Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
See Part 1, Item 1, “Business”, for additional detail on forward looking statements.
Company Overview
CIRCOR International is one of the world’s leading providers of mission critical flow control products and services for the Industrial and Aerospace & Defense markets. The Company has a product portfolio of market-leading brands serving its customers’ most demanding applications. CIRCOR markets its solutions directly and through various sales partners to more tha n 14,000 customers in approximately 100 countries. The Company has a global presence with approximatel y 3,100 employees and is headquartered in Burlington, Massachusetts. See Part 1, Item 1, Business, for additional information regarding the description of our business.
We organize our reporting structure into two segments: Aerospace & Defense and Industrial. Both the current and prior periods are reported under these two segments.
The Company's Aerospace & Defense segment continues to experience lingering effects of the COVD-19 pandemic, primarily in our Commercial Aerospace end markets, and impacts from volatile foreign exchange rates and interest rates. Commercial Aerospace order rates improved in 2022 compared to 2021 as demand for OEM components and aftermarket services increased with air framer production rates and aircraft utilization. We expect that a recovery to pre-pandemic levels of demand will not occur until the end of 2023. While our Defense business has been less impacted by the pandemic, we did experience a slowdown in government spending on spare parts as well as some delays on key programs which impacted our revenues in 2022. However, we expect a return to near term and long-term growth in this end market driven by our positions on key U.S. defense programs, including the Joint Strike Fighter and Columbia class submarines, strong backlog, and new product introductions in close partnership with our customers. We continue to focus on increasing our global aftermarket and deploying value-based pricing across the segment, both of which will contribute to drive growth and margin expansion.
The Company's Industrial reporting segment continues to experience the lingering effects of the COVID-19 pandemic, the ongoing conflict between Russia and Ukraine, and impacts driven by global energy inflation and volatile foreign exchange rates and interest rates. We exited 2021 with a strong backlog that positions the Industrial segment well for revenue growth in 2023 and beyond. We expect strong growth in our longer-cycle end markets, such as Commercial Marine and Downstream Oil & Gas, as we deliver on improved orders from 2022. Our General Industrial end market, which includes products that serve power generation, chemical processing, and other customers, is expected to experience moderate growth. We continue to focus on increasing our global aftermarket, deploying value-based pricing across the segment, and simplifying our organizational structure to drive growth and margin expansion.
In both reporting segments, the Company's results from operations were, and continue to be, adversely impacted by global supply chain constraints and rising inflation. In 2022, we faced unexpected difficulties in procuring certain raw material, castings, and components, additional labor constraints due to COVID-19 and a challenging labor market as well as inflation on both material and logistics. These challenges continued to evolve in 2022, in particular with inflation levels, including energy inflation, reaching multi-decade highs, and driving corresponding volatility in foreign exchange rates and interest rates. Should inflation or interest rates, or both, continue to increase higher than expected or stay high for longer than expected, the Company could face additional financial exposure. In order to mitigate the impact of these factors on our operations and financial position, we continue to implement actions across the company including, but not limited to: list price increases and surcharges, structural cost out actions, changes in suppliers from which we procure material, and manufacturing productivity through the implementation of the CIRCOR Operating System and 80/20 across the company. Finally, continuing to attract and retain diverse and talented personnel, including the enhancement of our global sales, operations, product management and engineering organizations, remains an important part of our strategy during 2023.
Finally, we continue to monitor and evaluate additional sanctions and export restrictions that may be imposed by the U.S. Government and other governments along with any responses from Russia that could directly affect our supply chain, business partners or customers. Further tightening of sanctions or restrictions could cause us to be unable to complete contractual commitments to end customers, cause our end customers to fail to compensate us for previously ordered or delivered products, or cause funds or products to be subjected to legal holds. The aggregate revenue from customers in Russia and Ukraine for each of the fiscal years ended 2022 and 2021 was less than 1% of consolidated net revenues, primarily related to our Downstream Oil & Gas business in the Industrial reporting segment. Currently we have a pending project in Russia that could result in approximately $4.0 million reversal of unbilled revenue and other receivables if tighter sanctions or restrictions prevented us from delivering the project and receiving payment. Additionally, the conflict between Russia and Ukraine has and continues to adversely impact demand in that region, increase energy costs related to our operations, and negatively impact material cost and availability.
