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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 

For the fiscal year ended December 31, 2019

Commission File Number 001-14962
 
logoa03.jpg
CIRCOR INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
001-14962
04-3477276
(State or other jurisdiction
of incorporation or organization)
 
(Commission File Number)
(I.R.S. Employer
Identification No.)
 
 
 
 
 
 
 
 
 
 
30 CORPORATE DRIVE, SUITE 200
 
 
 
 
 
Burlington,
MA
 
 
 
01803-4238
(Address of principal executive offices and Zip Code)
(Zip Code)
 
 
(781) 270-1200
(Registrant’s telephone number, including area code)
 
 
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
CIR
New York Stock Exchange
 
  
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ☒   No    ☐
 
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  ☒
 
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  ☒    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  ☒    No  ☐
 
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
 
Accelerated filer
Emerging growth company
Non-accelerated filer
 
Smaller reporting company
 
 

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  

The aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2019 was $887,999,502. The registrant does not have any non-voting common equity.

As of March 2, 2020, there were 19,920,230 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 2020 Annual Meeting of Stockholders to be held on May 7, 2020. 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, 2019.




Table of Contents
 
 
 
Page
Number
Part I
 
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
 
 
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 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, our ability to successfully implement our divestiture, restructuring or simplification strategies, the possibility that expected benefits related to the Fluid Handling 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, fluctuations in interest rates, our ability to successfully defend product liability actions, any actions of stockholders or others in response to the expiration of the recent unsolicited tender offer and the cost and disruption of responding to those 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 health pandemics, 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" in this Annual Report on Form 10-K. 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, aerospace and defense, and energy. 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, including through dispositions of non-core assets; achieve world class operational excellence; and attract and retain top industry talent. We have a global presence and operate 25 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”), Aerospace & Defense (“Aerospace & Defense segment”), and Energy ("Energy segment" or "Energy"). 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”).

In 2019, we completed the divestiture of our Engineered Valves ("EV") business and announced our intent to sell our Distributed Valves ("DV") business. These actions stemmed from our decision to exit the upstream oil and gas valves market, which was a strategic shift for the Company. As a result, these businesses are both accounted for as discontinued operations in our consolidated financial statements. The following discussion in this Item 1 relates only to our continuing operations unless otherwise noted. Refer to Note 1, Description of Business along with Note 3, Discontinued Operations and Assets Held for Sale, to the consolidated financial statements included in this Annual Report for additional information.


1




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.

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. During 2019, our simplification strategy shifted to include the exit of upstream oil and gas businesses.

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 the 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

Industrial

Industrial is a global portfolio of highly engineered and differentiated fluid handling 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 general industrial, commercial marine, oil & gas, and power and process markets.

2





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.

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 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. In 2019, we initiated a strategic shift away from upstream.

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, Leslie Controls, CPC Cryolab RG Lawrence, Rockwood Swendemann, RTK, Schroedahl, 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
Automatic Recirculation 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 $450.7 million, $487.6 million and $139.1 million or 47%, 48% and 28% of our net revenues for the years ended December 31, 2019, 2018 and 2017. Industrial backlog as of January 31, 2020 was $157.2 million compared with $168.2 million as of January 31, 2019. Industrial backlog represents backlog orders we believe to be firm.

3





Aerospace & Defense

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 aerospace market that we serve includes commercial aerospace primarily focused on 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.

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.

4





Revenue and Backlog

Aerospace & Defense accounted for $272.6 million, $237.0 million and $183.0 million, or 28%, 23% and 36% of our net revenues for the years ended December 31, 2019, 2018 and 2017, respectively. Aerospace & Defense backlog as of January 31, 2020 was $191.1 million compared with $183.3 million as of January 31, 2019. Aerospace & Defense backlog represents orders we believe to be firm.

Energy

The Energy segment significantly changed in 2019, reflecting CIRCOR's move away from the upstream oil and gas markets, as well as the divestiture of non-core assets. The Reliability Services business, which was added to the Energy segment in 2018 after the Fluid Handling acquisition, was divested in January of 2019. Reflecting our strategic shift away from upstream oil and gas, the EV business was divested in July 2019, and the DV business has been classified as held for sale. Additionally, in January 2020, we sold our non-core Instrumentation and Sampling business.
  
The remaining Energy businesses provide highly engineered integrated flow control solutions, valves, pipelines products and services for the midstream and downstream oil & gas and refinery 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 refining and petrochemical process control, critical pressure control and midstream pipeline engineering solutions and services.

Energy is headquartered in Houston, Texas and has manufacturing facilities in North America, the United Kingdom, India and United Arab Emirates.

