UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): November 9, 2017
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, MASSACHUSETTS 01803-4238
(Address of principal executive offices) (Zip Code)
(781) 270-1200
(Registrant's telephone number, including area code)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
o | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
o | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
o | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
o | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933(§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging Growth Company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Item 7.01. Regulation FD Disclosure.
In connection with its previously announced agreement to acquire the fluid handling business of Colfax Corporation (the “Transaction”), CIRCOR International, Inc. (the “Company”) will provide certain financial and other information, including the information attached as Exhibits 99.1, 99.2, and 99.3 to this Current Report on Form 8-K, to prospective lenders for the $785 million secured term loan facility and $150 million revolving credit facility to be entered into by the Company in connection with the Transaction.
The information contained herein includes financial measures of the Company that are not calculated in accordance with accounting principles generally accepted in the United States (“GAAP”). The Company’s management believes that these non-GAAP financial measures provide supplemental information that enhances management’s, investors’ and prospective lenders’ ability to evaluate the Company’s operating results and ability to repay its obligations.
These non-GAAP financial measures are not intended to be used in isolation and should not be considered a substitute for any other performance measure determined in accordance with GAAP. Investors and potential investors are cautioned that there are material limitations associated with the use of non-GAAP financial measures as an analytical tool, including that other companies may calculate similar non-GAAP financial measures differently than as defined in the attached materials, limiting their usefulness as a comparative tool. The Company compensates for these limitations by providing specific information regarding the GAAP amounts excluded from the non-GAAP financial measures. The Company further compensates for the limitations of its use of non-GAAP financial measures by presenting comparable GAAP measures. Investors and potential investors are encouraged to review the reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures contained herein.
The information in this Item 7.01 of Current Report on Form 8-K and Exhibits 99.1, 99.2, and 99.3 attached hereto shall not be deemed “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such a filing.
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits
Forward-Looking Statements
This Current Report on Form 8-K and Exhibit 99.1 attached hereto contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements may often be identified by the use of words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “should,” “will,” “potential,” and similar terms and expressions. Reliance should not be placed on forward-looking statements because they involve unknown risks, uncertainties and other factors, which are, in some cases, beyond the control of the Company. Any statements in this Current Report on Form 8-K that are not statements of historical fact are forward-looking statements, including, but not limited to, statements regarding the Company’s proposed debt financing, the benefits and synergies of the proposed Transaction, including the effect of the Transaction on revenue, cost savings, cash flow and operating margin; the expected timing for completing the Transaction; and the Company’s expected product offerings, market position and market opportunities. The following important factors and uncertainties, among others, could cause actual events, performance or results to differ materially from the anticipated events, performance or results expressed or implied by such forward-looking statements: the ability to satisfy the conditions to closing of the proposed Transaction, on the expected timing or at all; the ability to obtain required regulatory approvals for the proposed Transaction, on the expected timing or at all; the occurrence of any event that could give rise to the termination of the purchase agreement relating to the Transaction; higher than expected or unexpected costs associated with or relating to the Transaction; the risk that expected benefits, synergies and growth prospects of the Transaction may not be achieved in a timely manner, or at all; the risk that the fluid handling business may not be successfully integrated with the Company’s business following the closing of the Transaction; the risk that the Company will be unable to retain and hire key personnel; and the risk that disruption from the Transaction may adversely affect the Company’s business and relationships with its customers, suppliers or employees. For additional information about factors that could cause actual results to differ materially from those described in the forward-looking statements, please refer to the Company’s filings with the Securities and Exchange Commission, including the risk factors contained in the Company’s most recent Annual Report on Form 10-K and subsequent Quarterly Reports on Form 10-Q. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
CIRCOR INTERNATIONAL, INC. | |
Date: November 9, 2017 | By: /s/ Rajeev Bhalla |
Name: Rajeev Bhalla | |
Title: Executive Vice President and Chief Financial Officer | |
Public Lender Presentation
November 2017
Confidential - Not for Public Distribution
2
Forward-Looking Statements
This presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These statements may often be identified by the use of words such as
“anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “should,” “will,” “potential,” and similar terms
and expressions. Reliance should not be placed on forward-looking statements because they involve unknown risks, uncertainties and
other factors, which are, in some cases, beyond the control of CIRCOR. Any statements in this presentation that are not statements of
historical fact are forward-looking statements, including, but not limited to, statements regarding the benefits and synergies of the
proposed acquisition of the Fluid Handling business, including the effect of the transaction on revenue, cost savings, earnings and
operating margin; the expected timing for completing the transaction; CIRCOR’s expected product offerings, market position and market
opportunities; and the availability of debt financing for the transaction. The following important factors and uncertainties, among others,
could cause actual events, performance or results to differ materially from the anticipated events, performance or results expressed or
implied by such forward-looking statements: the ability to satisfy the conditions to closing of the proposed transaction, on the expected
timing or at all; the ability to obtain required regulatory approvals for the proposed transaction, on the expected timing or at all; the
occurrence of any event that could give rise to the termination of the acquisition agreement; higher than expected or unexpected costs
associated with or relating to the transaction; the risk that expected benefits, synergies and growth prospects of the transaction may not be
achieved in a timely manner, or at all; the risk that the Fluid Handling business may not be successfully integrated with CIRCOR’s
business following the closing; the risk that CIRCOR will be unable to retain and hire key personnel; and the risk that disruption from the
transaction may adversely affect CIRCOR’s business and relationships with its customers, suppliers or employees. For additional
information about factors that could cause actual results to differ materially from those described in the forward-looking statements, please
refer to our filings with the Securities and Exchange Commission, including the risk factors contained in our most recent Annual Report on
Form 10-K and subsequent Quarterly Reports on Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or otherwise.
Confidential - Not for Public Distribution
3
Use of Non-GAAP Financial Measures
Adjusted operating income, Adjusted operating margin, Adjusted net income, Adjusted earnings per share (diluted), EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, pro forma combined figures, net debt, net
leverage and free cash flow are non-GAAP financial measures. These non-GAAP financial measures are used by management in our financial and operating decision making because we believe they better reflect
our ongoing business and allow for meaningful period-to-period comparisons. We believe these non-GAAP financial measures provide useful information to investors and others in understanding and evaluating the
Company’s current operating performance and future prospects in the same manner as management does, if they so choose. These non-GAAP financial measures also allow investors and others to compare the
Company’s current financial results with the Company’s past financial results in a consistent manner. For example:
• We exclude costs and tax effects associated with restructuring activities, such as reducing overhead and consolidating facilities. We believe that the costs related to these restructuring activities are not indicative
of our normal operating costs
• We exclude certain acquisition-related costs, including significant transaction costs and amortization of inventory step-ups and the related tax effects. We exclude these costs because we do not believe they are
indicative of our normal operating costs.
• We exclude the expense and tax effects associated with the non-cash amortization of acquisition-related intangible assets because a significant portion of the purchase price for acquisitions may be allocated to
intangible assets that have lives of 5 to 20 years. Exclusion of the non-cash amortization expense allows comparisons of operating results that are consistent over time for both our newly acquired and long-held
businesses and with both acquisitive and non-acquisitive peer companies
• We also exclude certain gains/losses and related tax effects, which are either isolated or cannot be expected to occur again with any predictability, and that we believe are not indicative of our normal operating
gains and losses. For example, we exclude gains/losses from items such as the sale of a business, significant litigation-related matters and lump-sum pension plan settlements.
CIRCOR’s management uses these non-GAAP measures, in addition to GAAP financial measures, as the basis for measuring the Company’s operating performance and comparing such performance to that of prior
periods and to the performance of our competitors. We use such measures when publicly providing our business outlook, assessing future earnings potential, evaluating potential acquisitions and dispositions and in
our financial and operating decision-making process, including for compensation purposes.
Investors and potential investors should recognize that these non-GAAP measures might not be comparable to similarly titled measures of other companies. These measures should be considered in addition and
not as a substitute for or superior to, any measure of performance, cash flow or liquidity prepared in accordance with accounting principles generally accepted in the United States. Reconciliations of forward-looking
non-GAAP measures, including net debt-to-EBITDA ratio, to their most directly comparable GAAP measures are not being provided in this presentation because future operating results, cash flows and debt
levels cannot be reasonably calculated or predicted at this time. Accordingly, such reconciliations are not available without unreasonable effort.
None of Colfax, its affiliates or their respective representatives have any responsibility for the content of this presentation and disclaim all responsibility therefor.
Confidential - Not for Public Distribution
4
Special Notice regarding Publicly Available Information
THE COMPANY HAS REPRESENTED THAT THE INFORMATION CONTAINED IN THIS LENDER PRESENTATION REGARDING THE COMPANY
OTHER THAN PROJECTIONS, FINANCIAL ESTIMATES, FORECASTS AND OTHER FORWARD-LOOKING INFORMATION IS CONFIDENTIAL,
SENSITIVE AND PROPRIETARY BUT DOES NOT CONTAIN MATERIAL NON-PUBLIC INFORMATION WITHIN THE MEANING OF UNITED
STATES FEDERAL SECURITIES LAW WITH RESPECT TO THE COMPANY OR ITS SECURITIES. THE RECIPIENT OF THIS LENDER
PRESENTATION HAS STATED THAT IT DOES NOT WISH TO RECEIVE MATERIAL NON-PUBLIC INFORMATION WITH RESPECT TO THE
COMPANY OR ITS SECURITIES AND ACKNOWLEDGES THAT OTHER LENDERS HAVE RECEIVED A LENDER PRESENATION THAT
CONTAINS ADDITIONAL INFORMATION WITH RESPECT TO THE COMPANY OR ITS SECURITIES THAT MAY BE MATERIAL.
NOTWITHSTANDING THE RECIPIENT’S DESIRE TO ABSTAIN FROM RECEIVING MATERIAL NON-PUBLIC INFORMATION WITH RESPECT TO
THE COMPANY AND THE ABSENCE OF MATERIAL NON-PUBLIC INFORMATION IN THIS LENDER PRESENTATION, THE RECIPIENT
ACKNOWLEDGES THAT (1) ALL INDIVIDUALS LISTED AS CONTACTS ARE ON THE PRIVATE SIDE OF THE INFORMATION WALL AND THAT
IF THE RECIPIENT CHOOSES TO COMMUNICATE WITH ANY SUCH INDIVIDUAL THE RECIPIENT ASSUMES THE RISK OF RECEIVING
MATERIAL NON-PUBLIC INFORMATION CONCERNING THE COMPANY AND ITS RELATED PARTIES, OR THE SECURITIES THEREOF, (2)
INFORMATION OBTAINED AS A RESULT OF BECOMING A LENDER MAY INCLUDE SUCH MATERIAL NON-PUBLIC INFORMATION AND (3)
THAT IT HAS DEVELOPED COMPLIANCE PROCEDURES REGARDING THE USE OF MATERIAL NON-PUBLIC INFORMATION AND THAT IT
WILL HANDLE SUCH MATERIAL NON-PUBLIC INFORMATION IN ACCORDANCE WITH APPLICABLE LAW, INCLUDING FEDERAL AND STATE
SECURITIES LAWS. RECIPIENT FURTHER ACKNOWLEDGES THAT OTHER LENDERS HAVE RECEIVED A LENDER PRESENTATION THAT
CONTAINS ADDITIONAL INFORMATION WITH RESPECT TO THE COMPANY OR ITS SECURITIES THAT MAY BE MATERIAL. NEITHER THE
COMPANY NOR THE LEAD ARRANGERS TAKE ANY RESPONSIBILITY FOR THE RECIPIENT'S DECISION TO LIMIT THE SCOPE OF THE
INFORMATION IT HAS OBTAINED IN CONNECTION WITH ITS EVALUATION OF THE COMPANY AND THE FACILITIES.
Confidential - Not for Public Distribution
5
Scott Buckhout
Chief Executive Officer
Rajeev Bhalla
Chief Financial Officer
AJ Sharma
Senior Vice President, Business Development
Tanya Dawkins
Corporate Treasurer
Today’s Presenters
Confidential - Not for Public Distribution
6
Agenda
Transaction Overview
Chris Blum – Deutsche Bank
Section 1
Key Credit Highlights
Scott Buckhout – CEO
AJ Sharma – SVP, Business Development
Section 3
Financial Overview
Rajeev Bhalla – CFO
Tanya Dawkins – Corporate Treasurer
Section 4
Company Overview
Scott Buckhout – CEO
AJ Sharma – SVP, Business Development
Section 2
Confidential - Not for Public Distribution
Syndication Overview
Ryan Corning – Deutsche Bank
Section 5
Section 1
Transaction Overview
Confidential - Not for Public Distribution
8
Transaction Overview
Background
On September 24, 2017, CIRCOR International, Inc. entered into a definitive agreement to acquire the
Fluid Handling business (“FH”) from Colfax (“CFX”) for $855 million (the “Transaction”) or $765 million, net
of $90 million anticipated tax benefits associated with the Transaction
– CIRCOR provides flow and motion control solutions for the oil & gas, aerospace & defense, power
process, and industrial markets, and operates through two segments: Energy and Advanced Flow
Solutions. CIRCOR’s LTM Q3 2017 revenue and adj. EBITDA are $614 million and $69 million (11.3%
margin), respectively
– FH is part of the Air and Gas Handling segment of CFX, which provides pumps and related services to
the industrial, oil & gas, defense and commercial marine markets. FH’s LTM Q3 2017 revenue and adj.
EBITDA are $466 million and $67 million (14.3% margin), respectively
Transaction is expected to close in December 2017 (subject to customary closing conditions including
regulatory approvals)
Purchase Price
Purchase price of $855 million consisting of $542 million cash, ~3.3 million CIRCOR shares valued at $163
million(a) and $150 million of assumed net pension liabilities
CFX will own ~16% of CIRCOR’s fully diluted pro forma shares outstanding
– Lock-up period of 6 months
Debt Financing
The acquisition financing for the Transaction will consist of the following structure:
– $150 million Revolving Credit Facility (“RCF”)
– $785 million First Lien Term Loan (“TLB”)
– $1,047 million(b) pro forma market capitalization, representing a 57% equity cushion
Pro forma for the financing, the Company is expected to have 4.8x net leverage at closing
– Target net leverage of 3.0x by end of 2019
Note: CIRCOR financials reflect the impact of all acquisitions and divestures to date. Refer to Appendix for definition of adjusted EBITDA and a reconciliation to US GAAP net income
(a) Based on 20-day volume weighted average price of $49.48 as of September 25, 2017
(b) Market data as of September 25, 2017
Confidential - Not for Public Distribution
9
Estimated Sources, Uses and Pro Forma Capitalization
Note: Cash & debt balances presented as of Q3 2017
(a) Based on purchase price of ~$855 million less $163 million CIRCOR equity issuance and $150 million pension liability
(b) Based on 20-day volume weighted average price of $49.48 as of September 25, 2017
(c) Market data as of September 25, 2017
(d) Reflects $23 million of anticipated synergies and $67 million of stand-alone FH adjusted EBITDA
Source: Company disclosure
Target net leverage of 3.0x by end of 2019
Confidential - Not for Public Distribution
$855mm total
FH cash
purchase
consideration
($765mm net
of tax benefits)
Sources of funds Uses of funds
New revolver $-- Repay existing CIRCOR debt $269
New 1st lien term loan 785 FH cash purchase consideration 542
Cash from balance sheet 61 CIRCOR equity issued to CFX 163
CIRCOR equity issued to CFX 163 FH pension liability 150
FH pension liability 150 Estimated fees, expenses & OID 35
Total sources $1,159 Total uses $1,159
Pro forma capitalization
As of % of % of
Q3 2017 xEBITDA total cap. Adj. Pro forma xEBITDA total cap.
Cash $76 (61) $15
Revolver $172 2.5x 14.9% (172) $-- -- --
New revolver -- -- -- -- -- --
Term loan 97 1.4x 8.4% (97) -- -- --
New 1st lien term loan -- -- -- 785 785 4.9x 42.8%
Total debt $269 3.9x 23.3% $785 4.9x 42.8%
Net debt $193 2.8x 16.8% $770 4.8x 42.1%
Market capitalization 884 12.7x 76.7% 163 1,047 6.6x 57.2%
Total capitalization $1,153 16.6x 100.0% $1,832 11.5x 100.0%
LTM Q3 2017 operating metrics
Adjusted EBITDA $69 90 $159
PF interest expe se 10 29 38
Capital expenditures 12 15 27
Credit statistics
Adj. EBITDA / interest expense 7.2x 4.1x
(Adj. EBITDA - capex) / interest expense 6.0x 3.4x
(d)
(c)
(b)
(b)
(a)
Section 2
Company Overview
Confidential - Not for Public Distribution
11
What is CIRCOR?
En
e
rg
y
Instrument Valves & Fittings: Process controls
Highly Engineered Ball Valves
Welded Body Valve: Gas transmission
A
d
va
n
ce
d
Flo
w
Solution
s
Sensors: Brake pedal position sensors
Control Valves: Park brake selector valves
Flight Components: Landing gear valves
Fluid
H
a
ndlin
g
3 Screw Pumps: Fuel oil transfer
Specialty Centrifugal Pump: Water treatment
Progressing Cavity: Sludge removal
1
2
3
1
2
3
1
2
3
1
2
3
Upstream Drilling Rig
1
2 3
Commercial Plane
2
1
3
Industrial plant
Delivering smart, reliable, flow and motion control solutions for mission critical applications
Confidential - Not for Public Distribution
12
Strategic Rationale
Combination creates $1.1bn global manufacturer of flow control
products for severe service applications
Strategic Overview
Fluid Handling (“FH”) is a leading supplier of screw pumps
– Serves severe service flow control applications in diverse end markets
– Provides end-to-end engineering support to customers, ~115 FTE engineers
– Leading brands in served niches
Highly complementary product portfolio between valves and pumps
– Common end markets
– Natural and attractive adjacency in the flow control sector
– Significant sourcing, manufacturing and engineering synergies
– Broadens and diversifies CIRCOR’s product technology portfolio
The acquisition is expected to deliver strong strategic benefits
– Broader portfolio of solutions for customers
– Potential of sales synergy, particularly in defense and O&G markets
– Builds CIRCOR into larger diversified flow control company
FH products and culture are consistent with CIRCOR’s focus on engineered, severe service solutions
Expected Financial
Impact
Operating margin and cash flow accretive in year 1
Meaningful annual tax benefit of ~$7 million from step-up available
$23 million of cost synergies expected through sourcing, G&A reduction and
manufacturing rationalization
Confidential - Not for Public Distribution
13
Fluid Handling Consistent with Disciplined M&A Strategy
Building on Track Record
of Successful M&A
Differentiated Technology
Severe service engineered applications in niche flow control segments
A leader in 3-screw pumps
A leader in 2-screw and specialty centrifugal pumps
Compelling Growth Opportunity
Robust new product development pipeline
Cyclical rebound in Commercial Marine and Oil & Gas
Steady aftermarket growth
Realizable Synergies
Sourcing savings, G&A reductions, and manufacturing rationalization
Upside sales synergies in certain end markets
Attractive Financial Impact
Operating margin and cash flow accretive in year 1 with upside from synergies
Strong ROIC
Confidential - Not for Public Distribution
14
Overview of CIRCOR Segments
Advanced Flow Solutions
(25% of PF Revenue)
Financial Summary:
LTM Q3 Revenue
LTM Q3 Adj. EBITDA
% LTM Adj. EBITDA margin
$270
$47
17.5%
Key Product Categories:
Aerospace Valves
Defense Switches and
Sensors
Pump Protecting Valves
Control Valves
Key Brands:
Fluid Handling
(43% of PF Revenue)
Financial Summary:
LTM Q3 Revenue
LTM Q3 Adj. EBITDA
% LTM Adj. EBITDA margin
$466
$67
14.3%
Key Product Categories:
3 Screw Pumps
2 Screw Pumps
Specialty Centrifugal
Progressing Cavity
Reliability Services
Key Brands:
Note: Amounts LTM as of Q3 2017. Combined EBITDA includes corporate expenses. Segment EBITDA and margins exclude corporate expenses and are pre-synergy. Certain Fluid Handling product
lines will be merged with Energy or Advanced Flow Solutions after closing
(a) Includes $23mm in synergies
Energy
(32% of PF Revenue)
Financial Summary:
LTM Q3 Revenue
LTM Q3 Adj. EBITDA
% LTM Adj. EBITDA margin
$344
$40
11.5%
Key Product Categories:
Ball Valves
Instrumentation & Sampling
Refinery Valves
Pipeline Products
Key Brands:
LTM Q3 PF Revenue: $1,080
LTM Q3 PF Adj. EBITDA:(a) $159
% PF Adjusted EBITDA Margin: 14.7%
Employees: ~4,900
Confidential - Not for Public Distribution
($ millions)
15
Fluid
Handling
Energy
AFS
Pumps
Reliability
Services
Valves
Pumps
MC
& RS
Pro forma Combined Company Profile
Broader
Product Offering
Greater Scale
(Sales)
Margin Expansion
(Adj. EBITDA)
Combined Sales Mix
($ millions)
Pro forma
Note: Amounts presented LTM Q3 2017 with the exception of combined Sales Mix which is presented as of FY2016A
$614
$466 $1,080
11%
14%
13%
15%
Synergies
Valves
Motion
Control
Americas
Europe
Asia
MEA
ROW
O&G
Industrial
& Power
Aerospace
& Defense
Commercial
Marine
Other
End Markets Geography Segment
Confidential - Not for Public Distribution
16
52%
17%
37%
18%
42%
28%
24%
16%
20%
6%
7%
6%
18%
8%
CIR CFH Pro forma
Diversified End Market Exposure and Strong
Aftermarket Channels
($ millions)
Oil & Gas
Industrial
Power
Aerospace & Defense
Comm. Marine
Note: Amounts presented LTM Q3 2017
OEM
74%
$614 $466 $1,080
Sales Mix by End Market Sales Mix by Aftermarket vs. OEM
Confidential - Not for Public Distribution
Aftermarket is 26%
of total PF sales
Sales Mix by Channel
Direct
53%
Distributor
47%
Pro forma
17
10%
5%
8%
25%
CIR FH PF
CIRCOR
2020
Target
Make
Highly technical in-house
manufacturing, assembly and
test
In-house manufacturing is kept
to high tolerance machinery that
is critical to the performance of
the product; examples include:
‒ Main screw in 2 and 3-screw
pumps
‒ Tight tolerance and finishing
for engineered ball valves
‒ Exotic alloy machining for
high pressure fittings
Proprietary processes
Buy
Outsourcing strategy include
products that only require rough
machining; examples include:
‒ Commoditized products such
as generic fasteners
‒ Casing component of a screw
pump
‒ Simple turning and deburring
activities
Improved capital deployment
Pro Forma Sourcing and Supply Chain
Sourcing Initiatives Make vs. Buy
Reduce the number of suppliers from ~4,400 to
~2,200
Consolidate spend globally to improve pricing
Negotiate long term agreements
‒ Multi-year productivity
‒ Improved payment terms
Transition supply base to low cost countries where
appropriate
Make vs. Buy evaluation to reduce cost and focus
internally on critical operations
All critical components are dual sourced
Supply Chain Spend Low Cost Manufacturing
Castings /
Forgings
Machining
Hardware /
Motors / Elec.