Basis of Presentation
All significant intercompany balances and transactions have been eliminated in consolidation. We operate and report financial information using a 52-week fiscal year ending December 31. The data periods contained within our Quarterly Reports on Form 10-Q reflect the results of operations for the 13-week, 26-week and 39-week periods which generally end on the Sunday nearest the calendar quarter-end date.
Critical Accounting Policies and Use of Estimates
The Company’s discussion and analysis of its financial condition and results of operations is based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent liabilities. On an on-going basis, management evaluates its significant estimates, including those related to contracts accounted for under the percentage of completion method, bad debts, inventories, intangible assets and goodwill, delivery penalties, income taxes, and contingencies including litigation. Management believes goodwill, revenue recognition and income taxes to be the most complex and sensitive judgments because of their significance to the consolidated financial statements and which result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management bases its estimates on historical experience, current market and economic conditions and other assumptions that management believes are reasonable. The results of these estimates form the basis for judgments about the carrying value of assets and liabilities where the values are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
There have been no significant changes from the methodology applied by management for critical accounting estimates previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
For information regarding our significant accounting policies, refer to Note 2, Summary of Significant Accounting Policies, to the consolidated financial statements included in this Annual Report.
Goodwill
For goodwill, we perform an impairment assessment at the reporting unit level on an annual basis as of our October month-end or more frequently if circumstances warrant.
During the fourth quarter of 2021, we identified a change in our reporting units due to economic deviations within the Industrial business segment. Refinery valves (“RV”) and Industrial were determined to be two separate reporting units within the Industrial business segment. With the change in reporting units, we performed an impairment test prior to the change, on our previous one reporting unit, and then performed an impairment test immediately after the change on the two reporting units which also coincides with our annual impairment test date of October month end. With the change, we assigned goodwill to the Industrial and RV reporting units based on their relative fair values.
As of October 2022 month end, the Company had goodwill balances within its Industrial and A&D reporting units, with no goodwill in its RV reporting unit. For the annual goodwill assessment, we estimated the fair value of Industrial and Aerospace & Defense reporting units, using an income approach based on the present value of future cash flows. We selected this method as being the most meaningful in preparing the goodwill assessments because the use of the income approach typically generates a more precise measurement of fair value than the market approach. In applying the income approach to our accounting for goodwill, we make assumptions about the amount and timing of future expected cash flows, terminal value growth rates and appropriate discount rates. The amount and timing of future cash flows within our discounted cash flow analyses is based on our most recent operational budgets, current industry and market conditions, and other estimates of future performs. The terminal value growth rate is used to calculate the value of cash flows beyond the last projected period in our discounted cash flow analyses and reflects our best estimates for stable, perpetual growth of its reporting units. We corroborated the valuations that arose from the discounted cash flow approach by performing both a market multiple valuation and by reconciling the aggregate fair value of its reporting units to its market capitalization at the time of the test. As RV has no goodwill balance, following the $10.5 million goodwill charge recorded in 2021, we did not use an income approach, but did estimate RV's fair value using market approach for purposes of performing a reconciliation of the fair value of our reporting units to the market capitalization as of the date of our annual assessment.
The fair value of Industrial and A&D reporting units exceeded the respective carrying amounts as of the date of our assessment. The growth rate assumptions utilized were consistent with growth rates within the markets that we serve. If our results significantly vary from our estimates, related projections, or business assumptions in the future due to change in industry or market conditions, we may be required to record impairment charges.