Markets and Applications

Energy serves a 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. The primary markets served today include oil & gas: midstream and downstream, as well as petrochemical processing. The midstream markets are primarily served by our pipeline engineering business, and downstream and petrochemical markets are served primarily by our Refinery Valves, Instrumentation and Sampling business, and Reliability Services business until the latter two were sold in January 2020 and January 2019, respectively.

Midstream 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 designed to ensure the integrity of transmission pipelines.

Downstream Oil & Gas: The downstream market includes the refining, distilling, stripping, degassing, dehydrating, desulphurizing, and purifying of 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.

Brands

Energy provides its flow control solutions and services through the following significant brands: DeltaValve, Pipeline Engineering, and TapcoEnpro.

Products

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

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Pipeline pigs, quick opening closure, pig signalers
Delayed coking unheading devices and fluid catalytic converter and isolation valves

For our manufactured 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.
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 $241.0 million, $288.9 million, and $183.4 million, or 25%, 29%, and 36% of our net revenues for the years ended December 31, 2019, 2018 and 2017, respectively. Energy’s backlog as of January 31, 2020 was $61.4 million compared with $77.2 million as of January 31, 2019. Energy backlog represents backlog orders we believe to be firm.


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 Industrial segment include: Leistritz AG, Curtiss-Wright Corporation, Netzsch GmbH, ITT Corporation, Seepex GmbH, and Naniwa Ltd.

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

The primary competitors of our Energy segment include: T.D. Williamson, Blac Inc, IMI plc, and Baker Hughes.

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.


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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, 2019, 2018, and 2017, no customers accounted for more than 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 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.

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, 2020, our worldwide operations directly employed approximately 4,000 people. We have 71 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 - 702 employees
France - 105 employees
Mexico - 100 employees
Netherlands- 46 employees
United Kingdom - 25 employees
Sweden - 9 employees

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

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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.


Item 1A.    Risk Factors
 
Set forth below are certain risk factors that we believe are material to our stockholders. The risks described in these risk factors could harm our business, financial condition, cash flows, results of operations and reputation. 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 by any of the following risks:
 
Some of our end-markets are cyclical, which causes 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 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 we may not be able 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 results 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. Demand for our products and services depends on a number of factors, including 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, including with respect to climate change risks;
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 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

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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.

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 are not successful in continuously improving our processes, our results of operations may suffer.

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;
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;
performance shortfalls as a result of the diversion of management’s attention caused by integrating operations; and
servicing the 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.

Actions of stockholders or others in response to expiration of the recent unsolicited tender offer could cause us to incur substantial costs, divert management’s attention and resources, and have an adverse effect on our business.

During the second quarter of 2019, we became subject to an unsolicited tender offer to purchase all outstanding shares of our common stock. At the time the tender offer expired on July 19, 2019, approximately two-thirds of our issued and outstanding shares had been tendered and, as a result, we have and expect that we will continue to receive additional attention and scrutiny from investors, potential acquirors, activist stockholders and others. Various actions to seek to effect change are available to such persons, including private engagement, public campaigns, proxy contests, litigation and other efforts to force transactions not supported by our board of directors or to acquire control over our Company. Responding to such actions is costly and time-consuming, may not align with our business strategies and could divert the attention of our board of directors and management from the management of our operations and the pursuit of business strategies. In addition, perceived uncertainties as to our future direction, strategy or leadership created as a consequence of any such actions may result in the loss of potential business opportunities, harm our ability to attract new investors, customers and employees, and cause our stock price to experience periods of volatility or stagnation.


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A potential proxy contest launched by GAMCO Investors, Inc. (“GAMCO”) could cause us to incur substantial costs, divert management’s attention and resources, and have an adverse effect on our business.

On February 6, 2020, GAMCO Investors, Inc. notified us of its intention to nominate two directors at our 2020 annual meeting of stockholders. If GAMCO pursues a proxy contest or other actions at the 2020 annual meeting of stockholders to elect directors other than those recommended by our board of directors, or takes other actions that contest or conflict with our strategic direction, any such actions could have an adverse effect on us because:

responding to proxy contests may be costly and time-consuming and may disrupt our operations and divert the attention of our management and our employees; and

perceived uncertainties as to our future direction may be exploited by our competitors, cause concern to our current or potential customers, result in the loss of potential business opportunities and make it more difficult to attract and retain qualified personnel and business partners and may affect our relationships with vendors, customers and other third parties.

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. As part of this process, during 2019 we disposed of, announced plans to dispose of, or entered into agreements to dispose of our Reliability Services business, Engineered Valves business, certain assets and liabilities related to our Spence and Nicholson product lines, Distributed Valves business, and Instrumentation and Sampling business. We may in the future deem it appropriate to divest additional product lines or businesses. 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: 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 divestitures or restructuring activities.

