Ingersoll Rand Inc. - Quarter Report: 2018 September (Form 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 September 30, 2018

☐	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. (Check one):

Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒	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 198,762,737 shares of Common Stock, par value $0.01 per share, as of October 24, 2018.

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	42
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	61
	Item 4. Controls and Procedures	62
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings	62
	Item 1A. Risk Factors	62
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	63
	Item 3. Defaults Upon Senior Securities	63
	Item 4. Mine Safety Disclosures	63
	Item 5. Other Information	63
	Item 6. Exhibits	63
SIGNATURES		64

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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, 2017, 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 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.

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.

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.

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Credit and counterparty risks could harm our business.

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.

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.

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

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 agreements 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.

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

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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 the Company 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 e-mail 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.

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PART I.

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 September 30,						For the Nine Month Period Ended September 30,
	2018			2017			2018			2017
Revenues	$	689.3		$	649.6		$	1,977.1		$	1,710.4
Cost of sales		426.9			395.7			1,233.6			1,066.0
Gross Profit		262.4			253.9			743.5			644.4
Selling and administrative expenses		107.7			111.0			330.4			338.9
Amortization of intangible assets		31.0			29.5			93.4			87.6
Other operating expense, net		6.0			17.4			10.8			186.7
Operating Income		117.7			96.0			308.9			31.2
Interest expense		24.4			30.1			76.5			115.4
Loss on extinguishment of debt		0.9			34.1			1.0			84.5
Other income, net		(2.4	)		(0.6	)		(6.7	)		(2.4	)
Income (Loss) Before Income Taxes		94.8			32.4			238.1			(166.3	)
Provision (benefit) for income taxes		22.6			4.4			63.2			(41.2	)
Net Income (Loss)		72.2			28.0			174.9			(125.1	)
Less: Net income attributable to noncontrolling interests		-			-			-			0.1
Net Income (Loss) Attributable to Gardner Denver Holdings, Inc.	$	72.2		$	28.0		$	174.9		$	(125.2	)
Basic income (loss) per share	$	0.36		$	0.14		$	0.87		$	(0.71	)
Diluted income (loss) per share	$	0.35		$	0.13		$	0.83		$	(0.71	)

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

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GARDNER DENVER HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(Dollars in millions)

	For the Three Month Period Ended September 30,						For the Nine Month Period Ended September 30,
	2018			2017			2018			2017
Comprehensive Income (Loss) Attributable to Gardner Denver Holdings, Inc.
Net income (loss) attributable to Gardner Denver Holdings, Inc.	$	72.2		$	28.0		$	174.9		$	(125.2	)
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments, net		(21.9	)		41.5			(70.0	)		131.4
Foreign currency gains (losses), net		3.6			(14.8	)		18.7			(44.3	)
Unrecognized gains on cash flow hedges, net		4.4			4.0			20.5			5.5
Pension and other postretirement prior service cost and gain or loss, net		0.9			(0.6	)		3.9			(1.9	)
Total other comprehensive (loss) income, net of tax		(13.0	)		30.1			(26.9	)		90.7
Comprehensive income (loss) attributable to Gardner Denver Holdings, Inc.	$	59.2		$	58.1		$	148.0		$	(34.5	)
Comprehensive Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests	$	-		$	-		$	-		$	0.1
Other comprehensive income, net of tax:
Foreign currency translation adjustments, net		-			-			-			-
Total other comprehensive income, net of tax		-			-			-			-
Comprehensive income attributable to noncontrolling interests	$	-		$	-		$	-		$	0.1
Total Comprehensive Income (Loss)	$	59.2		$	58.1		$	148.0		$	(34.4	)

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

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GARDNER DENVER HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

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

	September 30, 2018			December 31, 2017
Assets
Current assets:
Cash and cash equivalents	$	269.0		$	393.3
Accounts receivable, net of allowance for doubtful accounts of $19.1 and $18.7, respectively		525.0			536.3
Inventories		550.1			494.5
Other current assets		63.4			39.5
Total current assets		1,407.5			1,463.6
Property, plant and equipment, net of accumulated depreciation of $238.7 and $203.8, respectively		346.9			363.2
Goodwill		1,268.4			1,227.6
Other intangible assets, net		1,356.8			1,431.2
Deferred tax assets		1.1			1.0
Other assets		135.7			134.6
Total assets	$	4,516.4		$	4,621.2
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings and current maturities of long-term debt	$	7.9		$	20.9
Accounts payable		320.0			269.7
Accrued liabilities		258.9			271.2
Total current liabilities		586.8			561.8
Long-term debt, less current maturities		1,747.4			2,019.3
Pensions and other postretirement benefits		90.5			99.8
Deferred income taxes		279.3			237.5
Other liabilities		189.0			226.0
Total liabilities		2,893.0			3,144.4
Commitments and contingencies (Note 14)
Stockholders' equity:
Common stock, $0.01 par value; 1,000,000,000 shares authorized; 200,876,956 and 198,377,237 shares issued at September 30, 2018 and December 31, 2017, respectively		2.0			2.0
Capital in excess of par value		2,280.8			2,275.4
Accumulated deficit		(403.2	)		(577.8	)
Accumulated other comprehensive loss		(226.4	)		(199.8	)
Treasury stock at cost; 1,937,480 and 2,159,266 shares at September 30, 2018 and December 31, 2017, respectively		(29.8	)		(23.0	)
Total stockholders' equity		1,623.4			1,476.8
Total liabilities and stockholders' equity	$	4,516.4		$	4,621.2

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

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GARDNER DENVER HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

(Dollars in millions)

	For the Nine Month Period Ended September 30, 2018
Number of Common Shares Issued (in thousands)
Balance at beginning of period		198.4
Exercise of stock options		0.8
Issuance of common stock for stock-based compensation plans		1.7
Balance at end of period		200.9
Common Stock
Balance at beginning of period	$	2.0
Exercise of stock options		-
Issuance of common stock for stock-based compensation plans		-
Balance at end of period	$	2.0
Capital in Excess of Par Value
Balance at beginning of period	$	2,275.4
Stock-based compensation		9.0
Exercise of stock options		6.3
Issuance of treasury stock for stock-based compensation plans		(9.9	)
Balance at end of period	$	2,280.8
Accumulated Deficit
Balance at beginning of period	$	(577.8	)
Net income attributable to Gardner Denver Holdings, Inc.		174.9
Cumulative-effect adjustment upon adoption of new accounting standard (ASU 2017-12)		(0.3	)
Balance at end of period	$	(403.2	)
Accumulated Other Comprehensive Loss
Balance at beginning of period	$	(199.8	)
Foreign currency translation adjustments, net		(70.0	)
Foreign currency gains, net		18.7
Unrecognized gains on cash flow hedges, net		20.5
Pension and other postretirement prior service cost and gain or loss, net		3.9
Cumulative-effect adjustment upon adoption of new accounting standard (ASU 2017-12)		0.3
Balance at end of period	$	(226.4	)
Treasury Stock
Balance at beginning of period	$	(23.0	)
Purchases of treasury stock		(11.1	)
Share repurchase program		(5.6	)
Issuance of treasury stock for stock-based compensation plans		9.9
Balance at end of period	$	(29.8	)
Total Stockholders' Equity	$	1,623.4

