Gardner Denver Holdings Earnings 2019-03-31

GDI 10Q Quarterly Report

Balance Sheet	Income Statement	Cash Flow

10-Q 1 form10q.htm 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to___________

Commission File Number: 001-38095

Gardner Denver Holdings, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		46-2393770
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

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)

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 every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an 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.

Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☐

Emerging growth Company	☐

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 or 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 registrant had outstanding 201,978,589 shares of Common Stock, par value $0.01 per share, as of April 24, 2019.

Table of Contents

GARDNER DENVER HOLDINGS, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

	Page No.
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 3. Quantitative and Qualitative Disclosures About Market Risk	53
Item 4. Controls and Procedures	53
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	54
Item 1A. Risk Factors	54
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 3. Defaults Upon Senior Securities	55
Item 4. Mine Safety Disclosures	56
Item 5. Other Information	56
Item 6. Exhibits	56
SIGNATURES	57

Index

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-Q (this “Form 10-Q”) 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-Q. Such risks, uncertainties and other important factors that could cause actual results to differ include, among others, the risks, uncertainties and factors set forth under “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, and in this report, as such risk factors may be updated from time to time in our periodic filings with the SEC, and are accessible on the SEC’s website at www.sec.gov, and also include the following:

•

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.

•

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.

•

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.

•

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.

•

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.

•

We face competition in the markets we serve, which could materially and adversely affect our operating results.

•

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 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.

•

Credit and counterparty risks could harm our business.

•

Acquisitions and integrating such acquisitions create certain risks and may affect our operating results.

•

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.

Index

•

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.

•

Our success depends on our executive management and other key personnel and our ability to attract and retain top talent throughout the Company.

•

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.

•

Cost overruns, delays, penalties or liquidated damages could negatively impact our results, particularly with respect to fixed-price contracts for custom engineered products.

•

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.

•

Changes in tax or other laws, regulations, or adverse determinations by taxing or other governmental authorities could increase our effective tax rate and cash taxes paid or otherwise affect our financial condition or operating results.

•

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.

•

Our business could suffer if we experience employee work stoppages, union and work council campaigns or other labor difficulties.

•

We are a defendant in certain asbestos and silica-related personal injury lawsuits, which could adversely affect our financial condition.

•

A natural disaster, catastrophe or other event could result in severe property damage, which could adversely affect our operations.

•

Information systems failure may disrupt our business and result in financial loss and liability to our customers.

•

The nature of our products creates the possibility of significant product liability and warranty claims, which could harm our business.

•

Environmental compliance costs and liabilities could adversely affect our financial condition.

•

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.

•

We face risks associated with our pension and other postretirement benefit obligations.

•

Our substantial indebtedness could have important adverse consequences and adversely affect our financial condition.

•

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.

•

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.

•

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.

Index

•

Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.

•

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.

•

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 caution you that the risks, uncertainties and other factors referenced above may not contain all of the risks, uncertainties and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. There can be no assurance that (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors’ likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct or (iv) our strategy, which is based in part on this analysis, will be successful. All forward-looking statements in this report apply only as of the date of this report or as of the date they were made and, except as required by applicable law, we undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.

All references to “we,” “us,” “our,” the “Company” or “Gardner Denver” in this Quarterly Report on Form 10-Q mean Gardner Denver Holdings, Inc. and its subsidiaries, unless the context otherwise requires.

Website Disclosure

We use our website www.gardnerdenver.com as a channel of distribution of Company information. Financial and other important information regarding us is routinely accessible through and posted on our website. Accordingly, investors should monitor our website, in addition to following our press releases, SEC filings and public conference calls and webcasts. In addition, you may automatically receive e-mail alerts and other information about Gardner Denver Holdings, Inc when you enroll your email address by visiting the “Email Alerts” section of our website at www.investors.gardnerdenver.com. The contents of our website is not, however, a part of this Quarterly Report on Form 10-Q.

Index

PART 1.

FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

GARDNER DENVER HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in millions, except per share amounts)

	For the Three Month Period Ended March 31, 2019			For the Three Month Period Ended March 31, 2018
Revenues	$	620.3		$	619.6
Cost of sales		389.8			387.7
Gross Profit		230.5			231.9
Selling and administrative expenses		107.7			106.9
Amortization of intangible assets		31.4			30.9
Other operating expense, net		11.2			4.3
Operating Income		80.2			89.8
Interest expense		22.4			26.0
Other income, net		(1.3	)		(2.0	)
Income Before Income Taxes		59.1			65.8
Provision for income taxes		12.0			23.4
Net Income	$	47.1		$	42.4
Basic earnings per share	$	0.23		$	0.21
Diluted earnings per share	$	0.23		$	0.20

The accompanying notes are an integral part of these condensed consolidated financial statements.

Index

GARDNER DENVER HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in millions)

	For the Three Month Period Ended March 31, 2019			For the Three Month Period Ended March 31, 2018
Net Income	$	47.1		$	42.4
Other comprehensive income, net of tax:
Foreign currency translation adjustments, net		(0.1	)		34.4
Unrecognized gains on cash flow hedges, net		1.9			11.4
Pension and other postretirement prior service cost and gain or loss, net		0.2			0.4
Total other comprehensive income, net of tax		2.0			46.2
Total Comprehensive Income	$	49.1		$	88.6

The accompanying notes are an integral part of these condensed consolidated financial statements.

Index

GARDNER DENVER HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in millions, except share and per share amounts)

	March 31, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	263.7		$	221.2
Accounts receivable, net of allowance for doubtful accounts of $17.9 and $17.4, respectively		509.9			525.4
Inventories		555.1			523.9
Other current assets		69.6			60.7
Total current assets		1,398.3			1,331.2
Property, plant and equipment, net of accumulated depreciation of $256.4 and $250.0, respectively		349.5			356.6
Goodwill		1,283.3			1,289.5
Other intangible assets, net		1,335.3			1,368.4
Deferred tax assets		1.2			1.3
Other assets		199.2			140.1
Total assets	$	4,566.8		$	4,487.1
Liabilities and Stockholders’ Equity
Current liabilities:
Short-term borrowings and current maturities of long-term debt	$	7.9		$	7.9
Accounts payable		342.4			340.0
Accrued liabilities		265.9			248.5
Total current liabilities		616.2			596.4
Long-term debt, less current maturities		1,622.3			1,664.2
Pensions and other postretirement benefits		91.9			94.8
Deferred income taxes		263.8			265.5
Other liabilities		234.9			190.2
Total liabilities		2,829.1			2,811.1
Commitments and contingencies (Note 16)
Stockholders’ equity:
Common stock, $0.01 par value; 1,000,000,000 shares authorized; 203,299,647 and 201,051,291 shares issued at March 31, 2019 and December 31, 2018, respectively		2.0			2.0
Capital in excess of par value		2,289.3			2,282.7
Accumulated deficit		(253.4	)		(308.7	)
Accumulated other comprehensive loss		(253.2	)		(247.0	)
Treasury stock at cost; 2,435,272 and 2,881,436 shares at March 31, 2019 and December 31, 2018, respectively		(47.0	)		(53.0	)
Total stockholders’ equity		1,737.7			1,676.0
Total liabilities and stockholders’ equity	$	4,566.8		$	4,487.1

The accompanying notes are an integral part of these condensed consolidated financial statements.