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.

Implementation of our acquisition strategy may not be successful, which could affect our ability to increase our revenues, reduce our profitability or lead to significant impairment charges.
 
One of our strategies has been and 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. Acquisitions may also

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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. Moreover, there can be no assurance that companies we have previously acquired or that we may acquire in the future 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. The acquired assets of businesses include goodwill and indefinite-lived intangible assets which are required to be tested for impairment at least annually or more frequently if impairment indicators are present. Events or changes that could indicate that the carrying value of our goodwill or indefinite-lived intangible assets may not be recoverable include reduced future cash flow estimates, slower growth rates in industry segments in which we participate and a decline in our stock price and market capitalization. The Company has recently experienced a significant decline in its market capitalization to below book value, which increases the risk of impairment charges. In addition, any prolonged material disruption of our employees, distributors, suppliers or customers, whether due to the recent coronavirus disease or otherwise, would negatively impact our global sales and operating results and could lead to impairments and other valuation allowances.

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 challenges, and 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.
 

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We use derivatives to help manage the currency risk related to certain business transactions denominated in foreign currencies. 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 derivatives. 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 in order for 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 will 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 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

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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 systems of third parties and 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.
 
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 has 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.


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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 Industrial segment. 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.

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 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

14




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 but which may be beneficial to our shareholders.
 
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 but that shareholders may consider favorable, including transactions in which shareholders might otherwise receive a premium for their shares. These include provisions establishing 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 and global health pandemics 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 maintain alternate sources for these components and products and the capability to produce such items in our own manufacturing facilities. However, 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 investors could result in higher interest rates on future debt obligations, restrict our ability to obtain sufficient financing to meet our long-term operational and capital needs or 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.

15





The coronavirus outbreak could impact our operations.

Our business and operations could be materially and adversely affected by the effects of a widespread outbreak of a contagious disease, including the recent outbreak of the respiratory illness caused by a coronavirus strain first identified in Wuhan, Hubei Province, China, or any other outbreak of contagious diseases, and other adverse public health developments. These effects could include disruptions or restrictions on our employees’ and other service providers’ ability to travel, as well as temporary closures of our facilities or the facilities of our customers, suppliers, or other vendors in our supply chain, potentially including single source suppliers.

 
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.

We have identified material weaknesses in our internal control over financial reporting and those weaknesses have led to a conclusion that our internal control over financial reporting and disclosure controls and procedures were not effective as of December 31, 2019. Our ability to remediate the material weaknesses, our discovery of additional weaknesses, and our inability to achieve and maintain effective
disclosure controls and procedures and internal control over financial reporting, could adversely affect our
results of operations, our stock price and investor confidence in our company.

Section 404 of the Sarbanes-Oxley Act of 2002 requires that companies evaluate and report on the effectiveness of their internal control over financial reporting. In addition, we engaged our independent registered public accounting firm to report on its evaluation of those controls. As disclosed in more detail under Item 9A, “Controls and Procedures” below, we have identified three material weaknesses as of December 31, 2019 in our internal control over financial reporting resulting from (i) a lack of a sufficient complement of corporate personnel with appropriate levels of accounting and controls knowledge and experience commensurate with our financial reporting requirements, (ii) a lack of design and effective controls over the analyses, accounting for, and review of non-routine transactions at the corporate level, and (iii) a lack of design and effective controls over the preparation, review and approval of account reconciliations at the corporate level and certain of our shared service locations. Due to the material weaknesses in our internal control over financial reporting, we have also concluded our disclosure controls and procedures were not effective as of December 31, 2019.

Failure to have effective internal control over financial reporting and disclosure controls and procedures could impair our ability to produce accurate financial statements on a timely basis and could lead to a restatement of our financial statements. For example, the identified material weaknesses resulted in immaterial adjustments to the consolidated financial statements for the year ended December 31, 2019 and caused a difference between the financial results we reported in the press release we issued on March 2, 2020 and furnished to the SEC with our Current Report on Form 8-K on the same date and reported in this annual report. If, as a result of the ineffectiveness of our internal control over financial reporting and disclosure controls and procedures, we cannot provide reliable financial statements, our business decision processes may be adversely affected, our business and results of operations could be harmed, investors could lose confidence in our reported financial information and our ability to obtain additional financing, or additional financing on favorable terms, could be adversely affected. In addition, failure to maintain effective internal control over financial reporting could result in sanctions by regulatory authorities.


