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
CIRCOR International, Inc. (NYSE: CIR)
(“CIRCOR”) today issued an open letter to shareholders and posted
an investor presentation on its website highlighting CIRCOR’s path
to significant near-term value creation for shareholders. The
materials explain how CIRCOR has repositioned its portfolio and
improved its operations to position the business for high growth
with enhanced margins. The presentation is available at
https://investors.circor.com.
The company also today issued a separate press release and filed
its Solicitation/Recommendation Statement on Schedule 14D-9 with
the Securities and Exchange Commission (“SEC”) disclosing that the
Board of Directors unanimously rejected the unsolicited tender
offer (the “offer”) from Crane Co. (NYSE: CR) (“Crane”) and is
recommending that shareholders not tender their shares into the
offer.
The text of the letter follows:
June 24, 2019
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 CIRCOR into a stronger and more resilient
business with enhanced growth and margin potential.
CIRCOR is executing a detailed plan to deliver
substantial earnings growth while deleveraging the company over the
next 18 months. We are confident this plan will generate
significant value for our shareholders in the near-term.
Through this plan, we are committed to:
- Delivering 2020 adjusted EBITDA of
$165 million, up 37% over pro forma 20181
- Expanding adjusted EBITDA margin
to 14.9% 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, Crane Co. (“Crane”) made an
unsolicited proposal to acquire CIRCOR for $45 per share and
recently launched a tender offer (the “offer”) to acquire your
shares at the same price. Crane’s offer is a change of tactics to
attempt to take over your company, but it does not change the fact
that the offer fails to deliver a compelling valuation for CIRCOR.
Your Board of Directors, with the advice of independent financial
and legal advisors, carefully reviewed Crane’s offer and
unanimously determined that the offer was highly opportunistic and
substantially undervalued CIRCOR and our future prospects.
We expect our plan to deliver significant
value to CIRCOR shareholders over the next 18 months, far in excess
of the offer. Applying CIRCOR’s historic multiples to our expected
2020 adjusted EBITDA (less our projected year-end 2019 net debt)
suggests the potential magnitude of the disconnect. We also
may have upside from potential multiple expansion as a result of
further diversification away from upstream O&G and accelerated
deleveraging. In addition, our plan does not assume a recovery in
the company’s O&G end markets, which, if markets recover, could
increase our 2020 estimated EBITDA.
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 $9 million over the last three
years), shrunk the number of business units from 22 to 12 (reducing
our overhead burden) and reduced the number of ERP systems by
~45%.3
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 $22 million in 2014 to $40 million in
2018, an increase of 82% and expanded adjusted EBITDA margin by
over 630bps.
In addition, we transformed our industrial
business into our largest group. We established the Industrial
Group as part of the Colfax Fluid Handling integration, and in 2018
we increased the Industrial Group’s adjusted EBITDA by
approximately 40%, and adjusted EBITDA margins by 350bps versus
2017 combined results. The substantial increase in results was
driven by synergies, G&A reduction, value pricing and the
implementation of our CIRCOR Operating System. In addition, we
continued to invest in growth. Within the Industrial Group, we
launched nine new products in 2018, and expect to launch an
additional nine new products in 2019. The Industrial Group ended
2018 with a record backlog.
Deployed capital for growth. CIRCOR has
transformed its portfolio by deploying capital on accretive
acquisitions. The recent acquisitions of Critical Flow Solutions (a
high technology business serving the downstream O&G market) and
Colfax Fluid Handling (a severe-service pump technology business
with diversified end markets and significant aftermarket exposure)
greatly improved the quality of CIRCOR’s revenue and
profitability.
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, CIRCOR has
invested in organic growth by expanding sales and engineering
across the company while establishing a Product Management function
that did not exist 5 years ago. In 2019 CIRCOR anticipates
launching at least 35 new products, a ~45% increase over 2018. New
products are expected to generate approximately $70 million of
revenue in 20194.
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 CIRCOR
shareholders. Crane’s offer was made at a time when CIRCOR’s stock
price was in the process of a rapid upswing and CIRCOR had
substantial visibility into significantly improved business
results.
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 CIRCOR shareholders, and we are open to all opportunities
to enhance value, but Crane’s offer substantially undervalues our
company given the value we expect to deliver in the near and
long-term.
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
Evercore and J.P. Morgan Securities LLC are serving as financial
advisors to CIRCOR. Ropes & Gray LLP is serving as legal
advisor to CIRCOR.
About CIRCOR
CIRCOR International, Inc. is a leading global flow control
technology company that designs, manufactures and markets
differentiated technology products and sub-systems for markets
including aerospace & defense, industrials and oil & gas.
