Business context and reporting period
The supplied filing is Gardner Denver Holdings, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2018—not a filing in the name of Ingersoll Rand Inc. The company manufactures flow-control, compression, pump and vacuum products and related aftermarket services across Industrials, Energy and Medical. Unless noted, figures are in millions of dollars.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $689.3 | $649.6 | $1,977.1 | $1,710.4 |
| Operating income | $117.7 | $96.0 | $308.9 | $31.2 |
| Net income (loss) | $72.2 | $28.0 | $174.9 | $(125.1) |
| Diluted EPS | $0.35 | $0.13 | $0.83 | $(0.71) |
| Adjusted EBITDA (non-GAAP) | $182.2 | $164.7 | $492.1 | $388.9 |
| Adjusted EBITDA margin (non-GAAP) | 26.4% | 25.4% | 24.9% | 22.7% |
Q3 gross margin was 38.1%, down from 39.1%; nine-month gross margin was 37.6%, versus 37.7%. Q3 growth reflected higher volume, pricing and upstream Energy demand, partly offset by currency headwinds. For the nine months, revenue rose 15.6%; management attributed growth to upstream Energy markets, higher volume and acquisitions, favorable currency and pricing.
Q3 segment revenue and Adjusted EBITDA were: Industrials $320.0 and $72.1; Energy $298.8 and $94.9; Medical $70.5 and $20.5. Nine-month segment revenue/Adjusted EBITDA were Industrials $965.7/$210.0, Energy $814.1/$242.5, and Medical $197.3/$54.4. Energy’s Q3 revenue and EBITDA declined year over year, while Industrials and Medical grew.
Cash flow, debt and liquidity
Nine-month operating cash flow was $298.3, versus $83.9 in 2017; capital expenditures were $32.1, producing reported non-GAAP free cash flow of $266.2, versus $47.5. Cash declined to $269.0 at September 30 from $393.3 at year-end, including $113.6 of acquisition spending and $262.4 of debt principal payments. Total debt was $1,755.3, down from $2,040.2 at year-end. The company repaid $100.0 in June and $150.0 in September on its U.S. dollar term loan.
Available capacity was $263.6 under the revolving facility and $81.4 under the receivables facility; outstanding letters of credit were $6.3 and $27.3, respectively. The company reported compliance with debt covenants and no defaults. It stated that cash, operating cash flow and facility availability should cover foreseeable requirements, while cautioning that future cash generation, borrowing access and refinancing are not assured.
Material changes and unusual items
- 2018 results included adoption of ASC 606; reported nine-month revenue was $18.1 higher and net income $5.1 higher than they would have been without adoption. Prior-year figures were not restated, so comparisons are not fully like-for-like.
- 2017 comparisons were affected by large IPO-related stock compensation and debt-extinguishment charges. Nine-month 2017 other operating expense included $166.0 of stock-based compensation; 2018 included $10.8 total other operating expense. The 2017 period also included $84.5 of debt-extinguishment losses.
- Acquisitions included Runtech for $94.9 cash, net of cash acquired, and PMI Pump Parts for total consideration of $21.0. Acquired businesses contributed $63.1 of revenue and $3.2 of operating income in the nine-month period.
- A new 2018 restructuring program generated $5.4 of charges through Q3; additional fourth-quarter charges were expected. Nine-month restructuring and related business-transformation costs were $25.2.
- The company authorized a share repurchase program of up to $250.0 through July 2020 and repurchased $5.6 of shares through September 30.
Outlook, commentary and risks
Management described favorable demand trends in Industrials, Energy and Medical and reported Q3 orders growth of 6.5% in Industrials, 3.8% in Energy and 20.3% in Medical (reported rates; constant-currency growth was higher). The filing discusses expected industrial-production, healthcare and energy-market demand but does not provide full-year revenue or earnings guidance. It expected 2018 capital expenditures of approximately $50–$60.
Management noted potential delays to Permian-related growth from pipeline takeaway constraints, with added capacity anticipated during 2019. Key stated risks include oil and gas price and activity volatility, currency movements, global economic and geopolitical conditions, raw-material supply and cost, customer and competitive pressures, acquisitions and integration, indebtedness and variable interest rates, and execution of restructuring and cost-saving plans.
Asbestos and silica litigation reserves totaled $98.3 at September 30, with a related insurance-recovery receivable of $95.9. The company considered recorded amounts adequate and did not expect a material effect, but noted uncertainty around litigation outcomes and collecting from insurers or indemnitors; much of the expected recovery is at issue in ongoing insurance litigation. Environmental liabilities accrued were $7.0. Tax Act accounting remained partly estimated, including a transition-tax estimate revised to $51.7.
Most important facts for investors to verify
- Confirm the issuer identity: the provided document names Gardner Denver Holdings, Inc., despite the request metadata naming Ingersoll Rand Inc.
- Assess earnings quality and comparability, including ASC 606 adoption effects, 2017 IPO-related compensation and debt charges, and the company’s non-GAAP adjustments.
- Track whether operating cash flow and free cash flow remain strong after working-capital movements, acquisition spending, debt reduction and share repurchases.
- Monitor segment orders, Energy exposure and margins, aftermarket mix, currency impacts, and the timing of pipeline capacity and related demand.
- Review debt, floating-rate exposure, facility availability and covenant headroom, alongside the material uncertainty in asbestos insurance recoveries and tax estimates.