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

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GARDNER DENVER HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in millions)

	For the Nine Month Period Ended September 30, 2018			For the Nine Month Period Ended September 30, 2017
Cash Flows From Operating Activities:
Net income (loss)	$	174.9		$	(125.1	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Amortization of intangible assets		93.4			87.6
Depreciation in cost of sales		33.9			33.2
Depreciation in selling and administrative expenses		7.3			6.1
Stock-based compensation expense		6.1			166.0
Foreign currency transaction (gains) losses, net		(0.6	)		6.3
Net (gain) loss on asset dispositions		(1.1	)		2.0
Loss on extinguishment of debt		1.0			84.5
Deferred income taxes		27.5			(68.1	)
Changes in assets and liabilities:
Receivables		10.5			(65.9	)
Inventories		(44.7	)		(36.4	)
Accounts payable		57.2			39.8
Accrued liabilities		(34.1	)		(19.8	)
Other assets and liabilities, net		(33.0	)		(26.3	)
Net cash provided by operating activities		298.3			83.9
Cash Flows From Investing Activities:
Capital expenditures		(32.1	)		(36.4	)
Net cash paid in business combinations		(113.6	)		(18.8	)
Proceeds from the termination of derivatives		-			6.2
Disposals of property, plant and equipment		3.1			5.9
Net cash used in investing activities		(142.6	)		(43.1	)
Cash Flows From Financing Activities:
Principal payments on long-term debt		(262.4	)		(2,872.2	)
Premium paid on extinguishment of senior notes		-			(29.7	)
Proceeds from long-term debt		-			2,010.7
Proceeds from the issuance of common stock, net of share issuance costs		-			893.3
Purchase of treasury stock		(16.7	)		(2.6	)
Proceeds from stock option exercises		6.3			-
Purchase of shares from noncontrolling interests		-			(5.2	)
Payments of debt issuance costs		-			(2.9	)
Other		-			0.4
Net cash used in financing activities		(272.8	)		(8.2	)
Effect of exchange rate changes on cash and cash equivalents		(7.2	)		14.6
Net (decrease) increase in cash and cash equivalents		(124.3	)		47.2
Cash and cash equivalents, beginning of period		393.3			255.8
Cash and cash equivalents, end of period	$	269.0		$	303.0
Supplemental Cash Flow Information
Cash paid for income taxes	$	80.8		$	47.4
Cash paid for interest	$	75.2		$	118.1
Capital expenditures in accounts payable	$	4.1		$	3.0
Expenditures directly related to our initial public offering in accounts payable	$	-		$	0.2

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

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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, 2017 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 the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the Securities and Exchange Commission (“SEC”).

The results of operations for the interim periods ended September 30, 2018 are not necessarily indicative of the results to be expected for the full year. The balance sheet as of December 31, 2017 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 and May 2, 2018, the Company completed secondary offerings of 25,300,000 shares and 30,533,478 shares respectively, of common stock held by affiliates of Kohlberg Kravis Roberts & Co. L.P. (“KKR”). As a result of the May 2018 secondary offering, 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 currently owns 90,721,409 shares of common stock, or approximately 46% of the total outstanding common stock based on the number of shares outstanding as of September 30, 2018.

Prior Year Reclassification

In the first quarter of fiscal year 2018, the Company adopted the provisions of ASU 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”). The reclassification of certain prior year amounts as a result of the adoption of ASU 2017-07 is detailed below in the section “Adopted Accounting Standard Updates” within this Note 1 “Condensed Consolidated Financial Statements.”

Adopted Accounting Standard Updates (“ASU”)

ASU 2014-09, Revenue from Contracts with Customers (Topic 606)

On January 1, 2018, the Company adopted Financial Accounting Standards Board (“FASB”) ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 606”) using the modified retrospective approach. Under the modified retrospective approach, the Company is required to recognize the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of retained earnings as of January 1, 2018, the date of initial application. The cumulative effect of initially applying ASC 606 was immaterial to the Condensed Consolidated Financial Statements. Therefore, the Company did not record a cumulative transition adjustment.

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In conjunction with the adoption of ASC 606, the Company updated its significant accounting policy related to revenue recognition disclosed in Note 1 “Summary of Significant Accounting Policies” of the Consolidated Financial Statements in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2017. An overview of the Company’s revenue recognition policy under ASC 606 is included in Note 12 “Revenue from Contracts with Customers.”

Results for the three month and nine month periods ended September 30, 2018 are presented under ASC 606. Prior periods are not adjusted and will continue to be reported in accordance with ASC 605 Revenue Recognition (“ASC 605”). However, during fiscal year 2018, the Company is required to provide additional disclosures presenting the amount by which each 2018 financial statement line item was affected as a result of applying ASC 606 and an explanation of significant changes in order to present 2018 on a comparative basis under ASC 605.

The following table summarizes the impacts of adopting ASC 606 on the Company’s Condensed Consolidated Statements of Operations for the three month period ended September 30, 2018.

Condensed Consolidated Statements of Operations

	As Reported		Adjustments			Balance Without Adoption of ASC 606
Revenues	$	689.3	$	(8.7	)	$	680.6
Cost of sales		426.9		(5.4	)		421.5
Provision (benefit) for income taxes		22.6		(0.8	)		21.8
Net Income (Loss)		72.2		(2.5	)		69.7

The following table summarizes the impacts of adopting ASC 606 on the Company’s Condensed Consolidated Statements of Operations for the nine month period ended September 30, 2018.

Condensed Consolidated Statements of Operations

	As Reported		Adjustments			Balance Without Adoption of ASC 606
Revenues	$	1,977.1	$	(18.1	)	$	1,959.0
Cost of sales		1,233.6		(11.2	)		1,222.4
Provision (benefit) for income taxes		63.2		(1.8	)		61.4
Net Income (Loss)		174.9		(5.1	)		169.8

The following table summarizes the impacts of adopting ASC 606 on the Company’s Condensed Consolidated Balance Sheets as of September 30, 2018.

Condensed Consolidated Balance Sheets

	As Reported			Adjustments			Balance Without Adoption of ASC 606
Assets
Inventories	$	550.1		$	11.2		$	561.3
Other current assets⁽¹⁾		63.4			(11.2	)		52.2

Liabilities and Stockholders' Equity
Accrued liabilities		258.9			5.1			264.0
Accumulated deficit		(403.2	)		(5.1	)		(408.3	)

⁽¹⁾

Adjustment represents “Contract asset.” See Note 12 “Revenue from Contracts with Customers” for an explanation of the Contract assets account included in “Other current assets” in the Condensed Consolidated Balance Sheets.

Index

ASU 2017-07 Compensation – Retirement Benefits (Topic 715) – Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

The Company adopted FASB ASU 2017-07 on January 1, 2018, the adoption date. The Company applied ASU 2017-07 retrospectively for the presentation of the service cost component and the other components of net periodic benefit cost in the income statement and prospectively for the capitalization of the service cost component of net periodic benefit cost in assets. ASU 2017-07 allows the Company to use the amounts disclosed in its pension and other postretirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. Applying the practical expedient, the Company reclassified $0.1 million and $0.2 million of expenses from “Selling and administrative expenses” to “Other income, net” within the Condensed Consolidated Statements of Operations for the three month and nine month periods ended September 30, 2017.

