Business context and reporting period
This is Gardner Denver Holdings, Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2017, filed August 4, 2017. The filing covers its Industrials, Energy and Medical businesses, which make flow-control and compression equipment and provide aftermarket parts and services. The request identifies Ingersoll Rand Inc.; that does not match the registrant named in this filing.
Unless otherwise noted, financial amounts are in millions of dollars. Comparisons are with the corresponding 2016 period.
Financial performance
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $579.1; up 25.3% from $462.0 | $1,060.8; up 18.0% from $899.0 |
| Gross profit / margin | $215.9 / 37.3%, versus $171.5 / 37.1% | $390.5 / 36.8%, versus $330.3 / 36.7% |
| Operating income (loss) | $(101.6), versus $26.0 | $(65.0), versus $45.6 |
| Net loss attributable to Gardner Denver | $(146.3), versus $(3.9); diluted loss per share $(0.83), versus $(0.03) | $(153.3), versus $(13.5); diluted loss per share $(0.94), versus $(0.09) |
| Adjusted EBITDA (non-GAAP) | $132.1, versus $86.6; margin 22.8%, versus 18.7% | $224.2, versus $163.4; margin 21.1%, versus 18.2% |
| Adjusted net income (non-GAAP) | $43.7, versus $25.9 | $63.9, versus $43.9 |
Revenue and adjusted EBITDA growth were led by Energy, particularly upstream markets recovering alongside higher oil prices and drilling activity. Second-quarter aftermarket parts and services were 41.7% of consolidated revenue, versus 33.5%; the six-month share was 43.1%, versus 33.5%.
Segment results
- Industrials: Q2 revenue $282.8 (up 0.7%); adjusted EBITDA $63.4 (up 16.1%), with margin rising to 22.4% from 19.4%. Six-month revenue fell 1.3% to $530.8, while adjusted EBITDA rose 9.9% to $110.6.
- Energy: Q2 revenue $239.5 (up 93.9%); adjusted EBITDA $62.2 (up 153.9%), with margin rising to 26.0% from 19.8%. Six-month revenue rose 68.4% to $417.7 and adjusted EBITDA rose 108.7% to $100.6.
- Medical: Q2 revenue fell 1.6% to $56.8, but adjusted EBITDA rose 10.8% to $15.4; six-month revenue fell 0.7% to $112.3 and adjusted EBITDA rose 6.7% to $30.1.
Cash flow, debt and liquidity
- Six-month operating cash flow was $20.0, down from $69.0. Capital expenditures were $26.8, producing negative free cash flow of $6.8, versus positive $43.0 in 2016.
- Cash was $245.7 at June 30, 2017, compared with $255.8 at December 31, 2016. Current assets were $1,266.5 and current liabilities $500.7; net working capital was $765.8.
- Total debt, including current maturities, was $1,982.5, down from $2,778.3 at year-end 2016. The IPO funded repayment of $575.0 principal of senior notes and $276.8 of U.S. term loans. Cash interest paid in the first half was $92.0.
- Available revolving-credit capacity was $343.0, with $17.0 of letters of credit outstanding. The receivables facility had $45.6 of reported available capacity and $29.4 of letters of credit outstanding; its amended borrowing capacity increased to $125.0, with the additional $50.0 not available until July 2017 after a borrowing-base certificate.
- Management said cash flow and available facilities were expected to cover foreseeable operating, working-capital, debt-service and capital-spending needs, while cautioning that cash generation and future borrowing availability are not assured. The company reported compliance with debt covenants and no default at June 30.
Material changes, outlook and risks
The May 2017 IPO generated approximately $897.7 of net proceeds after underwriting discounts and commissions; proceeds were principally used to redeem notes and repay term debt. IPO-related stock compensation of $156.2—including $94.8 for deferred stock units and $61.4 for options—was recorded in operating expense. Other notable IPO-related items included a $50.4 loss on debt extinguishment and a $16.2 KKR monitoring-agreement termination fee. These items contributed substantially to the GAAP operating and net losses; adjusted measures exclude specified charges and should not be treated as substitutes for GAAP results.
The company acquired LeROI Compressors in June for $20.5 net of acquired cash and bought the remaining 49% of Tamrotor for $5.2. It continued restructuring programs across all three segments, expected to conclude in 2017, with total estimated charges of $40–$45 for Industrials, $6–$7 for Energy and $5–$6 for Medical.
Management described improving industrial production prospects in the U.S. and Europe, a recovering upstream energy market, and longer-term growth drivers in midstream, downstream, petrochemicals and medical markets. Medical was characterized as being in a transition year as the company expands into liquid pumps. The filing gives no consolidated revenue or earnings guidance. It expected 2017 capital expenditures of approximately $65–$70.
Key risks include energy-price and drilling-activity volatility, international and currency exposure, substantial indebtedness and refinancing needs, execution of restructuring and acquisition integration, and competition and raw-material costs. Asbestos and silica litigation remains a contingency: the balance sheet included a $104.3 litigation reserve and a $97.3 insurance-recovery receivable, with significant expected recoveries tied to ongoing insurer litigation. Environmental liabilities accrued were $7.9. Management considered the recorded amounts adequate but acknowledged that litigation and insurance outcomes could differ materially.
Most important facts to verify
- Confirm the intended issuer: this filing is for Gardner Denver Holdings, Inc., not Ingersoll Rand Inc.
- Review the IPO-related stock-compensation, debt-extinguishment and sponsor-termination charges, and assess the quality and limitations of non-GAAP adjusted results.
- Track operating cash conversion, working-capital needs and free cash flow, which turned negative in the first half despite higher revenue and adjusted EBITDA.
- Verify debt-repayment effects, variable-rate exposure, facility availability and covenant headroom; the company remains highly leveraged.
- Monitor whether the upstream energy recovery persists, restructuring savings are realized, and the asbestos insurance recoveries are collectible.