Ingersoll Rand Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Ingersoll Rand is a global industrial technology company reporting Industrial Technologies and Services (ITS) and Precision and Science Technologies (PST). Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $1,738.9 | $1,515.7 | $5,054.7 | $4,292.6 |
| Gross profit / margin | $739.3 / 42.5% | $575.3 / 38.0% | $2,101.0 / 41.6% | $1,671.2 / 38.9% |
| Operating income / margin | $318.4 / 18.3% | $190.0 / 12.5% | $831.1 / 16.4% | $544.4 / 12.7% |
| Net income attributable to Ingersoll Rand | $208.3 | $145.1 | $548.9 | $387.3 |
| Diluted EPS | $0.51 | $0.36 | $1.34 | $0.94 |
| Adjusted EBITDA / margin | $461.5 / 26.5% | $376.1 / 24.8% | $1,286.3 / 25.4% | $1,014.6 / 23.6% |
| Operating cash flow | $397.3 | $274.4 | $796.0 | $510.6 |
| Free cash flow | $368.7 | $252.6 | $720.2 | $449.5 |
Q3 revenue rose 14.7%; management attributed the increase principally to acquisitions, pricing, favorable currency effects and modest organic volume growth. Gross-margin improvement reflected pricing increases exceeding material and labor inflation. Nine-month revenue rose 17.8%, driven by pricing, acquisitions and organic volume, partly offset by unfavorable currency. Free cash flow is a non-GAAP measure defined as operating cash flow less capital expenditures.
Segments and period-over-period developments
- ITS: Q3 revenue increased 19.1% to $1,428.4 million; Segment Adjusted EBITDA rose 30.9% to $410.9 million, and margin expanded to 28.8% from 26.2%. Q3 orders declined 0.6%, including an 8.7% organic decline, partly offset by acquisitions and currency. For nine months, revenue increased 21.7% and Segment Adjusted EBITDA increased 32.9%.
- PST: Q3 revenue declined 1.8% to $310.5 million, while Segment Adjusted EBITDA increased 2.4% to $94.2 million and margin rose to 30.3% from 29.1%. Q3 orders declined 2.8%. For nine months, revenue increased 3.1% and Segment Adjusted EBITDA increased 9.4%, but orders declined 4.6%.
- Consolidated Q3 net income increased despite higher selling and administrative expenses, taxes and interest expense. Nine-month interest expense was $119.3 million versus $68.8 million; the weighted-average borrowing rate including derivatives was approximately 5.3% versus 2.7%.
Financial position, debt and liquidity
- At September 30, 2023, cash and equivalents were $1,197.5 million; total debt was $2,733.2 million, implying approximate net debt of $1,535.7 million. At December 31, 2022, cash was $1,613.0 million and total debt $2,752.6 million.
- Current assets were $3,733.4 million and current liabilities $1,654.7 million. Operating working capital increased to $1,423.7 million from $1,194.2 million at year-end, mainly reflecting lower accounts payable and higher receivables and inventories.
- The company issued $1.5 billion of senior notes in August, with coupons of 5.400% due 2028 and 5.700% due 2033, and used proceeds to repay part of its secured term debt. It also extended the revolving credit facility maturity to 2028 and increased commitments to $2.0 billion. The full $2.0 billion was unused at quarter-end; the company reported compliance with debt covenants.
- Nine-month investing cash outflow was $991.7 million, including $923.8 million of net acquisition payments. Cash decreased $415.5 million over the period.
Outlook, risks and unusual items
- The filing provides no specific financial guidance. Management said operating cash flow and available revolver capacity are expected to fund obligations, working capital, debt service and capital spending for the foreseeable future, while noting that cash generation and future borrowing availability are not assured.
- Management cited pricing, inflation and product mix, interest rates, foreign exchange, global economic conditions, supply chains, acquisitions and integration, and customer demand as factors that could affect results. Approximately 56% of nine-month revenue was denominated in currencies other than the U.S. dollar.
- A cybersecurity incident detected April 27, 2023 disrupted several IT systems. The company reported workarounds and said it did not expect a material financial impact; it was not aware of confidential customer information being exfiltrated. Non-recoverable incident costs included in adjusted-result reconciliations were $2.3 million for the nine months.
- Q3 included a $12.6 million loss on extinguishment of debt; the nine-month amount was $13.5 million. The nine-month effective tax rate increased to 23.3% from 21.1%, including a discrete tax cost from a change in tax-law guidance.
- The company reported a $130.4 million asbestos litigation reserve and approximately $153.9 million of probable insurance recoveries. It stated that pending and future asbestos and silica claims were not expected, in aggregate, to materially affect results, but noted actual liabilities or recoveries could differ. Environmental liabilities accrued were $14.8 million.
- 2023 acquisitions included SPX FLOW Air Treatment and Howden Roots, among others. The company reported $938.5 million of total consideration for 2023 acquisitions and noted that purchase accounting for Roots and other third-quarter acquisitions remained preliminary.
Important facts for investors to verify
- Whether ITS order trends and the declines in Q3 orders at both segments persist, and how they translate into future revenue.
- How much margin improvement is sustainable as pricing, cost inflation, product mix and acquisition contributions change.
- Cash conversion and working-capital needs, particularly receivables, inventory and payables, alongside continued acquisition spending.
- Debt-service costs and refinancing flexibility under variable-rate borrowings, as well as continued covenant compliance and access to the revolver.
- Developments in the cybersecurity investigation and the adequacy of asbestos, silica and environmental reserves and related insurance recoveries.