ASU 2017-12 Derivatives and Hedging (Topic 815) – Targeted Improvements to Accounting for Hedging Activities

The Company early adopted FASB ASU 2017-12, Derivatives and Hedging (Topic 815) – Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”) on January 1, 2018, the adoption date, using the modified retrospective approach. As of the adoption date, the Company was the fixed rate payor on 12 interest rate swap contracts that fixed the LIBOR-based index used to determine the interest rates charged on a total of $1,125.0 million of the Company’s LIBOR-based variable rate borrowings. The Company recorded a cumulative-effect adjustment on the adoption date increasing the opening balance of the “Accumulated deficit” line of the Condensed Consolidated Balance Sheets by $0.3 million and decreasing the “Accumulated Other Comprehensive Loss” line of the Condensed Consolidated Balance Sheets by $0.3 million.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The amendments in this update will replace most of the existing GAAP lease accounting guidance in order to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU is effective for public companies beginning in the first quarter of 2019. The ASU requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. During March 2018, the FASB approved amendments to create an optional transition method that will provide an option to use the effective date of Topic 842 as the date of initial application of the transition.

The Company established an implementation team and selected a third party lease accounting software solution which will serve as a central repository of active leases and assist in the compliance with the new reporting requirements. The implementation team has been reassessing business processes, drafting an internal policy to address the new standard, extracting lease data for inclusion in the new lease software, determining a process to identify and update the Company’s incremental borrowing rate and understanding the impact on disclosures. The team is also determining which practical expedients to elect. The Company is still finalizing its evaluation of the impact of the new lease standard on its condensed consolidated financial statements and expects to record right of use assets and lease liabilities for its operating leases on its condensed consolidated balance sheets. The Company will adopt the new standard utilizing the optional transition method.

In March 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220). The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only related to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The ASU is effective for public companies beginning in the first quarter of 2019. The Company is currently assessing the impact of this ASU on its condensed consolidated financial statements.

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 consolidated financial statements and evaluating the timing of adoption.

Index

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 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 consolidated financial statements and evaluating the timing of adoption.

Note 2. Business Combinations

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 of $21.0 million, which consisted of payments to shareholders of $16.5 million, the retirement of PMI third-party debt at closing of $2.2 million, $0.1 million of other debt-like items, a $2.0 million promissory note and a $0.2 million holdback. The promissory note and holdback are each expected to be paid by the end of the second quarter of 2019 and recorded in “Accrued liabilities.” 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. 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 consolidated financial statements from the acquisition date and are included in the Industrials segment. The preliminary 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 of LeROI Compressors

On June 5, 2017, the Company acquired 100% of the stock of LeROI Compressors (“LeROI”), a leading North American manufacturer of gas compression equipment and solutions for vapor recovery, biogas and other process and industrial applications. The Company acquired all of the assets and assumed certain liabilities of LeROI for total cash consideration of $20.4 million, net of cash acquired. Included in the cash consideration is an indemnity holdback of $1.9 million recorded in “Accrued liabilities” and expected to be paid by the end of 2021. The revenues and operating income of LeROI 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 the Non-Controlling Interest in Tamrotor Kompressorit Oy

On March 3, 2017, the Company acquired the remaining 49% non-controlling interest of Tamrotor Kompressorit Oy (“Tamrotor”), a distributor of the Company’s Industrials segment air compression products. The Company acquired the remaining interest in Tamrotor for total cash consideration of $5.2 million, consisting entirely of payments to the former shareholders. Included in the cash consideration was a holdback of $0.5 million that was paid in the third quarter of 2017. This transaction resulted in an increase to “Capital in excess of par value” of $2.3 million and an increase to “Accumulated other comprehensive loss” of $1.5 million in the Condensed Consolidated Balance Sheets.

Index

Acquisition Revenues and Operating Income

The following table summarizes the revenue and operating income of these acquisitions for the periods presented subsequent to their date of acquisition.

	Three Month Periods Ended September 30,				Nine Month Periods Ended September 30,
	2018		2017		2018		2017
Revenue	$	25.3	$	5.9	$	63.1	$	7.9
Operating income		2.0		0.5		3.2		0.6

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

Note 3. Restructuring

Restructuring Programs 2014 to 2016

The Company announced a restructuring program in the Industrials segment in the third quarter of 2014 and that program was revised and expanded during the second quarter of 2016. In 2016, the Company also announced restructuring programs impacting the Energy and Medical segments. These restructuring programs were substantially completed as of December 31, 2017. Through December 31, 2017, $48.0 million had been charged to expense through “Other operating expense, net” in the Condensed Consolidated Statements of Operations ($38.5 million for Industrials, $6.3 million for Energy and $3.2 million for Medical). The Company does not anticipate any material future expense related to these restructuring programs and any remaining liabilities will be paid as contractually obligated. The activity associated with these restructuring programs for the nine month period ended September 30, 2018 was not material.

The following table summarizes the activity associated with these restructuring programs for the nine month period ended September 30, 2017.

Balance as of December 31, 2016	$	20.9
Charged to expense - termination benefits		1.9
Charged to expense - other		3.0
Payments		(17.3	)
Other, net		1.0
Balance as of September 30, 2017	$	9.5

As of September 30, 2018, restructuring reserves of $1.7 million related to these programs were included in “Accrued liabilities” and restructuring reserves of $0.2 million are included in “Other liabilities” in the Condensed Consolidated Balance Sheets. As of December 31, 2017, restructuring reserves of $6.5 million related to these programs were included in “Accrued liabilities” and restructuring reserves of $0.2 million were included in “Other liabilities” in the Condensed Consolidated Balance Sheets.

Restructuring Program 2018

The Company announced a restructuring program primarily involving workforce reductions in the third quarter of 2018. In the three month period ended September 30, 2018, $5.4 million was charged to expense through “Other operating expense, net” in the Condensed Consolidated Statements of Operations ($3.7 million for Industrials and $1.7 million for Energy). The Company expects further expense charges in the fourth quarter of 2018 related to these programs impacting the Industrials, Energy and Medical segments.

Index

The following table summarizes the activity associated with this restructuring program for the nine month period ended September 30, 2018.

Balance as of December 31, 2017	$	-
Charged to expense - termination benefits		4.9
Charged to expense - other		0.5
Payments		(1.0	)
Other, net		-
Balance as of September 30, 2018	$	4.4

As of September 30, 2018, restructuring reserves of $4.4 million are included in “Accrued liabilities” in the Condensed Consolidated Balance Sheets.

Note 4. Inventories

Inventories as of September 30, 2018 and December 31, 2017 consisted of the following.

	September 30, 2018		December 31, 2017
Raw materials, including parts and subassemblies	$	368.1	$	362.6
Work-in-process		84.6		57.9
Finished goods		84.0		60.6
		536.7		481.1
Excess of LIFO costs over FIFO costs		13.4		13.4
Inventories	$	550.1	$	494.5

Note 5. Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill attributable to each reportable segment for the nine month period ended September 30, 2018 is presented in the table below.