On March 29, 2020, we reorganized our reporting units and the stock price dropped below book value, which we determined were triggering events requiring an assessment of our goodwill and indefinite-lived trade names. Based on our impairment assessment as of March 29, 2020, we concluded that our goodwill in the Industrial reporting unit was impaired and, accordingly, recorded a goodwill impairment charge of $138.1 million in the quarter ended March 29, 2020.
Revenue Recognition
Revenues are recorded based on the amount of consideration we expect to be entitled to as a result of satisfying our performance obligations. Revenue on our point in time contracts are recognized when the customer obtains control of the product, which is generally at the time of shipping. Revenues and costs on certain long-term contracts are recognized over-time using an input measure (e.g., costs incurred to date relative to total estimated costs at completion, known as the “cost-to-cost” method) as we incur costs on our contracts. We use a cost-to-cost measure of progress because it best depicts the transfer of control to the customer which occurs as it incurs costs on its contracts. Under the cost-to-cost measure of progress, revenue is recognized proportionally as costs are incurred. Contract costs include labor, materials and subcontractors’ costs, other direct costs and an allocation of overhead, as appropriate. Accounting for over-time contracts requires reliable estimates in order to estimate total contract revenue and costs. For these contracts, management reviews the progress and execution of our performance obligations at least quarterly. Management estimates the profit on a contract as the difference between the total estimated revenue and estimate at completion (“EAC”) costs and recognizes the resultant profit over the life of the contract, using the cost-to-cost EAC input method to measure toward complete of a performance obligation. A change in one or more of these estimates could affect the of the related contracts. Management recognizes adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance is recognized using the adjusted estimate. The impact of adjustments in contract estimates on our operating earnings may be reflected in operating expenses and/or revenue.
The transaction price for our contracts represents our best estimate of the consideration we will receive and includes assumptions regarding variable consideration as applicable. Certain of our long-term contracts contain fees or other provisions that can either increase or decrease the transaction price. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance, historical performance, and all other information that is reasonably available to us.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Any material changes in tax rates or changes in tax laws could cause our estimates of taxes we anticipate to pay or to recover in the future to change. Any material changes could create an increase or a decrease in our effective tax rate.
In accordance with the provisions of ASC Topic 740, Income Taxes, the Company initially recognizes the financial statement effect of a tax position when, based solely on its technical merits, it is more likely than not (a likelihood of greater than fifty percent) that the position will be sustained upon examination by the relevant taxing authority. Those tax positions failing to qualify for initial recognition are recognized in the first interim period in which they meet the more likely than not standard, are resolved through negotiation or litigation with the taxing authority, or upon expiration of the statute of limitations. De-recognition of a tax position that was previously recognized occurs when an entity subsequently determines that a tax position no longer meets the more likely than not threshold of being sustained. Tax laws are complex and often subject to varied interpretations. Therefore, the ultimate outcome with respect to taxes we may owe may differ from the amounts recognized.
ASC Topic 740, Income Taxes, requires a valuation allowance to reduce deferred tax assets ("DTAs") if, based on the weight of available evidence, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. The weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, (a) the more positive evidence is necessary and (b) the more difficult it is to support a conclusion that a valuation allowance is not needed for some portion, or all, of the deferred tax asset. Should there be a cumulative loss in recent years it is considered a significant piece of negative evidence that is difficult to overcome in assessing the need for a valuation allowance.
The Company recognized a valuation allowance for the German and the U.S. net DTAs to the extent of reversing DTLs during the year ended December 31, 2020. The Company continued to maintain a valuation allowance against its deferred tax assets in Germany and the U.S. as both jurisdictions remain in a cumulative three year loss position at December 31, 2022. The Company calculated the valuation allowance based on the reversal of temporary differences. The Company concluded that the negative evidence associated with the history of losses outweighed any positive evidence as of December 31, 2022. Therefore, the Company has not relied on projections of future taxable income in our assessment of the realization of deferred tax assets at December 31, 2022. The Company maintained a valuation allowance related to the German deferred tax assets of $3.9 million and $13.2 million, as of December 31, 2022 and December 31, 2021, respectively. The Company maintained a valuation allowance related to the U.S. deferred tax assets of $82.5 million and $73.1 million, a s of December 31, 2022 and December 31, 2021, respectively. For other jurisdictions there are no temporary differences to consider for the valuation allowance
Results of Operations
The following tables present information on net revenues and operating income of our business segments, along with a reconciliation of total segment operating income to the Company's consolidated operating income. For information regarding our segment determination refer to Note 18, Business Segment and Geographical Information, of the consolidated financial statements included in this Annual Report.
