UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2017
Or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
Commission File Number: 001-38095
Gardner Denver Holdings, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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46-2393770
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(State or Other Jurisdiction of Incorporation or Organization)
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(I.R.S. Employer Identification No.)
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222 East Erie Street, Suite 500
Milwaukee, Wisconsin 53202
(Address of Principal Executive Offices) (Zip Code)
(414) 212-4700
(Registrant’s Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $0.01 Par Value
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New York Stock Exchange
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Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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☒ (Do not check if a smaller reporting company)
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Smaller reporting company
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Emerging growth company
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant on June 30, 2017 was approximately $1,026.4 million based on the closing price of such Common Stock on the New York Stock Exchange on such date.
The registrant had outstanding 196,315,518 shares of Common Stock, par value $0.01 per share, as of January 31, 2018.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the registrant’s 2018 Annual Meeting of Shareholders are incorporated by reference in Part III of this report.
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Page
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PART I
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Item 1.
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3
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Item 1A.
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11
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Item 1B.
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Item 2.
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Item 3.
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Item 4.
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PART II
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Item 5.
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Item 7.
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Item 8.
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Item 9.
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Item 9B.
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PART III
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Item 10.
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Item 11.
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Item 12.
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Item 13.
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Item 14.
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PART IV
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Item 15.
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Item 16.
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PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report on Form 10-K (this “Form 10-K”) may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. All statements, other than statements of historical facts included in this Form 10-Q, including statements concerning our plans, objectives, goals, beliefs, business strategies, future events, business conditions, results of operations, financial position, business outlook, business trends and other information, may be forward-looking statements. Words such as “estimates,” “expects,” “contemplates,” “will,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “forecasts,” “may,” “should,” and variations of such words or similar expressions are intended to identify forward-looking statements. The forward-looking statements are not historical facts, and are based upon our current expectations, beliefs, estimates and projections, and various assumptions, many of which, by their nature, are inherently uncertain and beyond our control. Our expectations, beliefs, estimates and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs, estimates, and projections will result or be achieved and actual results may vary materially from what is expressed in or indicated by the forward-looking statements.
There are a number of risks, uncertainties, and other important factors, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking statements contained in this Form 10-K. Such risks, uncertainties and other important factors include, among others, the risks, uncertainties and factors set forth under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Form 10-K. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. See “Item 1A. Risk Factors” for more information.
Gardner Denver Holdings, Inc. is an affiliate of Kohlberg Kravis and Roberts & Co. L.P. (“KKR” or “Sponsor”) and a holding company whose operating subsidiary is Gardner Denver, Inc. (“GDI”). The holding company and its consolidated subsidiary, GDI, are collectively referred to in this Annual Report as “we,” “us,” “our,” “ourselves,” “Company,” or “Gardner Denver.”
Service marks, trademarks and trade names, and related designs or logotypes owned by Gardner Denver or its subsidiaries are shown in italics.
Our Company
We are a leading global provider of mission-critical flow control and compression equipment and associated aftermarket parts, consumables and services, which we sell across multiple attractive end-markets within the industrial, energy and medical industries. We manufacture one of the broadest and most complete ranges of compressor, pump, vacuum and blower products in our markets, which, combined with our global geographic footprint and application expertise, allows us to provide differentiated product and service offerings to our customers. Our products are sold under a collection of premier, market-leading brands, including Gardner Denver, CompAir, Nash, Emco Wheaton, Robuschi, Elmo Rietschle and Thomas, which we believe are globally recognized in their respective end-markets and known for product quality, reliability, efficiency and superior customer service. These attributes, along with over 155 years of engineering heritage, generate strong brand loyalty for our products and foster long-standing customer relationships, which we believe have resulted in leading market positions within each of our operating segments. We have sales in more than 175 countries and our diverse customer base utilizes our products across a wide array of end-markets that have favorable near- and long-term growth prospects, including industrial manufacturing, energy (with particular exposure to the North American upstream land-based market), transportation, medical and laboratory sciences, food and beverage packaging and chemical processing.
Our products and services are critical to the processes and systems in which they are utilized, which are often complex and function in harsh conditions where the cost of failure or downtime is high. However, our products typically represent only a small portion of the costs of the overall systems or functions that they support. As a result, our customers place a high value on our application expertise, product reliability and the responsiveness of our service. To support our customers and market presence, we maintain significant global scale with 38 key manufacturing facilities, more than 30 complementary service and repair centers across six continents and approximately 6,400 employees worldwide as of December 31, 2017.
The process-critical nature of our product applications, coupled with the standard wear and tear replacement cycles associated with the usage of our products, generates opportunities to support customers with our broad portfolio of aftermarket parts, consumables and services. Customers place a high value on minimizing any time their operations are offline. As a result, the availability of replacement parts, consumables and our repair and support services are key components of our value proposition. Our large installed base of products provides a recurring revenue stream through our aftermarket parts, consumables and services offerings. As a result, our aftermarket revenue is significant, representing 41% of total Company revenue and approximately 45% of our combined Industrials and Energy segments’ revenue in 2017.
We were acquired by an affiliate of KKR on July 30, 2013 (the “KKR Transaction”) and have undergone a significant transformation since that date. From 2014 to 2016, our transformation significantly improved our underlying operating performance. Our senior leadership team, led by our CEO Vicente Reynal, has been reconstituted and expanded, which we believe brought together deep expertise from leading global industrial organizations. In addition, 45% of our top 100 business managers, including the senior management team, have joined since the KKR Transaction, which we believe added significant new levels of talent to our leadership team. As part of our transformation, we also reorganized our Company into three business segments because of the sales drivers and market characteristics of each. Together, our Industrials, Energy and Medical segments create a diverse portfolio with exposure to highly attractive end-markets, significant aftermarket revenues, upside from an upstream energy recovery and positive secular trends across all segments.
Our Segments
Our business is comprised of three strategic segments.
Industrials
We design, manufacture, market and service a broad range of air compression, vacuum and blower products, including associated aftermarket parts, consumables and services, across a wide array of technologies and applications for use in diverse end-markets. Compressors are used to increase the pressure of air or gas, vacuum products are used to remove air or gas in order to reduce the pressure below atmospheric levels, and blower products are used to produce a high volume of air or gas at low pressure. Almost every manufacturing and industrial facility, and many service and process industry applications, use air compression, vacuum and blower products in a variety of process-critical applications such as the operation of industrial air tools, vacuum packaging of food products and aeration of waste water, among others.
We offer one of the broadest portfolios of compression, vacuum and blower technology in our markets which we believe, alongside our geographic footprint, allows us to provide differentiated service to our customers globally and maintain leading positions in many of our end-markets. Our compression products cover the full range of technologies, including rotary screw, reciprocating piston, scroll, rotary vane and centrifugal compressors. Our vacuum products and blowers also cover the full technology spectrum; vacuum technologies include side channel, liquid ring, claw vacuum, screw and rotary vane vacuum pumps among others, while blower technologies include rotary lobe blowers, screw, claw and vane, turbo, side channel and radial blowers. We believe our ability to support custom industrial application needs from nearly full vacuum to approximately 7,000 pounds per square inch (psi) pressure levels makes us a partner of choice for many of our long-standing customers. The breadth and depth of our product offering creates incremental business opportunities by allowing us to cross-sell our full product portfolio and uniquely address customers’ needs in one complete solution.
We sell our industrial products through an integrated network of direct sales representatives and independent distributors, which is strategically tailored to meet the dynamics of each target geography or end-market. Our large installed base also provides for a significant stream of recurring aftermarket revenue. For example, on average, the useful life of a compressor is between 10 and 12 years. However, a customer typically services the compressor at regular intervals, starting within the first two years of purchase and continuing throughout the life of the product. The cumulative aftermarket revenue generated by a compressor over the product’s life cycle will typically exceed its original cost.
Industrial air compressors represent the largest market in which we compete in our Industrials segment and is a product category for which we believe there is significant potential to drive increased sales of our aftermarket parts, consumables and services. We use our direct salesforce and strong distributor relationships, the majority of which are exclusive to our business for the products that we sell through them, to sell our broad portfolio of aftermarket parts, consumables and services. Within our Industrials segment, we primarily sell through the Gardner Denver, CompAir, Elmo Rietschle and Robuschi brands, as well as other leading brand names.
Energy
We design, manufacture, market and service a diverse range of positive displacement pumps, liquid ring vacuum pumps, compressors and integrated systems, engineered fluid loading and transfer equipment and associated aftermarket parts, consumables and services. The highly engineered products offered by our Energy segment serve customers across upstream, midstream and downstream energy markets, as well as petrochemical processing, transportation and general industrial sectors. We are one of the largest suppliers of equipment and associated aftermarket parts, consumables and services for the energy market applications that we serve.
Our positive displacement pumps are fit-for-purpose to meet the demands and challenges of modern unconventional drilling and hydraulic fracturing activity, particularly in the major basins and shale plays in the North American land market. Our positive displacement pump offering includes mission-critical oil and gas drilling pumps, frac pumps and well servicing pumps, in addition to sales of associated consumables used in the operation of our pumps and aftermarket parts, consumables and services. The products we sell into upstream energy applications are highly aftermarket-intensive, and so we support these products in the field with one of the industry’s most comprehensive service networks, which encompasses locations across all major basins and shale plays in the North American land market. This North American land-based service network is critical to serving our customers and, by supporting them in the field, to generating demand for new original equipment sales. For example, fluid ends are key aftermarket parts used in hydraulic fracturing operations that represent approximately 30% of the original cost of the pump and need to be replaced approximately four times per year on each operating pump (depending on the basin and operating nature of the hydraulic fracturing fleet). Other aftermarket parts, such as plungers, and consumables, such as valves, seats and packing, are replaced on even shorter time frames, creating aftermarket opportunities which in aggregate are often multiples of the cost of the original pump.
Our liquid ring vacuum pumps and compressors are highly engineered products specifically designed for continuous duty in harsh environments to serve a wide range of applications, including oil and gas refining and processing, mining, chemical processing, petrochemical and industrial applications. Our liquid ring technology utilizes a service liquid to evacuate or compress gas by forming a rotating ring of liquid that acts like a piston to deliver an uninterrupted flow of gas without pulsation. In addition, our engineered fluid loading and transfer equipment and systems ensure the safe and efficient transportation and transfer of petroleum products as well as certain other liquid commodity products to serve a wide range of industries. Similar to our positive displacement pumps business, we complement these products with a broad array of aftermarket parts, service and repair capabilities by leveraging our global network of manufacturing and service locations to meet the diverse needs of our customers. Within our Energy segment, we primarily sell through the Gardner Denver, Nash and Emco Wheaton brands, as well as other leading brand names.
Medical
We design, manufacture and market a broad range of highly specialized gas, liquid and precision syringe pumps and compressors that are specified by medical and laboratory equipment suppliers and integrated into their final equipment for use in applications, such as oxygen therapy, blood dialysis, patient monitoring, laboratory sterilization and wound treatment, among others. We offer a comprehensive product portfolio across a breadth of technologies to address the medical and laboratory sciences pump and fluid handling industry, as well as a range of end-use vacuum products for laboratory science applications, and we recently expanded into liquid pumps and automated liquid handling components and systems. Our product performance, quality and long-term reliability are often mission-critical in healthcare applications. We are one of the largest product suppliers in the medical markets we serve and have long-standing customer relationships with industry-leading medical and laboratory equipment providers. Additionally, many of our Medical segment gas and liquid pumps are also used in other technology applications beyond the medical and laboratory sciences. Within our Medical segment, we primarily sell through the Thomas brand, as well as other leading brand names.
For financial information about our segments and our geographic areas, see Note 20, “Segment Information” in the audited consolidated financial statements included elsewhere in this annual report on Form 10-K.
Our Industries and Products
We operate in the global markets for flow control and air compression products for the industrial, energy and medical industries. Our highly engineered products and proprietary technologies are focused on serving specialized applications within these attractive and growing industries.
Industrials
Our Industrials segment designs, manufactures, markets and services a broad range of air compression, vacuum and blower products across a wide array of technologies. Compression, vacuum and blower products are used in a wide spectrum of applications in nearly all manufacturing and industrial facilities and many service and process industries in a variety of end-markets, including infrastructure, construction, transportation, food and beverage packaging and chemical processing.
Compression Products
Sales to industrial end-markets include industrial air compression products, as well as associated aftermarket parts, consumables and services. Industrial air compressors compress air to create pressure to power machinery, industrial tools, material handling systems and automated equipment. Compressed air is also used in applications as diversified as snow making and fish farming, on high-speed trains and in hospitals. Compressors can be either stationary or portable, depending on the requirements of the application or customer. Because compressed air is utilized as a core component in manufacturing operations in nearly every manufacturing plant, it is often referred to as the “fourth utility” (in addition to electricity, gas and water). The global industrial air compressor market is an estimated $13.2 billion industry, and according to Frost & Sullivan, we currently maintain a top three position in this market.
We focus on five basic types of air compression technologies: rotary screw, reciprocating piston, scroll, rotary vane and centrifugal compressors. Rotary screw compressors are a newer technology than reciprocating compressors and exhibit better suitability for continuous processes due to a more compact size, less maintenance and better noise profile. We believe our reciprocating piston compressors provide one of the broadest ranges of pressures in the market and are supported by increasing demand across wide-ranging attractive end-markets. Scroll compressors are most commonly seen where less oil-free air is needed, and is most commonly used in medical and food applications where the need for pure, clean and precise air is of great importance. Rotary vane compressors feature high efficiency, compact compression technology and can be found throughout all sectors of industry, including automotive, food and beverage, energy and manufacturing with specialist solutions within transit, gas and snow making. Centrifugal compressors are most effective when in applications that demand larger quantities of oil-free air and are utilized across a wide range of industries.
Vacuum Products
Industrial vacuum products are integral to manufacturing processes in applications for packaging, pneumatic conveying, drying, holding / lifting, distillation, evacuation, forming / pressing, removal and coating. Within each of these processes are a multitude of sub-applications. As an example of one such end-process, within packaging, a vacuum will be used on blister packaging, foil handling, labeling, carton erection, stacking and palletizing (placing, stacking or transporting goods on pallets), as well as central vacuum supply for entire packaging departments. Management believes that we hold a leading position in our addressable portion of the global vacuum products market.
We focus on five basic types of vacuum technologies: side channel, liquid ring, claw vacuum, screw and rotary vane vacuum pumps. Side channel vacuum pumps are used for conveying gases and gas-air mixtures in a variety of applications, including laser printers, packaging, soil treatment, textiles and food and beverage products. Liquid ring vacuum pumps are used for extreme conditions, which prevail in humid and wet processes across ceramics, environmental, medical and plastics applications. Claw vacuum pumps efficiently and economically generate contact-free vacuum for chemical, environmental and packaging applications. Screw vacuum pumps are a dry running technology used to reduce the carbon footprint and life cycle costs in drying and packaging applications. Rotary vane vacuum pumps are used for vacuum and combined pressure and vacuum applications in the environmental, woodworking, packaging and food and beverage end-markets.
Blower Products
Blower products are used for conveying high volumes of air and gas at various flow rates and at low pressures, and are utilized in a broad range of industrial and environmental applications, including waste water aeration, biogas upgrading and conveying, pneumatic transport and dehydrating applications for food and beverage, cement, pharmaceutical, petrochemical and mobile industrial applications. We also design, manufacture, market and service frac sand blowers within our Industrials segment. In many cases, blowers are a core component for the operation of the entire end-users’ systems. Management believes that we hold a leading position in our addressable portion of the global blower products market.
We focus on several key technologies within blower products: rotary lobe, screw, claw and vane, turbo, side channel and radial blowers. Rotary lobe blowers, screw blowers and claw and vane blowers are positive displacement technologies that have the ability to consistently move the same volume of gas or air and vary the volume flow according to the speed of the machine itself enabling it to adapt the flow condition in a flexible manner despite pressure in the system. Turbo blowers and side channel and radial blowers are dynamic technologies that have the ability to accelerate gas or air through an impeller and transform their kinetic energy at the discharge with some limitation on flexibility.
Energy
Our Energy segment designs, manufactures, markets and services a diverse range of positive displacement pumps, liquid ring vacuum pumps, compressors and integrated systems, engineered fluid loading and transfer equipment and associated aftermarket parts, consumables and services for a number of attractive, growing market sectors with energy exposure, spanning upstream, midstream, downstream and petrochemical applications. The high cost of failure in these applications makes quality and reliability key purchase criteria for end-users and drives demand for our highly engineered and differentiated products.
Upstream
Through the manufacture and aftermarket service of pumps and manufacture of associated aftermarket parts and consumables used in drilling, hydraulic fracturing and well servicing applications, our Energy segment is well-positioned to capitalize on an upstream recovery, particularly in the North American land-based market, where our customers include market-leading hydraulic fracturing (also known as pressure pumping) and contract drilling service companies, as well as certain other types of well service companies. Sales to upstream energy end-markets consist of positive displacement pumps and associated aftermarket parts, most notably fluid ends, as well as consumables and services.
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Positive displacement pumps in the upstream energy end-market primarily move fluid to assist in drilling, hydraulic fracturing and well servicing applications. The majority of positive displacement pumps we sell are frac pumps, which experience significant service intensity during use in the field and, as such, typically have useful life spans of approximately four to six years before needing to be replaced. During that useful life, such pumps will need to receive intermittent repairs as well as major overhauls. In addition, we also sell positive displacement pumps that are used in drilling and well servicing applications. Spears & Associates, Inc. estimates that we have the second largest market share in the global frac pump market based on installed base, and management estimates that we have the largest market share based on new unit sales from 2014 to 2017.
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Fluid ends are a key component of positive displacement pumps that generate the pumping action, along with other parts, such as plungers, and consumables, such as valves, seats and packing, which pressurizes the fluid, in the case of drilling or well servicing applications, or fluid and proppant mixture, in the case of hydraulic fracturing, and propels such fluid or mixture out of the pump and into a series of flow lines that distribute the fluid or mixture into the well. Fluid ends are incorporated in original equipment pumps, and due to the highly corrosive nature of the fluids and the abrasive nature of the proppants used in hydraulic fracturing operations, need to be frequently replaced. Specifically, fluid ends used in hydraulic fracturing operations represent approximately 30% of the original cost of the pump and need to be replaced approximately four times per year on each operating pump, depending on the basin and the operating nature of the hydraulic fracturing fleet. As such, fluid ends, other aftermarket parts and consumables represent a significant source of aftermarket product sales.
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The level of profitability at which new wells can be drilled is a primary driver of drilling and completions activities, including hydraulic fracturing. Thus, demand for our Energy and Industrials products exposed to the upstream energy industry is driven by the prices of crude oil and natural gas, and the intensity and activity levels of drilling and hydraulic fracturing. Importantly, according to Oil & Gas Financial Journal, the threshold oil price at which wells are profitable to drill has significantly decreased by an average across all U.S. shale plays of 47% from 2014 to 2016. As a result of this improvement in well profitability and the crude oil price improvement since the low points observed during the first half of 2016, an increased number of drilling rigs have reentered the market. However, it is important to note that while the crude oil price level has a meaningful impact on the level of activity in our upstream energy applications, the growth in demand for our products into such applications is significantly heightened by numerous other market dynamics and drivers (detailed below). We believe that these additional market dynamics result in our exposure to the upstream energy industry being among the most attractive in the present environment.
We believe we are exposed to some of the highest growth market drivers in the context of an upstream energy recovery. Secular industry trends are driving increased demand for and utilization of newer, fit-for-purpose equipment with innovations that increase productivity and are increasing the frequency of replacement, refurbishment and upgrade cycles of pumping equipment and associated consumable products used in drilling and hydraulic fracturing activity. The number of wells drilled is growing at a faster rate than active rig count with each active rig drilling more unconventional wells per unit of time than previously experienced. Further, each unconventional well, on average, is being drilled with longer laterals and more hydraulic fracturing stages per well. Moreover, this quickly growing demand for hydraulic fracturing horsepower, in conjunction with the usage of more volume of abrasive proppant per well, is resulting in accelerated wear and tear on frac pumps and associated aftermarket parts and consumables. As a result, there are multiple drivers of growth in frac pumps and associated aftermarket parts, including fluid ends, consumables and services that are incremental to active rig count, creating a growth profile that is leveraged to, but meaningfully accelerated relative to, the active rig count.
Midstream and Downstream
Sales to midstream and downstream energy end-markets consist of liquid ring vacuum pumps and compressors and integrated systems, engineered fluid loading and transfer equipment and associated aftermarket parts and services. According to Petrochemical Update, North American downstream industry capital expenditures are expected to reach $17.3 billion in 2018, with the maintenance capital expenditure portion for U.S. refineries estimated to increase 39% in 2018 to a total of $1.3 billion. These large investments in midstream and downstream energy end-markets are expected to drive sales of our equipment and future sales in aftermarket parts and services as these facilities age. Further, deferred maintenance of downstream energy infrastructure is expected to drive increased future sales in our replacement products and aftermarket parts and services. Our downstream energy business contributes a larger share of revenue and profitability than our midstream energy business.
We focus on two basic types of midstream and downstream energy equipment: fluid transfer equipment and liquid ring vacuum pumps and compressors, which are employed in the midstream and downstream markets, respectively.
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Fluid transfer equipment, including fluid loading systems, tank truck and fleet fueling products and couplers: Fluid loading systems are used in the transfer and loading of hydrocarbons and certain other liquid commodity products in marine and land applications. Tank truck and fleet fueling products allow for safe transfer of liquid products without spillage or contamination while safeguarding the operator and the environment. Operators use Dry-Break® technology couplers and adapters to provide a secure connection for the transfer of liquid products without spillage or contamination while safeguarding the operator and the environment.
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Liquid ring vacuum pumps and compressors: Liquid ring vacuum pumps and compressors are designed for continuous duty in harsh environments, including vapor and flare gas recovery equipment (which recovers and compresses certain polluting gases to transmit them for further processing), primarily in downstream applications. The liquid ring technology utilizes a service liquid, typically water, oil or fuel, to evacuate or compress gas by forming a rotating ring of liquid that follows the contour of the body of the pump or compressor and acts like a piston to deliver an uninterrupted flow of gas without pulsation.
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Petrochemical
Our Energy segment is positioned to capitalize on the large and growing petrochemical industry. Sales to petrochemical end-markets consist of vacuum and compression process systems, both of which are used in harsh, continuous-duty applications. According to the American Chemistry Council, U.S. chemical industry capital spending reached $31.9 billion in 2016 and is expected to grow at a 6.2% CAGR from 2017 to 2019. Further, the American Chemistry Council forecasts the annual U.S. capital spending by the chemical industry to reach $48 billion by 2022, more than double the level of spending in 2010.
Demand for our petrochemical industry products correlates with growth in the development of new petrochemical plants as well as activity levels therein, which drive demand for aftermarket parts and services on our market-leading installed base of equipment. Attractive secular trends in the petrochemical market provide additional sources of growth. Advancements in the development of unconventional natural gas resources in North America over the past decade have resulted in the abundant availability of locally-sourced natural gas as feedstock for petrochemical plants in North America, supporting long-term growth. In addition, new petrochemical plants are becoming larger, driving increased demand for more equipment within larger systems.
Medical
The Medical segment designs, manufactures and markets a broad range of flow control products for the durable medical equipment, laboratory vacuum and automated liquid handling end-markets. Key technologies include gas, liquid and precision syringe pumps and automated liquid handling systems.
Based on internal estimates, the durable medical equipment pump market represents approximately a $1.2 billion opportunity globally and can be divided into two primary sub-markets: gas pumps and liquid pumps. In both markets, energy efficiency, ultra-low vibration, reduced noise levels and compactness as compared to flow rate are key application considerations. Customers are mainly medium and large durable medical equipment manufacturers who integrate our products into their devices for a wide range of applications, such as aspirators, blood analyzers, blood pressure monitors, compression therapy, dental carts, dialysis machines, gas monitors and ventilators. Gas pumps transfer and compress gases and generate vacuum to enable precise flow conditions. We estimate the size of the global gas pump market to be approximately $700 million. Building on our strength in gas pump applications, we recently expanded into the liquid pump and automated liquid handling markets to gain share in sizable markets that were previously unaddressed by us. We estimate the liquid pump market to be a $450 million market globally. Our liquid pump products are primarily used to meter and transfer both neutral and chemically aggressive fluids. We view this space as an attractive adjacency to our existing strategy and one in which we are able to capture share in line with current operations in the gas pump market, building momentum and scale for our Medical business. We believe both gas and liquid pump markets present attractive long-term growth profiles based on strong secular trends.