16




Our management has taken action to begin remediating the material weaknesses; however, certain remedial actions have not started or have only recently been undertaken, and while we expect to continue to implement our remediation plans throughout the fiscal year ended December 31, 2020, we cannot be certain as to when remediation will be fully completed. Additional details regarding the initial remediation efforts are disclosed in more detail under Item 9A, “Controls and Procedures” below. In addition, we may in the future identify additional internal control deficiencies that could rise to the level of a material weakness or uncover other errors in financial reporting. During the course of our evaluation, we may identify areas requiring improvement and may be required to design additional enhanced processes and controls to address issues identified through this review. In addition, there can be no assurance that such remediation efforts will be successful, that our internal control over financial reporting will be effective as a result of these efforts or that any such future deficiencies identified may not be material weaknesses that would be required to be reported in future periods. In addition, we cannot assure you that our independent registered public accounting firm will be able to attest that such internal controls are effective when they are required to do so.

If we fail to remediate these material weaknesses and maintain effective disclosure controls and procedures or internal control over financial reporting, we may not be able to rely on the integrity of our financial results, which could result in inaccurate or late reporting of our financial results, as well as delays or the inability to meet our reporting obligations or to comply with SEC rules and regulations. The consequences of such failure include delisting actions by the New York Stock Exchange, investigation and sanctions by regulatory authorities and stockholder investigations and lawsuits, any of which could adversely affect our business and the trading price of our common stock.

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. 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 is 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.

17




Item 1B. Unresolved Staff Comments

None.


Item 2.    Properties
 
We maintain 25 major manufacturing facilities worldwide, including operations located in North America, Western Europe, Morocco, China 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, the United Kingdom, India and Dubai. Properties in South Carolina, Texas, Utah and the United Kingdom are leased. Our Aerospace & Defense segment has major manufacturing facilities located in North America, United Kingdom, France, Morocco and India. Properties in New York and California are leased. Our Industrial segment has major facilities located in North America, Germany, India and China. Properties in Germany, India and China are leased.

Segment
Leased
 
Owned
 
Total
Industrial
6

 
6

 
12

Aerospace & Defense
1

 
5

 
6

Energy
4

 
3

 
7

Total
11

 
14

 
25

 
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 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.


Item 3.    Legal Proceedings
 
For information regarding our legal proceedings refer to the first two paragraphs of Note 17, 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
 

18




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 March 2, 2020, there were 19,920,230 shares of our common stock outstanding and we had 54 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 (“2018 Peer Group”) and our updated peer group (“2019 Peer Group”). The companies included in the 2018 Peer Group and the 2019 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 along with divestitures of non-core businesses. 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 December 31, 2014 and its relative performance is tracked through December 31, 2019.

a5yearchart.jpg
 
12/14
 
12/15
 
12/16
 
12/17
 
12/18
 
12/19
CIRCOR International, Inc.
$
100.00

 
$
70.14

 
$
108.28

 
$
81.47

 
$
35.65

 
$
77.38

S&P 500
100.00

 
101.38

 
113.51

 
138.29

 
132.23

 
173.86

Russell 2000
100.00

 
95.59

 
115.95

 
132.94

 
118.30

 
148.49

2018 Peer Group
100.00

 
84.83

 
104.72

 
95.00

 
60.15

 
76.78

2019 Peer Group
100.00

 
78.65

 
84.12

 
112.27

 
87.27

 
116.16


2018 Peer Group: There are three companies included in the Company's 2018 Peer Group which are: Dover Corp, IDEX Corp and Schlumberger NV.
2019 Peer Group: The eight companies included in the Company's 2019 Peer Group are:Alfa Laval Ab, Flowserve Corp, Gardner Denver Holdings Inc, Imi Plc, Metso Oyj, Spx Flow Inc, Sulzer Ag and Weir Group Plc.

19




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 for the years ended December 31, 2019, 2018 and 2017, and the consolidated balance sheet data as of December 31, 2019 and 2018 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 for the years ended December 31, 2016 and 2015, and the consolidated balance sheet data as of December 31, 2017, 2016 and 2015, 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,
 
2019
 
2018 (2)
 
2017 (3)
 
2016 (3)
 
2015 (3)
Statement of (Loss) Income Data (1):
 
 
 
 
 
 
 
 
 
Net revenues
$
964,313

 
$
1,013,470

 
$
505,492

 
$
380,062

 
$
355,262

Gross profit
308,809

 
325,203

 
172,674

 
137,914

 
126,265

Operating income (loss)
37,681

 
21,653

 
16,307

 
(5,627
)
 
(12,538
)
Net (loss) income
$
(133,935
)
 
$
(39,384
)
 
$
11,789

 
$
10,101

 
$
9,863

Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Total assets
$
1,470,945

 
$
1,791,612

 
$
1,906,799

 
$
820,756

 
$
669,915

Total debt
636,297

 
786,037

 
795,208

 
251,200

 
90,500

Shareholders’ equity
391,411

 
528,993

 
601,974

 
404,410

 
400,777

Total capitalization
$
1,027,708

 
$
1,315,030

 
$
1,397,182

 
$
655,610

 
$
491,277

Other Financial Data:
 