Index

GARDNER DENVER HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

(Dollars in millions)

	For the Three Month Period Ended March 31, 2019			For the Three Month Period Ended March 31, 2018
Number of Common Shares Issued (in millions)
Balance at beginning of period		201.1			198.4
Issuance of common stock for stock-based compensation plans		2.2			1.0
Balance at end of period		203.3			199.4
Common Stock
Balance at beginning of period	$	2.0		$	2.0
Issuance of common stock for stock-based compensation plans		-			-
Balance at end of period	$	2.0		$	2.0
Capital in Excess of Par Value
Balance at beginning of period	$	2,282.7		$	2,275.4
Issuance of common stock for stock-based compensation plans		12.9			3.3
Issuance of treasury stock for stock-based compensation plans		(9.2	)		(1.6	)
Stock-based compensation		2.9			5.2
Balance at end of period	$	2,289.3		$	2,282.3
Accumulated Deficit
Balance at beginning of period	$	(308.7	)	$	(577.8	)
Net income		47.1			42.4
Cumulative-effect adjustment upon adoption of new accounting standard (ASU 2017-12)		-			(0.3	)
Cumulative-effect adjustment upon adoption of new accounting standard (ASU 2018-02)		8.2			-
Balance at end of period	$	(253.4	)	$	(535.7	)
Accumulated Other Comprehensive Loss
Balance at beginning of period	$	(247.0	)	$	(199.8	)
Foreign currency translation adjustments, net		(0.1	)		34.4
Unrecognized gains on cash flow hedges, net		1.9			11.4
Pension and other postretirement prior service cost and gain or loss, net		0.2			0.4
Cumulative-effect adjustment upon adoption of new accounting standard (ASU 2017-12)		-			0.3
Cumulative-effect adjustment upon adoption of new accounting standard (ASU 2018-02)		(8.2	)		-
Balance at end of period	$	(253.2	)	$	(153.3	)
Treasury Stock
Balance at beginning of period	$	(53.0	)	$	(23.0	)
Purchases of treasury stock		(8.5	)		(6.2	)
Issuance of treasury stock for stock-based compensation plans		14.5			1.6
Balance at end of period	$	(47.0	)	$	(27.6	)
Total Stockholders’ Equity	$	1,737.7		$	1,567.7

The accompanying notes are an integral part of these condensed consolidated financial statements.

Index

GARDNER DENVER HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in millions)

	For the Three Month Period Ended March 31, 2019			For the Three Month Period Ended March 31, 2018
Cash Flows From Operating Activities:
Net income	$	47.1		$	42.4
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of intangible assets		31.4			30.9
Depreciation in cost of sales		11.8			11.4
Depreciation in selling and administrative expenses		2.3			2.7
Stock-based compensation expense		7.5			3.4
Foreign currency transaction losses, net		3.1			2.6
Net loss (gain) on asset dispositions		0.1			(1.2	)
Deferred income taxes		(5.1	)		2.8
Changes in assets and liabilities:
Receivables		5.4			10.0
Inventories		(33.5	)		(42.9	)
Accounts payable		8.8			8.4
Accrued liabilities		15.5			2.0
Other assets and liabilities, net		(25.6	)		(12.3	)
Net cash provided by operating activities		68.8			60.2
Cash Flows From Investing Activities:
Capital expenditures		(14.1	)		(10.1	)
Net cash paid in business combinations		(0.5	)		(94.9	)
Disposals of property, plant and equipment		(0.1	)		3.0
Net cash used in investing activities		(14.7	)		(102.0	)
Cash Flows From Financing Activities:
Principal payments on long-term debt		(26.9	)		(5.3	)
Purchases of treasury stock		(8.5	)		(6.2	)
Proceeds from stock option exercises		18.1			3.3
Net cash used in financing activities		(17.3	)		(8.2	)
Effect of exchange rate changes on cash and cash equivalents		5.7			10.5
Net increase (decrease) in cash and cash equivalents		42.5			(39.5	)
Cash and cash equivalents, beginning of period		221.2			393.3
Cash and cash equivalents, end of period	$	263.7		$	353.8

Supplemental Cash Flow Information
Cash paid for income taxes	$	13.5		$	13.8
Cash paid for interest	$	21.1		$	25.7
Capital expenditures in accounts payable	$	4.5		$	6.0

The accompanying notes are an integral part of these condensed consolidated financial statements.

Index

GARDNER DENVER HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in millions, except share and per share amounts)

Note 1. Condensed Consolidated Financial Statements

Basis of Presentation

Gardner Denver Holdings, Inc. is a holding company whose operating subsidiaries are Gardner Denver, Inc. (“GDI”) and certain of GDI’s subsidiaries. GDI is a diversified, global manufacturer of highly engineered, application-critical flow control products and provider of related aftermarket parts and services. The accompanying condensed consolidated financial statements include the accounts of Gardner Denver Holdings, Inc. and its majority-owned subsidiaries (collectively referred to herein as “Gardner Denver” or the “Company”). The financial information presented as of any date other than December 31, 2018 has been prepared from the books and records of the Company without audit. The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, the condensed consolidated financial statements include all adjustments, consisting of adjustments associated with acquisition accounting and normal recurring adjustments, necessary for the fair presentation of such financial statements. All intercompany transactions and accounts have been eliminated in consolidation.

The Company’s unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the Securities and Exchange Commission (“SEC”).

The results of operations for the three month period ended March 31, 2019 is not necessarily indicative of the results to be expected for the full year. The balance sheet as of December 31, 2018 has been derived from the Company’s audited financial statements as of that date but does not include all of the information and notes required by GAAP for complete financial statements.

In May 2017, the Company sold a total of 47,495,000 shares of common stock in an initial public offering of shares of common stock. On November 15, 2017, May 2, 2018 and October 31, 2018, the Company completed secondary offerings of 25,300,000 shares, 30,533,478 and 20,000,000 shares, respectively, of common stock held by affiliates of Kohlberg Kravis Roberts & Co. L.P. (“KKR”). As a result of the secondary offerings, the Company is no longer considered a “controlled company” within the meaning of the corporate governance standards of the New York Stock Exchange (“NYSE”). KKR owns 70,671,135 shares of common stock, or approximately 35% of the total outstanding common stock based on the number of shares outstanding as of March 31, 2019.

Recently Adopted Accounting Standard Updates (“ASU”)

ASU 2016-02, Leases (Topic 842)

On January 1, 2019, the Company adopted Financial Accounting Standards Board (“FASB”) ASU 2016-02, Leases (Topic 842) (“ASC 842”) utilizing the optional transition method. The amendments in this update replaced most of the existing GAAP lease accounting guidance in order to increase transparency and comparability among organizations by recognizing right-of-use lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under current GAAP. The amendments also expanded disclosure requirements for key information about leasing arrangements. The Company elected the package of practical expedients in transition for leases that commenced prior to January 1, 2019 whereby these contracts were not reassessed or reclassified from their previous assessment as of December 31, 2018. The Company updated its internal lease accounting policy to address the new standard, revised the Company’s business processes and controls and completed the implementation and data input for the Company’s lease accounting software solution. The most significant impact of the standard on the Company was the recognition of a $61.3 million operating right of use (“ROU”) asset and a $61.4 million operating lease liability on the Condensed Consolidated Balance Sheet as of March 31, 2019. The standard did not have a material impact on both the Company’s Condensed Consolidated Statements of Operations and the Company’s Condensed Consolidated Statements of Cash Flows. See Note 14, “Leases” for further discussion of the Company’s operating and financing leases.

Index

ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220) – Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

On January 1, 2019, the Company adopted FASB ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220) – Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”). The standard allows a reclassification from accumulated other comprehensive (loss) income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act as of January 1, 2019. The Company recorded a cumulative-effect adjustment on the adoption date decreasing “Accumulated deficit” of the Condensed Consolidated Balance Sheets by $8.2 million and increasing “Accumulated other comprehensive loss” of the Condensed Consolidated Balance Sheets by $8.2 million.

Recently Issued Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update eliminate, add and modify certain disclosure requirements for fair value measurements as part of its disclosure framework project. The guidance is effective for public companies beginning in the first quarter of 2020. Early adoption is permitted. The Company is currently assessing the impact of this ASU on its condensed consolidated financial statements and evaluating the timing of adoption.