2022 Compared With 2021
Consolidated Operations
(in thousands)
Total
Change
Operations
Foreign
Exchange
Net Revenues
Industrial
Aerospace & Defense
Consolidated Net Revenues
Net revenues in 2022 were $786.9 million, an increase of $28.3 million from 2021 from improved operational results of $71.2 million driven primarily by improved pricing and increased volume, partially offset by unfavorable foreign exchange of $42.9 million.
Segment Results
(in thousands)
Change
Net Revenues
Industrial
Aerospace & Defense
Consolidated Net Revenues
Operating Income
Industrial - Segment Operating Income
Aerospace & Defense - Segment Operating Income
Corporate expenses
Subtotal
Special restructuring charges
Special other (recoveries) charges, net
Special and restructuring (recoveries) charges, net (1)
Restructuring related inventory charges (recoveries), net
Goodwill impairment charges
Acquisition amortization
Acquisition depreciation
Restructuring, impairment and other cost, net
Consolidated Operating Income (Loss)
Consolidated Operating Margin
(1) See Note 5, Special and Restructuring (Recoveries) Charges, net in the consolidated financial statements included in this Annual Report, for additional details.
Industrial Segment
(in thousands, except percentages)
Change
Net Revenues as reported
Segment Operating Income as reported
Segment Operating Margin as reported
Orders
Industrial segment revenues decreased $1.9 million, or less than 1%, in 2022 compared to 2021. A minimal increase in the Pumps businesses was offset by a decrease of 1% in the Valves businesses. Segment revenues, excluding the impact of the exited Pipeline Engineering business and unfavorable foreign exchange, increased $44.2 million or 9% largely driven by value-based pricing initiatives.
Industrial segment operating income increased $20.4 million, or 71%, in 2022 compared to 2021. The increase was primarily driven by an increase in the Valves businesses which was largely due to the exit of the loss-making Pipeline Engineering business and improved pricing offsetting increased material and freight inflation.
Industrial segment orders increased $3.6 million, or 1%, in 2022 compared to 2021. The increase was primarily driven by a 9% increase in the Pumps businesses partially offset by a 12% decrease in the Valves businesses. Segment orders, excluding the impact of the exited Pipeline Engineering business and unfavorable foreign exchange, increased $66.0 million, or 12%, in 2022 compared to 2021.
Aerospace & Defense Segment
(in thousands, except percentages)
Change
Net Revenues
Segment Operating Income
Segment Operating Margin
Orders
Aerospace & Defense segment net revenues increased by $30.2 million, or 12% in 2022 compared to 2021. The increase was primarily driven by a 33% increase in the Commercial Aerospace businesses partially offset by a 1% decrease in the Defense businesses. Segment revenue excluding the impact of foreign exchange increased $38.2 million, or 15%, in 2022 compared to 2021.
Segment operating income increased $7.5 million, or 13%, in 2022 compared to 2021. The increase was primarily driven by higher volume in the Commercial Aerospace business combined with improved pricing offsetting material and freight inflation.
Aerospace & Defense segment orders increased $53.0 million, or 21%, in 2022 compared to 2021. The increase was driven by a 27% and 17% increase in our Commercial Aerospace and Defense businesses, respectively. Segment orders excluding the impact of foreign exchange increased $62.3 million, or 24%, in 2022 compared to 2021.