 
 
 
 
 
 
 
 
Diluted earnings per common share
$
(6.73
)
 
$
1.99

 
$
0.70

 
$
0.61

 
$
0.58

Diluted weighted average common shares outstanding
19,903

 
19,834

 
16,849

 
16,536

 
16,913

Cash dividends declared per common share
$

 
$

 
$
0.15

 
$
0.15

 
$
0.15

(1) See Note 6, 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, 2019, December 31, 2018, and December 31, 2017 operating income above. The statement of income data for the year ended December 31, 2016 includes special and restructuring charges, net of $17.2 million. The statement of income data for the year ended December 31, 2015 includes special and restructuring charges, net of $14.4 million.
(2) On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts, which had a material impact on revenues during the year ended December 31, 2018. The Company discloses the impact of this change on revenue in Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. On January 1, 2018, we adopted ASU 2017-07, Compensation-Retirement Benefits (Topic 715), which had a material impact in 2018. Refer to Note 16, Retirement Plans, to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
(3) On December 11, 2017 we acquired FH, on October 12, 2016 we acquired Critical Flow Solutions, and on April 15, 2015 we acquired Schroedahl.
 



20




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, aerospace and defense, and energy. 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.
 
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. continues to improve in 2020. Capital expenditures in the industrial end markets that we serve are expected to grow modestly, although there are signs of a slowdown in Europe, North America, China and India. We expect to experience lower demand for our products that serve the power generation and stream driven commercial and residential construction markets. We expect continued growth in the downstream and midstream oil and gas markets. We do not expect an improvement in the commercial marine sector as global shipbuilding continues to be constrained, however, we do expect the regulatory environment will cause demand for our products in the commercial marine sector.

We continue to implement actions to mitigate the impact on our earnings from 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 2020.

Basis of Presentation
 
All significant intercompany balances and transactions have been eliminated in consolidation. 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. Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation, including the results of discontinued operations and reportable segment information.
 
Critical Accounting Policies
 
The Company’s discussion and analysis of its financial condition and results of operations is based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of these consolidated 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, 2018. For information regarding our significant 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.

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 2019 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 2019 goodwill assessment exceeded the carrying amounts by more than 20% for our Energy, Aerospace

21




& 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

2019 Compared With 2018

Consolidated Operations

(in thousands)
2019
 
2018
 
Total
Change
 
Divestiture
 
Operations
 
Foreign
Exchange
Net Revenues
 
 
 
 
 
 
 
 
 
 
 
Industrial
$
450,706

 
$
487,576

 
$
(36,870
)
 
$
(18,537
)
 
$
(1,203
)
 
$
(17,130
)
Aerospace & Defense
272,625

 
237,017

 
35,608

 

 
39,133

 
(3,525
)
Energy
240,982

 
288,877

 
(47,895
)
 
(62,507
)
 
16,483

 
(1,871
)
Consolidated Net Revenues
$
964,313

 
$
1,013,470

 
$
(49,157
)
 
$
(81,044
)
 
$
54,413

 
$
(22,526
)
 
Net revenues in 2019 were $964.3 million, a decrease of $(49.2) million from 2018 primarily driven by lower revenue as a result of divestitures $(81.0) million and unfavorable foreign exchange of $(22.5) million, partially offset by operational growth in all segments of $54.4 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. We define segment operating income as GAAP operating income excluding intangible amortization and amortization of fair value step-ups of inventory and fixed assets from acquisitions completed subsequent to December 31, 2011, the impact of restructuring related inventory write-offs, impairment charges and special charges or gains. The Company also refers to this measure as adjusted operating income. The Company uses this measure because it helps management understand and evaluate the segments’ core operating results and facilitates a comparison of performance for determining incentive compensation achievement.

For information regarding our segment determination refer to Note 19, Business Segment and Geographical Information, of the consolidated financial statements included in this Annual Report.

The following tables present information on net revenues and operating income of our business segments, along with a reconciliation of total segment operating income to the Company's consolidated operating income.