In August 2018, the FASB issued ASU 2018-14, Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans. The amendments in this eliminate, add and modify certain disclosure requirements for defined benefit pension plans. The guidance is effective for public companies beginning with its annual report for fiscal year 2020. Early adoption is permitted. The Company is currently assessing the impact of this ASU on its condensed consolidated financial statements and evaluating the timing of adoption.

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40); Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this update require implementation costs incurred by customers in cloud computing arrangements (i.e., hosting arrangements) to be capitalized under the same premises of authoritative guidance for internal-use software, and deferred over the noncancellable term of the cloud computing arrangement plus any option renewal periods that are reasonably certain to be exercised by the customer or for which the exercise is controlled by the service provider. The Company is required to adopt this new guidance in the first quarter of 2020. Early adoption is permitted. The Company is currently assessing the impact of this ASU on its condensed consolidated financial statements and evaluating the timing of adoption.

Note 2. Business Combinations

Acquisition of MP Pumps, Inc.

On December 12, 2018, the Company acquired MP Pumps, Inc. (“MP Pumps”), a leading manufacturer of specialty industrial pumps and associated aftermarket parts. The Company acquired all of the assets and assumed certain liabilities of MP Pumps for total consideration, net of cash acquired, of $58.5 million, which consisted of cash payments of $57.8 million, a payable $0.1 million purchase price adjustment and a $0.6 million holdback. During the first quarter of 2019, an additional purchase price adjustment of $0.2 million removed the $0.1 million payable purchase price adjustment and reduced the holdback to $0.5 million. The $0.5 million holdback was paid in the first quarter of 2019 and recorded in “Net cash paid in business combinations” of the Condensed Consolidated Statements of Cash Flows. The revenues and operating income of MP Pumps are included in the Company’s condensed consolidated financial statements from the acquisition date and are included in the Industrials segment. None of the goodwill resulting from this acquisition is deductible for tax purposes.

Acquisition of DV Systems, Inc.

On November 2, 2018, the Company acquired DV Systems, Inc. (“DV Systems”), a leading manufacturer of rotary screws and piston compressors and associated aftermarket parts. The Company acquired all of the assets and assumed certain liabilities of DV Systems for total consideration, net of cash acquired, of $16.1 million, which consisted of cash payments of $14.8 million and a $1.3 million holdback. During the first quarter of 2019, the purchase price was increased by $0.1 million and resulted in a payable $0.1 million purchase price adjustment. Of the $1.3 million holdback and $0.1 million purchase price adjustment, $0.2 million is expected to be paid by the end of the second quarter of 2019, $0.3 million by the end of the fourth quarter of 2019, $0.4 million by the end of the first quarter of 2020, and $0.5 million by the end of the fourth quarter of 2020. $0.5 million of the holdback and purchase price adjustment is recorded in “Accrued liabilities” of the Condensed Consolidated Balance Sheets and the remaining $0.9 million is recorded in “Other liabilities” of the Condensed Consolidated Balance Sheets. The revenues and operating income of DV Systems are included in the Company’s condensed consolidated financial statements from the acquisition date and are included in the Industrials segment. None of the goodwill resulting from this acquisition is deductible for tax purposes.

Index

Acquisition of PMI Pump Parts

On May 29, 2018, the Company acquired PMI Pump Parts (“PMI”), a leading manufacturer of plungers and other well service pump consumable products. The Company acquired all of the assets and assumed certain liabilities of PMI for total consideration, net of cash acquired, of $21.0 million, which consisted of cash payments of $18.8 million, a $2.0 million promissory note and a $0.2 million holdback. The $0.2 million holdback and $1.0 million of the promissory note were paid in the fourth quarter of 2018. The remaining $1.0 million of the promissory note is expected to be paid by the end of the second quarter of 2019 and recorded in “Accrued liabilities” of the Condensed Consolidated Balance Sheets. The revenues and operating income of PMI are included in the Company’s condensed consolidated financial statements from the acquisition date and are included in the Energy segment. None of the goodwill resulting from this acquisition is deductible for tax purposes.

Acquisition of Runtech Systems Oy

On February 8, 2018, the Company acquired 100% of the stock of Runtech Systems Oy (“Runtech”), a leading global manufacturer of turbo vacuum technology systems and optimization solutions for industrial applications. The Company acquired all of the assets and assumed certain liabilities of Runtech for total cash consideration of $94.9 million, net of cash acquired. The revenues and operating income of Runtech are included in the Company’s condensed consolidated financial statements from the acquisition date and are included in the Industrials segment. The purchase price allocation resulted in the recording of $63.6 million of goodwill and $31.3 million of amortizable intangible assets as of the acquisition date. None of the goodwill resulting from this acquisition is deductible for tax purposes.

Acquisition Revenues and Operating Income (Loss)

The revenue included in the financial statements for these acquisitions subsequent to their acquisition date was $25.8 million and $8.0 million for the three month periods ended March 31, 2019 and 2018, respectively. For the three month period ended March 31, 2019 and 2018, operating income (loss) included in the financial statements for the acquisitions described above, subsequent to their date of acquisition was $2.0 million and ($1.1) million, respectively.

Pro forma information regarding these acquisitions have not been provided as they did not have a material impact on the Company’s condensed consolidated results of operations individually or in the aggregate.

Note 3. Restructuring

Restructuring Program 2018

In the third quarter of 2018, the Company announced a restructuring program that primarily involves workforce reductions and facility consolidation. These actions continued in the fourth quarter and the Company expects additional restructuring activity in the first half of 2019 focused on targeted workforce optimization within general and administrative back-office and manufacturing overhead as well as continued facility consolidation. In the three month period ended March 31, 2019, $2.0 million was charged to expense through ‘‘Other operating expense, net’’ of the Condensed Consolidated Statements of Operations ($0.8 million for Industrials, $1.5 million for Energy and ($0.3) million for Medical).

Index

The following table summarizes the activity associated with the Company’s restructuring programs for the three month period ended March 31, 2019.

Balance as of December 31, 2018	$	10.1
Charged to expense - Termination benefits		1.3
Charged to expense - Other		0.7
Payments		(3.3	)
Other, net		(0.1	)
Balance as of March 31, 2019	$	8.7

As of March 31, 2019, restructuring reserves of $8.7 million are included in “Accrued liabilities” of the Condensed Consolidated Balance Sheets. As of December 31, 2018, restructuring reserves of $10.1 million related to these programs are included in ‘‘Accrued liabilities’’ of the Consolidated Balance Sheets.

Note 4. Inventories

Inventories as of March 31, 2019 and December 31, 2018 consisted of the following.

	March 31, 2019		December 31, 2018
Raw materials, including parts and subassemblies	$	400.5	$	369.2
Work-in-process		58.5		58.1
Finished goods		82.9		83.4
		541.9		510.7
Excess of LIFO costs over FIFO costs		13.2		13.2
Inventories	$	555.1	$	523.9

Note 5. Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill attributable to each reportable segment for the three month period ended March 31, 2019 is presented in the table below.

	Industrials			Energy			Medical			Total
Balance as of December 31, 2018	$	632.7		$	453.6		$	203.2		$	1,289.5
Foreign currency translation and other ⁽¹⁾		(2.2	)		(3.8	)		(0.2	)		(6.2	)
Balance as of March 31, 2019	$	630.5		$	449.8		$	203.0		$	1,283.3

⁽¹⁾

During the three month period ended March 31, 2019, the Company recorded an increase in goodwill of $0.5 million as a result of measurement period adjustments in the Industrial segment.

