Q1 2020 Earnings Call
Greetings and welcome to CIRCOR International's first quarter 2020, <unk> earnings Conference call. At this time, all participants are not listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference. Please press star zero.
Telephone keypad.
Well now turn the conference over to your host Scott Solomon Senior Vice President for Sharon Merrill Associates. Thank you may be n.. Thank you and good morning, everyone on the call today, Scott CIRCOR as president and CEO it'd be kind of walk the company's chief financial Officer.
Slides will be referring to today are available on <unk> website at www Dot <unk> dot com.
Webcasts and presentations section.
<unk>.
Let's turn to slide two.
Today's discussion contains forward looking statements that identify future expectations.
These expectations are subject to known and unknown risks uncertainties and other factors for a full discussion of these factors. The company advises you to refuse <unk> form 10-K, 10-Q's, and other Sep filings.
The company's filings are available on its website at <unk> Dot com.
Actual results could differ materially from those anticipated or implied by today's remarks.
Any forward looking statements represent the views companies views only as of today may 29 Twentytwenty.
While CIRCOR may choose to update these forward looking statements at a later date the company specifically disclaims any duty to do so.
On today's call management will refer to adjusted operating income adjusted operating margins adjusted net income adjusted yes, free cash flow and organic measures.
These non-GAAP metrics exclude certain special charges and recovery.
Asian absurd <unk> non-GAAP measures to the comparable GAAP measures are available in the financial tables at the earnings press release on <unk> website.
I'll now turn the call over to Scott, Please turn to slide three.
Thank you Scott and good morning, everyone.
These are truly unprecedented times.
And from everyone at CIRCOR, let me begin by offering our thoughts prayers and well wishes to all those impacted by October 19.
We also expressed our gratitude to those on the front lines battling this virus caring for others and saving lives.
At CIRCOR, our top priority remains the health and safety of our employees customers and suppliers.
I want to thank the entire CIRCOR team for their service an unwavering dedication to our customers in this rapidly changing environment.
They've been doing a remarkable job supporting one another and our customers, while keeping themselves and those around them say.
Because of the end markets, we serve the vast majority of our facilities are deemed essential operations in the countries in which they operate.
All of our sites are fully operational except perhaps in India, which are operating at less than normal capacity.
Over the last several months, we've implemented significant measures to keep our factory employees around the world as safe as possible, while supporting our customers with minimal disruption.
We continue to monitor the situation and take the appropriate steps to maintain our financial flexibility and position CIRCOR to weather further volatility if it comes.
We remain focused on our long term strategy, while positioning the company to exit the pandemic poised to outperform our peers.
Before we discuss our Q1 results I want to welcome a beat candle walk to CIRCOR as our new CFO.
Obese nearly two decades of experience managing global finance operations, including for multinational industrial companies and manufacturers of highly engineered mission critical products makes him a valuable addition to our team.
He has a proven track record of improving financial performance in complex global organizations and we're already benefiting from his expertise.
Please turn to slide four.
Let me recap our Q1 results at a high level.
We received $208 million of orders in the quarter.
Orders were down about 10% organically compared to a year ago.
Industrial segment orders were down 5% organically, primarily due to cobot nineteens impact on most industrial end markets in March coupled with continued manufacturing headwinds in Europe, and the United States.
And our aerospace and defense segment, we had a solid quarter borders the $72 million down 18% due to a difficult compare driven by the timing of large orders from the U.S. and UK Navy.
Defense orders were strong in the quarter and continue to show strong momentum.
Last week, we announced that the company was awarded six contracts totaling $18 million to provide ballots for their Virginia class submarine.
However, commercial aerospace orders were down in the quarter largely due to covert 19.
Overall, our book to Bill this quarter was 111%.
We delivered $192 million of revenue and 20 cents of adjusted earnings per share.
Adjusted operating margin in Q1 was 5.8% down 400 basis points from last year, and 750 basis points from last quarter.
The direct impact to covert 19 was significant in the quarter.
We saw $12 million of revenue pushed out over the quarter as suppliers and customers shut down operations and delayed projects.
In addition, we wrote off a 6 million dollar receivable due to customer financial issues exacerbated by Cobot 19.
These two unusual items reduced earnings per share by approximately 45 cents.
Due to the uncertain outlook caused by Cobot 19, we've taken prudent steps to maintain our financial flexibility and position CIRCOR to capitalize on the inevitable recovery.
Some of these steps include aggressive cost actions, adding up to $45 million.
Many of the structural actions taken to represent an acceleration of our strategic plan.