Our products are also used in the laboratory vacuum equipment space which includes end-use chemically resistant devices used in research and commercial laboratories which is a highly attractive niche market. In addition, we recently expanded into the automated liquid handling end-market, which includes syringe pumps, systems and accessories that are integrated into large scale automated liquid handling systems primarily for clinical, pharmaceutical and environmental analyses.
Customers in the durable medical pump end-market and the automated liquid handling end-market develop and manufacture equipment used in a highly regulated environment requiring highly specialized technologies. As a result, relationships with customers are built based on a supplier’s long-term reputation and expertise and deep involvement throughout a product’s evolution, from concept to long-term commercialization. Customers value suppliers that can provide global research and development, regulatory and manufacturing support, as well as sales footprint and expertise to foster close relationships with key decision makers at their company. Combined with the long product life cycle in the regulated medical device space, these factors create a strong, recurring base of business. As a leading pump manufacturer in these markets, we have established a history of innovation that enables us to work closely with our customers to create highly customized flow control solutions for their unique applications. These products are mission-critical in the ultimate device in which they are deployed and remain a key component over the entire life cycle of the end products. The regulated market structure and nature of long-tenured customer relationships enables pump manufacturers to have a highly visible, recurring revenue stream from key customers.
Competition
Industrials
The industrial end-markets we serve are competitive, with an increasing focus on product quality, performance, energy efficiency, customer service and local presence. Although there are several large manufacturers of compression, vacuum and blower products, the marketplace for these products remains highly fragmented due to the wide variety of product technologies, applications and selling channels. Our principal competitors in sales of compression, vacuum and blower products in our Industrials segment include Atlas Copco AB, Ingersoll-Rand PLC, Colfax Corp., Flowserve Corporation, IDEX Corporation, Accudyne and Kaeser Compressors, Inc.
Energy
Across our product lines exposed to the energy industry, the competitive landscape is specific to the end-markets served. Our principal competitor for drilling pumps is National Oilwell Varco Inc., and for frac pumps is The Weir Group plc. Within upstream energy, we additionally compete with certain smaller, regional manufacturers of pumps and aftermarket parts, although these are not direct competitors for most of our products. Our principal competitors in sales of fluid transfer equipment include Dover Corporation, SVT GmbH and TechnipFMC plc. Our principal competitors in the sale of liquid ring pumps and compressors are Flowserve Corporation and Busch-Holding GmbH.
Medical
Competition in the medical pump market is primarily based on product quality and performance, as most products must be qualified by the customer for a particular use. Further, there is an increasing demand for more efficient healthcare solutions, which is driving the adoption of premium and high performance systems. Our primary competitors in medical pumps include IDEX Corporation, Watson-Marlow, Inc., KNF Neuberger, Inc. and Thermo Fisher Scientific, as well as other regional and local manufacturers.
Customers and Customer Service
We consider superior customer service to be one of our primary pillars of future success and view it as being built upon a foundation of critical application expertise, an industry leading range of compressor, pump, vacuum and blower products, a global manufacturing and sales presence and a long-standing reputation for quality and reliability. Intense customer focus is at the center of our vision of becoming the industry’s first choice for innovative and application-critical flow control and compression equipment, services and solutions. We strive to collaborate with our customers and become an essential part of their engineering process by drawing on our deep industry and application engineering experience to develop best-in-class products that are critical to the processes and systems in which they operate.
We have established strong and long-standing customer relationships with numerous industry leaders. We sell our products directly to end-use customers and to certain OEMs, and indirectly through independent distributors and sales representatives. Our Energy and Medical products are primarily sold directly to end-use customers and OEMs, while approximately 50% of our Industrials sales in 2017 were fulfilled through independent distributors and sales representatives.
We use a direct sales force to serve end-use customers and OEMs because these customers typically require higher levels of technical assistance, more coordinated shipment scheduling and more complex product service than customers that purchase through distributors. We have distribution centers and warehouses that stock parts, accessories and certain products to provide adequate and timely availability. In addition, we provide direct aftermarket support through our service and remanufacturing facilities in the United States, Germany, Finland, France, Spain, the United Kingdom, China and Australia.
In addition to our direct sales force, we are also committed to developing and supporting our global network of over 1,000 distributors and representatives who we believe provide us with a competitive advantage in the markets and industries we serve. These distributors maintain an inventory of complete units and parts and provide aftermarket services to end-users. While most distributors provide a broad range of products from different suppliers, we view our distributors as exclusive at the product category level (e.g. compressor, vacuum and blower). For example, a distributor may exclusively carry our compressor technologies, and also source additional components of the broader industrial system in which those products operate from other suppliers. Our service personnel and product engineers provide the distributors’ service representatives with technical assistance and field training, particularly with respect to installation and repair of equipment. We also provide our distributors with sales and product literature, advertising and sales promotions, order-entry and tracking systems and an annual restocking program. Furthermore, we participate in major trade shows and directly market our offerings to generate sales leads and support the distributors’ sales personnel.
Our customer base is diverse, and we did not have any customers that individually provided more than 4% of 2017 consolidated revenues.
Research and Development
Our R&D expenditures focus on developing new products and new product applications to, among other things, enhance and expand existing product capabilities and performance, improve efficiency, reduce size, weight and noise levels, increase application flexibility and maintain compliance with changing regulatory requirements.
For the years ended December 31, 2017, 2016 and 2015, we spent approximately $26 million, $22 million, and $26 million, respectively, on research activities relating to the development of new products and new product applications. All such expenditures were funded by us and were expensed as incurred.
Patents, Trademarks, and Other Intellectual Property
We rely on a combination of intellectual property rights, including patents, trademarks, copyrights, trade secrets and contractual provisions to protect our intellectual property. While in the aggregate our more than 570 patents and our trademarks are of considerable importance to the manufacture and marketing of many of our products, we believe that the success of our business depends more on the technical competence, creativity and marketing abilities of our employees than on any individual patent or trademark, and therefore we do not consider any single patent or trademark, group of patents or trademarks, copyright or trade secret to be material to our business as a whole, except for the Gardner Denver trademark. We have registered our trademarks in the countries we deem necessary or in our best interest. We also rely upon trade secret protection for our confidential and proprietary information and techniques, and we routinely enter into confidentiality agreements with our employees as well as our suppliers and other third parties receiving such information.
Pursuant to trademark license agreements, Cooper Industries has exclusive rights to use the Gardner Denver trademark for certain power tools and their components, meaning that we are prevented from using our mark in connection with those products.
Raw Materials and Suppliers
We purchase a wide variety of raw materials to manufacture our products. Our most significant commodity exposures are to cast iron, aluminum and steel. Additionally, we purchase a large number of motors and, therefore, are also exposed to changes in the price of copper, which is a primary component of motors. Most of our raw materials are generally available from a number of suppliers. We have a limited number of long-term contracts with some suppliers of key components, but we believe that our sources of raw materials and components are reliable and adequate for our needs. We use single sources of supply for certain castings, motors and other select engineered components. A disruption in deliveries from a given supplier could therefore have an adverse effect on our ability to meet commitments to our customers. Nevertheless, we believe that we have appropriately balanced this risk against the cost of maintaining a greater number of suppliers. Moreover, we have sought, and will continue to seek, cost reductions in purchases of materials and supplies by consolidating purchases and pursuing alternate sources of supply.
Employees
As of December 31, 2017, we had approximately 6,400 employees of which approximately 2,050 are located in the United States. Of those employees located outside of the United States, a significant portion are represented by works councils and labor unions, and of those employees located in the United States, approximately 200 are represented by labor unions. We believe that our current relations with employees are satisfactory.
Environmental Matters
We are subject to numerous federal, state, local and foreign laws and regulations relating to the storage, handling, emission and disposal of materials and discharge of materials into the environment. We believe that our existing environmental control procedures are adequate and we have no current plans for substantial capital expenditures in this area. We have an environmental policy that confirms our commitment to a clean environment and compliance with environmental laws. We have an active environmental management program aimed at complying with existing environmental regulations and reducing the generation of pollutants in the manufacturing processes. We are also subject to laws concerning the cleanup of hazardous substances and wastes, such as the U.S. federal “Superfund” and similar state laws that impose liability for cleanup of certain waste sites and for related natural resource damages. We have been identified as a potentially responsible party with respect to several sites designated for cleanup under the “Superfund” or similar state laws. See “Part I, Item 3., Legal Proceedings—Environmental Liabilities.”
Corporate History
Gardner Denver Holdings, Inc. was incorporated in Delaware on March 1, 2013. Through our predecessors, Gardner Denver was founded in Quincy, Illinois in 1859. From August 1943 until the KKR Acquisition we operated as a public company. In July 2013 we were acquired by affiliates of KKR in the KKR Acquisition. We completed our initial public offering in May 2017 and our common stock is listed on the New York Stock Exchange under the symbol “GDI”. Our principal executive offices are located at 222 East Erie Street, Suite 500, Milwaukee, Wisconsin 53202.
Where You Can Find More Information
We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). Our SEC filings are available to the public over the internet at the SEC’s website at http://www.sec.gov. Our SEC filings are also available on our website at http://www.gardnerdenver.com as soon as reasonably practicable after they are filed with or furnished to the SEC. You may also read and copy any filed document at the SEC’s public reference room in Washington, D.C. at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information about public reference rooms.
We maintain an internet site at http://www.gardnerdenver.com. From time to time, we may use our website as a distribution channel of material company information. Financial and other important information regarding us is routinely accessible through and posted on our website at www.investors.gardnerdenver.com. In addition, you may automatically receive email alerts and other information about us when you enroll your email address by visiting the Email Alerts section at www.investors.gardnerdenver.com. Our website and the information contained on or connected to that site are not incorporated into this Annual Report on Form 10-K.
The following risk factors as well as the other information included in this Form 10-K, including “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto should be carefully considered. Any of the following risks could materially and adversely affect our business, financial condition or results of operations. The selected risks described below, however, are not the only risks facing us. Additional risks and uncertainties not currently known to us or those we currently view to be immaterial may also materially and adversely affect our business, financial condition or results of operations.
Risks Related to Our Business
We have exposure to the risks associated with instability in the global economy and financial markets, which may negatively impact our revenues, liquidity, suppliers and customers.
Our financial performance depends, in large part, on conditions in the markets we serve and on the general condition of the global economy, which impacts these markets. Any sustained weakness in demand for our products and services resulting from a contraction or uncertainty in the global economy could adversely impact our revenues and profitability.
In addition, we believe that many of our suppliers and customers access global credit markets to provide liquidity, and in some cases, utilize external financing to purchase products or finance operations. If our customers are unable to access credit markets or lack liquidity, it may impact customer demand for our products and services.
Furthermore, our products are sold in many industries, some of which are cyclical and may experience periodic contractions. For example, weakness in upstream energy activity in North America significantly impacted our business in 2015 and 2016. Cyclical weakness in the industries that we serve could adversely affect demand for our products and affect our profitability and financial performance.
More than half of our sales and operations are in non-U.S. jurisdictions and we are subject to the economic, political, regulatory and other risks of international operations.
For the year ended December 31, 2017, approximately 56% of our revenues were from customers in countries outside of the United States. We have manufacturing facilities in Germany, the United Kingdom, China, Finland, Italy, India and other countries. We intend to continue to expand our international operations to the extent that suitable opportunities become available. Non-U.S. operations and United States export sales could be adversely affected as a result of: political or economic instability in certain countries; differences in foreign laws, including increased difficulties in protecting intellectual property and uncertainty in enforcement of contract rights; credit risks; currency fluctuations, in particular, changes in currency exchange rates between the U.S. dollar, Euro, British Pound and the Chinese Renminbi; exchange controls; changes in tariff restrictions; significant changes in import/export trade restrictions; royalty and tax increases; nationalization of private enterprises; civil unrest and protests, strikes, acts of terrorism, war or other armed conflict; shipping products during times of crisis or war; and other factors inherent in foreign operations.
In addition, our expansion into new countries may require significant resources and the efforts and attention of our management and other personnel, which will divert resources from our existing business operations. As we expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these risks associated with our international operations.
Our revenues and operating results, especially in the Energy segment, depend on the level of activity in the energy industry, which is significantly affected by volatile oil and gas prices.
Demand for certain products of our Energy segment, particularly in the upstream energy market, depends on the level of activity in oil and gas exploration, development and production, and is primarily tied to the number of working and available drilling rigs, number of wells those rigs drill annually, the amount of hydraulic fracturing horsepower required on average to fracture each well and, ultimately, oil and natural gas prices overall. The energy market is volatile as the worldwide demand for oil and natural gas fluctuates. Generally, when worldwide demand or our customers’ expectations of future prices for these commodities are depressed, the demand for our products used in drilling and recovery applications is reduced. Other factors, including availability of quality drilling prospects, exploration success, relative production costs and political and regulatory environments are also expected to affect the demand for our products. Worldwide military, political and economic events have in the past contributed to oil and gas price volatility and are likely to do so in the future. Accordingly, our operating results for any particular period are not necessarily indicative of the operating results for any future period as the markets for our products have historically experienced volatility. In particular, orders in the Energy segment have historically corresponded to demand for oil and gas and petrochemical products and have been influenced by prices and inventory levels for oil and natural gas, rig count, number of wells those rigs drill annually, the amount of hydraulic fracturing horsepower required on average to fracture each well and other economic factors which we cannot reasonably predict. The Energy segment generated approximately 43% of our consolidated revenues for the year ended December 31, 2017.
Our results of operations are subject to exchange rate and other currency risks. A significant movement in exchange rates could adversely impact our results of operations and cash flows.
We conduct our business in many different currencies. A significant portion of our revenue, approximately 52% for the year ended December 31, 2017, is denominated in currencies other than the U.S. dollar. Accordingly, currency exchange rates, and in particular unfavorable movement in the exchange rates between U.S. dollars and Euros, British Pounds and Chinese Renminbi, affect our operating results. The effects of exchange rate fluctuations on our future operating results are unpredictable because of the number of currencies in which we do business and the potential volatility of exchange rates. We are also subject to the risks of currency controls and devaluations. Although historically not significant, if currency controls were enacted in countries where the Company generates significant cash balances, these controls may limit our ability to convert currencies into U.S. dollars or other currencies, as needed, or to pay dividends or make other payments from funds held by subsidiaries in the countries imposing such controls, which could adversely affect our liquidity. Currency devaluations could also negatively affect our operating margins and cash flows.
Potential governmental regulations restricting the use, and increased public attention to and litigation regarding the impacts, of hydraulic fracturing or other processes on which it relies could reduce demand for our products.
Oil and natural gas extracted from unconventional sources, such as shale, tight sands and coal bed methane, frequently requires hydraulic fracturing. Recent initiatives to study, regulate or otherwise restrict hydraulic fracturing and processes on which it relies, such as water disposal, as well as litigation over hydraulic fracturing impacts, could adversely affect some of our customers and their demand for our products, which could have a material adverse effect on our business, results of operations and financial condition.
For example, although hydraulic fracturing currently is generally exempt from regulation under the U.S. Safe Drinking Water Act’s (“SDWA”) Underground Injection Control program and is typically regulated by state oil and natural gas commissions or similar agencies, several federal agencies have asserted regulatory authority over certain aspects of the process. These include, among others, a number of regulations issued and other steps taken by the U.S. Environmental Protection Agency (“EPA”) over the last five years, including its New Source Performance Standards issued in 2012, its June 2016 rules establishing new emissions standards for methane and additional standards for volatile organic compounds from certain new, modified and reconstructed equipment and processes in the oil and natural gas source category and its June 2016 rule prohibiting the discharge of wastewater from onshore unconventional oil and natural gas extraction facilities to publicly owned wastewater treatment plants; and the federal Bureau of Land Management (“BLM”) rule in March 2015 that established new or more stringent standards relating to hydraulic fracturing on federal and American Indian lands (which was the subject of litigation and which the BLM rescinded in December 2017). While the newly appointed EPA administrator and the Trump administration more generally have indicated their interest in scaling back or rescinding regulations that inhibit the development of the U.S. oil and gas industry, it is difficult to predict the extent to which such policies will be implemented or the outcome of any litigation challenging such implementation, such as the suit the State of California’s attorney general filed in January 2018 challenging the BLM’s rescission of its March 2015 rule referred to above.
Moreover, some states and local governments have adopted, and other governmental entities are considering adopting, regulations that could impose more stringent requirements on hydraulic fracturing operations. For example, Texas, Colorado and North Dakota among others have adopted regulations that impose new or more stringent permitting, disclosure, disposal and well construction requirements on hydraulic fracturing operations. States could also elect to prohibit high volume hydraulic fracturing altogether, following the approach taken by the State of New York in 2015. Local land use restrictions, such as city ordinances, may restrict drilling in general and hydraulic fracturing in particular. Some state and federal regulatory agencies have also recently focused on a connection between the operation of injection wells used for oil and natural gas waste disposal and seismic activity. Similar concerns have been raised that hydraulic fracturing may also contribute to seismic activity. In March 2016, the United States Geological Survey identified six states with the most significant hazards from induced seismicity, including Oklahoma, Kansas, Texas, Colorado, New Mexico and Arkansas. In light of these concerns, some state regulatory agencies have modified their regulations or issued orders to address induced seismicity. For example, in December 2016, the Oklahoma Corporation Commission’s Oil and Gas Conservation Division (the “OCC Division”) and the Oklahoma Geologic Survey released well completion seismicity guidance, which requires operators to take certain prescriptive actions, including mitigation, following anomalous seismic activity within 1.25 miles of hydraulic fracturing operations; and in February 2017, the OCC Division issued an order limiting future increases in the volume of oil and natural gas wastewater injected into the ground in an effort to reduce earthquakes in the state. Ongoing lawsuits have also alleged that disposal well operations have caused damage to neighboring properties or otherwise violated state and federal rules regulating waste disposal. Increased regulation and attention given to induced seismicity could lead to greater opposition to, and litigation concerning, oil and natural gas activities utilizing hydraulic fracturing or injection wells for waste disposal. The adoption of more stringent regulations regarding hydraulic fracturing and the outcome of litigation over hydraulic fracturing could adversely affect some of our customers and their demand for our products, which could have a material adverse effect on our business, results of operations and financial condition.
We face competition in the markets we serve, which could materially and adversely affect our operating results.
We actively compete with many companies producing similar products. Depending on the particular product and application, we experience competition based on a number of factors, including price, quality, performance and availability. We compete against many companies, including divisions of larger companies with greater financial resources than we possess. As a result, these competitors may be both domestically and internationally better able to withstand a change in conditions within the markets in which we compete and throughout the global economy as a whole.
In addition, our ability to compete effectively depends on how successfully we anticipate and respond to various competitive factors, including new competitors entering our markets, new products and services that may be introduced by competitors, changes in customer preferences, pricing pressures and new government regulations. If we are unable to anticipate our competitors’ development of new products and services, identify customer needs and preferences on a timely basis, or successfully introduce new products and services or modify existing products and service offerings in response to such competitive factors, we could lose customers to competitors. If we cannot compete successfully, our sales and operating results could be materially and adversely affected.
Large or rapid increases in the cost of raw materials and component parts, substantial decreases in their availability or our dependence on particular suppliers of raw materials and component parts could materially and adversely affect our operating results.
Our primary raw materials, directly and indirectly, are cast iron, aluminum and steel. We also purchase a large number of motors and, therefore, also have exposure to changes in the price of copper, which is a primary component of motors. We have long-term contracts with only a few suppliers of key components. Consequently, we are vulnerable to fluctuations in prices and availability of such raw materials. Factors such as supply and demand, freight costs and transportation availability, inventory levels of brokers and dealers, the level of imports and general economic conditions may affect the price and availability of raw materials. In addition, we use single sources of supply for certain iron castings, motors and other select engineered components that are critical in the manufacturing of our products. From time to time in recent years, we have experienced disruptions to our supply deliveries for raw materials and component parts and may experience further supply disruptions. Any such disruption could have a material adverse effect on our ability to timely meet our commitments to customers and, therefore, our operating results.
Our operating results could be adversely affected by a loss or reduction of business with key customers or consolidation or the vertical integration of our customer base.
We derive revenue from certain key customers, in particular with respect to our oilfield service products and services. The loss or reduction of significant contracts with any of these key customers could result in a material decrease of our future profitability and cash flows. In addition, the consolidation or vertical integration of key customers may result in the loss of certain customer contracts or impact demand or competition for our products. Any changes in such customers’ purchasing practices, or decline in such customers’ financial condition, may have a material adverse impact on our business, results of operations and financial condition. Some of our customers are significantly larger than we are, have greater financial and other resources and also have the ability to purchase products from our competitors. As a result of their size and position in the marketplace, some of our customers have significant purchasing leverage and could cause us to materially reduce the price of our products, which could have a material adverse effect on our revenue and profitability. In addition, in the petroleum product market, lost sales may be difficult to replace due to the relative concentration of the customer base. We are unable to predict what effect consolidation in our customers’ industries may have on prices, capital spending by customers, selling strategies, competitive position, our ability to retain customers or our ability to negotiate favorable agreements with customers.
The loss of, or disruption in, our distribution network could have a negative impact on our abilities to ship products, meet customer demand and otherwise operate our business.
We sell a significant portion of our products through independent distributors and sales representatives. We rely in large part on the orderly operation of this distribution network, which depends on adherence to shipping schedules and effective management. We conduct all of our shipping through independent third parties. Although we believe that our receiving, shipping and distribution process is efficient and well-positioned to support our operations and strategic plans, we cannot provide assurance that we have anticipated all issues or that events beyond our control, such as natural disasters or other catastrophic events, labor disagreements, acquisition of distributors by a competitor, consolidation within our distributor network or shipping problems, will not disrupt our distribution network. If complications arise within a segment of our distribution network, the remaining network may not be able to support the resulting additional distribution demands. Any of these disruptions or complications could negatively impact our revenues and costs.
Our ongoing and expected restructuring plans and other cost savings initiatives may not be as effective as we anticipate, and we may fail to realize the cost savings and increased efficiencies that we expect to result from these actions. Our operating results could be negatively affected by our inability to effectively implement such restructuring plans and other cost savings initiatives.
We continually seek ways to simplify or improve processes, eliminate excess capacity and reduce costs in all areas of our operations, which from time to time includes restructuring activities. We have implemented significant restructuring activities across our global manufacturing, sales and distribution footprint, which include workforce reductions and facility consolidations. From 2015 to 2017, we incurred restructuring charges of approximately $42.9 million across our segments in connection with these initiatives. Costs of future initiatives may be material and the savings associated with them are subject to a variety of risks, including our inability to effectively eliminate duplicative back office overhead and overlapping sales personnel, rationalize manufacturing capacity, synchronize information technology systems, consolidate warehousing and distribution facilities and shift production to more economical facilities. As a result, the contemplated costs to effect these initiatives may materially exceed estimates. The initiatives we are contemplating may require consultation with various employees, labor representatives or regulators, and such consultations may influence the timing, costs and extent of expected savings and may result in the loss of skilled employees in connection with the initiatives.
Although we have considered the impact of local regulations, negotiations with employee representatives and the related costs associated with our restructuring activities, factors beyond the control of management may affect the timing of these projects and therefore affect when savings will be achieved under the plans. There can be no assurance that we will be able to successfully implement these cost savings initiatives in the time frames contemplated (or at all) or that we will realize the projected benefits of these and other restructuring and cost savings initiatives. If we are unable to implement our cost savings initiatives, our business may be adversely affected. Moreover, our continued implementation of cost savings initiatives may have a material adverse effect on our business, results of operations and financial condition.
In addition, as we consolidate facilities and relocate manufacturing processes to lower-cost regions, our success will depend on our ability to continue to meet customer demand and maintain a high level of quality throughout the transition. Failure to adequately meet customer demand or maintain a high level or quality could have a material adverse effect on our business, results of operations and financial condition.
Our success depends on our executive management and other key personnel.