Corporate Expenses
Corporate expenses decreased $5.3 million to $25.4 million for 2022. The decrease was driven largely by lower compensation and benefit costs.
Special and Restructuring (Recoveries) Charges, net
During 2022, the Company recorded a total of $19.0 million in special and restructuring recoveries compared to $24.3 million of charges in 2021. The recoveries recorded in 2022 were due to the gain on real estate sales partially offset by the Pipeline Engineering investigation and restatement costs, debt amendment charges and the strategic alternative evaluation. The charges recorded in 2021 were related to debt refinancing, the sale of two Industrial product lines, the write off of an aged receivable, and cost saving initiatives. In our consolidated statements of operations, these charges are recorded in special and restructuring charges (recoveries), net. These special and restructuring (recoveries) charges are described in further detail in Note 5, Special and Restructuring (Recoveries) Charges, net, in the consolidated financial statements included in this Annual Report.
Restructuring, impairment and other costs, net
During 2022, the Company recorded a total of $43.7 million of restructuring and other costs, net, including $2.8 million of restructuring related inventory charges in our Industrial business. The remaining charges represent plant, property, and equipment depreciation related to the step-up in fair value as part of our acquisition of Colfax Corporation's Fluid Handling (“FH”) business and intangible amortization in connection with acquisitions subsequent to December 31, 2011. These charges are recorded in either selling, general and administrative expenses or cost of revenues based upon the nature of the underlying asset.
Interest Expense, Net
Interest expense, net increased $12.5 million from 2021 to $44.9 million in 2022. The change in interest expense was primarily due to higher debt balances and increased interest rates throughout the year.
Other Income, Net
Other income, net was $5.7 million for 2022 compared to $3.8 million for 2021. The $1.9 million increase primarily relates to favorable exchange rates partially offset with lower returns on pension assets and increased pension interest costs.
Comprehensive Income (Loss)
Comprehensive income increased $45.4 million, from a comprehensive loss of $21.3 million for the year-ended December 31, 2021 to comprehensive income of $24.1 million for the year-ended December 31, 2022. This change was primarily driven by a $81.0 million increase in net income caused by a higher revenue, decrease of $10.5 million impairment of goodwill, a $0.9 million decrease in our income tax provision and a $1.4 million decrease in net loss from our discontinued operations, a $43.3 million increase in special and restructuring recoveries, partially offset by a $20.5 million decrease in pension related actuarial gains and a $8.1 million change in foreign currency translation adjustments.
As of December 31, 2022, we had a cumulative currency translation adjustment of $ 18.6 million in Accumulated Other Comprehensive Loss for our Brazil entity. If we were to cease to have a controlling financial interest in the Brazil entity or otherwise satisfy criteria for reclassification of the amount from Accumulated Other Comprehensive Loss to earnings, we would recognize a non-cash charge of $ 18.6 million based on December 31, 2022 balances, which would be included as a special charge within the consolidated statement of operations.
Provision for (Benefit from) Income Taxes
The table below outlines the change in effective tax rate for 2022 and 2021 (in thousands, except percentages).
Change
Income (Loss) Before Tax
Expected federal income tax rate
State income taxes, net of federal tax benefit
US permanent differences
Foreign tax rate differential
Maturity of Interest Rate Swap
Tax reserve
Rate Change
GILTI
Prior period adjustment
Dispositions
Valuation Allowance
Other, net
Equity compensation
Research and development
Effective tax rate
The Company recognized a valuation allowance for the German and the U.S. net DTAs to the extent of reversing DTLs during the year ended December 31, 2020. The Company continued to maintain a valuation allowance against its deferred tax assets in Germany and the U.S. as both jurisdictions remain in a cumulative three year loss position at December 31, 2022. The Company concluded that the negative evidence associated with the history of losses outweighed any positive evidence as of December 31, 2022. Therefore, the Company has not relied on projections of future taxable income in our assessment of the realization of deferred tax assets at December 31, 2022. The Company calculated the valuation allowance based on the reversal of temporary differences. The Company maintained a valuation allowance related to the German deferred tax assets of $3.9 million and $13.2 million, as of December 31, 2022 and December 31, 2021, respectively. The Company maintained a valuation allowance related to the U.S. deferred tax assets of $82.5 million and $73.1 million, a s of December 31, 2022 and December 31, 2021, respectively. For other jurisdictions there are no temporary differences to consider for the valuation allowance.