	Industrials			Energy			Medical			Total
Balance as of December 31, 2017	$	561.6		$	460.2		$	205.8		$	1,227.6
Acquisition		63.6			8.7			-			72.3
Foreign currency translation and other⁽¹⁾		(16.7	)		(12.4	)		(2.4	)		(31.5	)
Balance as of September 30, 2018	$	608.5		$	456.5		$	203.4		$	1,268.4

⁽¹⁾

During the nine month period ended September 30, 2018, the Company recorded a decrease in goodwill of $0.2 million as a result of measurement period adjustments in the Industrials segment.

On May 29, 2018, the Company acquired PMI Pump Parts which is included in the Energy segment. The excess of the purchase price over the estimated fair values of intangible assets, identifiable assets and assumed liabilities was recorded as goodwill. As of September 30, 2018, the preliminary purchase price allocation resulted in a total of $8.7 million of goodwill. The allocation of the purchase price is preliminary and subject to refinement based on final fair values of the identified assets acquired and liabilities assumed.

On February 8, 2018, the Company acquired Runtech which is included in the Industrials segment. The excess of the purchase price over the estimated fair values of intangible assets, identifiable assets and assumed liabilities was recorded as goodwill. As of September 30, 2018, the preliminary purchase price allocation resulted in a total of $63.6 million of goodwill. The allocation of the purchase price is preliminary and subject to refinement based on final fair values of the identified assets acquired and liabilities assumed.

Index

As of September 30, 2018, goodwill included $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 nine month period ended September 30, 2018.

Other intangible assets as of September 30, 2018 and December 31, 2017 consisted of the following.

	September 30, 2018					December 31, 2017
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Amortized intangible assets:
Customer lists and relationships	$	1,209.9	$	(542.6	)	$	1,226.8	$	(473.0	)
Technology		21.9		(4.6	)		8.1		(4.0	)
Trademarks		37.1		(12.4	)		30.3		(10.6	)
Backlog		69.1		(68.0	)		65.5		(65.5	)
Other		57.3		(28.8	)		53.6		(23.5	)
Unamortized intangible assets:
Trademarks		617.9		-			623.5		-
Total other intangible assets	$	2,013.2	$	(656.4	)	$	2,007.8	$	(576.6	)

Amortization of intangible assets for the three and nine month periods ended September 30, 2018 and 2017 were as follows.

	Three Month Period Ended September 30,				Nine Month Period Ended September 30,
	2018		2017		2018		2017
Intangible asset amortization expense	$	31.0	$	29.5	$	93.4	$	87.6

Amortization of intangible assets is anticipated to be approximately $124.2 million annually in 2019 through 2023 based upon exchange rates as of September 30, 2018.

Note 6. Accrued Liabilities

Accrued liabilities as of September 30, 2018 and December 31, 2017 consisted of the following.

	September 30, 2018		December 31, 2017
Salaries, wages and related fringe benefits	$	67.7	$	97.3
Restructuring		6.4		6.5
Taxes		15.5		34.5
Contract liabilities⁽¹⁾		90.5		42.7
Product warranty		24.5		22.3
Accrued interest		0.7		0.8
Other		53.6		67.1
Total accrued liabilities	$	258.9	$	271.2

⁽¹⁾

For purposes of comparability, “Advance payments on sales contracts” as of December 31, 2017 was reclassified to “Contract liabilities.” See Note 12 “Revenue from Contracts with Customers” for an explanation of the Contract liabilities account included in “Accrued liabilities” in the Condensed Consolidated Balance Sheets.

Index

A reconciliation of the changes in the accrued product warranty liability for the three and nine month periods ended September 30, 2018 and 2017 are as follows.

	Three Month Period Ended September 30, 2018			Three Month Period Ended September 30, 2017			Nine Month Period Ended September 30, 2018			Nine Month Period Ended September 30, 2017
Balance at beginning of period	$	23.9		$	21.7		$	22.3		$	21.7
Product warranty accruals		6.9			6.7			18.5			17.8
Settlements		(6.2	)		(5.0	)		(16.8	)		(17.1	)
Charged to other accounts⁽¹⁾		(0.1	)		0.2			0.5			1.2
Balance at end of period	$	24.5		$	23.6		$	24.5		$	23.6

⁽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 and nine month periods ended September 30, 2018 and 2017.

	Pension Benefits												Other Postretirement
	U.S. Plans						Non-U.S. Plans						Benefits
	Three Month Period Ended September 30, 2018			Nine Month Period Ended September 30, 2018			Three Month Period Ended September 30, 2018			Nine Month Period Ended September 30, 2018			Three Month Period Ended September 30, 2018		Nine Month Period Ended September 30, 2018
Service cost	$	-		$	-		$	0.4		$	1.4		$	-	$	-
Interest cost		0.5			1.5			1.8			5.7			-		0.1
Expected return on plan assets		(1.2	)		(3.5	)		(2.8	)		(8.8	)		-		-
Recognition of:
Unrecognized prior service cost		-			-			-			-			-		-
Unrecognized net actuarial loss		-			-			0.5			1.4			-		-
	$	(0.7	)	$	(2.0	)	$	(0.1	)	$	(0.3	)	$	-	$	0.1

	Pension Benefits												Other Postretirement
	U.S. Plans						Non-U.S. Plans						Benefits
	Three Month Period Ended September 30, 2017			Nine Month Period Ended September 30, 2017			Three Month Period Ended September 30, 2017			Nine Month Period Ended September 30, 2017			Three Month Period Ended September 30, 2017		Nine Month Period Ended September 30, 2017
Service cost	$	-		$	-		$	0.5		$	1.4		$	-	$	-
Interest cost		0.6			1.7			2.0			5.8			-		0.1
Expected return on plan assets		(1.1	)		(3.3	)		(2.7	)		(7.7	)		-		-
Recognition of:
Unrecognized prior service cost		-			-			-			-			-		-
Unrecognized net actuarial loss		-			-			1.3			3.7			-		-
	$	(0.5	)	$	(1.6	)	$	1.1		$	3.2		$	-	$	0.1

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

Index

Note 8. Debt

The Company’s debt as of September 30, 2018 and December 31, 2017 is summarized as follows.

	September 30, 2018			December 31, 2017
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⁾		1,025.9			1,282.3
Term loan denominated in Euros, due 2024 ⁽²⁾		706.7			735.9
Capitalized leases and other long-term debt		26.4			26.9
Unamortized debt issuance costs		(3.7	)		(4.9	)
Total long-term debt, net, including current maturities		1,755.3			2,040.2
Current maturities of long-term debt		7.9			20.9
Total long-term debt, net	$	1,747.4		$	2,019.3

⁽¹⁾

As of September 30, 2018, the applicable interest rate was 4.99% and the weighted-average rate was 4.78% for the nine month period ended September 30, 2018.

⁽²⁾

As of September 30, 2018, the applicable interest rate was 3.00% and the weighted-average rate was 3.00% for the nine month period ended September 30, 2018.

Senior Secured Credit Facilities

In connection with the KKR Transaction, the Company entered into a senior secured credit agreement with UBS AG, Stamford Branch, as administrative agent, and other agents and lenders party thereto (the “Senior Secured Credit Facilities”) on July 30, 2013.

