Business context and reporting period
This is Gardner Denver Holdings, Inc.’s Form 10-K for the fiscal year ended December 31, 2019, filed February 26, 2020. It is not an Ingersoll Rand Inc. post-merger annual report. Gardner Denver operated in Industrials, Energy and Medical, supplying flow-control and compression equipment and aftermarket parts and services. The company reported that aftermarket represented 37.8% of 2019 revenue.
Gardner Denver had agreed to combine with Ingersoll Rand’s industrial segment. The transaction was expected to close February 29, 2020; at closing, legacy Ingersoll Rand shareholders were expected to own at least 50.1% of the combined company, and approximately $1.9 billion of new debt was expected to fund cash consideration to Ingersoll Rand.
Financial performance and key metrics
Amounts are in U.S. dollars; figures below are for Gardner Denver on a consolidated basis unless identified by segment.
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Revenue | $2,451.9 million | $2,689.8 million | Down 8.8% |
| Gross profit / margin | $911.7 million / 37.2% | $1,012.5 million / 37.6% | Profit down 10.0%; margin down 0.4 percentage points |
| Operating income / margin | $275.3 million / 11.2% | $443.0 million / 16.5% | Down 37.9% |
| Net income | $159.1 million | $269.4 million | Down 41.0% |
| Diluted EPS | $0.76 | $1.29 | Down 41.1% |
| Adjusted EBITDA (non-GAAP) | $564.8 million / 23.0% margin | $681.8 million / 25.3% margin | Down 17.2%; margin down 2.3 percentage points |
| Operating cash flow / free cash flow (non-GAAP) | $343.3 million / $300.1 million | $444.5 million / $392.3 million | Down $101.2 million / $92.2 million |
| Cash and total debt at year-end | $505.5 million / $1,611.4 million | $221.2 million / $1,672.1 million | Cash increased; debt decreased |
Interest expense was $88.9 million, down from $99.6 million; the weighted-average interest rate increased to 5.4% from 5.2%. The effective tax rate was 16.7%, compared with 22.9%. Capital expenditures were $43.2 million. The company reported $969.3 million of net working capital and $603.0 million of operating working capital at year-end.
Segment performance: Industrials revenue was $1,301.3 million, with Adjusted EBITDA of $296.6 million and a 22.8% margin. Energy revenue was $870.2 million, with Adjusted EBITDA of $225.1 million and a 25.9% margin. Medical revenue was $280.4 million, with Adjusted EBITDA of $84.4 million and a 30.1% margin.
Fourth-quarter results
In Q4 2019, revenue was $605.8 million versus $712.7 million in Q4 2018; operating income was $47.6 million versus $134.1 million; net income was $25.8 million versus $94.5 million; and Adjusted EBITDA was $134.9 million versus $189.8 million. Q4 diluted EPS was $0.12 versus $0.45. Segment orders declined year over year: Industrials 4.6%, Energy 36.3%, and Medical 3.2% (reported constant-currency declines were 3.1%, 35.4%, and 1.8%, respectively).
Material changes versus the prior comparable period
- The full-year revenue decline was principally driven by lower upstream-energy revenue, down $235.6 million, and unfavorable foreign exchange of $65.2 million; improved pricing of $36.8 million and higher volume, including acquisitions, partly offset the decrease.
- Energy was the principal source of weakness: segment revenue fell 22.4% and Adjusted EBITDA fell 33.4%. Its aftermarket share rose to 58.7% from 56.6%, but did not offset the upstream downturn.
- Industrials revenue was nearly flat, while segment Adjusted EBITDA increased 2.9% and margin improved to 22.8% from 22.1%. Medical revenue increased 5.7% and Adjusted EBITDA increased 12.5%.
- Other operating expense increased to $75.7 million from $9.1 million, largely reflecting $53.8 million of acquisition-related expenses and non-cash charges, versus $9.8 million in 2018. Restructuring and related business-transformation costs were $25.6 million versus $38.8 million.
- Operating cash flow and free cash flow declined, despite cash generated by receivables and inventory reductions. Year-end cash rose primarily alongside cash generation and lower investment and financing outflows.
Outlook, risks and unusual items
- Management expected 2020 capital expenditures of approximately $45 million to $55 million. It provided segment commentary rather than consolidated revenue or earnings guidance: Industrials demand was linked to industrial production and capacity utilization; upstream Energy remained sensitive to oil and gas prices and activity; Medical was expected to benefit from healthcare and demographic trends.
- The merger was a major execution and financing consideration. The filing warned of integration costs, uncertain realization and timing of synergies, management distraction, and a possible termination fee of approximately $176 million under specified circumstances. The proposed transaction’s $1.9 billion of new debt would materially change leverage.
- At year-end, Gardner Denver had $445.6 million of unused revolving-credit availability and $62.4 million of unused receivables-financing capacity, with no borrowings under either facility. It reported compliance with debt covenants and no default. The revolving facility was scheduled to expand from $450 million to $1.0 billion upon merger completion.
- Major risks include upstream-energy cyclicality, international and foreign-exchange exposure (59% of revenue came from customers outside the U.S.), commodity and supplier risks, variable-rate debt and benchmark-rate transition, and merger execution. Approximately $1.6 billion of floating-rate debt was tied to IBOR benchmarks; the filing said transition effects were not yet reasonably estimable.
- Asbestos and silica litigation reserves were $118.1 million, alongside a $122.4 million insurance-recovery receivable. Recovery depends substantially on insurers and ongoing coverage litigation; the auditor identified these estimates as a critical audit matter. Environmental liabilities accrued were $6.6 million.
- Goodwill and other intangible assets totaled $2,542.7 million, or 55% of total assets. No goodwill impairment was recorded in 2019; reporting-unit fair values exceeded carrying values by at least 42.9%, based on management’s forecasts and valuation assumptions.
- The company did not pay dividends and said it did not intend to pay cash dividends in the foreseeable future. The independent auditor issued unmodified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Most important facts for investors to verify
- Confirm the merger’s actual closing date, final consideration and share issuance, debt added, and resulting ownership and leverage; this 10-K describes the transaction as pending.
- Track Energy orders, upstream customer activity, and whether the sharp 2019 declines persist or stabilize.
- Reconcile cash conversion and earnings quality, including the decline in operating cash flow and the substantial adjustments used in non-GAAP Adjusted EBITDA and free cash flow.
- Assess the asbestos insurance receivable’s collectability and the outcome of the Adams County insurer litigation, as well as changes in the related reserve.
- Review post-merger liquidity, debt maturities, interest-rate exposure and covenant capacity, including the effect of the anticipated transaction financing.