Filing summary
Entity and period: This is Gardner Denver Holdings, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2018—not a filing under the name Ingersoll Rand Inc. The company makes flow-control and compression equipment and related aftermarket products and services, reporting Industrials, Energy and Medical segments. Unless otherwise noted, amounts are in millions of U.S. dollars.
Financial performance
- Revenue: $619.6, up 28.6% from $481.7. Management attributed growth to stronger upstream Energy demand, higher volume, favorable foreign exchange and pricing. Approximately 51% of revenue was denominated in currencies other than the U.S. dollar.
- Profit and margins: Gross profit was $231.9 (37.4% margin), versus $174.6 (36.2%). Operating income was $89.8, compared with $36.8. Net income attributable to Gardner Denver was $42.4, or $0.20 diluted EPS, versus a $7.1 loss, or $0.05 loss per share.
- Adjusted measures: Adjusted EBITDA was $148.2, up from $92.1; margin increased to 23.9% from 19.1%. Adjusted net income was $80.7, versus $20.1. These are non-GAAP measures.
- Segments: Industrials revenue was $316.9 and Segment Adjusted EBITDA $66.8; Energy was $242.2 and $68.0; Medical was $60.5 and $15.9. Energy led growth, with revenue up 35.8% and segment margin rising 650 basis points to 28.1%, primarily on upstream activity.
- Cash flow: Operating cash flow was $60.2, versus cash used of $2.6. Capital expenditures were $10.1 and free cash flow was $50.1, compared with negative $19.0. Inventory growth used $42.9 of cash in the quarter.
- Liquidity and debt: Cash was $353.8 at March 31, down from $393.3 at year-end. Total debt was $2,055.1, up from $2,040.2; net debt was approximately $1,701.3. The company reported $352.6 of unused revolving-credit availability and $72.3 under its receivables facility, and said it was in compliance with debt covenants.
Changes, outlook and notable items
- Compared with Q1 2017, revenue, operating income and earnings improved substantially. Management cited higher upstream Energy sales, stronger Industrials volume, favorable currency movements and lower interest expense. Interest expense declined to $26.0 from $45.9, following debt reduction and a lower weighted-average interest rate.
- Q1 orders increased year over year: Industrials $337.8, up 18.2%; Energy $291.0, up 19.3%; and Medical $75.0, up 18.6%. Management described continued expected growth in industrial production and U.S. upstream activity, while noting the Energy business’s exposure to volatile oil and gas markets. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
- Management expected 2018 capital expenditures of approximately $65–$75. It said available cash, operating cash flow and credit-facility availability should fund foreseeable requirements, while cautioning that cash generation and future borrowing availability are not assured.
- The company acquired Runtech Systems Oy on February 8 for $94.9 cash, net of cash acquired. The preliminary allocation included $63.6 of goodwill; the acquired business contributed $15.2 revenue and $0.4 operating income after acquisition.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method, with no opening retained-earnings adjustment. Reported Q1 revenue was $3.9 higher and net income $0.9 higher than the amounts shown without ASC 606 adoption; prior-year figures were not restated, limiting direct comparability.
- The income-tax provision was $23.4, with a 35.6% effective rate. A $7.9 additional transition-tax expense related to the Tax Cuts and Jobs Act increased the quarterly effective rate by about 12 percentage points. Certain tax accounting remained provisional.
- Unusual items included a $4.5 shareholder-litigation insurance recovery, $5.6 of asbestos-defense-cost insurance recoveries reflected in selling and administrative expense, and $3.4 of stock-based compensation expense. Restructuring programs were substantially completed, with immaterial Q1 activity.
- Asbestos-related litigation reserves were $102.8 and probable insurance-recovery receivables were $96.4. Management said the recorded amounts were adequate but noted uncertainty around litigation and recovery from insurers or indemnitors. Environmental liabilities accrued were $7.3.
Risks and investor verification
Key disclosed risks include energy-market volatility, international and foreign-exchange exposure, raw-material costs and availability, competition, execution of acquisitions and cost initiatives, substantial indebtedness and variable interest rates, and legal, environmental and product-liability matters. The company uses interest-rate swaps covering $1,125.0 of variable-rate borrowings; its filings also warn that hedging does not eliminate market risk.
- Verify the reporting entity: the supplied filing names Gardner Denver Holdings, Inc., despite the request metadata naming Ingersoll Rand Inc.
- Assess how much Q1 growth and margin improvement depended on upstream Energy demand, favorable currency movements, acquisitions and non-GAAP adjustments.
- Review cash conversion and working-capital needs, especially the $42.9 inventory cash use and $94.9 acquisition payment, against expected capital spending.
- Monitor debt service, floating-rate exposure, swap maturities, revolving-facility availability and the approaching July 30, 2018 maturity reduction for certain revolving-credit commitments.
- Track final Runtech purchase accounting, the impact of ASC 606 on comparability, and completion of provisional Tax Act accounting.
- Follow asbestos insurance-recovery litigation and validate the assumptions underlying the $102.8 reserve and $96.4 recovery receivable.