Business context and reporting period
The supplied filing is Gardner Denver Holdings, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2019—not a filing by Ingersoll Rand Inc. Gardner Denver manufactures flow-control and compression equipment and aftermarket parts and services through its Industrials, Energy, and Medical segments. This distinction matters: the filing discusses a pending combination with Ingersoll Rand’s Industrial business.
Financial results
Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding 2018 period.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $596.7 | $689.3 | $1,846.1 | $1,977.1 |
| Gross profit / margin | $221.5 / 37.1% | $262.4 / 38.1% | $686.4 / 37.2% | $743.5 / 37.6% |
| Operating income / margin | $72.9 / 12.2% | $117.7 / 17.1% | $227.7 / 12.3% | $308.9 / 15.6% |
| Net income | $41.3 | $72.2 | $133.4 | $174.9 |
| Diluted EPS | $0.20 | $0.35 | $0.64 | $0.83 |
| Adjusted EBITDA / margin | $142.2 / 23.8% | $182.2 / 26.4% | $429.9 / 23.3% | $492.1 / 24.9% |
| Operating cash flow | Nine-month figure: $244.3 | $244.3 | $298.3 | |
| Free cash flow | Nine-month figure: $210.5 | $210.5 | $266.2 |
Q3 revenue fell 13.4%; the company attributed the decline mainly to lower upstream-energy sales ($85.9 million) and unfavorable foreign exchange ($13.3 million), partly offset by pricing. Nine-month revenue declined 6.6%, with upstream-energy weakness and foreign exchange partly offset by volume growth, including acquisitions, and pricing. Q3 net income and adjusted EBITDA declined 42.8% and 22.0%, respectively. Adjusted EBITDA is a non-GAAP measure.
At September 30, cash was $406.4, total debt was $1,601.5, and net debt was approximately $1,195.1. Current assets were $1,494.1 and current liabilities $595.8. The company reported $445.6 of unused revolving-credit availability and $78.2 of unused receivables-financing capacity; it was in compliance with debt covenants. Nine-month capital expenditures were $33.8. Operating cash flow and free cash flow were lower year over year.
Material changes and segment performance
- Energy: Q3 revenue decreased 30.2% to $208.5 and segment adjusted EBITDA decreased 41.6% to $55.4; margin contracted 520 basis points to 26.6%. For nine months, revenue fell 18.4% and EBITDA fell 29.2%, chiefly due to upstream-energy exposure.
- Industrials: Q3 revenue declined 1.3% to $315.9 and EBITDA declined 2.8% to $70.1. Nine-month revenue increased 0.3% and EBITDA increased 3.7% to $217.7.
- Medical: Q3 revenue increased 2.6% to $72.3 and EBITDA increased 9.3% to $22.4. Nine-month revenue rose 8.2% and EBITDA rose 17.3% to $63.8, including acquisition contributions.
- Q3 orders were $313.1 in Industrials, down 0.1% reported (up 2.7% at constant currency); $205.0 in Energy, down 21.3%; and $66.5 in Medical, down 9.5%.
- Acquisition-related expenses and non-cash charges increased to $15.3 in Q3 and $34.1 for nine months, primarily reflecting the pending Ingersoll Rand transaction. Other operating expense was $22.9 in Q3 versus $6.0 a year earlier.
Outlook, transaction, and risks
Management expected 2019 capital expenditures of approximately $50 million. The filing provides no explicit consolidated full-year revenue, earnings, or margin guidance. Management described upstream Energy demand as weak and volatile, while characterizing midstream and downstream demand as relatively stable and Medical end markets as benefiting from secular healthcare trends.
The proposed Reverse Morris Trust transaction was expected to close in early 2020, subject to Gardner Denver stockholder approval, regulatory approvals, and customary conditions. Ingersoll Rand Industrial was to be separated and combined with Gardner Denver; the transaction contemplated $1.9 billion in cash funded by new debt assumed by Gardner Denver, and existing Ingersoll Rand shareholders receiving 50.1% of the combined company on a fully diluted basis. The filing warns of execution, integration, management-distraction, and transaction-cost risks; a termination fee of approximately $176 million could apply in certain circumstances.
Other notable exposures include variable-rate debt and foreign-exchange risk; approximately 54% of nine-month revenue was denominated in non-U.S. currencies. Asbestos-related litigation reserves were $100.1, with a related insurance-recovery receivable of $102.8; significant expected recoveries are tied to ongoing insurer litigation, and actual outcomes could differ from recorded estimates. Environmental liabilities accrued were $6.7. The company continued restructuring and expected activity through 2019. The filing also reports a CFO transition agreement dated October 28, 2019.
Most important facts for investors to verify
- Confirm the registrant: this is Gardner Denver Holdings’ filing, not an Ingersoll Rand Inc. 10-Q.
- Check the merger’s final terms, approvals, financing, ownership split, closing status, and any termination-fee exposure.
- Assess how sustained upstream-energy weakness and order declines could affect Energy segment earnings, margins, and cash generation.
- Review debt repayment capacity, variable interest-rate exposure, liquidity availability, and planned merger-related borrowing.
- Monitor asbestos insurer litigation and whether recorded insurance recoveries remain collectible.
- Consider the effect of acquisition and restructuring costs on reported results, and distinguish GAAP results from management’s non-GAAP measures.