22




(in thousands)
2019
 
2018
 
Change
Net Revenues
 
 
 
 
 
Industrial
$
450,706

 
$
487,576

 
$
(36,870
)
Aerospace & Defense
272,625

 
237,017

 
35,608

Energy
240,982

 
288,877

 
(47,895
)
Consolidated Net Revenues
$
964,313

 
$
1,013,470

 
$
(49,157
)
 
 
 
 
 
 
Operating Income
 
 
 
 
 
Industrial - Segment Operating Income
$
52,188

 
$
57,340

 
$
(5,152
)
Aerospace & Defense - Segment Operating Income
52,480

 
36,047

 
16,433

Energy - Segment Operating Income
30,394

 
38,779

 
(8,385
)
Corporate expenses
(25,262
)
 
(30,299
)
 
5,037

Subtotal
109,800

 
101,867

 
7,933

Restructuring charges, net
5,186

 
5,848

 
(662
)
Special charges, net
17,686

 
13,061

 
4,625

Special and restructuring charges, net (1)
22,872

 
18,909

 
3,963

Restructuring related inventory charges (1)
(820
)
 
346

 
(1,166
)
Amortization of inventory step-up

 
6,600

 
(6,600
)
Acquisition amortization
45,715

 
47,310

 
(1,595
)
Acquisition depreciation
4,352

 
7,049

 
(2,697
)
Restructuring and other costs
49,247

 
61,305

 
(12,058
)
Consolidated Operating Income
$
37,681

 
$
21,653

 
$
16,028

 
 
 
 
 
 
Consolidated Operating Margin
3.9
%
 
2.1
%
 
 
 
 
 
 
 
 
(1) See Note 6, Special and Restructuring charges, net of the consolidated financial statements included in this Annual Report, for additional details.

Industrial Segment

(in thousands, except percentages)
2019
 
2018
 
Change
Net Revenues as reported
$
450,706

 
$
487,576

 
$
(36,870
)
Net Revenues excluding divestiture (1)
437,227

 
455,560

 
(18,333
)
Segment Operating Income as reported
52,188

 
57,340

 
(5,152
)
Segment Operating Income excluding divestiture (2)
48,701

 
51,642

 
(2,941
)
Segment Operating Margin (adjusted)
11.1
%
 
11.3
%
 
 
Orders
$
447,439

 
$
510,115

 
$
(62,676
)
(1) Adjusted for the August 2019 divestiture of certain assets and liabilities related to our Spence and Nicholson product lines and the October 2018 divestiture of our Rosscor B.V. and SES International B.V. subsidiaries (the "Delden Business"). The Spence and Nicholson components generated revenues of $13.5 million and $20.7 million for the year ended December 31, 2019 and December 31, 2018, respectively. The Delden business generated revenues of $0.0 million and $11.3 million for the year ended December 31, 2019, and December 31, 2018, respectively.
(2) Adjusted for the August 2019 divestiture of certain assets and liabilities related to our Spence and Nicholson product lines, which contributed $3.5 million and $6.4 million to segment operating income for the year ended December 31, 2019 and December 31, 2018, respectively, and for the divestiture of the Delden business, which contributed $0.0 million and ($0.7) million to segment operating income for the year ended December 31, 2019, and December 31, 2018, respectively.


23




Industrial segment net revenues, excluding divestitures, decreased $18.3 million, or (-4%), in 2019 compared to 2018. The decrease was primarily driven by timing of projects in Europe and North American Pumps businesses ("Pumps Businesses") of (-4%).

Segment operating income, excluding divestitures, decreased $2.9 million, or (-6%), to $48.7 million for 2019 compared to $51.6 million for 2018, primarily driven by the Pumps Businesses (-14%), partially offset by the Valves businesses (+6%) along with operational efficiencies in headquarters.

Industrial segment orders, excluding divestitures, decreased $62.7 million, or (-12%), to $446.7 million for 2019 as compared to $510.1 million in 2018, driven by declines within our Pumps Businesses (-9%) and Valves Businesses (-3%).

 
 
 
 
 
 
 
 
 
 
 
QUARTERLY INDUSTRIAL SEGMENT INFORMATION
(in thousands, except percentages)
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
2018
2019
 
1ST QTR
2ND QTR
3RD QTR
4TH QTR
TOTAL
1ST QTR
2ND QTR
3RD QTR
4TH QTR
TOTAL
Orders
136,607
136,746
114,876
121,886
510,115
123,746
120,660
105,710
97,323
447,439
Net Revenues
117,131
131,064
118,734
120,647
487,576
110,738
119,322
113,596
107,050
450,706
Operating Income
12,948
15,037
14,609
14,746
57,340
10,787
16,138
13,953
11,310
52,188
Operating Margin
11.1%
11.5%
12.3%
12.2%
11.8%
9.7%
13.5%
12.3%
10.6%
11.6%
Backlog (1)
170,568
167,325
178,044
163,801
163,801
174,228
175,717
159,056
152,084
152,084
(1) At end of period.
 