Focusing on cash, including prioritization of Capex spend that better reflects the current environment.
And more aggressive working capital management in particular more focused accounts receivable collections and tighter controls around inventory management.
And finally, we're preserving our growth resources and continuing to execute on our long term growth initiatives.
We expect to launch at least 45, new products. This year up from our previous commitment a 40 last summer and 33 last year.
And finally, we continue to execute on the strategic plan communicated last summer.
An important part of that plan was portfolio rationalization.
We intend to exit our distributed valves business in Q2.
After this is complete will have completed our shift away from upstream oil and gas divested other commodity businesses and sharpened our focus on our core mission critical flow control platforms.
This portfolio transformation has helped position CIRCOR to better manage through this time with volatility and uncertainty.
Now, let me turn the call over to would be to discuss our first quarter results in more detail before I review the outlook upper end markets.
Thank you Scott and good morning, everyone. It's great to be here with you all today on my first earnings call Circle.
I'm excited to work with the all in the coming quarters.
Let's begin by reviewing our segment results.
Figures are from continuing operations and exclude divestitures.
Starting with industrial on slide five.
The industrial segment and sales of 127 million.
Organically down 16% versus Q1 90.
The industrial group was impacted by Corbett 19 in March which was the primary reason for the organic sales declined for Q1.
Within industrial we saw 12 million on March revenue, we started the quarter you to covert 90.
Nine of the 12 million wasn't refinery valves, what keeps up I suppose factors in mid March.
Missing important milestones.
And on site aftermarket defined we service teams were asked to suspend bothered operations.
The margin decline was driven by lower sales volume and the write off of 6 million receivable in our European business.
Driven by the impact of covered 90.
Adjusting for those who will impact the it well and margin for the quarter would be at 9%, resulting in a drop through on lower sales of 19%.
Which is significantly lower than our contribution margin.
Reflecting the cost actions that we have taken to mitigate the pressure caused by the spend.
Turning to slide six.
Aerospace and defense had sales of 65 million up 8% organically.
By the strong shipments for the Virginia class submarine and joint strike fighter programs.
Our defense business continues to be strong as was evident in the quarter whether brought in topline.
Aerospace and defense operating margin was 19.1% up 380 basis points versus the prior year.
This was driven by topline growth pricing and manufacturing productivity.
Turning to slide seven.
For Q1.
The adjusted tax rate was 14.1%.
Given by foreign tax red differential and higher R&D tax credits.
Looking to special items and restructuring charges.
We recorded total pretax charge of $84 million in the quarter.
The largest component of the pretax charge is the non cash goodwill impairment of hundred 16 million.
Due to the impact of Goldman 19 on industrial segments outlook.
The acquisition related amortization was a charge of 11 million finally record again, a $55 million associated with the sale of instrumentation and sampling business.
Interest expense for the quarter was 9 million.
Down 4 million compared with the prior year driven by lower debt balances.
Other income of 3 million.
It's primarily due to higher foreign exchange gains and pension income.
Turning to slide eight.
Our free cash flow from operations was negative 27 million in Q1, which is consistent with the seasonality of free cash flow and in line with historical trends.
At the end of Q1.
Net debt was at 431 million, which was 138 million lower than Q4, 19, and a year over year decrease of $249 million.
Primarily driven by debt Paydown with proceeds from the sale of various non core assets.
Turning to slide nine.
Our bank leverage at the end of Q1 was 4.8 times EBITDA worse is a covenant of six and a half times.
As Scott mentioned, our intent is to exit the D.V. business at the end of Q2.
Pro forma bank leverage without distributed valves at the end of Q1 would be 3.3 times, which was significantly below our debt covenant.
Cash on hand at the end of Q1 was in 171 million with no near term debt repayments.
Our revolver is not due until December 2022, and our term loan matures in December 2024.
From a liquidity standpoint, we feel very confident in our ability to operate in this times of uncertainty.
Finally to wrap up we will not provide financial guidance for Q2 or 2020 do you do the uncertainty gosbank over 90.
Now I will hand over to Scott to give some color on our end markets and up.
Thank you Bobby.
Now I'll provide an overview of what we're seeing in our end markets as well as some of the actions, we're taking to manage through the pandemic.
As discussed on our last earnings call, we've eliminated or energy group. So going forward. We'll report our results in two segments industrial and aerospace and defense.
Our refinery valves business is now reported in our industrial group.
Restated financials, reflecting this new structure were released in an 8-K on may 20 seconds.