The Senior Secured Credit Facilities entered into on July 30, 2013 provided senior secured financing in the equivalent of approximately $2,825.0 million, consisting of: (i) a senior secured term loan facility (the “Original Dollar Term Loan Facility”) in an aggregate principal amount of $1,900.0 million; (ii) a senior secured term loan facility (the “Original Euro Term Loan Facility,” together with the Original Dollar Term Loan Facility, the “Term Loan Facilities”) in an aggregate principal amount of €400.0 million; and (iii) a senior secured revolving credit facility (the “Revolving Credit Facility”) in an aggregate principal amount of $400.0 million available to be drawn in U.S. dollars (“USD”), Euros (“EUR”), Great British Pounds (“GBP”) and other reasonably acceptable foreign currencies, subject to certain sublimits for the foreign currencies.

The Company entered into Amendment No. 1 to the Senior Secured Credit Facilities with UBS AG, Stamford Branch, as administrative agent, and the lenders and other parties thereto on March 4, 2016 (“Amendment No.1”) and Amendment No. 2 to the Senior Secured Credit Facilities with UBS AG, Stamford Branch, as administrative agent, and other agents, lenders and parties thereto on August 17, 2017 (“Amendment No. 2”).

Amendment No. 1 reduced the aggregate principal borrowing capacity of the Revolving Credit Facility by $40.0 million to $360.0 million, extended the term of the Revolving Credit Facility to April 30, 2020 with respect to consenting lenders and provided for customary bail-in provisions to address certain European regulatory requirements.

Amendment No. 2 refinanced the Original Dollar Term Loan Facility with a replacement $1,285.5 million senior secured U.S. dollar term loan facility (the ‘‘Dollar Term Loan Facility’’) and the Original Euro Term Loan Facility with a replacement €615.0 million senior secured euro term loan facility (the ‘‘Euro Term Loan Facility’’). Further the maturity for both term loan facilities was extended to July 30, 2024 and LIBOR Floor was reduced from 1.0% to 0.0%.

Index

On July 30, 2018, the Revolving Credit Facility principal borrowing capacity decreased to $269.9 million resulting from the maturity of the tranches of the Revolving Credit Facility which were owned by lenders that elected not to modify the original Revolving Credit Facility maturity date.

Any principal amounts outstanding as of April 30, 2020 will be due at that time and required to be paid in full.

The borrower of the Dollar Term Loan Facility and the Euro Term Loan Facility is Gardner Denver, Inc. Prior to the Company entering into Amendment No. 1, GD German Holdings II GmbH became an additional borrower and successor in interest to Gardner Denver Holdings GmbH & Co. KG. GD German Holdings II GmbH, GD First (UK) Limited and Gardner Denver, Inc. are the listed borrowers under the Revolving Credit Facility. The Revolving Credit Facility includes borrowing capacity available for letters of credit up to $200.0 million and for borrowings on same-day notice, referred to as swingline loans. As of September 30, 2018, the Company had $6.3 million of outstanding letters of credit under the Revolving Credit Facility and unused availability of $263.6 million.

The Senior Secured Credit Facilities provide that the Company will have the right at any time to request incremental term loans and/or revolving commitments in an aggregate principal amount of up to (i) if as of the last day of the most recently ended test period the Consolidated Senior Secured Debt to Consolidated EBITDA Ratio (as defined in the Senior Secured Credit Facilities) is equal to or less than 5.50 to 1.00, $250.0 million plus (ii) voluntary prepayments and voluntary commitment reductions of the Senior Secured Credit Facilities prior to the date of any such incurrence plus (iii) an additional amount if, after giving effect to the incurrence of such additional amount, the Company does not exceed a Consolidated Senior Secured Debt to Consolidated EBITDA Ratio of 4.50 to 1.00. The lenders under the Senior Secured Credit Facilities are not under any obligation to provide any such incremental commitments or loans, and any such addition of, or increase in commitments or loans, will be subject to certain customary conditions.

Interest Rate and Fees

Borrowings under the Dollar Term Loan Facility, the Euro Term Loan Facility and the Revolving Credit Facility bear interest at a rate equal to, at the Company’s option, either (a) the greater of LIBOR for the relevant interest period or 0.00% per annum, in each case adjusted for statutory reserve requirements, plus an applicable margin or (b) a base rate (the ‘‘Base Rate’’) equal to the highest of (1) the rate of interest publicly announced by the administrative agent as its prime rate in effect at its principal office in Stamford, Connecticut, (2) the federal funds effective rate plus 0.50% and (3) LIBOR for an interest period of one month, adjusted for statutory reserve requirements, plus 1.00%, in each case, plus an applicable margin. The applicable margin for (i) the Dollar Term Loan Facility is 2.75% for LIBOR loans and 1.75% for Base Rate loans, (ii) the Revolving Credit Facility is 2.75% for LIBOR loans and 1.75% for Base Rate loans and (iii) the Euro Term Loan is 3.00% for LIBOR loans.

The applicable margins under the Revolving Credit Facility may decrease based upon the Company’s achievement of certain Consolidated Senior Secured Debt to Consolidated EBITDA Ratios. In addition to paying interest on outstanding principal under the Senior Secured Credit Facilities, the Company is required to pay a commitment fee of 0.50% per annum to the lenders under the Revolving Credit Facility in respect of the unutilized commitments thereunder. The commitment fee rate was reduced to 0.375% because the Company’s Consolidated Senior Secured Debt to Consolidated EBITDA Ratio is less than or equal to 3.0 to 1.0. The Company must also pay customary letter of credit fees.

Prepayments

The Senior Secured Credit Facilities require the Company to prepay outstanding term loans, subject to certain exceptions, with: (i) 50% of annual excess cash flow (as defined in the Senior Secured Credit Facilities) commencing with the fiscal year ended December 31, 2014 (which percentage will be reduced to 25% if the Company’s Secured Debt to Consolidated EBITDA Ratio (as defined in the Senior Secured Credit Facilities) is less than or equal to 3.50 to 1.00 but greater than 3.00 to 1.00, and which prepayment will not be required if the Secured Debt to Consolidated EBITDA Ratio is less than or equal to 3.00 to 1.00); (ii) 100% of the net cash proceeds of non-ordinary course asset sales or other dispositions of property, subject to reinvestment rights; and (iii) 100% of the net cash proceeds of any incurrence of debt, other than proceeds from debt permitted under the Senior Secured Credit Facilities.

The foregoing mandatory prepayments will be applied to the scheduled installments of principal of the Term Loan Facilities in direct order of maturity.

Index

Subject to the following sentence, the Company may voluntarily repay outstanding loans under the Senior Secured Credit Facilities at any time without premium or penalty, subject to certain customary conditions, including reimbursements of the lenders’ redeployment costs actually incurred in the case of a prepayment of LIBOR borrowings other than on the last day of the relevant interest period.

