PAR announces agreements to sell its Government operating segment, in two separate transactions, for a combined total of $102 million 

Today, before the market open, PAR announced that it had agreed to sell its Government operating segment, in two separate transactions, for a combined total of $102 million.

Booz Allen Hamilton (NYSE: BAH) will acquire PAR Government Systems Corp. (PGSC) for ~$95 million, in a transaction that closed on June 7^th, while NexTech Solutions (private) will purchase Rome Research Corp. (RRC) for ~$7 million, in a transaction that is expected to close by the end of 2Q 2024.

Recall, PAR had previously disclosed it was seeking strategic alternatives for its Government business in its 2Q 2023 10-Q.

By our calculation, the combined purchase price represents an ~8.0x multiple on 2025E segment adj. EBITDA.

While the ultimate deal value modestly lagged our most recent $121 million fair value estimate (but exceeded our initial ~$91 million forecast) we think this announcement is a clear positive catalyst for the company; to that end, the transactions will reduce overall complexity (i.e., create a pure-play) while also providing significant capital for it to invest in its faster-growth/higher-margin (and increasingly recurring) SaaS business, which is focused on serving restaurant enterprises.  (As well, the deal will limit the perceived risk of future equity dilution as well as potentially make the remaining business a more attractive target to itself be acquired at some point).

Our fair value estimate for PAR is $48 per share, reflecting value of ~$55 per share for the Restaurants/Retail segment, based on a blended 2025E sales multiple of 5x, and accounting for projected net debt (see Exhibit #1 on page 2).

Edwards Lifesciences to Sell Critical Care Business to Becton Dickenson; Drop Coverage of EW Effective Immediately

• On June 3, 2024, before the market open, Edwards Lifesciences Corp. (NYSE: EW) announced an agreement to sell its Critical Care product group to Becton, Dickenson and Co. (NYSE: BDX) for $4.2 billion in an all-cash transaction.
• Given the sale, EW is no longer pursuing the previously announced spin-off of its Critical care business, we DROP coverage of Edwards Lifesciences effective immediately.
• Our prior estimates and fair value for EW should no longer be relied on.

Alert: DuPont to Separate into Three Independent Companies via Spin-Offs

On May 22, 2024, after the market close, DuPont Inc. (NYSE: DD) announced its intention to separate into three independent publicly traded companies via tax free spin-offs of its Electronics and Water businesses. The separations are expected to be completed within 18 to 24 months of the announcement, subject to standard conditions including final approval from DuPont’s Board of Directors, receipt of a tax opinion from counsel, and SEC approval of the company’s Form 10 registration statements, amongst others. Shareholder approval is not required.

In addition to the separations, DD also announced that current CEO Ed Breen is to transition to an Executive Chair position and Lori Koch, DD’s current CFO, has been named the new CEO, effective June 1, 2024.

DD describes itself as “a global innovation leader with technology-based materials and solutions … in key markets including electronics, transportation, construction, water, healthcare and worker safety.” The company generated $12.1 billion in revenue and $2.9 billion in operating EBITDA in 2023. As the company stands today it reports under two segments: Electronics & Industrial (44% of 2023 sales), and Water & Protection (47% of 2023 sales). (Corporate and other account for the remaining ~9% of sales.)

Electronics & Industrial (E&I) provides a broad portfolio of materials and components used in high performance computing, electric vehicles, and mobile devices, amongst others, to the aerospace, defense, transportation, healthcare and medical device industries. The segment reports three business lines: Industrial solutions, Interconnect Solutions, and Semiconductor Technologies. Water & Protection (W&P) provides engineered products and integrated systems across multiple industries including worker safety, water purification, transportation, energy, and medical packaging, amongst others. W&P business lines include Safety Solutions, Shelter Solutions, and Water Solutions.

The New Electronics company will be comprised of the current Semiconductor Technologies and Interconnect Solutions businesses (currently in E&I), as well as certain electronics related businesses from the current Industrial Solution business. Applications to be controlled by the New Electronics company include integrated circuit fabrication for memory and logic semiconductors, as well as printed circuit board, electronic and industrial finishing. Of particular note in relation to 2023 revenue, the Interconnect Solutions and Semiconductor Technologies business lines to be included in the new company experienced respective revenue declines of 18.4% and 16.5% on volume declines from decreased consumer and industry spending on electronics and customer inventory destocking, both of which were led by China. New Electronics would have recorded revenue and operating EBITDA margins of $4.0 billion and approximately 29% in 2023.