Our future success depends to a significant degree on the skills, experience and efforts of our executive management and other key personnel, many of whom have joined the Company since the KKR Transaction, and their ability to provide us with uninterrupted leadership and direction. The failure to retain our executive officers and other key personnel or a failure to provide adequate succession plans could have an adverse impact. The availability of highly qualified talent is limited, and the competition for talent is robust. However, we provide long-term equity incentives and certain other benefits for our executive officers which provide incentives for them to make a long-term commitment to us. Our future success will also depend on our ability to have adequate succession plans in place and to attract, retain and develop qualified personnel. A failure to efficiently replace executive management members and other key personnel and to attract, retain and develop new qualified personnel could have an adverse effect on our operations and implementation of our strategic plan.
Credit and counterparty risks could harm our business.
The financial condition of our customers could affect our ability to market our products or collect receivables. In addition, financial difficulties faced by our customers as a result of an adverse economic event or other market factors may lead to cancellation or delay of orders. Our customers may suffer financial difficulties that make them unable to pay for a product or solution when payments become due, or they may decide not to pay us, either as a matter of corporate decision-making or in response to changes in local laws and regulations. Although historically not material, we cannot be certain that, in the future, expenses or losses for uncollectible amounts will not have a material adverse effect on our revenues, earnings and cash flows.
If we are unable to develop new products and technologies, our competitive position may be impaired, which could materially and adversely affect our sales and market share.
The markets in which we operate are characterized by changing technologies and introductions of new products and services. Our ability to develop new products based on technological innovation can affect our competitive position and often requires the investment of significant resources. Difficulties or delays in research, development or production of new products and technologies, or failure to gain market acceptance of new products and technologies, may significantly reduce future revenues and materially and adversely affect our competitive position. We cannot assure you that we will have sufficient resources to continue to make the investment required to maintain or increase our market share or that our investments will be successful. If we do not compete successfully, our business, financial condition, results of operations and cash flows could be materially adversely affected.
Cost overruns, delays, penalties or liquidated damages could negatively impact our results, particularly with respect to fixed-price contracts for custom engineered products.
A portion of our revenues and earnings is generated through fixed-price contracts for custom engineered products. Certain of these contracts provide for penalties or liquidated damages for failure to timely perform our obligations under the contract, or require that we, at our expense, correct and remedy to the satisfaction of the other party certain defects. Because substantially all of our custom engineered product contracts are at a fixed price, we face the risk that cost overruns, delays, penalties or liquidated damages may exceed, erode or eliminate our expected profit margin, or cause us to record a loss on our projects.
The risk of non-compliance with U.S. and foreign laws and regulations applicable to our international operations could have a significant impact on our results of operations, financial condition or strategic objectives.
Our global operations subject us to regulation by U.S. federal and state laws and multiple foreign laws, regulations and policies, which could result in conflicting legal requirements. These laws and regulations are complex, change frequently, have become more stringent over time and increase our cost of doing business. These laws and regulations include import and export control, environmental, health and safety regulations, data privacy requirements, international labor laws and work councils and anti-corruption and bribery laws such as the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, the U.N. Convention Against Bribery and local laws prohibiting corrupt payments to government officials.
We are subject to the risk that we, our employees, our affiliated entities, contractors, agents or their respective officers, directors, employees and agents may take actions determined to be in violation of any of these laws, for which we might be held responsible, particularly as we expand our operations geographically through organic growth and acquisitions. An actual or alleged violation could result in substantial fines, sanctions, civil or criminal penalties, debarment from government contracts, curtailment of operations in certain jurisdictions, competitive or reputational harm, litigation or regulatory action and other consequences that might adversely affect our results of operations, financial condition or strategic objectives.
U.S. Federal income tax reform could adversely affect us.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code that will affect 2017, including, but not limited to, (1) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years and (2) bonus depreciation that will allow for full expensing of qualified property.
The Tax Act also establishes new tax laws that will affect 2018, including, but not limited to, (1) reduction of the U.S. federal corporate tax rate; (2) elimination of the corporate alternative minimum tax (“AMT”); (3) the creation of the base erosion anti-abuse tax (“BEAT”), a new minimum tax; (4) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (5) a new provision designed to tax global intangible low-taxed income (“GILTI”), which allows for the possibility of using foreign tax credits (“FTC”) and a deduction of up to 50% to offset the income tax liability (subject to some limitations); (6) a new limitation on deductible interest expense; (7) the repeal of the domestic production activity deduction; (8) limitations on the deductibility of certain executive compensation; (9) limitations on the use of FTCs to reduce the U.S. income tax liability; and (10) limitations on net operating losses (“NOL”) generated after December 31, 2017, to 80% of taxable income.
The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
In connection with our initial analysis of the impact of the Tax Act, we have recorded a discrete net tax benefit of $95.3 million in the period ending December 31, 2017. This net expense benefit primarily consists of (1) a net expense benefit for the corporate rate reduction of $89.6 million, (2) a net expense for the transition tax of $63.3 million and (3) a corresponding reduction of the repatriation liability under ASC 740-30 (formerly Accounting Principles Board 23) of $69.0 million.
For various reasons we have not completed our accounting for the income tax effects of certain elements of the Tax Act. If we were able to make reasonable estimates of the effects of elements for which our analysis is not yet complete, we recorded provisional adjustments, as described above. If we were not yet able to make reasonable estimates of the impact of certain elements, we have not recorded any adjustments related to those elements and have continued accounting for them in accordance with ASC 740 on the basis of the tax laws in effect before the Tax Act. As we complete our accounting of the income tax effects of the Tax Act, we anticipate that we may record additional charges or benefits at such time as prescribed by ASC 740 and SAB 118, and as further information becomes available regarding the Tax Act, we may make further adjustments to the provisions that have been recorded in our financial statements. We also continue to examine the impact this tax reform legislation may have on our business.
The future impacts of the Tax Act on holders of our common shares are uncertain and could in certain instances be adverse. We urge our stockholders to consult with their legal and tax advisors with respect to any such legislation and the potential tax consequences of investing in our common stock.
A significant portion of our assets consists of goodwill and other intangible assets, the value of which may be reduced if we determine that those assets are impaired.
As a result of the KKR Transaction, we applied the acquisition method of accounting and established a new basis of accounting on July 30, 2013. Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the tangible and identifiable intangible assets acquired, liabilities assumed and any non-controlling interest. Intangible assets, including goodwill, are assigned to our reporting units based upon their fair value at the time of acquisition. In accordance with GAAP, goodwill and indefinite-lived intangible assets are evaluated for impairment annually, or more frequently if circumstances indicate impairment may have occurred. In 2017, we recorded an impairment charge related to other intangible assets of $1.6 million primarily within the Industrials segment. In 2016, we recorded an impairment charge related to other intangible assets of $25.3 million primarily within the Industrials segment. In 2015, we recorded a goodwill impairment charge of $343.3 million within the Energy segment and recorded impairment charges related to other intangible assets of $78.1 million within our Industrials, Energy and Medical segments. As of December 31, 2017, the net carrying value of goodwill and other intangible assets, net represented $2,658.8 million, or 58%, of our total assets. A future impairment, if any, could have a material adverse effect to our consolidated financial position or results of operations. See Note 8 “Goodwill and Other Intangible Assets” to our audited consolidated financial statements for additional information related to impairment testing for goodwill and other intangible assets and the associated charges taken.
Our business could suffer if we experience employee work stoppages, union and work council campaigns or other labor difficulties.
As of December 31, 2017, we had approximately 6,400 employees of which approximately 2,050 were located in the United States. Of those employees located outside of the United States, a significant portion are represented by works councils and labor unions, and of those employees located in the United States, approximately 200 are represented by labor unions. Although we believe that our relations with employees are satisfactory and have not experienced any material work stoppages, work stoppages have occurred, and may in the future occur, and we may not be successful in negotiating new collective bargaining agreements. In addition, negotiations with our union employees may (1) result in significant increases in our cost of labor, (2) divert management’s attention away from operating our business or (3) break down and result in the disruption of our operations. The occurrence of any of the preceding conditions could impair our ability to manufacture our products and result in increased costs and/or decreased operating results.
We are a defendant in certain asbestos and silica-related personal injury lawsuits, which could adversely affect our financial condition.
We have been named as a defendant in many asbestos and silica-related personal injury lawsuits. The plaintiffs in these suits allege exposure to asbestos or silica from multiple sources, and typically we are one of approximately 25 or more named defendants. We believe that, given our financial reserves and anticipated insurance recoveries, the pending and potential future lawsuits are not likely to have a material adverse effect on our consolidated financial position, results of operations or liquidity. However, future developments, including, without limitation, potential insolvencies of insurance companies or other defendants, an adverse determination in the Adams County Case (discussed below), or other inability to collect from our historical insurers or indemnitors, could cause a different outcome. In addition, even if any damages payable by us in any individual lawsuit are not material, the aggregate damages and related defense costs could be material and could materially adversely affect our financial condition if we were to receive an adverse judgment in a number of these lawsuits. Accordingly, the resolution of pending or future lawsuits may have a material adverse effect on our consolidated financial position, results of operations or liquidity. See “Business—Legal Proceedings—Asbestos and Silica-Related Litigation.”
Acquisitions and integrating such acquisitions create certain risks and may affect our operating results.
We have acquired businesses in the past and may continue to acquire businesses or assets in the future. The acquisition and integration of businesses or assets involves a number of risks. The core risks are valuation (negotiating a fair price for the business), integration (managing the process of integrating the acquired company’s people, products, technology and other assets to extract the value and synergies projected to be realized in connection with the acquisition), regulation (obtaining necessary regulatory or other government approvals that may be necessary to complete acquisitions) and diligence (identifying undisclosed or unknown liabilities or restrictions that will be assumed in the acquisition).
In addition, acquisitions outside of the United States often involve additional or increased risks including, for example:
|
· |
managing geographically separated organizations, systems and facilities;
|
|
· |
integrating personnel with diverse business backgrounds and organizational cultures;
|
|
· |
complying with non-U.S. regulatory requirements;
|
|
· |
fluctuations in currency exchange rates;
|
|
· |
enforcement of intellectual property rights in some non-U.S. countries;
|
|
· |
difficulty entering new non-U.S. markets due to, among other things, consumer acceptance and business knowledge of these new markets; and
|
|
· |
general economic and political conditions.
|
The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of one or more of our combined businesses and the possible loss of key personnel. The diversion of management’s attention and any delays or difficulties encountered in connection with acquisitions and the integration of an acquired company’s operations could have an adverse effect on our business, results of operations, financial condition or prospects.
A natural disaster, catastrophe or other event could result in severe property damage, which could adversely affect our operations.
Some of our operations involve risks of, among other things, property damage, which could curtail our operations. For example, disruptions in operations or damage to a manufacturing plant could reduce our ability to produce products and satisfy customer demand. If one of more of our manufacturing facilities are damaged by severe weather or any other disaster, accident, catastrophe or event, our operations could be significantly interrupted. Similar interruptions could result from damage to production or other facilities that provide supplies or other raw materials to our plants or other stoppages arising from factors beyond our control. These interruptions might involve significant damage to, among other things, property, and repairs might take from a week or less for a minor incident to many months for a major interruption.
Information systems failure may disrupt our business and result in financial loss and liability to our customers.
Our business is highly dependent on financial, accounting and other data-processing systems and other communications and information systems, including our enterprise resource planning tools. We process a large number of transactions on a daily basis and rely upon the proper functioning of computer systems. If any of these systems fail, whether caused by fire, other natural disaster, power or telecommunications failure, acts of cyber terrorism or war or otherwise, or they do not function correctly, we could suffer financial loss, business disruption, liability to our customers, regulatory intervention or damage to our reputation. If our systems are unable to accommodate an increasing volume of transactions, our ability to grow could be limited. Although we have backup systems, procedures and capabilities in place, they may also fail or be inadequate. Further, to the extent that we may have customer information in our databases, any unauthorized disclosure of, or access to, such information could result in claims under data protection laws and regulations. If any of these risks materialize, our reputation and our ability to conduct our business may be materially adversely affected.
The nature of our products creates the possibility of significant product liability and warranty claims, which could harm our business.
Customers use some of our products in potentially hazardous applications that can cause injury or loss of life and damage to property, equipment or the environment. In addition, our products are integral to the production process for some end-users and any failure of our products could result in a suspension of operations. Although we maintain quality controls and procedures, we cannot be certain that our products will be completely free from defects. We maintain amounts and types of insurance coverage that we believe are currently adequate and consistent with normal industry practice for a company of our relative size, and we limit our liability by contract wherever possible. However, we cannot guarantee that insurance will be available or adequate to cover all liabilities incurred. We also may not be able to maintain insurance in the future at levels we believe are necessary and at rates we consider reasonable. We may be named as a defendant in product liability or other lawsuits asserting potentially large claims if an accident occurs at a location where our equipment and services have been or are being used.
Environmental compliance costs and liabilities could adversely affect our financial condition.
Our operations and properties are subject to increasingly stringent domestic and foreign laws and regulations relating to environmental protection, including laws and regulations governing air emissions, water discharges, waste management and workplace safety. Under such laws and regulations, we can be subject to substantial fines and sanctions for violations and be required to install costly pollution control equipment or put into effect operational changes to limit pollution emissions or decrease the likelihood of accidental hazardous substance releases.
We use and generate hazardous substances and waste in our manufacturing operations. In addition, many of our current and former properties are, or have been, used for industrial purposes. We have been identified as a potentially responsible party with respect to several sites designated for cleanup under U.S. federal “Superfund” or similar state laws that may impose joint and several liability for cleanup of certain waste sites and for related natural resource damages. An accrued liability on our balance sheet reflects costs that are probable and estimable for our projected financial obligations relating to these matters. If we have underestimated our remaining financial obligations, we may face greater exposure that could have an adverse effect on our financial condition, results of operations or liquidity.
We have experienced, and expect to continue to experience, operating costs to comply with environmental laws and regulations. In addition, new laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination or the imposition of new cleanup requirements could require us to incur costs or become the basis for new or increased liabilities that could have a material adverse effect on our business, financial condition, results of operations or liquidity.
Third parties may infringe upon our intellectual property or may claim we have infringed their intellectual property, and we may expend significant resources enforcing or defending our rights or suffer competitive injury.
Our success depends in part on the creation, maintenance and protection of our proprietary technology and intellectual property rights. We rely on a combination of patents, trademarks, trade secrets, copyrights, confidentiality provisions, contractual restrictions and licensing arrangements to establish and protect our proprietary rights. Our nondisclosure agreements and confidentiality agreements may not effectively prevent disclosure of our proprietary information, technologies and processes, and may not provide an adequate remedy in the event of breach of such agreements or unauthorized disclosure of such information, and if a competitor lawfully obtains or independently develops our trade secrets, we would have no right to prevent such competitor from using such technology or information to compete with us, either of which could harm our competitive position. Our applications for patent and trademark protection may not be granted, or the claims or scope of such issued patents or registered trademarks may not be sufficiently broad to protect our products. In addition, effective patent, copyright, trademark and trade secret protection may be unavailable or limited for some of our trademarks and patents in some foreign countries. We may be required to spend significant resources to monitor and police our intellectual property rights, and we cannot guarantee that such efforts will be successful in preventing infringement or misappropriation. If we fail to successfully enforce these intellectual property rights, our competitive position could suffer, which could harm our operating results.
Although we make a significant effort to avoid infringing known proprietary rights of third parties, the steps we take to prevent misappropriation, infringement or other violation of the intellectual property of others may not be successful and from time to time we may receive notice that a third party believes that our products may be infringing certain patents, trademarks or other proprietary rights of such third party. Responding to and defending such claims, regardless of their merit, can be costly and time-consuming, can divert management’s attention and other resources, and we may not prevail. Depending on the resolution of such claims, we may be barred from using a specific technology or other rights, may be required to redesign or re-engineer a product which may require significant resources, may be required to enter into licensing arrangements from the third party claiming infringement (which may not be available on commercially reasonable terms, or at all), or may become liable for significant damages.
If any of the foregoing occurs, our ability to compete could be affected or our business, financial condition and results of operations may be materially adversely affected.
We face risks associated with our pension and other postretirement benefit obligations.
We have both funded and unfunded pension and other postretirement benefit plans worldwide. As of December 31, 2017, our projected benefit obligations under our pension and other postretirement benefit plans exceeded the fair value of plan assets by an aggregate of approximately $97.2 million (“unfunded status”), compared to $124.4 million as of December 31, 2016. Estimates for the amount and timing of the future funding obligations of these benefit plans are based on various assumptions. These assumptions include discount rates, rates of compensation increases, expected long-term rates of return on plan assets and expected healthcare cost trend rates. If our assumptions prove incorrect, our funding obligations may increase, which may have a material adverse effect on our financial results.
We have invested the plan assets of our funded benefit plans in various equity and debt securities. A deterioration in the value of plan assets could cause the unfunded status of these benefit plans to increase, thereby increasing our obligation to make additional contributions to these plans. An obligation to make contributions to our benefit plans could reduce the cash available for working capital and other corporate uses, and may have an adverse impact on our operations, financial condition and liquidity.
Risks Related to Our Indebtedness
Our substantial indebtedness could have important adverse consequences and adversely affect our financial condition.
We have a significant amount of indebtedness. As of December 31, 2017, we had total indebtedness of $2,040.2 million, and we had availability under the Revolving Credit Facility and the Receivables Financing Agreement of $352.6 million and $66.8 million, respectively. Our high level of debt could have important consequences, including: making it more difficult for us to satisfy our obligations with respect to our debt; limiting our ability to obtain additional financing to fund future working capital, capital expenditures, investments or acquisitions, or other general corporate requirements; requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, investments or acquisitions and other general corporate purposes; increasing our vulnerability to adverse changes in general economic, industry and competitive conditions; exposing us to the risk of increased interest rates as certain of our borrowings, including borrowings under the Senior Secured Credit Facilities, are at variable rates of interest; limiting our flexibility in planning for and reacting to changes in the industries in which we compete; placing us at a disadvantage compared to other, less leveraged competitors; increasing our cost of borrowing; and hampering our ability to execute on our growth strategy. For a complete description of the Company’s credit facilities and definitions of capitalized terms used in this section, see Note 10 “Debt” to our audited consolidated financial statements included elsewhere in this Form 10-K.
We may not be able to generate sufficient cash to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on, or refinance, our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic, industry and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control (as well as and including those factors discussed under “Risks Related to Our Business” above). We may be unable to maintain a level of cash flow from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.
If our cash flow and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital, or restructure or refinance our indebtedness. We may not be able to implement any such alternative measures on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations.
If we cannot make scheduled payments on our debt, we will be in default and the lenders under the Revolving Credit Facility could terminate their commitments to loan money, and our secured lenders (including the lenders under the Senior Secured Credit Facilities) could foreclose against the assets securing their borrowings and we could be forced into bankruptcy or liquidation.
Despite our level of indebtedness, we and our subsidiaries may still be able to incur substantially more debt, including off-balance sheet financing, contractual obligations and general and commercial liabilities. This could further exacerbate the risks to our financial condition described above.
We and our subsidiaries may be able to incur significant additional indebtedness in the future, including off-balance sheet financings, contractual obligations and general and commercial liabilities. Although the credit agreement governing the Senior Secured Credit Facilities contains restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the additional indebtedness incurred in compliance with these restrictions could be substantial. In addition, we can increase the borrowing availability under the Senior Secured Credit Facilities by up to $250 million in the form of additional commitments under the Revolving Credit Facility and/or incremental term loans plus an additional amount so long as we do not exceed a specified senior secured leverage ratio. We also can incur additional secured indebtedness under the Term Loan Facilities if certain specified conditions are met under the credit agreement governing the Term Loan Facilities. If new debt is added to our current debt levels, the related risks that we now face could intensify. For a complete description of the Company’s credit facilities and definitions of capitalized terms used in this section, see Note 10 “Debt” to our audited consolidated financial statements included elsewhere in this Form 10-K.
The terms of the credit agreement governing the Senior Secured Credit Facilities may restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.
The credit agreement governing the Senior Secured Credit Facilities contains a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our best interest, including restrictions on our ability to: incur additional indebtedness and guarantee indebtedness; pay dividends, make other distributions in respect of, or repurchase or redeem capital stock; prepay, redeem or repurchase certain debt; make loans, investments and other restricted payments; sell or otherwise dispose of assets; incur liens; enter into transactions with affiliates; enter into agreements restricting our subsidiaries’ ability to pay dividends; consolidate, merge or sell all or substantially all of our assets; make needed capital expenditures; make strategic acquisitions, investments or enter into joint ventures; plan for or react to market conditions or otherwise execute our business strategies; and engage in business activities, including future opportunities, that may be in our interest.
A breach of the covenants under the credit agreement governing the Senior Secured Credit Facilities could result in an event of default under the applicable indebtedness. Such a default may allow the creditors to accelerate the related debt principal and/or related interest payments and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In addition, an event of default under the credit agreement governing our Senior Secured Credit Facilities would permit the lenders under our Revolving Credit Facility to terminate all commitments to extend further credit under that facility. Furthermore, if we were unable to repay the amounts due and payable under our Senior Secured Credit Facilities, those lenders could proceed against the collateral granted to them to secure that indebtedness. In the event our lenders or noteholders accelerate the repayment of our borrowings and/or interest, we and our subsidiaries may not have sufficient assets to repay that indebtedness.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
Borrowings under our Senior Secured Credit Facilities and our Receivables Financing Agreement are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness will increase even though the amount borrowed will remain the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease.
We utilize derivative financial instruments to reduce our exposure to market risks from changes in interest rates on our variable rate indebtedness and we will be exposed to risks related to counterparty credit worthiness or non-performance of these instruments.
We have entered into pay-fixed interest rate swaps instruments to limit our exposure to changes in variable interest rates. Such instruments will result in economic losses should interest rates not rise above the pay-fixed interest rate in the derivative contracts. We will be exposed to credit-related losses which could impact the results of operations in the event of fluctuations in the fair value of the interest rate swaps due to a change in the credit worthiness or non-performance by the counterparties to the interest rate swaps. See Note 16 “Hedging Activities, Derivative Instruments and Credit Risk” to our audited consolidated financial statements included elsewhere in this Form 10-K.
If the financial institutions that are part of the syndicate of our Revolving Credit Facility fail to extend credit under our facility or reduce the borrowing base under our Revolving Credit Facility, our liquidity and results of operations may be adversely affected.
We have access to capital through our Revolving Credit Facility, which is part of our Senior Secured Credit Facilities. Each financial institution which is part of the syndicate for our Revolving Credit Facility is responsible on a several, but not joint, basis for providing a portion of the loans to be made under our facility. If any participant or group of participants with a significant portion of the commitments in our Revolving Credit Facility fails to satisfy its or their respective obligations to extend credit under the facility and we are unable to find a replacement for such participant or participants on a timely basis (if at all), our liquidity may be adversely affected.
| ITEM 1B. |
UNRESOLVED STAFF COMMENTS
|
None
Our corporate headquarters is a leased facility located at 222 East Erie Street, Milwaukee, Wisconsin 53202. The number of significant properties used by each of our segments is summarized by segment, type and geographic location in the tables below.
| |
|
Type of Significant Property
|
|
| |
|
Manufacturing
|
|
Warehouse
|
|
Other
|
|
Total
|
|
|
Industrials
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
5
|
|
|
|
1
|
|
|
|
0
|
|
|
6
|
|
|
|
EMEA
|
|
|
9
|
|
|
|
1
|
|
|
|
15
|
|
|
25
|
|
|
|
APAC
|
|
|
1
|
|
|
|
1
|
|
|
|
8
|
|
|
10
|
|
|
|
Industrials Total
|
|
|
15
|
|
|
|
3
|
|
|
|
23
|
|
|
41
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
8
|
|
|
|
2
|
|
|
|
9
|
|
|
19
|
|
|
|
EMEA
|
|
|
5
|
|
|
|
0
|
|
|
|
2
|
|
|
7
|
|
|
|
APAC
|
|
|
2
|
|
|
|
0
|
|
|
|
2
|
|
|
4
|
|
|
|
Energy Total
|
|
|
15
|
|
|
|
2
|
|
|
|
13
|
|
|
30
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
3
|
|
|
|
0
|
|
|
|
0
|
|
|
3
|
|
|
|
EMEA
|
|
|
4
|
|
|
|
0
|
|
|
|
1
|
|
|
5
|
|
|
|
APAC
|
|
|
1
|
|
|
|
0
|
|
|
|
0
|
|
|
1
|
|
|
|
Medical Total
|
|
|
8
|
|
|
|
0
|
|
|
|
1
|
|
|
9
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (All Segments)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
16
|
|
|
|
3
|
|
|
|
9
|
|
|
28
|
|
|
|
EMEA
|
|
|
18
|
|
|
|
1
|
|
|
|
18
|
|
|
37
|
|
|
|
APAC
|
|
|
4
|
|
|
|
1
|
|
|
|
10
|
|
|
15
|
|
|
|
Company Total(1)
|
|
|
38
|
|
|
|
5
|
|
|
|
37
|
|
|
80
|
|
|
|
(1) |
Two facilities are shared between our segments and each is counted once, in the Industrials segment, to avoid double counting.
|
We believe that our properties, taken as a whole, are in good operating condition and are suitable for our business operations.
| ITEM 3. |
LEGAL PROCEEDINGS
|
We are a party to various legal proceedings, lawsuits and administrative actions, which are of an ordinary or routine nature for a company of our size and in our sector. We believe that such proceedings, lawsuits, and administrative actions will not materially adversely affect our operations, financial condition, liquidity or competitive position. A more detailed discussion of certain of these proceedings, lawsuits, and administrative actions is set forth below.