Components
Outside
Processing /
Raw Material
Other
Confidential - Not for Public Distribution
$17 million in sourcing synergies with
35% implemented in year 1 and 100%
implemented in year 2
Production Hours
18
CIRCOR Pro Forma Manufacturing Strategy
Manufacturing Overview
Most plants operate 1 to 1.5 shifts per day for 5 days / week
Both CIR / FH suppliers have enough capacity to support
demand
Significant number of subscale factories in high cost regions
Manufacturing Footprint
Headquarters
CIRCOR Manufacturing facility
Fluid Handling Manufacturing facility
Manufacturing Strategy Summary
Confidential - Not for Public Distribution
Ongoing consolidation of manufacturing footprint
‒ Economies of scale
‒ Improved controls and quality
Transition center of gravity to low cost facilities
‒ Lower labor and overhead
‒ Emerging centers of excellence
Drive CIRCOR operating system
‒ Productivity
‒ Inventory turns
Section 3
Key Credit Highlights
Confidential - Not for Public Distribution
20
Key Credit Highlights
Confidential - Not for Public Distribution
Mission critical products designed for severe applications with a focus on innovation
A leader in niche segments with the further benefit of scale
Longstanding, diverse customer base driving meaningful recurring revenues
Diverse end markets
Proven operator with a clearly executable strategy
Attractive financial profile with strong free cash flow
Best-in-class management team with proven track record
1
2
5
3
4
6
7
21
Mission critical products designed for severe applications
1
Process: Refinery Delayed
Coking Unit
Problem: Manual unheading
of high temperature coke
takes 2+ hours daily;
extremely unsafe environment
Product: DeltaValveTM
Bottom Unheading Device
(BUD)
Benefit: Reduced unheading
time from 2 hours to 10 mins
daily, Increased safety
through remote operation
Process: Power Generation
Problem: Low flow into
pumping systems leads to
pump failure, causing severe
damage to power generators
Product: SchroedahlTM ARV
Pump Protection Valves
Benefit: Reduced risk of
pump failure; Increased
efficiency and uptime
Process: Mature Oil Well
Development
Problem: Pressure declines
in mature oil fields requires
additional gas injection for
production, reducing the
output and increasing the cost
of production
Product: CFH MR 250TM
Multiphase Pump System
Benefit: ~70% increase in
well production; Payback in
less than 2 months
Process: Aircraft Braking
Systems
Problem: Angular position
sensing is critical for failsafe
operation of aircraft braking
systems, but sensors can be
unreliable in extreme
temperatures
Product: CIRCOR
Aerospace BPTU Series
Brake Pedal Transmitters
Benefit: Designed for failsafe
performance in harsh
environments (-550C to
+850C)
Key products covered by more than 200 patents
Confidential - Not for Public Distribution
22
Mission critical products designed for severe applications
1
Refinery Valves
• Higher efficiency-low steam
consumption
• Expand technology into
ethylene market – bi-
directional flow
• Improve reliability and in-line
service
Instrumentation &
Sampling
• Higher pressure class
• Severe service environment
• Mistake proof installation
Aerospace
• Electromechanical
valves/actuation
• Miniature switches
• High temp solenoid valves
Fluid Handling
• Smart condition monitoring
solutions
• Continuing development in
Multiphase
• Lower cost of ownership
Product Priorities 2016 2017 2018 2019+
UAV Launcher Main Hydraulic
Supply
Auto-charge System/
Pressure Reducing Station
Next Gen
Switches
High Pressure
Reducing Station
Soft Seat Flanged
Ball Valve
FCC Isolation
Valve
Ethylene Isolation
Valve
Coker Isolation
Valve
Acquired
10/2016
Gyrolok XP
Valves
Remote Hydraulic
Install Tool
Medium Pressure
Valves & Fittings
Rotary Ceramic
Slide Valve
Confidential - Not for Public Distribution
New Product Development Roadmap with a Focus on Innovation
Higher Efficiency Design Multiphase Pump
Expanded Flow Rate
Validation for MTU
Diesel Applications
23
A Leader in Niche Segments with
the Further Benefit of Scale - Valves
2
Diversified product portfolio with recognized brands that fulfill its customers’ unique application needs
Well positioned products in the growing flow and motion control markets
Focused on technologically differentiated products with extreme temperature and pressure capabilities
Products provide intelligent solutions for severe service applications
DifferentiationLow High CIRCOR’s
Differentiation
Worldwide Leader in Specialty
Valves
90% of Revenue Designed-to-
spec with Owned IP and Sole-
source Position
Distinct Patented Advantage
over IMI
Only Solution for Thermal Stress
Caused by Side-feed Injection
Track Record of Developing and
Commercializing New Products
Brand Loyalty and Large
Installed Base
Wide Range of Dimensions and
Pressure Classes for Severe
Service Applications
Low-noise and Energy
Efficiency
Ball Valves
25% sales
Refinery Valves
13% sales
Aerospace
25% sales
Product
% of CIRCOR Sales
CIR Cameron
CIRIMI
CIRMeggitt ITT
Emerson
Confidential - Not for Public Distribution
Flowserve
Forum
Energy
Marotta
Note: Only selected competitors are identified
24
Product
% of FH Sales
A Leader in Niche Segments with
the Further Benefit of Scale - Pumps
2
Portfolio breadth, application engineering and strong brand recognition are leading differentiators for FH across all end markets
FH has the most comprehensive screw pump portfolio
Strong manufacturing and technical expertise
Energy efficiency and increased need for high viscosity fluids are favorable trends for screw pump technology
DifferentiationLow High
Fluid Handling’s
Differentiation
3 Screw
39% of sales
2 Screw
6% of sales
FHNetzschLeistritzKral
FH ITTLeistritz Netzsch
Note: Only selected competitors are identified
Premier Multi-phase
Capabilities with Recent Large-
scale Wins
Low Total Cost of Ownership
Tremendous Viscosity Range
A Leading Global Player
Largest Installed Base
Leading Choice for US Navy
Submarines
Supports Highly Viscous and
Highly Sensitive Fluids
Confidential - Not for Public Distribution
Specialty Centrifugal
24% of sales
PG MarineDesmi Naniwa FH
Continuous, Pulsation-free
Pumping
Dynamically Balanced Impeller
Reduces Vibration
Withstands Wide Range of Low-
viscosity Fluids
25
OEM: 74%
Longstanding, Diverse Customer Base
Driving Meaningful Recurring Revenues
3
Top 10 Customers Represent 15% of Revenue
Confidential - Not for Public Distribution
50% of orders
are <$1 million
75% of orders
are <$5 million
26
Diverse End Markets
Rebounding Outlook in Key Customer Sectors
4
Segment Trends Outlook
Exceptional strength in unconventional investment in North America
Moderate increase in upstream outside North America
Increase in new pipelines and upgrades
Refining capacity growth in Middle East and Asia Pacific
Refining expansions and upgrades in the Americas
Chemical processing build out in Asia
Global increase in wastewater processing
Energy efficiency initiatives
Global increases in defense spending
Key programs to receive increased funding
– Submarines / aircraft carriers
– F35 Joint Strike Fighter
Emerging markets fuel power investment growth
Asia representing 70% of incremental power capacity
Commercial aircraft build rates and backlog at historic highs
Global airline passenger traffic growth over 5%
Shipbuilding demand showing signs of recovery
Expanded global fleet aging, increasing aftermarket demand
Continued growth in trade import and export volume
Oil & Gas
Power Generation
Industrial
Commercial Marine
Aerospace
Defense
Confidential - Not for Public Distribution
27
Diverse End Markets
Poised for Growth as Demonstrated by Key Indicators
Note: Capex for integrated Oils and Independent E&Ps
Source: EIA, Rystad Energy, GlobalData, Exxon Mobil
Confidential - Not for Public Distribution
Energy
Industrial
Aerospace
&
Defense
Oil & Gas Capex
1
3
%
9
%
4
%
1
5
%
(9%
)
1
8
%
1
7
% 2
5
%
6
%
(9%
)
1
2
%
3
3
%
3
%
1
5
%
1
7
% 2
5
%
3
0
%
2
2
% 3
3
%
(1
5
%
)
2
7
%
5
%
1
1
%
5
%
(2%
)
(2
7
%
)
(3
0
%
)
4
% 9
% 8
%
(40%)
(20%)
0%
20%
40%
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
2
0
1
5
2
0
1
6
2
0
1
7
2
0
1
8
2
0
1
9
(%
Y
-o
-Y
Ch
a
n
g
e
)
Exploration & Production Spend
0
20
40
60
80
100
120
2016 2020 2025
Series1 Series2
1.4x
1.8x
Onshore Offshore
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
1
9
8
5
1
9
8
6
1
9
8
7
1
9
8
8
1
9
8
9
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
2
0
1
5
2
0
1
6
2
0
1
7
2
0
1
8
2
0
1
9
2
0
2
0
ISM Manufacturing Index
Commercial Marine
New Ship Ordering Activity
Nu
m
b
e
r
o
f
V
e
ss
e
ls
Build Rates: Boeing 737, Airbus A320, A350
0
400
800
1,200
1,600
2017 2018 2019 2020
Boeing Airbus
1,224
1,330
1,449
1,516
US Defense Subs vs Others
4
0
5
10
15
20
25
30
2012 2014 2016 2018 2020 2022
(U
S
$
b
n
)
‘17 – ‘22E CAGR
Subs: 5.7%
Non-subs: (9.8%)
Subs are
increasingly
larger part of US
Navy spending
to 2022
$0
5
$ 0
15
$20
5
$30
2012 2014 2016 2018 2020 2022
(US$bn)
Submarines Other Naval Ships
30
35
40
45
50
55
60
65
1
9
9
5
1
9
9
7
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
3
2
0
0
5
2
0
0
6
2
0
0
8
2
0
0
9
2
0
1
1
2
0
1
3
2
0
1
4
2
0
1
6
2
0
1
7
58.7ISM trending above 50 indicates
sustained industrial recovery
28
Proven Operator with a Clearly Executable Strategy
Simplification
5
CIRCOR Simplification Since 2013 Opportunities with Fluid Handling
2016
17 Systems
0
50,000
100,000
150,000
200,000
Sq. Feet
0
500
1,000
1,500
2,000
Business Units
Suppliers
Factories
2016
15 Factories
2013
24 Factories
2016
~2,600 Suppliers
2013
~5,000 Suppliers
0
5
10
15
20
(years)
Age of ERP
ERP Systems
2013
24 Systems
0
50
100
150
200
Sales ($M)
Business Units
2016
15 Units
2013
22 Units
Note: CIRCOR 2013 – 2016 excludes acquisitions
Description Opportunity
5 factories in high-cost
locations (95% of hours)
1 in India and 1 in China
4 system integration
shops
Vertically integrated
Rationalization
Make-to-buy opportunities
Transition to low-cost
Description Opportunity
~630 suppliers
>95% of suppliers in
high-cost locations
Consolidation
Transition to low-cost
Description Opportunity
Duplicative OPEX
infrastructure
Leverage existing CIRCOR
shared services and
overhead
Confidential - Not for Public Distribution
Supply Chain
OPEX
Manufacturing
29
$846 $858 $841
$656
$590
28.6%
31.2% 30.5%
30.4% 31.0%
2012 2013 2014 2015 2016
Revenue Gross Margin
($ millions)
Current management
team joined CIRCOR
5
Proven Operator with a Clearly Executable Strategy
CIRCOR Historical Financials Over Time
(29.8)%
Note: All financials are reported CIRCOR numbers
Source: Company disclosure
Reported Revenue and Gross Margin Through the Cycle
Confidential - Not for Public Distribution
Despite downturn in end markets, CIRCOR has consistently held gross margins steady at ~30%
Oil & Gas Downturn
30
Proven Operator with a Clearly Executable Strategy
5
Synergy Roadmap Anticipated Synergy Detail
Sourcing
Manufacturing
Rationalization
G&A
Reduction
$23
$17
$4
$2
Anticipate $23 million in synergies
with ~90% implementation by year 2
Cost Synergies
($ millions)
Confidential - Not for Public Distribution
Sourcing
Shifting of FH casting suppliers from higher cost
countries to low cost countries
Outsourcing of non-core machining work to 3rd party
suppliers in low cost countries
35% implemented in year 1 and 100% implemented in
year 2
G&A Reduction
Elimination of duplicative headcount at FH
75% implemented in year 1 and 100% in year 2
Manufacturing Rationalization
Headcount and overhead savings from manufacturing
footprint optimization
100% implemented in year 3
31
Integration Overview
Scott Buckhout
Chief Executive Officer
AJ Sharma
Senior Vice President, Business Development
Darryl Mayhorn
Group President, Fluid Handling
Fluid Handling Team
Largely operates as a stand-alone 3rd group of CIRCOR
Group is fully staffed, with all functions represented
Strong leadership team in place with successful track
record
Existing leadership team stays in their respective roles
Integration Team
Dedicated team of 10
Expertise to deliver synergies: sourcing, G&A and
manufacturing
Works with business leaders to support delivery of
financials
Special focus on ensuring high employee engagement
Centrally managed functional integration
Teams responsible for delivery of financials, synergies, and growth
Proven Operator with a Clearly Executable Strategy
5
Confidential - Not for Public Distribution
32
$59
$17
$46
$12
$26
$80
$44
$68
$85
$97
$90
$79
$-
$50
$100
$150
2014 2015 2016 LTM Q3 2017
($
i
n
m
ill
ion
s
)
CIRCOR Fluid Handling
Fixed
~35%
Variable
~65%
Attractive Financial Profile with Attractive
Free Cash Flow
6
Flexible
Cost Structure
Asset-light business model with a flexible cost structure
– Significant mitigation of margin erosion during
market declines due to facility consolidations,
supplier rationalization and strategic sourcing
– Historical total capex of ~2% of annual sales with
maintenance & IT capex of ~1% of sales
Through-the-cycle cash flow
– Sound financial policies guided by a seasoned
management team and board of directors
comprised of senior executives with deep industry
backgrounds
– Consistent positive free cash flow even during
periods of cyclical downturns
– Average of ~$90 million actual annual free cash
flow generation(a)
– Projected cash tax rate at ~28%
LTM Q3 2017 pro forma unlevered free cash flow
conversion(c) is 83.2%
Actual Free Cash Flow
Capex as % of
sales
1.5% 1.7% 2.0% 2.5%
(b)
Attractive business model with strong cash flow generation in challenging end-market conditions
(a)
Confidential - Not for Public Distribution
Growth
56%
IT
17%
Maintenance
27%
(a) CIR free cash flow defined as cash from operating activities less net capital expenditure; FH free cash flow defined as cash from operating activities plus asbestos related expenses and allocated
expenses from CFX and less capital expenditure
(b) Excludes cash payments in excess of expenses related to asbestos
(c) Defined as of pro forma combined adjusted EBITDA less capex, divided by pro forma combined EBITDA (inclusive of run-rate synergies)
(b)
Flexible
Capex Investments
33
Best-in-Class Management Team with Proven Track Record7
CIRCOR Leadership
Strong senior management team with
relevant leadership experience
Scott Buckhout
President,
Chief Executive Officer
Rajeev Bhalla
Executive Vice President,
Chief Financial Officer
AJ Sharma
Senior Vice President,
Business Development
Erik Wiik
Group President,
CIRCOR Energy
Sumit Mehrota
Group President,
Advanced Flow Solutions
Darryl Mayhorn
Group President,
Fluid Handling
Josh Raha
VP, Product Manufacturing &
Engineering
Jennifer Allen
Senior Vice President,
General Counsel
James Lapointe
Global Operations &
Supply Chain
Confidential - Not for Public Distribution
Section 4
Financial Overview
Confidential - Not for Public Distribution
35
Historical Financial Overview
Revenue
Capital Expenditure Actual Free Cash Flow(a)
Pro forma Adj. EBITDA
Capex as
% of sales
1.5% 1.7% 2.0% 2.5%
($ millions)
Confidential - Not for Public Distribution
$790
$666 $680 $614
$654
$533 $462
$466
$1,445
$1,199
$1,142
$1,080
-
$400
$800
$1,200
$1,600
$2,000
2014 2015 2016 LTM Q3 2017
Re
v
enu
e
CIRCOR Fluid Handling
$13 $13 $15 $12
$9 $7
$8 $15
$22 $20
$23
$27
-
$10
$20
$30
$40
$50
$60
$70
$80
2014 2015 2016 LTM Q3 2017
C
a
p
e
x
CIRCOR Fluid Handling
$59
$17
$46
$12
$26
$80
$44
$68
$85
$97
$90
$79
$-
$50
$100
$150
2014 2015 2016 LTM Q3 2017
($
i
n
m
ill
ion
s
)
CIRCOR Fluid Handling
(b)
Note: CIRCOR financials reflect the impact of all acquisitions and divestures to date. Refer to Appendix for definition of adjusted EBITDA and a reconciliation to US GAAP net income
(a) CIR free cash flow defined as cash from operating activities less net capital expenditure; FH free cash flow defined as cash from operating activities plus asbestos related expenses and allocated
expenses from CFX and less capital expenditure
(b) Excludes cash payments in excess of expenses related to asbestos
Source: Company disclosure
$111
$89 $85 $69
$95
$75 $66
$67
$23
$206
$164
$151 $159
14.3%
13.7% 13.2%
14.7%
0.0%
3.0%
6.0%
9.0%
12.0%
15.0%
18.0%
-
$50
$100
$150
$200
$250
$300
$350
2014 2015 2016 LTM Q3 2017
M
argin
%
Ad
j. E
B
ITD
A
CIRCOR Fluid Handling Synergies
36
Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017
649 630
577
506 501 480
453 460
499
502 505
0
100
200
300
400
500
600
700
Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017
Order and Backlog Overview
Orders
Backlog
Quoting Activity
($ millions)
Energy Fluid HandlingAFS
Energy Fluid HandlingAFS
Confidential - Not for Public Distribution
Energy & AFS Fluid Handling
319
266
251 251 247 252
221
259
297
263
276
0
50
100
150
200
250
300
350
Q1
2015
Q2
2015
Q3
2015
Q4
2015
Q1
2016
Q2
2016
Q3
2016
Q4
2016
Q1
2017
Q2
2017
Q3
2017
37
CIRCOR is focused on generating organic EBITDA growth and robust cash flow
Capital structure provides ample liquidity and financial flexibility
– $150 million cash flow revolver
– Minimal amortization requirements on the Term Loan
– Significant free cash flow to fund de-leveraging and growth
– 3.3 million shares issued to CFX as part of the acquisition, increasing overall equity cushion beneath the debt
Focus on generating free cash flow and de-leveraging to ~4.0x by the end of 2018 and ~3.0x by the end of 2019
– EBITDA margin expansion from restructuring actions and market growth
– Limited capex requirements (~2% of sales) with maintenance and IT capex of ~1% of sales
– Significant tax benefits from the transaction and a 28% cash tax rate
– Working capital improvements largely from improved velocity in inventory
Minimal dividend policy of $0.15/share per annum and no increase since inception
Long-term incentive plan consists of stock options (50%) and performance-based restricted stock units (PSUs) for 50%
– PSU’s linked to three year average performance
– 50% for Adjusted Return on Invested Capital and 50% for Adjusted Operating Margin
CIRCOR’s continued success is guided by sound financial policy
CIRCOR’s Financial Policy
Confidential - Not for Public Distribution
Section 5
Syndication Overview
Confidential - Not for Public Distribution
39
Summary of Terms
Borrower CIRCOR International, Inc. (the “Borrower”)
Guarantees
The Senior Secured Credit Facilities shall be unconditionally guaranteed on a senior secured basis by each of the Borrower’s
direct and indirect material domestic restricted subsidiaries
Security
The Senior Secured Credit Facilities shall be secured by a first priority interest in substantially all tangible and intangible assets
(including capital stock of certain subsidiaries) of the Borrower and the Guarantors
Facility
Tranche Amount Spread OID LIBOR floor Tenor
Revolving Credit Facility (“RCF”) $150m TBD TBD 0.00% 5 years
First Lien Term Loan B (“TLB”) $785m TBD TBD 1.00% 7 years
Accordion
Greater of $150m and LTM EBITDA plus unlimited up to 5.0x Net First Lien Leverage Ratio
50bps MFN for 18 months
Amortization
RCF: None
TLB: 1.0% per annum; bullet at maturity
Optional redemption
RCF: Prepayable at par at anytime
TLB: 101 soft call for 6 months
Mandatory prepayments
100% of proceeds from certain asset sales and insurance proceeds; 100% of net proceeds from issuances of certain debt; and
50% of annual excess cash flow with step downs to 25% and 0% subject to compliance with Net First Lien Leverage Ratio of 0.5x
and 1.0x below Closing Net First Lien Leverage
Financial covenants
RCF: Springing maximum leverage ratio covenant set at 6.5x net first lien leverage ratio (25% usage trigger)
TLB: None (covenant lite)
Other covenants
Other covenants customary for transactions of this nature, including but not limited to: (i) limitations on debt, (ii) limitations on
mergers and acquisitions, (iii) limitations on restricted payments, (iv) limitations on asset sales, (v) limitations on liens, and (vi)
limitations on transactions with affiliates
Confidential - Not for Public Distribution
40
Pro Forma Organization Structure
CIRCOR
International, Inc.