The New Water company will control the current Water Solutions business line (currently in W&S) and offers products and solutions for water filtration, purification, reverse osmosis, ion exchange, and ultrafiltration. Water Solutions sales declined by 2.3% in 2023. New Water would have generated revenue and operating EBITDA margins of $1.5 billion and approximately 24% in 2023.

Following the separation, the parent DuPont company, New DuPont, will remain a diversified industrial company controlling a range of material science and application expertise with well-known brand names such as Tyvek, Kevlar, and Nomex. End market exposure is expected to focus on healthcare, and electric vehicles, while remaining an active participant in the safety, construction, and aerospace end markets, amongst others. Absent New Electronics, and New Water’s contribution, New DuPont would have generated $6.6 billion in revenue and operated with an approximate EBITDA margin of 24% in 2023.

In terms of rationale, investor appetite for more specialized companies, particularly in the water and electronics businesses, may result in an unlocking of value. New Water and New Electronics should exhibit faster growth rates than the current conglomerate and a set of focused peer comps currently trade at higher forward multiples than the current DD. Water peers trade at approximately 19.5x forward EBITDA estimates, and Electronic peers trade at 22.5x forward EBITDA. DD currently trades at 13.0x forward EBITDA, which is roughly in line with other diversified industrial companies. It should be noted that this is not the first spin that DD has undertaken; the company’s predecessor DowDuPont completed the spin-off of Dow Inc. and Corteva in 2019, and completed the separation of International Flavors & Fragrances Inc. in 2021.

Looking forward, management has issued 2024 guidance that includes revenue between $12.1 and $12.4 billion, and EBITDA between $2.9 and $3.05 billion. At the midpoint of guidance, this implies a 2.5% decline in revenue and a 1.1% increase in EBITDA. Management cites improving trends throughout the year in relation to a recovery in electronics, and reduced channel destocking as trends included in guidance measures. Based on the disclosed post-spin companies 2023 revenue and EBITDA margins, and assuming a modest recovery starting in 2H 2024 and continuing through 2025, it appears reasonable that the post spin companies would be able to earn $1.5 billion, $1.1 billion, and $355 million in respective 2025 EBITDA for New DuPont, New Electronics, and New Water. Valuing each piece at a slight discount their respective peer set, and incorporating current net debt and shares outstanding, on a preliminary sum-of-the-parts basis, shares of pre-spin DuPont could be assigned a fair value estimate of $90 per share.

SOLV Reports 1Q 2024 Results Including Positive Revenue Growth; Adjust FVE to $86 per share, Maintain BUY Rating