CIRCOR has a diversified flow and motion control product portfolio
with recognized, market-leading brands that fulfill its customers’
mission critical needs. CIRCOR’s strategy is to grow organically
and through complementary acquisitions; simplify CIRCOR’s
operations; achieve world class operational excellence; and attract
and retain top talent.
CIRCOR routinely posts information that may be important to
investors in the “Investor Relations” section of its website at
www.circor.com. The company encourages investors and potential
investors to consult the CIRCOR website regularly for important
information.
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 the United States. A reconciliation of the
non-GAAP financial measures to the most directly comparable GAAP
measures is included in this press release and available at
https://investors.circor.com.
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 December 31, 2017,
which presents the combined results of operations as if the
acquisitions had been completed on January 1, 2017. The unaudited
combined results do not reflect any cost saving synergies from
operating efficiencies or the effect of the incremental costs
incurred in integrating the two companies. Accordingly, these
unaudited combined results are presented for informational purposes
only and are not necessarily indicative of what the actual results
of operations of the combined company would have been if the
acquisition had occurred at the beginning of the period presented,
nor are they indicative of future results of operations.
During the first quarter of 2019, we completed the sale of the
Reliability Services business for net cash proceeds of $82 million.
We present adjusted pro forma income statement information for the
year ended December 31, 2018, which gives effect to the sale as if
it had occurred on January 1, 2018. We also present balance sheet
information (debtless cash) as if the divestiture was completed on
December 31, 2018. Such information is illustrative and not
intended to represent what our results of operations would have
been if the sale had been completed before the first quarter of
2019 or to project our results for any future period. Such
information may not be comparable to, or indicative of, future
performance.
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 CIRCOR. Any statements in this press
release that are not statements of historical fact are
forward-looking statements, including, but not limited to, those
relating to CIRCOR’s plan to deliver significant value over the
next 18 months, 2019 and 2020 financial guidance, divestitures
under consideration, plans to reduce leverage, our future
performance, including realization of cost reductions from
restructuring activities and expected synergies, and CIRCOR’s
strategic priorities. Actual events, performance or results could
differ materially from the anticipated events, performance or
results expressed or implied by such forward-looking statements.
Important factors that could cause actual results to vary from
expectations include, but are not limited to: our ability to
respond to competitive developments and to grow our business, both
domestically and internationally; changes in the cost, quality or
supply of raw materials; our ability to comply with our debt
obligations; our ability to successfully implement our acquisition,
divestiture or restructuring strategies, including our integration
of the Fluid Handling business; changes in industry standards,
trade policies or government regulations, both in the United States
and internationally; and our ability to operate our manufacturing
facilities at current or higher levels and respond to increases in
manufacturing costs. BEFORE MAKING ANY INVESTMENT DECISIONS
REGARDING CIRCOR, WE STRONGLY ADVISE YOU TO READ THE SECTION
ENTITLED “RISK FACTORS” IN OUR MOST RECENT ANNUAL REPORT ON FORM
10-K AND SUBSEQUENT REPORTS ON FORMS 10-Q, WHICH CAN BE ACCESSED
UNDER THE “INVESTORS” LINK OF OUR WEBSITE AT WWW.CIRCOR.COM. We
undertake no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information,
future events or otherwise.
Important Information
CIRCOR has filed with the SEC a Solicitation/Recommendation
Statement on Schedule 14D-9. CIRCOR shareholders are advised to
read the company's Solicitation/Recommendation Statement on
Schedule 14D-9 because it contains important information.
Shareholders may obtain a free copy of the
Solicitation/Recommendation Statement on Schedule 14D-9, as well as
any other documents filed by CIRCOR in connection with the offer,
free of charge at the SEC's website at www.sec.gov. In addition,
investors and security holders can obtain free copies of these
documents from CIRCOR by directing a request to CIRCOR
International, 30 Corporate Drive, Burlington, Massachusetts 01803,
Attention: investor relations, or by calling (781) 270-1200.
Shareholders may also request copies of these documents from
MacKenzie Partners, Inc., which is assisting CIRCOR in this matter,
by calling 800-322-2885 Toll-Free or by email at
circor@mackenziepartners.com.
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
ReliabilityServices
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 Incometo 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
127.6
10.8%
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
119.9
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 Dec. 31,
2018
EBITDA, divested business
(b)
Pro Forma Year Ended Dec. 31,
2018
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 Handling
2017 Combined
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
70.6
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 & Defense
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 & Defense
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%
View source
version on businesswire.com: https://www.businesswire.com/news/home/20190624005305/en/
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
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