Ingersoll Rand Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Dollar amounts are in millions, except per-share data. The Company acquired Ingersoll Rand Industrial on February 29, 2020; 2020 results include the acquired business from that date, so comparisons with 2019 are not like-for-like.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1,335.2 | $596.7 | $3,399.5 | $1,846.1 |
| Gross profit / margin | $482.0 / 36.1% | $221.5 / 37.1% | $1,086.5 / 32.0% | $686.4 / 37.2% |
| Operating income (loss) | $74.3 | $72.9 | $(44.7) | $227.7 |
| Net income (loss) attributable to Ingersoll Rand | $29.5 | $41.3 | $(184.9) | $133.4 |
| Diluted earnings (loss) per share | $0.07 | $0.20 | $(0.50) | $0.64 |
| Adjusted EBITDA (non-GAAP) / margin | $284.2 / 21.3% | $141.8 / 23.8% | $673.2 / 19.8% | $427.1 / 23.1% |
| Adjusted net income (non-GAAP) | $167.7 | $85.9 | $372.7 | $252.8 |
Q3 revenue rose 123.8%, principally reflecting $853.8 million from the acquired business; COVID-19-related volume declines partly offset the increase. For the first nine months, revenue rose 84.1%, including $1,973.7 million attributed to the acquisition. Management attributed lower consolidated margins primarily to acquisition mix and purchase-accounting effects. Nine-month GAAP results also included substantial amortization, restructuring and acquisition-related costs.
Cash flow and liquidity: Nine-month operating cash flow was $502.5 million, capital expenditures were $33.5 million and free cash flow (non-GAAP) was $469.0 million. Cash was $1,313.3 million at September 30, 2020, versus $505.5 million at year-end 2019. Total debt was $3,877.3 million, versus $1,611.4 million; cash less total debt implies net debt of approximately $2,564.0 million. The $1,100 million revolving facility had no borrowings, $103 million of letters of credit and $997 million of unused availability. The Company reported compliance with debt covenants and no default.
Interest expense was $28.8 million in Q3 and $86.7 million for nine months. The Company said new acquisition-related and incremental term loans increased interest expense, partly offset by lower borrowing rates. Most borrowings are variable-rate; $3,212.5 million of U.S.-dollar and €598.2 million of euro LIBOR-based borrowings were outstanding at quarter-end.
Segments and material changes
- Industrial Technologies and Services: Q3 revenue was $902.6 million and segment adjusted EBITDA was $216.8 million; revenue included substantial acquired-business contribution. Organic volume was lower year over year. Segment margin was 24.0%, versus 22.9%.
- Precision and Science Technologies: Q3 revenue was $209.9 million and segment adjusted EBITDA was $64.5 million. Management noted increased demand for vacuum solutions used in respirator and ventilator applications, while other demand was curtailed; segment margin was 30.7%, versus 31.1%.
- High Pressure Solutions: Q3 revenue fell 68.3% to $31.7 million and segment adjusted EBITDA fell to $1.3 million from $27.1 million. Management cited the upstream energy downturn, lower volumes and pricing. A customer’s Chapter 11 filing led to a $12.5 million increase in the doubtful-accounts allowance during the first nine months.
- Specialty Vehicle Technologies: Q3 revenue was $191.0 million and segment adjusted EBITDA was $37.6 million. There is no 2019 segment comparison because this segment was formed through the acquisition.
Segment comparisons also reflect the acquisition and the Company’s reorganization into four reporting segments. Q3 total aftermarket revenue represented 36.7% of consolidated revenue, compared with 38.6% a year earlier.
Outlook, risks and unusual items
- Management said near-term visibility was limited because of COVID-19 and did not provide consolidated earnings or revenue guidance in the text provided.
- Management expected reduced demand in High Pressure Solutions to persist through 2020. Q3 orders there declined 80.6% year over year. Industrial Technologies and Services and Precision and Science Technologies reported higher orders, with part of each increase attributable to the acquisition. Specialty Vehicle Technologies had demand strength in golf, consumer vehicles and aftermarket, partly offset by pressure in commercial markets; management cited a solid Q4 backlog.
- The post-acquisition 2020–2022 restructuring program is expected to cost approximately $350 million, with approximately $250 million of annualized cost synergies targeted by the end of 2022. The Company had recognized $84.4 million of program expense through September 30, 2020. Further costs may arise, but management said amounts were not yet estimable.
- The Company recorded a $19.9 million impairment of two Industrial Technologies and Services tradenames. It reported no goodwill impairment, but warned prolonged adverse pandemic effects could result in future impairment charges.
- Nine-month other operating expense was $178.6 million, including $84.4 million of restructuring charges and $77.0 million of acquisition-related expenses and non-cash charges. Purchase accounting also contributed to elevated amortization and cost of sales.
- COVID-19, global economic conditions, oil and gas prices, foreign exchange, integration and synergy execution, substantial indebtedness and variable interest rates are identified risks. The Company also reported $113.4 million of asbestos litigation reserves and $8.9 million of environmental accruals; it said these matters were not expected to materially adversely affect it, while noting outcomes could differ from estimates.
Important facts for investors to verify
- How much reported growth and adjusted earnings reflect acquired operations versus organic performance, and whether acquisition-related margin pressure eases.
- Progress toward the $250 million annualized synergy target, alongside the expected $350 million restructuring cost and any additional transformation costs.
- Cash conversion and working-capital trends: operating working capital increased to $1,192.0 million from $603.0 million at year-end, with much of the change associated with the acquisition.
- Debt service capacity, variable-rate exposure, covenant headroom and the availability of the revolving facility as pandemic and market conditions evolve.
- Developments in High Pressure Solutions demand and customer credit, and whether COVID-19-related conditions trigger further intangible-asset impairments.