—		(39,757		)	—		—		—
Classified as current (3)	31,411			129,782		161,193			109,297		87,941		197,238
Classified as noncurrent	—			—		—			30,374		—		30,374
Total assets held for sale	$	31,411		$	129,782	$	161,193		$	139,671	$	87,941	$	227,612
Accounts payable	$	8,708		$	5,997	$	14,705		$	29,166	$	3,370	$	32,536
Accrued and other current liabilities	5,834			2,192		8,026			17,991		5,576		23,567
Deferred income taxes	638			151		789			325		—		325
Other noncurrent liabilities	13,931			5,838		19,769			536		2,195		2,731
Classified as current (3)	29,111			14,178		43,289			47,157		11,141		58,298
Classified as noncurrent	—			—		—			861		—		861
Total liabilities held for sale	$	29,111		$	14,178	$	43,289		$	48,018	$	11,141	$	59,159
(1) Reflects the assets and liabilities of the DV disposal group at December 31, 2019, and the assets and liabilities of the DV and EV disposal groups at December 31, 2018.
(2) Reflects the assets and liabilities of disposal groups that did not meet the criteria to be classified as discontinued operations. At December 31, 2019, the balances consist of assets and liabilities of the I&S disposal group. At December 31, 2018, the balances consist of assets and liabilities related to the RS disposal group, along with a $4.5 million building that was actively being marketed for sale. The building was sold during 2019.
(3) The Company classified all assets and liabilities held for sale as current on the December 31, 2019 consolidated balance sheet because it is probable that these assets will be sold within one year. Similarly, the Company classified all assets and liabilities associated with RS disposal group and a building being marketed for sale as current on the December 31, 2018 consolidated balance sheet. For the assets and liabilities that were reclassified to discontinued operations as of December 31, 2018, the Company maintained the current and noncurrent classification from its historical consolidated balance sheet.

Business Acquisitions

On September 24, 2017, CIRCOR entered into a Purchase Agreement (the “Purchase Agreement”) with Colfax Corporation (“Colfax”). Pursuant to the Purchase Agreement, on December 11, 2017, the Company acquired the fluid handling business of Colfax ("FH") for consideration consisting of $542.0 million in cash, 3,283,424 unregistered shares of the Company's common stock, with a fair value of approximately $140.0 million at closing, and the assumption of net pension and post-retirement liabilities of FH. The Company financed the cash consideration through a combination of committed debt financing and cash on hand. During the second quarter of 2018, the shares were registered and sold with all proceeds going to Colfax.

FH is a leader in the engineering, development‚ manufacturing‚ distribution‚ service and support of fluid handling systems. With a history dating back to 1860‚ FH is a leading supplier of screw pumps for high demand, severe service applications across a range of markets including general industry, commercial marine, defense, and oil & gas. FH leverages differentiated technology, and provides critical aftermarket customer support, to maintain leading positions in high demand niche markets.

The operating results of FH have been split between each of our operating segments, Energy, Aerospace & Defense, and Industrial based upon the end markets of the sub-businesses within FH.

The purchase price allocation is based upon a valuation of assets and liabilities that was prepared with assistance from a third party valuation specialist. The purchase accounting was finalized in the fourth quarter of 2018.

During 2018, the Company paid Colfax approximately $2.6 million pursuant to a transition services agreement which facilitated the orderly separation of the FH business from Colfax.  Colfax was a significant shareholder of the Company during the first six months of 2018.

The following table summarizes the acquisition date fair value of the assets acquired and the liabilities assumed:

