CIRCOR Issues Open Letter to Shareholders and Provides Investor Presentation Highlighting Path to Significant Value Creation

Source Press Release
Company CIRCOR International, Inc.Crane Co. 
Tags Corporate Deals, Deals, Oil Services
Date June 24, 2019

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

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 visibilityas 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.

Source: EvaluateEnergy® ©2019 EvaluateEnergy Ltd