CIRCOR Issues Open Letter to Shareholders and Provides Investor Presentation Highlighting Path to Significant Value Creation
Strategic Plan Expected to Deliver Substantial Additional Shareholder Value Over Next 18 Months
Crane’s Highly Opportunistic Offer Substantially Undervalues CIRCOR and Would Transfer Significant Value Away from CIRCOR Shareholders
Board Strongly Urges Shareholders Not to Tender Shares into Crane’s Offer
The company also today issued a separate press release and filed its Solicitation/Recommendation Statement on Schedule 14D-9 with the
The text of the letter follows:
Dear CIRCOR Shareholder,
CIRCOR’s Board of Directors and management team are focused on delivering value for you, our fellow shareholders. Over the past few years, we have transformed our portfolio and streamlined our operations in the face of unprecedented upstream oil & gas (“O&G”) market headwinds. We have repositioned
- Delivering 2020 adjusted EBITDA of
$165 million , up 37% over pro forma 20181 - Expanding adjustedEBITDA margin to14.9% in 2020 from 10.8% in pro forma 20181
- Reducing our net leverage ratio from 5.5x in pro forma 20181 to 4.3x in run rate 20192 and ~3.5x in 2020.
As you know,
We expect our plan to deliver significant value to
We Have Transformed Our Business
Improved revenue quality. CIRCOR’s Board and management team have transformed the company into a stronger, more resilient business with an improved growth and margin profile. We have reduced exposure to upstream O&G and made significant investments to grow and strengthen our Aerospace & Defense (“A&D”) and Industrial businesses.
Since 2014, we have proactively repositioned the company during an unprecedented and protracted downturn in the upstream O&G market. We took aggressive actions inside our Energy group, including non-core divestitures, the exit of unprofitable businesses, factory consolidations, and significant simplification and restructuring.
Between 2014 and 2018, we reduced our O&G exposure and improved the quality of revenue along several dimensions:
- Increased exposure to more attractive and resilient end markets: A&D, Industrial, and Downstream O&G. CIRCOR’s adjusted EBITDA generated from these attractive end markets grew by 2.7x. These markets represented 83% of sales in 2018, up from 44% in 2014.
- Increased sales of higher-margin, highly-differentiated products by 2.3x. These products represented 75% of sales in 2018, up from 46% in 2014.
- Increased higher-margin aftermarket sales by 6.1x. Aftermarket represented 26% of sales in 2018, up from 6% in 2014.
Increased profitability. In addition to improving the quality of CIRCOR’s revenue, we implemented substantial simplification initiatives to drive profitability. Since 2014 we decreased our manufacturing footprint by 630,000 square feet, reduced the number of our suppliers by 55% (helping to drive average annual savings of
Within A&D, we consolidated factories, exited negative margin businesses, integrated the Colfax Fluid Handling Navy business, improved factory and supply chain performance, expanded engineering and sales, and increased new product launches each year over the last four years. These actions led to a successful turnaround of the A&D business. We drove A&D adjusted EBITDA from
In addition, we transformed our industrial business into our largest group. We established the
Deployed capital for growth.
Both of these acquisitions are performing well, exceeding our initial synergy targets and delivering a strong ROIC:
- 10.7% in 2018 (year 2) for Critical Flow Solutions, expected to be 12%+ by year 3; and
- 8.8% in 2018 (year 1) for Colfax Fluid Handling, expected to be 11%+ by year 3.
In addition to acquisitions,
We are Poised to Deliver Significant Value
And our work isn’t done.We are executing a detailed plan to deliver accelerated earnings growth while we significantly deleverage the company over the next 18 months by:
- Accelerating growth and margin expansion in A&D;
- Driving integration synergies and investing in growth in Industrial;
- Further repositioning Energy;
- Prudently managing the portfolio, including evaluating non-core divestitures; and
- Further enhancing operational efficiency.
We expect to deliver substantial shareholder value over the next 18 months compared to 2018 pro forma. Our 2020 earnings and leverage targets include:
- Growing adjusted EBITDA by 37%;
- Improving adjusted EBITDA margin by 410 bps; and
- Reducing leverage by ~2x.
We are confident in our outlook because it is based largely on actions in our control and a business mix with higher visibility as a result of our transformation. In addition, the outlook includes cost actions that have been or are in the process of being executed.
We also have potential upside opportunities. Continued portfolio optimization and non-core divestitures may contribute additional debt reduction and potential multiple expansion. We have taken a conservative view of our upstream O&G prospects; therefore, a recovery in those markets could drive additional earnings growth and cash generation.