 
 
 
 
 
 
 

Aerospace & Defense Segment

(in thousands, except percentages)
2019
 
2018
 
Change
Net Revenues
$
272,625

 
$
237,017

 
$
35,608

Segment Operating Income
52,480

 
36,047

 
16,433

Segment Operating Margin
19.2
%
 
15.2
%
 
 
Orders
$
313,939

 
$
277,469

 
$
36,470


Aerospace & Defense segment net revenues increased by $35.6 million, or 15%, in 2019 as compared to 2018. The increase was driven by our Defense businesses (+10%) and our Aerospace businesses (+5%).

Segment operating income increased $16.4 million, or 46%, to $52.5 million for 2019 compared to $36.0 million for 2018. The increase in operating income was driven by our Defense businesses (+25%) and our Aerospace businesses (21%).
 
Aerospace & Defense segment orders increased $36.5 million, or 13%, to $313.9 million for 2019 compared to $277.5 million in 2018, driven by our Defense businesses (+10%) and our Aerospace businesses (+3%).


24




 
 
 
 
 
 
 
 
 
 
 
QUARTERLY A&D SEGMENT INFORMATION
(in thousands, except percentages)
(unaudited)
 
2018
2019
 
1ST QTR
2ND QTR
3RD QTR
4TH QTR
TOTAL
1ST QTR
2ND QTR
3RD QTR
4TH QTR
TOTAL
Orders
59,793
59,441
81,533
76,702
277,469
88,107
93,405
63,968
68,459
313,939
Net Revenues
58,477
57,500
57,757
63,283
237,017
61,240
64,694
67,621
79,070
272,625
Operating Income
8,931
6,992
8,709
11,415
36,047
9,374
10,443
13,564
19,099
52,480
Operating Margin
15.3%
12.2%
15.1%
18.0%
15.2%
15.3%
16.1%
20.1%
24.2%
19.2%
Backlog (1)
165,841
152,081
150,571
156,256
156,256
206,457
234,964
206,917
194,459
194,459
(1) At end of period.

Energy Segment

(in thousands, except percentages)
2019
 
2018
 
Change
Net Revenues as reported
$
240,982

 
$
288,877

 
$
(47,895
)
Net Revenues excluding divestiture (1)
237,876

 
223,264

 
$
14,612

Segment Operating Income as reported
30,394

 
38,779

 
(8,385
)
Segment Operating Income excluding divestiture (2)
30,394

 
32,183

 
(1,789
)
Segment Operating Margin (adjusted)
12.8
%
 
14.4
%
 
 
Orders
$
216,114

 
$
311,626

 
$
(95,512
)
(1) Adjusted for the January 2019 divestiture of our Reliability Services business, which generated revenues of $3.1 million and $65.6 million for the years ended December 31, 2019 and December 31, 2018, respectively.
(2) Adjusted for the January 2019 divestiture of our Reliability Services business, which contributed $0.0 million and $6.6 million to segment operating income for the years ended December 31, 2019 and December 31, 2018, respectively.

Energy segment net revenues, excluding divestiture, increased $14.6 million, or 7%, in 2019 compared to 2018. The increase was primarily driven by organic growth in our Refinery Valves business (+7%) and Pipeline business (+2%), partially offset by declines within our Instrumentation and Sampling business (-1%), and unfavorable foreign currency fluctuations (-1%). The Instrumentation and Sampling business was sold in January 2020. See Note 1, Description of Business, of the consolidated financial statements included in this Annual Report.

Segment operating income, excluding divestiture, decreased $1.8 million, or (-6%), to $30.4 million for 2019 compared to $32.2 million in 2018.

Energy segment orders decreased $95.5 million, or (-31%), to $216.1 million for 2019 compared to $311.6 million in 2018, primarily driven by the divestiture of our Reliability Services business (-21%) and in comparison to a strong 2018 order book within our Refinery Valves business (-9%).

QUARTERLY ENERGY SEGMENT INFORMATION
(in thousands, except percentages)
(unaudited)
 
2018
2019
 
1ST QTR
2ND QTR
3RD QTR
4TH QTR
TOTAL
1ST QTR
2ND QTR
3RD QTR
4TH QTR
TOTAL
Orders
85,336
66,825
87,146
72,319
311,626
48,088
43,982
53,276
70,768
216,114
Net Revenues
64,279
71,094
70,718
82,786
288,877
66,876
61,752
55,835
56,519
240,982
Operating Income
5,627
10,691
9,726
12,735
38,779
9,978
8,343
5,286
6,787
30,394
Operating Margin
8.8%
15.0%
13.8%
15.4%
13.4%
14.9%
13.5%
9.5%
12.0%
12.6%
Backlog (1)
112,336
106,190
121,600
110,498
110,498
80,714
62,364
59,309
74,124
74,124
(1) at end of period.