Environmental Matters
We are subject to numerous federal, state, local and foreign laws and regulations relating to the storage, handling, emission and disposal of materials and discharge of materials into the environment. We believe that our existing environmental control procedures are adequate and we have no current plans for substantial capital expenditures in this area. We have an environmental policy that confirms our commitment to a clean environment and compliance with environmental laws. We have an active environmental management program aimed at complying with existing environmental regulations and reducing the generation of pollutants in the manufacturing processes. We are also subject to laws concerning the cleanup of hazardous substances and wastes, such as the U.S. federal “Superfund” and similar state laws that impose liability for cleanup of certain waste sites and for related natural resource damages. We have been identified as a potentially responsible party with respect to several sites designated for cleanup under the “Superfund” or similar state laws.
Asbestos and Silica-Related Litigation
We have been named as a defendant in many asbestos-related and silica-related personal injury lawsuits. The plaintiffs in these suits allege exposure to asbestos or silica from multiple sources and typically we are one of approximately 25 or more named defendants. Our predecessors sometimes manufactured, distributed and/or sold products allegedly at issue in these pending asbestos and silica-related lawsuits (the “Products”). However, neither we nor our predecessors ever mined, manufactured, mixed, produced or distributed asbestos fiber or silica sand, the materials that allegedly caused the injury underlying the lawsuits. Moreover, the asbestos-containing components of the Products, if any, were enclosed within the subject Products.
Although we have never mined, manufactured, mixed, produced or distributed asbestos fiber or silica, many of the companies that did engage in such activities or produced such products are no longer in operation. This has led to law firms seeking potential alternative companies to name in lawsuits where there has been an asbestos or silica related injury. However, in our opinion, based on our experience to date, the substantial majority of the plaintiffs have not suffered an injury for which we bear responsibility.
We believe that the pending and future asbestos and silica-related lawsuits are not likely to, in the aggregate, have a material adverse effect on its consolidated financial position, results of operations or liquidity, based on: our anticipated insurance and indemnification rights to address the risks of such matters; the limited potential asbestos exposure from the Products described above; our opinion, based on our experience to date, that the vast majority of plaintiffs are not impaired with a disease attributable to alleged exposure to asbestos or silica from or relating to the Products or for which we otherwise bear responsibility; various potential defenses available to us with respect to such matters; and our prior disposition of comparable matters. However, inherent uncertainties of litigation and future developments, including, without limitation, potential insolvencies of insurance companies or other defendants, an adverse determination in the Adams County Case (discussed below), or other inability to collect from our historical insurers or indemnitors, could cause a different outcome. While the outcome of legal proceedings is inherently uncertain, based on presently known facts, experience and circumstances, we believe that the amounts accrued on the Company’s balance sheet are adequate and that the liabilities arising from the asbestos and silica-related personal injury lawsuits will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity. We have accrued liabilities and other liabilities on our consolidated balance sheet to include a total litigation reserve of $105.6 million and $108.5 million as of December 31, 2017 and December 31, 2016 respectively, with respect to potential liability arising from our asbestos-related litigation. Asbestos-related defense costs are excluded from the asbestos claims liability and are recorded separately as an operating expense as services are incurred. We currently expect to continue to incur significant asbestos-related defense costs. In the event of unexpected future developments, it is possible that the ultimate resolution of these matters may be material to the Company’s consolidated financial position, results of operation or liquidity, and defense costs may be material. However, at this time, based on presently available information, we view this possibility as remote.
We have entered into a series of agreements with certain of the Company’s or the Company’s predecessors’ legacy insurers and certain potential indemnitors to secure insurance coverage and/or reimbursement for the costs associated with the asbestos and silica-related lawsuits filed against us. We have also pursued litigation against certain insurers or indemnitors where necessary. We have an insurance recovery receivable for probable asbestos related recoveries of approximately $100.4 million and $97.3 million, which is included on our consolidated balance sheet as of December 31, 2017 and December 31, 2016, respectively.
The largest such recent action, Gardner Denver, Inc. v. Certain Underwriters at Lloyd’s, London, et al., was filed on July 9, 2010, in the Eighth Judicial Circuit, Adams County, Illinois, as case number 10-L-48 (the “Adams County Case”). In the lawsuit, we seek, among other things, to require certain excess insurer defendants to honor their insurance policy obligations to us, including payment in whole or in part of the costs associated with the asbestos-related lawsuits filed against us. In October 2011, we reached a settlement with one of the insurer defendants, which had issued both primary and excess policies, for approximately the amount of such defendant’s policies which were subject to the lawsuit. Since then, the case has been proceeding through the discovery and motions process with the remaining insurer defendants. On January 29, 2016, we prevailed on the first phase of that discovery and motions process (“Phase I”). Specifically, the Court in the Adams County Case ruled that we have rights under all of the policies in the case, subject to their terms and conditions, even though the policies were sold to our former owners rather than to the Company itself. On June 9, 2016, the Court denied a motion by several of the insurers who sought permission to appeal the Phase I ruling now rather than waiting until the end of the whole case as is normally required. The case has now begun proceeding through the discovery and motions process regarding the remaining issues in dispute.
A majority of our expected future recoveries of the costs associated with the asbestos-related lawsuits are the subject of the Adams County Case.
The amounts we recorded for asbestos-related liabilities and insurance recoveries are based on currently available information and assumptions that we believe are reasonable based on our evaluation of relevant factors with input from a third party actuarial expert. Our actual liabilities or insurance recoveries could be higher or lower than those recorded if actual results vary significantly from the assumptions. There are a number of key variables and assumptions including the number and type of new claims to be filed each year, the resolution or outcome of these claims, the average cost of resolution of each new claim, the amount of insurance available, allocation methodologies, the contractual terms with each insurer with whom we have reached settlements, the resolution of coverage issues with other excess insurance carriers with whom we have not yet achieved settlements and the solvency risk with respect to our insurance carriers. Other factors that may affect our future liability include uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, legal rulings that may be made by state and federal courts and the passage of state or federal legislation. We make the necessary adjustments for our asbestos liability and corresponding insurance recoveries on an annual basis unless facts or circumstances warrant assessment as of an interim date.
Environmental Liabilities
We have been identified as a potentially responsible party (“PRP”) with respect to several sites designated for cleanup under U.S. federal “Superfund” or similar state laws that impose liability for cleanup of certain waste sites and for related natural resource damages. Persons potentially liable for such costs and damages generally include the site owner or operator and persons that disposed or arranged for the disposal of hazardous substances found at those sites. Although these laws impose joint and several liability on PRPs, in application, the PRPs typically allocate the investigation and cleanup costs based upon the volume of waste contributed by each PRP. Based on currently available information, our Company was only a small contributor to these waste sites, and we have, or are attempting to negotiate, de minimis settlements for our cleanup. The cleanup of the remaining sites is substantially complete and our future obligations entail a share of the sites’ ongoing operating and maintenance expense. We are also addressing four on-site cleanups for which we are the primary responsible party. Three of these cleanup sites are in the operation and maintenance stage and one is in the implementation stage.
We have an accrued liability on our consolidated balance sheet of $7.5 million and $7.6 million as of December 31, 2017 and December 31, 2016, respectively, to the extent costs are known or can be reasonably estimated for our remaining financial obligations for the environmental matters discussed above and which does not anticipate that any of these matters will result in material additional costs beyond amounts accrued. Based upon consideration of currently available information, we do not anticipate any material adverse effect on our results of operations, financial condition, liquidity or competitive position as a result of compliance with federal, state, local or foreign environmental laws or regulations, or cleanup costs relating to these matters.
| ITEM 4. |
MINE SAFETY DISCLOSURES
|
Not Applicable
PART II
| ITEM 5. |
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market Information
Our common stock, $0.01 par value per share, began trading on the New York Stock Exchange (“NYSE”) under the symbol “GDI” on May 12, 2017. Prior to that time, there was no public market for our common stock. As of January 31, 2018, there were 216 holders of record of our common stock. This stockholder figure does not include a substantially greater number of holders whose shares are held of record by banks, brokers, and other financial institutions. The following table sets forth the high and low intra-day sale prices per share for our common stock as reported on the NYSE for the periods indicated.
| |
|
Stock Price
|
|
| |
|
High
|
|
|
Low
|
|
|
Fiscal year ended December 31, 2017:
|
|
|
|
|
|
|
|
Second quarter ended June 30, 2017 (beginning on May 12, 2017)
|
|
$
|
24.55
|
|
|
$
|
19.91
|
|
|
Third quarter ended September 30, 2017
|
|
$
|
27.65
|
|
|
$
|
20.55
|
|
|
Fourth quarter ended December 31, 2017
|
|
$
|
34.63
|
|
|
$
|
26.10
|
|
Dividend Policy
We do not intend to pay cash dividends on our common stock in the foreseeable future. We may, in the future, decide to pay dividends on our common stock. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions contained in current or future financing instruments and other factors that our board of directors deem relevant. Additionally, our ability to pay dividends is limited by restrictions on the ability of our operating subsidiaries to make distributions, including restrictions under the terms of the agreements governing our debt. We did not declare or pay dividends to the holders of our common stock in the years ended December 31, 2017 and 2016.
Company Purchases
The following table contains detail related to the repurchase of our common stock based on the date of trade during the quarter ended December 31, 2017. The repurchases relate to purchases of our common stock as a result of net exercises of stock options and have been recorded as “Treasury stock at cost” in the Consolidated Balance Sheet.
|
Period
|
|
Total Number of
Shares Purchased(1)
|
|
|
Average Price Paid
Per Share(2)
|
|
|
Total Number of
Shares Purchased
as Part of
Publicly Announced
Plans or Programs
|
|
|
Maximum Approximate
Dollar Value
of Shares that May Yet
Be Purchased Under the
Plans or Programs
|
|
|
October 1, 2017 - October 31, 2017
|
|
|
9,469
|
|
|
$
|
29.21
|
|
|
|
-
|
|
|
|
-
|
|
|
November 1, 2017 - November 30, 2017
|
|
|
24,297
|
|
|
$
|
27.23
|
|
|
|
-
|
|
|
|
-
|
|
|
December 1, 2017 - December 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
(1)
|
Includes 9,469 and 24,297 shares for the periods from October 1, 2017 through October 31, 2017 and November 1, 2017 through November 30, 2017, respectively, repurchased in connection with net exercises of stock options.
|
|
(2) |
The average price paid per share includes brokerage commissions.
|
| ITEM 6. |
SELECTED FINANCIAL DATA
|
Set forth below is our selected consolidated financial data as of the dates and for the periods indicated. The selected consolidated financial data as of December 31, 2017 and 2016 and for the fiscal years ended December 31, 2017, 2016, and 2015 have been derived from our audited consolidated financial statements and related notes thereto included elsewhere in this Form 10-K. The selected consolidated financial data as of December 31, 2015, December 31, 2014, and for the period from July 30, 2013 through December 31, 2013 have been derived from our consolidated financial statements and related notes thereto not included in this Form 10-K. The selected historical consolidated financial data as of July 29, 2013 and for the period from January 1, 2013 through July 29, 2013 have been derived from the consolidated financial statements and related notes thereto of Gardner Denver, Inc., our “accounting predecessor,” not included in this Form 10-K.
Selected historical consolidated financial data are presented for two periods: Predecessor and Successor, which relate to the period preceding the KKR Transaction and the period succeeding the KKR Transaction, respectively. The Company refers to the operations of our accounting predecessor and its subsidiaries for the Predecessor period and the operations of Gardner Denver Holdings, Inc. (formerly known as Renaissance Parent Corp.) and subsidiaries for the Successor periods. The financial Successor and Predecessor financial statements are not comparable as a result of the application of acquisition accounting and changes in the Company’s capital structure resulting from the KKR Transaction.
The selected historical consolidated financial data set forth below should be read in conjunction with, and are qualified by reference to, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto included elsewhere in this Form 10-K.
| |
|
Successor
|
|
|
Predecessor
|
|
|
(in millions, except per share amounts)
|
|
Year Ended
December 31,
2017
|
|
|
Year Ended
December 31,
2016
|
|
|
Year Ended
December 31,
2015
|
|
|
Year Ended
December 31,
2014
|
|
|
July 30, 2013 –
December 31,
2013
|
|
|
January 1, 2013 –
July 29,
2013
|
|
|
Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,375.4
|
|
|
$
|
1,939.4
|
|
|
$
|
2,126.9
|
|
|
$
|
2,570.0
|
|
|
$
|
978.4
|
|
|
$
|
1,231.6
|
|
|
Cost of sales
|
|
|
1,477.5
|
|
|
|
1,222.7
|
|
|
|
1,347.8
|
|
|
|
1,633.2
|
|
|
|
666.5
|
|
|
|
799.5
|
|
|
Gross profit
|
|
|
897.9
|
|
|
|
716.7
|
|
|
|
779.1
|
|
|
|
936.8
|
|
|
|
311.9
|
|
|
|
432.1
|
|
|
Selling and administrative expenses
|
|
|
446.6
|
|
|
|
414.3
|
|
|
|
427.0
|
|
|
|
476.0
|
|
|
|
193.7
|
|
|
|
263.8
|
|
|
Amortization of intangible assets
|
|
|
118.9
|
|
|
|
124.2
|
|
|
|
115.4
|
|
|
|
113.3
|
|
|
|
111.9
|
|
|
|
9.9
|
|
|
Impairment of goodwill
|
|
|
-
|
|
|
|
-
|
|
|
|
343.3
|
|
|
|
220.6
|
|
|
|
-
|
|
|
|
-
|
|
|
Impairment of other intangible assets
|
|
|
1.6
|
|
|
|
25.3
|
|
|
|
78.1
|
|
|
|
14.4
|
|
|
|
-
|
|
|
|
-
|
|
|
Other operating expense, net
|
|
|
222.1
|
|
|
|
48.6
|
|
|
|
20.7
|
|
|
|
64.3
|
|
|
|
76.9
|
|
|
|
46.5
|
|
|
Operating income (loss)
|
|
|
108.7
|
|
|
|
104.3
|
|
|
|
(205.4
|
)
|
|
|
48.2
|
|
|
|
(70.6
|
)
|
|
|
111.9
|
|
|
Interest expense
|
|
|
140.7
|
|
|
|
170.3
|
|
|
|
162.9
|
|
|
|
164.4
|
|
|
|
65.4
|
|
|
|
6.6
|
|
|
Loss on extinguishment of debt
|
|
|
84.5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Other income, net
|
|
|
(3.8
|
)
|
|
|
(2.8
|
)
|
|
|
(1.6
|
)
|
|
|
(3.3
|
)
|
|
|
(2.1
|
)
|
|
|
(2.0
|
)
|
|
(Loss) income before income taxes
|
|
|
(112.7
|
)
|
|
|
(63.2
|
)
|
|
|
(366.7
|
)
|
|
|
(112.9
|
)
|
|
|
(133.9
|
)
|
|
|
107.3
|
|
|
(Benefit) provision for income taxes
|
|
|
(131.2
|
)
|
|
|
(31.9
|
)
|
|
|
(14.7
|
)
|
|
|
23.0
|
|
|
|
(59.4
|
)
|
|
|
35.4
|
|
|
Net income (loss)
|
|
|
18.5
|
|
|
|
(31.3
|
)
|
|
|
(352.0
|
)
|
|
|
(135.9
|
)
|
|
|
(74.5
|
)
|
|
|
71.9
|
|
|
Less: Net income (loss) attributable to noncontrolling interest
|
|
|
0.1
|
|
|
|
5.3
|
|
|
|
(0.8
|
)
|
|
|
(0.9
|
)
|
|
|
(1.1
|
)
|
|
|
0.7
|
|
|
Net income (loss) attributable to Gardner Denver Holdings, Inc.
|
|
$
|
18.4
|
|
|
$
|
(36.6
|
)
|
|
$
|
(351.2
|
)
|
|
$
|
(135.0
|
)
|
|
$
|
(73.4
|
)
|
|
$
|
71.2
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) per share, basic
|
|
$
|
0.10
|
|
|
$
|
(0.25
|
)
|
|
$
|
(2.35
|
)
|
|
$
|
(0.91
|
)
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) per share, diluted
|
|
$
|
0.10
|
|
|
$
|
(0.25
|
)
|
|
$
|
(2.35
|
)
|
|
$
|
(0.91
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares, basic
|
|
|
182.2
|
|
|
|
149.2
|
|
|
|
149.6
|
|
|
|
148.9
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares, diluted
|
|
|
188.4
|
|
|
|
149.2
|
|
|
|
149.6
|
|
|
|
148.9
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows - operating activities
|
|
$
|
200.5
|
|
|
$
|
165.6
|
|
|
$
|
172.1
|
|
|
$
|
141.8
|
|
|
$
|
(15.2
|
)
|
|
$
|
77.4
|
|
|
Cash flows - investing activities
|
|
|
(60.8
|
)
|
|
|
(82.1
|
)
|
|
|
(84.0
|
)
|
|
|
(155.4
|
)
|
|
|
(3,806.7
|
)
|
|
|
(15.1
|
)
|
|
Cash flows - financing activities
|
|
|
(17.4
|
)
|
|
|
(43.0
|
)
|
|
|
(35.0
|
)
|
|
|
(3.7
|
)
|
|
|
3,929.5
|
|
|
|
(205.0
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
393.3
|
|
|
$
|
255.8
|
|
|
$
|
228.3
|
|
|
$
|
184.2
|
|
|
$
|
218.7
|
|
|
$
|
107.4
|
|
|
Total assets
|
|
|
4,621.2
|
|
|
|
4,316.0
|
|
|
|
4,462.0
|
|
|
|
5,107.1
|
|
|
|
5,420.7
|
|
|
|
2,376.4
|
|
|
Total liabilities
|
|
|
3,144.4
|
|
|
|
4,044.2
|
|
|
|
4,056.5
|
|
|
|
4,218.5
|
|
|
|
4,226.4
|
|
|
|
847.3
|
|
|
Total stockholders’ equity
|
|
|
1,476.8
|
|
|
|
271.8
|
|
|
|
405.5
|
|
|
|
888.6
|
|
|
|
1,194.3
|
|
|
|
1,529.1
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Financial Data (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(1)
|
|
$
|
561.5
|
|
|
$
|
400.7
|
|
|
$
|
418.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income(1)
|
|
|
249.3
|
|
|
|
133.6
|
|
|
|
128.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
56.8
|
|
|
|
74.4
|
|
|
|
71.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow(1)
|
|
|
143.7
|
|
|
|
91.2
|
|
|
|
101.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
We report our financial results in accordance with GAAP. To supplement this information, we also use the following measures in this Form 10-K: “Adjusted EBITDA,” “Adjusted Net Income” and “Free Cash Flow.” Management believes that Adjusted EBITDA and Adjusted Net Income are helpful supplemental measures to assist us and investors in evaluating our operating results as they exclude certain items whose fluctuation from period to period do not necessarily correspond to changes in the operations of our business. Adjusted EBITDA represents net income (loss) before interest, taxes, depreciation and amortization, as further adjusted to exclude certain non-cash, non-recurring and other adjustment items. We believe that the adjustments applied in presenting Adjusted EBITDA are appropriate to provide additional information to investors about certain material non-cash items and about non-recurring items that we do not expect to continue at the same level in the future. Adjusted Net Income is defined as net income (loss) including interest, depreciation and amortization of non-acquisition related intangible assets and excluding other items used to calculate Adjusted EBITDA and further adjusted for the tax effect of these exclusions.
|
We use Free Cash Flow to review the liquidity of our operations. We measure Free Cash Flow as cash flows from operating activities less capital expenditures. We believe Free Cash Flow is a useful supplemental financial measure for us and investors in assessing our ability to pursue business opportunities and investments and to service our debt. Free Cash Flow is not a measure of our liquidity under GAAP and should not be considered as an alternative to cash flows from operating activities.
As a result, we and our board of directors regularly use these measures as tools in evaluating our operating and financial performance and in establishing discretionary annual compensation. Such measures are provided in addition to, and should not be considered to be a substitute for, or superior to, the comparable measure under GAAP. In addition, we believe that Adjusted EBITDA, Adjusted Net Income and Free Cash Flow are frequently used by investors, analysts and other interested parties in the evaluation of issuers, many of which also present Adjusted EBITDA, Adjusted Net Income and Free Cash Flow when reporting their results in an effort to facilitate an understanding of their operating and financial results and liquidity.
Adjusted EBITDA, Adjusted Net Income and Free Cash Flow should not be considered as alternatives to net income (loss) or other performance measures calculated in accordance with GAAP, or as alternatives to cash flow from operating activities as a measure of our liquidity. Adjusted EBITDA, Adjusted Net Income and Free Cash Flow have limitations as analytical tools, and you should not consider such measures either in isolation or as substitutes for analyzing our results as reported under GAAP.