(US)
CIRCOR Foreign Subsidiaries
$150mm Revolving Credit Facility (“RCF”)
$785mm Term Loan B (“TLB”)
Denotes Borrower
Denotes Guarantor
Denotes Restricted Subsidiary
CIRCOR US Entities FH US Entities CIRCOR Foreign Entities
Confidential - Not for Public Distribution
FH Foreign Entities
Disclaimer: the chart above is a draft and subject to change
41
Questions and Answers
Confidential - Not for Public Distribution
Mission critical products designed for severe applications with a focus on innovation
A leader in niche segments with the further benefit of scale
Longstanding, diverse customer base driving meaningful recurring revenues
Diverse end markets
Proven operator with a clearly executable strategy
Attractive financial profile with strong free cash flow
Best-in-class management team with proven track record
1
2
5
3
4
6
7
Appendix I
Additional Segment and
Product Detail
Confidential - Not for Public Distribution
43
Global Valve Market Overview
Lower priced, commoditized
Basic design and function to open/close
Simple liquids like water
Stock and sell business model, limited application
know how
Typical operating parameters
– Ambient conditions (Low temperature and
pressure)
Serves a broad range of applications, typically non
critical balance of plant secondary processes:
– Building / Construction (Residential,
commercial)
– Residential (heating, water)
– Public Utilities (water treatment, transport)
– Industrial processes (Water, oil applications
in steel mills, textiles, manufacturing)
Severe service and critical process flow control
Ball valves and control valves engineered to meet
specific application requirements
Typical operating parameters
– High temperatures (Power plant turbines,
Refinery fractionators )
– High pressures (superheated steam, subsea,
downhole)
– Aggressive liquids (upstream crude, refinery
distillates)
– Special system specs (critical to high value
equipment like turbines, cokers, submarines,
aircraft braking systems)
– Precision control (commercial and military jet
steering, landing gear actuation systems)
CIRCOR Technologies
Control valves
Fittings
Solenoid Valves Pressure Reducing
Safety / Relief
Unheading valves
Valves
$30bn Market
General Valve Market
(~60-70% of Total Market)
CIRCOR Target Market
(~25% of Total Market)
On/Off Control / Other
Flow Control Motion Control OtherGate Globe Check BallButterfly
Confidential - Not for Public Distribution
44
Energy: Product Portfolio Overview
Products Applications
% of Q3 LTM 2017
Energy Sales
Severity of
Application Key Differentiators
Blowdown
Compressor Stations
Gas transmission and
separation systems
[TBU] High
Full range 1” – 60”
Temp range -320ºF to +1470ºF
Operating pressure up to 20,000 PSI
Very high energy dissipation
Refining
Delayed cooking
process
[TBU] Extreme
Fully sealed housing providing totally
enclosed system
Fully automated remote operation
20 year operational life
Patented dynamic seat technology
Process controls
[TBU] Medium
High tolerance NPT thread
Durable in harsh conditions
Ability to remake fitting
Controlled ferrule drive prevents
overstressing of connection
Pipeline cleaning [TBU] High
Caliper system and process data
logging
Measure debris of 1mm or less
43%
25%
29%
3%
Ball Valves
Instrument Valves
and Fittings
Refinery Valves
Cleaning Assessment
Tool
Confidential - Not for Public Distribution
45
Advanced Flow Solutions: Product Portfolio Overview
Products Applications
% of Q3 LTM 2017
AFS Sales
Severity of
Application Key Differentiators
Steam boilers
Paper manufacture
Water treatment
[TBU] Medium
Converts angular position into a DC
voltage
Operates in harsh conditions
Reversible direction of action
3-point step control
Customizable for special applications
Boiler systems
Condensate systems
Main steam system
[TBU] High
Protects pumps from overheating
Up to eight stage pressure reduction
Aircraft
Brake pedal position
sensor
[TBU] High
Converts angular position into a DC
voltage
Operates in harsh conditions
Pump Protection Valve
Aerospace Valves and
Controls
Control Valves and
Actuators
33%
10%
57%
Confidential - Not for Public Distribution
46
Global Pump Market Overview
Less expensive (commoditized)
Moving basic fluids like fresh water
Mostly Centrifugal pumps
Typical operating parameters
– Ambient temperatures
– Low viscosity
– Low pressure
Serves a broad range of applications
– Recreation (Pools, aquariums, fountains)
– Agriculture (Irrigation, application)
– Residential (heating, wells)
– Public Utilities (firefighting,
portable water)
High demand mission critical applications
Positive displacement or specialty centrifugal
Typical operating parameters
– High temperatures (heat exchangers,
hot oil)
– Caustic fluids (saltwater, acids)
– Viscosity extremes (asphalt,
polymers, gums)
– Special system specs (sensitive to shear or pulsation,
non-Newtonian)
– Low noise (submarines, elevators)
– High pressures (up to 10,00 PSI, 690 bar)
– Precision metering (medical tubing extrusion,
additives, labs)
– Fluids with abrasives (fluids with titanium oxide)
Fluid Handling Technologies
General Pump Market
(~60-70% of Total Market)
Fluid Handling Target Market
(~15% of Total Market)
Piston
Plunger
Diaphragm
Screw
Gear
Vane
Peristaltic
Progressing Cavity
Lobe
Pumps
$40bn Market
Kinetic
Centrifugal Regenerative
Positive Displacement
Reciprocating Rotary
Confidential - Not for Public Distribution
47
Fluid Handling: Differentiated Product Portfolio
Products Applications
% of 2016
FH Sales
Severity of
Application Key Differentiators
3 Screw Pump
Fuel oil transfer
Machinery lubrication
Hydraulic systems
High
Highest efficiency
Ultra-quiet pumps
World-class manufacturer
Global reach
Specialty Centrifugal
Pump
Marine engine room and
other ship applications
Chemical processing
Water treatment
High
Wide range of low viscosity
fluid applications
Low vibration
Continuous pumping, pulsation-free
Progressing Cavity Sludge removal
Chemical slurries and
coagulants
Drilling mud
Extreme
Extreme high viscosity capabilities
Handles shear-sensitive fluids
A leader in industrial / wastewater
2 Screw Pump
Fuel loading / unloading
Tank stripping
Multiphase flows
Extreme
High temperature compatibility
High fluid contaminant capability
Versatile self-priming pumps
Lubricating / non-lubricating liquids
Precision Metering
Pumps
Chemical dosing
Pipeline and process
injection
Food and beverage filling
High
Broadest portfolio in capacity range
Highest accuracy metering
Handles difficult applications
Long product life
Reliability Services
Oil purification
Chemical cleaning
N/A
Co-locations near large customers
Proprietary oil mist systems
Specialized to clean / recondition
39%
24%
15%
Confidential - Not for Public Distribution
22%
Appendix II
Additional Financial Detail
Confidential - Not for Public Distribution
49
CIRCOR Adjusted EBITDA Reconciliation
1
2
3
4
5
6
7
8
9
11
10
12
1
Expenses associated with streamlining and restructuring activities including
reducing overhead, consolidating facilities and the associated revaluation (write-
off) of inventory
2
Costs (or gains) associated with closing facilities related to announced
restructuring initiatives
3 Severance expense for terminated employees under restructuring programs
4 Non-cash pension settlement charge for terminated and vested participants
5
On Jan 6, 2015, the Company announced the divestiture of two non-core
businesses as part of a simplification strategy. The Energy divestiture was
substantially completed in Q4 2014 with the related charge recorded in 2014.
During Q1 2015, the Advanced Flow Solutions divestiture was substantially
completed. During Q2 2017, the Advanced Flow Solutions segment divested the
French build-to-print business (Chemille)
6
Includes executive retirement charges, settlements, and contingent consideration
for the Critical Flow Solution acquisition
7 Costs associated with exiting Brazilian operations
8
Costs associated with the Critical Flow Solutions (Oct 12, 2016) and Schroedahl
(Apr 15, 2015) acquisitions
9
Non-cash charge associated with the increase in fair value arising from CFS
acquisition
10 Non-cash impairments taken for intangible assets with no use
11
Excludes the historical impact of Cambridge Fluid Systems (2014), Sagebrush
Pipeline (2014) and Chemille (2017) divestitures, and includes the run-rate impact
of the acquisitions of Schroedahl (2015) and Critical Flow Solutions (2016)
12 Non-cash expense add-back related to stock issued to employees
Confidential - Not for Public Distribution
$ in millions FY-14 FY-15 FY-16 LTM Q3 2017
Net income $50.4 $9.9 $10.1 $15.4
Income tax expense 12.9 12.6 (0.4) (1.8)
Interest expense 2.7 2.8 3.3 7.8
Depreciation and amortization 19.6 23.9 25.6 28.8
EBITDA $85.5 $49.2 $38.6 $50.1
Energy and AFS restructuring initiatives
Inventory adjustment 8.0 2.5 0.8 0.8
Facility related expenses (recoveries) 0.7 (0.1) 4.5 3.4
Employee related expenses 4.5 4.8 4.5 4.2
Non-cash pension settlement - - 4.5 4.5
Divestiture charges (recoveries) 3.4 (1.0) - 3.8
Contingent consideration 4.1 0.4 - (12.2)
Total energy and AFS initiatives $20.7 $6.5 $14.3 $4.6
Brazilian facility closure
Brazilian facility closure - 22.1 4.9 0.9
Other one-time US GAAP related non-cash addbacks
Legal and professional fees - 0.9 0.8 2.9
Amortization of inventory step-up - - 1.4 1.4
Impairment charges 0.7 - 0.2 -
Adjusted EBITDA $106.9 $78.7 $60.2 $59.9
Run-rate acquisitions (3.0) 4.0 19.0 5.5
Stock based compensation 7.2 6.6 5.5 4.0
PF Adjusted EBITDA $111.1 $89.3 $84.7 $69.4
50
Fluid Handling Adjusted EBITDA Reconciliation
1
2
3
4
5
6
7
8
9
11
10
12
13
1
Costs associated with closing the Baric Systems, FH Middle East and Lubritech
Venezuela entities
2
Colfax Corporation charges for Group corporate allocations (recorded as
Management fees) in addition to expected costs to CIR to run the go-forward pro
forma business
3
Non-cash impairment expenses of certain assets (i.e., trade names and customer
lists) related to certain acquired assets (i.e., Baric Systems)
4
Non-recurring, non-cash inventory reserves for the Sicelub Mexico entity, the
Marine business segments, Shark and 2-Screw products
5
Inventory reserves from discontinued counterparty PDVSA (Petroleos de
Venezuela, SA), the state-owned oil and natural gas company of Venezuela
6
In FY-16, the Venezuela business was deconsolidated from Group reporting and
the intercompany balances were required to be settled
7
Includes non-recurring severance expense (associated with restructuring plans
across various entities, mainly in the EMEA region) and normal course severance
8
Includes add back for asbestos related expenses; all asbestos related liabilities
and expenses will remain with Colfax parent and will not be transferred to
CIRCOR as part of the sale
9
Consists of the forgiveness of a related party loan arrangement (FY-15),
intercompany royalties and intercompany differences
10
EBITDA normalization to reflect the future cost of servicing existing participants
and reducing any underfunded pension plan (interest / actuarial gain/loss)
11 Non-cash expense related to stock issued to employees
12
Includes corporate administrative expense, employee-related costs including
benefits for corporate and shared employees, and fees for other corporate and
support services charged by Colfax parent to FH
13
Includes foreign exchange losses related to Venezuela, bonus normalization,
equity earnings and other income
Confidential - Not for Public Distribution
$ in millions FY-14 FY-15 FY-16 LTM Q3 2017
Net Income $6.4 $18.6 ($15.0) $14.1
Income tax expense 13.2 6.9 1.5 12.1
Interest expense (0.6) 1.3 1.4 2.3
Depreciation and amortization 18.4 14.3 12.8 11.5
EBITDA $37.4 $41.1 $0.8 $39.9
Restructuring adjustments 4.9 3.4 1.2 0.5
Stand-alone entity adjustments
Management charges 4.8 6.1 3.9 5.1
Stand alone costs (1.4) (1.4) (1.4) (0.7)
Impairment of acquired intangibles 13.4 2.9 1.4 -
Non-recurring inventory reserves - - 4.6 0.5
Out of period PDVSA inventory write-offs 1.2 8.4 0.9 -
Acquistion/Divestiture/Severance Related Items
Venezuela Deconsolidation - - 1.9 -
Headcount reduction 6.9 6.6 18.7 (3.2)
Other adjustments
Other non-recurring items 11.9 16.1 20.9 10.0
Group adjustments 0.7 (18.6) 0.7 0.1
Defined benefit plans 4.4 4.4 3.3 3.3
Stock compensati n 1.4 1.7 2.0 0.5
Allocated corporate overhead 6.1 4.3 7.8 8.4
Other (0.2) (0.3) (0.2) 2.2
Adjusted EBITDA $95.4 $74.5 $66.4 $66.6
51
Combined Company Pro Forma Adjusted EBITDA Reconciliation
Twelve Months Ended Q3 2017
$ in millions CIRCOR Fluid Handling Pro Forma Combined
Revenue, as reported $614 $466 $1,080
Net Income $15 $14 $29
Interest Expense 8 2 10
Income Taxes (2) 12 10
Depreciation & Amortization 29 11 40
Stock Compensation Expense 4 1 5
Restructuring, Special & Other Charges 10 22 32
Disposed Business 6 - 6
Diligence Adjustments - 4 4
Adjusted EBITDA $69 $67 $136
Adj. EBITDA margin % 11.3% 14.3% 12.6%
Synergies 23
Pro Forma Adjusted EBITDA $159
Pro Forma Adj. EBITDA margin % 14.7%
Total Pro Forma capital expenditures $27
Pro Forma combined adj. EBITDA - Capex $132
Unlevered free cash flow conversion(a) 83.2%
Confidential - Not for Public Distribution
(a) Defined as of pro forma combined adjusted EBITDA less capex, divided by pro forma combined EBITDA (inclusive of run-rate synergies)
52
(a)
(a) Cash flow from operations adds back $8mm related to asbestos liability funding; the asbestos liability will not be transferred to CIRCOR as part of the acquisition of FH
Source: Company filings
CIR and FH Free Cash Flow Reconciliation
$ in millions FY-14 FY-15 FY-16 LTM Q3 2017
CIR cash flow from operating activities (CFO) $70.8 $27.1 $59.4 $22.5
Less: Purchase of property, plant and equipment (12.8) (12.7) (14.7) (11.6)
Plus: Sale of property, plant and equipment 0.8 2.2 1.7 0.8
CIR net capital expenditures ($12.0) ($10.5) ($13.0) ($10.8)
CIR Free Cash Flow $58.8 $16.6 $46.4 $11.6
$ in millions FY-14 FY-15 FY-16 LTM Q3 2017
FH cash flow from operating activities (CFO) $15.5 $64.7 $23.1 $52.1
Asbestos-related expenses 14.8 16.1 20.9 1.8
Allocations from Colfax Corporate 4.7 6.1 3.9 5.1
FH adjusted cash flow from operating activities $35.0 $86.9 $47.9 $59.0
Less: Purchase of property, plant and equipment (9.3) (7.5) (8.2) (15.0)
Plus: Sale of property, plant and equipment 0.5 0.8 4.1 23.8
FH net capital expenditures ($8.9) ($6.7) ($4.1) $8.8
FH Free Cash Flow $26.2 $80.1 $43.7 $67.7
Combined Free Cash Flow $85.0 $96.7 $90.1 $79.3
CIR Free Cash Flow Reconciliation
FH Free Cash Flow Reconciliation
(a)
Confidential - Not for Public Distribution
53
CIRCOR Segment and Revenue Reconciliation
CIRCOR Segment Operating Income to Segment EBITDA LTM Q3 2017
$ in millions Energy AFS
Revenue, as reported $344 $270
Segment Operating Income $32.4 $34.8
Stock Compensation 0.4 0.4
Disposed Business - 5.5
Other income (expense) (0.9) (1.2)
Depreciation & Amortization 7.7 7.8
Adjusted EBITDA $39.7 $47.2
Adj. EBITDA margin % 11.5% 17.5%
Confidential - Not for Public Distribution
$ in millions FY-14 FY-15 FY-16 LTM Q3 2017
CIR Revenue, as reported $841.4 $656.3 $590.3 $614.4
Divested business (51.1) - - -
Adj. to reflect full year 2015 revenue from Schroedahl acquisition - 9.2 - -
Adj. to reflect full year 2016 revenue from Critical Flow Solutions acquisition - - 90.0 -
CIR Pro Forma Revenue $790.3 $665.5 $680.3 $614.4
CIRCOR Reported Revenue to Pro Forma Revenue
Appendix III
Financial Overview
Confidential - Not for Public Distribution
1
1.1. Summary historical financial information
Historical financial summary
CIRCOR has a long and consistent history of cash flow generation, with a track record of stable margins, low capital
expenditures and through-cycle performance resiliency.
($ in millions)
Revenue Pro forma Adj. EBITDA
$790 $666 $680 $614
$654
$533 $462 $466
$1,445
$1,199 $1,142 $1,080
-
$400
$800
$1,200
$1,600
$2,000
2014 2015 2016 LTM Q3 2017
R
ev
en
ue
CIRCOR Fluid Handling
$111 $89 $85 $69
$95
$75 $66
$67
$23
$206
$164 $151 $159
14.3% 13.7% 13.2%
14.7%
0.0%
3.0%
6.0%
9.0%
12.0%
15.0%
18.0%
-
$50
$100
$150
$200
$250
$300
$350
2014 2015 2016 LTM Q3 2017
M
argin %
A
dj
. E
B
IT
D
A
CIRCOR Fluid Handling Synergies
Capital Expenditure Actual Free Cash Flow(a)
$13 $13 $15 $12
$9 $7 $8 $15
$22 $20 $23
$27
-
$10
$20
$30
$40
$50
$60
$70
$80
2014 2015 2016 LTM Q3 2017
C
ap
ex
CIRCOR Fluid Handling
$59
$17
$46
$12
$26
$80
$44
$68
$85
$97
$90
$79
$-
$50
$100
$150
2014 2015 2016 LTM Q3 2017
($
in
m
ill
io
ns
)
CIRCOR Fluid Handling
(b)
Note: CIRCOR financials reflect the impact of all acquisitions and divestures to date. Refer to Appendix for definition of adjusted EBITDA and a reconciliation to US
GAAP net income
(a) CIR free cash flow defined as cash from operating activities less net capital expenditure; FH free cash flow defined as cash from operating activities plus asbestos
related expenses, restructuring expenses and allocated expenses from CFX and less capital expenditure
(b) Excludes cash payments in excess of expenses related to asbestos
Source: Company disclosure
2
Pro forma annual historical financials by segment
($ in millions) 2014A 2015A 2016A LTM Q3 2017
Energy (a) $513 $384 $412 $344
Advanced Flow Solutions (a) 277 282 268 270
Fluid Handling 654 533 462 466
Total revenue $1,445 $1,199 $1,142 $1,080
Energy Adj. EBITDA $93 $50 $61 $40
% EBITDA margin 18.2% 12.9% 14.7% 11.5%
Advanced Flow Solutions Adj. EBITDA 39 48 43 47
% EBITDA margin 14.2% 16.9% 15.8% 17.5%
Fluid Handling Adj. EBITDA 95 75 66 67
% EBITDA margin 14.6% 14.0% 14.4% 14.3%
Synergies -- -- -- 23
Corporate overhead (22) (8) (18) (18)
Pro forma adj. EBITDA $206 $164 $151 $159
% EBITDA margin 14.3% 13.7% 13.2% 14.7%
CIR D&A $20 $24 $26 $29
% sales 2.5% 3.6% 3.8% 4.7%
FH D&A 32 16 14 11
% sales margin 4.9% 3.0% 3.1% 2.5%
Total D&A $51 $40 $40 $40
% total sales 3.6% 3.3% 3.5% 3.7%
CIR capex $13 $13 $15 $12
% sales 1.6% 1.9% 2.2% 1.9%
FH capex 9 7 8 15
% sales 1.4% 1.4% 1.8% 3.2%
Total capex (b) $22 $20 $23 $27
% total sales 1.5% 1.7% 2.0% 2.5%
Note: CIRCOR financials reflect the impact of all acquisitions and divestures to date. Refer to Appendix for definition of adjusted EBITDA and a reconciliation to US
GAAP net income
(a) Adjusted on a pro forma basis
(b) Excludes the impact from the sale of property, plant and equipment
3
Financial performance comparison
Energy
Energy segment revenues of $344 million for the last twelve months ending Q3 2017 decreased $68 million, or 16%, as
compared to the twelve months ending Q4 2016. The decrease was primarily driven by substantially lower shipment
volumes within the Company’s large international projects business and the refinery valves capital projects business
due in large part to the deferral of capital project orders by the refineries. This was partially offset by higher shipment
volumes within the North American distributed valves business. The EBITDA margin for the LTM Q3 2017 period was
11.5% and was driven primarily by volume declines especially in the large international projects business, increased
costs to ramp up our North American distributed valves business, and start-up costs of the new Monterrey, Mexico
manufacturing operations.
