Ingersoll Rand Inc. quarterly report, Q2 FY2019

Filing summary

Entity and period: The supplied filing is Gardner Denver Holdings, Inc.’s Form 10-Q for the quarter ended June 30, 2019—not a 10-Q filed by Ingersoll Rand Inc. It reports the three and six months ended June 30, 2019, compared with the same 2018 periods. Amounts are in U.S. dollars; financial statement figures are in millions unless noted.

Business context and reporting period

Gardner Denver makes flow-control and compression equipment and related aftermarket products and services. Its reportable segments are Industrials, Energy, and Medical. On April 30, 2019, it agreed to combine with Ingersoll Rand’s Industrial segment in a Reverse Morris Trust transaction, expected to close in early 2020 subject to shareholder and regulatory approvals and other conditions.

Financial performance and liquidity

At June 30, 2019, cash was $317.5, total debt was $1,631.5 (including current maturities), and long-term debt net of current maturities was $1,623.5. The company had no revolving-credit borrowings, $445.0 of unused revolving availability and $76.4 of unused receivables-financing capacity. It reported compliance with debt covenants and no default. The new $450 million revolving facility matures in 2024. Cash less total debt was approximately $1,314.0 net debt, calculated from reported balances.

Six-month capital expenditures were $24.7; management expected full-year 2019 capital expenditures of approximately $50–$60. Cash increased from $221.2 at year-end 2018 to $317.5. Operating cash flow fell year over year, with management citing increased cash use by operating working capital. Operating working capital rose to $676.6 from $646.1 at December 31, 2018; inventory additions in anticipation of demand contributed to the increase.

Material changes versus prior comparable periods

• Q2 revenue declined 5.9%; six-month revenue declined 3.0%. Management attributed the decreases mainly to weaker upstream-energy markets and unfavorable foreign exchange, partly offset by pricing and higher volumes in Industrials, Medical, and other Energy markets.
• Energy was the primary source of weakness: Q2 segment revenue fell 18.4% and adjusted EBITDA fell 29.4%; for six months, revenue fell 11.5% and adjusted EBITDA fell 21.2%. Six-month Energy adjusted EBITDA margin decreased 310 basis points to 25.5%.
• Industrials and Medical grew. Six-month segment revenue increased 1.1% and 11.3%, respectively; adjusted EBITDA increased 7.1% and 22.1%. Their margins improved by 120 and 260 basis points, respectively.
• Consolidated adjusted EBITDA margin decreased to 23.5% from 24.2% in Q2 and to 23.0% from 24.1% for the six-month period. Net income and diluted EPS also declined in both comparisons.
• Other operating expense rose to $25.3 in Q2 from $0.6, and to $36.4 for six months from $4.9. The increases included transaction-related acquisition costs and non-cash charges, higher stock-based compensation and employer taxes, foreign-currency losses, and restructuring charges.
• Interest expense declined year over year, primarily because of debt repayments, despite higher weighted-average interest rates. The effective tax rate was 15.6% in Q2 and 18.1% for six months, versus 22.2% and 28.4%, respectively, in 2018; management cited earnings mix, windfall tax benefits, and, for the six-month comparison, the prior-year transition tax.

Outlook, risks, contingencies, and unusual items

• Merger: The proposed transaction includes $1.9 billion in cash to Ingersoll Rand, funded by newly issued debt assumed by Gardner Denver, and 50.1% ownership of the combined company for existing Ingersoll Rand shareholders on a fully diluted basis. The filing expected closing in early 2020, subject to required approvals and conditions. The company warned that the deal could distract management, constrain certain actions before closing, incur significant costs whether or not completed, and fail to deliver expected benefits. A termination fee of approximately $176 million may apply in specified circumstances.
• Orders and market outlook: Q2 orders were down 3.9% in Industrials and 31.8% in Energy, while Medical orders rose 5.4% (reported changes; the filing also provides constant-currency comparisons). Management described upstream Energy demand as exposed to oil and gas prices and activity, while noting more stable long-term trends in midstream, downstream, and petrochemical markets. It cited favorable secular demand trends in Medical. No consolidated full-year revenue or earnings guidance is provided in the supplied text.
• Restructuring: The 2018 program, focused on workforce reductions and facility consolidation, continued through 2019. Six-month restructuring charges were $2.8, and the reserve was $5.8 at June 30.
• Legal and environmental contingencies: The company reported asbestos-related litigation reserves of $102.3 and probable insurance-recovery receivables of $102.8. A substantial portion of expected recoveries is subject to ongoing insurer litigation; the company warned actual liabilities or recoveries could differ from recorded amounts. Environmental liabilities accrued were $6.8.
• Other items: Adoption of lease accounting standards added approximately $61.3 of operating right-of-use assets and $61.4 of operating lease liabilities, with no material reported effect on operations or cash flows. On July 8, 2019, the company acquired Oina VV AB for $10.0 in cash.
• Principal risk exposures: The filing highlights global economic and currency risks, dependence of Energy results on volatile oil and gas markets, competition, raw-material supply and cost pressures, acquisition and integration risks, substantial indebtedness and variable rates, and litigation, environmental, product-liability, and other regulatory exposures.

Important facts for investors to verify

1. Confirm the intended issuer: this source is Gardner Denver Holdings’ 2019 Q2 10-Q, despite the request metadata naming Ingersoll Rand Inc.
2. Track whether the proposed Ingersoll Rand Industrial combination closed as expected, including final debt assumed, ownership dilution, approvals, and transaction costs.
3. Assess whether the sharp Energy segment and order declines—especially upstream exposure—persisted, and whether Industrials and Medical growth offset them.
4. Review cash conversion and working-capital trends, particularly inventory levels, customer milestone payments, and the decline in operating and free cash flow.
5. Monitor debt service, interest-rate exposure, available borrowing capacity, and the impact of the merger financing on leverage and liquidity.
6. Follow the insurer litigation and adequacy and collectability of asbestos reserves and related recovery receivables.
7. Distinguish GAAP results from non-GAAP adjusted EBITDA and free cash flow, including the substantial transaction, stock-compensation, and restructuring adjustments.