As of December 31, 2022 and 2021, the Company maintained a total valuation allowance of $127.4 million and $139 million, respectively, which relates to foreign, federal, and state deferred tax assets as of December 31, 2022 and 2021. This decrease is partially due to the removal of the United Kingdom deferred tax asset of $8.7 million related to Pipeline UK and the deconsolidation. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth.
Results of Operations
2021 Compared With 2020
Comparisons between prior year periods can be found in the Company's Annual Report on Form 10-K for the Fiscal Year ended December 31, 2021.
Liquidity and Capital Resources
Our liquidity needs arise primarily from capital investment in machinery, equipment and the improvement of facilities, funding working capital requirements to support business growth initiatives, debt service costs, and acquisitions. We have historically generated cash from operations and remain in a strong financial position, with resources available for reinvestment in existing businesses and managing our capital structure on a short and long-term basis.
Cash Flow Activities for the Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021
The following table summarizes our cash flow activities for the year-ended indicated (in thousands):
Cash flow provided by (used in):
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes on cash, cash equivalents and restricted cash
Increase (decrease) in cash, cash equivalents, and restricted cash
During the year ended December 31, 2022, cash used in operating activities was $0.8 million compared to $10.4 million provided during the year ended December 31, 2021. The $11.3 million decrease in operating cash flows was primarily driven by an increase in inventories due to relief of previous supply chain disruptions as well as prepaid assets.
During the year ended December 31, 2022, cash provided by investing activities was $37.5 million compared to $2.7 million used during the year ended December 31, 2021. The $40.3 million increase in investing cash flows was primarily driven by the cash received from the sale of two properties within the Industrial segment located in Walden, New York and Tampa, Florida and one property within the Aerospace and Defense segment in Corona, California.
During the year ended December 31, 2022, cash used in financing activities was $26.5 million compared to $11.5 million used during the year ended December 31, 2021. The $14.9 million increase in cash used in financing activities is driven by $14.0 million higher debt payments, $4.5 million increase in debt issuance costs, partially offset by $4.0 million in failed sales leaseback proceeds and $2.9 million of lower tax withholding on share based plans.
As of December 31, 2022, total debt (including current portion) was $496.5 million compared to $513.3 million at December 31, 2021. Total debt is net of unamortized debt discount and debt issuance costs of $20.4 million and $13.0 million at December 31, 2022 and 2021, respectively. Total debt as a percentage of total shareholders’ equity was 312% as of December 31, 2022 compared to 384% as of December 31, 2021. As of December 31, 2022, we had available capacity to borrow an additional $48.3 million under our revolving credit facility.
We entered into a new secured Credit Agreement, dated as of December 20, 2021 (“Credit Agreement”), which provides for a $100.0 million revolving line of credit with a five year maturity and a $530.0 million term loan with a seven year maturity of which the term loan was funded in full at closing. This Credit Agreement replaced and terminated the Credit Agreement dated December 11, 2017 (“Prior Credit Agreement”) under which the Company had borrowings of $492.0 million on its term loan and $38.7 million on its revolving line of credit as of December 20, 2021. The Company amended its Credit Agreement with the First Amendment on April 8, 2022 and the Second Amendment on May 27, 2022. For further discussion of both amendments, see Note 12, Financing Arrangements.