Energy segment revenues of $412 million for the twelve months ending Q4 2016 increased $28 million, or 7%, as
compared to the twelve months ending Q4 2015. The increase was primarily driven by an acquisition of the refinery
valves business, partially offset by lower shipment volumes in the North American short-cycle business and other oil
and gas businesses. Lower orders in the North American short-cycle business were impacted by the destocking of
CIRCOR distributors as well as lower production activity overall. EBITDA margin of 14.7% for the twelve months ending
Q4 2016 was primarily driven by sourcing, restructuring and productivity initiatives, partially offset by lower shipment
volumes for the large international projects business and a $3.2 million bad debt and inventory write-down related to
Petróleos de Venezuela ("PDVSA").
Energy segment revenues of $384 million for the twelve months ending Q4 2015 decreased $130 million, or 25%, as
compared to the twelve months ending Q4 2014. The decrease was primarily driven by lower shipment volumes in the
North American short-cycle business and downstream instrumentation business. Lower orders in the Company’s North
American short-cycle business were impacted by the destocking of CIRCOR distributors as well as lower production
activity overall. EBITDA margin of 12.9% for the twelve months ending Q4 2015 was primarily driven by lower shipment
volumes from the North American short-cycle business, partially offset from savings from sourcing, restructuring, and
productivity initiatives.
Advanced Flow Solutions
AFS segment revenues of $270 million for the LTM Q3 2017 increased $2 million, or 1%, as compared to the twelve
months ending Q4 2016. The increase was primarily driven by the Company’s aerospace businesses partially offset by
declines in the industrial solutions businesses. EBITDA margin of 17.5% for LTM Q3 2017 was primarily driven by
savings from productivity and restructuring actions, partially offset by lower margin shipments to North American power
customers and mix impact in defense businesses.
AFS segment revenues of $268 million for the twelve months ending Q4 2016 decreased $14 million, or 5%, as
compared to the twelve months ending Q4 2015. The decrease was primarily driven by the industrial solutions
businesses. EBITDA margin of 15.8% for the twelve months ending Q4 2016 was primarily a result of the revenue
declines described above. These declines were partially offset by restructuring savings and operational efficiencies in
the Company’s California and French businesses.
4
AFS segment revenues of $282 million for the twelve months endings Q4 2015 increased $5 million, or 2%, as
compared to the twelve months ending Q4 2014. The increase was primarily driven by industrial solutions businesses
and was partially offset by the Company’s aerospace businesses where CIRCOR exited its structural landing gear
product line. EBITDA margin of 16.9% for the period was driven by savings from productivity and restructuring actions,
as well as benefits from exiting the structural landing gear product line.
Fluid Handling
Fluid Handling revenue grew to $466 million for the LTM Q3 2017 period primarily due to a strengthening aftermarket in
oil & gas, reliability services, and general industrial market. The increase in sales was partially offset by continued
weakness in the commercial marine market and timing of certain defense awards. Profitability improved due to
operating leverage from additional sales volume and benefits from restructuring actions. These improvements were
partially offset by higher commissions due to market mix changes, and variable compensation expense attributable to
improved results.
For fiscal year 2016, total revenue declined 13.4% to $462 million from 2015 total revenue of $533 million due to the
reduction in upstream capex impacting the oil & gas segment, while commercial marine revenue continued to be
adversely impacted by historically low global shipyard activity. The revenue decline was partially offset by industrial
segment penetration, aftermarket capture and additional US Navy share wins (share in Block IV US submarine project).
Customer spending on capital projects and maintenance appeared to stabilize through the second half of 2016.
Margins improved as a result of the realization of restructuring and cost saving initiatives, mostly in the EMEA
operations and relocating the European headquarters to Radzolfell as the segment strategically exited from low-margin
businesses and executed a disciplined contract selection process.
For fiscal year 2015, total revenue declined 18.5% to $533 million from 2014 total revenue of $654 million, primarily
due to declines in the power generation, mining, and general industrial and other end markets, partially offset by growth
in the marine, oil & gas, and petrochemical end markets.
Capital expenditures
On a pro forma basis, the Company’s capital expenditure profile is approximately 2% of total revenue per
annum. Overall split of capital expenditures is approximately 27% maintenance capex, 17% IT capex, and 56% growth
capex. Maintenance and IT capital expenditures represents ~1% of total revenue which reflects a highly flexible ability
to preserve cash when necessary. Capital expenditures in 2016 and LTM Q3 2017 at CIR and FH respectively were
increased by growth capex to support capacity expansion and new products.
5
Net working capital
($ in millions) 12/31/2014 12/31/2015 12/31/2016 9/30/2017
Days in the year 365 365 366 365
CIRCOR
Reported revenue $841 $656 $590 $614
Reported COGS 584 457 407 423
Trade receivables $157 $126 $133 $130
Inventories 183 178 150 180
Accounts payable (a) 87 64 50 64
Net working capital $253 $239 $233 $247
Decrease / (increase) 21 14 6 (14)
DSO (b) 68 70 82 77
DIO (b) 115 142 134 156
DPO (b) 54 51 45 55
Cash conversion cycle 128 161 172 178
Inventory turns 3.2x 2.6x 2.7x 2.3x
Fluid Handling
Reported revenue $654 $533 $462 $466
Reported COGS 437 353 309 308
Trade receivables $83 $75 $75
Inventories 45 39 53
Accounts payable 53 52 55
Net working capital $74 $62 $73
Decrease / (increase) 12 (10)
DSO (b) 56 60 58
DIO (b) 46 46 63
DPO (b) 55 62 65
Cash conversion cycle 48 44 56
Inventory turns 7.9x 7.9x 5.8x
PF CIRCOR
Net working capital $313 $295 $320
Note: 2014 FH audited balance sheet is not available.
(a) Includes changes in accounts payable, accrued expenses and other liabilities
(b) DSO is defined by trade receivables divided by revenue and multiplied by day counts in the year; DIO is defined by inventories divided by COGS and multiplied by
day counts in the year; DPO is defined by accounts payable divided by COGS and multiplied by day counts in the year
6
CIRCOR
During the LTM Q3 2017 period, net working capital consumed cash of $14 million, primarily due to an increase in
inventories for the North American distributed valves business as the Company ramped-up operations and the supply
chain to meet the increased demand during Q2 and Q3, 2017. CIRCOR projects to receive a $15 million working
capital benefit as this trend reverses in Q4 2017.
During fiscal year 2016, net working capital generated cash of $6 million. The principal contributors were more efficient
inventory management and an extension for payments to the Company’s vendors for products and services as seen by
a decline in days payable outstanding. The benefit in inventory and payables was partially offset by higher receivables
due to the timing of shipments.
During fiscal year 2015, net working capital generated $14 million, primarily due to improved collections as well as a
decrease in inventories. The decreases were offset in part by a decrease in payables, which was due to the timing of
payments to the Company’s vendors for products and services as seen by a decline in days payable outstanding.
Fluid Handling
Fluid Handling tends to have peaks in net working capital in April to May of each year driven by increased inventory
during that timeframe. Working capital has been at its lowest points in December of each year due to decreased
inventories.
During the LTM Q3 2017 period, net working capital consumed cash of $10 million, primarily due to an increase in
inventories as seen by a decline in inventory turn level. The receivables was stable while there was a decrease in days
sales outstanding, which benefited from improved collections from customers.
During fiscal year 2016, net working capital generated cash of $12 million, primarily due to decreases in receivables
and inventories. The principal contributors to this improvement were an improved ability to collect receivables and more
efficiently managed inventory. The accounts payable was stable while there was an increase in days payable
outstanding.
7
1.2. Synergies
Management has identified $23 million of cost synergies, ~90% of which will be implemented by year 2. Opportunities
for further improvement lie both within the Fluid Handling business and through the acquisition integration. Currently,
Fluid Handling has 5 vertically integrated factories in high-cost locations, greater than 95% of its ~630 suppliers in high-
cost locations, and duplicative operating expense structure. The anticipated synergies can be broken down into three
primary categories:
($ in millions)
$17.0
$4.0
$2.0 $23.0
$0.0
$5.0
$10.0
$15.0
$20.0
$25.0
Sourcing G&A Reduction Manufacturing Rationalization Total run-rate synergies
($
in
m
ill
io
n)
Sourcing:
− Shifting of FH casting suppliers from higher cost countries to low cost countries
− Outsourcing of non-core machining work to 3rd party suppliers in low cost countries
− 35% implemented in year 1 and 100% implemented in year 2
G&A Reduction:
− Elimination of duplicative headcount at FH
− 75% implemented in year 1 and 100% in year 2
Manufacturing Rationalization:
− Headcount and overhead savings from manufacturing footprint optimization
− 100% implemented in year 3
8
1.3. Orders and backlog overview
CIRCOR has maintained consistent orders and backlog through cyclical end-market demand, with the largest impact
seen in the Energy segment, which has steadily increased activity in the past three quarters. Backlog represents orders
the Company believes to be firm across all business segments including future customer demand requirements on
long-term aerospace product platforms within AFS where the Company is the sole source provider. The Company
determines the amount of orders to include in backlog for such aircraft platforms based on 12 months demand
published by its customers.
Orders
Backlog
($ in millions)
($ in millions)
Energy:
As of Q3 2017, North American activity remains robust with rig counts continuing to increase through the third quarter
result of continued strength in the Permian, Eagle Ford and Marcellus regions. Energy segment orders increased 62%
year-over-year in Q3, led by strong demand in the distributed valves business and the contribution of CFS with organic
orders up 26% over the same period. Backlog as of October 1, 2017 was $143 million with a signification portion of that
consisting of distributed valves. Backlog at the beginning of 2017 was higher than that of the prior year, $140 million as
of January 31, 2017 compared with $135 million as of January 31, 2015. The Company expects to ship all but
$3.3 million of the January 31, 2017 backlog by December 31, 2017.
CIRCOR expects strong demand in the distributed valves business as the Company focuses on maintaining current
production levels and realizing past-due backlog. Orders in engineered valves project business were up slightly in Q3
with an uptick in quote volume, primarily for midstream projects. This market remains challenged from a pricing
perspective with most activity occurring in the Middle East and some new projects launching in Asia.
In 2016, orders decreased 20.1% to $271 million from 2015 orders as of $339 million mainly due to lower bookings in
the large international projects business and in North American short-cycle business. Low orders in long-cycle, large
international projects business was impacted by reduced capital expenditures for exploration and production of oil and
gas as well as project deferrals, whereas low orders in North American distributed valves and instrumentation &
sampling businesses were impacted by the destocking of the Company’s distributors as well as lower production
activity overall.
Energy Fluid Handling AFS
9
In 2015, orders decreased 33.9% to $447 million from 2014 orders as of $676 million mainly due to lower bookings in
the North American short-cycle market, a business divestiture, downstream instrumentation business, and control
valves. Lower orders in the North American short-cycle market were impacted by the destocking of the Company’s
distributors as well as lower production activity overall.
Advanced Flow Solutions:
As of Q3 2017, the Company has experienced broad-based strength with each product line showing year-over-year
growth with aerospace coming in strongest at 27%. Aerospace has benefited as a result of CIRCOR’s focus on growing
the segment’s platforms, including the Joint Strike Fighter and the A350 combined with an increased focus on
aftermarket sales. Furthermore, commercial and military aircraft build rates continue to increase providing a strong
platform for growth and margin expansion.
Orders for industrial solutions which serves end-markets including HVAC, maritime, and industrial, are expected to be
up sequentially and year-over-year, driven by HVAC orders in the residential market and MRO orders from the U.S.
Navy.
2016 orders increased 1.6% to $255 million from 2015 orders of $251 million, primarily due to Airbus and Boeing
ordering products for planes. 2015 orders decreased 17.0% to $251 million from 2014 orders of $290 million mainly
due to the Company’s defense based actuation business and a business divestiture.
Fluid Handling:
Orders continued to be strong in oil, gas, and petrochemical, mining, and general industrial and other industrial end
markets during the nine months ended September 30, 2017. The year-over-year growth in these end markets was
primarily offset by declines in the marine and power generation end markets.
In 2016, orders, net of cancellations, decreased in comparison to 2015 due to a decline in all end markets except
mining. Orders reached multi year lows, mainly due to commercial marine. The unfavorable domestic and international
macroeconomic conditions experienced during the first half of the year were partially offset by consecutive quarters of
order growth during the second half of 2016. Second half order growth was delivered in a stable, but not growing end
market environment and reflected, in part, the benefits from applying Colfax Business System to improve commercial
processes.
10
1.4. Appendix
CIRCOR Adjusted EBITDA by Segment
The following tables provide a segment-level reconciliation of EBITDA, by year (excluding corporate overhead and
expenses).
$ in millions FY-14 FY-15 FY-16 LTM Q3 2017
CIR Segment Energy AFS Energy AFS Energy AFS Energy AFS
CIR Segment Revenue $513.3 $277.0 $383.7 $281.8 $412.0 $268.2 $344.3 $270.0
Segment Operating Income 79.7 29.9 50.4 33.8 34.6 33.5 32.4 34.8
Stock Compensation 0.7 0.6 0.7 0.6 0.6 0.5 0.4 0.4
Disposed business (1.0) (2.0) 0.0 4.0 19.0 0.0 0.0 5.5
Other income (expense) 6.1 1.5 (8.6) 0.3 0.1 0.5 (0.9) (1.2)
Depreciation & Amortization 7.9 9.4 7.1 8.8 6.3 8.1 7.7 7.8
CIR Segment Adjusted EBITDA $93.4 $39.3 $49.6 $47.5 $60.7 $42.5 $39.7 $47.2
Adjusted EBITDA margin (%) 18.2% 14.2% 12.9% 16.9% 14.7% 15.8% 11.5% 17.5%
C O M B I N E D F I N A N C I A L S T A T E M E N T S
Colfax Fluid Handling
December 31, 2016, 2015, and 2014
With Report of Independent Auditors
1
INDEX TO THE COMBINED FINANCIAL STATEMENTS
Page
Report of Independent Auditors 2
Combined Statements of Operations 3
Combined Statements of Comprehensive Income (Loss) 4
Combined Balance Sheets 5
Combined Statements of Changes in Equity 6
Combined Statements of Cash Flows 7
Notes to Combined Financial Statements 8
Note 1. Organization and Nature of Operations 8
Note 2. Summary of Significant Accounting Policies 8
Note 3. Recently Issued Accounting Pronouncements 13
Note 4. Income Taxes 14
Note 5. Goodwill and Intangible Assets 17
Note 6. Property, Plant and Equipment, Net 18
Note 7. Inventories, Net 18
Note 8. Accrued Liabilities 19
Note 9. Defined Benefit Plans 20
Note 10. Financial Instruments and Fair Value Measurements 23
Note 11. Commitments and Contingencies 25
Note 12. Components of Accumulated Other Comprehensive Income 28
Note 13. Related Party Transactions 29
Note 14. Subsequent Events - Divestiture Transaction 29
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2
Report of Independent Auditors
The Management of Colfax Corporation
We have audited the accompanying combined financial statements of Colfax Fluid Handling (a division of
Colfax Corporation), which comprise the combined balance sheets as of December 31, 2016 and 2015, and the
related combined statements of operations, comprehensive income (loss), changes in equity and cash flows for
each of the three years in the period ended December 31, 2016, and the related notes to the combined financial
statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in conformity
with U.S. generally accepted accounting principles; this includes the design, implementation and maintenance
of internal control relevant to the preparation and fair presentation of financial statements that are free of
material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our
audits in accordance with auditing standards generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of
the risks of material misstatement of the financial statements, whether due to fraud or error. In making those
risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation
of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we
express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and
the reasonableness of significant accounting estimates made by management, as well as evaluating the overall
presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the combined
financial position of Colfax Fluid Handling at December 31, 2016 and 2015, and the combined results of its
operations and its cash flows for each of the three years in the period ended December 31, 2016 in conformity
with U.S. generally accepted accounting principles.
October 31, 2017
3
COLFAX FLUID HANDLING
COMBINED STATEMENTS OF OPERATIONS
Dollars in thousands
Year Ended December 31,
2016 2015 2014
Net sales $ 462,018 $ 533,323 $ 654,385
Cost of sales 308,748 353,160 436,859
Gross profit 153,270 180,163 217,526
Selling, general and administrative expense 140,441 167,562 190,692
Asbestos coverage adjustment 8,226 — —
Restructuring and other related charges 15,674 4,355 6,988
Operating income (loss) (11,071) 8,246 19,846
Other income — 19,454 —
Interest expense, net (2,461) (2,306) (327)
Income (loss) before income taxes (13,532) 25,394 19,519
Provision for income taxes 1,487 6,872 13,157
Net income (loss) (15,019) 18,522 6,362
Add: Loss attributable to noncontrolling interest, net of taxes 58 59 51
Net income (loss) attributable to CFH Parent $ (14,961) $ 18,581 $ 6,413
See Notes to Combined Financial Statements.
4
COLFAX FLUID HANDLING
COMBINED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)
Dollars in thousands
Year Ended December 31,
2016 2015 2014
Net income (loss) $ (15,019) $ 18,522 $ 6,362
Other comprehensive income (loss):
Changes in unrecognized pension and other post-retirement benefit costs (11,560) 12,104 42,202
Changes in foreign currency translation adjustment (16,497) (16,206) (8,850)
Other comprehensive income (loss) (28,057) (4,102) 33,352
Comprehensive income (loss) $ (43,076) $ 14,420 $ 39,714
See Notes to Combined Financial Statements.
5
COLFAX FLUID HANDLING
COMBINED BALANCE SHEETS
Dollars in thousands
December 31,
2016 2015
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 12,916 $ 18,292
Trade receivables, less allowance for doubtful accounts of $12,506 and $11,922 75,392 82,522
Inventories, net 38,885 44,751
Short-term asbestos receivable 27,259 28,872
Other current assets 23,422 24,809
Total current assets 177,874 199,246
Property, plant and equipment, net 66,474 77,244
Goodwill 212,330 219,512
Intangible assets, net 15,302 20,639
Long-term asbestos receivable 358,299 380,102
Notes due from affiliates 138,992 146,574
Other assets 39,075 36,200
Total assets $ 1,008,346 $ 1,079,517
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable $ 51,998 $ 53,328
Accrued asbestos litigation reserve 48,031 48,095
Accrued liabilities 44,480 54,294
Total current liabilities 144,509 155,717
Long-term asbestos litigation reserve 330,194 347,933
Notes due to affiliates 141,343 149,456
Retirement benefits obligation 109,586 98,006
Other long-term liabilities 2,177 4,595
Total liabilities 727,809 755,707
Equity:
Net parent investment 425,985 441,164
Accumulated other comprehensive loss (144,970) (116,913)
Total parent equity 281,015 324,251
Noncontrolling interest (478) (441)
Total equity 280,537 323,810
Total liabilities and equity $ 1,008,346 $ 1,079,517
See Notes to Combined Financial Statements.
6
COLFAX FLUID HANDLING
COMBINED STATEMENTS OF CHANGES IN EQUITY
Dollars in thousands
Net Parent
Investment
Accumulated
Other
Comprehensive
Loss
Non Controlling
Interest Total Equity
Balance at January 1, 2014 $ 500,143 $ (146,164) $ (432) $ 353,547
Net income 6,413 — (51) 6,362
Foreign exchange loss — (8,850) — (8,850)
Pension gain — 42,203 — 42,203
Net transfers from (to) Parent (75,723) — 30 (75,693)
Balance at December 31, 2014 430,833 (112,811) (453) 317,569
Net income (loss) 18,581 — (59) 18,522
Foreign exchange loss — (16,206) — (16,206)
Pension gain — 12,104 — 12,104
Net transfers from (to) Parent (8,250) — 71 (8,179)
Balance at December 31, 2015 441,164 (116,913) (441) 323,810
Net income (loss) (14,961) — (58) (15,019)
Foreign exchange loss — (16,497) — (16,497)
Pension loss — (11,560) — (11,560)
Net transfers from (to) Parent (218) — 21 (197)
Balance at December 31, 2016 $ 425,985 $ (144,970) $ (478) $ 280,537
See Notes to Combined Financial Statements.