CIRCOR’s executive compensation structure is correlated with the successful execution of this strategic plan and our interests are closely aligned with those of our shareholders.
Crane’s Highly Opportunistic Offer
In addition to substantially undervaluing our business, Crane’s offer is opportunistically timed just as the company is poised to deliver substantial value associated with its transformation, taking away value that rightfully belongs to
Crane is attempting to justify its undervalued offer by making inaccurate statements and focusing on CIRCOR’s past product portfolio and the impact of headwinds in upstream O&G – failing to recognize our recent transformation and opportunities for near-term value creation.
Our Commitment to Value
CIRCOR’s Board is committed to delivering value to
We appreciate the feedback that we have received from shareholders and look forward to providing you with updates on our progress.
Best Regards,
The CIRCOR Board of Directors
/s/ David Dietz |
/s/ Scott Buckhout |
Chairman of the Board |
President and Chief Executive Officer |
About
Use of Non-GAAP Financial Information
In this press release, the company uses non-GAAP financial measures, including Adjusted EBITDA, Adjusted EBITDA margin and net debt. These non-GAAP financial measures are used by management in our financial and operating decision making because we believe they reflect our ongoing business and facilitate 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.
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 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
We are not able to provide a reconciliation of CIRCOR’s non-GAAP financial guidance (including the 2019 information presented on a run-rate basis, which reflects an estimate of the full year benefit of cost actions taken in 2019, as detailed on slide 22 of the investor presentation) to the corresponding GAAP measures without unreasonable effort because of the inherent difficulty in forecasting and quantifying certain amounts necessary for such a reconciliation such as the costs associated with selling or exiting non-core businesses as well as the tax impact of these expenses.
We completed the acquisition of Colfax Corporation’s Fluid Handling business in the fourth quarter of 2017. We present adjusted combined information for the year ended
During the first quarter of 2019, we completed the sale of the Reliability Services business for net cash proceeds of
Forward Looking Statements
This press release contains forward-looking statements. Reliance should not be placed on forward-looking statements because they involve risks, uncertainties and other factors, which are, in some cases, beyond the control of
Important Information
1 |
Pro forma for the completed divestiture of Reliability Services |
|
2 |
Reflects an estimate of full year benefit of cost actions taken in 2019, as detailed on slide 22 of the investor presentation |
|
3 |
Excluding the impact of acquired businesses |
|
4 |
New product revenue is revenue from products launched within three years of current year |
CIRCOR International | ||||||||||||||||
Supplemental Financial Information | ||||||||||||||||
$ millions | ||||||||||||||||
Reliability Services |
||||||||||||||||
Revenue |
2018 |
2018 PF (a) | ||||||||||||||
Energy |
451.3 |
65.6 |
385.7 |
|||||||||||||
Aerospace & Defense |
237.1 |
- |
237.1 |
|||||||||||||
Industrial |
487.5 |
- |
487.5 |
|||||||||||||
Total |
1,175.8 |
65.6 |
1,110.2 |
|||||||||||||
Reconciliation of GAAP Operating Income to Adjusted Operating Income and GAAP Operating Margin % to Adjusted Operating Margin % | % of Revenue | Reconciliation of GAAP Net Income to Adjusted EBITDA |
% of Revenue | |||||||||||||
GAAP Operating Income |
9.4 |
0.8% |
GAAP Net Loss |
(39.4) |
-3.3% |
|||||||||||
Restructuring related inventory charges |
