Business context and reporting period
Ingersoll Rand Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2020. The company manufactures flow-control, compression, pump, vacuum and blower products, and provides aftermarket parts and services. On February 29, 2020, it acquired Ingersoll Rand Industrial for estimated consideration of $6.937 billion, primarily company shares. Results include the acquired business only from the acquisition date, making year-over-year comparisons materially affected by the transaction.
Financial performance and position
Amounts are in millions of dollars except per-share data and percentages.
- Q2 revenue: $1,264.4, up 101.0% from $629.1; the increase primarily reflected $828.0 of acquired revenue. Organic volume weakness related to COVID-19 partly offset growth.
- Q2 earnings and margins: Gross profit was $360.0 and gross margin 28.5%, versus $234.4 and 37.3%. Operating loss was $52.2 versus income of $74.6; net loss attributable to Ingersoll Rand was $177.6, or $0.43 per diluted share, versus net income of $44.9, or $0.21 per diluted share. The $95.8 tax provision on a pretax loss contributed to the net loss.
- Q2 adjusted results: Adjusted EBITDA, a non-GAAP measure, was $241.2 versus $146.3, but margin declined to 19.1% from 23.3%. Adjusted net income was $129.9 versus $88.5.
- Six-month results: Revenue was $2,064.3 versus $1,249.4; net loss attributable to the company was $214.4 versus net income of $92.1. Gross margin was 29.3% versus 37.2%, and adjusted EBITDA was $389.0 versus $285.3, with margin of 18.8% versus 22.8%.
- Cash flow and liquidity: Six-month operating cash flow was $315.8 versus $130.1; free cash flow, a non-GAAP measure, was $290.4 versus $105.4. Cash was $1,173.6 at June 30, 2020, compared with $505.5 at year-end 2019. The company had $1,014.7 of unused revolving-credit availability and $39.1 available under its receivables facility; no revolver borrowings were outstanding.
- Debt: Total debt was $3,856.5, up from $1,611.4 at year-end 2019, largely reflecting acquisition-related financing. Long-term debt is principally term loans due in 2027. The company reported compliance with debt covenants and no defaults.
- Segments: Q2 revenue and adjusted EBITDA were $829.6 and $183.8 for Industrial Technologies and Services; $195.8 and $59.3 for Precision and Science Technologies; $21.5 and a $15.2 loss for High Pressure Solutions; and $217.5 and $41.0 for Specialty Vehicle Technologies. The last segment was added with the acquisition and has no comparable prior-period segment results.
Material changes versus the prior comparable period
- Reported revenue and adjusted EBITDA increased substantially due to the acquired business, but consolidated gross and adjusted EBITDA margins declined, reflecting purchase-accounting inventory charges, mix and lower organic volumes.
- High Pressure Solutions was sharply weaker: Q2 revenue fell 82.0% and the segment recorded an adjusted EBITDA loss, amid the upstream energy downturn. A customer bankruptcy prompted a $12.5 allowance for doubtful accounts.
- Amortization, restructuring and acquisition-related costs rose materially. Q2 amortization was $114.6 versus $30.9; six-month restructuring charges were $72.2 versus $2.8.
- Operating cash flow and free cash flow improved year over year, while reported net income turned to a loss. Cash flow benefited in part from working-capital movements and noncash adjustments; comparisons also reflect the acquisition.
Outlook, risks and unusual items
- Management said COVID-19 reduced demand and near-term visibility was limited. It expected reduced High Pressure Solutions demand to persist through 2020; no consolidated full-year financial guidance was provided.
- Management expected approximately $350 million of restructuring and transformation costs from 2020 through 2022 and approximately $250 million in annualized cost synergies by the end of 2022. These are expectations, not guaranteed outcomes.
- Q2 orders were $787.9 in Industrial Technologies and Services, $201.3 in Precision and Science Technologies, $12.8 in High Pressure Solutions and $208.2 in Specialty Vehicle Technologies. Acquired-business orders contributed materially to the first two segments’ year-over-year increases. Management cited stronger consumer-vehicle and aftermarket demand, partly offsetting commercial-market pressure, for Specialty Vehicle Technologies.
- The purchase-price allocation remained preliminary; measurement-period adjustments were expected. The acquisition added substantial goodwill and intangible assets, and management cautioned that prolonged pandemic effects could trigger future impairment charges. No impairment was recorded in the period.
- The company added $400 million of term loans in June and increased its revolving facility to $1.1 billion, citing general business purposes and potential incremental liquidity needs if COVID-19 effects persisted. Variable-rate debt, foreign exchange, energy-market exposure and acquisition integration remain risks.
- Asbestos and silica litigation reserves were $115.2, with a related insurance receivable of $122.4; environmental liabilities accrued were $9.2. The company said these matters were not expected to have a material adverse effect, while noting outcomes could differ from estimates.
- The tax provision was unusually high relative to the pretax loss: management attributed the effective rate in part to the geographic mix of earnings and lower pretax book income in lower-tax jurisdictions.
Important facts for investors to verify
- How much of reported growth and cash generation is sustainable organically, apart from acquisition effects and working-capital changes.
- Whether the company realizes the targeted $250 million of annualized synergies and controls the expected restructuring costs.
- Whether purchase accounting, intangible amortization and the preliminary goodwill allocation change materially as the acquisition valuation is finalized.
- How COVID-19, oil-and-gas conditions and customer credit stress affect segment demand, margins, receivables and impairment risk.
- Debt service capacity, variable-rate exposure and continued compliance with credit-facility covenants.