Business context and reporting period
This summary covers the quarter and nine months ended September 30, 2017. The filing is for Gardner Denver Holdings, Inc., a global manufacturer of flow-control and compression equipment—not Ingersoll Rand Inc. The filing reports Industrials, Energy and Medical segments. The company completed its IPO in May 2017 and remained majority-controlled by KKR affiliates.
Financial performance
Amounts are in U.S. dollars, millions except per-share data and percentages.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $649.6 | $462.6 | $1,710.4 | $1,361.6 |
| Gross profit / margin | $253.9 / 39.1% | $164.2 / 35.5% | $644.4 / 37.7% | $494.5 / 36.3% |
| Operating income | $95.9 | $20.2 | $31.0 | $65.8 |
| Net income (loss) | $28.0 | $(13.0) | $(125.1) | $(27.0) |
| Diluted EPS | $0.13 | $(0.09) | $(0.71) | $(0.18) |
| Adjusted EBITDA (non-GAAP) | $164.7 / 25.4% of revenue | $89.0 / 19.2% | $388.9 / 22.7% | $252.3 / 18.5% |
- Q3 revenue rose 40.4%; management attributed the increase chiefly to recovery in upstream energy markets, higher Energy and Industrials volumes, pricing and favorable currency effects. Aftermarket parts and services were 40.5% of revenue, up from 37.6%.
- Nine-month revenue increased 25.6%, while net loss widened. The nine-month loss included $166.0 million of stock-based compensation, $84.5 million of debt-extinguishment loss and IPO-related costs; these items materially affect comparison with 2016.
- Q3 Energy revenue increased 118.7% to $301.6 million and segment adjusted EBITDA rose to $98.6 million from $22.0 million. Industrials revenue increased 8.5% to $288.2 million; Medical revenue was nearly flat at $59.8 million.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $83.9 million versus $106.8 million; capital expenditures were $36.4 million versus $46.3 million; and free cash flow, a non-GAAP measure, was $47.5 million versus $60.5 million.
- Cash and equivalents were $303.0 million at September 30, 2017. Total debt was $2,028.0 million, down from $2,778.3 million at December 31, 2016. The company reported $352.0 million of unused revolving-credit availability and $82.1 million under its receivables financing arrangement. It was in compliance with debt covenants.
- In May, IPO proceeds were used to redeem $575.0 million of senior notes and repay $276.8 million of term loans. An August refinancing replaced dollar and euro term loans with facilities due in 2024; the filing records $84.5 million of debt-extinguishment losses for the year to date.
- Operating working capital increased to $704.2 million from $611.7 million at year-end, mainly reflecting higher receivables and inventory. Management cited working-capital usage as a principal reason for lower nine-month operating cash flow.
Outlook, commentary and risks
- Management described improving industrial conditions and an energy-market recovery, and reported Q3 orders growth of 14% in Industrials, 48% in Energy and 19% in Medical year over year. These are order trends, not full-year earnings guidance.
- Management expected 2017 capital expenditures of approximately $50–$60 million and believed cash, operating cash flow and available credit would cover foreseeable needs, while cautioning that cash generation and future borrowing access are not assured.
- Restructuring programs were expected to conclude in 2017. Estimated total charges were $40–$45 million for Industrials, $6–$7 million for Energy and $5–$6 million for Medical.
- Major risks include energy-price and activity volatility, foreign-exchange exposure, substantial indebtedness and variable interest rates, international operations, input costs, execution of restructuring and customer or supplier concentration. The company hedged interest exposure on $1,125 million of borrowings; it said hedging does not eliminate risk.
- Asbestos and silica litigation remained a contingency: reserves were $102.8 million and the related insurance-recovery receivable was $97.3 million. Recoveries are subject to uncertainty, including ongoing insurer litigation. Environmental reserves were $7.5 million.
- Adoption of the new revenue-recognition standard was planned for Q1 2018 using the modified retrospective method; the impact on reported revenue and earnings had not been determined. The filing says interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Confirm the issuer identity: this is Gardner Denver Holdings’ 2017 Form 10-Q, not an Ingersoll Rand filing.
- Assess how much of the revenue and margin recovery depends on upstream energy activity and whether order growth converts to shipments and cash.
- Separate recurring performance from IPO-related stock compensation and debt-refinancing charges; review the company’s non-GAAP reconciliations and adjustment choices.
- Monitor working-capital needs, free cash flow, debt service and the refinancing terms, including variable-rate exposure and facility maturities.
- Track the outcome of asbestos insurer litigation and whether recorded reserves and expected insurance recoveries remain supportable.