As of March 31, 2019, goodwill included a total of $563.9 million of accumulated impairment losses within the Energy segment since the date of the transaction in which the Company was acquired by an affiliate of Kohlberg Kravis Roberts & Co. L.P. on July 30, 2013 (the “KKR Transaction”). There were no goodwill impairment charges recorded during the three month periods ended March 31, 2019 and 2018.

Index

Other intangible assets as of March 31, 2019 and December 31, 2018 consisted of the following.

	March 31, 2019					December 31, 2018
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Amortized intangible assets
Customer lists and relationships	$	1,241.1	$	(593.2	)	$	1,245.5	$	(567.8	)
Technology		21.2		(5.0	)		21.7		(4.8	)
Trademarks		44.6		(13.7	)		44.9		(13.0	)
Backlog		68.6		(68.6	)		68.8		(68.6	)
Other		62.0		(34.2	)		62.3		(31.9	)
Unamortized intangible assets
Trademarks		612.5		-			611.3		-
Total other intangible assets	$	2,050.0	$	(714.7	)	$	2,054.5	$	(686.1	)

Amortization of intangible assets was $31.4 million for the three month period ended March 31, 2019 and $30.9 million for the three month period ended March 31, 2018. Amortization of intangible assets is anticipated to be approximately $122.9 million annually in 2020 through 2024 based upon exchange rates as of March 31, 2019.

Note 6. Accrued Liabilities

Accrued liabilities as of March 31, 2019 and December 31, 2018 consisted of the following.

	March 31, 2019		December 31, 2018
Salaries, wages and related fringe benefits	$	62.7	$	62.9
Restructuring		8.7		10.1
Taxes		28.6		24.3
Contract liabilities		64.3		69.6
Product warranty		21.8		23.9
Accrued interest		0.7		0.3
Operating lease liabilities⁽¹⁾		18.3		-
Other		60.8		57.4
Total accrued liabilities	$	265.9	$	248.5

⁽¹⁾

The Company adopted ASU 2016-02, Leases, on January 1, 2019 using the optional transition method. See Note 1 “Condensed Consolidated Financial Statements” for further discussion of the adoption of ASU 2016-02 and Note 14 “Leases” for discussion of the Company’s operating and financing leases.

Index

A reconciliation of the changes in the accrued product warranty liability for the three month periods ended March 31, 2019 and 2018 are as follows.

	For the Three Month Period Ended March 31, 2019			For the Three Month Period Ended March 31, 2018
Balance at beginning of period	$	23.9		$	22.3
Product warranty accruals		6.8			6.1
Settlements		(8.8	)		(5.4	)
Charged to other accounts⁽¹⁾		(0.1	)		1.3
Balance at end of period	$	21.8		$	24.3

⁽¹⁾

Includes primarily the effects of foreign currency translation adjustments for the Company’s subsidiaries with functional currencies other than the USD and changes in the accrual related to acquisitions.

Note 7. Pension and Other Postretirement Benefits

The following table summarizes the components of net periodic benefit cost for the Company’s defined benefit pension plans and other postretirement benefit plans recognized for the three month periods ended March 31, 2019 and 2018.

	Pension Benefits						Other Postretirement
	U.S. Plans			Non-U.S. Plans			Benefits
	For the Three Month Period Ended March 31, 2019			For the Three Month Period Ended March 31, 2019			For the Three Month Period Ended March 31, 2019
Service cost	$	-		$	0.4		$	-
Interest cost		0.5			2.0			-
Expected return on plan assets		(0.5	)		(2.6	)		-
Recognition of:
Unrecognized prior service cost		-			-			-
Unrecognized net actuarial loss		-			0.5			-
	$	-		$	0.3		$	-

Index

	Pension Benefits						Other Postretirement
	U.S. Plans			Non-U.S. Plans			Benefits
	For the Three Month Period Ended March 31, 2018			For the Three Month Period Ended March 31, 2018			For the Three Month Period Ended March 31, 2018
Service cost	$	-		$	0.5		$	-
Interest cost		0.5			1.9			-
Expected return on plan assets		(1.2	)		(3.0	)		-
Recognition of:
Unrecognized prior service cost		-			-			-
Unrecognized net actuarial loss		-			0.5			-
	$	(0.7	)		(0.1	)	$	-

The components of net periodic benefit cost other than the service cost component are included in “Other income, net” of the Condensed Consolidated Statements of Operations.

Note 8. Debt

Debt as of March 31, 2019 and December 31, 2018 is summarized as follows.

	March 31, 2019			December 31, 2018
Short-term borrowings	$	-		$	-
Long-term debt:
Revolving credit facility, due 2020	$	-		$	-
Receivables financing agreement, due 2020		-			-
Term loan denominated in U.S. dollars, due 2024⁽¹⁾		927.6			952.6
Term loan denominated in Euros, due 2024⁽²⁾		679.5			696.5
Capitalized leases and other long-term debt		26.1			26.3
Unamortized debt issuance costs		(3.0	)		(3.3	)
Total long-term debt, net, including current maturities		1,630.2			1,672.1
Current maturities of long-term debt		7.9			7.9
Total long-term debt, net	$	1,622.3		$	1,664.2

⁽¹⁾

As of March 31, 2019, the applicable interest rate was 5.25% and the weighted-average interest rate was 5.24% for the three month period ended March 31, 2019.

⁽²⁾

As of March 31, 2019, the applicable interest rate was 3.00% and the weighted-average interest rate was 3.00% for the three month period ended March 31, 2019.

As of March 31, 2019, the Company had no outstanding borrowings, $27.6 million of letters of credit outstanding and $73.6 million of capacity available under the Receivables Financing Agreement (“RFA”). The RFA requires that the Company comply with certain financial performance covenants including, among others, a Days’ Sales Outstanding (“DSO”) ratio. As of March 31, 2019, the Company’s DSO ratio for the receivables under the RFA did not meet the covenant requirement. The lender waived the covenant requirement as of March 31, 2019. Subsequent to the waiver, the next DSO covenant testing date is June 30, 2019. As a result of the waiver, there is no impact of this covenant violation on the Company’s financial condition or liquidity. The Company was in compliance with the covenant requirements as of December 31, 2018.

In March 2019, the Company used excess cash to repay $25.0 million of principal on outstanding borrowings under the Dollar Term Loan Facility.

Index

Note 9. Stock-Based Compensation Plans

The Company has outstanding stock-based compensation awards granted under the 2013 Stock Incentive Plan (“2013 Plan”) and the 2017 Omnibus Incentive Plan (“2017 Plan”) as described in Note 16, “Stock-Based Compensation Plans” to the consolidated financial statements in its annual report on Form 10-K for the year ended December 31, 2018.

In the three month periods ended March 31, 2019 and 2018, the Company recognized stock-based compensation expense of approximately $7.5 million and $3.4 million, respectively. These costs are included in “Other operating expense, net” of the Condensed Consolidated Statements of Operations.

The $7.5 million of stock-based compensation expense for the three month period ended March 31, 2019 included expense of $0.7 million for the modification of a former employee’s equity awards, expense for equity awards granted under the 2013 Plan and 2017 Plan of $2.1 million and an increase in the liability for stock appreciation rights (“SAR”) of $4.7 million. The $0.7 million stock-based compensation expense for the modification incurred in the three month period ended March 31, 2019 provided continued vesting through scheduled vesting dates for certain awards of a former employee.

As of March 31, 2019, there was $38.4 million of total unrecognized compensation expense related to outstanding stock options and restricted stock awards.

SARs, granted under the 2013 Plan are expected to be settled in cash and are accounted for as liability awards. As of March 31, 2019, a liability of approximately $9.6 million for SARs was included in “Accrued liabilities” of the Condensed Consolidated Balance Sheets.

Stock Option Awards

A summary of the Company’s stock option (including SARs) activity for the three month period ended March 31, 2019 is presented in the following table (underlying shares in thousands).