(in thousands)	Preliminary Fair Value of Assets Acquired			Measurement Period Adjustment			Finalized Fair Value of Assets Acquired
Cash and cash equivalents (a)	$	63,403		$	—		$	63,403
Restricted cash (a)	1,911			—			1,911
Accounts receivable	77,970			(2,128		)	75,842
Inventory	79,329			(402		)	78,927
Prepaid expenses and other current assets	16,937			(1,348		)	15,589
Property, plant and equipment	115,891			5,033			120,924
Identifiable intangible assets	388,000			(3,000		)	385,000
Other assets	338			586			924
Accounts payable	(46,045		)	20			(46,025		)
Cash payable to seller (a)	(65,314		)	—			(65,314		)
Accrued and other expenses	(63,115		)	(9,273		)	(72,388		)
Long-term post-retirement liabilities	(143,067		)	2,600			(140,467		)
Other long-term liabilities	(11,215		)	—			(11,215		)
Deferred tax liabilities	(4,479		)	(10,366		)	(14,845		)
Total identifiable net assets	410,544			(18,278		)	392,266
Goodwill	293,344			8,195			301,539
Total purchase price	$	703,888		$	(10,083	)	$	693,805
Consideration
Base purchase price	$	542,000		$	—		$	542,000
Net working capital and other purchase accounting adjustments	18,121			(6,300		)	11,821
Common Stock	143,767			(3,783		)	139,984
Total	$	703,888		$	(10,083	)	$	693,805
(a) Cash acquired and returned to seller by the second quarter of 2018, net of FX impact of $2.3 million and cash withheld to pay Colfax obligations to foreign taxing authorities of $1.8 million.

As illustrated in the table above, during the measurement period we identified certain uncollectible account receivable balances, unsubstantiated prepaid and other assets, certain existence or valuation adjustments to inventory amounts, revised valuation of property, plant, and equipment from our third party specialists, revised valuation of intangibles from our third party specialists, and accrual adjustments primarily relating to a loss contract for which we needed to establish a liability in purchase accounting. Additionally, we settled customary working capital adjustments ($11.8 million) with Colfax.

The excess of purchase price paid over the fair value of FH's net assets was recorded to goodwill, which is primarily attributable to projected future profitable growth, market penetration, as well as an expanded customer base for the acquired businesses. As of December 31, 2019, approximately 65.5% of goodwill is projected to be deductible for income tax purposes.

The FH acquisition resulted in the preliminary identification of the following identifiable intangible assets (in thousands):

	Original Estimate		Measurement Period Adjustment			Fair Value		Weighted average amortization period (in years)
Customer relationships	$	215,000	$	—		$	215,000	19
Acquired technologies	107,000		6,000			113,000		20
Trade names	44,000		(3,000		)	41,000		Indefinite-life
Backlog	22,000		(6,000		)	16,000		4
Total intangible assets	$	388,000	$	(3,000	)	$	385,000

During the measurement period, with the help of third party specialists, we adjusted the fair value of the acquired FH intangibles based upon better information regarding discount rates, royalty rates, and more detailed business unit forecasts that was determinable at the time of acquisition. The revised fair value of acquired FH intangibles have been recorded against our FH opening balance sheet during 2018.

The fair value of the intangible assets was based on variations of the income approach, which estimates fair value based on the present value of cash flows that the assets are expected to generate. These approaches included the relief-from-royalty method and multi-period excess earnings method, depending on the intangible asset being valued. Customer relationships, backlog, and existing technology are amortized on a cash flow basis which reflects the economic benefit consumed. The trade name was assigned an indefinite life based on the Company’s intention to keep the trade names for an indefinite period of time. Refer to Note 10, Goodwill and Intangibles, net for future expected amortization to be recorded.

The results of operations of FH have been included in our consolidated financial statements beginning on the acquisition date and reported within the Industrial segment, with the exception of the U.S. Defense business which is reported in the Aerospace & Defense segment and RS business which is reported in the Energy segment. As disclosed in Note 1, Description of Business, the RS business was sold in January 2019. The consolidated results for the year ended December 31, 2018 include $484.8 million of net revenue and $6.1 million operating loss. The results for the year ended December 31, 2017 include $36.5 million of net revenue and a $1.1 million operating loss.

The following unaudited pro forma information presents the combined results of operations as if the acquisition had been completed on January 1, 2017, the beginning of the comparable prior annual reporting period. The unaudited pro forma results include: (i) amortization associated with preliminary estimates for the acquired intangible assets; (ii) interest expense on borrowings in connection with the acquisition; (iii) the associated tax impact on these unaudited pro forma adjustments; and the transaction costs presented in the earliest period (2017).

The unaudited pro forma results do not reflect any cost saving synergies from operating efficiencies or the effect of the incremental costs incurred in integrating the two companies. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations of the combined company would have been if the acquisition had occurred at the beginning of the period presented, nor are they indicative of future results of operations (in thousands):

(Unaudited)	Year ended December 31,
	2017
Net Revenues	$	942,760
Net Income	$	(6,475	)