CIRCOR International, Inc. -- Moody's confirms CIRCOR's B3 CFR, outlook changed to negative
Rating Action: Moody's confirms CIRCOR's B3 CFR, outlook changed to negativeGlobal Credit Research - 12 Aug 2022New York, August 12, 2022 -- Moody's Investors Service ("Moody's") confirmed the ratings of CIRCOR International, Inc. ("CIRCOR"), including the B3 corporate family rating, B3-PD probability of default rating and B2 senior secured debt rating. Moody's also changed the outlook to negative from ratings under review. This concludes the review for downgrade that was initiated on March 15, 2022. The SGL-3 speculative grade liquidity rating remains unchanged.This rating action follows CIRCOR's filing of its 2021 10-K, which included the current year and restated prior-year financial statements. The filing was delayed by the discovery of accounting irregularities in the company's Pipeline Engineering business, resulting in earnings overstatements over five years through Q3 2021. This has led to weaker credit metrics than Moody's previous expectations, including adjusted debt-to-EBITDA (currently above 8.5x). The leverage will likely remain high through 2022, despite moderating from expected EBITDA growth. Moody's also expects free cash flow to be constrained by rising interest expense, given the company's all-floating rate debt structure with no interest rate hedging, as well as supply chain challenges.The negative outlook reflects the uncertain timing and challenges with remediating the material weaknesses in the company's internal controls. There is also uncertainty around the company's ongoing strategic review that could include the divestiture of significant/core assets.Governance risks were a key consideration in the rating action, including the weak internal controls and recent senior management turnover following a period of underperformance.Confirmations:..Issuer: CIRCOR International, Inc....Corporate Family Rating, confirmed B3...Probability of Default Rating, confirmed B3-PD...Senior Secured 1st Lien Bank Credit Facility, confirmed B2 (LGD3)Outlook Actions:..Issuer: CIRCOR International, Inc....Outlook changed to negative from ratings under reviewRATINGS RATIONALECIRCOR's ratings reflect its favorable niche market focus within severe flow control applications, a diverse customer base highlighted by blue-chip industry leaders and improved cost flexibility. Scale and scope remain modest within the large, highly fragmented global flow control sector. However, revenue should rise as demand gradually strengthens in the commercial aerospace industry along with order growth in certain sectors within CIRCOR's industrial end markets, including commercial marine aftermarket, chemical processing and machinery. Resilience from defense revenue, approximately 21% of total revenue, and benefits from the aftermarket revenue stream (roughly 35% of revenue) should lead to stronger earnings over the next couple of years.The ratings also reflect Moody's expectation that CIRCOR's debt-to-EBITDA will remain high over the next year but fall towards 7x, applying Moody's standard adjustments that include a pension liability of approximately $125 million. Operations are exposed to key end markets that can be cyclical, especially within the industrial segment. Cost inflation pressures, labor availability constraints and supply chain challenges that impact the timing of order shipments will continue to exert margin and cash flow pressures into 2023. However, CIRCOR's price increases, cost measures and productivity initiatives should help offset these pressures and support moderate margin expansion, aided by the order backlog.Moody's expects CIRCOR to have adequate liquidity, with cash balances (about $61 million at April 3, 2022) and revolver availability balancing modest free cash flow over the next 12 to 15 months. Free cash flow is constrained by lumpiness in the timing of collections for large orders, although deliveries of certain large orders expected to ship in the near term will help offset these constraints. Moody's believes the company will use a majority of free cash flow for debt repayment, which would accelerate de-leveraging and restore balance sheet flexibility. The $100 million revolving facility, expiring in 2026, will likely be drawn periodically for working capital requirements. The revolver had roughly $22 million drawn and about $49 million available, net of letters of credit at April 3, 2022, although the availability has since likely diminished to accommodate seasonal working capital needs.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings could be upgraded with a robust uptick in performance from stronger and sustained demand in the industrial, oil & gas, and aerospace & defense sectors, resulting in a meaningful improvement in margins and cash flow. Debt-to-EBITDA expected to remain below 5.75x, an EBITDA margin approaching 15% and good liquidity, including free cash flow-to-debt sustained around 5%, reduced reliance on the revolver and ample covenant headroom could also lead to a ratings upgrade. Additionally, resolution of the material weaknesses in internal controls would be important for an upgrade. Accelerated growth in higher-margin, recurring (aftermarket) revenue could also drive upward ratings pressure.The ratings could be downgraded with negative organic growth, inability to demonstrate steady improvement in earnings. A lack of demonstrated progress of steady reduction in debt-to-EBITDA to around 7x through 2023 could also lead to a ratings downgrade. Deteriorating liquidity, including sustained negative free cash flow and/or diminishing revolver availability, could also drive a negative rating action.The principal methodology used in these ratings was Manufacturing published in September 2021 and available at https://ratings.moodys.com/api/rmc-documents/74970. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.CIRCOR International, Inc. provides flow and motion control precision-engineered pumps, valves, fittings, switches, sensors and flight components for use in extreme operating environments (e.g. high pressure, high temperature, caustic fluids, fluids with abrasives) within the industrial and aerospace & defense markets. Net revenue approximated $768 million for the twelve months ended April 3, 2022.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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