Steel Partners Issues Letter to Fellow Shareholders Regarding Its Vision for Enhanced Value Creation at Aerojet Rocketdyne
Fellow Shareholders,
Steel Partners is one of the largest shareholders of
We recently nominated seven highly qualified director candidates, including four sitting Board members with extensive business leadership experience and strong track records of value creation, for election to Aerojet Rocketdyne’s Board at this year’s Annual Meeting. We believe the four other sitting Board members, including Chief Executive Officer
We believe you – our fellow shareholders – have a critical choice to make in the coming weeks and months:
- Support our aligned and experienced slate, which has already established a vision for enhanced value creation.
- Support a seemingly misaligned faction that we contend lacks credibility and vision.
We feel the choice between Steel Partners’ slate and Ms. Drake’s slate should come down to credibility and vision. When evaluated through that lens, we expect the right choice will be clear.
With respect to credibility, we feel our more than
On the other hand, we question whether
We find it notable that
In due course, we will release our own presentation that copiously details Steel Partners’ case for change, nominee qualifications and strategy for value creation. Our slate will do its best to be comprehensive while remaining fully mindful of its inability to disclose or opine on non-public information. We see a path to helping the Company’s Defense and Space units start achieving enhanced operating profits and cash flow. We believe improved unit profit performance, coupled with corporate cost reductions, could position
Here is an overview of the priorities we will expand on in our presentation:
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Capital Structure & Capital Allocation Improvements
We see significant opportunities to optimize the capital structure and more effectively allocate the Company’s considerable cash.Aerojet Rocketdyne had approximately in cash at the end of the fiscal year, which is generating next to no return for shareholders. Given that the Company’s customer relationships fund most of its research and development, our nominees want to explore returning up to$700 million in cash to shareholders via share and convertible debt repurchases.$400 million
Our nominees would also endeavor to refinance the Company’s line of credit and debt coming due in 2023, effectively providing more flexibility during what remains a low interest rate environment relative to historical norms.
In the intermediate term, our nominees would explore divestitures of real estate holdings, non-core assets and underperforming business units on a tax efficient basis, which could yield more than in proceeds based on our estimates. Our nominees would also aim to trim excessive corporate overhead and spending, including on government affairs, public relations and high-priced external consultants. All of this could potentially free up even more capital for opportunistic share repurchases or a special dividend.$200 million
We believe the successful implementation of the Competitive Improvement Program (“CIP”) has positioned the Company well. Nonetheless, there remains opportunity to further lean out the business by reducing overhead and administrative costs and limiting production inefficiencies. Over the next three years, our own analysis suggests that to$20 million in corporate cost reductions are achievable.$25 million
Naturally, we are also cognizant of reinvestment in the business. Our nominees would look to allocate capital to forward-looking research and development initiatives that customers are not yet funding. Another area of emphasis for us is human capital, especially following a period of apparent uncertainty and turnover.
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Business Unit Improvements
In our view, the Company’s Defense and Space segments are materially underperforming their potential. We see opportunities to meaningfully grow the Defense unit’s sales and the Space unit’s sales over the next three years. Likewise, we feel low double-digit margins can be expanded to strong double-digit margins with significantly better cash flows.
In Defense, our independent analysis leads us to believe that several mature programs in missile defense and tactical systems and armaments may not be meeting their sales, profit or cash flow potential. This type of underperformance is often due to quality issues in the build process, which disrupt manufacturing flow and on-time deliveries. We are concerned that these types of quality issues could be driving up labor costs and eroding customer confidence due to excessive delays.
If these issues were avoided and programs would have met their targets in fiscal year 2021, we believe it would have resulted in tens of millions of dollars in profit and brought the unit’s operating profit to a mid-teens level. We feel averting these issues and hitting targets also would have had a positive impact on cash flows.
If Defense can maintain a healthy backlog of solid rocket motor orders, continuing to service underperforming product lines should be analyzed. In addition to exiting any underperforming product lines, our nominees would perform an extensive evaluation of specialized manufacturing facilities that are not accretive to the business.
Based on our analysis, the Space unit’s cash flow position can also be greatly enhanced with program improvements. However, additional diligence on future advanced space programs' contract payment terms will be necessary. Our nominees would likely pursue alternative payment terms and subsequent supplier subcontract arrangements on applicable programs to ensure a positive cash flow position.