Please turn to page test.
Let me start by recapping, our end market exposure.
Approximately 52% of our revenue is general industrial.
16% is downstream oil and gas, which is reported in the industrial segment.
And 32% is aerospace and defense of which 70% of defense and 30% is commercial aerospace.
At a high level, we expect our industrial group to be down approximately 20% to 30% in Q2 and most likely Q3.
For aerospace and defense in aggregate, we expect to be down 5% to 10% driven by the commercial side of the business, which is expected to be down 20% to 30%.
We expect defense to be up 5% to 10%.
Please turn to slide 11.
In the base industrial business in Q1, we saw stronger than expected orders performance in our four market business in North American Europe.
Early in Q1, we won several large projects in the U.S. Latin American Germany.
Despite a weak commercial marine market and lower orders and refinery valves. The industrial business delivered a strong book to bill ratio of 1.08.
Since late Q1, we're seeing the impact of cobot 19 across virtually all end markets.
We're seeing capital project delays and cancellations and machinery manufacturing chemical processing power generation and wastewater.
We saw a decline in aftermarket quote activity linked to the reduction and industrial manufacturing as well as lower capital equipment utilization.
Commercial marine as an example is experiencing reduced activity in shipyards impacting the four market and low levels of activity for cruise ships and offshore supply vessels impacting the aftermarket.
[noise] refinery valve orders were down about 3% year over year in Q1.
Refineries cut production at the end of Q1 at the onset of Coburn 19, and we're seeing them slowly start to increase production from the lowest levels reached in April.
As a result, we expect aftermarket projects to resume slowly and many capital projects to be delayed three to 12 months.
Despite this trend activity levels in proposals for capital projects continue to be high.
For industrial overall in Q2, we expect the global impact of the Cobot 19 outbreak to drive a year over year decline in orders of between 20% to 30%.
The primary driver across most OEM end markets, there's an overall reduction in capex and the way capital projects.
On the aftermarket side lower orders are expected in the short term driven by lower capacity utilization of customer assets and coated related disruption of operations.
We expect a gradual improvement in aftermarket orders in Q3.
Regionally the general industrial market is expected to be down in the U.S. Europe and India.
We expect to see a slow ramp up of activity in China.
Please turn to slide 12.
The backlog for the aerospace and defense segment continues to be strong driven by ongoing strength in defense programs, including the joint strike fighter. The U.S. Navy, Virginia class submarine the CVN 80 aircraft carrier and yes, Im three missile.
This is driving backlog increases despite recent headwinds in commercial aerospace.
Our aerospace and defense segment delivered another strong quarter of orders of $72 million driven by our defense business.
The strength in defense in the quarter was primarily driven by 16 million dollar order for the joint strike Fighter program.
Commercial aerospace orders were down from the previous quarter due to the impact of cobot 19 on production rates at Boeing and Airbus.
Overall, we expect Q2 orders increased sequentially, driven primarily by our U.S. Naval defense business other defense programs and defense spares.
Commercial aerospace is expected to be down, but will be offset by strength in defense orders in the quarter.
As we look into Q3, we expect commercial orders to be down year over year for defense. The timing of large program orders is not clear, but we expect to see single digit order growth in the back half of the year.
It's important to note that we're increasing prices on both sides of the business commercial aerospace and defense.
With carryover pricing from 2019, and new increases this year, we expect a net a 3% price increase across the business in 2020.
The majority of the increases on the defense side heavily weighted in the aftermarket.
Please turn to slide 13.
We've taken prudent steps to maintain our financial flexibility and positioned CIRCOR to withstand future volatility.
Some of these steps include $45 million of cost actions initiated of which 21 million or structural.
Prioritization of Capex spend reflecting the current environment.
An aggressive working capital management in particular accounts receivable collections and inventory management.
Despite these actions Q2, and Q3 cash flow will be depressed as we absorbed restructuring expenses and complete the disbursements associated with finalizing CIRCOR strategic transformation out of upstream oil and gas.
Please turn to slide 14.
I wanted to make sure we point out the despite cobot 19, we're still very focused on driving the transformation, we laid out last summer.
Well the pandemic has had a significant impact on our end markets. We've responded by accelerating and expanding many aspects of the plan, particularly with respect to reducing structural costs and leaning out the company.
As noted in the previous slide we're taking out $21 million of structural cost in 2020.
This is significantly larger than our commitment last year.
There is also important to know that we're preserving the growth capacity of the company. Despite the larger reduction of structural cost.