• On May 9, 2024, before the market open, Solventum Corp. (NYSE: SOLV) reported 1Q 2024 standalone results after being spun-off from 3M Corp. (NYSE: MMM) on April 1, 2024.
• Included in the earnings release, Solventum reported revenue growth of 0.2%, or 0.9% on an adjusted organic basis accounting for FX headwind of 0.4% and 0.3% decline from divestitures.
• SOLV maintained their 2024 guidance including an expected revenue decline of 2% to flat, adjusted EPS of $6.10 – $6.40, and free cash flow of $700 to $800 million.
• Management reiterated its priority for debt paydown over the next 24 months and announced it will not institute a cash dividend or share repurchases at this time. SOLV is currently levered at 3.3x net debt to our 2025 EBITDA estimate. By our estimates leverage could decline to ~2.7x by year end 2025 using.
• Since being spun out, Solventum shares have declined by 3.9% versus a decline in the S&P 500 of 1.1% over the same time period.
• Notably, the sell-off in shares, which was not totally unexpected as we viewed investor preference for 3M’s diversified business, has largely recovered from the stock’s closing low of $61.69 on April 15, 2024. Since the closing low shares have increased by 7.7% versus an increase of 2.5% in the S&P 500 over the same period.
• Despite the recent recovery in SOLV’s share price, we still view shares as attractively priced versus a basket medical device/supply companies and suggest that managements articulation of near-term challenges has appropriately set expectations. Management has stated that results for the remainder of 2024 will include a normalized pricing environment, SKU rationalization, FX headwinds, and stand-alone costs that include supply agreements with MMM.
• Given the low expectations for near-term growth, we suggest that any topline growth or management commentary implying a return to growth following the 2024 “reset year” (due to the above noted 2024 company specific issues) to more closely approximate that of the company’s end market growth rate (4% – 6%) would be viewed as a positive for shares.
• At yesterday’s closing price, shares of SOLV are trading at 8.7x our 2025 EBITDA estimate, about 10.5x the mid-point of this year’s EPS guidance, and yielding 7% at the mid-point of free cash flow guidance.
• While we remain positive on shares of SOLV, we adjust our fair value estimate to better reflect the current peer trading environment and lower our fair value estimate to $86 per share. Our revised fair value estimate is based on a 10.0x multiple of our unchanged 2025 EBITDA estimate of $2.2 billion.
• For reference a peer set across SOLV’s operating segments trades at approximately 12.5x the consensus 2025 EBITDA estimate, while peers to the MedSurg segment (Solventum’s largest revenue and profit contributor) trade at 11.5x consensus 2025 EBITDA estimate. (In general, we use JNJ as a proxy for the comparable set, which trades at 11.0x its 2025 consensus EBITDA estimate.)
• For more details, please refer to The Spin-Off Report dated March 8, 2024, and UPDATE dated April 1, 2024.

MATW reports mixed 2Q F2024 results and sets full-year adj. EBITDA guidance at ~$220 million (slightly below prior commentary); fair value estimate moves to $46 per share (from $51 per share)

Last night, after the market close, MATW reported 2Q F2024 consolidated sales down 1.7% to $471.2 million (versus consensus of $474.5 million) with a ~2.8% decline in adjusted EBITDA to $56.8 million (compared with consensus of $52 million). Adj. EPS were up 6.2% to $0.69 (versus $0.65 in the prior year period and consensus of $0.46).

By segment, Memorialization sales and adj. EBITDA were essentially flat at ~$222 million and $46.6 million, respectively, while sales at Industrial Technologies declined ~7.5%, as growth in energy storage was offset by declines in warehouse automation, to $116.1 million with adj. EBITDA of $10 million (compared with $15.6 million in the year ago period). At SGK, sales rose ~1.5% to ~$133 million while adj. EBITDA jumped ~39.5% to ~$15.4 million (as previous pricing and cost reduction actions are seemingly bearing fruit).

MATW ended 2Q F2024 with net debt of ~$797.3 million, including ~$45.5 million in cash and ~$842.8 million of debt, and a net leverage ratio of 3.6x (versus 3.7x at year end F2023 and 3.5x at the end of F2022). The company’s long-term target remains “at or below 3.0x” and management notes that improving its leverage profile is a “priority” in the remainder of F2024 (although the company anecdotally indicated that current stock levels make share repurchases a tempting option).

In terms of F2024 guidance, the company expects full year adjusted EBITDA of approximately $220 million, which we note is modestly below prior consensus of $230 million and compares with previous management commentary that suggested F2024 would be “another year of consolidated growth in sales and adj. EBITDA” (off the F2023 base of $225.8 million). The change primarily reflects customer delays within the energy storage solutions business as well as transitory weakness in the warehouse automation business (both within the Industrial Technologies segment).

We adjust our base case fair value estimate for MATW to $46 per share (from ~$51 per share), reflecting a blended multiple of ~9.5x multiple on our F2025E adjusted EBITDA of $~$236 million and net debt of ~$697 million (see Exhibit #1 on page 2).

PCS Research Group welcomes and encourages your feedback. Please feel free to call us if we can be of service.

