Ingersoll Rand Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited, with comparisons to Q1 2022. The company is a global provider of industrial flow, compression, vacuum, pump and related technologies, reporting in Industrial Technologies and Services and Precision and Science Technologies. Amounts below are in U.S. dollars unless noted.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $1,629.3 million | $1,337.0 million | Up 21.9% |
| Gross profit / margin | $664.2 million / 40.8% | $526.1 million / 39.3% | Margin up 150 bps |
| Operating income / margin | $240.3 million / 14.7% | $157.0 million / 11.7% | Margin up 300 bps |
| Net income attributable to Ingersoll Rand | $161.1 million | $103.7 million | Up 55.3% |
| Diluted EPS | $0.39 | $0.25 | Up $0.14 |
| Adjusted EBITDA (non-GAAP) | $400.1 million / 24.6% of revenue | $303.6 million / 22.7% | Up 31.8%; margin up 190 bps |
| Operating cash flow | $170.3 million | $50.1 million | Up $120.2 million |
| Free cash flow (non-GAAP) | $147.9 million | $32.2 million | Up $115.7 million |
Revenue growth reflected higher pricing ($135.9 million), organic volume ($136.3 million) and acquisitions ($77.0 million), partly offset by foreign exchange ($56.9 million). Gross-margin expansion was attributed primarily to pricing gains exceeding material and labor inflation. The effective tax rate was 22.8%, versus 22.7%.
Segments: Industrial Technologies and Services revenue rose 26.7% to $1,317.2 million; Segment Adjusted EBITDA increased 39.7% to $345.6 million, with margin up 240 bps to 26.2%. Orders increased 12.2%. Precision and Science Technologies revenue rose 4.9% to $312.1 million; Segment Adjusted EBITDA increased 11.0% to $94.5 million, with margin up 170 bps to 30.3%. Orders declined 3.1%, including organic decline and currency headwinds.
Balance sheet and liquidity: At March 31, cash and cash equivalents were $1,119.3 million and total debt was $2,742.7 million, compared with cash of $1,613.0 million and debt of $2,752.6 million at year-end 2022. Current assets were $3,672.4 million and current liabilities $1,700.1 million. The company had no revolver borrowings and $1,100.0 million of unused revolver availability at quarter-end; it reported compliance with debt covenants. On April 21, 2023, after quarter-end, it amended its credit agreement to extend revolver maturity to April 2028 and increase commitments to $2,000.0 million.
Operating cash flow benefited from higher continuing-operations income but was partly offset by working-capital cash use. Investing cash outflow was $581.5 million, including $566.4 million of net acquisition payments and $22.4 million of capital expenditures. Cash declined by $493.7 million during the quarter. Operating working capital increased $203.0 million from year-end to $1,397.2 million, primarily due to higher receivables and inventories and lower accounts payable.
Material changes, outlook and risks
- Acquisitions: The company acquired SPX FLOW’s Air Treatment business for $519.0 million and Paragon Tank Truck Equipment for $42.3 million in Q1. Acquired businesses contributed $48.4 million of revenue and $3.2 million of operating income after acquisition dates. Air Treatment purchase accounting remains preliminary.
- Interest expense: Increased to $38.9 million from $19.0 million, mainly due to higher average interest rates. The weighted-average rate including derivatives was approximately 5.2%, versus 1.9% a year earlier. The company uses swaps and caps to manage some variable-rate exposure.
- Management outlook: The filing provides no specific numerical full-year guidance. Management said current cash, operating cash flow and revolver availability were expected to fund obligations and planned needs for the foreseeable future, while cautioning that economic conditions, cash generation and access to financing could affect liquidity.
- Business risks: Management cited global economic and supply-chain uncertainty, inflation and component availability, currency movements, competition, acquisition integration, and geopolitical risks. The company said its Russia and Ukraine exposure was limited and had not materially affected results to date. Approximately 55% of Q1 revenue was denominated in currencies other than the U.S. dollar.
- Cybersecurity incident: On April 27, 2023, the company detected an incident that disrupted several IT systems. It was investigating and taking steps to maintain business continuity; as of the filing, it was not aware of customer confidential information being exfiltrated. It did not expect a material impact but could not yet determine the incident’s full effect.
- Contingencies: The company recorded $135.7 million in asbestos litigation reserves and a $154.1 million receivable for probable insurance recoveries. Environmental liabilities were $15.3 million. Management did not expect these matters to have a material adverse effect based on currently available information, but noted outcomes and recoveries could differ from estimates.
- Restructuring: Q1 restructuring charges, net, were $2.9 million versus $12.5 million in Q1 2022. The company expects to complete its 2020 restructuring plan by year-end 2023; estimated total plan expense is $128 million to $138 million. Further actions may be taken.
Most important facts for investors to verify
- How much Q1 revenue and earnings growth came from sustainable pricing and organic demand versus acquisitions, and whether the decline in Precision and Science Technologies orders continues.
- Whether working-capital investment converts to cash and whether free cash flow can support acquisitions, repurchases, dividends and debt service.
- The ongoing effect of higher interest rates on interest expense and debt, including the coverage and effectiveness of hedges.
- The final Air Treatment purchase-price allocation, integration progress and realization of expected synergies.
- The operational, financial and customer-information impact of the cybersecurity incident as the investigation develops.
- Whether asbestos insurance recoveries are collected as expected and whether litigation or environmental estimates change.
- Developments in full-year outlook: the filing states no numerical guidance, so subsequent company communications should be reviewed.