We've increased our commitment of new products launched in 2020 to 45 up from 40 in the original plan and 33 last year.
And finally price remains an important part of our playbook.
Due to the mission critical nature of our products, we've been able to raise prices. This year in line with the original plan commitment. Despite the market disruption caused by covert 19.
I'd like to close by once again thanking the entire CIRCOR team for their service an unwavering dedication to our customers they've been doing a remarkable job.
To summarize.
We're taking the appropriate steps to navigate the current environment, while continuing to make progress on our strategic plan.
As a market continues to change, we'll continue to adapt and respond accordingly.
We remain committed to positioning the company for long term growth expanding margins generating strong free cash flow and de leveraging the company.
Now a b and I will be happy to take your questions.
Thank you if he would like to ask a question. Please press star one and your telephone keypad confirmation tell indicate your line is in the question can you maybe prestart too if you would like to remove your question friendly Q and for participants using speaker equipment and may be necessary to pick up your handset before proceeding.
Mr. Keith.
Our first question is from Andy Kaplowitz with Citi. Please proceed.
Funding guys. This is due somebody help army.
Thanks for taking my question.
Hello, Good morning, how are you.
I'm good.
One of them a bit Martin Parrish Howard Thank you.
So you guys provided some good color on BQ EWC fee revenue outlook, maybe elaborate on how we should think about margins are decrementals in the segments over the next few quarters adds or cost savings kick in.
[laughter].
So I.
I think the way to think about the Decrementals are.
Historically and normally for CIRCOR, you would see Decrementals add two or certainly very close to our gross margin.
I don't think that really changes here the decrementals would be about the same offset by the cost takeout that weve that we've announced so so I think that's probably the right way to think about it. So when you think about the aggregate drop in revenue I'd take that 35% and then offside it with the cost takeout that we've announced.
Gotcha, and we are already two months into the quarter or maybe talk about the plans you have seen you Pro war Susan may across both your segments and if you could provide some color on aftermarket an OE competence in these two months out as well this would be helpful.
Sure.
So let's start with a we'll start with industrial so April and May are.
But both aftermarket and Oh, we are down at roughly similar levels consistent with what we we laid out in a in on page 12 of the of the prepared remarks, I'm sorry page page 11 of the prepared remarks, the in terms of magnitude so.
So far in Q2, we're on the better end of this range. So for industrial were coming in around 20% down.
And the first two months of the quarter.
But as you know there's still a lot of uncertainty coming into the last much of the quarter, which is our which is a five we quarter. So.
It's probably too early to say, we'll be at the higher into the range, but that's certainly what it looks like so far.
Well in May.
With respect to two aerospace and defense orders are quite strong.
Largely driven by defense you probably saw the press release and heard US talk about $18 million order that we got a couple of weeks ago.
In defense, so that's going to pump up the orders pretty significantly in the second quarter on on the aerospace and defense side in terms of revenue.
We were coming in as expected I mentioned in aggregate, we're looking to be down in revenue.
Between five and 10% I think that's a that's a pretty good number in terms of expectation for us.
Aerospace and defense in Q2, so that's down down between five and 10% versus versus prior year.
As far as aftermarket and and Oh, we.
It's coming in consistent with what we have on page 12 aftermarket is down significantly and commercial aerospace, but as you can see that's a relatively small piece of our business.
Boeing and Airbus or down inline with what we're showing here on the page in over 30% as well as other platforms being down down as well on the defense side, we're seeing we're seeing good growth on the top programs that we list here, depending on lumpy shipments you may see more or less growth in any given quarter, but we.
Back to see no single digit growth on these platforms through the remainder of the year.
In aftermarket is running quite strong right now.
On the defense side of the business so in aggregate.
I'd say, we're in line for revenue in Q2 in the range that we stated on the call between five and 10% down.
Gotcha, and lastly, maybe maybe talk about the different geographies like how they have played out so far Europe was particularly critical wed and you guys mentioned about investments in China, and India benefiting the industrial segment, maybe talk about what you're seeing there now and how these investments play out in the longer Ron. Thanks.
Sure.
[noise] I'd say that English and in the last two months, we've seen the U.S. and Europe.
Behaving very similarly, so that so both down significantly on both the OE OE side as well as the aftermarket side and we're talking in the 20% range on both sides of the business. So we don't expect a big mix shift at least in the short term here.
India is down more.
As you probably know India to took a severe locked down and that was the only country, where we were asked to shut our factory store factors were shot for about a month in India, they're ramping up again now Israel as the supply base, but there's still well below their normal operating capacity. So we're expecting India is going to be down significantly.