Amortization and Final Maturity

The Dollar Term Loan Facility amortizes in equal quarterly installments in aggregate annual amounts equal to 1.00% of the original principal amount of the Dollar Term Loan Facility, with the balance being payable on July 30, 2024. In June 2018 and September 2018, the Company used excess cash to repay $100.0 million and $150.0 million, respectively, of principal on outstanding borrowings under the Dollar Term Loan Facility. In June 2018, the principal prepayment was first applied to the quarterly installments with the remaining balance used to reduce the balance due on July 30, 2024. As a result of the June 2018 prepayment, the Company is no longer subject to mandatory quarterly principal installment payments on the Dollar Term Loan Facility. The prepayments resulted in the write-off of unamortized debt issuance costs of $0.3 million and $0.4 million for the three month and nine month periods ended September 30, 2018, included in the “Loss on Debt Extinguishment” line of the Condensed Consolidated Statements of Operations.

The Euro Term Loan Facility includes repayments in equal quarterly installments in aggregate annual amounts equal to 1.00% of the original principal amount of the Euro Term Loan Facility, with the balance being payable on July 30, 2024.

Amendment No. 1 reduced the minimum aggregate principal amount for extension amendments to the facilities from $50.0 million to $35.0 million.

Guarantee and Security

All obligations of the borrowers under the Senior Secured Credit Facilities are unconditionally guaranteed by the Company and all of its material, wholly-owned U.S. restricted subsidiaries, with customary exceptions including where providing such guarantees are not permitted by law, regulation or contract or would result in adverse tax consequences.

All obligations of the borrowers under the Senior Secured Credit Facilities, and the guarantees of such obligations, are secured, subject to permitted liens and other exceptions, by substantially all of the assets of the borrowers and each guarantor, including but not limited to: (i) a perfected pledge of the capital stock issued by the borrowers and each subsidiary guarantor and (ii) perfected security interests in substantially all other tangible and intangible assets of the borrowers and the guarantors (subject to certain exceptions and exclusions). The obligations of the non-U.S. borrowers are secured by certain assets in jurisdictions outside of the United States.

Certain Covenants and Events of Default

The Senior Secured Credit Facilities contain a number of covenants that, among other things, restrict, subject to certain exceptions, the Company’s ability to: incur additional indebtedness and guarantee indebtedness; create or incur liens; engage in mergers or consolidations; sell, transfer or otherwise dispose of assets; create limitations on subsidiary distributions; pay dividends and distributions or repurchase its own capital stock; and make investments, loans or advances, prepayments of junior financings, or other restricted payments. In addition, certain restricted payments constituting dividends or distributions (subject to certain exceptions) are subject to compliance with a Consolidated Total Debt to Consolidated EBITDA Ratio (as defined in the Senior Secured Credit Facilities) of 5.00 to 1.00. Investments in unrestricted subsidiaries are permitted up to an aggregate amount that does not exceed the greater of $100.0 million or 25% of Consolidated EBITDA.

The Revolving Credit Facility also requires the Company’s Consolidated Senior Secured Debt to Consolidated EBITDA Ratio to not exceed 7.50 to 1.00 for each fiscal quarter when outstanding revolving credit loans and swingline loans plus non-cash collateralized letters of credit under the Revolving Credit Facility (excluding (i) letters of credit in an aggregate amount not to exceed $80.0 million existing on the date of the closing of the Senior Secured Credit Facilities and any extensions thereof, replacement letters of credit or letters of credit issued in lieu thereof, in each case, to the extent the face amount of such letters of credit is not increased above the face amount of the letter of credit being extended, replaced or substituted and (ii) other non-cash collateralized letters of credit in an aggregate amount not to exceed $25.0 million, provided that the aggregate amount of non-cash collateralized letters of credit outstanding excluded pursuant to this provision shall not exceed $50.0 million) exceed $120.0 million.

The Senior Secured Credit Facilities also contain certain customary affirmative covenants and events of default, including a change of control.

Index

Receivables Financing Agreement

In May 2016, the Company entered into the Receivables Financing Agreement, providing for aggregated borrowing of up to $75.0 million governed by a borrowing base. The Receivables Financing Agreement provides for a lower cost alternative in the issuance of letters of credit with the remaining unused capacity providing additional liquidity. On June 30, 2017, the Company signed the first amendment of the Receivables Financing Agreement which increased the aggregated borrowing capacity by $50.0 million to $125.0 million governed by a borrowing base and extended the term to June 30, 2020. The Receivables Financing Agreement terminates on June 30, 2020, unless terminated earlier pursuant to its terms. As of September 30, 2018, the Company had no outstanding borrowings under the Receivables Financing Agreement and $27.3 million of letters of credit outstanding. As of September 30, 2018 there was $81.4 million of capacity available under the Receivables Financing Agreement.

Borrowings under the Receivables Financing Agreement accrue interest at a reserve-adjusted LIBOR or a base rate, plus 1.6%. Letters of credit accrue interest at 1.6%. The Company may prepay borrowings or letters of credit or draw on the Receivables Financing Agreement upon one business day prior written notice and may terminate the Receivables Financing Agreement with 15 days’ prior written notice.

As part of the Receivables Financing Agreement, eligible accounts receivable of certain of the Company’s subsidiaries are sold to a wholly owned “bankruptcy remote” special purpose vehicle (“SPV”). The SPV pledges the receivables as security for loans and letters of credit. The SPV is included in the Company’s consolidated financial statements and therefore, the accounts receivable owned by it are included in the Company’s Condensed Consolidated Balance Sheets. However, the accounts receivable owned by the SPV are separate and distinct from the Company’s other assets and are not available to the Company’s other creditors should we become insolvent.

The Receivables Financing Agreement contains various customary representations and warranties and covenants, and default provisions which provide for the termination and acceleration of the commitments and loans under the agreement in circumstances including, but not limited to, failure to make payments when due, breach of representations, warranties or covenants, certain insolvency events or failure to maintain the security interest in the trade receivables, a change in control and defaults under other material indebtedness.

Note 9. Stock-Based Compensation

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 15, “Stock-Based Compensation” of the Consolidated Financial Statements in its annual report on Form 10-K for the fiscal year ended December 31, 2017.

Prior to the Company’s initial public offering in May 2017, the Company had certain repurchase rights on stock acquired through the exercise of a stock option that created an implicit service period and created a condition in which an optionee may not receive the economic benefits of the option until the repurchase rights are eliminated. The repurchase rights creating the implicit service period were eliminated at the earlier of an initial public offering or change of control event. Before the elimination of the repurchase rights, because an initial public offering or change of control were not probable of occurring, no compensation expense was recorded for equity awards. The Company recognized a liability for compensation expense measured at intrinsic value when it was probable that an employee would receive benefits under the terms of the plan due to the termination of employment.

Under the terms of the 2013 Plan, concurrent with the initial public offering, the Company no longer retains repurchase rights on stock acquired through the exercise of a stock option and the implicit service period was eliminated on outstanding stock options.

In the three and nine month periods ended September 30, 2017, the Company recognized stock-based compensation expense of approximately $7.8 million and $69.2 million, respectively. The Company recognized stock-based compensation expense of approximately $0.9 million and $6.1 million for the three and nine month periods ended September 30, 2018, respectively. These costs are included in “Other operating expense, net” in the Condensed Consolidated Statements of Operations.