Set forth below are the reconciliations of net income (loss) to Adjusted EBITDA and Adjusted Net Income and cash flows from operating activities to Free Cash Flow.
|
|
Year Ended December 31,
|
|
|
(in millions)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
Net Income (Loss)
|
|
$
|
18.5
|
|
|
$
|
(31.3
|
)
|
|
$
|
(352.0
|
)
|
|
Plus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
140.7
|
|
|
|
170.3
|
|
|
|
162.9
|
|
|
Benefit for income taxes
|
|
|
(131.2
|
)
|
|
|
(31.9
|
)
|
|
|
(14.7
|
)
|
|
Depreciation expense
|
|
|
54.9
|
|
|
|
48.5
|
|
|
|
47.6
|
|
|
Amortization expense(a)
|
|
|
118.9
|
|
|
|
124.2
|
|
|
|
115.4
|
|
|
Impairment of goodwill and other intangible assets(b)
|
|
|
1.6
|
|
|
|
25.3
|
|
|
|
421.4
|
|
|
Sponsor fees and expenses(c)
|
|
|
17.3
|
|
|
|
4.8
|
|
|
|
4.6
|
|
|
Restructuring and related business transformation costs(d)
|
|
|
24.7
|
|
|
|
78.7
|
|
|
|
31.4
|
|
|
Acquisition related expenses and non-cash charges(e)
|
|
|
4.1
|
|
|
|
4.3
|
|
|
|
4.8
|
|
|
Environmental remediation loss reserve(f)
|
|
|
0.9
|
|
|
|
5.6
|
|
|
|
-
|
|
|
Expenses related to public stock offerings(g)
|
|
|
4.1
|
|
|
|
-
|
|
|
|
-
|
|
|
Establish public company financial reporting compliance(h)
|
|
|
8.1
|
|
|
|
0.2
|
|
|
|
-
|
|
|
Stock-based compensation(i)
|
|
|
194.2
|
|
|
|
-
|
|
|
|
-
|
|
|
Loss on extinguishment of debt(j)
|
|
|
84.5
|
|
|
|
-
|
|
|
|
-
|
|
|
Foreign currency transaction losses (gains), net
|
|
|
9.3
|
|
|
|
(5.9
|
)
|
|
|
1.1
|
|
|
Other adjustments(k)
|
|
|
10.9
|
|
|
|
7.9
|
|
|
|
(3.6
|
)
|
|
Adjusted EBITDA
|
|
$
|
561.5
|
|
|
$
|
400.7
|
|
|
$
|
418.9
|
|
|
Minus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
140.7
|
|
|
$
|
170.3
|
|
|
$
|
162.9
|
|
|
Income tax provision, as adjusted(l)
|
|
|
105.4
|
|
|
|
34.7
|
|
|
|
71.9
|
|
|
Depreciation expense
|
|
|
54.9
|
|
|
|
48.5
|
|
|
|
47.6
|
|
|
Amortization of non-acquisition related intangible assets
|
|
|
11.2
|
|
|
|
13.6
|
|
|
|
8.4
|
|
|
Adjusted Net Income
|
|
$
|
249.3
|
|
|
$
|
133.6
|
|
|
$
|
128.1
|
|
|
Free Cash Flow
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows - operating activities
|
|
$
|
200.5
|
|
|
$
|
165.6
|
|
|
$
|
172.1
|
|
|
Minus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
|
|
56.8
|
|
|
|
74.4
|
|
|
|
71.0
|
|
|
Free Cash Flow
|
|
$
|
143.7
|
|
|
$
|
91.2
|
|
|
$
|
101.1
|
|
|
(a) |
Represents $107.7 million, $110.6 million and $107.0 million of amortization of intangible assets arising from the KKR Transaction and other acquisitions (customer relationships and trademarks) and $11.2 million, $13.6 million, and $8.4 million of amortization of non-acquisition related intangible assets, in each case for the years ended December 31, 2017, 2016 and 2015, respectively.
|
|
(b) |
Represents non-cash charges for impairment of goodwill and other intangible assets.
|
|
(c) |
Represents management fees and expenses paid to our Sponsor, including a monitoring agreement termination fee of $16.2 million paid in 2017 concurrent with our initial public offering on May 12, 2017.
|
|
(d) |
Restructuring and related business transformation costs consist of the following.
|
|
|
|
Year Ended December 31,
|
|
|
(in millions)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
Restructuring charges
|
|
$
|
5.3
|
|
|
$
|
32.9
|
|
|
$
|
4.7
|
|
|
Severance, sign-on, relocation and executive search costs
|
|
|
3.5
|
|
|
|
22.4
|
|
|
|
18.4
|
|
|
Facility reorganization, relocation and other costs
|
|
|
5.3
|
|
|
|
8.7
|
|
|
|
1.6
|
|
|
Information technology infrastructure transformation
|
|
|
5.2
|
|
|
|
2.3
|
|
|
|
-
|
|
|
Losses (gains) on asset and business disposals
|
|
|
0.8
|
|
|
|
0.1
|
|
|
|
(4.5
|
)
|
|
Consultant and other advisor fees
|
|
|
1.7
|
|
|
|
9.7
|
|
|
|
10.1
|
|
|
Other, net
|
|
|
2.9
|
|
|
|
2.6
|
|
|
|
1.1
|
|
|
Total restructuring and related business transformation costs
|
|
$
|
24.7
|
|
|
$
|
78.7
|
|
|
$
|
31.4
|
|
|
(e) |
Represents costs associated with successful and/or abandoned acquisitions, including third-party expenses, post-closure integration costs and non-cash charges and credits arising from fair value purchase accounting adjustments.
|
|
(f) |
Represents estimated environmental remediation costs and losses relating to a former production facility.
|
|
(g) |
Represents certain expenses related to the Company’s initial public offering and subsequent secondary offerings.
|
|
(h) |
Represents third party expenses to comply with the requirements of Sarbanes-Oxley in 2018 and the accelerated adoption of the new revenue recognition standard (ASC 606 – Revenue from Contracts with Customers) in the first quarter of 2018, one year ahead of the adoption date for a private company. These expenses were previously included in “Expenses related to the initial public offering” and prior periods have been restated to conform to current period presentation.
|
|
(i) |
Represents stock-based compensation expense recognized for stock options outstanding ($77.6 million) and DSUs granted to employees at the date of the initial public offering ($97.4 million) under the 2013 Stock Incentive Plan, and employer taxes related to DSUs granted to employees at the date of the initial public offering ($19.2 million).
|
|
(j) |
Represents losses on extinguishment of debt recognized on the redemption of the senior notes and a portion of the Original Dollar Term Loan Facility with proceeds from the initial public offering in May 2017 ($50.4 million) and in connection with the refinancing of the Original Dollar Term Loan Facility and the Original Euro Term Loan Facility in August 2017 ($34.1 million).
|
|
(k) |
Includes (i) non-cash impact of net LIFO reserve adjustments, (ii) effects of amortization of prior service costs and amortization of gains in pension and other postretirement benefits (OPEB) expense, (iii) certain legal and compliance costs and (iv) other miscellaneous adjustments. Formerly included “Foreign currency transaction losses (gains), net”, the years ended December 31 2016 and 2015 have been restated to conform to the year ended December 31, 2017 presentation.
|
Represents our income tax provision adjusted for the tax effect of pre-tax items excluded from Adjusted Net Income and the removal of the applicable discrete tax items. The tax effect of pre-tax items excluded from Adjusted Net Income is computed using the statutory tax rate related to the jurisdiction that was impacted by the adjustment after taking into account the impact of permanent differences and valuation allowances. Discrete tax items include changes in tax laws or rates, changes in uncertain tax positions relating to prior years and changes in valuation allowances. All impacts relating the Tax Cuts and Jobs Act of 2017 have been included as an adjustment on the ‘Tax law change” line of the table below.
The income tax provision, as adjusted for each of the periods presented below consists of the following.
| |
|
Year Ended December 31,
|
|
|
(in millions)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
Benefit for income taxes
|
|
$
|
(131.2
|
)
|
|
$
|
(31.9
|
)
|
|
$
|
(14.7
|
)
|
|
Tax impact of pre-tax income adjustments
|
|
|
139.3
|
|
|
|
71.8
|
|
|
|
76.7
|
|
|
Tax law change
|
|
|
95.3
|
|
|
|
-
|
|
|
|
-
|
|
|
Discrete tax items
|
|
|
2.0
|
|
|
|
(5.2
|
)
|
|
|
9.9
|
|
|
Income tax provision, as adjusted
|
|
$
|
105.4
|
|
|
$
|
34.7
|
|
|
$
|
71.9
|
|
| ITEM 7. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following discussion contains management’s discussion and analysis of our financial condition and results of operations and should be read together with “Item 6. Selected Financial Data” and our audited consolidated financial statements and related notes thereto included elsewhere in this Form 10-K. This discussion contains forward-looking statements and involves numerous risks and uncertainties. Our actual results may differ materially from those anticipated in any forward-looking statements as a result of many factors, including those set forth under the “Special Note Regarding Forward-Looking Statements,” “Item 1A. Risk Factors” and elsewhere in this Form 10-K.
Executive Overview
Our Company
We are a leading global provider of mission-critical flow control and compression equipment and associated aftermarket parts, consumables and services, which we sell across multiple attractive end-markets within the industrial, energy and medical industries. We manufacture one of the broadest and most complete ranges of compressor, pump, vacuum and blower products in our markets, which, combined with our global geographic footprint and application expertise, allows us to provide differentiated product and service offerings to our customers. Our products are sold under a collection of premier, market-leading brands, including Gardner Denver, CompAir, Nash, Emco Wheaton, Robuschi, Elmo Rietschle and Thomas, which we believe are globally recognized in their respective end-markets and known for product quality, reliability, efficiency and superior customer service. These attributes, along with over 155 years of engineering heritage, generate strong brand loyalty for our products and foster long-standing customer relationships, which we believe have resulted in leading market positions within each of our operating segments. We have sales in more than 175 countries and our diverse customer base utilizes our products across a wide array of end-markets that have favorable near- and long-term growth prospects, including industrial manufacturing, energy (with particular exposure to the North American upstream land-based market), transportation, medical and laboratory sciences, food and beverage packaging and chemical processing.
Our products and services are critical to the processes and systems in which they are utilized, which are often complex and function in harsh conditions where the cost of failure or downtime is high. However, our products and services typically represent only a small portion of the costs of the overall systems or functions that they support. As a result, our customers place a high value on our application expertise, product reliability and the responsiveness of our service. To support our customers and market presence, we maintain significant global scale with 38 key manufacturing facilities, more than 30 complementary service and repair centers across six continents and approximately 6,400 employees worldwide as of December 31, 2017.
The process-critical nature of our product applications, coupled with the standard wear and tear replacement cycles associated with the usage of our products, generates opportunities to support customers with our broad portfolio of aftermarket parts, consumables and services. Customers place a high value on minimizing any time their operations are offline. As a result, the availability of replacement parts, consumables and our repair and support services are key components of our value proposition. Our large installed base of products provides a recurring revenue stream through our aftermarket parts, consumables and services offerings. As a result, our aftermarket revenue is significant, representing 41% of total Company revenue and approximately 45% of our combined Industrials and Energy segments’ revenue in 2017.
Our Segments
We report our results of operations through three reportable segments: Industrials, Energy and Medical.
Industrials
We design, manufacture, market and service a broad range of air compression, vacuum and blower products, including associated aftermarket parts, consumables and services, across a wide array of technologies and applications for use in diverse end-markets. Compressors are used to increase the pressure of air or gas, vacuum products are used to remove air or gas in order to reduce the pressure below atmospheric levels and blower products are used to produce a high volume of air or gas at low pressure. Almost every manufacturing and industrial facility, and many service and process industry applications, use air compression, vacuum and blower products in a variety of process-critical applications, such as the operation of power industrial air tools, vacuum packaging of food products and aeration of waste water, among others. We offer one of the broadest portfolios of compression, vacuum and blower technology in our markets, which we believe, alongside our geographic footprint, allows us to provide differentiated service to our customers globally and maintain leading positions in many of our end-markets. We sell our Industrials products through an integrated network of direct sales representatives and independent distributors, which is strategically tailored to meet the dynamics of each target geography or end-market. In 2017, the Industrials segment generated Segment Revenue of $1,130.7 million and Segment Adjusted EBITDA of $242.7 million, reflecting a Segment Adjusted EBITDA Margin of 21.5%.
Energy
We design, manufacture, market and service a diverse range of positive displacement pumps, liquid ring vacuum pumps, compressors and integrated systems, engineered fluid loading and transfer equipment and associated aftermarket parts, consumables and services. The highly engineered products offered by our Energy segment serve customers across upstream, downstream and midstream energy markets, as well as petrochemical processing, transportation and general industrial sectors. Our positive displacement pumps are fit-for-purpose to meet the demands and challenges of modern unconventional drilling and hydraulic fracturing activity, particularly in the major basins in the North American land market. The products we sell into upstream energy applications are highly aftermarket-intensive, and so we support these products in the field with one of the industry’s most comprehensive service networks, which encompasses locations across all major basins and shale plays in the North American land market. Our liquid ring vacuum pumps and compressors are highly engineered products specifically designed for continuous duty in harsh environments to serve a wide range of applications, including oil and gas refining and processing, mining, chemical processing, petrochemical and industrial applications. Finally, our engineered fluid loading and transfer equipment and systems ensure the safe and efficient transportation and transfer of petroleum products as well as certain other liquid commodity products to serve a wide range of industries. In 2017, the Energy segment generated Segment Revenue of $1,014.5 million and Segment Adjusted EBITDA of $296.1 million, reflecting a Segment Adjusted EBITDA Margin of 29.2%.
Medical
We design, manufacture and market a broad range of highly specialized gas, liquid and precision syringe pumps and compressors that are specified by medical and laboratory equipment suppliers and integrated into their final equipment for use in applications, such as oxygen therapy, blood dialysis, patient monitoring, laboratory sterilization and wound treatment, among others. We offer a comprehensive product portfolio across a breadth of pump technologies to address the medical and laboratory sciences pump and fluid handling industry, as well as a range of end-use vacuum products for laboratory science applications, and we recently expanded into liquid pumps and automated liquid handling components and systems. Our product performance, quality and long-term reliability are often mission-critical in healthcare applications. We are one of the largest product suppliers in the markets we serve and have long-standing customer relationships with industry-leading medical and laboratory equipment providers. In 2017, the Medical segment generated Segment Revenue of $230.2 million and Segment Adjusted EBITDA of $62.4 million, reflecting a Segment Adjusted EBITDA Margin of 27.1%.
Components of Our Revenue and Expenses
Revenues
We generate revenue from sales of our highly engineered, application-critical products and by providing associated aftermarket parts, consumables and services. We sell our products and deliver aftermarket services both directly to end-users and through independent distribution channels, depending on the product line and geography. Below is a description of our revenues by segment and factors impacting total revenues.
Industrials Revenue
Our Industrials Segment Revenues are generated primarily through sales of air compression, vacuum and blower products to customers in multiple industries and geographies. A significant portion of our sales in the Industrials segment are made to independent distributors. Revenue is recognized when products are shipped or delivered, title and risk of loss are passed to the customer and collection is reasonably assured. Our large installed base of products in our Industrials segment drives demand for recurring aftermarket support services primarily composed of replacement parts sales to our distribution partners and, to a lesser extent, by directly providing replacement parts and repair and maintenance services to end customers. Revenue for services is recognized when services are performed. Historically, our shipments and revenues have peaked during the fourth quarter as our customers seek to fully utilize annual capital spending budgets.
Energy Revenue
Our Energy Segment Revenues are generated primarily through sales of positive displacement pumps, liquid ring vacuum pumps, compressors and integrated systems and engineered fluid loading and transfer equipment and associated aftermarket parts, consumables and services for use primarily in upstream, midstream, downstream and petrochemical end-markets across multiple geographies. Certain contracts with customers in the mid- and downstream and petrochemical markets are higher sales value and often have longer lead times and involve more application specific engineering. Revenue is recognized for these arrangements when the contract is complete or substantially complete, provided all other revenue recognition criteria have been met. The arrangement is considered substantially complete when the Company receives acceptance and remaining tasks are perfunctory or inconsequential and in control of the Company. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined to be probable. As a result, the timing of these contracts can result in significant variation in reported revenue from quarter to quarter. Our large installed base of products in our Energy segment drives demand for recurring aftermarket support services to customers, including replacement parts, consumables and repair and maintenance services. The mix of aftermarket to original equipment revenue within the Energy segment is impacted by trends in upstream energy activity in North America. Revenue for services is recognized when services are performed. In response to customer demand for faster access to aftermarket parts and repair services, we expanded our direct aftermarket service locations in our Energy segment, particularly in North American markets driven by upstream energy activity. Energy segment products and aftermarket parts, consumables and services are sold both directly to end customers and through independent distributors, depending on the product category and geography.
Medical Revenue
Our Medical Segment Revenues are generated primarily through sales of highly specialized gas, liquid and precision syringe pumps that are specified by medical and laboratory equipment suppliers for use in medical and laboratory applications. Our products are often subject to extensive collaborative design and specification requirements, as they are generally components specifically designed for, and integrated into, our customers’ products. Revenue is recognized when products are shipped or delivered, title and risk of loss pass to the customer, and collection is reasonably assured. Our Medical segment has no substantive aftermarket revenues.
Expenses
Cost of Sales
Cost of sales includes the costs we incur, including purchased materials, labor and overhead related to manufactured products and aftermarket parts sold during a period. Depreciation related to manufacturing equipment and facilities is included in cost of sales. Purchased materials represent the majority of costs of sales, with steel, aluminum, copper and partially finished castings representing our most significant materials inputs. We have instituted a global sourcing strategy to take advantage of coordinated purchasing opportunities of key materials across our manufacturing plant locations.
Cost of sales for services includes the direct costs we incur, including direct labor, parts and other overhead costs including depreciation of equipment and facilities, to deliver repair, maintenance and other field services to our customers.
Selling and Administrative Expenses
Selling and administrative expenses consist of (i) salaries and other employee-related expenses for our selling and administrative functions and other activities not associated with the manufacture of products or delivery of services to customers; (ii) facility operating expenses for selling and administrative activities, including office rent, maintenance, depreciation and insurance; (iii) marketing and direct costs of selling products and services to customers including internal and external sales commissions; (iv) research and development expenditures; (v) professional and consultant fees; (vi) Sponsor fees and expenses; (vii) expenses related to our public stock offerings and to establish public company reporting compliance; and (viii) other miscellaneous expenses. Certain corporate expenses, including those related to our shared service centers in the United States and Europe, that directly benefit our businesses are allocated to our business segments. Certain corporate administrative expenses, including corporate executive compensation, treasury, certain information technology, internal audit and tax compliance, are not allocated to the business segments.
Amortization of Intangible Assets
Amortization of intangible assets includes the periodic amortization of intangible assets recognized when an affiliate of our Sponsor acquired us on July 30, 2013 and intangible assets recognized in connection with businesses we acquired since July 30, 2013, including customer relationships and trademarks.
Impairment of Goodwill and Other Intangible Assets
Impairment of goodwill and other intangible assets includes non-cash charges we recognized for the impairment of goodwill and other intangible assets.
Other Operating Expense, Net
Other operating expense, net includes foreign currency gains and losses, restructuring charges, certain litigation and contract settlement losses, environmental remediation, stock-based compensation expense and other miscellaneous operating expenses.
Benefit or Provision for Income Taxes
The benefit or provision for income taxes includes U.S. federal, state and local income taxes and all non-U.S. income taxes. We are subject to income tax in approximately 33 jurisdictions outside of the United States. Because we conduct operations on a global basis, our effective tax rate depends, and will continue to depend, on the geographic distribution of our pre-tax earnings among several different taxing jurisdictions. Our effective tax rate can also vary based on changes in the tax rates of the different jurisdictions, the availability of tax credits and non-deductible items.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code that affected 2017, including, but not limited to, (1) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years, (2) bonus depreciation that will allow for full expensing of qualified property, and (3) a change in US deferred tax assets and liabilities relating to the US tax rate reduction from 35% to 21%.
Items Affecting our Reported Results
General Economic Conditions and Capital Spending in the Industries We Serve
Our financial results closely follow changes in the industries and end-markets we serve. Demand for most of our products depends on the level of new capital investment and planned and unplanned maintenance expenditures by our customers. The level of capital expenditures depends, in turn, on the general economic conditions as well as access to capital at reasonable cost. In particular, demand for our Industrials products generally correlates with the rate of total industrial capacity utilization and the rate of change of industrial production. Capacity utilization rates above 80% have historically indicated a strong demand environment for industrial equipment. In our Energy segment, demand for our products that serve upstream energy end-markets are influenced heavily by energy prices and the expectation as to future trends in those prices. Energy prices have historically been cyclical in nature and are affected by a wide range of factors. As energy prices start improving from low levels observed in the first half of 2016, we have observed increases in drilled but uncompleted wells, global land rig count, wells and footage drilled as well as drilling and completion capital expenditures to positively impact our results of operations. In the midstream and downstream portions of our Energy segment, overall economic growth and industrial production, as well as secular trends, impact demand for our products. In our Medical segment we expect demand for our products to be driven by favorable trends, including the growth in healthcare spend and expansion of healthcare systems due to an aging population requiring medical care and increased investment in health solutions and safety infrastructures in emerging economies. Over longer time periods, we believe that demand for all of our products also tends to follow economic growth patterns indicated by the rates of change in the GDP around the world, as augmented by secular trends in each segment. Our ability to grow and our financial performance will also be affected by our ability to address a variety of challenges and opportunities that are a consequence of our global operations, including efficiently utilizing our global sales, manufacturing and distribution capabilities and engineering innovative new product applications for end-users in a variety of geographic markets.
Foreign Currency Fluctuations
A significant portion of our revenues, approximately 52% for the year ended December 31, 2017, were denominated in currencies other than the U.S. dollar. Because much of our manufacturing facilities and labor force costs are outside of the United States, a significant portion of our costs are also denominated in currencies other than the U.S. dollar. Changes in foreign exchange rates can therefore impact our results of operations and are quantified when significant to our discussion.
Seasonality
Historically, our shipments and revenues have peaked during the fourth quarter as our customers seek to fully utilize annual capital spending budgets. Also, our EMEA operations generally experience a slowdown during the July, August and December holiday seasons. General economic conditions may, however, impact future seasonal variations.
Factors Affecting the Comparability of our Results of Operations
As a result of a number of factors, our historical results of operations are not comparable from period to period and may not be comparable to our financial results of operations in future periods. Key factors affecting the comparability of our results of operations are summarized below.
Variability within Upstream Energy Markets
We sell products and provide services to customers in upstream energy markets, primarily in the United States. For the upstream energy end-market, in our Energy segment we manufacture pumps and associated aftermarket products and services used in drilling, hydraulic fracturing and well service applications, while in our Industrials segment we sell dry bulk frac sand blowers, which are used in hydraulic fracturing operations. We refer to these products and services in the Energy and Industrial segments as “upstream energy.” Our Medical segment is not exposed to the upstream energy industry.
Variability in the upstream energy industry can significantly impact our financial results period to period. Since oil prices peaked in 2014, contractions in the upstream energy industry negatively impacted our financial results in 2015 and 2016. The annual average daily closing West Texas Intermediate spot market crude oil prices declined from $92.89 in 2014 to $48.80 in 2015 and $43.42 in 2016. Many exploration and production companies scaled back drilling activity during this period. As a result, according to Baker Hughes, Inc., the annual average weekly U.S. land rig count declined from 1,804 in 2014 to 943 in 2015 and 486 in 2016 and, according to Spears & Associates, Inc., the annual average monthly new wells drilled in the United States declined from 3,857 in 2014 to 2,398 in 2015 and 1,093 in 2016. With these precipitous declines in exploration and production activity, many oilfield service companies deferred maintenance and growth capital expenditures during 2015 and 2016.
Upstream energy markets stabilized late in 2016 and have continued to recover throughout 2017, positively impacting our financial results in the current year. In 2017 the annual average daily closing West Texas Intermediate spot market crude oil price increased to $50.80. As a result, there has been increased exploration activity and capital expenditures by upstream energy companies. According to Baker Hughes, Inc., the annual average weekly U.S. land rig count increased to 856 in 2017 compared to 486 in 2016, and according to Spears & Associates, Inc., the annual average monthly new wells drilled in the United States increased to 2,033 in 2017 compared to 1,093 in 2016. We have experienced significant improvement in demand for our upstream energy products and services in 2017.
We believe it is helpful to consider the impact of our exposure to upstream energy in evaluating our 2015, 2016 and 2017 Segment Revenue and Segment Adjusted EBITDA, in order to better understand other drivers of our performance during those periods, including operational improvements from the execution of our business transformation. For the Energy segment, we assess the impact of our exposure to upstream energy as the portion of Energy Segment Adjusted EBITDA of the business unit serving the upstream energy market. For the Industrials segment, we assess the impact as the standard profit on the specific upstream energy market products.
Restructuring and Other Business Transformation Initiatives
Our top priority since the completion of the KKR Transaction in 2013 has been the transformation of our business. In 2014, we commenced operational excellence initiatives to streamline our cost structure and support margin expansion, including through manufacturing footprint reduction, selling and administrative expense efficiency, and strategic sourcing in our Industrials, Energy and Medical segments.
A key element of our business transformation initiatives are restructuring programs within our Industrials, Energy, and Medical segments. Restructuring charges, program related facility reorganization, relocation and other costs, and related capital expenditures were impacted most significantly by these business transformation initiatives. Under these restructuring programs, we incurred restructuring charges of $5.3 million, $32.9 million and $4.7 million in 2017, 2016 and 2015, respectively. In addition, we incurred program related facility reorganization, relocation and other costs of $5.3 million, $8.7 million and $1.6 million in 2017, 2016 and 2015, respectively. We also made capital expenditures related to these programs of approximately $3.1 million in 2017, $16.2 million in 2016 and $6.9 million in 2015. The Industrials restructuring program included the closure of a business that had approximately $3 million and $9 million in revenues in 2016 and 2015, respectively. These restructuring programs were completed in 2017. We generally expect that the savings associated with these restructuring programs will recover the associated costs within two to three years of such costs being incurred.
Acquisitions
Given our global reach, market leading position in our various product categories, strong channel access and aftermarket presence and operational excellence competency, our Company provides an attractive acquisition platform in the flow control and compression equipment sectors. Part of our strategy for growth is to acquire complementary flow control and compression equipment businesses, which provide access to new technologies or geographies or improve our aftermarket offerings.