Hearing in Q2, now it's not a huge part of our business, but it does it does contribute to normally contributes to the growth.
In Asia.
And significantly in Q1, we are seeing a recovery in in China, mainly.
It's slow but it is certainly better than what we saw in Q1 and we are seeing we are seeing sequential growth in China again, not a huge participate or but it is helping and that is contributing.
All right I'll get back into the current events.
Okay. Thank you.
Our next question is from Jeff Hammond Keybanc capital markets. Please proceed.
Hey, good morning, guys.
Good morning, Jeff how are you doing.
Doing well if you could just.
Talk about where the write off hit and segments and now you know to talk about this delayed revenue and where that would have impacted you and one that you know comes back there.
Then the framework.
Sure. So the the write off with with one customer in our industrial segment in Europe.
This is a customer that was having financial does this financial issues coming into Q1, and the covered 19 situation put them into a and to basically in insolvent positioned so the the write off was that was the right way to handle that.
With respect to delayed revenue, we had about 12 million that was directly related to covert 19 9 million of that was in our refinery valve business that was into two areas in one area was the capital projects where.
Where we have a supply base here in the U.S. that we use a percentage of completion accounting in this business of course and the supply base basically shut down the last two weeks of March.
We did not reach milestones that we it is expected to hit in our forecast and so as a result after hit our revenue in the quarter.
In addition, we had we had.
About let's see was eight.
Eight aftermarket service teams at refineries working on projects of the 18 six of them more asked to suspend the project and basically leave the refinery due to the covered 19 situation. So all of that aftermarket service revenue stopped in the middle of March as well. So those two those two situations created nine.
Revenue that slipped slid into into Q2.
Turning to slide was was a project on the industrial side of the business that the did not ship in the quarter, because our customer shut down and moved into Q2, so all of that revenue.
We expect is happening in Q2. The real question is is a is what's happened to everything else. So we still expect despite the 12 million happening in Q2, we expect other issue revenues pushing out of Q2 across all the other parts of the business. So we're still expecting to be.
20% to 30% down on revenue and industrial in Q2.
But that 12 million specifically, we will it will ship in Q.
Okay, Great and then.
Can you quantify the cash restructuring costs and the cost that distributed valves and you know all in and then just you know kind of give us your sense for what you think for your free cash flow is gonna be.
Given this framework.
Sure I can I can talk to some of that I think so.
Well start with distributed valves distributed valves is consuming.
8 million a quarter. So they will be negative 16 million for the first half and that's just the operations of of the of the business there will be.
Incremental cash disbursements that will depend on whether we sell the business or whether we end up having shut it down.
The decision will really come down to cash and right now we still have.
A couple of buyers in the process, but we're at the end of the process. So we will certainly no in the next in the coming weeks here, which direction, we're going to go.
But there will be cash disbursements in both cases, but there's there's quite a significant range I'd, rather not I'd, rather not for obvious reasons I'd, rather not talk about that on the call.
So so that's the distributed valves situation with regard to two to restructuring.
We have about 21 million of structural cost that's coming out in 2020.
That ramps up from Q1 to Q2 and kind of hit the run rate in the back half of 2020.
In general the cash cost of restructuring is easily slightly less than the annualized savings depending on the mix between Europe and the U.S. of of course, so it's not a bad assumption to two to take the the annualized savings did take a little bit off of that and that's usually around what the cash costs.
It will be now not all of the 21 million is restructuring.
We can probably follow up with you after and give you the exact number on that but it's probably in the in the order of 60% to 70% of that is gonna be restructuring related.
Okay, and then phone based defense you know clearly bifurcation between between defense and commercial can you talk about how that impacts in all those moving pieces impact you know the mix dynamic within a Andy.
So.
I think what Youre, what you should expect well so first of all wouldn't let me step start by saying the commercial aerospace and defense as of 2019 have remarkably similar margins and whether you're looking at that OEM or aftermarket if you're comparing aftermarket are comparing howie businesses across the two they're very soon.
Similar operating margins.
As you look forward for aerospace and defense, obviously commercial Aero is going to shrink over the next say six to 12 months at least.
Defense will continue to grow.
Defense.
Aftermarket versus OE for both aerospace commercial and defense aftermarket is significantly higher margins.
When you look at the defense side of the business, you're going to see both OE and aftermarket grow and you'll see aftermarket grow a little faster.