2.4 |
0.2% |
Provision for income taxes |
3.3 |
0.3% |
|||||||||||
Amortization of inventory step-up |
6.6 |
0.6% |
Interest expense, net |
52.9 |
4.5% |
|||||||||||
Restructuring charges, net |
12.8 |
1.1% |
Depreciation & Amortization |
78.1 |
6.6% |
|||||||||||
Acquisition amortization |
47.3 |
4.0% |
Inventory restructuring charges |
2.4 |
0.2% |
|||||||||||
Acquisition deprecation |
7.0 |
0.6% |
Amortization of inventory step-up |
6.6 |
0.6% |
|||||||||||
Special charges |
11.1 |
0.9% |
Restructuring charges |
12.8 |
1.1% |
|||||||||||
Adjusted Operating Income |
96.6 |
8.2% |
Special charges, net of recoveries |
11.1 |
0.9% |
|||||||||||
Adjusted EBITDA |
127.8 |
10.9% |
||||||||||||||
Components of Adjusted Operating Income | Less Adj EBITDA of Reliability Services | |||||||||||||||
Energy Segment Operating Income |
33.5 |
7.6 |
||||||||||||||
Aerospace & Defense Segment Operating Income |
36.0 |
Pro Forma Adjusted EBITDA |
120.1 |
10.8% |
||||||||||||
Industrial Segment Operating Income |
57.3 |
|||||||||||||||
Corporate Expenses |
(30.3) |
|||||||||||||||
Adjusted Operating Income |
96.6 |
|||||||||||||||
Reconciliation of Segment Operating Income to Adjusted EBITDA | Energy | Aerospace & Defense |
Industrial | Corporate | Total | |||||||||||
Segment/Adjusted Operating Income |
33.5 |
36.0 |
57.3 |
(30.3) |
96.6 |
|||||||||||
Remove: Depreciation & Amortization expense included in Segment Operating Income |
8.5 |
4.5 |
9.6 |
1.2 |
23.7 |
|||||||||||
Add: Other Income, not included in Segment Operating Income |
- |
- |
- |
7.4 |
7.4 |
|||||||||||
Adjusted EBITDA |
42.0 |
40.5 |
66.9 |
(21.7) |
127.8 |
|||||||||||
Reliability Services segment operating income |
6.6 |
- |
- |
- |
6.6 |
|||||||||||
Reliability Services depreciation & amortization included in segment operating income |
1.0 |
- |
- |
- |
1.0 |
|||||||||||
Pro Forma Adjusted EBITDA |
34.4 |
40.5 |
66.9 |
(21.7) |
120.1 |
|||||||||||
Reconciliation of Segment Operating Income % to Adjusted EBITDA % of revenue | Energy | Aerospace & Defense |
Industrial | |||||||||||||
Segment Operating Income % |
7.4% |
15.2% |
11.8% |
|||||||||||||
Depreciation & Amortization |
1.9% |
1.9% |
2.0% |
|||||||||||||
Adjusted EBITDA % |
9.3% |
17.1% |
13.7% |
|||||||||||||
(a) 2018 Pro Forma amounts assume the sale of Reliability Services occurred on January 1, 2018 | ||||||||||||||||
CIRCOR International | ||||||||||
Supplemental Financial Information | ||||||||||
$ millions | ||||||||||
Reconciliation of Gross Debt to Net Debt, Actual and Pro Forma | ||||||||||
Year Ended |
Net Proceeds |
Pro Forma Year Ended |
||||||||
Dec. 31, 2018 |
from Sale (a) |
Dec. 31, 2018 |
||||||||
Debt Balances | ||||||||||
Current Portion |
7.9 |
(7.9) |
- |
|||||||
Long-term |
799.2 |
(74.2) |
725.1 |
|||||||
Gross Debt |
807.1 |
(82.0) |
725.1 |
|||||||
Less: Cash |
(68.5) |
- |
(68.5) |
|||||||
Net Debt |
738.6 |
(82.0) |
656.6 |
|||||||
Year Ended |
EBITDA, |
Pro Forma Year |
||||||||
Adjusted EBITDA |
127.8 |
(7.6) |
120.1 |
|||||||
Net Debt Divided by Adjusted EBITDA |
5.8 |
5.5 |
||||||||
(a) Reduces debt by the amount of proceeds from the sale of Reliability Services | ||||||||||
(b) Removes the Adjusted EBITDA related to 2018 Reliability Services | ||||||||||
CIRCOR International | ||||||||
Supplemental Financial Information | ||||||||
$ millions | ||||||||
Fluid |
2017 |
|||||||
Revenue |
2017 |
|||||||
Energy |
339.6 |
64.7 |
404.3 |
|||||
Aerospace & Defense |
183.0 |
45.9 |
228.9 |
|||||
Industrial |
139.1 |
326.7 |
465.8 |
|||||
Total |
661.7 |
437.3 |
1,099.0 |
|||||
Reconciliation of GAAP Operating Income to Adjusted Operating Income and GAAP Operating Margin % to Adjusted Operating Margin % GAAP Operating Income |
20.6 |
29.5 |
50.0 |
|||||
Amortization of inventory step-up |
4.3 |
- |
4.3 |
|||||