The $6.1 million of stock-based compensation expense for the nine month period ended September 30, 2018 included expense for modifications of equity awards for certain former employees of $3.8 million and expense for equity awards granted under the 2013 Plan and 2017 Plan of $5.3 million reduced by a benefit for a reduction in the liability for stock appreciation rights (“SAR”) of $3.0 million.

Index

The $3.8 million stock-based compensation expense for modifications for the nine month period ended September 30, 2018 provided continued vesting through scheduled vesting dates and extended expiration dates for certain former employees. The incremental stock-based compensation was determined using the Black-Scholes option pricing model based on assumptions which included expected lives of 1.0 to 1.3 years, a risk-free rate of 2.0%, assumed volatility of 26.8% to 27.3% and an expected dividend rate of 0.0%.

As of September 30, 2018, there was $22.8 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 September 30, 2018, a liability of approximately $13.8 million for SARs was included in “Accrued liabilities” in the Condensed Consolidated Balance Sheets.

Stock Option Awards

The following assumptions were used to estimate the fair value of options granted (excluding previously disclosed modified awards) during the nine month periods ended September 30, 2018 and 2017 using the Black-Scholes option-pricing model.

	Nine Month Period Ended September 30, 2018			Nine Month Period Ended September 30, 2017
Assumptions:
Expected life of options (in years)		7.0 - 7.5			5.0 - 6.3
Risk-free interest rate		2.9% - 3.0	%		1.9% - 2.1	%
Assumed volatility		34.4 - 35.4			41.2 - 45.8	%
Expected dividend rate		0.0	%		0.0	%

A summary of the Company’s stock option (including SARs) activity for the nine month period ended September 30, 2018 is presented in the following table (underlying shares in thousands).

	Shares			Weighted-Average Exercise Price (per share)
Outstanding at December 31, 2017		12,834		$	9.54
Granted		848		$	31.74
Exercised or settled		(752	)	$	8.36
Forfeited		(433	)	$	16.21
Outstanding at September 30, 2018		12,497		$	10.88

Vested at September 30, 2018		8,612		$	9.03

Restricted Stock Unit Awards

A summary of the Company’s restricted stock unit activity for the nine month period ended September 30, 2018 is presented in the following table (underlying shares in thousands).

	Shares			Weighted-Average Grant-Date Fair Value
Non-vested as of December 31, 2017		-		$	-
Granted		365		$	31.84
Vested		-		$	-
Forfeited		(10	)	$	32.06
Non-vested as of September 30, 2018		355		$	31.83

Index

Deferred Stock Units

Concurrent with the Company’s initial public offering in May of 2017, the Company’s Board authorized the grant of 5.5 million deferred stock units (“DSU”) to all permanent employees that had not previously received stock-based awards under the 2013 Plan. The DSUs vested immediately upon grant, however contained restrictions such that the employee may not sell or otherwise realize the economic benefits of the award until certain dates through April 2019. $2.0 million and $96.8 million of compensation expense for the DSU awards was recognized in the three month and nine month periods ended September 30, 2017, respectively, and included in “Other operating expense, net” in the Condensed Consolidated Statements of Operations.

As of the date of the grant, the fair value of a DSU was determined to be $17.20 assuming a share price at the pricing date of the initial public offering of $20.00 and a discount for lack of marketability commensurate with the period of the sale restrictions. The Company estimated the fair value of DSUs at the time of grant using the Finnerty discount for lack of marketability pricing model. The model assumed a holding restriction period of 1.42 years and volatility of 51.5%.

Note 10. Accumulated Other Comprehensive (Loss) Income

The Company’s other comprehensive (loss) income 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. The before tax income (loss) and related income tax effect are as follows.

	For the Three Month Period Ended September 30, 2018									For the Nine Month Period Ended September 30, 2018
	Before-Tax Amount			Tax (Expense) or Benefit			Net of Tax Amount			Before-Tax Amount			Tax (Expense) or Benefit			Net of Tax Amount
Foreign currency translation adjustments, net	$	(21.9	)	$	-		$	(21.9	)	$	(70.0	)	$	-		$	(70.0	)
Foreign currency gains, net		4.7			(1.1	)		3.6			24.4			(5.7	)		18.7
Unrecognized gains on cash flow hedges, net		5.8			(1.4	)		4.4			27.1			(6.6	)		20.5
Pension and other postretirement benefit prior service cost and gain or loss, net		1.0			(0.1	)		0.9			3.0			0.9			3.9
Other comprehensive loss	$	(10.4	)	$	(2.6	)	$	(13.0	)	$	(15.5	)	$	(11.4	)	$	(26.9	)

	For the Three Month Period Ended September 30, 2017									For the Nine Month Period Ended September 30, 2017
	Before-Tax Amount			Tax (Expense) or Benefit			Net of Tax Amount			Before-Tax Amount			Tax (Expense) or Benefit			Net of Tax Amount
Foreign currency translation adjustments, net	$	41.5		$	-		$	41.5		$	131.4		$	-		$	131.4
Foreign currency losses, net		(23.5	)		8.7			(14.8	)		(71.2	)		26.9			(44.3	)
Unrecognized gains (losses) on cash flow hedges, net		5.5			(1.5	)		4.0			8.9			(3.4	)		5.5
Pension and other postretirement benefit prior service cost and gain or loss, net		(1.1	)		0.5			(0.6	)		(3.4	)		1.5			(1.9	)
Other comprehensive income	$	22.4		$	7.7		$	30.1		$	65.7		$	25.0		$	90.7

Index

Changes in accumulated other comprehensive (loss) income by component for the nine month periods ended September 30, 2018 and 2017 are presented in the following tables⁽¹⁾:

	Cumulative Currency Translation Adjustment			Foreign Currency Gains and (Losses)		Unrealized (Losses) Gains on Cash Flow Hedges			Pension and Postretirement Benefit Plans			Total
Balance as of December 31, 2017	$	(166.6	)	$	37.0	$	(29.8	)	$	(40.4	)	$	(199.8	)
Other comprehensive (loss) income before reclassifications		(70.0	)		18.7		11.5			2.8			(37.0	)
Amounts reclassified from accumulated other comprehensive (loss) income		-			-		9.0			1.1			10.1
Other comprehensive (loss) income		(70.0	)		18.7		20.5			3.9			(26.9	)
Cumulative effect adjustment upon adoption of new accounting standard (ASU 2017-12)		-			-		0.3			-			0.3
Balance as of September 30, 2018	$	(236.6	)	$	55.7	$	(9.0	)	$	(36.5	)	$	(226.4	)

	Cumulative Currency Translation Adjustment			Foreign Currency Gains and (Losses)			Unrealized (Losses) Gains on Cash Flow Hedges			Pension and Postretirement Benefit Plans			Total
Balance as of December 31, 2016	$	(324.2	)	$	88.6		$	(42.2	)	$	(64.6	)	$	(342.4	)
Other comprehensive income (loss) before reclassifications		131.4			(44.3	)		(3.1	)		(4.2	)		79.8
Amounts reclassified from accumulated other comprehensive (loss) income		-			-			8.6			2.3			10.9
Other comprehensive income (loss)		131.4			(44.3	)		5.5			(1.9	)		90.7
Balance as of September 30, 2017	$	(192.8	)	$	44.3		$	(36.7	)	$	(66.5	)	$	(251.7	)

⁽¹⁾

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

Index

Reclassifications out of accumulated other comprehensive (loss) income for the nine month periods ended September 30, 2018 and 2017 are presented in the following table.