At bottom, we fear that execution issues are costing the Company money and reputational currency in the industry. We estimate that there is up to in annual waste and leakage alone that could be addressed with our slate assembling the right leadership team and prioritizing operational rigor.$50 million
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Executive Compensation and Corporate Governance Improvements
Moving forward, we believe the Company’s executive compensation policies need to be realigned. Executives should have the vast majority of their incentive compensation tied to shareholder returns, not nebulous non-GAAP and adjusted metrics. Executives should have equity compensation with a sizable performance-based vesting component, instead of a majority of equity compensation being tied to just time served.
Our nominees would also aim to modify executives’ change-in-control compensation to limit perverse incentives if a deal opportunity emerges. We would also take steps to improve the Company’s corporate governance profile, including reducing the threshold for allowing shareholders to call special meetings.
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Strategic Alternatives
If elected, our nominees plan to implement a two-pronged strategy that entails implementing a new operating plan focused on profitably growing over the long-term and reviewing strategic alternatives that could maximize shareholder value in the immediate-term. Our slate would take steps to ensure the Company is properly shopped. If and when a deal were to be reached, we would also take steps to secure a break fee and other terms to protect shareholders’ interests. We feel it is absolutely critical for an aligned and long-term shareholder to be actively involved in this process, rather than ceding control toMs. Drake and her faction.
We look forward to sharing appropriate details regarding our strategy in the near-term. Of course, if there is an opportunity to reach a negotiated resolution with
Founder and Executive Chairman
Steel Partners Holdings L.P.
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About Steel Partners Holdings L.P.
Steel Partners Holdings L.P. is a diversified global holding company that owns and operates businesses and has significant interests in leading companies in various industries, including diversified industrial products, energy, defense, supply chain management and logistics, banking and youth sports.
Certain Information Concerning the Participants
THE STEEL PARTNERS GROUP STRONGLY ADVISES ALL STOCKHOLDERS OF THE COMPANY TO READ THE PROXY STATEMENT AND OTHER PROXY MATERIALS AS THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. SUCH PROXY MATERIALS WILL BE AVAILABLE AT NO CHARGE ON THE
The participants in the proxy solicitation are anticipated to be
As of the date hereof,
Forward-Looking Statements
This press release contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that reflect Steel Partners Holdings L.P.’s (“SPLP”) current expectations and projections about its future results, performance, prospects and opportunities. SPLP identifies these forward-looking statements by using words such as "may," "should," "expect," "hope," "anticipate," "believe," "intend," "plan," "estimate," "will" and similar expressions. These forward-looking statements are based on information currently available to SPLP and are subject to risks, uncertainties and other factors that could cause its actual results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. These factors include, without limitation, the adverse effects of the COVID-19 pandemic to SPLP’s business, results of operations, financial condition and cash flows; material weaknesses in SPLP’s internal control over financial reporting; fluctuations in crude oil and other commodity prices; substantial cash funding requirements that may be required in the future as a result of certain of SPLP’s subsidiaries’ sponsorship of defined benefit pension plans; significant costs, including remediation costs, as a result of complying with environmental laws or failing to comply with other extensive regulations, including banking regulations; the impact of climate change legislation or regulations restricting emissions of greenhouse gases on costs and demand for SPLP’s services; impacts to SPLP’s liquidity or financial condition as a result of legislative and regulatory actions; SPLP’s ability to maintain sufficient cash flows from operations or through financings to meet its obligations under its senior credit facility; risks associated with SPLP’s business strategy of acquisitions; losses sustained in SPLP’s investment portfolio; the impact of interest rates on SPLP’s investments, such as increased interest rates or the use of a SOFR based interest rate in SPLP’s credit facilities; reliance on the intellectual property owned by others and SPLP’s ability to protect its own intellectual property and licenses; risks associated with conducting operations outside of
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1 Press release entitled “Steel Partners Pleased by Court’s Decision to Grant Temporary Restraining Order Preventing the Unauthorized Use of Aerojet Rocketdyne’s Resources in Connection With 2022 Annual Meeting,” issued on
View source version on businesswire.com: https://www.businesswire.com/news/home/20220314005282/en/
mharnett@okapipartners.com
gmarose@longacresquare.com / ckiaie@longacresquare.com
Source: Steel Partners Holdings L.P.