	Shares			Weighted-Average Exercise Price (per share)
Outstanding at December 31, 2018		12,352		$	10.93
Granted		1,067		$	27.05
Exercised or settled		(2,271	)	$	8.55
Forfeited		(57	)	$	32.06
Outstanding at March 31, 2019		11,091		$	12.86
Vested at March 31, 2019		8,879		$	9.48

The following assumptions were used to estimate the fair value of options granted (excluding previously disclosed modified awards) during the three month periods ended March 31, 2019 and 2018 using the Black-Scholes option-pricing model.

	Three Month Period Ended March 31, 2019		Three Month Period Ended March 31, 2018
Assumptions
Expected life of options (in years)		6.3		7.0 - 7.5
Risk-free interest rate		2.6%		2.9%
Assumed volatility		31.8%		35.1 - 35.4%
Expected dividend rate		0.0%		0.0%

Index

Restricted Stock Unit Awards

A summary of the Company’s restricted stock unit activity for the three month period ended March 31, 2019 is presented in the following table (underlying shares in thousands).

	Shares			Weighted-Average Grant-Date Fair Value
Non-vested as of December 31, 2018		362		$	31.78
Granted		417		$	27.05
Vested		(28	)	$	32.06
Forfeited		(25	)	$	32.06
Non-vested as of March 31, 2019		726		$	29.01

Note 10. Accumulated Other Comprehensive (Loss) Income

The Company’s other comprehensive income (loss) consists of (i) unrealized foreign currency net gains and losses on the translation of the assets and liabilities of its foreign operations; (ii) realized and unrealized foreign currency gains and losses on intercompany notes of a long-term nature and certain hedges of net investments in foreign operations, net of income taxes; (iii) unrealized gains and losses on cash flow hedges (consisting of interest rate swaps), net of income taxes; and (iv) pension and other postretirement prior service cost and actuarial gains or losses, net of income taxes. See Note 7 “Pension and Other Postretirement Benefits” and Note 11 “Hedging Activities and Fair Value Measurements.”

The before tax income (loss) and related income tax effect are as follows.

	For the Three Month Period Ended March 31, 2019								For the Three Month Period Ended March 31, 2018
	Before-Tax Amount		Tax (Expense) or Benefit			Net of Tax Amount			Before-Tax Amount			Tax Benefit or (Expense)			Net of Tax Amount

Foreign currency translation adjustments, net	$	4.5	$	(4.6	)	$	(0.1	)	$	29.7			4.7		$	34.4
Unrecognized gains on cash flow hedges, net		1.3		0.6			1.9			15.1			(3.7	)		11.4
Pension and other postretirement benefit prior service cost and gain or loss, net		0.1		0.1			0.2			(1.2	)		1.6			0.4
Other comprehensive income	$	5.9	$	(3.9	)	$	2.0		$	43.6		$	2.6		$	46.2

Index

On January 1, 2019, the Company adopted ASU 2018-02 which reclassified stranded tax effects resulting from the Tax Cuts and Jobs Act from accumulated other comprehensive (loss) income to retained (deficit) earnings. The Company recorded a cumulative-effect adjustment which increased “Accumulated other comprehensive loss” of the Condensed Consolidated Balance Sheet by $8.2 million. Changes in accumulated other comprehensive (loss) income by component for the three month periods ended March 31, 2019 and 2018 are presented in the following table ⁽¹⁾.

	Foreign Currency Translation Adjustments, Net			Unrealized (Losses) Gains on Cash Flow Hedges			Pension and Postretirement Benefit Plans			Total
Balance as of December 31, 2018	$	(190.6	)	$	(11.4	)	$	(45.0	)	$	(247.0	)
Other comprehensive loss before reclassifications		(0.1	)		(0.9	)		(0.2	)		(1.2	)
Amounts reclassified from accumulated other comprehensive (loss) income		-			2.8			0.4			3.2
Other comprehensive (loss) income		(0.1	)		1.9			0.2			2.0
Cumulative effect adjustment upon adoption of new accounting standard (ASU 2018-02)		(1.5	)		(6.7	)		-			(8.2	)
Balance as of March 31, 2019	$	(192.2	)	$	(16.2	)	$	(44.8	)	$	(253.2	)

	Foreign Currency Translation Adjustments, Net			Unrealized (Losses) Gains on Cash Flow Hedges			Pension and Postretirement Benefit Plans			Total
Balance as of December 31, 2017	$	(129.6	)	$	(29.8	)	$	(40.4	)	$	(199.8	)
Other comprehensive income before reclassifications		34.4			7.8			-			42.2
Amounts reclassified from accumulated other comprehensive (loss) income		-			3.6			0.4			4.0
Other comprehensive income		34.4			11.4			0.4			46.2
Cumulative effect adjustment upon adoption of new accounting standard (ASU 2017-12)		-			0.3			-			0.3
Balance as of March 31, 2018	$	(95.2	)	$	(18.1	)	$	(40.0	)	$	(153.3	)

⁽¹⁾

All amounts are net of tax. Amounts in parentheses indicate debits.

Index

Reclassifications out of accumulated other comprehensive (loss) income for the three month periods ended March 31, 2019 and 2018 are presented in the following table:

Amount Reclassified from Accumulated Other Comprehensive (Loss) Income
Details about Accumulated Other Comprehensive (Loss) Income Components	For the Three Month Period Ended March 31, 2019			For the Three Month Period Ended March 31, 2018			Affected Line in the Statement Where Net Income is Presented
Loss on cash flow hedges
Interest rate swaps	$	3.7		$	4.8		Interest expense
		3.7			4.8		Total before tax
		(0.9	)		(1.2	)	Income tax benefit
	$	2.8		$	3.6		Net of tax
Amortization of defined benefit pension and other postretirement benefit items	$	0.5		$	0.5		⁽¹⁾
		0.5			0.5		Total before tax
		(0.1	)		(0.1	)	Income tax benefit
	$	0.4		$	0.4		Net of tax
Total reclassifications for the period	$	3.2		$	4.0		Net of tax

⁽¹⁾

These components are included in the computation of net periodic benefit cost. See Note 7 “Pension and Other Postretirement Benefits” for additional details.

Note 11. Hedging Activities and Fair Value Measurements

Hedging Activities

The Company is exposed to certain market risks during the normal course of its business arising from adverse changes in interest rates and foreign currency exchange rates. The Company selectively uses derivative financial instruments (‘‘derivatives’’), including foreign currency forward contracts and interest rate swaps, to manage the risks from fluctuations in foreign currency exchange rates and interest rates, respectively. The Company does not purchase or hold derivatives for trading or speculative purposes. Fluctuations in interest rates and foreign currency exchange rates can be volatile, and the Company’s risk management activities do not totally eliminate these risks.

Consequently, these fluctuations could have a significant effect on the Company’s financial results.

The Company’s exposure to interest rate risk results primarily from its variable-rate borrowings. The Company manages its debt centrally, considering tax consequences and its overall financing strategies. The Company manages its exposure to interest rate risk by maintaining a mixture of fixed and variable rate debt and, from time to time, using pay-fixed interest rate swaps as cash flow hedges of variable rate debt in order to adjust the relative fixed and variable proportions.

A substantial portion of the Company’s operations is conducted by its subsidiaries outside of the United States in currencies other than the USD. Almost all of the Company’s non-U.S. subsidiaries conduct their business primarily in their local currencies, which are also their functional currencies. Other than the USD, the EUR, GBP, and Chinese Renminbi are the principal currencies in which the Company and its subsidiaries enter into transactions. The Company is exposed to the impacts of changes in foreign currency exchange rates on the translation of its non-U.S. subsidiaries’ assets, liabilities and earnings into USD. The Company has certain U.S. subsidiaries borrow in currencies other than the USD.