7
COLFAX FLUID HANDLING
COMBINED STATEMENTS OF CASH FLOWS
Dollars in thousands
Year Ended December 31,
2016 2015 2014
Cash flows from operating activities:
Net income (loss) $ (15,019) $ 18,522 $ 6,362
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation, amortization and impairment charges 14,193 16,015 31,817
Stock-based compensation expense 2,023 1,672 1,350
Non-cash portion of Parent management fees 7,817 4,321 7,052
Deferred income tax benefit (2,355) (7,804) (6,189)
Non-cash pension/OPEB expense 7,733 10,100 7,191
Changes in operating assets and liabilities:
Trade receivables, net 3,738 26,607 14,490
Inventories, net 4,461 1,970 920
Accounts payable (52) (10,008) (4,157)
Changes in other operating assets and liabilities 559 3,264 (51,338)
Net cash provided by operating activities 23,098 64,659 7,498
Cash flows from investing activities:
Purchases of fixed assets (8,210) (7,490) (9,331)
Proceeds from sale of fixed assets 4,102 776 456
Cash paid for acquisitions — — (6,176)
Proceeds from disposition of business — — 3,953
Other, net 162 1,610 1,345
Net cash used in investing activities (3,946) (5,104) (9,753)
Cash flows from financing activities:
Net transfers to affiliates and parent (23,795) (63,087) (7,252)
Net cash used in financing activities (23,795) (63,087) (7,252)
Effect of foreign exchange rates on cash and cash equivalents (733) (2,247) (309)
Decrease in cash and cash equivalents (5,376) (5,779) (9,816)
Cash and cash equivalents, beginning of period 18,292 24,071 33,887
Cash and cash equivalents, end of period $ 12,916 $ 18,292 $ 24,071
See Notes to Combined Financial Statements.
COLFAX FLUID HANDLING
NOTES TO COMBINED FINANCIAL STATEMENTS
8
1. Organization and Nature of Operations
The accompanying combined carve-out financial statements include the historical accounts of the Target Business (“Colfax
Fluid Handling Business”, “CFH” or the “Business”), a division of Colfax Corporation (“Colfax” or the “Parent”). CFH is a global
organization that designs, manufactures, distributes and supports pumps and systems in five primary market segments: Commercial
Marine; Defense; Industrial and Power; Oil and Gas; and Reliability Services. CFH is headquartered in the United States in
Monroe, North Carolina. Products are marketed to customers under a portfolio of brands.
The Parent is a leading diversified industrial technology company that provides gas- and fluid-handling and fabrication
technology products and services to customers around the world under the Howden, ESAB and Colfax Fluid Handling brands.
On September 24, 2017, the Parent entered into a definitive purchase agreement to sell the Colfax Fluid Handling business
to a third party for estimated aggregate consideration of approximately $860 million. The sale is expected to close during the
three months ending December 31, 2017, subject to regulatory approval and other customary conditions.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying combined financial statements have been prepared in accordance with accounting principles generally
accepted in the United States (U.S. GAAP) from the Consolidated financial statements and accounting records of Colfax using
the historical results of operations and historical cost basis of the assets and liabilities of Colfax that comprise CFH. These financial
statements have been prepared solely to demonstrate its historical results of operations, financial position, and cash flows for the
indicated periods under Colfax’s management. All intercompany balances and transactions within CFH have been eliminated.
Transactions and balances between or among CFH and Colfax and its subsidiaries are reflected as related-party transactions within
these financial statements.
The Business has historically operated as part of Colfax and not as a stand-alone Company and has no separate legal status
or existence. The financial statements have been derived from Colfax’s historical accounting records and are presented on a carve-
out basis.The accompanying combined financial statements include the assets, liabilities, revenues, and expenses that are directly
attributable to CFH. In addition, certain costs related to the Business as well as allocations deemed reasonable by management
have been included to present the combined financial position, results of operations, changes in equity and cash flows of the
Business on a stand-alone basis. The allocation methodologies have been described within the notes to the combined financial
statements where appropriate. These methodologies were primarily based on proportionate time and effort, headcount, or direct
labor costs incurred by CFH compared to Colfax’s other business units. These allocated costs are primarily related to corporate
administrative expenses, employee-related costs including benefits for corporate and shared employees, and fees for other corporate
and support services. Income taxes have been accounted for in these financial statements as described in Note 4, “Income Taxes.”
Pension expenses have been accounted for in these financial statements as described in Note 9, “Defined Benefit Plans.”
The financial information included herein may not necessarily reflect the combined financial position, results of operations,
changes in equity and cash flows of CFH in the future or what they would have been had the Business been a separate, stand-alone
entity during the periods presented.
The Business utilizes the Parent’s centralized processes and systems for cash management, payroll, purchasing, and
distribution. The net results of these cash transactions between the Business and the Parent are reflected within Equity in the
accompanying balance sheets. In addition, the equity represents the Parent’s interest in the recorded net assets of CFH and represents
the cumulative net investment by the Parent in CFH through the dates presented, inclusive of cumulative operating results.
During the year ended December 31, 2016, the Parent determined that an other-than-temporary lack of exchangeability between
the Venezuelan bolivar and U.S. dollar, due to government controls, had restricted CFH’s Venezuelan operation’s ability to pay
dividends and satisfy other obligations denominated in U.S. dollars. In addition, other government-imposed restrictions affecting
labor, production, and distribution were prohibiting the Business from controlling key operating decisions. These circumstances
caused the Business to no longer meet the accounting criteria for control in order to continue consolidating its Venezuelan operations.
As a result, the Business deconsolidated its Venezuelan operations as of September 30, 2016 for accounting and reporting purposes.
As a result of the deconsolidation, the CFH recorded a charge of $1.9 million in Selling, general and administrative expense for
the year ended December 31, 2016, substantially all of which related to accumulated foreign currency translation charges previously
COLFAX FLUID HANDLING
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
9
included in Accumulated other comprehensive loss. Due to this loss of control, the Business has applied the cost method of
accounting for its Venezuelan operations beginning on September 30, 2016. Prior to, and at the date of deconsolidation, the
Business’s Venezuelan operations represented less than 1% of CFH’s net assets, revenues and operating results.
Revenue Recognition
The Business generally recognizes revenues and costs from product sales when all of the following criteria are met: persuasive
evidence of an arrangement exists, the price is fixed or determinable, product delivery has occurred or services have been rendered,
there are no further obligations to customers, and collectibility is reasonably assured. Product delivery occurs when title and risk
of loss transfer to the customer. CFH’s shipping terms vary based on the contract. If any significant obligations to the customer
with respect to such sale remain to be fulfilled following shipments, typically involving obligations relating to installation and
acceptance by the buyer, revenue recognition is deferred until such obligations have been fulfilled. Any customer allowances and
discounts are recorded as a reduction in reported revenues at the time of sale because these allowances reflect a reduction in the
sales price for the products sold. These allowances and discounts are estimated based on historical experience and known trends.
Revenue related to service agreements is recognized ratably over the term of the agreement.
Amounts billed for shipping and handling are recorded as revenue. Shipping and handling expenses are recorded as a component
of Cost of sales.
Taxes Collected from Customers and Remitted to Governmental Authorities
The Business collects various taxes and fees as an agent in connection with the sale of products and remits these amounts to
the respective taxing authorities. These taxes and fees have been presented on a net basis in the Combined Statements of Operations
and are recorded as a component of Accrued liabilities in the Combined Balance Sheets until remitted to the respective taxing
authority.
Research and Development Expense
Research and development costs of $2.5 million, $3.5 million, and $3.7 million for the years ended December 31, 2016, 2015,
and 2014, respectively, were expensed as incurred and are included in Selling, general and administrative expense in the Combined
Statements of Operations.
Other Income
Other income consists of a gain recognized on the forgiveness of a related party loan arrangement during the year ended
December 31, 2015.
Cash and Cash Equivalents
Treasury activities, including activities related to the Business, are centralized by the Parent such that cash collections are
generally distributed to the Parent and reflected as equity. Cash and cash equivalents include all financial instruments purchased
with an initial maturity of three months or less.
Trade Receivables
Trade receivables are presented net of an allowance for doubtful accounts. The Business records an allowance for doubtful
accounts based upon estimates of amounts deemed uncollectible and a specific review of significant delinquent accounts factoring
in current and expected economic conditions. Estimated losses are based on historical collection experience, and are reviewed
periodically by management.
Inventories
Inventories, net include material, labor and overhead costs and are stated at the lower of cost (determined under various
methods including average cost, but predominantly first-in, first-out) or market. CFH periodically reviews its quantities of
inventories on hand and compares these amounts to the expected usage of each particular product. The Business records as a charge
to Cost of sales any amounts required to reduce the carrying value of inventories to net realizable value.
COLFAX FLUID HANDLING
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
10
Property, Plant and Equipment
Property, plant and equipment, net are stated at historical cost, which includes the fair values of such assets acquired in prior
business combinations. Depreciation of property, plant and equipment is recorded on a straight-line basis over estimated useful
lives. Assets recorded under capital leases are amortized over the shorter of their estimated useful lives or the lease terms, which
range from three to fifteen years. Repair and maintenance expenditures are expensed as incurred unless the repair extends the
useful life of the asset.
Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents the costs in excess of the fair value of net assets acquired associated with acquired businesses of the
Parent. Indefinite-lived intangible assets consist of trade names.
The Business evaluates the recoverability of goodwill and indefinite-lived intangible assets annually or more frequently if an
event occurs or circumstances change in the interim that would more likely than not reduce the fair value of the asset below its
carrying amount.
In the evaluation of goodwill for impairment, CFH assesses qualitative factors to determine whether it is more likely than not
that the fair value of the reporting unit is less than its carrying value. If the Business determines that it is not more likely than not
for the reporting unit’s fair value to be less than its carrying value, a calculation of the fair value is not performed. If the Business
determines that it is more likely than not for the reporting unit’s fair value to be less than its carrying value, a calculation of the
reporting unit’s fair value is performed and compared to the carrying value of that reporting unit. In certain instances, CFH may
elect to forgo the qualitative assessment and proceed directly to the first step of the quantitative impairment test. If the carrying
value of the reporting unit exceeds its fair value, step two of the impairment analysis is performed. In step two of the analysis, an
impairment loss is recorded equal to the excess of the carrying value of the reporting unit’s goodwill over its implied fair value.
Generally, the Business measures the fair value of its reporting unit using an income approach, which entails among other
things calculating the present value of future discounted cash flows. The discounted cash flow model indicates the fair value of
the reporting unit based on the present value of the cash flows that the reporting unit is expected to generate in the future. Significant
estimates in the discounted cash flows model include: the weighted average cost of capital; long-term rate of growth and profitability
of our business; and working capital effects.
CFH has experienced a concurrent decline in numerous end markets and geographic markets that has had a negative impact
on the levels of capital invested and maintenance expenditures by certain of its customers which in turn has reduced the demand
for its products and services, affecting operating results. Given the above, the Parent elected not to perform qualitative assessments
of goodwill and instead proceeded directly to performing the first step of the two-step quantitative goodwill impairment test for
its 2016 annual impairment test. The quantitative impairment assessment of goodwill for the CFH reporting unit, based on the
methodologies identified above, resulted in a calculated fair value that exceeded the carrying values of the reporting unit, resulting
in no impairment charges to goodwill.
In the evaluation of indefinite-lived intangible assets for impairment, CFH first assesses qualitative factors to determine
whether it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying value. If the
Business determines that it is not more likely than not for the indefinite-lived intangible asset’s fair value to be less than its carrying
value, a calculation of the fair value is not performed. If CFH determines that it is more likely than not that the indefinite-lived
intangible asset’s fair value is less than its carrying value, the fair value is measured and compared to the carrying value of the
asset. If the carrying amount of the indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an
amount equal to that excess. The Business measures the fair value of its indefinite-lived intangible assets using the “relief-from-
royalty” method. Significant estimates in this approach include projected revenues and royalty and discount rates for each trade
name evaluated.
From time to time, CFH has identified certain indefinite-lived intangible assets that, due to indicators present at the specific
operation associated with the indefinite-lived intangible asset, required testing for impairment prior to the annual impairment
evaluation.
Analyses performed in 2014, 2015 and the most recent analysis performed as of October 1, 2016, resulted in no impairment
charges to indefinite-lived assets.
COLFAX FLUID HANDLING
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
11
Impairment of Long-Lived Assets Other than goodwill and Indefinite-Lived Intangible Assets
Intangibles primarily represent acquired customer relationships, acquired order backlog, acquired technology and software
license agreements. A portion of the CFH’s acquired customer relationships is being amortized on an accelerated basis over periods
ranging from seven to 30 years based on the present value of the future cash flows expected to be generated from the acquired
customers. All other intangibles are being amortized on a straight-line basis over their estimated useful lives, generally ranging
from two to fifteen years.
The Business assesses its long-lived assets other than goodwill and indefinite-lived intangible assets for impairment whenever
facts and circumstances indicate that the carrying amounts may not be fully recoverable. To analyze recoverability, the Business
projects undiscounted net future cash flows over the remaining lives of such assets. If these projected cash flows are less than the
carrying amounts, an impairment loss would be recognized, resulting in a write-down of the assets with a corresponding charge
to earnings. The impairment loss is measured based upon the difference between the carrying amounts and the fair values of the
assets. Assets to be disposed of are reported at the lower of the carrying amounts or fair value less cost to sell. Management
determines fair value using the discounted cash flow method or other accepted valuation techniques.
The Business recorded asset impairment losses related to facility closures totaling $2.0 million during the year ended
December 31, 2016 as a component of Restructuring and other related charges in the Combined Statements of Operations. The
aggregate carrying value of these assets subsequent to impairment was $0.
In addition, analyses were performed during the year ended December 31, 2014 to evaluate certain long-lived intangible assets
related to a specific operation within the Business due to projected cash flow declines. The analysis determined certain long-lived
intangible assets, primarily consisting of acquired customer relationships and acquired technology, were either impaired or no
longer recoverable based upon projected undiscounted net cash flows. The impairment was calculated as the difference between
the fair value of the remaining expected future cash flows to be generated from the asset or asset group and the respective carrying
value as of the measurement date. The Business recorded $10.5 million of intangible asset impairment loss as a component of
Selling, general and administrative expense in the Combined Statement of Operations for the year ended December 31, 2014. The
total fair value of these assets of $3.3 million as of December 31, 2014 is included in Level Three of the fair value hierarchy.
Warranty Costs
Estimated expenses related to product warranties are accrued as the revenue is recognized on products sold to customers and
included in Cost of sales in the Combined Statements of Operations. Estimates are established using historical information as to
the nature, frequency, and average costs of warranty claims.
The activity in the Business’s warranty liability, which is included in Accrued liabilities and Other long-term liabilities in
CFH’s combined Balance Sheets, consisted of the following:
Year Ended December 31,
2016 2015
(In thousands)
Warranty liability, beginning of period $ 1,772 $ 1,684
Accrued warranty expense 2,305 2,961
Changes in estimates related to pre-existing warranties 51 (232)
Cost of warranty service work performed (2,576) (2,511)
Foreign exchange translation effect (53) (130)
Warranty liability, end of period $ 1,499 $ 1,772
Income Taxes
The results of operations have historically been included in the consolidated federal income tax returns of Colfax Corporation
and the state income tax returns of Colfax Corporation and its US Subsidiaries, including but not limited to CFH. The income tax
amounts reflected in the accompanying combined carve-out financial statements have been allocated based on taxable income
directly attributable to the CFH Business, resulting in a stand-alone presentation. Management believes the assumptions underlying
the allocation of income taxes are reasonable. However, the amounts allocated for income taxes in the accompanying combined
carve-out financial statements are not necessarily indicative of the amount of income taxes that would have been recorded had the
combined operations been operated as a separate, stand-alone entity.
COLFAX FLUID HANDLING
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
12
Income taxes for the Business are accounted for under the asset and liability method. Deferred income tax assets and liabilities
are recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets and
liabilities in the Combined Financial Statements and their respective tax basis. Deferred income tax assets and liabilities are
measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is generally
recognized in Provision for income taxes in the period that includes the enactment date.
Valuation allowances are recorded if it is more likely than not that some portion of the deferred income tax assets will not be
realized. In evaluating the need for a valuation allowance, the Business takes into account various factors, including the expected
level of future taxable income and available tax planning strategies. Any changes in judgment about the valuation allowance are
recorded through Provision for income taxes and are based on changes in facts and circumstances regarding realizability of deferred
tax assets.
The Business must presume that an income tax position taken in a tax return will be examined by the relevant tax authority
and determine whether it is more likely than not that the tax position will be sustained upon examination based upon the technical
merits of the position. An income tax position that meets the more-likely-than-not recognition threshold is measured to determine
the amount of benefit to recognize in the financial statements. The Business establishes a liability for unrecognized income tax
benefits for income tax positions for which it is more likely than not that a tax position will not be sustained upon examination by
the respective taxing authority to the extent such tax positions reduce the Business’s income tax liability. The Business recognizes
interest and penalties related to unrecognized income tax benefits in the Provision for income taxes in the Combined Statements
of Operations.
Foreign Currency Transactions and Exchange Gains and Losses
The Business’s financial statements are presented in U.S. dollars. The functional currencies of the Business’s operating
subsidiaries are generally the local currencies of the countries in which each subsidiary is located. Assets and liabilities denominated
in foreign currencies are translated at rates of exchange in effect at the balance sheet date. The amounts recorded in each year in
Foreign currency translation are net of income taxes to the extent the underlying equity balances in the entities are not deemed to
be permanently reinvested. Revenues and expenses are translated at average rates of exchange in effect during the year.
Transactions in foreign currencies are translated at the exchange rate in effect at the date of each transaction. Differences in
exchange rates during the period between the date a transaction denominated in a foreign currency is consummated and the date
on which it is either settled or translated for inclusion in the Combined Balance Sheets are recognized in Selling, general and
administrative expense or Interest expense in the Combined Statements of Operations for that period.
During the year ended December 31, 2016, the Business recognized net foreign currency transaction losses of $0.2 million,
and $0.0 million in Interest expense and Selling, general and administrative expense, respectively, in the Combined Statement of
Operations. During the year ended December 31, 2015, the Business recognized a net foreign currency transaction loss of $0.1
million and a gain of $0.1 million in Interest expense and Selling, general and administrative expense, respectively, in the Combined
Statement of Operations. During the year ended December 31, 2014, a net foreign currency transaction gain of $0.1 million and
a net foreign currency loss of $0.2 million were recognized in Interest Expense and Selling, general and administrative expense,
respectively, in the Combined Statement of Operations.
Interest expense, net
In 2016 and 2015, interest expense, net was primarily comprised of royalties, commissions and interest expense related to
Parent and affiliates, net of interest income with Parent and affiliates. In 2014, interest expense, net represented interest expense
related to Parent and affiliates.
Use of Estimates
The Business makes certain estimates and assumptions in preparing its Combined Financial Statements in accordance with
GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities
at the date of the Combined Financial Statements and the reported amounts of revenues and expenses for the period presented.
COLFAX FLUID HANDLING
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
13
3. Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
“Revenue from Contracts with Customers (Topic 606)”. The ASU outlines a single set of comprehensive principles for recognizing
revenue under U.S. GAAP and supersedes existing revenue recognition guidance. The main principle of the ASU is that revenue
should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. The Business expects to apply ASU No. 2014-09
and its related updates on a full retrospective basis as of January 1, 2018. Based on Business-wide analysis performed to date on
the Business’s different revenue streams, we expect the adoption of the ASU to impact the timing of revenue recognition related
to the identification of additional performance obligations. The adoption of the ASU is not expected to have a material impact on
the Combined Financial Statements.
In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330) - Simplifying the Measurement of Inventory”. The
ASU requires an entity to measure inventory at the lower of cost and net realizable value, except for inventory that is measured
using the last-in, first-out method or the retail inventory method. The Business adopted ASU No. 2015-11 in the annual period
beginning January 1, 2017 on a prospective basis and it did not have a material impact on the Business’s Combined Financial
Statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. The ASU requires, among other things, a lessee
to recognize assets and liabilities associated with the rights and obligations attributable to most leases but also recognize expenses
similar to current lease accounting. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2018. Early adoption is permitted. The new guidance must be adopted using a modified retrospective transition
and provides for certain practical expedients. The Business is currently evaluating the timing of adoption as well as the impact of
adopting the ASU on its Combined Financial Statements.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718)”. The ASU, among
other things, aims to simplify the accounting for shared-based payment accounting by recording all excess tax benefits and tax
deficiencies as income tax expense or benefit in the income statement and eliminates the requirement that excess tax benefits be
realized before they can be recognized. The effect for excess tax benefits not previously recognized will be recorded as a cumulative
adjustment to retained earnings pursuant to a modified retrospective adoption method. Excess tax benefits and deficiencies will
be accounted for as discrete items in the period the stock awards vest or otherwise are settled. Further, the guidance will require
that excess tax benefits be presented as an operating activity on the statement of cash flows consistent with other income tax cash
flows. The Business adopted the ASU in the annual period beginning January 1, 2017 and has continued its policy to estimate the
amount of awards that are expected to vest. The adoption of ASU 2016-09 will not have a material impact on the Business’s
Combined Financial Statements.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 203)”. The ASU addresses eight specific
cash flow issues and clarifies their presentation and classification in the Statement of Cash Flows. The ASU is effective for fiscal
years beginning after December 15, 2017 and is to be applied retrospectively with early adoption permitted. The Business is
currently evaluating the impact of adopting ASU No. 2016-15 on its Combined Financial Statements.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other (Topic 350)”. The ASU modifies
the measurement of a goodwill impairment loss from the portion of the carrying amount of goodwill that exceeds its implied fair
value to the excess of the carrying amount of a reporting unit that exceeds its fair value. This eliminates step 2 of the goodwill
impairment test under current guidance. The ASU will be applied prospectively for annual or interim goodwill impairment tests
in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests
performed after January 1, 2017. The Business is currently evaluating the timing of adoption.
