Ingersoll Rand Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Ingersoll Rand completed its merger with Ingersoll Rand Industrial on February 29, 2020; Q1 results include the acquired business from the acquisition date and are not directly comparable with 2019. The filing was delayed under SEC relief related to COVID-19. Amounts below are in millions, except per-share data and percentages.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $799.9 | $620.3 |
| Gross profit / margin | $244.5 / 30.6% | $230.5 / 37.2% |
| Operating income (loss) | $(66.8) | $80.2 |
| Net income (loss) | $(36.8) | $47.1 |
| Diluted EPS | $(0.13) | $0.23 |
| Adjusted EBITDA / margin | $147.8 / 18.5% | $139.0 / 22.4% |
| Operating cash flow | $68.4 | $68.8 |
| Capital expenditures / free cash flow | $8.3 / $60.1 | $14.1 / $54.7 |
Reported revenue rose 29.0%, principally reflecting the acquisition, while lower volume, weaker High Pressure Solutions pricing and foreign exchange partly offset the increase. Management attributed $294.9 of revenue to acquisitions and cited a $102.5 volume decline. Unaudited pro forma combined revenue was $1,269.8 versus $1,500.0 in Q1 2019; pro forma net loss was $0.2 versus $110.5. These pro forma figures are informational and are not forecasts. Gross and adjusted EBITDA margins declined, reflecting acquisition mix, purchase-accounting inventory step-up costs and weaker organic activity. Other operating expense increased to $100.7, including $41.6 of restructuring charges and $55.0 of acquisition-related expenses and non-cash charges.
Segments
| Segment | Revenue | Adjusted EBITDA | Margin |
|---|---|---|---|
| Industrial Technologies and Services | $504.0 | $94.8 | 18.8% (21.1% prior year) |
| Precision and Science Technologies | $112.9 | $32.9 | 29.1% (unchanged) |
| High Pressure Solutions | $96.4 | $23.5 | 24.4% (30.8% prior year) |
| Specialty Vehicle Technologies | $86.6 | $14.1 | 16.3% (no prior-period segment comparison) |
High Pressure Solutions revenue fell 29.1% and segment Adjusted EBITDA fell 43.8%, as lower oil prices weakened upstream demand and pricing. Comparisons for the other segments are affected by the merger and reorganized reporting segments.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $555.7 at March 31, 2020, versus $505.5 at December 31, 2019.
- Total debt, including current maturities, was $3,462.8, up from $1,611.4; approximate net debt was $2,907.1. Long-term debt was primarily term loans due in 2027.
- The $1,000 revolving credit facility had no borrowings, $44.7 of letters of credit and $955.3 of unused availability. The receivables financing facility had $65.9 of unused availability and $26.7 of letters of credit outstanding.
- Management reported compliance with debt covenants. It stated that cash, operating cash flow and available facilities were expected to cover foreseeable needs, while warning that a further deterioration from COVID-19 could constrain cash generation or access to borrowing.
- Net working capital was $1,539.4, compared with $969.3 at year-end; management attributed much of the increase in operating working capital to acquired balances.
Material changes, outlook and risks
- The $6,937.0 acquisition consideration was primarily stock. The preliminary purchase-price allocation included $4,278.2 of goodwill and $4,501.3 of identifiable intangible assets and remained subject to revision. Acquired Ingersoll Rand Industrial contributed $293.4 of Q1 revenue and a $33.3 net loss, including purchase-accounting effects.
- The company expects approximately $350 of restructuring and transformation costs over 2020–2022 and approximately $250 of annualized cost synergies by the end of 2022. It also expects approximately $100 of acquisition stand-up costs.
- No consolidated earnings or revenue guidance was provided. Management described near-term visibility as limited because of COVID-19. It reported Q1 orders of $567.5 for Industrial Technologies and Services, $130.8 for Precision and Science Technologies, $83.5 for High Pressure Solutions and $62.4 for Specialty Vehicle Technologies. Respirator and ventilator-related demand benefited Precision and Science Technologies; hospitality and golf weakness was expected to weigh on Specialty Vehicle Technologies.
- COVID-19 had reduced demand and disrupted some facilities; the duration and financial impact were uncertain. The sharp oil-price decline and upstream energy weakness added pressure. Other material exposures include foreign currency and variable-rate debt, customer and supplier disruption, and potential impairment of goodwill or intangibles if adverse conditions persist.
- Asbestos and silica litigation reserves were $116.3, with a related probable insurance recovery receivable of $122.4; recovery depends in part on ongoing insurer litigation. Environmental liabilities accrued were $8.8. Management did not expect these matters to be material based on information then available, but outcomes remain uncertain.
Most important facts for investors to verify
- Separate acquisition-driven reported growth from underlying demand: confirm the effect of COVID-19, volume and pricing trends, and the interpretation of pro forma revenue.
- Track integration costs, the preliminary purchase-price allocation, realization of the $250 annualized synergy target, and whether total restructuring and stand-up costs exceed current estimates.
- Monitor cash conversion and working-capital needs alongside debt service, variable interest exposure, covenant compliance and actual availability under credit facilities.
- Assess the duration and severity of pandemic and oil-market effects, particularly for energy, golf and hospitality end markets, and any resulting goodwill or intangible-asset impairment risk.
- Review developments in asbestos insurance recovery litigation and the adequacy of related reserves and receivables.