So when you look at that you'll see the mix of CIRCOR shift to be more defense less commercial aerospace and you'll also see the aftermarket part of defense growing faster than the than the OE piece at least over the next six six months or six to 12 months or so so that'll be a favorable mix as well I think the last thing I would say.
Say about margin and mix and.
Aerospace and defense is that we are raising prices we have carry over price in 2020 from 19, and we're we're adding incremental price increases we have been all the way through this year. So so we expect to net 3% on both sides of the business.
This year, which is in line with what we had expected coming into the here as well.
Okay. Thanks, Scott.
Okay.
As a reminder to star one on your telephone keypad, if he would like to ask a question. Our next question is from Nathan Jones as CFO. Please proceed.
Good morning, everyone.
Morning, Nathan.
Welcome to the team are they.
Yeah.
I'm going to start on the balance sheet and cash flows well I'm not say the leverage coming down.
South Reight point grey pro forma the way that bank had calculate that.
Your covenants at six and I'll hop I'm sure you've got the stress tested your models.
Willing to talk about how bad things happen, yet before you would be in danger tripping that covenant, what kind of revenue level, we need to say.
For that to be in any danger just to start we.
We we have stress test stress tested Nathan I'd, rather not get into the kind of the specifics, but and we ran three scenarios where the most likely.
We have a best case of course, and then we have a you know extreme worst case and even in the extreme worst case, which is significantly worse than what we're showing everyone today.
We were comfortably we had a comfortable margin between the covenant and and and where we end up at the end of year. So we're feeling we're feeling confident that the covenant is not going to be big issue for us.
Okay.
Maybe a follow up on free cash flow do you guys expect to be free cash flow positive for the even you take into account.
You know they cash headwinds that you're going to say into Q in threeq year from restructuring and and a wind down into the babies.
It's unlikely that will be cash positive for the full year, so what you're what you're likely to see as the has cash flows out for the rest of the years you will see cash in Q2 likely coming in more or less in line with Q1.
Q3 will be significantly better than that.
And then you'll see clean clean positive cash flow in Q4, when you net it all out for the full year, you should expect that will still be negative.
But we'll be exiting the year with clean positive cash flow in Q4, Q threes, and it's not clear exactly where that's going to fall yet a lot of its going to depend depend on timing of timing in the size of disbursements associated with exiting distributed valves. So it's not perfectly clear to us yet.
Certainly Q3 will be better than Q2 and in Q4 would be clean.
Okay. That's helpful. I guess, then maybe if you could just comment on your available liquidity in how you feel about the liquidity in the face of update cash.
Requirements over the next two three quarters.
Right. So we're very comfortable.
Well, we win if you look at our balance sheet today, we have $171 million of cash sitting on our balance sheet, we will probably consume some of that.
Through the year as we continue the transformation of the company here in Q2 in Q3.
But we are very far from being concerned about cash and liquidity for the company.
Okay. That's helpful. Thanks for taking my question Okay.
Our next question is from Brett Carney with Gamco investors. Please proceed.
Hi, guys good morning.
Pardon me bread How're you.
Phil model.
You mentioned.
Positive impact.
Exiting the distributed valves business would have on the leverage race here last pertains to the banks definition.
Taking it down to 3.3 times.
I was just help me understand is that I guess, how the bank looks at that where you just referring to I guess once the company gets to a full year kind of clean look without that business a lot kind of leverage would look like or.
How did the bank dr. in the exit up that yeah, that's do they.
I will allow for kind of a look for pro forma consideration.
So so.
Yes. Good question. So so the the banks.
The banks look at the leverage ratio a little differently from the way you and I might look at it they will they make certain adjustments that you and I might not make so when you look at the bank adjusted EBITDA and we talk about exiting distributed valves. Once we've exited the business either shut it down or sold it.
We the banks will exclude distributed valves from the trailing 12 months so of EBITDA and as you know distributed valves has been significantly negative EBITDA over the trailing 12 months so that it increases the the way they look at EBITDA. Some of the other adjustments that the bank will make is they will add back.
Stock based compensation.
They also will add back on a forward basis restructuring that has been executed. So there is some adjustments that they make two to come up with their ratio in general I'd say there they are favorable adjustments.
And so when you exit distributed valves and look at what our leverage ratio would be without that he essentially exclude the business from the last 12 months and that's how you come up with the to 3.3 that we're showing on the chart.
Yep that's helpful. Thank Scott.
Okay.
You bet.
Ladies and gentlemen.
There are no further questions at this time. Thank you for joining US today. This does conclude our conference call. You may now disconnect your lines.