COLFAX FLUID HANDLING
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
14
4. Income Taxes
Income before income taxes and Provision for (benefit from) income taxes consisted of the following:
Year Ended December 31,
2016 2015 2014
(In thousands)
Income (loss) before income taxes:
Domestic operations $ (1,728) $ 3,427 $ 10,694
Foreign operations (11,804) 21,967 8,825
$ (13,532) $ 25,394 $ 19,519
Provision for (benefit from) income taxes:
Current:
Federal $ (1,017) $ 5,139 4,824
State 130 722 696
Foreign 4,729 8,815 13,826
$ 3,842 $ 14,676 $ 19,346
Deferred:
Domestic operations $ 908 $ (3,939) $ (1,292)
Foreign operations (3,263) (3,865) (4,897)
(2,355) (7,804) (6,189)
$ 1,487 $ 6,872 $ 13,157
The Provision for (benefit from) income taxes differs from the amount that would be computed by applying the US federal
statutory rate as follows:
Year Ended December 31,
2016 2015 2014
(In thousands)
Taxes calculated at the US federal statutory rate $ (4,736) $ 8,888 $ 6,832
State taxes (164) 450 343
Nondeductible expenses, domestic manufacturing deduction and other 614 (1,739) 814
Effect of tax rates on international operations 1,876 (2,559) 1,670
Changes in valuation allowance and tax reserves 3,897 1,832 3,498
Provision for income taxes $ 1,487 $ 6,872 13,157
COLFAX FLUID HANDLING
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
15
Deferred income taxes, net reflect the net tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax purposes. For purposes of these financial statements,
CFH has applied ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”, and classified its deferred tax assets and liabilities
as non-current. The significant components of deferred tax assets and liabilities, in addition to the reconciliation of the beginning
and ending amount of gross unrecognized tax benefits, are as follows:
December 31,
2016 2015
(In thousands)
Deferred tax assets:
Post-retirement benefit obligation $ 22,629 $ 18,866
Expenses currently not deductible 36,761 36,431
Net operating loss carryforward 10,949 7,124
Depreciation and amortization 246 83
Other 700 706
Valuation allowance (9,831) (5,848)
Deferred tax assets, net $ 61,454 $ 57,362
Deferred tax liabilities:
Depreciation and amortization $ (14,033) $ (13,734)
Basis difference on acquired business and other (11,003) (12,041)
Total deferred tax liabilities $ (25,036) $ (25,775)
Total deferred tax assets, net $ 36,418 $ 31,587
CFH evaluates the recoverability of its deferred tax assets on a jurisdictional basis by considering whether deferred tax assets
will be realized on a more-likely-than-not basis. To the extent a portion or all of the applicable deferred tax assets do not meet the
more-likely-than-not threshold, a valuation allowance is recorded. During the year ended December 31, 2016, the valuation
allowance increased by $4.0 million to a total valuation allowance of $9.8 million compared to the December 31, 2015 balance
of $5.8 million which had increased by $1.8 million from December 31, 2014. In each year the increases were recognized in the
Provision for income taxes. Assessment of the amount of valuation allowance was determined by evaluating any carryback to
recover taxes paid in prior years, reversing taxable temporary difference, tax planning strategies and future taxable income as to
how much of the relevant deferred tax asset could be realized on a more-likely-than-not basis.
CFH has recognized a deferred tax asset balance of $10.8 million for non-US entity operating loss carryforwards, to which
some of the gross NOL amounts can be carried forward indefinitely. In other jurisdictions, the Business’s net operating losses
expire in years 2017 through 2037. In some cases, the Business’s ability to use certain net operating loss carryforwards to offset
any taxable income generated in future taxable periods may be limited under certain jurisdictional tax laws.
Current income taxes payable have been increased by $0.6 million in 2016 and reduced by $1.9 million in 2015 for tax
deductions attributed to stock-based compensation, of which, the excess tax benefit over the amount recorded for financial reporting
purposes was $0.2 million and $0.8 million, respectively. The Business’s income tax payable or receivable computed under the
separate return method is adjusted to equity as it does not represent a liability with the relevant taxing authorities since the Business
is a part of the Parent’s tax returns filed with the taxing authorities.
In general, the undistributed earnings of the Business’s non-US operations are considered to be indefinitely reinvested outside
the US and no tax expense in the US has been recognized under the applicable accounting standard for these reinvested earnings.
The amount of unremitted earnings from the Business’s international subsidiaries, subject to local statutory restrictions, as of
December 31, 2016 is approximately $199 million. Determination of the amount of deferred tax liability that may be applicable
on such indefinitely reinvested earnings is not practicable.
COLFAX FLUID HANDLING
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
16
The Business records a liability for unrecognized income tax benefits for the amount of benefit included in its previously filed
income tax returns and in its financial results expected to be included in income tax returns to be filed for periods through the date
of its Consolidated Financial Statements for income tax positions for which it is more likely than not that a tax position will not
be sustained upon examination by the respective taxing authority. A reconciliation of the beginning and ending amount of gross
unrecognized tax benefits is as follows (inclusive of associated interest and penalties):
(In thousands)
Balance, December 31, 2013 $ 2,238
Addition for tax positions taken in prior periods 137
Addition for tax positions taken in the current period —
Reduction for tax positions taken in prior periods (1) (112)
Other, including the impact of foreign currency translation (221)
Balance, December 31, 2014 2,042
Addition for tax positions taken in prior periods 65
Addition for tax positions taken in the current period (125)
Reduction for tax positions taken in prior periods (1) —
Other, including the impact of foreign currency translation (134)
Balance, December 31, 2015 $ 1,848
Addition for tax positions taken in prior periods 354
Addition for tax positions taken in the current period 337
Reduction for tax positions taken in prior periods (1) (446)
Other, including the impact of foreign currency translation (47)
Balance, December 31, 2016 $ 2,046
(1) Includes reductions for lapses in statute of limitations.
CFH conducts its business on a global basis and the Parent files income tax returns in the US federal, state and non-US
jurisdictions on a combined basis where permitted by the tax law. The Parent and its subsidiaries (including the Business) are
routinely examined by tax authorities around the world. Tax examinations remain in process in multiple countries and various US
state taxing jurisdictions. In the US, the Parent and its subsidiaries (including the Business) remain subject to examination or
adjustment of its carryover tax attributes from tax year 2003. With some exceptions, other major tax jurisdictions generally are
not subject to tax examinations for years beginning before 2010.
The Business’s total unrecognized tax benefits were $2.0 million, $1.8 million and $2.0 million as of December 31, 2016 and
2015 and 2014, respectively, inclusive of $0.5 million in each year of interest and penalties. The net liabilities for uncertain tax
positions as of December 31, 2016, 2015 and 2014 were $2.0 million, $1.8 million and $2.2 million, respectively, and, if recognized,
would favorably impact the effective tax rate. The Business records interest and penalties on uncertain tax positions as a component
of Provision for (benefit from) income taxes.
Due to the difficulty in predicting with reasonable certainty when tax audits will be fully resolved and closed, the range of
reasonably possible significant increases or decreases in the liability for unrecognized tax benefits that may occur within the next
12 months is difficult to ascertain. Currently, the Business estimates that it is reasonably possible that the expiration of various
statutes of limitations, resolution of tax audits and court decisions may reduce its tax expense in the next 12 months by less than
$1.0 million.
COLFAX FLUID HANDLING
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
17
5. Goodwill and Intangible Assets
The change in the carrying value of Goodwill for the period from December 31, 2014 to 2016 is primarily comprised of foreign
currency translation effects.
The following table summarizes CFH’s Intangible assets, excluding Goodwill (in thousands):
December 31,
2016 2015
(In Thousands)
Gross
Carrying
Amount
Accumulated
Amortization
Net
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Amount
Trade names – indefinite life $ 981 $ — $ 981 $ 988 $ — $ 988
Acquired customer relationships 25,287 (18,028) 7,259 27,428 (16,311) 11,117
Acquired technology 9,770 (4,097) 5,673 9,981 (3,604) 6,377
Acquired backlog 260 (260) — 268 (268) —
Other intangible assets 7,951 (6,562) 1,389 8,107 (5,950) 2,157
$ 44,249 $ (28,947) $ 15,302 $ 46,772 $ (26,133) $ 20,639
Amortization expense related to intangible assets was included in the Combined Statements of Operations as follows:
Year Ended December 31,
2016 2015 2014
(In thousands)
Selling, general and administrative expense $ 2,814 $ 3,795 $ 5,453
See Note 2, “Summary of Significant Accounting Policies” for discussion regarding impairment of Intangible assets.
As of December 31, 2016, total amortization expense for intangible assets is expected to be $2.9 million, $2.9 million, $1.6
million, $1.5 million and $1.5 million for the years ending December 31, 2017, 2018, 2019, 2020 and 2021, respectively.
COLFAX FLUID HANDLING
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
18
6. Property, Plant and Equipment, Net
December 31,
Depreciable Life 2016 2015
(In years) (In thousands)
Land n/a $ 10,924 $ 12,210
Buildings and improvements 5-40 30,831 36,588
Machinery and equipment 3-15 134,091 146,327
Software 3-5 13,693 15,243
189,539 210,368
Accumulated depreciation (123,065) (133,124)
Property, plant and equipment, net $ 66,474 $ 77,244
Depreciation expense, including the amortization of assets recorded under capital leases, for the years ended December 31,
2016, 2015 and 2014, was $9.5 million, $10.5 million and $13.1 million, respectively. Depreciation expense for the years ended
December 31, 2016, 2015, and 2014 includes $2.0 million, $0 and $0 of non-cash impairment of fixed assets, respectively. These
amounts also include depreciation expense related to software for the years ended December 31, 2016, 2015 and 2014 of $0.6
million, $0.8 million and $1.5 million, respectively.
7. Inventories, Net
Inventories, net consisted of the following:
December 31,
2016 2015
(In thousands)
Raw materials $ 26,628 $ 29,961
Work in process 19,487 20,089
Finished goods 15,640 18,353
61,755 68,403
Less: customer progress payments (14,624) (15,876)
Less: allowance for excess, slow-moving and obsolete inventory (8,246) (7,776)
Inventories, net $ 38,885 $ 44,751
COLFAX FLUID HANDLING
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
19
8. Accrued Liabilities
Accrued liabilities in the Combined Balance Sheets consisted of the following:
December 31,
2016 2015
(In thousands)
Accrued payroll $ 14,658 $ 16,079
Accrued taxes 3,138 5,521
Warranty liability - current portion 1,477 1,764
Accrued restructuring liability - current portion 2,401 85
Accrued third-party commissions 2,556 3,591
Customer advances & other 20,250 27,254
Accrued liabilities $ 44,480 $ 54,294
Accrued Restructuring Liability
The CFH’s restructuring programs include a series of restructuring actions to reduce the structural costs of the Business. A
summary of the activity in CFH’s restructuring liability included in Accrued liabilities in the Combined Balance Sheets follows:
Year Ended December 31, 2016
Balance at
Beginning of
Period Provisions Payments
Foreign
Currency
Translation
Balance at
End of
Period
(In thousands)
Restructuring and other related charges:
Termination benefits(1) $ 71 $ 8,776 $ (6,623) $ (302) $ 1,922
Facility closure costs(2) 14 4,621 (4,134) (22) 479
85 13,397 (10,757) (324) 2,401
Non-cash charges 2,277
$ 15,674
(1) Includes severance and other termination benefits, including outplacement services. CFH recognizes the cost of involuntary termination
benefits at the communication date or ratably over any remaining expected future service period. Voluntary termination benefits are recognized
as a liability and an expense when employees accept the offer and the amount can be reasonably estimated.
(2) Includes the cost of relocating associates, relocating equipment and lease termination expense in connection with the closure of facilities.
Year Ended December 31, 2015
Balance at
Beginning of
Period Provisions Payments
Foreign
Currency
Translation
Balance at
End of
Period(3)
(In thousands)
Restructuring and other related charges:
Termination benefits(1) $ 2,699 $ 705 $ (3,216) $ (117) $ 71
Facility closure costs(2) (1,762) 3,650 (1,831) (43) 14
$ 4,355
(1) Includes severance and other termination benefits, including outplacement services. The Business recognizes the cost of involuntary termination
benefits at the communication date or ratably over any remaining expected future service period. Voluntary termination benefits are recognized
as a liability and an expense when employees accept the offer and the amount can be reasonably estimated.
(2) Includes the cost of relocating associates, relocating equipment and lease termination expense in connection with the closure of facilities.
(3) As of December 31, 2015, $0.1 million of CFH’s restructuring liability was included in Accrued liabilities.
CFH expects to incur Restructuring and other related charges of approximately $5 million during the year ending December
31, 2017 related to its restructuring activities.
COLFAX FLUID HANDLING
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
20
9. Defined Benefit Plans
Outside of the U.S., the Business sponsors certain defined benefit pension plans for its employees in Germany, Norway and Sweden.
The pension disclosures presented in the table below include these non-U.S pension plans only. The related expenses for these
plans are included in Selling, general and administrative expense in the accompanying combined statements of operations.
Years Ended December 31,
2016 2015
Pension Benefits-Non U.S. Plans:
Service cost $ 2,206 $ 2,366
Interest cost 2,289 2,058
Expected return on plan assets (99) (159)
Amortization 1,724 2,451
Net periodic benefit cost $ 6,120 $ 6,716
Other Post-Retirement Benefits:
Service cost $ — $ —
Interest cost 436 475
Amortization (32) 495
Net periodic benefit cost $ 404 $ 970
In the US, CFH’s salaried employees participate in defined benefit pension plans sponsored by the Parent. These plans include
other Parent employees that are not employees of CFH. The Parent also sponsors certain defined contribution plans and provides
other post-retirement benefits, including health and life insurance, for certain eligible employees and eligible former employees
who have retired from the Business. For the years ended December 31, 2016, 2015 and 2014, respectively, the Parent allocated
to CFH approximately $0, $0.9 million and $0.5 million of net pension and other post-retirement benefit expenses, which have
been reflected within Selling, general and administrative expense in the accompanying combined statements of operations. The
related U.S. pension assets and liabilities have not been allocated to the Business and have not been presented on the accompanying
balance sheet since these are assets and liabilities of the Parent.
The Business’s other accrued post-retirement benefit obligations as of December 31, 2016 and December 31, 2015 were $11.0
million and $12.0 million, respectively. These obligations are actuarially determined. These balances are accrued within Retirement
benefits obligation and Accrued liabilities on the balance sheet. The Business used a weighted-average discount rate of 3.9% and
4.0% to compute its post-retirement benefit obligation at December 31, 2016 and 2015, respectively. The net periodic benefit cost
for the Business’s other post-retirement benefit plan was $0.4 million, $1.0 million and $1.0 million for the years ended December
31, 2016, 2015 and 2014, respectively. The Business used a weighted-average discount rate of 4.0%, 3.6% and 4.4% to compute
its net periodic benefit cost for its post-retirement benefit obligation for the years ended December 31, 2016, 2015 and 2014,
respectively. For measurement purposes, a weighted-average annual rate of increase in the per capita cost of covered health care
benefits of approximately 6.2% was assumed. The rate was assumed to decrease gradually to 5.25% by 2021 for one the Company’s
plans and to 4.5% by 2027 for the remaining plans and remain at those levels thereafter for benefits covered under the plans.
COLFAX FLUID HANDLING
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
21
The following table summarize the total changes in the Business’s pension plan assets and includes a statement of the plans’ funded
status:
Pension Benefits
Year Ended December 31,
2016 2015
(In thousands)
Change in benefit obligation:
Projected benefit obligation, beginning of year $ 91,543 $ 106,989
Service cost 2,205 2,366
Interest cost 2,289 2,058
Actuarial loss (gain) 16,142 (3,466)
Foreign exchange effect (3,301) (11,013)
Benefits paid (3,398) (3,465)
Other (240) (1,926)
Projected benefit obligation, end of year $ 105,240 $ 91,543
Accumulated benefit obligation, end of year $ 92,216 $ 83,970
Change in plan assets:
Fair value of plan assets, beginning of year $ 5,409 $ 7,027
Actual return on plan assets (152) 7
Employer contribution 2,793 2,749
Foreign exchange effect 25 (851)
Benefits paid (3,398) (3,465)
Settlements — (58)
Other (199) —
Fair value of plan assets, end of year $ 4,478 $ 5,409
Funded status, end of year $ (100,762) $ (86,134)
Amounts recognized on the Combined Balance Sheets at December 31:
Non-current assets $ — $ —
Current liabilities (1,002) (762)
Non-current liabilities (99,760) (85,372)
Total $ (100,762) $ (86,134)
The actuarial loss of $16.4 million in 2016 consisted of changes in financial assumptions, including expected return on assets,
changes in demographic assumptions and an experience gain of $0.3 million.
COLFAX FLUID HANDLING
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
22
Expected contributions to the Business’s pension and other post-employment benefit plans for the year ending December 31, 2017,
related to plans as of December 31, 2016, are $2.8 million. The following benefit payments are expected to be paid during each
respective fiscal year:
Expected Benefit
Payments
2017 $ 3,380
2018 3,390
2019 3,396
2020 3,451
2021 3,631
2022- 2026 $ 18,448
The Business’s primary investment objective for its pension plan assets is to provide a source of retirement income for the plans’
participants and beneficiaries. The assets are invested with the goal of preserving principal while providing a reasonable rate of
return over the long term. Diversification of assets is achieved through strategic allocations to various asset classes. Actual
allocations to each asset class vary due to periodic investment strategy changes, market value fluctuations, the length of time it
takes to fully implement investment allocation positions, and the timing of benefit payments and contributions. The asset allocation
is monitored and rebalanced as required, as frequently as on a quarterly basis in some instances. The following are the actual and
target allocation percentages for the Business’s pension plan assets:
Actual Asset Allocation December 31,
2016 2015 Target Allocation
Equity securities 6% 10% 10% - 50%
Fixed income securities 86% 84% 50% - 90%
Cash and cash equivalents 8% 6% 0% - 25%
Total 100% 100%
The key economic assumptions used in the measurement of the Business’s pension obligations are as follows:
Economic Assumptions
December 31,
2016 2015
Weighted-average discount rate:
All plans 1.8% 2.5%
Weighted-average rate of increase in
compensation levels 1.6% 1.6%
COLFAX FLUID HANDLING
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
23
The key economic assumptions used in the computation of net periodic benefit cost are as follows:
Net Benefit Cost Assumptions
Year Ended December 31,
2016 2015
Weighted-average discount rate: 2.5% 2.1%
Weighted-average expected return on plan assets: 2.6% 2.7%
Weighted-average rate of increase in compensation
levels 2.2% 2.0%
The components of net unrecognized pension cost included in Accumulated other comprehensive loss in the Combined Balance
Sheets that have not been recognized as a component of net periodic benefit cost are as follows:
December 31,
2016 2015
(In thousands)
Amortization of loss $ 2,381 $ 1,690
The Business maintains defined contribution plans covering certain union and non-union employees. CFH’s expense relating
to these plans for the years ended December 31, 2016, 2015 and 2014 was $2.8 million, $3.3 million and $3.2 million, respectively.
10. Financial Instruments and Fair Value Measurements
CFH utilizes fair value measurement guidance prescribed by accounting standards to value its financial instruments. The
guidance establishes a fair value hierarchy based on the inputs used to measure fair value. This hierarchy prioritizes the inputs into
three broad levels as follows:
Level One: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.
Level Two: Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets,
quoted prices for identical or similar assets or liabilities in inactive markets, and inputs that are observable for the asset or
liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level Three: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the
fair value measurement.
A summary of the Business’s assets and liabilities that are measured at fair value on a recurring basis for each fair value
hierarchy level for the periods presented is as follows:
December 31, 2016
Level
One
Level
Two
Level
Three Total
(In thousands)
Assets:
Cash equivalents $ 12,916 $ — $ — $ 12,916
Foreign currency contracts related to sales - not designated as hedges — 137 — 137
$ 12,916 $ 137 $ — $ 13,053
COLFAX FLUID HANDLING
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
24
December 31, 2015
Level
One
Level
Two
Level
Three Total
(In thousands)
Assets:
Cash equivalents $ 18,292 $ — $ — $ 18,292
Foreign currency contracts related to sales - not designated as hedges — 140 — 140
$ 18,292 $ 140 $ — $ 18,432
Liabilities:
Foreign currency contracts related to sales - not designated as hedges — 10 — 10
$ — $ 10 $ — $ 10
There were no transfers in or out of Level One, Two or Three during the years ended December 31, 2016 and 2015.
Cash Equivalents
The Business’s cash equivalents consist of investments in interest-bearing deposit accounts and money market mutual funds
which are valued based on quoted market prices. The fair value of these investments approximate cost due to their short-term
maturities and the high credit quality of the issuers of the underlying securities.