The Company and its subsidiaries are also subject to the risk that arises when they, from time to time, enter into transactions in currencies other than their functional currency. To mitigate this risk, the Company and its subsidiaries typically settle intercompany trading balances monthly. The Company also selectively uses forward currency contracts to manage this risk. These contracts for the sale or purchase of European and other currencies generally mature within one year.

Index

Derivative Instruments

The following table summarizes the notional amounts, fair values and classification of the Company’s outstanding derivatives by risk category and instrument type within the Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018.

	March 31, 2019
	Derivative Classification	Notional Amount (1)		Fair Value ⁽¹⁾ Other Current Assets		Fair Value ⁽¹⁾ Other Assets		Fair Value ⁽¹⁾ Accrued Liabilities		Fair Value ⁽¹⁾ Other Liabilities
Derivatives Designated as Hedging Instruments
Interest rate swap contracts	Cash Flow	$	925.0	$	-	$	-	$	9.1	$	10.1
Derivatives Not Designated as Hedging Instruments
Foreign currency forwards	Fair Value	$	32.8	$	0.2	$	-	$	-	$	-
Foreign currency forwards	Fair Value	$	166.8	$	-	$	-	$	3.3	$	-

	December 31, 2018

	Derivative Classification	Notional Amount ⁽¹⁾		Fair Value ⁽¹⁾ Other Current Assets		Fair Value ⁽¹⁾ Other Assets		Fair Value ⁽¹⁾ Accrued Liabilities		Fair Value ⁽¹⁾ Other Liabilities
Derivatives Designated as Hedging Instruments
Interest rate swap contracts	Cash Flow	$	925.0	$	-	$	-	$	11.2	$	8.7
Derivatives Not Designated as Hedging Instruments
Foreign currency forwards	Fair Value	$	143.3	$	1.3	$	-	$	-	$	-
Foreign currency forwards	Fair Value	$	27.5	$	-	$	-	$	0.1	$	-

⁽¹⁾

Notional amounts represent the gross contract amounts of the outstanding derivatives excluding the total notional amount of positions that have been effectively closed through offsetting positions. The net gains and net losses associated with positions that have been effectively closed through offsetting positions but not yet settled are included in the asset and liability derivatives fair value columns, respectively.

Gains and losses on derivatives designated as cash flow hedges included in the Condensed Consolidated Statements of Comprehensive Income for the three month periods ended March 31, 2019 and 2018 are as presented in the table below.

	For the Three Month Period Ended March 31, 2019			For the Three Month Period Ended March 31, 2018
Interest rate swap contracts
(Loss) gain recognized in AOCI on derivatives	$	(2.4	)	$	10.3
Loss reclassified from AOCI into income (effective portion)⁽¹⁾		(3.7	)		(4.8	)

⁽¹⁾

Losses on derivatives reclassified from accumulated other comprehensive income (“AOCI”) into income were included within “Interest expense” of the Condensed Consolidated Statements of Operations.

As of March 31, 2019, the Company is the fixed rate payor on eight interest rate swap contracts that effectively fix the LIBOR-based index used to determine the interest rates charged on a total of $925.0 million of the Company’s LIBOR-based variable rate borrowings. These contracts carry fixed rates ranging from 3.3% to 4.3% and have expiration dates ranging from 2019 to 2020. These swap agreements qualify as hedging instruments and have been designated as cash flow hedges of forecasted LIBOR-based interest payments. Based on LIBOR-based swap yield curves as of March 31, 2019, the Company expects to reclassify losses of $14.0 million out of AOCI into earnings during the next 12 months. The Company’s LIBOR-based variable rate borrowings outstanding as of March 31, 2019 were $927.6 million and €605.8 million.

Index

The Company had nine foreign currency forward contracts outstanding as of March 31, 2019 with notional amounts ranging from $4.0 million to $47.9 million. These contracts are used to hedge the change in fair value of recognized foreign currency denominated assets or liabilities caused by changes in currency exchange rates. The changes in the fair value of these contracts generally offset the changes in the fair value of a corresponding amount of the hedged items, both of which are included within “Other operating expense, net” of the Condensed Consolidated Statements of Operations. The Company’s foreign currency forward contracts are subject to master netting arrangements or agreements between the Company and each counterparty for the net settlement of all contracts through a single payment in a single currency in the event of default on or termination of any one contract with that certain counterparty. It is the Company’s practice to recognize the gross amounts in the Condensed Consolidated Balance Sheets. The amount available to be netted is not material.

The Company’s losses on derivative instruments not designated as accounting hedges and total net foreign currency losses for the three month periods ended March 31, 2019 and 2018 were as follows.

	For the Three Month Period Ended March 31, 2019			For the Three Month Period Ended March 31, 2018
Foreign currency forward contract losses	$	(1.6	)	$	(1.0	)
Total foreign currency transaction losses, net		(3.1	)		(2.6	)

The Company has a significant investment in consolidated subsidiaries with functional currencies other than the USD, particularly the EUR. The Company designated its Original Euro Term Loan as a hedge of the Company’s net investment in subsidiaries with EUR functional currencies in 2017 until it was extinguished and replaced on August 17, 2017 by a €615.0 million Euro Term Loan, further described in Note 10 “Debt” to the consolidated financial statements in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2018. On August 17, 2017, the Company designated the €615.0 million Euro Term Loan as a hedge of the Company’s net investment in subsidiaries with EUR functional currencies. As of March 31, 2019, the Euro Term Loan of €605.8 million remained designated.

The Company’s gains and (losses), net of income tax, associated with changes in the value of debt for the three month periods ended March 31, 2019 and 2018 and the net balance of such gains and (losses) included in accumulated other comprehensive (loss) income as of March 31, 2019 and 2018 were as follows.

	For the Three Month Period Ended March 31, 2019		For the Three Month Period Ended March 31, 2018

Gain (loss), net of income tax, recorded through other comprehensive income	$	11.6	$	(15.2	)
Balance included in accumulated other comprehensive (loss) income as of March 31, 2019 and 2018, respectively		68.2		17.0

For the periods presented, all cash flows associated with derivatives are classified as operating cash flows in the Condensed Consolidated Statements of Cash Flows.

Fair Value Measurements

A financial instrument is defined as cash or cash equivalents, evidence of an ownership interest in an entity, or a contract that creates a contractual obligation or right to deliver or receive cash or another financial instrument from another party. The Company’s financial instruments consist primarily of cash and cash equivalents, trade accounts receivables, trade accounts payables, deferred compensation assets and obligations, derivatives and debt instruments. The carrying values of cash and cash equivalents, trade accounts receivables, trade accounts payables, and variable rate debt instruments are a reasonable estimate of their respective fair values.

Index

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or more advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value as follows.

Level 1

Quoted prices (unadjusted) in active markets for identical assets or liabilities as of the reporting date.

Level 2

Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities as of the reporting date.

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2019.

	Level 1		Level 2		Level 3		Total
Financial Assets
Foreign currency forwards⁽¹⁾	$	-	$	0.2	$	-	$	0.2
Trading securities held in deferred compensation plan⁽²⁾		6.5		-		-		6.5
Total	$	6.5	$	0.2	$	-	$	6.7
Financial Liabilities
Foreign currency forwards⁽¹⁾	$	-	$	3.3	$	-	$	3.3
Interest rate swaps⁽³⁾		-		19.2		-		19.2
Deferred compensation plan⁽²⁾		6.5		-		-		6.5
Total	$	6.5	$	22.5	$	-	$	29.0

⁽¹⁾

Based on calculations that use readily observable market parameters at their basis, such as spot and forward rates.

⁽²⁾

Based on the quoted price of publicly traded mutual funds which are classified as trading securities and accounted for using the mark-to-market method.