NR posts solid improvements in segment-level profitability in 1Q 2024; maintains full-year Industrial Solutions segment guidance and still sees the strategic review at Fluid Systems being completed by “mid-year 2024”; fair value remains $10 per share

Last night, after the market close, Newpark posted 1Q 2024 consolidated sales of $169 million (compared with consensus of $171 million and $200 million in the year ago period) with adj. EBITDA of $21.8 million (compared with consensus of $16.35 million and $20.96 million in the year ago quarter).  Adjusted net income was $0.10 per share (versus $0.09 in the prior year period) while free cash flow (FCF) was ($0.8) million (versus $23.2 million in 1Q 2023 although we would note that management anecdotally expects to be FCF positive in the remaining quarters of 2024 and for the full year).

By segment, Fluid Systems posted 1Q 2024 sales of $120.1 million (compared with $144.2 million in 1Q 2023) with adj. segment EBITDA of $8.6 million (compared with $8.7 million in the year ago period), implying ~120 bps of margin improvement to 7.2%, while Industrial Solutions generated March-quarter sales of $49 million (versus $55.9 million in the year ago quarter) with adj. segment EBITDA of $18 million (compared with $19.7 million in the year ago period), implying ~150 bps of margin expansion to 36.8%.

NR ended 1Q 2024 with net debt of $39.7 million, including debt of $77.4 million and cash of $39.7 million, and a net leverage ratio of 0.5x (compared with 1.4x at the end of 2022 and 0.4x at the end of 2023).  

The company maintained its initial guidance for the Industrial Solutions segment, which calls for sales of $230-$240 million, implying growth of ~11%-16%, with adj. segment EBITDA of $80-$85 million, suggesting growth of 7.5%-14%.  Total Industrial Solutions segment capital expenditures are expected to be $30-$35 million in 2024E (of which ~75% is anecdotally expected to be deployed towards growth in the rental fleet).

For 2Q 2024 specifically, given a “strong start” to the quarter (in both rentals & product sales) management anecdotally expects total Industrial Solutions segment sales to be up15%-20% in the June-quarter.

The company did not provide any full-year guidance for the Fluid Systems business although management anecdotally expects segment sales to be down 15%-20 in 2Q 2024, as on-going weakness in the U.S. market are offset by strength in the company’s international business (most notably in Canada and the Eastern hemisphere), with an adjusted EBITDA margin profile in the “low-to-mid single digits”.

On the transactional front, management indicated that the on-going strategic review at Fluid Systems (managed by Lazard) continues to “move forward” and that management remained “optimistic” the process will be completed in “the first half” of 2024 (Anecdotally, management has previously noted that the due diligence process is “time intensive” given the scope/global nature of the business.)

For our part, aside from the incremental financial flexibility/opportunity for capital returns provided by a successful transaction for Fluid Systems we estimate a deal would precipitate a significant re-rating of NR shares toward a valuation more in-line with specialty rental & services peers as opposed to a legacy oilfield services provider (i.e., high single-digit to low double-digit multiples versus low- to mid-single digit-type valuations).

Our base case fair value for NR remains ~$10 per share based on an 8.5x blended multiple on 2025E adjusted EBITDA of $98.1 million, reflecting a 5.5x multiple at Fluid Systems and 9.5x at Industrial Solutions, while accounting for corporate costs and projected net debt (see Exhibit #1 on page 2).

PCS Research Group welcomes and encourages your feedback.  Please feel free to call us if we can be of service.

IAC to join the S&P SmallCap 600 Index, effective May 6th; 1Q 2024 results to be reported after the close on May 7th (with a conference call the following morning at 8:30 a.m. (ET)

Last night, after the market close, IAC announced that the company was set to join the S&P SmallCap 600 Index (replacing American Equity Investment Life Holding Co. following its acquisition by Brookfield Reinsurance on May 3rd).

The change will become effective prior to the market open on Monday, May 6, 2024.  Subsequently, the company will report 1Q 2024 results after the market close on Tuesday, May 7th and hold a conference call the following morning, May 8th, at 8:30 a.m. (ET).