The Credit Agreement contains covenants that require, among other items, maintenance of certain financial ratios and also limits our ability to: enter into secured and unsecured borrowing arrangements; issue dividends to shareholders; acquire and dispose of businesses; invest in capital equipment; transfer assets among domestic and international entities; participate in certain higher yielding long-term investment vehicles; and issue certain types of additional shares of our stock which limits our ability to borrow under the credit facility. The primary financial covenant is total net leverage, a ratio of total secured debt (less cash and cash equivalents up to a maximum of $75.0 million) to total earnings before interest expense, taxes, depreciation, and amortization based on the four fiscal quarters at the testing period.
As of December 31, 2022, we had $27.4 million borrowings outstanding under our revolving credit facility, $489.6 million gross borrowings under our term loan, and $32.4 million borrowings outstanding under letters of credit. We were in compliance with all financial covenants related to the Credit Agreement at December 31, 2022 and we believe it is likely that we will continue to meet such covenants for at least the next twelve months from date of issuance of the financial statements.
The ratio of current assets to current liabilities was 2.2:1 at December 31, 2022 compared to 2.0:1 at December 31, 2021. As of December 31, 2022, cash and cash equivalents totaled $64.3 million, the majority of which was held in foreign bank accounts. This compares to $59.9 million of cash and cash equivalents as of December 31, 2021, with balances all substantially held in foreign bank accounts. These funds are considered indefinitely reinvested to be used to expand operations either organically or through acquisitions outside of the United States.
In 2023, we expect to generate positive cash flow from operating activities sufficient to support our capital expenditures and service our debt. Based on our expected cash flows from operations and contractually available borrowings under our credit facility, we expect to have sufficient liquidity to fund working capital needs and future growth over at least the next twelve months from March 15, 2023 the date of filing these 2022 financial statements.
Cash Flow Activities for the Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020
Comparisons between prior year periods can be found in the Company's Annual Report on Form 10-K for the Fiscal Year ended December 31, 2021.
Significant Contractual Obligations and Commercial Commitments
The following summarizes our contractual obligations and commitments as of December 31, 2022.
Purchase obligations were $157.0 million, of which $152.6 million is due within one year. Purchase obligations include contracts for raw materials and finished goods purchases, selling and administrative services, and capital expenditures. Additionally, the Company had $10.0 million of future contractual commitments, primarily including letter of credit fees.
Total lease payments under non-cancellable operating leases as of December 31, 2022 were $7.9 million in 2023, $7.4 million in 2024, $6.3 million in 2025, $5.8 million in 2026, $5.0 million in 2027 and $19.2 million thereafter.
Debt payments due during the next five years as of December 31, 2022 are zero in 2023 through 2025, $27.4 million in 2026, zero in 2027 and $489.6 million thereafter.
Interest payments due during the next five years as of December 31, 2022 are $51.9 million in 2023, $51.9 million in 2024, $51.9 million in 2025, $51.9 million in 2026, $51.9 million in 2027, $46.6 million thereafter.
In accordance with authoritative guidance for accounting for uncertainty in income taxes, as of December 31, 2022, we had unrecognized tax benefits of $2.1 million and $0.1 million of accrued interest. Approximately $1.5 million as of December 31, 2022 represents the amount that if recognized would affect the Company’s effective income tax rate in future periods. The Company does not expect the unrecognized tax benefits to change over the next 12 months.
In 2023, we expect to make defined benefit plan contributions based on the minimum required funding in accordance with statutory requirements (approximately $1.0 million in the U.S. and approximately $3.8 million for our foreign plans). The estimates for plan funding for future periods may change as a result of the uncertainties concerning the return on plan assets, the number of plan participants, and other changes in actuarial assumptions. We anticipate fulfilling these commitments through the generation of cash flow from operations.
In addition to the contractual obligations and commitments described above, we also had other commercial commitments for which we are contingently liable as of December 31, 2022. Other corporate commercial commitments include standby letters of credit of $32.4 million, in the aggregate, $16.3 million of which expire in less than one year.
Off-Balance Sheet Arrangements
Through December 31, 2022, we have not entered into any off-balance sheet arrangements or material transactions with unconsolidated entities or other persons that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.