Restructuring charges (recoveries), net |
6.1 |
- |
6.1 |
|||||
Acquisition amortization |
12.5 |
(13.0) |
(0.5) |
|||||
Acquisition deprecation |
0.2 |
2.4 |
2.7 |
|||||
Special charges |
8.0 |
8.0 |
||||||
Asbestos costs |
- |
8.9 |
8.9 |
|||||
Stay bonus |
- |
2.3 |
2.3 |
|||||
Adjusted Operating Income |
51.7 |
30.0 |
81.7 |
|||||
Components of Adjusted Operating Income | ||||||||
Energy Segment Operating Income |
30.1 |
3.6 |
33.7 |
|||||
Aerospace & Defense Segment Operating Income |
23.4 |
7.0 |
30.4 |
|||||
Industrial Segment Operating Income |
19.9 |
19.5 |
39.4 |
|||||
Corporate Expenses |
(21.7) |
- |
(21.7) |
|||||
Adjusted Operating Income |
51.7 |
30.0 |
81.7 |
|||||
Reconciliation of Industrial Segment Operating Income to Adjusted EBITDA | Industrial | |||||||
Industrial segment operating income - reported |
19.9 |
|||||||
Industrial segment operating income - Fluid Handling |
19.5 |
|||||||
Combined Segment Operating Income |
39.4 |
|||||||
Depreciation & Amortization |
8.3 |
|||||||
Combined Adjusted EBITDA |
47.7 |
|||||||
CIRCOR International | ||||||||||||||||
Supplemental Financial Information | ||||||||||||||||
$ millions | ||||||||||||||||
Revenue |
2014 |
|||||||||||||||
Energy |
534.5 |
|||||||||||||||
Aerospace & Defense |
206.7 |
|||||||||||||||
Industrial |
100.3 |
|||||||||||||||
Total |
841.4 |
|||||||||||||||
Reconciliation of GAAP Operating Income to Adjusted Operating Income and GAAP Operating Margin % to Adjusted Operating Margin % |
% of Revenue |
Reconciliation of GAAP Net Income to Adjusted EBITDA |
% of Revenue |
|||||||||||||
GAAP Operating Income |
64.8 |
7.7% |
GAAP Net Income |
50.4 |
6.0% |
|||||||||||
Restructuring related inventory charges |
8.0 |
0.9% |
Provision for income taxes |
12.9 |
1.5% |
|||||||||||
Restructuring charges, net |
5.2 |
0.6% |
Interest expense, net |
2.7 |
0.3% |
|||||||||||
Impairment charges |
0.7 |
0.1% |
Depreciation & Amortization |
19.6 |
2.3% |
|||||||||||
Special charges |
7.5 |
0.9% |
Inventory restructuring charges |
8.0 |
0.9% |
|||||||||||
Adjusted Operating Income |
86.2 |
10.2% |
Impairment charges |
0.7 |
0.1% |
|||||||||||
Special charges, net of recoveries |
12.7 |
1.5% |
||||||||||||||
Components of Adjusted Operating Income | Adjusted EBITDA |
106.9 |
12.7% |
|||||||||||||
Energy Segment Operating Income |
76.6 |
|||||||||||||||
Aerospace & Defense Segment Operating Income |
15.4 |
|||||||||||||||
Industrial Segment Operating Income |
17.6 |
|||||||||||||||
Corporate Expenses |
(23.4) |
|||||||||||||||
Adjusted Operating Income |
86.2 |
|||||||||||||||
Reconciliation of Segment Operating Income to Adjusted EBITDA |
Energy |
Aerospace & |
Industrial |
Corporate |
Total |
|||||||||||
Segment/Adjusted Operating Income |
76.6 |
15.4 |
17.6 |
(23.4) |
86.2 |
|||||||||||
Remove: Depreciation & Amortization expense included in Segment Operating Income |
8.5 |
6.9 |
3.0 |
1.1 |
19.5 |
|||||||||||
Add: Other Income, not included in Segment Operating Income |
- |
- |
- |
1.2 |
1.2 |
|||||||||||
Adjusted EBITDA |
85.1 |
22.3 |
20.7 |
(21.2) |
106.9 |
|||||||||||
Reconciliation of Segment Operating Income % to Adjusted EBITDA % of revenue |
Energy |
Aerospace & |
Industrial |
|||||||||||||
Segment Operating Income % |
14.3% |
7.5% |
17.6% |
|||||||||||||
Depreciation & Amortization |
1.6% |
3.3% |
3.0% |
|||||||||||||
Adjusted EBITDA % |
15.9% |
10.8% |
20.6% |
Source:
Investor:
David F. Mullen
Senior Vice President Finance
CIRCOR International
(781) 270-1200
Additional Investor:
MacKenzie Partners, Inc.
Dan Burch, (212)929-5784, dburch@mackenziepartners.com
Paul Schulman, (212) 929-5364, pschulman@mackenziepartners.com
Larry Schimmel, (212) 378-7068, lschimmel@mackenziepartners.com
Media:
Matthew Sherman / Andi Rose / Nick Lamplough
Joele Frank, Wilkinson Brimmer Katcher
(212) 355-4449