In April 2015, we acquired a manufacturer of precision syringe pumps and related technologies for approximately $30.8 million, creating a new automated liquid handling platform within our Medical segment. In August 2016, we built further upon our new automated liquid handling platform and acquired a manufacturer of highly specialized consumable micro-syringes and valves that are used in liquid handling instruments in our Medical segment for approximately $18.8 million. In June 2017, within our Industrials segment, we acquired a leading North American manufacturer of gas compression equipment and solutions for vapor recovery, biogas and other process and industrial applications for approximately $20.4 million (inclusive of an indemnity holdback of $1.9 million recorded in “Accrued liabilities”).
The revenues for these acquisitions subsequent to the respective dates of acquisition included in our financial results were $40.1 million, $19.4 million and $13.4 million for the years ended December 31, 2017, 2016 and 2015, respectively. The operating income for these acquisitions subsequent to the respective dates of acquisition, including organic growth since acquisition, included in our financial results was $5.2 million, $2.8 million and $2.4 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Sponsor Management Fees and Expenses
Through the date of our initial public offering, our Sponsor charged an annual management fee, as well as fees and expenses for services provided. These fees and charges were $17.3 million, $4.8 million and $4.6 million for the years ended December 31, 2017, 2016 and 2015, respectively. In May 2017, the monitoring agreement was terminated in accordance with its terms and we paid a termination fee of approximately $16.2 million.
Stock-based Compensation Expense
Under the terms of the 2013 Stock Incentive Plan, subsequent to the initial public offering in May 2017, the Company recognized stock-based compensation expense of approximately $77.6 million related to time-based and performance-based stock options. As of December 31, 2017 there was $9.1 million of unrecognized stock-based compensation expense related to outstanding stock options that will be recognized in future periods. The Company also recognized $97.4 million of compensation expense related to a grant of 5.5 million deferred stock units (“DSU”) to employees at the date of the initial public offering and employer taxes related to DSUs of $19.2 million. The Company expects to make stock-based awards to employees and recognize stock-based compensation expenses in future periods.
Income Taxes
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code that will affect 2017, including, but not limited to, (1) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years and (2) bonus depreciation that will allow for full expensing of qualified property.
The Tax Act also establishes new tax laws that will affect 2018, including, but not limited to, (1) reduction of the U.S. federal corporate tax rate; (2) elimination of the corporate alternative minimum tax (“AMT”); (3) the creation of the base erosion anti-abuse tax (“BEAT”), a new minimum tax; (4) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (5) a new provision designed to tax global intangible low-taxed income (“GILTI”), which allows for the possibility of using foreign tax credits (“FTC”) and a deduction of up to 50% to offset the income tax liability (subject to some limitations); (6) a new limitation on deductible interest expense; (7) the repeal of the domestic production activity deduction; (8) limitations on the deductibility of certain executive compensation; (9) limitations on the use of FTCs to reduce the U.S. income tax liability; and (10) limitations on net operating losses (“NOL”) generated after December 31, 2017, to 80% of taxable income.
The SEC staff issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
For various reasons we have not completed our accounting for the income tax effects of certain elements of the Tax Act. If we were able to make reasonable estimates of the effects of elements for which our analysis is not yet complete, we recorded provisional adjustments, as described above. If we were not yet able to make reasonable estimates of the impact of certain elements, we have not recorded any adjustments related to those elements and have continued accounting for them in accordance with ASC 740 on the basis of the tax laws in effect before the Tax Act. As we complete our accounting of the income tax effects of the Tax Act, we anticipate that we may record additional charges or benefits at such time as prescribed by ASC 740 and SAB 118, and as further information becomes available regarding the Tax Act, we may make further adjustments to the provisions that have been recorded in our financial statements. We also continue to examine the impact this tax reform legislation may have on our business.
The Tax Act reduces the corporate tax rate to 21%, effective January 1, 2018. While we are able to make a reasonable estimate of the impact of the reduction in corporate rate, it may be affected by other analyses related to the Tax Act, including, but not limited to, our calculation of deemed repatriation of deferred foreign income and the state tax effect of adjustments made to federal temporary differences.
The Deemed Repatriation Transition Tax (“Transition Tax”) is a tax on previously untaxed accumulated and current earnings and profits (“E&P”) of certain of our foreign subsidiaries. To determine the amount of the Transition Tax, we must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, the amount of non-U.S. income taxes paid on such earnings, and the impact of the accumulated overall foreign source loss on our ability to utilize foreign tax credits. We are able to make a reasonable estimate of the Transition Tax and recorded a provisional Transition Tax obligation. However, we are continuing to gather additional information to more precisely compute the amount of the Transition Tax.
Our accounting for the following elements of the Tax Act is incomplete, and we were not yet able to make reasonable estimates of the effects. Therefore, no provisional adjustments, other than the adjustment related to the effects of the transitional tax, were recorded related to ASC 740-30.
The Tax Act creates a new requirement that certain income (i.e., GILTI) earned by controlled foreign corporations (“CFC”) must be included currently in the gross income of the CFCs’ U.S. shareholder. GILTI is the excess of the shareholder’s “net CFC tested income” over the net deemed tangible income return, which is currently defined as the excess of (1) 10% of the aggregate of the U.S. shareholder’s pro rata share of the qualified business asset investment of each CFC with respect to which it is a U.S. shareholder over (2) the amount of certain interest expense taken into account in the determination of net CFC-tested income.
Because of the complexity of the new GILTI tax rules, we are continuing to evaluate this provision of the Tax Act and the application of ASC 740. Under U.S. GAAP, we are allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method”). Because whether we expect to have future U.S. inclusions in taxable income related to GILTI depends on not only our current structure and estimated future results of global operations but also our intent and ability to modify our structure and/or our business, we are not yet able to reasonably estimate the effect of this provision of the Tax Act.
Due to these complexities, we have not been able to determine if our company policy concerning permanent reinvestment will change as a result of the new Tax Act. No additional adjustments relating to ASC 740-30 have been recorded in accordance with SAB 118 as we are not currently able to reasonably estimate the impact as of the filing of the December 31, 2017 financial statements.
See Note 14 “Income Taxes” to our audited consolidated financial statements included elsewhere in this Form 10-K.
Outlook
Industrials Segment
The mission-critical nature of our Industrials products across manufacturing processes drives a demand environment and outlook that are highly correlated with global and regional industrial production, capacity utilization and long-term GDP growth. In the United States and Europe, we are poised to continue benefiting from expected growth in real GDP, along with a continued rebound in industrial production activity in 2018. In APAC, despite the recent deceleration, GDP growth remains robust. In the fourth quarter of 2017, we had $319.2 million of orders in our Industrials segment, an increase of 25% over the fourth quarter of 2016, or a 20% increase on a constant currency basis.
Energy Segment
Our Energy segment has a diverse range of equipment and associated aftermarket parts, consumables and services for a number of market sectors with energy exposure, spanning upstream, midstream, downstream and petrochemical applications. Demand for certain of our Energy products has historically corresponded to the supply and demand dynamics related to oil and natural gas products, and has been influenced by oil and natural gas prices, the level and intensity of hydraulic fracturing activity, rig count, drilling activity and other economic factors. These factors have caused the level of demand for certain of our Energy products to change at times (both positively and negatively) and we expect these trends to continue in the future. In the fourth quarter of 2017, we had $281.2 million of orders in our Energy segment, an increase of 62% over the fourth quarter of 2016, or a 58% increase on a constant currency basis.
An increased number of drilling rigs have reentered the market as crude oil prices have improved from low points observed during the first half of 2016 and the number of drilled but uncompleted wells has grown 82% from December 2013 to December 2017. Land rig count in the United States has increased 137% from 384 rigs in May 2016 to 911 rigs in December 2017 compared to a relatively flat rig count growth in the rest of the world over this same time period. This trend is expected to continue, as Spears & Associates, Inc. projects the U.S. land rig count to grow 12% from the fourth quarter of 2017 to the fourth quarter of 2018, compared to 2.5% for the rest of the world (excluding Canada) over this same time period. We believe we are well positioned to benefit from the expected growth in drilling rigs and improvements in crude oil prices. In addition, secular industry trends that are driving increased demand of newer, fit-for-purpose equipment with innovations that increase productivity and are increasing the frequency of replacement, refurbishment and upgrade cycles of pumping equipment and associated consumable products used in drilling and particularly hydraulic fracturing activity by increasing the intensity of such activities. As a result of our expanded direct aftermarket service locations, particularly within North America, we believe we are well positioned to benefit from both the increasing intensity of hydraulic fracturing activity and the increase in the backlog of drilled but uncompleted wells. We expect both trends to positively impact our hydraulic fracturing and drilling product mix and our aftermarket to original equipment ratio within the Energy segment.
Our midstream and downstream products provide relatively stable demand with attractive, long-term growth trends related to an expected increase in the production and transportation of hydrocarbons. Demand for our petrochemical industry products correlates with growth in the development of new petrochemical plants as well as activity levels therein. Advancements in the development of unconventional natural gas resources in North America over the past decade have resulted in the abundant availability of locally-sourced natural gas as feedstock for petrochemical plants in North America, supporting long-term growth.
Medical Segment
During 2016, we focused on the development and introduction of new products and applications to access the liquid pump market, leveraging our technology and expertise in gas pumps. We believe 2017 was a transition year; while a large customer has elected to dual source its requirements for gas pumps, we expanded into the liquid pump market and diversified our customer base. For example, excluding the impact of the customer that elected to dual source, revenues for the year ended December 31, 2017 increased 9.1% compared to 2016. Entering 2018, we believe that demand for products and services in the Medical space will continue to benefit from attractive secular growth trends in the aging population requiring medical care, emerging economies modernizing and expanding their healthcare systems and increased investment globally in health solutions. In addition, we expect growing demand for higher healthcare efficiency, requiring premium and high performance systems. In the fourth quarter of 2017, we had $66.8 million of orders in our Medical segment, an increase of 29% over the fourth quarter of 2016, or a 23% increase on a constant currency basis.
How we Assess the Performance of Our Business
We manage operations through the three business segments described above. In addition to our consolidated GAAP financial measures, we review various non-GAAP financial measures, including Adjusted EBITDA, Adjusted Net Income and Free Cash Flow.
We believe Adjusted EBITDA and Adjusted Net Income are helpful supplemental measures to assist us and investors in evaluating our operating results as they exclude certain items whose fluctuation from period to period do not necessarily correspond to changes in the operations of our business. Adjusted EBITDA represents net loss before interest, taxes, depreciation, amortization and certain non-cash, non-recurring and other adjustment items. We believe that the adjustments applied in presenting Adjusted EBITDA are appropriate to provide additional information to investors about certain material non-cash items and about non-recurring items that we do not expect to continue at the same level in the future. Adjusted Net Income is defined as net loss including interest, depreciation and amortization of non-acquisition related intangible assets and excluding other items used to calculate Adjusted EBITDA and further adjusted for the tax effect of these exclusions.
We use Free Cash Flow to review the liquidity of our operations. We measure Free Cash Flow as cash flows from operating activities less capital expenditures. We believe Free Cash Flow is a useful supplemental financial measure for us and investors in assessing our ability to pursue business opportunities and investments and to service our debt. Free Cash Flow is not a measure of our liquidity under GAAP and should not be considered as an alternative to cash flows from operating activities.
Management and our board of directors regularly use these measures as tools in evaluating our operating and financial performance and in establishing discretionary annual compensation. Such measures are provided in addition to, and should not be considered to be a substitute for, or superior to, the comparable measures under GAAP. In addition, we believe that Adjusted EBITDA, Adjusted Net Income and Free Cash Flow are frequently used by investors and other interested parties in the evaluation of issuers, many of which also present Adjusted EBITDA, Adjusted Net Income and Free Cash Flow when reporting their results in an effort to facilitate an understanding of their operating and financial results and liquidity.
Adjusted EBITDA, Adjusted Net Income and Free Cash Flow should not be considered as alternatives to net income (loss) or any other performance measure derived in accordance with GAAP, or as alternatives to cash flow from operating activities as a measure of our liquidity. Adjusted EBITDA, Adjusted Net Income and Free Cash Flow have limitations as analytical tools, and you should not consider such measures either in isolation or as substitutes for analyzing our results as reported under GAAP.
Included in our discussion of our consolidated and segment results below are changes in revenues and Adjusted EBITDA on a Constant Currency basis. Constant Currency information compares results between periods as if exchange rates had remained constant period over period. We define Constant Currency revenues and Adjusted EBITDA as total revenues and Adjusted EBITDA excluding the impact of foreign exchange rate movements and use it to determine the Constant Currency revenue and Adjusted EBITDA growth on a year-over-year basis. Constant Currency revenues and Adjusted EBITDA are calculated by translating current period revenues and Adjusted EBITDA using corresponding prior period exchange rates. These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP. Results on a Constant Currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not a measure of performance presented in accordance with GAAP.
For further information regarding these measures, see “Item 6. Selected Financial Data.”
Results of Operations
Consolidated results should be read in conjunction with segment results and the Segment Information notes to our audited consolidated financial statements included elsewhere in this Form 10-K, which provide more detailed discussions concerning certain components of our consolidated statements of operations. All intercompany accounts and transactions have been eliminated within the consolidated results.
Consolidated Results of Operations for the Years Ended December 31, 2017, 2016 and 2015
|
|
|
Year Ended December 31,
|
|
|
(dollars in millions)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,375.4
|
|
|
$
|
1,939.4
|
|
|
$
|
2,126.9
|
|
|
Cost of sales
|
|
|
1,477.5
|
|
|
|
1,222.7
|
|
|
|
1,347.8
|
|
|
Gross Profit
|
|
|
897.9
|
|
|
|
716.7
|
|
|
|
779.1
|
|
|
Selling and administrative expenses
|
|
|
446.6
|
|
|
|
414.3
|
|
|
|
427.0
|
|
|
Amortization of intangible assets
|
|
|
118.9
|
|
|
|
124.2
|
|
|
|
115.4
|
|
|
Impairment of goodwill
|
|
|
-
|
|
|
|
-
|
|
|
|
343.3
|
|
|
Impairment of other intangible assets
|
|
|
1.6
|
|
|
|
25.3
|
|
|
|
78.1
|
|
|
Other operating expenses, net
|
|
|
222.1
|
|
|
|
48.6
|
|
|
|
20.7
|
|
|
Operating income (loss)
|
|
|
108.7
|
|
|
|
104.3
|
|
|
|
(205.4
|
)
|
|
Interest expense
|
|
|
140.7
|
|
|
|
170.3
|
|
|
|
162.9
|
|
|
Loss on extinguishment of debt
|
|
|
84.5
|
|
|
|
-
|
|
|
|
-
|
|
|
Other income, net
|
|
|
(3.8
|
)
|
|
|
(2.8
|
)
|
|
|
(1.6
|
)
|
|
Loss before income taxes
|
|
|
(112.7
|
)
|
|
|
(63.2
|
)
|
|
|
(366.7
|
)
|
|
Benefit for income taxes
|
|
|
(131.2
|
)
|
|
|
(31.9
|
)
|
|
|
(14.7
|
)
|
|
Net income (loss)
|
|
|
18.5
|
|
|
|
(31.3
|
)
|
|
|
(352.0
|
)
|
|
Net income (loss) attributable to noncontrolling interest
|
|
|
0.1
|
|
|
|
5.3
|
|
|
|
(0.8
|
)
|
|
Net income (loss) attributable to Gardner Denver Holdings, Inc
|
|
$
|
18.4
|
|
|
$
|
(36.6
|
)
|
|
$
|
(351.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
37.8
|
%
|
|
|
37.0
|
%
|
|
|
36.6
|
%
|
|
Selling and administrative expenses
|
|
|
18.8
|
%
|
|
|
21.4
|
%
|
|
|
20.1
|
%
|
|
Operating income (loss)
|
|
|
4.6
|
%
|
|
|
5.4
|
%
|
|
|
(9.7
|
)%
|
|
Net income (loss)
|
|
|
0.8
|
%
|
|
|
(1.6
|
)%
|
|
|
(16.5
|
)%
|
|
Adjusted EBITDA(1)
|
|
|
23.6
|
%
|
|
|
20.7
|
%
|
|
|
19.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(1)
|
|
$
|
561.5
|
|
|
$
|
400.7
|
|
|
$
|
418.9
|
|
|
Adjusted net income(1)
|
|
|
249.3
|
|
|
|
133.6
|
|
|
|
128.1
|
|
|
Cash flows - operating activities
|
|
|
200.5
|
|
|
|
165.6
|
|
|
|
172.1
|
|
|
Cash flows - investing activities
|
|
|
(60.8
|
)
|
|
|
(82.1
|
)
|
|
|
(84.0
|
)
|
|
Cash flows - financing activities
|
|
|
(17.4
|
)
|
|
|
(43.0
|
)
|
|
|
(35.0
|
)
|
|
Free cash flow(1)
|
|
|
143.7
|
|
|
|
91.2
|
|
|
|
101.1
|
|
|
(1) |
See “Item 6. Selected Financial Data” for a reconciliation to the most directly comparable GAAP measure.
|
Revenues
Revenues for 2017 were $2,375.4 million, an increase of $436.0 million, or 22.5%, compared to $1,939.4 million in 2016. The increase in revenues was due primarily to higher revenues from upstream energy exposed markets (20.9% or $405.5 million), the favorable impact of foreign currencies (1.1% or $21.8 million), improved pricing in the other markets of our Energy segment as well as in our Industrials and Medical segments (1.0% or $18.8 million), and higher volume in our Industrials segment including from acquisitions net of divestitures (0.1% or $1.6 million), partially offset by lower volume including acquisitions in other markets in our Energy segment as well as in our Medical segment (0.6% or $11.7 million). The percentage of consolidated revenues derived from aftermarket parts and services was 41.3% in 2017 compared to 34.7% in 2016.
Revenues for 2016 were $1,939.4 million, a decrease of $187.5 million, or 8.8%, compared to $2,126.9 million in 2015. The decrease in revenues was due primarily to lower revenues from upstream energy exposed markets (6.9% or $146.8 million), lower volume in other markets in our Energy segment as well as in our Industrials and Medical segments (2.0% or $43.1 million), and the unfavorable impact of foreign currencies, especially the Euro and the British Pound relative to the U.S. Dollar (1.4% or $28.9 million), partially offset by improved pricing in other markets in our Energy segment as well as in our Industrials and Medical segments (1.2% or $25.3 million) and the impact of acquisitions in 2016 and 2015 (0.3% or $6.0 million).
See further analysis in the segment results below.
Gross Profit
Gross profit in 2017 was $897.9 million, an increase of $181.2 million, or 25.3%, compared to $716.7 million in 2016, and as a percentage of revenues was 37.8% in 2017 and 37.0% in 2016. The increase in gross profit reflects higher revenues from upstream energy exposed markets, higher volume in our Industrials segment including acquisitions and net of divestitures, improved pricing in other markets in our Energy segment as well as in our Industrials and Medical segments, and the favorable impact of foreign currencies, partially offset by lower volume including acquisitions in other markets in our Energy segment as well as in our Medical segment.
Gross profit in 2016 was $716.7 million, a decrease of $62.4 million, or 8.0%, compared to $779.1 million in 2015, and as a percentage of revenues was 37.0% in 2016 and 36.6% in 2015. The decrease in gross profit reflects lower sales volume and the unfavorable impact of foreign currencies, partially offset by improved pricing and reduced material and other manufacturing costs.
Selling and Administrative Expenses
Selling and administrative expenses were $446.6 million in 2017, an increase of $32.3 million, or 7.8%, compared to $414.3 million in 2016. The increase in selling and administrative expense in 2017 primarily reflects increased salaries and other employee related expenses, and professional and consulting fees, partially offset by reduced facilities operating expenses and reduced sales commissions. Selling and administrative expenses as a percentage of revenues decreased primarily due to higher revenues. Selling and administrative expenses in 2017 includes $12.2 million of expenses related to our public stock offerings and establishment of public company financial reporting and $17.3 million of Sponsor fees and expenses, compared to $0.2 million and $4.8 million of Sponsor fees and expenses in 2016, respectively. Excluding these items, selling and administrative expenses were $417.1 million in 2017 compared to $409.3 million in 2016, and selling and administrative expenses as a percentage of revenues decreased to 17.6% in 2017 from 21.1% in 2016.
Selling and administrative expenses were $414.3 million in 2016, a decrease of $12.7 million, or 3.0%, compared to $427.0 million in 2015. The decrease in selling and administrative expenses primarily reflects reduced sales commissions, reduced facilities operating expenses and the favorable impact of foreign currencies, partially offset by increased salaries and other employee-related expenses and professional and consultant fees. Selling and administrative expenses as a percentage of revenue increased to 21.4% in 2016 from 20.1% in 2015, primarily due to lower revenues.
Amortization of Intangible Assets
Amortization of intangible assets was $118.9 million, $124.2 million, and $115.4 million in 2017, 2016 and 2015, respectively. The decrease of $5.3 million in 2017 compared to 2016 was primarily due to assets that became fully amortized in 2016, partially offset by changes in foreign currencies. The increase of $8.8 million in 2016 compared to 2015 was primarily due to tradenames that were determined to no longer have an indefinite useful life in the fourth quarter of 2015 and that have been amortized prospectively.
Impairment of Goodwill and Other Intangible Assets
In 2017, we recorded a non-cash charge for the impairment of other intangible assets of $1.6 million primarily related to trademarks in our Industrials segment. In 2016, the Company recorded a non-cash charge for the impairment of other intangible assets of $25.3 million, primarily related to trademarks in our Industrials segment. In 2015, we recorded non-cash charges for the impairment of goodwill and other intangible assets of $421.4 million, primarily related to the Petroleum and Industrial Pump (“P&IP”) reporting unit of our Energy segment. The impairment of goodwill within the P&IP reporting unit resulted from the adverse impact of declining oil prices on our customer base and the corresponding demand for our products.
Other Operating Expense, Net
Other operating expense, net was $222.1 million in 2017, an increase of $173.5 million compared to $48.6 million in 2016, primarily due to the recognition of stock-based compensation expense for stock options and deferred stock units of $175.0 million, employer taxes related to deferred stock options of $19.2 million and increased foreign currency losses of $9.3 million in 2017 compared to gains of $5.9 million in 2016, partially offset by lower employee severance costs of $5.3 million in 2017 compared to $32.9 million in 2016, and lower environmental remediation of $0.9 million in 2017 compared to $5.6 million in 2016.
Other operating expense, net was $48.6 million in 2016, an increase of $27.9 million, compared to $20.7 million in 2015, primarily due to an increase in restructuring charges of $28.2 million compared to $32.9 million in 2016 and $4.7 million in 2015, and a charge for environmental remediation expenses of $5.6 million in 2016 related to a former production facility.
Interest Expense
Interest expense was $140.7 million, $170.3 million and $162.9 million in 2017, 2016 and 2015, respectively. The decrease of $29.6 million in 2017 compared to 2016 was primarily due to reduced debt as a result of repayments of debt with proceeds of the Company’s initial public offering, and a decreased weighted-average interest rate of approximately 6.0% in 2017 compared to 6.1% in 2016. The increase of $7.4 million in 2016 compared to 2015 primarily resulted from a higher weighted average interest rate of approximately 6.1% in 2016 compared to 5.8% in 2015 due to an increase in the amount of variable rate debt swapped to fixed rates that were higher than the variable rates in the prior year.
Other Income, Net
Other income, net, was $3.8 million, $2.8 million and $1.6 million in 2017, 2016 and 2015, respectively and consists primarily of investment income and realized and unrealized gains and losses on investments.
(Benefit) Provision for Income Taxes
The benefit for income taxes was $131.2 million resulting in a 116.3% effective tax benefit rate in 2017 compared to a benefit of $31.9 million resulting in a 50.5% effective tax benefit rate in 2016. The increase in the tax benefit and the effective tax rate resulted primarily from the Tax Act. There was a $89.6 million deferred benefit associated with the rate moving from 35% to 21%. In 2017 we recognized an ASC 740-30 liability reduction, resulting in a benefit of $69.0 million which was partially offset by a one-time transition tax provision of approximately $63.3 million.