25




Corporate Expenses

Corporate expenses decreased $5.0 million to $25.3 million for 2019. This decrease was primarily driven by ongoing cost savings initiatives resulting in lower professional fees, variable compensation and integration costs.

Special and Restructuring charges, net

During 2019, the Company recorded a total of $22.9 million of Special and restructuring charges. In our consolidated statements of (loss) income, these charges are recorded in Special and restructuring charges, net. These costs are primarily related to our simplification and restructuring efforts, as well as cost relating to an unsolicited tender offer to acquire the Company. These restructuring charges and other special charges are described in further detail in Note 6, Special and Restructuring charges, net, of the consolidated financial statements included in this Annual Report.

Restructuring and other costs

During 2019, the Company recorded a total of $49.2 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 acquisition of Colfax Corporation's Fluid Handling ("FH") business, 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.

Interest Expense, Net
 
Interest expense decreased $4.4 million to $48.6 million for 2019. The change in interest expense was primarily due to lower debt balances, and our net investment hedge, partially offset by an increase in interest rates.

Other Income, Net
 
Other income, net, was $0.8 million for 2019 compared to $7.4 million in 2018. The difference of $6.6 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 recorded in the Other (Income) Expense, net caption on our consolidated statement of (loss) income. In addition we experienced lower gains from foreign exchange in 2019 compared to 2018.

Comprehensive (Loss) Income

Comprehensive loss increased $72.1 million, from a comprehensive loss position of $72.4 million for the year-ended December 31, 2018 to a comprehensive loss position of $144.5 million for the year-ended December 31, 2019. This change was primarily driven by an increase in net loss of $103.1 million in our discontinued operations, partially offset by $15.8 million of lower negative effects of foreign currency translation, and reduced losses in our continuing operations of $8.6 million, as compared to the prior year.

As of December 31, 2019, we had a cumulative currency translation adjustment of $18.2 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 $18.2 million, which would be included as a special charge within the consolidated statements of (loss) income.


26




 (Benefit from) Provision for Income Taxes

The table below outlines the change in effective tax rate for 2019 and 2018 (in thousands, except percentages).

 
2019
 
2018
 
Change
Income/ (Loss) Before Tax
$(10,092)
 
$(23,896)
 
$13,804
 
 
 
 
 
 
US tax rate
21.0%
 
21.0%
 
—%
State taxes
15.5%
 
3.8%
 
11.7%
US permanent differences
(1.6)%
 
(1.0)%
 
(0.6)%
Foreign tax rate differential
(26.0)%
 
(7.6)%
 
(18.4)%
Unbenefited foreign losses
(0.5)%
 
(5.5)%
 
5.0%
Global intangible low-taxed income ("GILTI") impact
(3.9)%
 
(20.7)%
 
16.8%
Intercompany financing
30.4%
 
12.7%
 
17.7%
Foreign tax credit write off
—%
 
(45.6)%
 
45.6%
Tax reserve
(0.3)%
 
1.3%
 
(1.6)%
Rate change
5.9%
 
—%
 
5.9%
Foreign-derived intangible income ("FDII")
10.7%
 
0.1%
 
10.6%
Dispositions
(227.0)%
 
—%
 
(227.0)%
Prior period adjustment
44.1%
 
4.3%
 
39.8%
Equity compensation
(10.8)%
 
(4.2)%
 
(6.6)%
R&D credits
13.1%
 
2.7%
 
10.4%
Other
(16.0)%
 
(0.8)%
 
(15.2)%
Total
(145.4)%
 
(39.5)%
 
(105.9)%

27




Results of Operations

2018 Compared With 2017

Consolidated Operations
(in thousands)
2018
 
2017
 
Total
Change
 
Acquisitions
 
Operations
 
Foreign
Exchange
Net Revenues
 
 
 
 
 
 
 
 
 
 
 
Industrial
$
487,576

 
$
139,110

 
$
348,466

 
$
344,456

 
$
1,911

 
$
2,099

Aerospace & Defense
237,017

 
182,983

 
54,034

 
46,929

 
4,669

 
2,436

Energy
288,877

 
183,399

 
105,478

 
57,290

 
47,068

 
1,120

Consolidated Net Revenues
$
724,593

 
$
322,093

 
$
402,500

 
$
391,385

 
$
6,580

 
$
4,535


Net revenues in 2018 were $1.0 billion, an increase of $508.0 million from 2017. The increase in net revenue was primarily driven by our acquisition of the FH business, which contributed $448.7 million in net revenues, along with operations increases of $53.6 million and favorable foreign exchange increase of $5.7 million.

Segment Results

The following table present information on net revenues and operating income of our business segments, along with a reconciliation of total segment operating income to the Company's consolidated operating income.
(in thousands)
2018
 
2017
 
Change