Recall, IAC’s initial 2024 adjusted EBITDA guidance is $320-$420 million (compared with current consensus of ~$374 million). By segment, IAC expects adj. EBITDA of $280-$300 million and $120-$150 million at Dotdash Meredith and Angi, respectively. At Search and Emerging & Other, adj. EBITDA is expected to be $20-$40 million and $0-$20 million, respectively. (Notably, management’s outlook the Emerging & Other segment accounts for the ~$20 million impact from the pending $160 million sale of Mosaic, which is expected to close in 1Q 2024). Corporate costs are projected to be $90-$100 million while stock-based compensation and depreciation & amortization expenses are projected to be $120-$130 and $250-$270 million, respectively.

Notably, we highlight that the implied value of IAC’s so-called “stub” has remained relatively flat over the last several quarters, which, for context, represents among the lowest implied valuation we have seen over the last two years and a material discount to our fair value estimate of ~$3.015 billion (see Exhibits 1 & 2 on page #2).

In terms of valuation, among its private holdings, based on IAC’s guidance and commentary, as well as peer and M&A valuations, we value Dotdash Meredith at ~$22.50 per share and Emerging & Other at $12 per share, which awards per share values of $7 and ~$3.50 to Care.com and Vivian Health, respectively, while assigning zero value to the other businesses (i.e., The Daily Beast, IAC Films and Newco). Search’s profits are assumed to partially offset corporate costs, while Turo is valued at ~$4 per share. For its public holdings, based on slightly discounted prices, we value ANGI at ~$11.00 per share and MGM at ~$34 per share. Accounting for remaining corporate costs as well as net debt yields a total sum-of-the-parts value of ~$72 per share (with bull and bear cases of ~$89 and ~$40.50 per share, respectively; see Exhibit #3 on page 3).

GTX reports mixed results in the seasonally weak March-quarter but maintained its initial (albeit back-half weighted) full-year guidance; 2024E FCF guide implies a current yield of 14%-18%; the company endeavors to complete its $350 million share repurchase authorization during 2024 and made a $100 million early debt repayment so far in 2Q 2024; our fair value remains ~$12.50 per share

This morning, before the market open, GTX reported 1Q 2024 sales down 6% (or 5% on a constant currency basis) to $915 million as softness in gasoline, diesel & commercial vehicle sales (primarily in Europe) amid on-going supply chain disruptions as well as commodity-driven deflation in prices were partially offset by aftermarket strength in North America, Brazil and China. Adjusted EBITDA fell ~10% to $151 million (reflecting 80bps of margin degradation to 16.5%). Adj. net income and adj. free cash flow (FCF) were $61 million and $68 million, respectively (versus $81 million and $88 million in the prior year period).

On the capital allocation front, management repurchased $109 million worth of shares 1Q 2024 (or ~11.95 million shares at an average cost $9.11), of which we note the bulk were completed in March, and ended the year with a net leverage ratio of 2.3x (versus 2.2x at the end of 2023). Subsequent to the end of 1Q 2024, in early-April, the company divested an equity interest in an unconsolidated joint venture for proceeds of $46 million as well as made a $100 million early debt repayment on its Term Loan B (due 2028).

Anecdotally, the company indicated that its aggregate diluted share count at quarter-end was ~227 million (compared to the 1Q 2024 average of ~239 million) and assuming it can be accomplished at reasonable prices management endeavors to complete the remaining $241 million on its most recent $350 million share repurchase authorization during 2024. (As well, while not providing specific guidance management did not quibble with the contention that the diluted share count could be ~210 million or below at year end).

On the guidance front, GTX maintained its initial 2024E guidance, which calls for sales of $3.8-$3.95 billion, adj. EBITDA of $590-$650 million, net income of $230-$275 million and adj. FCF of $325-$425 million (see Exhibit #1 on page 2). Anecdotally, the company expects a stronger 2H 2024 with results sequentially better in 2Q 2024 (versus 1Q 2024) but softer on a year-over-year basis.

Underlying assumptions include a Euro/Dollar exchange rate of 1.08 to 1, RD&E investments and capital expenditures at 4.5% and 2.2% of sales, respectively (of which ~60% and 30% will be focused on zero emission technology).

On the latter electric vehicle (EV) or zero-emission vehicle (ZEV) front, GTX continues to garner pre-development projects for its E-Powertrain, E-Cooling Compressor and H2 Fuel Cell solutions/systems and it indicates it is “on target to achieve” ~$1 billion of EV/ZEV sales (at or above the company’s existing margin profile) by 2030. Additionally, the company indicates that it secured two new awards in its large industrial turbo product set, a new vertical for GTX, which serves the power generation market (driven by the global expansion of data center infrastructure).