Derivatives
The Business periodically enters into foreign currency, interest rate swap and commodity derivative contracts. The Business
uses interest-rate swaps to manage exposure to interest-rate fluctuations. Foreign currency contracts are used to manage exchange
rate fluctuations. Commodity futures contracts are used to manage costs of raw materials used in CFH’s production processes.
The Business does not enter into derivative contracts for trading purposes.
During the periods presented there were no changes in CFH’s valuation techniques used to measure asset and liability fair
values on a recurring basis.
Foreign Currency Contracts
Foreign currency contracts are measured using broker quotations or observable market transactions in either listed or over-
the-counter markets. The Business primarily uses foreign currency contracts to mitigate the risk associated with customer forward
sale agreements denominated in currencies other than the applicable local currency, and to match costs and expected revenues
where production facilities have a different currency than the selling currency.
As of December 31, 2016 and 2015, the Business had foreign currency contracts with the following notional values:
December 31,
2016 2015
(In thousands)
Foreign currency contracts sold - not designated as hedges $ 1,630 $ 7,931
Total foreign currency derivatives $ 1,630 $ 7,931
The Business recognized the following in its Combined Financial Statements related to its derivative instruments Realized
gains and losses are included in Interest expense, net and unrealized gains and losses are included in Other comprehensive income
(loss).
COLFAX FLUID HANDLING
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
25
Year Ended December 31,
2016 2015
(In thousands)
Contracts Not Designated in a Hedge Relationship:
Foreign Currency Contracts - related to customer sales contracts:
Unrealized gain (loss) 7 131
Realized loss 168 (480)
Foreign Currency Contracts - related to supplier purchases contracts:
Unrealized (loss) gain — 607
Realized (loss) gain — 32
Concentration of Credit Risk
Financial instruments which potentially subject the Business to concentrations of credit risk consist primarily of trade accounts
receivable. Concentrations of credit risk are considered to exist when there are amounts collectible from multiple counterparties
with similar characteristics, which could cause their ability to meet contractual obligations to be similarly impacted by economic
or other conditions. CFH performs credit evaluations of its customers prior to delivery or commencement of services and normally
does not require collateral. Letters of credit are occasionally required when the Business deems necessary.
11. Commitments and Contingencies
Asbestos and Other Product Liability Contingencies
CFH is one of many defendants in a large number of lawsuits that claim personal injury as a result of exposure to asbestos
from products manufactured with components that are alleged to have contained asbestos. Such components were acquired from
third-party suppliers, and were not manufactured by CFH nor was CFH a producer or direct supplier of asbestos. The manufactured
products that are alleged to have contained asbestos generally were provided to meet the specifications of CFH’s customers,
including the U.S. Navy.
CFH settles asbestos claims for amounts it considers reasonable given the facts and circumstances of each claim. The annual
average settlement payment per asbestos claimant has fluctuated during the past several years. The Business expects such
fluctuations to continue in the future based upon, among other things, the number and type of claims settled in a particular period
and the jurisdictions in which such claims arise. To date, the majority of settled claims have been dismissed for no payment.
Claims activity for the years ended December 31, 2016 and 2015 related to asbestos claims (1):
Year Ended December 31,
2016 2015
(Number of claims)
Claims unresolved, beginning of period 20,583 21,681
Claims filed(2) 5,163 4,821
Claims resolved(3) (5,179) (5,919)
Claims unresolved, end of period 20,567 20,583
(In whole dollars)
Average cost of resolved claims(4) $ 8,872 $ 6,056
(1) Excludes claims filed by one legal firm that have been “administratively dismissed.”
(2) Claims filed include all asbestos claims for which notification has been received or a file has been opened.
(3) Claims resolved include all asbestos claims that have been settled, dismissed or that are in the process of being settled or dismissed based
upon agreements or understandings in place with counsel for the claimants.
(4) Excludes claims settled in Mississippi for which the majority of claims have historically been resolved for no payment and insurance recoveries.
CFH has projected its future asbestos-related liability costs with regard to pending and future unasserted claims based upon
the Nicholson methodology. The Nicholson methodology is a standard approach used by experts and has been accepted by numerous
COLFAX FLUID HANDLING
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
26
courts. It is CFH’s policy to record a liability for asbestos-related liability costs for the longest period of time that it can reasonably
estimate.
The Business believes that it can reasonably estimate the asbestos-related liability for pending and future claims that will be
resolved in the next 15 years and has recorded that liability as its best estimate. While it is reasonably possible that it will incur
costs after this period, the Business does not believe the reasonably possible loss or range of reasonably possible losses is estimable
at the current time. Accordingly, no accrual has been recorded for any costs which may be paid after 15 years. Defense costs
associated with asbestos-related liabilities, as well as costs incurred related to litigation against CFH’s insurers are expensed as
incurred.
The Business has evaluated the insurance assets for each subsidiary based upon the applicable policy language and allocation
methodologies, and law pertaining to the affected subsidiary’s insurance policies.
CFH was notified in 2010 by the primary and umbrella carrier who had been fully defending and indemnifying the Business
for 20 years that the limits of liability of its primary and umbrella layer policies had been exhausted. CFH has sought coverage
from certain excess layer insurers whose terms and conditions follow form to the umbrella carrier, which parties’ dispute was
resolved by the Delaware state courts during 2016. This litigation confirmed that asbestos-related costs should be allocated among
excess insurers using an “all sums” allocation (which allows an insured to collect all sums paid in connection with a claim from
any insurer whose policy is triggered, up to the policy’s applicable limits), that the entity has rights to excess insurance policies
purchased by a former owner of the business, and that, based on the September 12, 2016 ruling by the Delaware Supreme Court,
the entity has a right to immediate access to the excess layer policies. Further, the Delaware Supreme Court ruled in the entity’s
favor on a “trigger of coverage” issue, holding that every policy in place during or after the date of a claimant’s first significant
exposure to asbestos was “triggered” and potentially could be accessed to cover that claimant’s claim. The Court also largely
affirmed and reversed in part some of the prior lower court rulings on defense obligations and whether payment of such costs erode
policy limits or are payable in addition to policy limits.
Based upon these rulings, the Business currently estimates that CFH’s future expected recovery percentage is approximately
92% of asbestos-related costs with CFH expected to be responsible for approximately 8% of its future asbestos-related costs.
Since approximately mid-2011, the Parent had funded $94.9 million of CFH’s asbestos-related defense and indemnity costs
through December 31, 2016, which it expects to recover from insurers. Based on the above-referenced court rulings, CFH recently
requested that its insurers reimburse all of that amount and currently expects to receive substantially all of that amount. In late
December 2016, $23.6 million of that amount was reimbursed. Certain of the excess insurers have advised CFH that they are still
reviewing costs data relating to the other unreimbursed amounts. CFH also has requested that certain excess insurers provide
ongoing coverage for future asbestos-related defense and/or indemnity costs. The insurers to which the vast majority of pending
claims have been tendered have not yet responded to this request. To the extent any disagreements concerning excess insurers’
payment obligations under the Delaware Supreme Court’s rulings remain, they are expected to be resolved by Delaware court
action, which is still pending and has been remanded to the Delaware Superior Court for any further proceedings. In the interim,
and while not impacting the results of operations, CFH’s cash funding for future asbestos-related defense and indemnity costs for
which it expects reimbursement from insurers could range up to $10 million per quarter.
During the year ended December 31, 2014, CFH recorded a $6.9 million pre-tax charge due to a higher number of asbestos
claims settlements and a decline in the insurance recovery rate. The charge was comprised of an increase in asbestos-related
liabilities of $14.5 million partially offset by an increase in expected insurance recoveries of $7.6 million. During the year ended
December 31, 2015, the Business recorded a $4.1 million pre-tax charge due to an increase in mesothelioma and lung cancer claims
and higher settlement values per claim that have occurred and are expected to continue to occur in certain jurisdictions. The pre-
tax charge was comprised of an increase in asbestos-related liabilities of $20.2 million partially offset by an increase in expected
insurance recoveries of $16.1 million. These pre-tax charges were included in Selling, general and administrative expense in the
Combined Statements of Operations. During the year ended December 31, 2016, the Business recorded an $8 million increase in
asbestos-related liabilities due to higher settlement values per claim. The related insurance asset was accordingly increased $6.4
million, resulting in a net pre-tax charge to Selling, general, and administrative expense of $1.6 million.
COLFAX FLUID HANDLING
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
27
The Business’s Combined Balance Sheets included the following amounts related to asbestos-related litigation:
December 31,
2016 2015
(In thousands)
Current asbestos insurance receivable(1) $ 27,259 $ 28,872
Long-term asbestos insurance asset (1) 266,030 284,095
Long-term asbestos insurance receivable 92,269 96,007
Accrued asbestos liability 48,031 48,095
Long-term asbestos liability (2) 330,194 347,933
(1) Included in Asbestos asset receivable in the Combined Balance Sheets.
(2) Represents accruals for probable and reasonably estimable asbestos-related liability cost that the Business believes it will pay through the next
15 years, overpayments by certain insurers and unpaid legal costs related to defending itself against asbestos-related liability claims and legal
action against the Business’s insurers, which is included in Accrued Asbestos litigation reserve in the Combined Balance Sheets.
As discussed above, on September 12, 2016, the Delaware Supreme Court affirmed prior rulings regarding CFH ’s insurance
policies and also ruled on other matters including specific determinations of coverage for defense costs under the excess policies.
The net result of the ruling is an adjustment to the Business’s expected future recoveries, resulting in an $8.2 million reduction to
the net recoverable insurance asset recorded as a pre-tax charge to the Combined Statement of Operations for the year ended
December 31, 2016. The estimated future expected recovery rate may change over time as these claims are fully settled, which
may result in periodic adjustments impacting our financial condition and results of operations.
Certain matters, including potential interest which could be awarded to CFH, are subject to further rulings from the Delaware
courts. While the outcome is uncertain, none of these matters is expected to have a material adverse effect on the financial condition,
results of operations or cash flows of the Business.
The Delaware Supreme Court’s ruling is also expected to result in the receipt from excess insurers of approximately $73
million in unreimbursed costs, as of December 31, 2016, funded by CFH in defense and settlement of asbestos claims, although
the timing of cash defense and settlement costs, compared to levels experienced prior to the ruling, remains uncertain.
Management’s analyses are based on currently known facts and a number of assumptions. However, projecting future events,
such as new claims to be filed each year, the average cost of resolving each claim, coverage issues among layers of insurers, the
method in which losses will be allocated to the various insurance policies, interpretation of the effect on coverage of various policy
terms and limits and their interrelationships, the continuing solvency of various insurance companies, the amount of remaining
insurance available, as well as the numerous uncertainties inherent in asbestos litigation could cause the actual liabilities and
insurance recoveries to be higher or lower than those projected or recorded which could materially affect the Business’s financial
condition, results of operations or cash flow.
COLFAX FLUID HANDLING
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
28
General Litigation
The Business is involved in various pending legal proceedings arising out of the ordinary course of CFH’s and the Parent’s
businesses. None of these legal proceedings are expected to have a material adverse effect on the financial condition, results of
operations or cash flow of the Business. With respect to these proceedings and the litigation and claims described in the preceding
paragraphs, management of the Parent and the Business believe that they will either prevail, have adequate insurance coverage or
have established appropriate accruals to cover potential liabilities. Any costs that management estimates may be paid related to
these proceedings or claims are accrued when the liability is considered probable and the amount can be reasonably estimated.
There can be no assurance, however, as to the ultimate outcome of any of these matters, and if all or substantially all of these legal
proceedings were to be determined adverse to the Business, there could be a material adverse effect on the financial condition,
results of operations or cash flow of the Business.
Minimum Lease Obligations
The Business’s minimum obligations under non-cancelable operating leases are as follows:
December 31, 2016
(In thousands)
2017 $ 2,179
2018 1,665
2019 1,359
2020 780
2021 525
Thereafter 63
Total $ 6,571
The Business’s operating leases extend for varying periods and, in some cases, contain renewal options that would extend the
existing terms. During the years ended December 31, 2016, 2015 and 2014, CFH’s net rental expense related to operating leases
was $2.9 million, $4.4 million and $4.1 million, respectively.
Off-Balance Sheet Arrangements
As of December 31, 2016, the Business had $33.9 million of unconditional purchase obligations with suppliers, substantially
all of which is expected to be paid by December 31, 2017.
12. Components of Other Accumulated Comprehensive Income (Loss)
Foreign Currency
Translation
Adjustment
Pension and Other
Post-retirement
Benefits
Total Accumulated
Other
Comprehensive
Income (Loss)
(In thousands)
Balance at January 1, 2014 $ (63,685) $ (82,479) $ (146,164)
Foreign currency translation loss (8,850) — (8,850)
Pension gain — 42,203 42,203
Balance at December 31, 2014 (72,535) (40,276) (112,811)
Foreign currency translation loss (16,206) — (16,206)
Pension gain — 12,104 12,104
Balance at December 31, 2015 (88,741) (28,172) (116,913)
Foreign currency translation loss (16,497) — (16,497)
Pension loss — (11,560) (11,560)
Balance at December 31, 2016 $ (105,238) $ (39,732) $ (144,970)
COLFAX FLUID HANDLING
NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)
29
13. Related Party Transactions
Allocated Expenses
CFH has been allocated expenses from the Parent of $11.7 million, $10.4 million and $11.8 million for 2016, 2015 and 2014,
respectively. These costs from the Parent are derived from multiple levels of the organization including geographic business unit
expenses, shared corporate expenses, and other fees. These allocated costs, which are included in Selling, general and adminstrative
expenses are primarily corporate administrative expenses related to Legal, Corporate Development, Human Resources, Finance,
and other departmental corporate costs for activities that provide benefit to CFH as well as Colfax’s other business units. The
costs associated with these services and support functions have been allocated to CFH using the most meaningful respective
allocation methodologies which were primarily based on proportionate: level of effort; time spent on CFH matters; headcount;
and direct labor costs.
All of CFH’s transactions with the Parent are considered to be financing transactions, which are presented as Net distributions
from (to) Parent in the accompanying statements of cash flows.
14. Subsequent Event - Divestiture Transaction
Subsequent events have been evaluated through October 31, 2017, the date these financial statements were issued. On
September 24, 2017, the Parent entered into a definitive purchase agreement to sell the Colfax Fluid Handling business to a third
party for estimated aggregate consideration of $860 million. The sale is expected to close during the three months ending December
31, 2017, subject to regulatory approval and other customary conditions.
Ernst & Young LLP
C O M B I N E D I N T E R I M F I N A N C I A L S T A T E M E N T S
Colfax Fluid Handling
As of September 29, 2017 and for the three- and nine- month periods
ended September 29, 2017 and September 30, 2016
With Review Report of Independent Auditors
1
INDEX TO THE COMBINED FINANCIAL STATEMENTS
Page
Review Report of Independent Auditors 2
Condensed Combined Statements of Operations 3
Condensed Combined Statements of Comprehensive Income (Loss) 4
Condensed Combined Balance Sheets 5
Condensed Combined Statements of Changes in Equity 6
Condensed Combined Statements of Cash Flows 7
Notes to Condensed Combined Financial Statements 8
Note 1. General 8
Note 2. Recently Issued Accounting Pronouncements 9
Note 3. Income Taxes 10
Note 4. Inventories, Net 10
Note 5. Accrued Liabilities 11
Note 6. Defined Benefit Plans 12
Note 7. Financial Instruments and Fair Value Measurements 12
Note 8. Commitments and Contingencies 13
Note 9. Related Party Transactions 14
Note 10. Subsequent Events 15
A member firm of Ernst & Young Global Limited
Ernst & Young LLP
621 East Pratt Street
Baltimore, MD 21202
Tel: +1 410 539 7940
Fax: +1 410 783 3832
ey.com
2
Review Report of Independent Auditors
The Management of Colfax Corporation
We have reviewed the condensed combined financial information of Colfax Fluid Handling, which comprise the
condensed combined balance sheet as of September 29, 2017, and the related condensed combined statements
of operations, comprehensive income (loss), changes in equity and cash flows for the three- and nine-month
periods ended September 29, 2017 and September 30, 2016.
Management’s Responsibility for the Financial Information
Management is responsible for the preparation and fair presentation of the condensed financial information in
conformity with U.S. generally accepted accounting principles; this includes the design, implementation and
maintenance of internal control sufficient to provide a reasonable basis for the preparation and fair presentation
of interim financial information in conformity with U.S. generally accepted accounting principles.
Auditor’s Responsibility
Our responsibility is to conduct our review in accordance with auditing standards generally accepted in the
United States applicable to reviews of interim financial information. A review of interim financial information
consists principally of applying analytical procedures and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing
standards generally accepted in the United States, the objective of which is the expression of an opinion regarding
the financial information. Accordingly, we do not express such an opinion.
Conclusion
Based on our review, we are not aware of any material modifications that should be made to the condensed
combined financial information referred to above for it to be in conformity with U.S. generally accepted
accounting principles.
Report on Condensed Balance Sheet as of December 31, 2016
We have previously audited, in accordance with auditing standards generally accepted in the United States, the
combined balance sheet of Colfax Fluid Handling as of December 31, 2016, and the related combined statements
of operations, comprehensive income (loss), changes in equity and cash flows for the year then ended (not
presented herein); and we expressed an unmodified audit opinion on those audited combined financial statements
in our report dated October 31, 2017. In our opinion, the accompanying condensed combined balance sheet of
Colfax Fluid Handling as of December 31, 2016, is consistent, in all material respects, with the combined balance
sheet from which it has been derived.
November 2, 2017
3
COLFAX FLUID HANDLING
CONDENSED COMBINED STATEMENTS OF OPERATIONS
Dollars in thousands
(Unaudited)
Three Months Ended Nine Months Ended
September 29,
2017
September 30,
2016
September 29,
2017
September 30,
2016
Net sales $ 114,601 $ 112,697 $ 344,197 $ 340,599
Cost of sales 77,267 75,603 224,880 225,958
Gross profit 37,334 37,094 119,317 114,641
Selling, general and administrative expense 33,034 33,809 100,607 108,677
Asbestos coverage adjustment — 8,226 — 8,226
Restructuring and other related items 634 5,407 (7,628) 11,319
Operating income (loss) 3,666 (10,348) 26,338 (13,581)
Interest expense, net 730 500 1,820 1,533
Income (loss) before income taxes 2,936 (10,848) 24,518 (15,114)
Provision for (benefit from) income taxes 1,308 (2,576) 7,914 (2,714)
Net income (loss) 1,628 (8,272) 16,604 (12,400)
Add: loss (income) attributable to noncontrolling interest, net of
tax 14 (31) 47 37
Net income (loss) attributable to CFH Parent $ 1,642 $ (8,303) $ 16,651 $ (12,363)
See Notes to Condensed Combined Financial Statements.
4
COLFAX FLUID HANDLING
CONDENSED COMBINED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Dollars in thousands
(Unaudited)
Three Months Ended Nine Months Ended
September 29,
2017
September 30,
2016
September 29,
2017
September 30,
2016
Net income (loss) $ 1,628 $ (8,272) 16,604 $ (12,400)
Other comprehensive income (loss):
Foreign currency translation gain 10,242 1,801 32,082 3,200
Unrecognized gain (loss) on pension and other
post-retirement benefit obligations 424 539 (3,592) 2,224
Other comprehensive income 10,666 2,340 28,490 5,424
Comprehensive income (loss) $ 12,294 $ (5,932) $ 45,094 $ (6,976)
See Notes to Condensed Combined Financial Statements.
5
COLFAX FLUID HANDLING
CONDENSED COMBINED BALANCE SHEETS
Dollars in thousands
(Unaudited)
September 29, 2017 December 31, 2016
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 12,037 $ 12,916
Trade receivables, less allowance for doubtful accounts of $11,245 and $12,506 74,520 75,392
Inventories, net 53,282 38,885
Short-term asbestos receivable — 27,259
Other current assets 24,207 23,422
Total current assets 164,046 177,874
Property, plant and equipment, net 73,907 66,474
Goodwill 222,419 212,330
Intangible assets, net 14,516 15,302
Long-term asbestos receivable 354,527 358,299
Notes due from affiliates 188,805 138,992
Other assets 40,846 39,075
Total assets $ 1,059,066 $ 1,008,346
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable $ 55,027 $ 51,998
Accrued asbestos litigation reserve 51,301 48,031
Accrued liabilities 41,350 44,480
Total current liabilities 147,678 144,509
Long-term asbestos litigation reserve 308,995 330,194
Retirement benefits obligation 114,225 109,586
Notes due to affiliates 160,979 141,343
Other liabilities 3,153 2,177
Total liabilities 735,030 727,809
Equity:
Net parent investment 441,072 425,985
Accumulated other comprehensive loss (116,480) (144,970)
Total parent equity 324,592 281,015
Noncontrolling interest (556) (478)
Total equity 324,036 280,537
Total liabilities and equity $ 1,059,066 $ 1,008,346
See Notes to Condensed Combined Financial Statements.
6
COLFAX FLUID HANDLING
CONDENSED COMBINED STATEMENT OF CHANGES IN EQUITY
Dollars in thousands
(Unaudited)
Net Parent
Investment
Accumulated Other
Comprehensive
Income (Loss)
Noncontrolling
Interest Total
Balance at January 1, 2017 $ 425,985 $ (144,970) $ (478) $ 280,537
Net income 16,651 — (47) 16,604
Other Comprehensive income — 28,490 — 28,490
Net transfers to Parent (1,564) — (31) (1,595)
Balance at September 29, 2017 $ 441,072 $ (116,480) $ (556) $ 324,036
See Notes to Condensed Combined Financial Statements.
