Filing summary: Gardner Denver Holdings, Inc. — fiscal year ended December 31, 2017
Entity caveat: The supplied filing is Gardner Denver Holdings, Inc.’s Form 10-K, not an Ingersoll Rand Inc. filing. Confirm the issuer before relying on this summary.
Business context and reporting period
Gardner Denver is a global manufacturer of flow-control and compression equipment, pumps, vacuum and blower products, and related aftermarket parts and services. It reports Industrials, Energy and Medical segments. This annual report covers the year ended December 31, 2017; quarterly figures below include the fourth quarter. The company completed its IPO in May 2017 and remained controlled by KKR at year-end.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $2,375.4 million | $1,939.4 million |
| Gross profit / margin | $897.9 million / 37.8% | $716.7 million / 37.0% |
| Operating income | $108.7 million | $104.3 million |
| Net income (loss) | $18.5 million | $(31.3) million |
| Adjusted EBITDA / margin | $561.5 million / 23.6% | $400.7 million / 20.7% |
| Operating cash flow | $200.5 million | $165.6 million |
| Capital expenditures | $56.8 million | $74.4 million |
| Free cash flow (non-GAAP) | $143.7 million | $91.2 million |
| Cash and cash equivalents at year-end | $393.3 million | $255.8 million |
| Total debt at year-end | $2,040.2 million | $2,778.3 million |
FY 2017 revenue rose 22.5%, primarily from recovery in upstream energy markets. Aftermarket sales were 41.3% of consolidated revenue, up from 34.7%. Segment results were: Industrials revenue of $1,130.7 million and Adjusted EBITDA of $242.7 million (21.5% margin); Energy $1,014.5 million and $296.1 million (29.2%); Medical $230.2 million and $62.4 million (27.1%).
Fourth-quarter 2017 revenue was $665.0 million versus $577.7 million in Q4 2016; net income was $143.8 million versus a $4.3 million loss; and Adjusted EBITDA was $172.6 million versus $148.3 million. The quarter’s net income includes a substantial tax benefit and should not be read as a measure of recurring earnings.
At year-end, unused availability was $352.6 million under the revolving credit facility and $66.8 million under the receivables financing agreement. The company reported compliance with debt covenants. Operating working capital was $705.0 million, or 29.7% of annual revenue, versus $611.7 million, or 31.5%, in 2016.
Material changes versus the prior comparable period
- Revenue increased 22.5%; management attributed most of the increase to upstream energy-exposed markets, which contributed $405.5 million of growth.
- Energy segment revenue rose 61.4% and Adjusted EBITDA increased 105.9%, reflecting the recovery in North American drilling and hydraulic-fracturing activity. Industrials revenue rose 4.5%; Medical revenue increased 0.7%.
- Adjusted EBITDA margin expanded to 23.6% from 20.7%. GAAP operating income rose only modestly, while reported net income moved to profit.
- Operating cash flow increased, but working capital used $55.0 million of cash, primarily as receivables and inventory rose with higher sales and anticipated Energy demand.
- IPO proceeds supported debt reduction, and August refinancing extended term-loan maturities to 2024. Total debt declined by about $738 million year over year.
Outlook, management commentary, risks and unusual items
- Management described improving industrial conditions and expected the Energy recovery to continue, highlighting stronger Q4 orders: Industrials orders rose 25% year over year and Energy orders 62%. No consolidated full-year revenue or earnings guidance is provided in the supplied text.
- Management expected 2018 capital expenditures of approximately $65–$75 million. It cited secular medical-market demand and anticipated growth in U.S. drilling activity, while noting the Energy business remains sensitive to oil and gas prices and activity levels.
- 2017 results include $194.2 million of stock-based compensation, a $16.2 million KKR monitoring-agreement termination fee, and an $84.5 million loss on debt extinguishment. These items materially affect comparisons between GAAP and adjusted results.
- The Tax Cuts and Jobs Act generated a reported $131.2 million income-tax benefit, including a provisional $89.6 million benefit from the U.S. corporate rate reduction, partly offset by a $63.3 million transition-tax expense and a $69.0 million reduction in a repatriation-related deferred tax liability. Accounting for some provisions, including GILTI, remained incomplete.
- Key risks include energy-market cyclicality, foreign-exchange exposure, variable-rate debt, significant leverage, raw-material and supplier disruption, hydraulic-fracturing regulation, and execution of restructuring and growth plans. Goodwill and other intangible assets totaled $2,658.8 million, or 58% of total assets.
- Asbestos-related litigation reserves were $105.6 million, with a $100.4 million receivable for probable insurance recoveries; recovery depends in part on continuing insurer litigation. Environmental liabilities accrued were $7.5 million. Management stated it did not expect these matters to have a material adverse effect, but outcomes remain uncertain.
- After year-end, the company acquired Runtech Systems Oy for approximately $93 million in cash. This transaction was not part of FY 2017 results.
Most important facts for investors to verify
- Confirm that Gardner Denver Holdings, Inc.—rather than Ingersoll Rand Inc.—is the intended issuer and filing.
- Review segment disclosures and order trends to assess how much 2017’s growth depends on a continued upstream Energy recovery.
- Reconcile GAAP earnings to Adjusted EBITDA and assess the recurring costs excluded from the non-GAAP measures, especially stock compensation and restructuring-related items.
- Review debt terms, maturities, interest-rate hedges and covenant headroom; substantial debt remained despite the IPO-funded repayment.
- Check final tax-accounting updates and the eventual effect of the new tax law on cash taxes and repatriation.
- Monitor collections, inventory and working-capital conversion, and the outcome of asbestos-insurance litigation.