⁽³⁾

Measured as the present value of all expected future cash flows based on the LIBOR-based swap yield curves as of March 31, 2019. The present value calculation uses discount rates that have been adjusted to reflect the credit quality of the Company and its counterparties.

Note 12. Revenue from Contracts with Customers

Overview

The Company recognizes revenue when the Company has satisfied its obligation and control is transferred to the customer. The amount of revenue recognized includes adjustments for any variable consideration, such as rebates, sales discounts, liquidated damages, etc., which are included in the transaction price, and allocated to each performance obligation. The variable consideration is estimated throughout the course of the contract using the Company’s best estimates. Judgments impacting variable consideration related to material rebate and sales discount programs, and significant contracts containing liquidated damage clauses are governed by management review processes.

The majority of the Company’s revenues are derived from short duration contracts and revenue is recognized at a single point in time when control is transferred to the customer, generally at shipment or when delivery has occurred or services have been rendered.

Index

The Company has certain long duration engineered to order (‘‘ETO’’) contracts that require highly engineered solutions designed to customer specific applications. For contracts where the contractual deliverables have no alternative use and the contract termination clauses provide for the recovery of cost plus a reasonable margin, revenue is recognized over time based on the Company’s progress in satisfying the contractual performance obligations, generally measured as the ratio of actual costs incurred to date to the estimated total costs to complete the contract. For contracts with termination provisions that do not provide for recovery of cost and a reasonable margin, revenue is recognized at a point in time, generally at shipment or delivery to the customer. Identification of performance obligations, determination of alternative use, assessment of contractual language regarding termination provisions, and estimation of total project costs are all significant judgments required in the application of ASC 606.

Contractual specifications and requirements may be modified. The Company considers contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. In the event a contract modification is for goods or services that are not distinct in the contract, and therefore, form part of a single performance obligation that is partially satisfied as of the modification date, the effect of the contract modification on the transaction price and the Company’s measure of progress for the performance obligation to which it relates, is recognized on a cumulative catch-up basis.

Taxes assessed by a government authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. Sales commissions are due at either collection of payment from customers or recognition of revenue. Applying the practical expedient from ASC 340-40-25-4, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs are included in ‘‘Selling and administrative expenses’’ of the Condensed Consolidated Statements of Operations.

Disaggregation of Revenue

The following tables provide disaggregated revenue by reportable segment for the three month periods ended March 31, 2019 and 2018.

	For the Three Month Period Ended March 31, 2019
	Industrials		Energy		Medical		Total
Primary Geographic Markets
United States	$	98.7	$	142.8	$	27.7	$	269.2
Other Americas		21.1		22.3		0.6		44.0
Total Americas	$	119.8	$	165.1	$	28.3	$	313.2
EMEA		152.2		43.9		28.2		224.3
Asia Pacific		46.1		24.1		12.6		82.8
Total	$	318.1	$	233.1	$	69.1	$	620.3

Product Categories
Original equipment⁽¹⁾	$	219.7	$	88.8	$	66.8	$	375.3
Aftermarket⁽²⁾		98.4		144.3		2.3		245.0
Total	$	318.1	$	233.1	$	69.1	$	620.3

Pattern of Revenue Recognition
Revenue recognized at point in time⁽³⁾	$	307.6	$	216.1	$	69.1	$	592.8
Revenue recognized over time⁽⁴⁾		10.5		17.0		-		27.5
Total	$	318.1	$	233.1	$	69.1	$	620.3

Index

	For the Three Month Period Ended March 31, 2018
	Industrials		Energy		Medical		Total
Primary Geographic Markets
United States	$	90.4	$	165.4	$	21.3	$	277.1
Other Americas		21.2		27.5		0.9		49.6
Total Americas	$	111.6	$	192.9	$	22.2	$	326.7
EMEA		161.0		25.2		27.0		213.2
Asia Pacific		44.3		24.1		11.3		79.7
Total	$	316.9	$	242.2	$	60.5	$	619.6

Product Categories
Original equipment⁽¹⁾	$	215.6	$	91.3	$	58.1	$	365.0
Aftermarket⁽²⁾		101.3		150.9		2.4		254.6
Total	$	316.9	$	242.2	$	60.5	$	619.6

Pattern of Revenue Recognition
Revenue recognized at point in time⁽³⁾	$	307.6	$	239.0	$	60.5	$	607.1
Revenue recognized over time⁽⁴⁾		9.3		3.2		-		12.5
Total	$	316.9	$	242.2	$	60.5	$	619.6

⁽¹⁾

Revenues from sales of capital equipment within the Industrials and Energy Segments and sales of components to original equipment manufacturers in the Medical Segment.

⁽²⁾

Revenues from sales of spare parts, accessories, other components and services in support of maintaining customer owned, installed base of the Company’s original equipment.

⁽³⁾

Revenues from short and long duration product and service contracts recognized at a point in time when control is transferred to the customer generally when products delivery has occurred and services have been rendered.

⁽⁴⁾

Revenues primarily from long duration ETO product contracts and certain contracts for delivery of a significant volume of substantially similar products recognized over time as contractual performance obligations are completed.

Performance Obligations

The majority of the Company’s contracts have a single performance obligation as the promise to transfer goods and/or services. For contracts with multiple performance obligations, the Company utilizes observable prices to determine standalone selling price or cost plus margin if a standalone price is not available. The Company has elected to account for shipping and handling activities as fulfillment costs and not a separate performance obligation. If control transfers and related revenue is recognized for the related good before the shipping and handling activities occur, the related costs of those shipping and handling activities are accrued.

The Company’s primary performance obligations include delivering standard or configured to order (“CTO”) goods to customers, designing and manufacturing a broad range of equipment customized to a customer’s specifications in ETO arrangements, rendering of services (maintenance and repair contracts), and certain extended or service type warranties. For incidental items that are immaterial in the context of the contract, costs are expensed as incurred or accrued at delivery.

As of March 31, 2019, for contracts with an original duration greater than one year, the Company expects to recognize revenue in the future related to unsatisfied (or partially satisfied) performance obligations of $209.3 million in the next twelve months and $47.2 million in periods thereafter. The performance obligations that are unsatisfied (or partially satisfied) are primarily related to orders for goods or services that were placed prior to the end of the reporting period and have not been delivered to the customer, on-going work on ETO contracts where revenue is recognized over time and service contracts with an original duration greater than one year.

Index

Contract Balances

The following table provides the contract balances as of March 31, 2019 and December 31, 2018 presented in the Condensed Consolidated Balance Sheets.

	March 31, 2019		December 31, 2018
Accounts receivable	$	509.9	$	525.4
Contract assets		24.8		19.6
Contract liabilities		64.3		69.6

Accounts receivable – Amounts due where the Company’s right to receive cash is unconditional.

Contract assets – The Company’s rights to consideration for the satisfaction of performance obligations subject to constraints apart from timing. Contract assets are transferred to receivables when the right to collect consideration becomes unconditional. Contract assets are presented net of progress billings and related advances from customers.

Contract liabilities – Advance payments received from customers for contracts for which revenue is not yet recognized. Contract liability balances are generally recognized in revenue within twelve months.

Contract assets and liabilities are reported on the Condensed Consolidated Balance Sheets on a contract-by-contract basis at the end of each reporting period. Contract assets and liabilities are presented net on a contract level, where required.

Payments from customer are generally due 30-60 days after invoicing. Invoicing for sales of standard products generally coincides with shipment or delivery of goods. Invoicing for CTO and ETO contracts typically follows a schedule for billing at contractual milestones. Payment milestones normally include down payments upon the contract signing, completion of product design, completion of customer’s preliminary inspection, shipment or delivery, completion of installation, and customer’s on-site inspection. The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets) and customer advances and deposits (contract liabilities) on the Condensed Consolidated Balance Sheets.