7
COLFAX FLUID HANDLING
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
Dollars in thousands
(Unaudited)
Nine Months Ended
September 29, 2017 September 30, 2016
Cash flows from operating activities:
Net income (loss) $ 16,604 $ (12,400)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation, amortization and impairment charges 8,514 11,243
Stock-based compensation expense (155) 1,490
Non-cash portion of Parent management fees 6,987 6,358
Gain on sale of fixed assets (11,734) —
Deferred income tax benefit (218) (421)
Non-cash pension/OPEB expense 6,361 5,521
Changes in operating assets and liabilities:
Trade receivables, net 5,023 11,739
Inventories, net (11,980) 564
Accounts payable 582 (4,740)
Changes in other operating assets and liabilities 7,356 (20,993)
Net cash provided by (used in) operating activities 27,340 (1,639)
Cash flows from investing activities:
Purchases of fixed assets, net (11,184) (4,392)
Proceeds from sale of fixed assets 21,337 1,632
Other, net — 161
Net cash used in investing activities 10,153 (2,599)
Cash flows from financing activities:
Net transfers (to)/from affiliates and Parent (39,222) 904
Net cash provided by (used in) financing activities (39,222) 904
Effect of foreign exchange rates on Cash and cash equivalents 850 (276)
Decrease in Cash and cash equivalents (879) (3,610)
Cash and cash equivalents, beginning of period 12,916 18,292
Cash and cash equivalents, end of period $ 12,037 $ 14,682
See Notes to Condensed Combined Financial Statements.
COLFAX CORPORATION
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(Unaudited)
8
1. General
The accompanying condensed combined carve-out financial statements include the historical accounts of the Target Business
(“Colfax Fluid Handling Business”, “CFH” or the “Business”), a division of Colfax Corporation (“Colfax” or the “Parent”). CFH
is a global organization that designs, manufactures, distributes and supports pumps and systems in five primary market segments:
Commercial Marine; Defense; Industrial and Power; Oil and Gas; and Reliability Services. CFH is headquartered in the United
States in Monroe, North Carolina. Products are marketed to customers under a portfolio of brands.
The Parent is a leading diversified industrial technology company that provides gas- and fluid-handling and fabrication
technology products and services to customers around the world under the Howden, ESAB and Colfax Fluid Handling brands.
The condensed combined financial statements included herein have been prepared by the Business in accordance with the
rules and regulations of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the
United States of America (“GAAP”) for interim financial statements of an acquired business.
The condensed combined Balance Sheet as of December 31, 2016 is derived from CFH’s audited financial statements. Certain
information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have
been omitted in accordance with the rules and regulations for interim financial statements. The condensed combined financial
statements included herein should be read in conjunction with the audited financial statements and related footnotes included in
CFH’s stand-alone (“carve-out”) financial statements as of and for the year ended December 31, 2016.
The condensed combined financial statements reflect, in the opinion of management, all adjustments, which consist solely of
normal recurring adjustments, necessary to present fairly the Business’s financial position and results of operations as of and for
the periods indicated. Significant intercompany transactions and accounts are eliminated in consolidation.
The Business makes certain estimates and assumptions in preparing its condensed combined financial statements in accordance
with GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the condensed combined financial statements and the reported amounts of revenues and expenses
for the periods presented. Actual results may differ from those estimates.
The results of operations for the three and nine months ended September 29, 2017 are not necessarily indicative of the results
of operations that may be achieved for the full year. Quarterly results are affected by seasonal variations in CFH’s business. As
CFH’s fluid handling customers seek to fully utilize capital spending budgets before the end of the year, historically its shipments
have peaked during the fourth quarter. Also, its European operations typically experience a slowdown during the July, August and
December holiday seasons. General economic conditions may, however, impact future seasonal variations.
These financial statements have been prepared solely to demonstrate CFH’s historical results of operations, financial position,
and cash flows for the indicated periods under Colfax’s management. All intercompany balances and transactions within CFH
have been eliminated. Transactions and balances between or among CFH and Colfax and its subsidiaries are reflected as related-
party transactions within these financial statements.
The accompanying combined financial statements include the assets, liabilities, revenues, and expenses that are directly
attributable to CFH. In addition, the combined financial statements include certain costs related to the Business as well as allocations
deemed reasonable by management, to present the combined financial position, results of operations, changes in Net Parent
investment and cash flows of the Business on a stand-alone basis. The allocation methodologies have been described within the
notes to the combined financial statements where appropriate. These methodologies were primarily based on proportionate time
and effort, headcount, or direct labor costs incurred by CFH compared to Colfax’s other business units. These allocated costs are
primarily related to corporate administrative expenses, employee-related costs including benefits for corporate and shared
employees, and fees for other corporate services. Income taxes have been accounted for in these financial statements as described
in Note 3, “Income Taxes.” Pension expenses have been accounted for in these financial statements as described in Note 6, “Defined
Benefit Plans.”
The financial information included herein may not necessarily reflect the combined financial position, results of operations,
changes in equity and cash flows of CFH in the future or what they would have been had the Business been a separate, stand-alone
entity during the periods presented.
COLFAX CORPORATION
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(Unaudited)
9
The Business utilizes the Parent’s centralized processes and systems for cash management, payroll, purchasing, and distribution.
As a result, substantially all cash received by the Business was deposited in and commingled with the Parent’s general corporate
funds and is not specifically allocated to CFH. The net results of these cash transactions between the Business and the Parent are
reflected as Net parent investment within Equity in the accompanying balance sheets. In addition, the Net Parent investment
represents the Parent’s interest in the recorded net assets of CFH and represents the cumulative net investment by the Parent in
CFH through the dates presented, inclusive of cumulative operating results.
During the three months ended September 30, 2016, the Parent determined that an other-than-temporary lack of exchangeability
between the Venezuelan bolivar and U.S. dollar, due to government controls, had restricted CFH’s Venezuelan operation’s ability
to pay dividends and satisfy other obligations denominated in U.S. dollars. In addition, other government-imposed restrictions
affecting labor, production, and distribution were prohibiting the Business from controlling key operating decisions. These
circumstances caused CFH not to meet the accounting criteria for control in order to continue consolidating its Venezuelan
operations.
As a result, the Business deconsolidated its Venezuelan operations as of September 30, 2016 for accounting and reporting
purposes. As a result of the deconsolidation, CFH recorded a charge of $1.9 million in Selling, general and administrative expense
for the nine months ended September 30, 2016, substantially all of which charge related to accumulated foreign currency translation
charges previously included in Accumulated other comprehensive loss. Due to this loss of control, the Business has applied the
cost method of accounting for its Venezuelan operations beginning on September 30, 2016. Prior to, and at the date of
deconsolidation, the Business’s Venezuelan operations represented less than 1% of CFH’s net assets, revenues and operating
income.
On September 24, 2017, the Parent entered into a definitive purchase agreement to sell the Colfax Fluid Handling business
to a third party for estimated aggregate consideration of approximately $860 million. The sale is expected to close during the
three months ending December 31, 2017, subject to regulatory approval and other customary conditions.
2. Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
“Revenue from Contracts with Customers (Topic 606)”. The ASU outlines a single set of comprehensive principles for recognizing
revenue under U.S. GAAP and supersedes existing revenue recognition guidance. The main principle of the ASU is that revenue
should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. The Business expects to apply ASU No. 2014-09
and its related updates on a full retrospective basis as of January 1, 2018. Based on Business-wide analysis performed to date on
the Business’s different revenue streams, we expect the adoption of the ASU to impact the timing of revenue recognition related
to the identification of additional performance obligations. The adoption of the ASU is not expected to have a material impact on
the Combined Financial Statements.
In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330) - Simplifying the Measurement of Inventory”. The
ASU requires an entity to measure inventory at the lower of cost and net realizable value, except for inventory that is measured
using the last-in, first-out method or the retail inventory method. The Business adopted the ASU during the nine months ended
September 29, 2017 on a prospective basis, and it did not have a material impact on the Business’s condensed combined financial
statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. The ASU requires, among other things, a lessee
to recognize assets and liabilities associated with the rights and obligations attributable to most leases but also recognize expenses
similar to current lease accounting. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2018. The new guidance must be adopted using a modified retrospective transition and provides for certain
practical expedients. The Business is currently evaluating the impact of adopting the ASU on its Combined Financial Statements.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718)”. The ASU, among
other things, aims to simplify the accounting for shared-based payment accounting by recording all excess tax benefits and tax
deficiencies as income tax expense or benefit in the income statement and eliminates the requirement that excess tax benefits be
realized before they can be recognized. The effect for excess tax benefits not previously recognized will be recorded as a cumulative
adjustment to retained earnings pursuant to a modified retrospective adoption method. Excess tax benefits and deficiencies will
be accounted for as discrete items in the period the stock awards vest or otherwise are settled. Further, the guidance will require
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that excess tax benefits be presented as an operating activity on the statement of cash flows consistent with other income tax cash
flows. The Business adopted the ASU in the annual period beginning January 1, 2017 and has continued its policy to estimate the
amount of awards that are expected to vest. The adoption of ASU 2016-09 will not have a material impact on the Business’s
Combined Financial Statements.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 203)”. The ASU addresses eight specific
cash flow issues and clarifies their presentation and classification in the Statement of Cash Flows. The ASU is effective for fiscal
years beginning after December 15, 2017 and is to be applied retrospectively with early adoption permitted. The Business is
currently evaluating the impact of adopting ASU No. 2016-15 on its Combined Financial Statements.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other (Topic 350)”. The ASU modifies the
measurement of a goodwill impairment loss from the portion of the carrying amount of goodwill that exceeds its implied fair value
to the excess of the carrying amount of a reporting unit that exceeds its fair value. This eliminates step 2 of the goodwill impairment
test under current guidance. The ASU will be applied prospectively for annual or interim goodwill impairment tests in fiscal years
beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed after
January 1, 2017. The Business is currently evaluating the timing of adoption.
3. Income Taxes
During the three and nine months ended September 29, 2017, Income before income taxes was $2.9 million and $24.5 million,
respectively, while the Provision for income taxes was $1.3 million and $7.9 million, respectively. The effective tax rates were
44.6% and 32.3% for the three and nine months ended September 29, 2017, respectively. The effective tax rates differ from the
U.S. federal statutory rate primarily due to international taxes, which are lower than the U.S. tax rate, offset in part by losses in
certain jurisdictions where a tax benefit is not expected to be recognized in 2017.
During the three and nine months ended September 30, 2016, Loss before income taxes was $(10.8) million and $(15.1)
million, respectively, while the benefit from income taxes was $(2.6) million and $(2.7) million, respectively. The effective tax
rates were 23.7% and 18.0% for the three and nine months ended September 30, 2016, respectively. The effective tax rate differs
from the U.S. federal statutory rate primarily due to international tax rates, which are lower than the U.S. tax rate, offset in part
by losses in certain jurisdictions where a tax benefit was not expected to be recognized in 2016.
4. Inventories, Net
Inventories, net consisted of the following:
September 29, 2017 December 31, 2016
(In thousands)
Raw materials $ 29,502 $ 26,628
Work in process 28,527 19,487
Finished goods 17,795 15,640
75,824 61,755
Less: customer progress payments (14,566) (14,624)
Less: allowance for excess, slow-moving and obsolete inventory (7,976) (8,246)
Inventories, net $ 53,282 $ 38,885
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5. Accrued Liabilities
Accrued liabilities in the Condensed Combined Balance Sheets consisted of the following:
September 29, 2017 December 31, 2016
(In thousands)
Accrued payroll $ 18,355 $ 14,658
Accrued taxes 3,160 3,138
Warranty liability - current portion 1,483 1,477
Accrued restructuring liability - current portion 2,297 2,401
Accrued third-party commissions 3,149 2,556
Customer advances 12,707 10,795
Other 199 9,455
Accrued liabilities $ 41,350 $ 44,480
Warranty Liability
The activity in the Business’s warranty liability - current portion consisted of the following:
Nine Months Ended Year Ended
September 29, 2017 December 31, 2016
(In thousands)
Warranty liability, beginning of period $ 1,477 $ 1,772
Accrued warranty expense 1,388 2,283
Changes in estimates related to pre-existing warranties (119) 51
Cost of warranty service work performed (1,385) (2,576)
Foreign exchange translation effect 122 (53)
Warranty liability, end of period $ 1,483 $ 1,477
Accrued Restructuring Liability
CFH’s restructuring programs include a series of actions to reduce the structural costs of the Business. A summary of the
activity in the Business’s restructuring liability included in Accrued liabilities and Other liabilities in the Condensed Consolidated
Balance Sheets is as follows:
Nine Months Ended September 29, 2017
Balance at
Beginning of
Period Provisions Payments
Foreign
Currency
Translation
Balance at End
of Period(3)
(In thousands)
Restructuring and other related items:
Termination benefits(1) $ 1,922 $ 3,908 $ (3,872) $ 273 $ 2,231
Facility closure costs(2) 479 (11,536) 11,119 4 66
$ 2,401 $ (7,628) $ 7,247 $ 277 $ 2,297
(1) Includes severance and other termination benefits, including outplacement services. The Business recognizes the cost of involuntary termination
benefits at the communication date or ratably over any remaining expected future service period. Voluntary termination benefits are recognized
as a liability and an expense when employees accept the offer and the amount can be reasonably estimated.
(2) Includes the cost of relocating associates, relocating equipment and lease termination expense, net of an $11.7 million gain realized on the
sale of a building, in connection with the closure of facilities.
(3) As of September 29, 2017, $2.3 million of the Business’s restructuring liability was included in Accrued liabilities.
The Business expects to incur charges of approximately $1.3 million during the remainder of 2017 related to its restructuring
activities.
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6. Defined Benefit Plans
CFH’s salaried employees participate in defined benefit pension plans in the U.S. sponsored by the Parent. These plans include
other Parent employees that are not employees of the CFH Business. The Parent also sponsors certain defined contribution plans
and provides other post-retirement benefits, including health and life insurance, for certain eligible employees and eligible former
employees who have retired from the Business. The Parent allocated to CFH pension and other post-retirement benefits expenses
of $2.0 million and $4.5 million for the three and nine months ended September 29, 2017, respectively, and $1.1 million and $4.5
million for the three and nine months ended September 30, 2016, respectively. These costs have been reflected within Selling,
general and administrative in the accompanying combined statements of operations. The related U.S. pension assets and liabilities
have not been allocated to the Business and have not been presented on the accompanying balance sheet since these are assets and
liabilities of the Parent.
Certain CFH legal subsidiaries also sponsor non-U.S. pension plans. The related net liabilities of these plans are legal
obligations of CFH and are included on the Condensed Combined Balance Sheets.
7. Financial Instruments and Fair Value Measurements
The carrying values of financial instruments, including Trade receivables and Accounts payable, approximate their fair values
due to their short-term maturities. The estimated fair values may not represent actual values of the financial instruments that could
be realized as of the balance sheet date or that will be realized in the future.
A summary of CFH’s assets and liabilities that are measured at fair value for each fair value hierarchy level for the periods
presented is as follows:
September 29, 2017
Level
One
Level
Two
Level
Three Total
(In thousands)
Assets:
Cash equivalents $ 12,037 $ — $ — $ 12,037
$ 12,037 $ — $ — $ 12,037
December 31, 2016
Level
One
Level
Two
Level
Three Total
(In thousands)
Assets:
Cash equivalents $ 12,916 $ — $ — $ 12,916
Foreign currency contracts related to sales - not designated as hedges — 137 — 137
$ 12,916 $ 137 $ — $ 13,053
Cash equivalents are recorded within Cash and cash equivalents on the Combined Balance Sheets. Other derivative assets
are recorded in Other current assets. There were no transfers in or out of Level One, Two or Three during the nine months ended
September 29, 2017.
Foreign Currency Contracts
As of September 29, 2017 and December 31, 2016, the Business had foreign currency contracts with the following notional
values:
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September 29, 2017 December 31, 2016
(In thousands)
Foreign currency contracts sold - not designated as hedges $ — $ 1,630
Total foreign currency derivatives $ — $ 1,630
Realized gains and losses are included in Interest expense, net and unrealized gains and losses are included in Other
comprehensive income (loss). The Business recognized the following in its Combined Financial Statements related to its derivative
instruments:
Three Months Ended Nine Months Ended
September 29,
2017
September 30,
2016
September 29,
2017
September 30,
2016
(In thousands)
Contracts Not Designated in a Hedge Relationship:
Foreign Currency Contracts - related to customer sales contracts:
Unrealized loss $ — $ (236) $ — $ (236)
Realized gain 114 — 114 —
Realized loss on purchase contracts (202) — (90) —
8. Commitments and Contingencies
Asbestos and Other Product Liability Contingencies
Claims activity since December 31 related to asbestos claims is as follows(1):
Nine Months Ended
September 29, 2017 September 30, 2016
(Number of claims)
Claims unresolved, beginning of period 20,567 20,583
Claims filed(2) 3,450 4,022
Claims resolved(3) (6,414) (3,092)
Claims unresolved, end of period 17,603 21,513
(1) Excludes claims filed by one legal firm that have been “administratively dismissed.”
(2) Claims filed include all asbestos claims for which notification has been received or a file has been opened.
(3) Claims resolved include all asbestos claims that have been settled, dismissed or that are in the process of being settled or dismissed based upon
agreements or understandings in place with counsel for the claimants.
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The Business’s Condensed Combined Balance Sheets included the following amounts related to asbestos-related litigation:
September 29, 2017 December 31, 2016
(In thousands)
Current asbestos insurance receivable $ — $ 27,259
Long-term asbestos insurance asset(1) 275,109 266,030
Long-term asbestos insurance receivable(1) 79,417 92,269
Accrued asbestos liability(2) 51,301 48,031
Long-term asbestos liability 308,995 330,194
(1) Included in Long-term asbestos receivable in the Condensed Combined Balance Sheets.
(2) Represents current accruals for probable and reasonably estimable asbestos-related liability costs that the Business believes the subsidiaries
will pay, overpayments by certain insurers and unpaid legal costs related to defending themselves against asbestos-related liability claims and
legal action against the Business’s insurers, which is included in Accrued liabilities in the Condensed Combined Balance Sheets.
Following a Delaware Supreme Court ruling on September 12, 2016, the Business received a total of $26.0 million of previously
unreimbursed costs funded by the Business in defense and settlement of asbestos claims from insurance companies during the
nine months ended September 29, 2017. Certain matters, including potential interest which could be awarded to a specific subsidiary,
are subject to further rulings from the Delaware courts. While the outcome is uncertain, none of these matters is expected to have
a material adverse effect on the financial condition, results of operations or cash flows of the Business.
Management’s analyses are based on currently known facts and a number of assumptions. However, projecting future events,
such as new claims to be filed each year, the average cost of resolving each claim, coverage issues among layers of insurers, the
method in which losses will be allocated to the various insurance policies, interpretation of the effect on coverage of various policy
terms and limits and their interrelationships, the continuing solvency of various insurance companies, the amount of remaining
insurance available, as well as the numerous uncertainties inherent in asbestos litigation could cause the actual liabilities and
insurance recoveries to be higher or lower than those projected or recorded which could materially affect the Business’s financial
condition, results of operations or cash flows.
Other Litigation Matters
The Business is involved in various pending legal proceedings arising out of the ordinary course of the Business’s business.
None of these legal proceedings are expected to have a material adverse effect on the financial condition, results of operations or
cash flow of the Business. With respect to these proceedings and the litigation and claims described in the preceding paragraphs,
management of the Business believes that it will either prevail, has adequate insurance coverage or has established appropriate
accruals to cover potential liabilities. Any costs that management estimates may be paid related to these proceedings or claims are
accrued when the liability is considered probable and the amount can be reasonably estimated. There can be no assurance, however,
as to the ultimate outcome of any of these matters, and if all or substantially all of these legal proceedings were to be determined
adverse to the Business, there could be a material adverse effect on the financial condition, results of operations or cash flows of
the Business.
9. Related-Party Transactions
Allocated Expenses
CFH has been allocated expenses from the Parent of $9.6 million and $7.8 million for the nine months ended September 29,
2017 and September 30, 2016, respectively, and $3.2 million and $2.6 million for the three months ended September 29, 2017 and
September 30, 2016, respectively. These costs from the Parent are derived from multiple levels of the organization including
geographic business unit expenses, shared corporate expenses, and other fees. These allocated costs are primarily related to
corporate administrative expenses related to Legal, Corporate Development, Human Resources, Finance, and other departmental
corporate costs related to activities that provide benefit to CFH as well as Colfax’s other business units. The costs associated with
these services and support functions have been allocated to the Business using the most meaningful respective allocation
methodologies which were primarily based on proportionate level of effort and time spent on FCH matters; proportionate headcount,
and proportionate direct labor costs.
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All of CFH’s transactions with the Parent are considered to be financing transactions, which are presented as Net distributions
(to) from affiliates and Parent in the accompanying combined statements of cash flows.
10. Subsequent Events
The Business has evaluated events through November 2, 2017, the date these financial statements were issued, and determined
that no subsequent events have occurred that would require recognition in its condensed combined financial statements for the
period ended September 29, 2017.
.