The benefit for income taxes in 2016 was $31.9 million resulting in a 50.5% effective tax benefit rate in 2016 compared to a benefit of $14.7 million resulting in a 4.0% effective tax benefit rate in 2015. The increase in the tax benefit and effective rate in 2016 compared to 2015 resulted primarily from an increase in the tax benefit for losses in the U.S. and a $16.6 million tax benefit relating to the reduction in deferred U.S. tax liability for the repatriation of unremitted foreign earnings partially offset by a $11.6 million tax on capital gains related to legal entity reorganization in Europe. In 2015, the loss before income taxes in the U.S. included a charge for the impairment of goodwill of approximately $331.0 million with no corresponding tax benefit.
Net Income (Loss)
Net income was $18.5 million in 2017 compared to a net loss of $31.3 million in 2016. The increase in net income was primarily due to higher operating income on higher revenues and gross profit and lower interest expense, and an increase in the benefit for income taxes, partially offset by higher stock-based compensation expense and loss on extinguishment of debt.
Net loss was $31.3 million in 2016 compared to $352.0 million in 2015. The reduced net loss was primarily due to lower charges for the impairment of goodwill and other intangible assets in 2016, lower selling and administrative expenses and the increased benefit for income taxes, offset by lower gross profit on lower revenues, increased other operating expense, net and higher interest expense.
Adjusted EBITDA
Adjusted EBITDA increased $160.8 million to $561.5 million in 2017 compared to $400.7 million in 2016. Adjusted EBITDA as a percentage of revenues increased 290 basis points to 23.6% in 2017 from 20.7% in 2016. The increase in Adjusted EBITDA was primarily due to increased revenues in upstream energy exposed markets ($159.7 million), improved pricing ($18.8 million), the favorable impact of foreign currencies ($5.9 million), and lower material and manufacturing costs ($1.2 million), partially offset by lower volume in other markets in our Energy segment as well as in our Industrials and Medical segments including acquisitions and divestitures ($15.5 million), and higher selling and administrative costs ($9.3 million).
Adjusted EBITDA decreased $18.2 million to $400.7 million in 2016 compared to $418.9 million in 2015. Adjusted EBITDA as a percentage of revenues increased 100 basis points to 20.7% in 2016 from 19.7% in 2015. The decrease in Adjusted EBITDA was primarily due to reduced revenues in upstream energy exposed markets ($61.6 million), reduced volume in other markets in our Energy segment as well as in our Industrials and Medical segments ($14.3 million) and the unfavorable impact of foreign currencies ($6.4 million), partially offset by improved pricing in other markets in our Energy segment as well as in our Industrials and Medical segments ($25.4 million), reduced material and other manufacturing costs ($18.5 million) and lower selling and administrative expenses ($20.2 million).
Adjusted Net Income
Adjusted Net Income increased $115.7 million to $249.3 million in 2017 compared to $133.6 million in 2016. The increase was primarily due to increased Adjusted EBITDA and lower interest expense, partially offset by an increase in the income tax provision, as adjusted.
Adjusted Net Income increased $5.5 million to $133.6 million in 2016 compared to $128.1 million in 2015. The increase was primarily due to a lower income tax provision, as adjusted, partially offset by lower Adjusted EBITDA and higher interest expense, depreciation expense and amortization of non-acquisition related intangible assets.
Segment Results
We classify our businesses into three segments: Industrials, Energy and Medical. Our Corporate operations (as described below) are not discussed separately as any results that had a significant impact on operating results are included in the consolidated results discussion above.
We evaluate the performance of our segments based on Segment Revenues and Segment Adjusted EBITDA. Segment Adjusted EBITDA is indicative of operational performance and ongoing profitability. Our management closely monitors Segment Adjusted EBITDA to evaluate past performance and identify actions required to improve profitability.
The segment measurements provided to, and evaluated by, the chief operating decision maker are described in Note 20 “Segment Information” of the Notes to our audited consolidated financial statements included elsewhere in this Form 10-K.
Included in our discussion of our segment results below are changes in Segment Revenues and Segment Adjusted EBITDA on a Constant Currency basis. Constant Currency information compares results between periods as if exchange rates had remained constant period over period. We define Constant Currency as changes in Segment Revenues and Segment Adjusted EBITDA excluding the impact of foreign exchange rate movements. We use these measures to determine the Constant Currency Segment Revenues and Segment Adjusted EBITDA growth on a year-on-year basis. Constant Currency Segment Revenues and Segment Adjusted EBITDA are calculated by translating current period Segment Revenues and Segment Adjusted EBITDA using prior period exchange rates. These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP. Results on a constant currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and are not a measure of performance presented in accordance with GAAP.
Segment Results for Years Ended December 31, 2017, 2016 and 2015
The following tables display Segment Revenues, Segment Adjusted EBITDA and Segment Adjusted EBITDA Margin (Segment Adjusted EBITDA as a percentage of Segment Revenues) for each of our Segments and illustrates, on a percentage basis, the impact of foreign currency fluctuations on Segment Revenues and Segment Adjusted EBITDA growth.
Industrials Segment Results
| |
|
Years Ended December 31,
|
|
|
Percent Change
|
|
|
Constant Currency
Percent Change
|
|
|
(dollars in millions)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2017 vs. 2016
|
|
|
2016 vs. 2015
|
|
|
2017 vs. 2016
|
|
|
2016 vs. 2015
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Revenues
|
|
$
|
1,130.7
|
|
|
$
|
1,082.4
|
|
|
$
|
1,149.7
|
|
|
|
4.5
|
%
|
|
|
(5.9
|
)%
|
|
|
3.4
|
%
|
|
|
(4.0
|
)%
|
|
Segment Adjusted EBITDA
|
|
$
|
242.7
|
|
|
$
|
217.6
|
|
|
$
|
197.6
|
|
|
|
11.5
|
%
|
|
|
10.1
|
%
|
|
|
10.2
|
%
|
|
|
12.0
|
%
|
|
Segment Margin
|
|
|
21.5
|
%
|
|
|
20.1
|
%
|
|
|
17.2
|
%
|
|
140 bps
|
|
|
290 bps
|
|
|
|
|
|
|
|
|
|
2017 vs. 2016
Segment Revenues for 2017 were $1,130.7 million, an increase of $48.3 million, or 4.5%, compared to $1,082.4 million in 2016. The increase in Segment Revenues was due to higher volume including acquisitions and net of divestitures (1.9% or $20.4 million, including $18.9 million from upstream energy exposed markets), higher pricing (1.5% or $16.1 million) and the favorable impact of foreign currencies (1.1% or $11.8 million). The percentage of Segment Revenues derived from aftermarket parts and service was 34.0% in 2017 compared to 34.7% in 2016.
Segment Adjusted EBITDA in 2017 was $242.7 million, an increase of $25.1 million, or 11.5%, from $217.6 million in 2016. Segment Margin increased 140 bps to 21.5% from 20.1% in 2016. The increase in Segment Adjusted EBITDA was due primarily to improved pricing ($16.1 million), higher volume including acquisitions and net of divestitures ($6.0 million, including $13.0 million from upstream energy exposed markets), the favorable impact of foreign currencies ($2.8 million), and lower selling and administrative expenses ($0.7 million), partially offset by higher material and other manufacturing costs ($0.5 million).
2016 vs. 2015
Segment Revenues for 2016 were $1,082.4 million, a decrease of $67.3 million, or 5.9%, compared to $1,149.7 million in 2015. The decrease in Segment Revenues was due to the unfavorable impact of foreign currencies (1.9% or $21.7 million), lower volume (4.6% or $53.3 million, including $21.9 million from upstream energy exposed markets) and revenues from business divestitures in 2016 (1.0% or $11.4 million), partially offset by improved pricing (1.7% or $19.1 million). The percentage of Segment Revenues derived from aftermarket parts, consumables and services was 34.7% in 2016 compared to 34.3% in 2015.
Segment Adjusted EBITDA in 2016 was $217.6 million, an increase of $20.0 million, or 10.1%, from $197.6 million in 2015. Segment Adjusted EBITDA Margin increased 290 basis points to 20.1% from 17.2% in 2015. The increase in Segment Adjusted EBITDA was due primarily to improved pricing ($19.1 million), lower material and other manufacturing costs ($13.9 million) and selling and administrative expenses ($20.9 million), partially offset by reduced volume ($30.3 million, including $11.7 million from upstream energy exposed markets) and the unfavorable impact of foreign currencies ($3.6 million).
Energy Segment Results
| |
|
Years Ended December 31,
|
|
|
Percent Change
|
|
|
Constant Currency
Percent Change
|
|
|
(dollars in millions)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2017 vs. 2016
|
|
|
2016 vs. 2015
|
|
|
2017 vs. 2016
|
|
|
2016 vs. 2015
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Revenues
|
|
$
|
1,014.5
|
|
|
$
|
628.4
|
|
|
$
|
753.5
|
|
|
|
61.4
|
%
|
|
|
(16.6
|
)%
|
|
|
60.0
|
%
|
|
|
(15.6
|
)%
|
|
Segment Adjusted EBITDA
|
|
$
|
296.1
|
|
|
$
|
143.8
|
|
|
$
|
186.8
|
|
|
|
105.9
|
%
|
|
|
(23.0
|
)%
|
|
|
104.0
|
%
|
|
|
(21.5
|
)%
|
|
Segment Margin
|
|
|
29.2
|
%
|
|
|
22.9
|
%
|
|
|
24.8
|
%
|
|
630 bps
|
|
|
(190) bps
|
|
|
|
|
|
|
|
|
|
2017 vs. 2016
Segment Revenues for 2017 were $1,014.5 million, an increase of $386.1 million, or 61.4%, compared to $628.4 million in 2016. The increase in Segment Revenues was due to higher revenues from upstream energy exposed markets (61.5% or $386.6 million), the favorable impact of foreign currencies (1.3% or $8.0 million), and improved pricing in other markets of our Energy segment (0.0% or $0.1 million), partially offset by lower volume in other markets of our Energy segment (1.4% or $8.6 million). The percentage of Segment Revenues derived from aftermarket parts and service was 58.0% in 2017 compared to 47.3% in 2016.
Segment Adjusted EBITDA in 2017 was $296.1 million, an increase of $152.3 million, or 105.9%, from $143.8 million in 2016. Segment Margin increased 630 bps to 29.2% in 2017 from 22.9% in 2016. The increase in Segment Adjusted EBITDA was due primarily due to increased revenues from upstream energy exposed markets ($146.7 million), lower selling and administrative expenses ($5.4 million), the favorable impact of foreign currencies ($2.8 million), lower higher material and manufacturing costs ($2.0 million), and improved pricing ($0.1 million), partially offset by lower volume in other markets in our Energy segment ($4.7 million).
2016 vs. 2015
Segment Revenues for 2016 were $628.4 million, a decrease of $125.1 million, or 16.6%, compared to $753.5 million in 2015. The decrease in Segment Revenues was primarily due to lower revenues from upstream energy exposed markets (16.6% or $124.9 million) and the unfavorable impact of foreign currencies (0.9% or $7.0 million), partially offset by improved pricing and higher volume in other markets in our Energy segment (0.9% or $6.8 million). The percentage of Segment Revenues derived from aftermarket parts, consumables and services was 47.3% in 2016 compared to 48.1% in 2015.
Segment Adjusted EBITDA in 2016 was $143.8 million, a decrease of $43.0 million, or 23.0%, from $186.8 million in 2015. Segment Adjusted EBITDA Margin decreased 190 basis points to 22.9% in 2016 from 24.8% in 2015. The decrease in Segment Adjusted EBITDA was primarily due to reduced revenues from upstream energy exposed markets ($49.9 million), and the unfavorable impact of foreign currencies ($2.8 million), partially offset by improved pricing and higher volume in other markets in our Energy segment ($9.0 million) and reduced manufacturing, selling and administrative expenses ($0.7 million).
Medical Segment Results
| |
|
Years Ended December 31,
|
|
|
Percent Change
|
|
|
Constant Currency
Percent Change
|
|
|
(dollars in millions)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2017 vs. 2016
|
|
|
2016 vs. 2015
|
|
|
2017 vs. 2016
|
|
|
2016 vs. 2015
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Revenues
|
|
$
|
230.2
|
|
|
$
|
228.7
|
|
|
$
|
223.7
|
|
|
|
0.7
|
%
|
|
|
2.2
|
%
|
|
|
(0.2
|
)%
|
|
|
2.3
|
%
|
|
Segment Adjusted EBITDA
|
|
$
|
62.4
|
|
|
$
|
61.9
|
|
|
$
|
59.5
|
|
|
|
0.8
|
%
|
|
|
4.0
|
%
|
|
|
(0.3
|
)%
|
|
|
4.3
|
%
|
|
Segment Margin
|
|
|
27.1
|
%
|
|
|
27.1
|
%
|
|
|
26.6
|
%
|
|
|
-
|
|
|
50 bps
|
|
|
|
|
|
|
|
|
|
2017 vs. 2016
Segment Revenues for 2017 were $230.2 million, an increase of $1.5 million, or 0.7%, compared to $228.7 million in 2016. The increase in Segment Revenues was due to improved pricing (1.1% or $2.6 million), the favorable impact of foreign currencies (0.9% or $2.0 million), partially offset by lower volume including acquisitions (1.3% or $3.1 million). The percentage of Segment Revenues derived from aftermarket parts, consumables and services was 3.7% in 2017 compared to 0.0% in 2016.
Segment Adjusted EBITDA in 2017 was $62.4 million, an increase of $0.5 million, or 0.8%, from $61.9 million in 2016. Segment Margin remained constant at 27.1% in 2017 and 2016. The increase in Segment Adjusted EBITDA was due primarily to improved pricing ($2.6 million), lower selling and administrative expense ($2.1 million), and the favorable impact of foreign currencies ($0.7 million), partially offset by lower volume including acquisitions ($3.7 million), and higher material and other manufacturing costs ($1.2 million).
2016 vs. 2015
Segment Revenues for 2016 were $228.7 million, an increase of $5.0 million, or 2.2%, compared to $223.7 million in 2015. The increase in Segment Revenues was due to improved pricing (0.5% or $1.1 million) and higher volume, including the impact of 2016 and 2015 acquisitions (1.7% or $4.0 million), partially offset by the unfavorable impact of foreign currencies ($0.1 million).
Segment Adjusted EBITDA in 2016 was $61.9 million, an increase of $2.4 million, or 4.0%, from $59.5 million in 2015. Segment Adjusted EBITDA Margin increased 50 basis points to 27.1% in 2016 from 26.6% in 2015. The increase in Segment Adjusted EBITDA was primarily due to improved pricing ($1.1 million), higher volume, including the impact of 2016 and 2015 acquisitions ($0.6 million), lower selling and administrative expenses ($0.2 million) and lower material and other manufacturing costs ($0.6 million), partially offset by the unfavorable impact of foreign currencies ($0.1 million).
Unaudited Quarterly Results of Operations
|
(in millions, except per share amounts)
|
|
Year Ended December 31, 2017
|
|
|
Year Ended December 31, 2016
|
|
| |
|
|
Q1
|
|
|
|
Q2
|
|
|
|
Q3
|
|
|
|
Q4(2)
|
|
|
|
Q1
|
|
|
|
Q2
|
|
|
|
Q3
|
|
|
|
Q4
|
|
|
Revenues
|
|
$
|
481.7
|
|
|
$
|
579.1
|
|
|
$
|
649.6
|
|
|
$
|
665.0
|
|
|
$
|
437.1
|
|
|
$
|
462.0
|
|
|
$
|
462.6
|
|
|
$
|
577.7
|
|
|
Gross profit
|
|
|
174.6
|
|
|
|
215.9
|
|
|
|
253.9
|
|
|
|
253.5
|
|
|
|
158.9
|
|
|
|
171.5
|
|
|
|
164.2
|
|
|
|
222.1
|
|
|
Operating income (loss)
|
|
|
36.7
|
|
|
|
(101.6
|
)
|
|
|
95.9
|
|
|
|
77.7
|
|
|
|
19.6
|
|
|
|
26.0
|
|
|
|
20.2
|
|
|
|
38.5
|
|
|
Net (loss) income
|
|
|
(7.0
|
)
|
|
|
(146.3
|
)
|
|
|
28.0
|
|
|
|
143.8
|
|
|
|
(9.9
|
)
|
|
|
(4.1
|
)
|
|
|
(13.0
|
)
|
|
|
(4.3
|
)
|
|
Weighted average shares, basic
|
|
|
|
|
|
|
176.9
|
|
|
|
201.3
|
|
|
|
201.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares, diluted
|
|
|
|
|
|
|
176.9
|
|
|
|
208.1
|
|
|
|
209.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share(1)
|
|
|
|
|
|
|
(0.83
|
)
|
|
|
0.14
|
|
|
|
0.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share(1)
|
|
|
|
|
|
|
(0.83
|
)
|
|
|
0.13
|
|
|
|
0.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(1)
|
|
|
92.1
|
|
|
|
132.1
|
|
|
|
164.7
|
|
|
|
172.6
|
|
|
|
76.8
|
|
|
|
86.6
|
|
|
|
89.0
|
|
|
|
148.3
|
|
|
(1) |
Basic (loss) earnings per share and diluted (loss) earnings per share have not been provided for the quarters prior to the initial public offering due to the significant change in capital structure.
|
|
(2) |
See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Factors Affecting the Comparability of our Results of Operations.
|
|
(3) |
Set forth below are the reconciliations of net income (loss) to Adjusted EBITDA
|
|
(dollars in millions)
|
|
Year Ended December 31, 2017
|
|
|
Year Ended December 31, 2016
|
|
| |
|
|
Q1
|
|
|
|
Q2
|
|
|
|
Q3
|
|
|
|
Q4
|
|
|
|
Q1
|
|
|
|
Q2
|
|
|
|
Q3
|
|
|
|
Q4
|
|
|
Net (Loss) Income
|
|
|
(7.0
|
)
|
|
|
(146.3
|
)
|
|
$
|
28.0
|
|
|
|
143.8
|
|
|
|
(9.9
|
)
|
|
|
(4.1
|
)
|
|
$
|
(13.0
|
)
|
|
|
(4.3
|
)
|
|
Plus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
45.9
|
|
|
|
39.5
|
|
|
|
30.1
|
|
|
|
25.2
|
|
|
|
43.0
|
|
|
|
42.7
|
|
|
|
43.0
|
|
|
|
41.6
|
|
|
(Benefit) provision for income taxes
|
|
|
(1.6
|
)
|
|
|
(43.9
|
)
|
|
|
4.4
|
|
|
|
(90.1
|
)
|
|
|
(13.2
|
)
|
|
|
(10.9
|
)
|
|
|
(9.1
|
)
|
|
|
1.3
|
|
|
Depreciation and amortization expense
|
|
|
39.7
|
|
|
|
43.8
|
|
|
|
43.5
|
|
|
|
46.8
|
|
|
|
41.2
|
|
|
|
42.7
|
|
|
|
42.9
|
|
|
|
45.9
|
|
|
Impairment of goodwill and other intangible assets(a)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1.6
|
|
|
|
-
|
|
|
|
1.5
|
|
|
|
-
|
|
|
|
23.8
|
|
|
Sponsor fees and expenses(b)
|
|
|
1.1
|
|
|
|
16.2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1.0
|
|
|
|
1.0
|
|
|
|
1.8
|
|
|
|
1.0
|
|
|
Restructuring and related business transformation costs (c)
|
|
|
8.6
|
|
|
|
5.6
|
|
|
|
6.3
|
|
|
|
4.2
|
|
|
|
9.3
|
|
|
|
18.7
|
|
|
|
18.2
|
|
|
|
32.5
|
|
|
Acquisition related expenses and non-cash charges (d)
|
|
|
0.7
|
|
|
|
1.2
|
|
|
|
1.2
|
|
|
|
1.0
|
|
|
|
0.8
|
|
|
|
0.8
|
|
|
|
1.9
|
|
|
|
0.6
|
|
|
Environmental remediation loss reserve (e)
|
|
|
1.0
|
|
|
|
(0.1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5.6
|
|
|
Expenses related to public stock offerings(f)
|
|
|
1.3
|
|
|
|
1.8
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Establish public company financial reporting compliance(g)
|
|
|
1.3
|
|
|
|
2.1
|
|
|
|
3.8
|
|
|
|
0.9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
Stock-based compensation(h)
|
|
|
-
|
|
|
|
156.2
|
|
|
|
9.8
|
|
|
|
28.2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Loss on extinguishment of debt(i)
|
|
|
-
|
|
|
|
50.4
|
|
|
|
34.1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Foreign currency transaction losses (gains), net
|
|
|
0.6
|
|
|
|
4.0
|
|
|
|
1.7
|
|
|
|
3.0
|
|
|
|
2.9
|
|
|
|
(6.0
|
)
|
|
|
0.5
|
|
|
|
(3.3
|
)
|
|
Other adjustments(j)
|
|
|
0.5
|
|
|
|
1.6
|
|
|
|
1.3
|
|
|
|
7.5
|
|
|
|
1.7
|
|
|
|
0.2
|
|
|
|
2.7
|
|
|
|
3.5
|
|
|
Adjusted EBITDA
|
|
|
92.1
|
|
|
|
132.1
|
|
|
|
164.7
|
|
|
|
172.6
|
|
|
|
76.8
|
|
|
|
86.6
|
|
|
|
89.0
|
|
|
|
148.3
|
|
|
(a) |
Represents non-cash charges for impairment of goodwill and other intangible assets.
|
|
(b) |
Represents management fees and expenses paid to our Sponsor, including a monitoring agreement termination fee of $16.2 million paid concurrent with our initial public offering on May 12, 2017.
|
|
(c) |
Restructuring and related business transformation costs consist of (i) restructuring charges, (ii) severance, sign-on, relocation and executive search costs, (iii) facility reorganization, relocation and other costs, (iv) information technology infrastructure transformation, (v) gains and losses on asset and business disposals, (vi) consultant and other advisor fees and (vii) other miscellaneous costs. These restructuring and related business transformation costs amounted to $24.7 million and $78.7 million for the years ended December 31, 2017 and 2016.
|
|
(d) |
Represents costs associated with successful and/or abandoned acquisitions, including third-party expenses, post-closure integration costs and non-cash charges and credits arising from fair value purchase accounting adjustments.
|
|
(e) |
Represents estimated environmental remediation costs and losses relating to a former production facility.
|
|
(f) |
Represents certain expenses related to the Company’s initial public offering and subsequent secondary offerings.
|
|
(g) |
Represents third party expenses to comply with the requirements of Sarbanes-Oxley in 2018 and the accelerated adoption of the new revenue recognition standard (ASC 606 – Revenue from Contracts with Customers) in the first quarter of 2018, one year ahead of the required adoption date for a private company. These expenses were previously included in “Expenses related to initial public offering” and prior periods have been restated to conform to current period presentation.
|
|
(h) |
Represents stock-based compensation expense recognized for stock options outstanding ($77.6 million), DSUs granted to employees at the date of the initial public offering ($97.4 million) under the 2013 Stock Incentive Plan, and employer taxes related to DSUs granted to employees at the date of the initial public offering ($19.2 million).
|
|
(i) |
Represents losses on the extinguishment of debt recognized on the redemption of the senior notes and pay down of a portion of the Original Dollar Term Loan Facility with proceeds from the initial public offering in May 2017 ($50.4 million) and in connection with the refinancing of the Original Dollar Term Loan Facility and Original Euro Term Loan Facility in August 2017 ($34.1 million).
|
|
(j) |
Includes (i) non-cash impact of net LIFO reserve adjustments, (ii) effects of amortization of prior service costs and amortization of gains in pension and other postretirement benefits (OPEB) expense, (iii) certain legal and compliance costs and (iv) other miscellaneous adjustments. Formerly included “Foreign currency transaction losses (gains), net”, the years ended December 31 2016 and 2015 have been restated to conform to the year ended December 31, 2017 presentation.
|
Liquidity and Capital Resources
Our operations and strategic objectives require continuing investment. Our resources include cash generated from operations and borrowings under our Revolving Credit Facility and Receivables Financing Agreement.
For a description of our material indebtedness, see Note 10 “Debt” in our audited consolidated financial statements included elsewhere in this Form 10-K.
As of December 31, 2017, the Company had $7.4 million of outstanding letters of credit written against the Revolving Credit Facility and $352.6 million of unused availability. The Company also had $33.4 million of letters of credit outstanding against the Receivables Financing Agreement and $66.8 million of unused availability. On June 30, 2017, we entered into the first amendment to the Receivables Financing Agreement which increased the aggregated borrowing capacity by $50.0 million to $125.0 million governed by a borrowing base and also extended the term to June 30, 2020.