In terms of the longer-term outlook, on which we note that management has solid visibility considering ~80% of sales over the next 5-years have already been award by its OEM customers, we concur with management’s contention that the core turbocharger business will be bigger in 2030 than it is today and that GTX will generate free cash that equals or exceeds the company’s current market capitalization over the next five years. (As well, in terms of allocating that capital, management will continue to repurchase shares, reduce leverage and may ultimately instate a dividend.)

Our base case fair value estimate for GTX remains ~$12.50 per share, reflecting an 8.5x multiple on our 2025E adjusted net income forecast of ~$305 million (previously ~$314.5 million) and a fully diluted share count of ~210 million (previously~ 216 million; see Exhibit #3 on page 2)

PCS Research Group welcomes and encourages your feedback. Please feel free to call us if we can be of service.

Last night, APG announced and priced an 11 million share secondary offering at $37.50 per share; maintain $40 per share fair value

• Last night, after the market close, APi Group (APG) announced (and subsequently priced) a secondary offering of 11 million common shares at $37.50 per share.
• Proceeds from the offering are expected to be ~$412.5 million (excluding fees/expenses) and be deployed toward “general corporate purposes”, including “capital expenditures, working capital and acquisitions”.  [Note: the company has granted its underwriters, led by Citigroup and UBS, a 30-day overallotment option for an additional 1.65 million shares.]  The offering is expected to close on April 19^th.
• For context, recall that earlier this week, on April 15^th, APG announced an agreement to acquire Elevated Facility Services for ~$570 million in cash; the transaction is expected to close in 2Q 2024.
• As previously described, Elevated provides APG entry into the ~$10 billion elevator & escalator services market, and generates ~$220 million of annual sales, of which ~70% comes from inspections, services & repairs (compared with APG’s consolidated mix of ~52% in 2023) with a ~20% adj. EBITDA margin profile (versus APG’s consolidated margin profile of 11.3% in 2023),
• By implication, the deal could be expected to add ~$44 million of incremental annual EBITDA and was priced at ~12.95x.
• In our view, the pending transaction looks accretive toward APG’s previously articulated 2025E goals of generating ~60% of consolidated sales from inspections, services & repairs as well as its 13%-plus adj. EBITDA margin and ~80% free cash flow conversion targets.
• Concurrent with the acquisition announcement, APG adjusted its previous/initial 1Q 2024 guidance, which currently calls for March-quarter sales of $1.59-$1.61 billion (versus its previous range of $1.56-$1.61 billion) with adj. EBITDA of $172-$177 million (versus initial guidance of $165-$180 million; see Exhibit #1 on page 2).  Adj. free cash flow is expected to be “ahead of last year”, in-line with seasonality.
• Management made no adjustment to its initial (i.e., pre-Elevated acquisition) full-year 2024E guidance, which called for consolidated sales of $7.05-$7.250 billion with adj. EBITDA of $855-$905 million and an adj. FCF conversion ratio of ~70% (see Exhibit #1 on page 2).
• Our base case fair value estimate for Api Group (APG) remains ~$40 per share, reflecting a blended multiple of ~12.5x on F2025E adjusted EBITDA of ~$1.01 billion along with projected net debt of ~$1.4 billion (previously $1.835 billion) and a diluted share count of ~281.5 million (previously 270.5 million; see Exhibit #2 on page 2).

Drop Coverage of Worthington Enterprises Inc. and Worthington Steel Inc. Effective Immediately

• On December 1, 2023, before the market open, Worthington Enterprises Inc. (NYSE: WOR) (formerly Worthington Industries) completed the spin-off of its steel business into a stand-alone publicly traded company named Worthington Steel Inc. (NYSE: WS).
• Given the transaction has now passed our coverage mandate of 90 days post-spin, we DROP coverage of Worthington Enterprises and Worthington Steel effective immediately.
• Our prior estimates and fair values for WOR and WS should no longer be relied on.