Amount Reclassified from Accumulated Other Comprehensive (Loss) Income
Details about Accumulated Other Comprehensive (Loss) Income Components	For the Nine Month Period Ended September 30, 2018			For the Nine Month Period Ended September 30, 2017			Affected Line in the Statement Where Net Income is Presented
Loss on cash flow hedges
Interest rate swaps	$	11.8		$	13.9		Interest expense
		11.8			13.9		Total before tax
		(2.8	)		(5.3	)	Benefit for income taxes
	$	9.0		$	8.6		Net of tax

Amortization of defined benefit pension and other postretirement benefit items	$	1.4		$	3.7		⁽¹⁾
		1.4			3.7		Total before tax
		(0.3	)		(1.4	)	Benefit for income taxes
	$	1.1		$	2.3		Net of tax
Total reclassifications for the period	$	10.1		$	10.9		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 Yuan 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 September 30, 2018 and December 31, 2017.

	September 30, 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	$	1,025.0	$	-	$	-	$	3.4	$	14.2
Derivatives Not Designated as Hedging Instruments
Foreign currency forwards	Fair Value	$	26.5	$	-	$	-	$	0.3	$	-

	December 31, 2017
	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	$	1,125.0	$	-	$	-	$	16.1	$	30.6
Derivatives Not Designated as Hedging Instruments
Foreign currency forwards	Fair Value	$	94.4	$	-	$	-	$	1.2	$	-

⁽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 (Loss) Income for the three and nine month periods ended September 30, 2018 and 2017, are as presented in the table below. See Note 1 “Condensed Consolidated Financial Statements” for a discussion of the adoption of ASU 2017-12.

	For the Three Month Periods Ended September 30,						For the Nine Month Periods Ended September 30,
	2018			2017			2018			2017
Interest rate swap contracts
Gain (loss) recognized in AOCI on derivatives	$	1.8		$	1.4		$	15.2		$	(4.9	)
Loss reclassified from AOCI into income (effective portion)⁽¹⁾		(3.3	)		(4.1	)		(11.2	)		(13.9	)
Loss reclassified from AOCI into income (missed forecast)⁽²⁾		(0.6	)		-			(0.6	)		-

⁽¹⁾

Losses on derivatives reclassified from accumulated other comprehensive income (“AOCI”) into income (effective portion) were included in “Interest expense” in the Condensed Consolidated Statements of Operations, the same income statement line item as the earnings effect of the hedged item.

⁽²⁾

During the three month period ended September 30, 2018, the Company used excess cash to pay down $150.0 million of its Dollar Term Loan Facility. Due to this unforecasted pay down of debt, the Company paid $2.7 million in the amendment of the interest rate swap contracts to reflect the updated forecasted cash flows. The updated forecasts caused certain hedged items to be deemed probable of not occurring in the future and thus, the Company accelerated the release of AOCI related to those hedged items. Losses reclassified from AOCI into income (missed forecast) were included in “Loss on extinguishment of debt” in the Condensed Consolidated Statements of Operations.

Index

As of September 30, 2018, the Company is the fixed rate payor on 11 interest rate swap contracts that effectively fix the LIBOR-based index used to determine the interest rates charged on a total of $1,025.0 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 2018 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 September 30, 2018, the Company expects to reclassify losses of $13.3 million out of AOCI into earnings during the next 12 months. The Company’s LIBOR-based variable rate borrowings outstanding as of September 30, 2018 were $1,025.9 million and €608.9 million.

The Company had two foreign currency forward contracts outstanding as of September 30, 2018 with notional amounts of $9.3 million and $17.2 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 in the “Other operating expense, net” line on the face 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) gains on derivative instruments not designated as accounting hedges and total net foreign currency (losses) gains for the three and nine month periods ended September 30, 2018 and 2017 were as follows.

	For the Three Month Periods Ended September 30,						For the Nine Month Periods Ended September 30,
	2018			2017			2018		2017
Foreign currency forward contracts (losses) gains	$	(0.4	)	$	(1.8	)	$	5.8	$	(6.7	)
Total foreign currency transaction gains (losses), net		0.8			(1.7	)		0.6		(6.3	)

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 8 “Debt.” 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 September 30, 2018, the Euro Term Loan of €608.9 million remained designated.

For the period from January 1, 2017 to August 16, 2017, the Company designated two cross currency interest rate swaps, each with a USD notional amount of $100.0 million as hedges of its net investment in EUR functional subsidiaries. Both cross currency interest rate swaps were terminated on August 16, 2017. The losses and gains from the change in the fair value of the designated net investment hedges were recorded through other comprehensive income. The recorded Accumulated Other Comprehensive (Loss) Income at the termination of the cross currency interest rate swaps will remain in Accumulated Other Comprehensive (Loss) Income until there is a substantial liquidation of the Company’s net investment in subsidiaries with EUR functional currencies.

The Company’s gains and (losses), net of income tax, associated with changes in the value of debt and designated cross currency interest rate swaps for the three and nine month periods ended September 30, 2018 and 2017 and the net balance of such gains and (losses) included in accumulated other comprehensive (loss) income as of September 30, 2018 and 2017 were as follows.

	For the Three Month Periods Ended September 30,					For the Nine Month Periods Ended September 30,
	2018		2017			2018		2017
Gain (loss), net of income tax, recorded through other comprehensive income	$	3.5	$	(13.6	)	$	18.0	$	(43.2	)
Balance included in accumulated other comprehensive (loss) income as of September 30, 2018 and 2017, respectively						$	50.1	$	39.2

Index

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 instruments 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.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (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 the 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 September 30, 2018.

	Level 1		Level 2		Level 3		Total
Financial Assets
Trading securities held in deferred compensation plan⁽¹⁾	$	6.3	$	-	$	-	$	6.3
Total	$	6.3	$	-	$	-	$	6.3
Financial Liabilities
Foreign currency forwards⁽²⁾	$	-	$	0.3	$	-	$	0.3
Interest rate swaps⁽³⁾		-		17.6		-		17.6
Deferred compensation plan⁽¹⁾		6.3		-		-		6.3
Total	$	6.3	$	17.9	$	-	$	24.2

⁽¹⁾

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.

⁽²⁾

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

⁽³⁾

Measured as the present value of all expected future cash flows based on the LIBOR-based swap yield curves as of September 30, 2018. 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 adopted ASC 606 on January 1, 2018 using the modified retrospective method. See Note 1 “Condensed Consolidated Financial Systems” for further discussion of the adoption.

Index

The Company recognizes revenue when 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 robust 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.

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 the earlier of 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 the “Selling and administrative expenses” line of the Condensed Consolidated Statements of Operations.

Index

Disaggregation of Revenue

The following table provides disaggregated revenue by reportable segment for the three month period ended September 30, 2018.

	Industrials		Energy		Medical		Total
Primary Geographic Markets
United States	$	96.7	$	200.1	$	31.1	$	327.9
Other Americas