As of December 31, 2017, December 31, 2016 and December 31, 2015, we were in compliance with all of our debt covenants and no event of default had occurred or was ongoing.
Liquidity
A substantial portion of our liquidity needs arise from debt service requirements, and from the ongoing cost of operations, working capital and capital expenditures.
| |
|
Year Ended December 31,
|
|
|
(in millions)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
Cash and cash equivalents
|
|
$
|
393.3
|
|
|
$
|
255.8
|
|
|
$
|
228.3
|
|
|
Short-term borrowings and current maturities of long-term debt
|
|
|
20.9
|
|
|
|
24.5
|
|
|
|
25.4
|
|
|
Long-term debt
|
|
|
2,019.3
|
|
|
|
2,753.8
|
|
|
|
2,769.5
|
|
|
Total debt
|
|
$
|
2,040.2
|
|
|
$
|
2,778.3
|
|
|
$
|
2,794.9
|
|
We can increase the borrowing availability under the Senior Secured Credit Facilities by up to $250.0 million in the form of additional commitments under the Revolving Credit Facility and/or incremental term loans plus an additional amount so long as we do not exceed a specified senior secured leverage ratio. We can incur additional secured indebtedness under the Term Loan Facilities if certain specified conditions are met under the credit agreement governing the Senior Secured Credit Facilities. Our liquidity requirements are significant primarily due to debt service requirements. See Note 10 “Debt” to our audited consolidated financial statements included elsewhere in this Form 10-K.
Our principal sources of liquidity have been existing cash and cash equivalents, cash generated from operations and borrowings under the Senior Secured Credit Facilities and the Receivables Financing Agreement. Our principal uses of cash will be to provide working capital, meet debt service requirements, fund capital expenditures and finance strategic plans, including possible acquisitions. We used the proceeds from our initial public offering in May 2017 to pay down our long-term debt by approximately $851.8 million reducing our debt service requirements in the second half of 2017. We may also seek to finance capital expenditures under capital leases or other debt arrangements that provide liquidity or favorable borrowing terms. We continue to consider acquisition opportunities, but the size and timing of any future acquisitions and the related potential capital requirements cannot be predicted. In the event that suitable businesses are available for acquisition upon acceptable terms, we may obtain all or a portion of the necessary financing through the incurrence of additional long-term borrowings. As market conditions warrant, we and our major equity holders, including our Sponsor and its affiliates, may from time to time, seek to repurchase debt securities that we have issued or loans that we have borrowed, including the borrowings under the Senior Secured Credit Facilities, in privately negotiated or open market transactions, by tender offer or otherwise. Based on our current level of operations and available cash, we believe our cash flow from operations, together with availability under the Revolving Credit Facility and the Receivables Financing Agreement, will provide sufficient liquidity to fund our current obligations, projected working capital requirements, debt service requirements and capital spending requirements for the foreseeable future. Our business may not generate sufficient cash flows from operations or future borrowings may not be available to us under our Revolving Credit Facility or the Receivables Financing Agreement in an amount sufficient to enable us to pay our indebtedness, or to fund our other liquidity needs. Our ability to do so depends on, among other factors, prevailing economic conditions, many of which are beyond our control. In addition, upon the occurrence of certain events, such as a change in control, we could be required to repay or refinance our indebtedness. We may not be able to refinance any of our indebtedness, including the Senior Secured Credit Facilities, on commercially reasonable terms or at all. Any future acquisitions, joint ventures, or other similar transactions may require additional capital and there can be no assurance that any such capital will be available to us on acceptable terms or at all.
The majority of our cash is in jurisdictions outside of the United States. However, we believe our U.S. operations will generate sufficient cash flows from operations along with our availability under the Revolving Credit Facility and the Receivables Financing Agreement to satisfy our cash needs in the United States. As a result of the KKR transaction and the significant increase in our long-term debt balance as of July 30, 2013, at the acquisition date, we modified our assertion concerning the permanent reinvestment of undistributed earnings for non-U.S. subsidiaries in these foreign operations. We intend to repatriate certain foreign earnings for the purpose of servicing our Senior Secured Credit Facilities, which will result in net U.S. tax liabilities as these foreign earnings are distributed. We have previously asserted that we intend to repatriate about $200 million of accumulated earnings and while we currently have sufficient cash flows in the U.S. as of December 31, 2017 we are maintaining that assertion. We are still evaluating our positon from a business perspective in light of the Tax Cuts and Job Act and have only adjusted our deferred liability for the impacts of the transitional tax. Our deferred income tax liability as of December 31, 2017 is $9.3 million which consists mainly of withholding taxes. No additional adjustments relating to taxation and unremitted earning have been recorded in accordance with SAB 118, as we are not currently able to reasonably estimate the impact as of the filing of the December 31, 2017 financial statements.
Working Capital
| |
|
For the Years Ended December 31,
|
|
|
(dollars in millions)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
Net Working Capital:
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
1,463.6
|
|
|
$
|
1,188.5
|
|
|
$
|
1,157.4
|
|
|
Less: Current liabilities
|
|
|
561.8
|
|
|
|
497.9
|
|
|
|
431.3
|
|
|
Net working capital
|
|
$
|
901.8
|
|
|
$
|
690.6
|
|
|
$
|
726.1
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Working Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
536.3
|
|
|
$
|
441.6
|
|
|
$
|
403.3
|
|
|
Plus: Inventories (excluding LIFO)
|
|
|
481.1
|
|
|
|
428.0
|
|
|
|
461.3
|
|
|
Less: Accounts payable
|
|
|
269.7
|
|
|
|
214.9
|
|
|
|
156.9
|
|
|
Less: Advance payments on sales contracts
|
|
|
42.7
|
|
|
|
43.0
|
|
|
|
58.0
|
|
|
Operating working capital
|
|
$
|
705.0
|
|
|
$
|
611.7
|
|
|
$
|
649.7
|
|
In 2017, we revised our definition of operating working capital to accounts receivable, plus inventories excluding LIFO, less accounts payable, less advance payments on sales contracts. Prior periods have been restated to conform to the current presentation. Net working capital increased $211.2 million to $901.8 million as of December 31, 2017 from $690.6 million as of December 31, 2016. Operating working capital increased $93.3 million to $705.0 million as of December 31, 2017 from $611.7 million as of December 31, 2016. Operating working capital at December 31, 2017 as a percentage of 2017 revenues was 29.7% as compared to 31.5% at December 31, 2016 as a percentage of 2016 revenues. This increase was primarily due to higher accounts receivable, higher inventories, and lower advance payments on sales contracts, partially offset by higher accounts payable. The increase in accounts receivable was primarily due to a higher level of sales in the fourth quarter of 2017 compared to the fourth quarter of 2016 as a result of the recovery in the upstream energy markets. The increase in accounts receivable was also due to a difference in sales mix between the fourth quarter of 2016 and the fourth quarter of 2017. A higher portion of revenues in the fourth quarter of 2016 were related to highly engineered solution product contracts with higher advance payments ahead of revenue recognition than in the fourth quarter of 2017. The increase in inventories was primarily due to additions to inventories in anticipation of increased demand for certain products primarily in the Energy segment evidenced by increased orders in the Energy segment in the fourth quarter of 2017 compared to the fourth quarter of 2016. The increase in accounts payable was due to increased levels of inventories and continuing efforts to standardize vendor payment terms and timing of vendor disbursements. Advance payments on sales contracts was essentially flat as of December 31, 2017 in comparison to 2016.
Net working capital decreased $35.5 million to $690.6 million as of December 31, 2016 from $726.1 million as of December 31, 2015. Operating working capital decreased $38.0 million to $611.7 million as of December 31, 2016 from $649.7 million as of December 31, 2015. Operating working capital at December 31, 2016 as a percentage of 2016 revenues was 31.5% as compared to 30.5% at December 31, 2015 as a percentage of 2015 revenues. The decrease was primarily due to lower inventories and higher accounts payable, partially offset by higher accounts receivable and lower advance payments on sales contracts. During 2016, management proactively focused on reducing inventory levels while maintaining product availability and improving delivery times. Also, centralized processes were redesigned to improve the timing of customer cash collections and to standardize vendor payment terms resulting in the improvement of accounts receivable and accounts payable performance. The increase in accounts receivable was primarily due to higher levels of sales in the fourth quarter of 2016 compared to the fourth quarter of 2015. The increase in accounts payable was primarily due to the timing of vendor cash disbursements. The decrease in advance payments on sales contracts was due to a decreased level of in process engineered to order contracts at the end of the fourth quarter of 2016 compared to the fourth quarter of 2015.
Cash Flows
The following table reflects the major categories of cash flows for the years ended December 31, 2017, 2016 and 2015, respectively.
| |
|
Year Ended December 31,
|
|
|
(in millions)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
Cash flows - operating activities
|
|
$
|
200.5
|
|
|
$
|
165.6
|
|
|
$
|
172.1
|
|
|
Cash flows - investing activities
|
|
|
(60.8
|
)
|
|
|
(82.1
|
)
|
|
|
(84.0
|
)
|
|
Cash flows - financing activities
|
|
|
(17.4
|
)
|
|
|
(43.0
|
)
|
|
|
(35.0
|
)
|
|
Free cash flow (1)
|
|
|
143.7
|
|
|
|
91.2
|
|
|
|
101.1
|
|
|
(1) |
See “Item 6. Selected Financial Data” for a reconciliation to the most directly comparable GAAP measure.
|
Operating activities
Cash provided by operating activities increased $34.9 million to $200.5 million in 2017 from $165.6 million in 2016, primarily due to higher net income (excluding non-cash charges for impairments of goodwill and other intangible assets, stock-based compensation, depreciation and amortization, foreign currency transaction (gains) losses, loss extinguishment of debt) and deferred income taxes, partially offset by increased cash used by working capital. Operating working capital used cash of $55.0 million in 2017 compared to providing cash of $20.5 million in 2016. Changes in accounts receivable used cash of $65.7 million in 2017 compared to using cash of $48.8 million in 2016. Changes in inventory used cash of $22.7 million in 2017 compared to generating cash of $23.5 million in 2016. Changes in accounts payable generated cash of $39.9 million in 2017 as compared to generating cash of $58.1 million in 2016. Changes in advance payments on sales contracts used cash of $6.5 million in 2017 and used cash of $12.3 million in 2016.
Cash provided by operating activities decreased $6.5 million to $165.6 million in 2016 from $172.1 million in 2015, primarily due to lower net income (excluding non-cash charges for impairments of goodwill and other intangible assets, depreciation and amortization and foreign currency transaction (gains) losses), offset by cash generated from reduced operating working capital. Operating working capital provided cash of $20.5 million in 2016 compared to $24.6 million in 2015. Changes in accounts receivable used cash of $48.8 million in 2016 and generated cash of $83.9 million in 2015. Changes in inventory generated cash of $23.5 million in 2016 and used cash of $27.8 million in 2015. Changes in accounts payable generated cash of $58.1 million in 2016 and used cash of $46.8 million in 2015. Changes in advance payments on sales contracts used cash of $12.3 million in 2016 and generated cash of $15.3 million in 2015.
Investing activities
Cash flows from investing activities included capital expenditures of $56.8 million (2.4% of consolidated revenues), $74.4 million (3.8% of consolidated revenues) and $71.0 million (3.3% of consolidated revenues), in 2017, 2016 and 2015, respectively, invested primarily to support sales growth initiatives and increase operating efficiency. We currently expect capital expenditures to total approximately $65 to $75 million in 2018. Proceeds from the termination of derivatives was $6.2 million in 2017. Cash paid in business combinations was $18.8 million in 2017, $18.8 million in 2016 and $26.2 million in 2015. Net proceeds from business divestitures and disposals of property, plant and equipment were $8.6 million, $11.1 million and $13.2 million in 2017, 2016, and 2015, respectively.
Financing activities
Cash used in financing activities of $17.4 million in 2017 reflects net repayments of long-term borrowings of $868.6 million, a premium paid on the extinguishment of senior notes of $29.7 million, purchases of treasury stock of $3.6 million, purchases of shares of noncontrolling interest of $5.2 million, and the payment of debt issuance costs of $4.1 million, partially offset by proceeds from the issuance of common stock $893.6 million and other items of $0.2 million.
Cash used in financing activities of $43.0 million in 2016, reflects scheduled principal payments on long-term borrowings of $25.5 million, purchases of treasury stock of $14.1 million, a $4.7 million payment of contingent consideration related to an acquisition, payments of debt issuance costs of $1.1 million and other items of $0.9 million, partially offset by issuances of common stock of $3.3 million.
Cash used in financing activities of $35.0 million in 2015 reflects scheduled principal payments on long-term borrowings of $26.5 million, net payments on short-term borrowings of $6.7 million, purchases of treasury stock of $2.1 million, a $3.0 million payment of contingent consideration related to an acquisition and other items of $0.9 million, partially offset by issuances of common stock of $4.2 million.
Free cash flow
Free cash flow increased $52.5 million to $143.7 million in 2017 from $91.2 million in 2016 due to increased cash provided by operating activities of $34.9 million and a decrease in capital expenditures of $17.6 million in 2017 compared to 2016. Free Cash Flow decreased $9.9 million to $91.2 million in 2016 from $101.1 million in 2015 due to a decrease in cash provided by operating activities of $6.5 million in 2016 compared to 2015 and an increase in capital expenditures of $3.4 million in 2016 compared to 2015.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are materially likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Contractual Obligations
The following table summarizes our future minimum payments as of December 31, 2017 for all contractual obligations for years subsequent to the year ended December 31, 2017:
| |
|
|
|
|
Payments Due by Period
|
|
|
(in millions)
Contractual Obligations
|
|
Total
|
|
|
2018
|
|
|
|
2019-2020
|
|
|
|
2021-2022
|
|
|
More than
5 years
|
|
|
Debt
|
|
$
|
2,018.2
|
|
|
$
|
20.2
|
|
|
$
|
40.5
|
|
|
$
|
40.5
|
|
|
$
|
1,917.0
|
|
|
Estimated interest payments(1)
|
|
|
666.6
|
|
|
|
102.6
|
|
|
|
216.8
|
|
|
|
184.8
|
|
|
|
162.4
|
|
|
Capital leases
|
|
|
26.9
|
|
|
|
0.7
|
|
|
|
1.9
|
|
|
|
2.3
|
|
|
|
22.0
|
|
|
Operating leases
|
|
|
82.1
|
|
|
|
22.9
|
|
|
|
32.6
|
|
|
|
14.3
|
|
|
|
12.3
|
|
|
Purchase obligations(2)
|
|
|
338.5
|
|
|
|
318.9
|
|
|
|
19.4
|
|
|
|
0.2
|
|
|
|
-
|
|
|
Total
|
|
$
|
3,132.3
|
|
|
$
|
465.3
|
|
|
$
|
311.2
|
|
|
$
|
242.1
|
|
|
$
|
2,113.7
|
|
|
(1) |
Estimated interest payments for long-term debt were calculated as follows: for fixed-rate debt and term debt, interest was calculated based on applicable rates and payment dates; for variable-rate debt and/or non-term debt, interest rates and payment dates were estimated based on management’s determination of the most likely scenarios for each relevant debt instrument.
|
|
(2) |
Purchase obligations consist primarily of agreements to purchase inventory or services made in the normal course of business to meet operational requirements. The purchase obligation amounts do not represent the entire anticipated purchases in the future, but represent only those items for which we are contractually obligated as of December 31, 2017. For this reason, these amounts will not provide a complete and reliable indicator of our expected future cash outflows.
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Total pension and other postretirement benefit liabilities recognized on our consolidated balance sheet as of December 31, 2017 were $101.8 million. The total pension and other postretirement benefit liabilities are included in our consolidated balance sheet line items “Accrued liabilities” and “Pensions and other postretirement benefits.” Because these liabilities are impacted by, among other items, plan funding levels, changes in plan demographics and assumptions and investment return on plan assets, it does not represent expected liquidity needs. Accordingly, we did not include these liabilities in the “Contractual Obligations” table above.
We fund our U.S. qualified pension plans in accordance with the Employee Retirement Income Security Act of 1974 regulations for the minimum annual required contribution and Internal Revenue Service regulations for the maximum annual allowable tax deduction. We are committed to making the required minimum contributions and expect to contribute a total of approximately $0.1 million to our U.S. qualified pension plans during 2018. Furthermore, we expect to contribute a total of approximately $0.3 million to our postretirement life insurance benefit plans during 2018. Future contributions are dependent upon various factors including the performance of the plan assets, benefit payment experience and changes, if any, to current funding requirements. Therefore, no amounts were included in the “Contractual Obligations” table related to expected plan contributions. We generally expect to fund all future contributions to our plans with cash flows from operating activities.
Our non-U.S. pension plans are funded in accordance with local laws and income tax regulations. We expect to contribute a total of approximately $6.6 million to our non-U.S. qualified pension plans during 2018. No amounts have been included in the “Contractual Obligations” table related to these plans due to the same reasons noted above.
Disclosure of amounts in the “Contractual Obligations” table regarding expected benefit payments in future years for our pension plans and other postretirement benefit plans cannot be properly reflected due to the ongoing nature of the obligations of these plans. We currently anticipate the annual benefit payments for the U.S. plans to be in the range of approximately $4.5 million to $5.0 million in 2018 and to remain at those levels for the next several years, and the annual benefit payments for the non-U.S. plans to be in the range of approximately $9.0 million to $9.5 million in 2018 and to gradually increase to an annual level in the range of $9.5 million to $11.5 million for the next several years.
Contingencies
We are a party to various legal proceedings, lawsuits and administrative actions, which are of an ordinary or routine nature for a company of our size and in our sector. We believe that such proceedings, lawsuits and administrative actions will not materially adversely affect our operations, financial condition, liquidity or competitive position. We have accrued liabilities and other liabilities on our consolidated balance sheet to include a total litigation reserve of $105.6 million as of December 31, 2017 with respect to potential liability arising from our asbestos-related litigation. Other than our asbestos-related litigation reserves, we only have de minimis accrued liabilities and other liabilities on our consolidated balance sheet with respect to other legal proceedings, lawsuits and administrative actions. A more detailed discussion of certain of these proceedings, lawsuits and administrative actions is set forth in “Item 3. Legal Proceedings.”
Critical Accounting Estimates
Accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our financial statements because they involve significant judgments and uncertainties. Certain of these estimates include determining fair value. All of these estimates reflect our best judgment about current, and for some estimates, future economic and market conditions and their effect based on information available as of the date of these financial statements. If these conditions change from those expected, it is reasonably possible that the judgments and estimates described below could change, which may result in future impairments of goodwill, intangibles and long-lived assets, increases in reserves for contingencies, establishment of valuation allowances on deferred tax assets and increase in tax liabilities, among other effects. Also see Note 1 “Summary of Significant Accounting Policies” to our audited consolidated financial statements included elsewhere in this Form 10-K, which discusses the significant accounting policies that we have selected from acceptable alternatives.
Impairment of Goodwill and Other Identified Intangible Assets
We test goodwill for impairment annually in the fourth quarter of each year using data as of October 1 of that year. Upon adoption of ASU 2017-04, the impairment test consists of comparing the fair value of the reporting unit to the carrying value of the reporting unit. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; provided, the loss recognized cannot exceed the total amount of goodwill allocated to the reporting unit. If applicable, we consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss. We determined fair values for each of the reporting units using a combination of the income and market multiples approaches which are weighted 75% and 25%, respectively.
Under the income approach, fair value is determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We use our internal forecasts to estimate future cash flows and include an estimate of long-term future growth rates based on our most recent views of the long-term outlook for each business. Actual results may differ from those assumed in our forecasts. We derive our discount rates using a capital asset pricing model and analyzing published rates for industries relevant to our reporting units to estimate the cost of equity financing. We use discount rates that are commensurate with the risks and uncertainty inherent in the respective businesses and in our internally developed forecasts. Discount rates used in our 2017 reporting unit valuations ranged from 9.9% to 11.3%. Additionally, we assumed 3.0% terminal growth rates for all reporting units.
Under the market multiples approach, fair value is determined based on multiples derived from the stock prices of publically traded guideline companies to develop a business enterprise value (“BEV”) for our reporting units. The application of the market multiples method entails the development of book value multiples based on the market value of the guideline companies. The multiples are developed by first calculating the market value of equity of the guideline companies and then adjusting these multiples for cash and debt to arrive at a BEV multiple. Identifying appropriate guideline companies and computing appropriate market multiples is subjective. We considered various public companies that had reasonably similar qualitative factors as our reporting units while also considering quantitative factors such as revenue growth, profitability and total assets.
For all reporting units, the excess of the estimated fair value over carrying value (expressed as a percentage of carrying value) was a minimum of 83.3%. With each reporting unit’s fair value in excess of its carrying value, no goodwill impairment was recorded.
We annually test intangible assets with indefinite lives for impairment utilizing a discounted cash flow valuation referred to as the relief from royalty method. We estimated forecasted revenues for a period of five years with discount rates ranging from 10.9% to 12.3%, a terminal growth rate of 3.0%, and royalty rates ranging from 3.0% to 4.0%.
In the fourth quarter of 2017, as a result of the annual impairment test of indefinite-lived intangible assets, the Company recorded an impairment charge of $1.5 million related to indefinite-lived trademarks, including $1.2 million related to two trademarks in the Industrials segment and $0.3 million related to an indefinite-lived trademark in the Energy segment.
We review identified intangible assets with defined useful lives and subject to amortization for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Determining whether an impairment loss occurred requires comparing the carrying amount to the sum of undiscounted cash flows expected to be generated by the asset.
Also see Note 8 “Goodwill and Other Intangible Assets” to our audited consolidated financial statements included elsewhere in this Form 10-K.
Pension Benefits
Pension assumptions are significant inputs to the actuarial models that measure pension benefit obligations and related effects on operations. Two assumptions – discount rate and expected return on assets – are important elements of plan expense and asset/liability measurement. We evaluate these critical assumptions at least annually on a plan and country-specific basis. We periodically evaluate other assumptions involving demographic factors such as retirement age, mortality and turnover, and update them to reflect our experience and expectations for the future. Actual results in any given year will often differ from actuarial assumptions because of economic and other factors.
Accumulated and projected benefit obligations are measured as the present value of expected payments. We discount those cash payments using the weighted average of market-observed yields for high-quality fixed-income securities with maturities that correspond to the payment of benefits. Lower discount rates increase present values and subsequent-year pension expense; higher discount rates decrease present values and subsequent-year pension expense.
Our weighted average discount rates used to determine benefit obligations for U.S. pension plans were 3.6%, 4.0% and 4.1% and for non-U.S. Plans were 2.3%, 2.3% and 3.3% as of December 31, 2017, 2016 and 2015, respectively. The discount rate in both the United States and the United Kingdom was determined by projecting the plans’ expected future benefit payments, discounting those expected payments using a theoretical zero-coupon spot yield curve derived from a universe of high-quality bonds as of the measurement date, and solving for the single equivalent discount rate that results in the same projected benefit obligation. In all other countries, the discount rate was based on appropriate published indices with recognition of the plan liability durations.
To determine the expected weighted average long-term rate of return on pension plan assets, we consider current and target asset allocations, as well as historical and expected returns on various categories of plan assets. In developing future long-term return expectations for our principal benefit plans’ assets, we formulate views on the future economic environment, both in the United States and abroad. We evaluate general market trends and historical relationships among a number of key variables that impact asset class returns such as expected earnings growth, inflation, valuations, yields and spreads, using both internal and external sources. We also take into account expected volatility by asset class and diversification across classes to determine expected overall portfolio results given current and target allocations. Based on our analysis of future expectations of asset performance, past return results and our current and target asset allocations, for cost recognition in 2018, we have assumed a long-term expected return on assets of 7.75% for U.S. Plans and 5.0% for non-U.S. Plans.
The table below illustrates the sensitivity of the significant pension assumptions on a combined basis for the Company’s U.S. and non-U.S. Plans.
|
|
|
Change in Discount Rate
|
|
|
Change in Expected Return
|
|
|
Change in Market Value of Assets
|
|
|
(in millions)
|
|
Plus 100 bps
|
|
|
Minus 100 bps
|
|
|
Plus 100 bps
|
|
|
Minus 100 bps
|
|
|
|