The Company has elected the practical expedient from ASC 606-10-32-18 and does not adjust the transaction price for the effects of a financing component if, at contract inception, the period between when the Company transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.

Note 13. Income Taxes

The following table summarizes the Company’s provision for income taxes and effective income tax provision rate for the three month periods ended March 31, 2019 and 2018.

	For the Three Month Period Ended March 31, 2019			For the Three Month Period Ended March 31, 2018
Income before income taxes	$	59.1		$	65.8
Provision for income taxes	$	12.0		$	23.4
Effective income tax provision rate		20.3	%		35.6	%

The decrease in the provision for income taxes and decrease in the effective income tax provision rate for the three month period ended March 31, 2019 when compared to the same three month period of 2018 was primarily due to an increase in the amount of earnings generated in countries with lower statutory tax rates, an increase in windfall tax benefits and the Transition tax imposed under the Tax Cuts and Jobs Act of 2017.

Index

Note 14. Leases

The Company adopted ASC 842 on January 1, 2019 using the optional transition method. See Note 1 “Condensed Consolidated Financial Statements” for further discussion of the adoption.

The Company has operating and financing leases for real estate, vehicles, IT equipment, office equipment and production equipment. The Company determines if an arrangement is a lease and identifies the classification of the lease as a financing lease or an operating lease at inception. Operating leases are recorded as operating lease right-of-use assets (“ROU assets”) in “Other assets” and operating lease liabilities in “Accrued liabilities” and “Other liabilities” of the Condensed Consolidated Balance Sheets. Financing leases are recorded as financing ROUs in “Property, plant and equipment” and lease liabilities in “Short-term borrowings and current maturities of long-term debt” and “Long-term debt, less current maturities” of the Condensed Consolidated Balance Sheets.

At the date of commencement, lease liabilities are recorded at the present value of the future minimum lease payments over the lease term. The lease term is equal to the initial term at commencement plus any renewal or extension options that the Company is reasonably certain will be exercised. ROU assets at the date of commencement are equal to the amount of the initial lease liability, the initial direct costs incurred by the Company and any prepaid lease payments less any incentives received.

Subsequent to the commencement date, operating lease liabilities are recorded at the present value of unpaid lease payments discounted at a discount rate established at the commencement date. Due to the absence of an implicit rate in the Company’s lease contracts, an incremental borrowing rate is used in the determination of the present value of future lease payments. Incremental borrowing rates for a lease are based on the lease term, lease currency and the Company’s credit spread. Operating ROU assets are recorded as the beginning balance less accumulated amortization with accumulated amortization equaling the straight-lined lease expense less the periodic accretion of the lease liability using the effective interest rate method.

Subsequent to the commencement date, financing lease liabilities are increased to reflect interest on the lease liability and decreased for principal lease payments made. The financing ROU asset is measured at cost less amortization expense and any accumulated impairment loss. Amortization expense is calculated on a straight-line basis over the lease term or remaining useful life.

The Company’s lease terms allow for the extension or termination of its leases and accounts for the extension and termination when it is reasonably certain that the Company will exercise the option or terminate the lease. Reassessment of the lease term occurs when there is a significant event or a significant change in circumstances that is within the control of the Company that directly affects whether the Company is reasonably certain to exercise or not to exercise an option to extend or terminate the lease or to purchase the underlying asset.

Contractual specifications and requirements may be modified. The Company considers contract modifications to exist when the modification includes a change to the contractual terms, scope of the lease or the consideration given. In the event that the right to use an additional asset is granted and the lease payments associated with the additional asset are commensurate with the ROU asset’s standalone price, the modification is accounted for as a separate contract and the original contract remains unchanged. In the event that a single lease is modified, the Company reassessed the classification of the modified lease as of the effective date of the modification based on the modified terms and accounts for initial direct costs, lease incentives and any other payments made to or by the Company in connection with the modification in the same manner that items would be accounted for in connection with a new lease. If there is an additional ROU asset included, the lease term is extended or reduced, or the consideration is the only change in the contract, the Company reallocates the remaining consideration in the contract and remeasures the lease liability using a discount rate determined at the effective date of the modification. The remeasured lease liability for the modified lease is an adjustment to the corresponding ROU asset and does not impact the Condensed Consolidated Statements of Operations. In the event of a full or partial termination, the carrying value of the ROU asset decreases on a basis proportionate to the full or partial termination and any difference between the reduction in the lease liability and the proportionate reduction of the ROU asset is recognized as a gain or loss at the effective date of the modification.

The Company elected not to recognize short-term leases on its balance sheet and continues to expense such leases.

Index

The components of lease expense for the three month period ended March 31, 2019 were as follows.

	For the Three Month Period Ended March 31, 2019
Operating lease cost	$	5.4

Finance lease cost
Amortization of right-of-use assets	$	0.4
Interest on lease liabilities		0.4
Total finance lease cost	$	0.8

Short-term lease cost	$	0.2

Supplemental cash flow information related to leases was as follows.

	For the Three Month Period Ended March 31, 2019
Cash paid for amounts included in the measurement of leases
Operating cash flows from operating leases		5.4
Operating cash flows from finance leases		0.4
Financing cash flows from finance leases		0.2

Supplemental balance sheet information related to leases was as follows.

	March 31, 2019
Operating leases
Other assets	$	61.3

Accrued liabilities		18.3
Other liabilities		43.1
Total operating lease liabilities	$	61.4

Finance Leases
Property, plant and equipment		25.0

Short-term borrowings and current maturities of long-term debt		0.9
Long-term debt, less current maturities		25.2
Total finance lease liabilities	$	26.1

Closing Price ($)	Shares Out (MM)	Market Cap ($MM)
$33.43	202	$6,750

10-Q	2019-03-31	Quarter: 2019-03-31
10-K	2018-12-31	Annual: 2018-12-31
10-Q	2018-09-30	Quarter: 2018-09-30
10-Q	2018-06-30	Quarter: 2018-06-30
10-Q	2018-03-31	Quarter: 2018-03-31
10-K	2017-12-31	Annual: 2017-12-31
10-Q	2017-09-30	Quarter: 2017-09-30
10-Q	2017-06-30	Quarter: 2017-06-30

8-K	2019-05-09	Shareholder Vote
8-K	2019-04-30	Other Events, Exhibits
8-K	2019-04-30	Enter Agreement, Exhibits
8-K	2019-04-30	Earnings, Exhibits
8-K	2019-02-19	Earnings, Exhibits
8-K	2018-12-18	Officers, Regulation FD, Exhibits
8-K	2018-12-13	Enter Agreement, Exhibits
8-K	2018-11-28	Officers, Regulation FD, Exhibits
8-K	2018-10-31	Enter Agreement, Exhibits
8-K	2018-10-25	Earnings, Exhibits
8-K	2018-10-24	Officers
8-K	2018-09-11	Officers
8-K	2018-08-01	Earnings, Other Events, Exhibits
8-K	2018-05-10	Shareholder Vote
8-K	2018-05-02	Enter Agreement, Exhibits
8-K	2018-04-26	Earnings, Exhibits
8-K	2018-02-07	Officers, Regulation FD, Exhibits
8-K	2018-01-05	Officers, Regulation FD, Exhibits

AZN	AstraZeneca	100,930
CMG	Chipotle	19,540
SRPT	Sarepta Therapeutics	8,820
MBUU	Malibu Boats	874
VSLR	Vivint Solar	797
ZIOP	Ziopharm Oncology	690
CPSI	Computer Programs & Systems	405
HBIO	Harvard Bioscience	93
NSPM	Northern States Power	0
ELECU	Electrum Special Acquisition	0

EX-31.1	ex31_1.htm
EX-31.2	ex31_2.htm
EX-32.1	ex32_1.htm
EX-32.2	ex32_2.htm