Ingersoll Rand Inc. annual report, FY2018

Business context and reporting period

The supplied filing is Gardner Denver Holdings, Inc.’s Form 10-K for the year ended December 31, 2018, filed February 27, 2019—not an Ingersoll Rand Inc. filing. Gardner Denver provided flow-control and compression equipment and aftermarket parts and services through Industrials, Energy and Medical segments. It reported operations in more than 175 countries. Aftermarket sales were 39.2% of 2018 revenue.

Financial performance and liquidity

Amounts are in U.S. dollars; millions except per-share data.

Fourth-quarter 2018 revenue was $712.7 million versus $665.0 million a year earlier; operating income was $134.1 million versus $77.9 million, net income was $94.5 million versus $143.8 million, and Adjusted EBITDA was $189.8 million versus $172.6 million.

Segment results in 2018: Industrials revenue of $1,303.3 million and Adjusted EBITDA of $288.2 million (22.1% margin); Energy revenue of $1,121.1 million and EBITDA of $337.8 million (30.1% margin); Medical revenue of $265.4 million and EBITDA of $75.0 million (28.3% margin).

At year-end, cash was $221.2 million and total debt was $1,672.1 million, down from $2,040.2 million in 2017; approximate net debt was $1,450.9 million. Current assets were $1,331.2 million and current liabilities $596.4 million. The company reported $263.4 million of unused revolving-credit availability and $83.3 million under its receivables facility, and said it complied with debt covenants. Most term debt matures in 2024. Cash declined by $172.1 million during 2018, including $337.6 million of debt repayments, $40.7 million of treasury-stock purchases and $186.3 million of cash paid for acquisitions.

Changes versus the prior comparable period

• Revenue growth reflected higher upstream-energy sales, other-market volume including acquisitions, pricing and favorable currency effects. Energy remained the largest segment by EBITDA; upstream-exposed markets were a significant contributor to growth.
• Gross margin edged down 0.2 percentage points, reflecting higher materials and manufacturing costs, product mix and original-equipment growth outpacing aftermarket growth in Industrials.
• Operating income rose sharply, in part because 2017 included substantial stock-based compensation and debt-extinguishment costs. Other operating expense fell to $9.1 million from $222.1 million; 2017 included approximately $175 million of stock-based compensation and $84.5 million of debt-extinguishment loss.
• Interest expense fell to $99.6 million from $140.7 million, principally after debt repayments and refinancing. Operating cash flow and free cash flow increased; cash on hand nevertheless fell, partly due to acquisitions, debt repayment and repurchases.

Outlook, risks and unusual items

• Management expected 2019 capital expenditures of approximately $50–$60 million. It described the industrial outlook as slower but positive, expected upstream-energy growth to slow with some factors potentially declining, and characterized midstream/downstream and petrochemical demand as relatively stable. Medical demand was expected to benefit from secular healthcare trends. No numerical full-year revenue or earnings guidance was provided.
• Fourth-quarter segment orders were mixed: Industrials $322.5 million, up 4% constant currency; Energy $269.5 million, down 3%; Medical $65.8 million, up 1%. Management cautioned that upstream demand is exposed to oil and gas price and activity volatility.
• Four 2018 acquisitions contributed $108.0 million of post-acquisition revenue. The company also announced restructuring actions, recording $12.7 million of charges in 2018 and expecting further workforce optimization and facility consolidation in the first half of 2019.
• The Tax Cuts and Jobs Act affected comparability: 2017 included major deferred-tax benefits and transition-tax items; 2018 included $11.9 million of tax expense for GILTI. The 2018 tax provision was $80.1 million (22.9% effective rate), compared with a $131.2 million tax benefit in 2017.
• Asbestos-related litigation reserve was $105.8 million, with a probable insurance-recovery receivable of $103.0 million; significant expected future recoveries depend in part on ongoing insurer litigation. Environmental liabilities accrued were $6.9 million. Management said these matters were not expected to be material based on information then available, while acknowledging litigation and recovery uncertainty.
• Key risks include upstream-energy cyclicality, foreign exchange exposure (56% of revenue from outside the U.S.), raw-material and single-source supplier risks, substantial variable-rate debt, and potential asbestos, environmental and product-liability costs. Goodwill and other intangible assets totaled $2,657.9 million, or 59% of total assets; no goodwill impairment was recorded in 2018.
• ASC 606 was adopted in 2018 using the modified retrospective method. The filing’s comparison indicated that, without ASC 606, reported 2018 revenue would have been $26.5 million lower and net income $8.4 million lower. The auditor reported effective internal control over financial reporting and issued an unqualified opinion on the financial statements.

Important facts for investors to verify

1. Confirm the registrant: the supplied 10-K is for Gardner Denver Holdings, Inc.; the request identifies Ingersoll Rand Inc.
2. Review the sustainability of 2018 cash generation and the working-capital contribution, including delayed collections from some upstream customers and increased vendor-payment terms.
3. Assess debt-service capacity, variable-rate exposure, the 2024 term-loan maturity and restrictions under credit agreements.
4. Separate recurring operating performance from adjusted metrics and unusual 2017 stock-compensation, tax and debt-refinancing effects.
5. Track upstream-energy orders and activity, aftermarket mix, restructuring savings, acquisition integration and the resolution and collectability of asbestos insurance recoveries.